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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, 1999.

|_|  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 29, 2000, on the New York Stock Exchange was $419,693,971.

      At February 29, 2000,  28,148,409 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  26,  2000  are
incorporated by reference in Part III hereof.

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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 .........    6
                Construction Lending ....................................    6
                Commercial Lending ......................................    7
                Consumer Lending ........................................    7
             Investment Activities ......................................    7
             Deposit Activities .........................................    7
             Borrowing Activities .......................................    8
             Asset/Liability Management .................................    8
             Earnings Spread ............................................    9
          Real Estate Investment Activities .............................    9
          Competition ...................................................   10
          Employees .....................................................   10
          Regulation ....................................................   10
             General ....................................................   10
             Regulation of Downey .......................................   10
             Regulation of the Bank .....................................   12
             Regulation of DSL Service Company ..........................   17
          Taxation ......................................................   18
          Factors That May Affect Future Results ........................   19
   2.  PROPERTIES .......................................................   20
          Branches ......................................................   20
          Electronic Data Processing ....................................   20
   3.  LEGAL PROCEEDINGS ................................................   20
   4.  SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS ..................   20

PART II
   5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS ...........................................   21
   6.  SELECTED FINANCIAL DATA ..........................................   22
   7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS .....................................   24
          Overview ......................................................   24
          Results of Operations .........................................   26
             Net Interest Income ........................................   26
             Provision for Loan Losses ..................................   28
             Other Income ...............................................   28
                Loan and Deposit Related Fees ...........................   28
                Real Estate and Joint Venture
                   Operations Held for Investment .......................   28
                Secondary Marketing Activities ..........................   29
                Other Category ..........................................   29
             Operating Expenses .........................................   29
             Provision for Income Taxes .................................   29


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TABLE OF CONTENTS

ITEM                                                                      PAGE
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PART II----(CONTINUED)

             Business Segment Reporting .................................   30
                Banking .................................................   30
                Real Estate Investment ..................................   31
          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 .................   42
             Problem Loans and Real Estate ..............................   47
                Non-Performing Assets ...................................   47
                Delinquent Loans ........................................   49
                Allowance for Losses on Loans and Real Estate ...........   51
             Capital Resources and Liquidity ............................   55
             Regulatory Capital Compliance ..............................   56
             Current Accounting Issue ...................................   56
             Year 2000 ..................................................   57
             Subsequent Event ...........................................   57
   8.  FINANCIAL STATEMENTS .............................................   58
   9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURES ..........................  101

PART III
  10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ...............  101
  11.  EXECUTIVE COMPENSATION ...........................................  101
  12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT ....................................................  101
  13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...................  101

PART IV
  14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
          ON FORM 8-K ...................................................  101
SIGNATURES ..............................................................  103


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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 19.

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, 1999,
it conducts  its  business  through 104 retail  deposit  branches,  including 40
full-service in-store branches.  Residential loans are originated by residential
loan  officers  who  work  out of 36 of the  Bank's  California  retail  deposit
branches and two loan  origination  centers  outside of California,  one each in
Arizona and  Washington.  Residential  loan officers also originate  residential
loans through the Internet from two  California  call centers.  Wholesale  loans
submitted by mortgage  brokers are  originated  from the Arizona and  Washington
loan origination centers and eight California loan origination centers,  four of
which are located in or by a Bank office.

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

     o    As a federally charted 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  ("FDIC")
          with respect to some of its activities and investments.

     o    The Bank is a member of the  Federal  Home Loan Bank  ("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.

     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.

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     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 for 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.

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

     o    fees we earn in connection with loans and deposits; and

     o    income  we  earn  on  our  portfolio  of  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 loans and  mortgage-backed  securities  are a
relatively  stable  source of our  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  and
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,
or the Bank with  other  participants.  We also  originate  loans to  businesses
through our commercial banking operations.

                                       2
<PAGE>


     We originate our 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 wholly owned  subsidiary of the
Bank, operated this indirect  auto-lending  program.  For more information,  see
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Financial Condition--Subsequent Event on page 57.

     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.

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  Lending
Activities--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 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 loans as held for sale and record them at the lower of
amortized  cost or market  value.  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
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 and 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  our 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 all these loans in the secondary  market,  rather than hold
these loans 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

                                       3
<PAGE>


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.

     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  market  value of the
underlying  collateral  on the loan would be  insufficient  to satisfy fully the
outstanding  principal and interest. We impose a limit on the amount of negative
amortization, so that the principal plus the added amount cannot exceed:

     o    125% of the original loan amount on loans having a loan-to-value ratio
          of 80% or less; and

     o    110% on loans having a loan-to-value ratio over 80%.

A  loan-to-value  ratio is the ratio of the principal  amount of the loan to the
appraised  value at  origination  of the property  securing the loan.  We permit
adjustable rate mortgages to be assumed by qualified borrowers.

     During 1999,  approximately  86% 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 these 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 retail
loan  representatives  generated  approximately  14%  of  our  one-to-four  unit
residential  loans  during  1999.  In  general,  we  compensate  our retail loan
representatives  on a salary basis plus a fixed amount per loan they  originate.
Retail loan  representatives  typically  receive loan referrals from real estate
agents, builders,  depositors and customers obtained from our retail advertising
and other sources, including over the Internet.

     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 1999,
our average loan size was $243,928.  We generally make loans with  loan-to-value
ratios not exceeding 80%. We will make loans with  loan-to-value  ratios of over
80%, but not  exceeding 97% of the value of the  property,  if borrowers  obtain
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 structure.

     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 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 staff appraisers or approved
fee  appraisers.  We also  obtain  information  about  the  applicant's  income,
financial condition, employment and credit history.

                                       4
<PAGE>


Typically, we will verify an applicant's credit information for loans originated
by our retail loan representatives.  For loans from mortgage brokers, we require
the mortgage broker to review and verify the applicant's  credit information and
employment.  In addition,  we obtain credit  information about the applicant and
perform other underwriting tests of these mortgage broker originated loans.

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

     o    for  loan  programs  with  no  negative   amortization  and  having  a
          loan-to-value ratio of 80% or less, at the higher of:

          o    the initial incentive interest rate plus 2%; or

          o    the fully indexed  interest rate, with a minimum  qualifying rate
               of 7%.

     o    for  loan  programs  with  no  negative   amortization  and  having  a
          loan-to-value  ratio of  greater  than 80%,  at a  minimum  qualifying
          interest rate of 7%.

     o    for loan programs that include negative amortization and having a loan
          to value ratio of 80% or less, at the lesser of:

          o    the initial incentive interest rate plus 2%; or

          o    the fully indexed  interest rate, with a minimum  qualifying rate
               of 6%.

     o    for loan programs that include negative amortization and having a loan
          to value ratio of greater than 80%, at the minimum qualifying interest
          rate of 7%.

     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 the best market terms.  These lower grade credits or "A-," "B" and "C" loans
are  commonly  referred  to as  subprime  loans and 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 underwriting guidelines for each classification of credit.

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 market.  These loans are secured by first
liens on one-to-four unit  residential  properties and generally have maturities
of 30 years or less.

     We use various  hedging  programs to manage the  interest  rate risk of our
fixed  rate   mortgage   origination   process.   For  more   information,   see
Asset/Liability Management on page 8.

     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  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 our sale of 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. Effective January 1, 1997, we adopted
Statement of Financial  Accounting  Standards No. 125, "Accounting for Transfers
and Servicing of Financial Assets and  Extinguishments  of Liabilities,"  ("SFAS
125")

                                       5
<PAGE>


which governs the accounting treatment of mortgage servicing rights. As required
by SFAS 125, 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 mortgages  loans without
mortgage  servicing  rights based on their relative fair values.  We include our
mortgage servicing rights in our financial  statements in the category of "other
assets." 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, 1999, our mortgage  servicing rights totaled $34
million.

     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 our
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 lending and multi-family activities.  We compensate these
officers on a salary basis.

     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 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 estimate of value on the completed project.

                                       6
<PAGE>


     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

     Until its sale in February 2000, we originated  fixed rate automobile loans
through an indirect  lending  program of Downey Auto  Finance  Corp.  which used
preapproved  automobile  dealers to finance  consumer  purchases of new and used
automobiles. For additional information regarding Downey Auto Finance Corp., see
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Financial Condition--Subsequent Event on page 57.

     In addition, 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

     Federal  and state  regulations  require  the Bank to  maintain a specified
minimum amount of liquid assets  invested in particular  short-term  obligations
and  other   securities.   For  additional   information   regarding   liquidity
requirements  and the Bank's  compliance  with the liquidity  requirements,  see
Regulation--Regulation  of  the  Bank--Liquidity  Requirements  on  page  17 and
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Financial  Condition--Capital Resources and Liquidity on page 55. As
a federally  chartered  savings  association,  the Bank's  ability to make other
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.

     We carry  securities held for investment at 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 market  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 Southern and

                                       7
<PAGE>


Northern  California 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 and prevailing  interest rates.  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  Southern  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.

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 more
rapidly,  or 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 42.

                                       8
<PAGE>


EARNINGS SPREAD

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

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

     o    the interest we pay on our interest-bearing  liabilities like deposits
          and borrowings.

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 24. For returns on our assets and other  selected
financial data see Selected Financial Data on page 22.

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 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.

     Before  Congress  passed the Financial  Institutions  Reform,  Recovery and
Enforcement Act of 1989 ("FIRREA"),  the Bank conducted real estate  development
and joint  venture  operations  directly,  in addition to  operations  conducted
through DSL Service Company. Since FIRREA, however, the Bank's ability to engage
in new real estate  development  and joint venture  activities and to retain its
existing real estate investments has been curtailed  dramatically.  In addition,
these  activities  may be  economically  unfeasible  for the Bank because of the
capital requirements FIRREA imposes on these activities.  FIRREA requires,  with
some limited exceptions, a savings institution like the Bank to exclude from the
Bank's regulatory capital:

     o    the Bank's  investments  in, and  extensions of credit to, real estate
          subsidiaries like DSL Service Company; and

     o    the Bank's direct equity  investments in real estate  development  and
          joint venture operations.

FIRREA  also  prohibits  the Bank from  making new  investments  in real  estate
development and joint venture operations.

     Since July 1, 1996, the Bank has been 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

                                       9
<PAGE>


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, 1999, we had  approximately  1,357 full-time  employees and
461  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 Downey 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.  We are  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  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

                                       10
<PAGE>


acquisition  and each also  satisfies the qualified  thrift lender test or meets
the  definition  of  a  domestic  building  and  loan   association.   For  more
information,  see Regulation of the  Bank--Qualified  Thrift Lender Test on page
15.

     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.

     Recent Legislation. On November 12, 1999, President Clinton signed into law
the Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act").
The Financial Services  Modernization Act repeals the two affiliation provisions
of the Glass-Steagall Act:

     o    Section 20, which restricted the affiliation of Federal Reserve member
          banks  with  firms  "engaged   principally"  in  specified  securities
          activities; and

     o    Section 32, which restricts officer,  director or employee  interlocks
          between a member bank and any company or person "primarily engaged" in
          specified securities activities.

     In addition,  the Financial Services  Modernization Act contains provisions
that expressly  preempt any state law restricting the establishment of financial
affiliations,  primarily related to insurance.  The general effect of the law is
to establish 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  system  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,  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  Financial  Services  Modernization  Act  provides  that no company may
acquire control of an insured savings association after May 4, 1999, 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.  The Financial  Institution  Modernization Act
grandfathers  any company that was a unitary savings and loan holding company on
May 4, 1999 (or becomes a unitary savings and loan holding  company  pursuant to
an  application  pending on that date).  Such a company may  continue to operate
under  present law as long as the company  continues to control only one savings
institution, excluding supervisory acquisitions, and each controlled institution
must  meet  the  qualified  thrift  lender  test.  It  further  requires  that a
grandfathered  unitary savings and loan holding company must continue to control
at least one savings association, or a successor institution, that it controlled
on May 4, 1999. We are a grandfathered unitary savings and loan holding company.

     The Financial  Services  Modernization  Act also permits  national banks to
engage in expanded activities through the formation of financial subsidiaries. A
national  bank may have a  subsidiary  engaged in any  activity  authorized  for
national  banks  directly  or  any  financial  activity,  except  for  insurance
underwriting,  real estate investment or development, or merchant banking, which
may only be  conducted  through a  subsidiary  of a Financial  Holding  Company.
Financial  activities include all activities permitted under new sections of the
Bank Holding Company Act of 1956 ("BHCA") or permitted by regulation.

     We do not believe that the Financial Services Modernization Act 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

                                       11
<PAGE>


companies to affiliate,  the financial  services industry may experience further
consolidation.  The Financial Services Modernization 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  substantially  more  financial  resources.  In  addition,  the
Financial Services Modernization 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.

     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, 1999, SAIF members paid within a range of 0 cents
to 27 cents per $100 of domestic deposits, depending upon the institution's risk
classification.  This risk  classification is based on an institution's  capital
group and supervisory subgroup assignment.

     In addition, pursuant to the Economic Growth and Paperwork Reduction Act of
1996 (the "Paperwork  Reduction  Act"), the Bank pays, in addition to its normal
deposit  insurance  premium  as a  member  of  the  SAIF,  an  amount  equal  to
approximately   6.4  basis  points  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.  Until December 31, 1999,  members of
the Bank  Insurance  Fund (the "BIF") by  contrast,  paid,  in addition to their
normal deposit insurance premium, approximately 1.3 basis points.

     Under the Paperwork  Reduction  Act, the FDIC is not permitted to establish
SAIF  assessment  rates that are lower than  comparable  BIF  assessment  rates.
Effective  January 1, 2000,  the rate paid to retire the Fico Bonds became equal
for members of the BIF and the SAIF.  The Paperwork  Reduction Act also provided
for the merging of the BIF and the SAIF by January 1, 1999  provided  there were
no financial institutions still chartered as savings

                                       12
<PAGE>


associations  at that  time.  Although  legislation  to  eliminate  the  savings
association   charter  had  been  proposed,   at  January  1,  1999,   financial
institutions  such as the Bank were still  chartered  as  savings  associations.
Therefore, the two insurance funds have not been merged.

     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, 1999,  the Bank would not have been required to deduct an
interest rate risk component in  calculating  its total  risk-based  capital had
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; and

     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, 1999, 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 such credits  having  higher  interest  rates and fees, in March
1999,  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 guidelines provide that
if the risks associated with subprime lending are not properly  controlled,  the
agencies  consider  subprime  lending a  high-risk  activity  that is unsafe and
unsound.  The federal banking agencies believe that subprime lending  activities
can  present a greater  than  normal  risk for  financial  institutions  and the
deposit insurance funds.

                                       13
<PAGE>


Therefore,  the federal  banking  agencies  believe that the level of regulatory
capital an  institution  needs to support this activity  should be  commensurate
with the additional risks incurred.  Although no formal  rulemaking has occurred
related to increased  regulatory  capital minimums for  institutions  engaged in
subprime lending,  regulatory agencies may impose additional  regulatory capital
requirements  upon an  institution  as part of  their  comprehensive  regulatory
authority.  Should a rule be adopted  to  increase  capital  or the OTS  require
Downey to maintain  additional  regulatory capital as a result of our activities
in subprime  lending,  this 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, if adopted or imposed, then 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 in what form, rules may eventually
be  adopted.  In  addition,  there  can  be  no  guaranty  that  the  OTS,  upon
examination,  will not require us to increase capital or cease our activities in
subprime lending.

     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;"

     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, 1999,  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.

                                       14
<PAGE>


     At  December  31,  1999,  the Bank's  loans-to-one-borrower  limit was $100
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, 1999, 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.

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

                                       15
<PAGE>


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

     The  OTS  regulation   generally  excludes  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 regulation also requires 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.  OTS regulations impose limitations upon
all capital distributions by savings associations, like cash dividends, payments
to  repurchase  or otherwise  acquire its shares,  payments to  shareholders  of
another institution in a cash-out merger and other distributions charged against
capital.  The OTS recently  adopted an amendment to these  capital  distribution
limitations.  Under the new rule, a savings  association  in some  circumstances
may:

     o    be required to file an  application  and await  approval  from the OTS
          before it makes a capital distribution;

     o    be required to file a notice 30 days before the capital  distribution;
          or

     o    be  permitted  to make the  capital  distribution  without  notice  or
          application to the OTS.

The OTS regulations require a savings association to file an application if:

     o    it is not eligible for expedited  treatment of its other  applications
          under OTS regulations;

     o    the  total  amount  of all of  capital  distributions,  including  the
          proposed  capital  distribution,  for  the  applicable  calendar  year
          exceeds its net income for that year to date plus  retained net income
          for the preceding two years;

     o    it would not be at least  adequately  capitalized,  under  the  prompt
          corrective  action  regulations of the OTS following the distribution;
          or

     o    the  association's  proposed  capital  distribution  would  violate  a
          prohibition  contained  in  any  applicable  statute,  regulation,  or
          agreement between the savings association and the OTS, or the FDIC, or
          violate  a  condition  imposed  on  the  savings   association  in  an
          OTS-approved application or notice.

     In addition,  a savings  association  must give the OTS notice of a capital
distribution if the savings  association is not required to file an application,
but:

     o    would not be well  capitalized  under  the  prompt  corrective  action
          regulations of the OTS following the distribution;

     o    the proposed capital distribution would reduce the amount of or retire
          any part of the savings  association's  common or  preferred  stock or
          retire any part of debt instruments like notes or debentures  included
          in  capital,  other  than  regular  payments  required  under  a  debt
          instrument approved by the OTS; or

     o    the savings  association is a subsidiary of a savings and loan holding
          company.

     If neither the savings  association nor the proposed  capital  distribution
meet any of the above  listed  criteria,  the OTS does not  require  the savings
association  to submit an  application  or give notice when making the  proposed
capital distribution.  The OTS may prohibit a proposed capital distribution that
would otherwise be permitted if the OTS determines that the  distribution  would
constitute an unsafe or unsound practice.

     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

                                       16
<PAGE>


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    0.3% of total assets; or

     o    5% of its FHLB advances or borrowings.

     The Bank's  required  investment in FHLB stock,  based on December 31, 1999
financial  data,  was $104  million.  At December  31,  1999,  the Bank had $102
million of FHLB stock. The Bank has  subsequently  purchased  additional  stock,
thereby increasing the Bank's investment to the required amount.

     Liquidity  Requirements.  Under OTS regulations,  a savings  association is
required to maintain an average  daily  balance of liquid  assets.  These liquid
assets  include  cash,  some  time  deposits  and  savings  accounts,   bankers'
acceptances, some government obligations and other investments. The OTS requires
a savings  association  to maintain an average daily balance of liquid assets in
each calendar quarter of not less than 4% of either:

     o    its liquidity base, which consists of some net  withdrawable  accounts
          plus short-term  borrowings,  as of the end of the preceding  calendar
          quarter; or

     o    the average daily  balance of its liquidity  base during the preceding
          quarter.

     The OTS may  change  this  liquidity  requirement  from time to time to any
amount between 4% and 10%, depending upon factors, including economic conditions
and savings flows of all savings associations.  The Bank maintains liquid assets
in compliance with these regulations. The OTS may impose monetary penalties upon
an institution for violations of liquidity requirements.

     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, 1999,  the Bank was in  compliance
with these requirements.

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,

                                       17
<PAGE>


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."

     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  generally  is taxed in the same manner as
other corporations for federal income tax purposes,  though savings institutions
have historically enjoyed favorable treatment under the Internal Revenue Code in
determining  their  deductions  for bad debts.  During 1996,  however,  Congress
enacted  legislation  that repealed the reserve method of  determining  bad debt
deductions  for large thrift  institutions  or thrifts with assets  greater than
$500  million.  As a result,  savings  associations  are required to comply with
rules similar to those currently  applicable to large  commercial  banks wherein
the Bank's bad debt  deductions  are  determined  under the specific  charge-off
method, which allows the Bank to take a tax deduction for loans determined to be
wholly or partially worthless.  Congress made the repeal effective for tax years
beginning after 1995.

     In addition to the regular  corporate income tax,  corporations,  including
qualifying savings institutions, might be required to pay an alternative minimum
tax. This 20% tax is computed with respect to the corporation's  regular taxable
income,  with some adjustments,  as increased by tax preference items and called
"alternative  minimum  taxable  income."  This  alternative  minimum  income tax
applies to corporations to the extent that the corporation's alternative minimum
taxable income exceeds the corporation's  regular tax liability.  In computing a
corporation's  alternative  minimum taxable income,  the  corporation's  regular
taxable income is required to be increased by 75% of:

     o    the excess of the  corporation's  current  earnings  and  profits,  as
          adjusted, over

     o    the corporation's alternative minimum taxable income determined before
          this  adjustment  and  without  regard  to  the  alternative  tax  net
          operating loss deduction.

     A corporation that incurs alternative  minimum tax generally is entitled to
take this tax as a credit  against  its regular tax in later years to the extent
that the corporation's regular tax liability in these later years, as reduced by
some other tax credits,  exceeds the corporation's  so-called "tentative minimum
tax." This  tentative  minimum  tax is an amount  computed  by  multiplying  the
corporation's   alternative   minimum   taxable  income  for  the  year  by  the
then-applicable rate for the alternative minimum tax.

                                       18
<PAGE>


     State.  The Bank  uses a  formula  to  compute  its  applicable  California
franchise tax. This formula results in a rate higher than the rate applicable to
non-financial  corporations  because  the rate  reflects  an amount "in lieu" of
local  personal  property  and  business  license  taxes  paid by  non-financial
corporations, but not generally paid by banks or financial corporations like the
Bank.  The  variable  tax rate  has been  10.84%  in 1999  and  1998.  We file a
California  franchise tax return on a combined reporting basis. State income tax
returns are also filed on a separate-entity basis in Arizona,  Colorado,  Idaho,
Oregon and Utah.  The Bank  anticipates  that  additional  state returns will be
required in future years, as its lending business is expanded nationwide.

     The Internal Revenue Service and state taxing authorities have examined our
tax returns for all tax years through 1995 and are currently  reviewing  returns
filed for the 1996 tax year.  We have  protested  proposed  adjustments  for the
years examined by the Internal  Revenue Service and are currently moving through
the appeals process.  We believe that substantial legal authority exists for the
positions  we have taken on the tax returns and we intend to  vigorously  defend
those  positions.  In  addition  we have made  adequate  provisions  for what we
believe to be the potential  exposure.  Our tax years  subsequent to 1996 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 Southern  California,  and its  operations are  concentrated  in Southern and
Northern California. As a result of this geographic  concentration,  our results
depend  largely upon economic  conditions in these areas.  While the  California
economy has  exhibited  positive  economic and  employment  trends,  there is no
assurance that such trends will continue. 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 interest rate levels may continue to
rise in 2000, and if interest rates vary  substantially from present levels, our
results may differ materially from the results currently anticipated. 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.  If  interest  rates  were to  increase  significantly,  the  economic
feasibility  of real  estate  investment  activities  also  could  be  adversely
affected.

     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
underwriting and loan monitoring  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.

                                       19
<PAGE>


ITEM 2. PROPERTIES

BRANCHES

     The  executive  offices  of both  Downey  and the Bank are  located at 3501
Jamboree Road,  Newport Beach,  California 92660. Part of that 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 the headquarters building.

     At December 31, 1999, we had 104  branches.  We owned the building and land
occupied by 56 of our branches and we owned one branch  building on leased land.
We operate  branches in 47  locations  (including  40 in-store  locations)  with
leases or licenses  expiring at various dates through August 2009,  with options
to extend the term.

     The net book value of our owned branches, including the one on leased land,
totaled $88 million at December 31,  1999,  and the net book value of our leased
branch  offices  totaled $1 million at December 31, 1999.  The net book value of
our furniture and fixtures,  including electronic data processing equipment, was
$23 million at December 31, 1999.

     For additional information regarding our offices and equipment,  see Note 1
on  page  65 and  Note 10 on page  81 of  Notes  to the  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. The net book value of our electronic data processing
equipment,  including  personal  computers  and  software,  was $15  million  at
December 31, 1999.

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

     None.

                                       20
<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 29, 2000, we
had  approximately  935  stockholders  of record (not  including the number of
persons or  entities  holding  stock in nominee or street name  through  various
brokerage  firms)  and  28,148,409  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>
                                  1999                                  1998
                   ------------------------------------------------------------------------
                     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 ........      $22.94   $24.13   $23.00   $25.75     $26.38   $35.00   $34.50   $30.95
Low .........       19.06    19.81    18.13    18.25      17.75    23.06    30.83    23.58
End of period       20.19    20.13    21.94    18.31      25.44    23.81    32.69    30.83
===========================================================================================
</TABLE>

     During 1999, we paid quarterly cash  dividends  totaling  $0.350 per share,
aggregating $9.9 million compared to $0.316 per share,  aggregating $8.9 million
during  1998.  On February 25, 2000,  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 16.

                                       21
<PAGE>


ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Amounts)                      1999         1998         1997         1996          1995
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>          <C>          <C>          <C>          <C>
INCOME STATEMENT DATA:
Total interest income ..........................................  $  533,751   $  440,404   $  420,418   $  346,360   $   318,828
Total interest expense .........................................     326,273      266,057      266,260      211,765       214,238
----------------------------------------------------------------------------------------------------------------------------------
    Net interest income ........................................     207,478      174,347      154,158      134,595       104,590
Provision for loan losses ......................................      11,270        3,899        8,640        9,137         9,293
----------------------------------------------------------------------------------------------------------------------------------
    Net interest income after provision for loan losses ........     196,208      170,448      145,518      125,458        95,297
----------------------------------------------------------------------------------------------------------------------------------
Other income, net:
    Loan and deposit related fees ..............................      20,097       15,645       10,921        7,435         5,546
    Real estate and joint ventures held for investment, net ....      19,302       22,363       14,222        8,241        11,192
    Net gains (losses) on sales of:
      Loans and mortgage-backed securities .....................      14,806        6,462        2,675        1,543           266
      Investment securities ....................................         288           68         --          4,473           (15)
    Reduction of loss on investment in lease residual ..........        --           --           --           --             207
    Other ......................................................       4,785        2,815        7,370        3,507         3,403
----------------------------------------------------------------------------------------------------------------------------------
      Total other income, net ..................................      59,278       47,353       35,188       25,199        20,599
----------------------------------------------------------------------------------------------------------------------------------
Operating expense:
    General and administrative expense .........................     144,382      115,890       99,556       86,460        74,470
    SAIF special assessment (1) ................................        --           --           --         24,644          --
    Net operation of real estate acquired in settlement of loans          19          260        1,184        2,567         4,206
    Amortization of excess of cost over fair value of net assets
      acquired .................................................         474          510          532          532           530
----------------------------------------------------------------------------------------------------------------------------------
      Total operating expense ..................................     144,875      116,660      101,272      114,203        79,206
----------------------------------------------------------------------------------------------------------------------------------
Net income (1) .................................................  $   63,804   $   57,973   $   45,234   $   20,704   $    21,093

PER SHARE DATA (2):
Earnings per share--Basic (1) ..................................  $     2.27   $     2.06   $     1.61   $     0.74   $      0.75
Earnings per share--Diluted (1) ................................        2.26         2.05         1.61         0.74          0.75
Book value per share at end of period ..........................       18.91        17.08        15.32        13.95         13.68
Stock price at end of period ...................................       20.19        25.44        27.08        17.80         13.16
Cash dividends paid ............................................       0.350        0.316        0.301        0.290         0.276

SELECTED FINANCIAL RATIOS:
Effective interest rate spread .................................        2.88%        3.08%        2.83%        2.96%         2.35%
Return on average assets (1) ...................................        0.85         0.98         0.79         0.43          0.45
Return on average equity (1) ...................................       12.70        12.71        11.07         5.33          5.69
Dividend payout ratio ..........................................       15.44        15.33        18.69        39.35         36.78

LOAN ACTIVITY:
Loans originated ...............................................  $7,132,486   $4,071,262   $2,329,266   $1,583,784   $   637,490

Loans and mortgage-backed securities purchased .................      49,669        7,463       35,828       30,296        44,194
Loans and mortgage-backed securities sold ......................   2,386,958    1,740,416      557,511      166,503       102,097

BALANCE SHEET SUMMARY (END OF PERIOD):
Total assets ...................................................  $9,407,540   $6,270,419   $5,835,825   $5,198,157   $ 4,656,267
Loans and mortgage-backed securities ...........................   8,746,063    5,788,365    5,366,396    4,729,846     4,169,474
Investments and cash equivalents ...............................     299,698      215,086      221,201      222,255       237,904
Deposits .......................................................   6,562,761    5,039,733    4,869,978    4,173,102     3,790,221
Borrowings .....................................................   2,122,870      703,720      483,735      595,345       436,218
Capital securities .............................................     120,000         --           --           --            --
Stockholders' equity ...........................................     532,418      480,566      430,346      391,571       384,072
Loans serviced for others ......................................   2,923,778    1,040,264      612,529      576,044       527,234

AVERAGE BALANCE SHEET DATA:
Assets .........................................................  $7,501,228   $5,918,507   $5,693,869   $4,789,648   $ 4,717,959
Loans ..........................................................   6,937,342    5,345,380    5,174,767    4,269,136     4,175,085
Deposits .......................................................   5,697,292    5,102,045    4,588,320    3,892,981     3,758,948
Stockholders' equity ...........................................     502,412      456,237      408,473      388,187       370,714
</TABLE>

                                       22
<PAGE>


ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>

(Dollars in Thousands, Except Per Share Amounts)                      1999         1998         1997         1996          1995
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>          <C>          <C>          <C>          <C>
CAPITAL RATIOS:
Average stockholders' equity to average assets .................        6.70%        7.71%        7.17%        8.10%       7.86%
Bank only--end of period (3):
    Core and tangible capital ..................................        6.27         6.83         6.61         6.56        7.28
    Risk-based capital .........................................       12.14        12.88        12.64        12.66       14.25

SELECTED ASSET QUALITY DATA (END OF PERIOD):
Total non-performing assets ....................................  $   39,194   $   27,419   $   52,120   $   62,027   $  97,195
Non-performing assets as a percentage of total assets                   0.42%        0.44%        0.89%        1.19%       2.09%
Allowance for loan losses:
    Amount .....................................................  $   38,342   $   31,517   $   32,092   $   30,094   $  27,943
    As a percentage of non-performing loans ....................      116.25%      140.86%       76.96%       66.84%      35.67%
==================================================================================================================================
<FN>
(1)  In 1996,  savings  associations  such as the Bank were  assessed a one-time
     charge for purposes of recapitalizing the SAIF.  Excluding the SAIF special
     assessment,  1996 net income  would  have been  $34.7  million or $1.23 per
     share on both a basic and diluted basis, the return on average assets would
     have been 0.73% and the return on average equity would have been 8.95%.
(2)  Adjusted for a 5% stock dividend paid in May 1998.
(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 56.
</FN>
</TABLE>

                                       23
<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 19.

OVERVIEW

     Our net income for 1999 totaled a record  $63.8  million or $2.26 per share
on a diluted  basis,  up 10.1% from last year's record of $58.0 million or $2.05
per share.  Our year-ago net income benefited from the settlement of a number of
loan and real estate  investment  obligations of a former joint venture partner.
That settlement added $4.8 million to our 1998 net income. The pre-tax amount of
the settlement was $8.4 million of which:

     o    $1.4  million  represented  the  recovery  of a prior loan  charge-off
          thereby reducing provision for loan losses;

     o    $4.4 million was recorded in income from real estate and joint venture
          operations of which $4.3 million was a reduction of loss;

     o    $1.0 million was recorded in miscellaneous other income; and

     o    $1.6 million was recorded as a reduction to  professional  fees within
          general and administrative expense.

Excluding  the  benefit  of the  settlement,  our net  income in 1999 would have
increased over a year ago by $10.6 million or 20.0%.  This adjusted increase was
generated in both of our business segments as follows:

     o    Banking activities contributed $9.0 million to the increase reflecting
          the following:

          o    net interest  income  increased  $32.8 million or 18.8% due to an
               increase  in  average  interest-earning  assets as the  effective
               interest rate spread declined;

          o    all categories of other income improved with a combined  adjusted
               increase  of $16.1  million,  primarily  in net gains on sales of
               loans and  mortgage-backed  securities of $8.3 million,  loan and
               deposit  related fees of $4.5 million and loan  servicing fees of
               $1.4 million; and

          o    adjusted increases of $28.1 million in operating expense and $6.0
               million in  provision  for loan  losses  partially  offset  those
               favorable  factors.  The increase in operating  expense reflected
               higher general and  administrative  expense due to  significantly
               higher lending volumes and branch expansion.

     o    Real estate  investment  activities  contributed  $1.6  million to the
          increase  primarily  from a higher  level of gains  from sales of real
          estate investments.

     Our assets  increased  a record $3.1  billion or 50.0%  during 1999 to $9.4
billion at year-end,  following a 7.4% increase during 1998.  Assets expanded in
1999 primarily from loan growth.  Our single family loan originations  increased
from $3.7  billion  in 1998 to a record  $6.7  billion  in 1999,  of which  $2.0
billion were originated for sale in the secondary  market. Of the current year's
total, $1.2 billion  represented  originations for portfolio of subprime credits
as part of our  continuing  strategy to enhance the  portfolio's  net yield.  In
addition to single  family  loans,  we  originated  $530  million of other loans
during the year,  including $234 million of automobile loans and $206 million of
construction and land loans.

     We funded  our asset  growth  with  increases  of $1.5  billion or 30.2% in
deposits,  a record,  and $1.4 billion in  borrowings.  In  addition,  we issued
during the year $120 million of 10.00% capital securities, of which $108 million
was invested as additional common stock in the Bank.

     Non-performing assets totaled $39 million at December 31, 1999, up from $27
million a year ago.  This  increase was  primarily  in the subprime  residential
category.  When  measured as a percentage of total  assets,  our  non-performing
assets fell from 0.44% at year-end 1998 to 0.42% at year-end 1999.

                                       24
<PAGE>


     At December 31, 1999, the Bank exceeded all three regulatory capital tests,
with capital-to-asset ratios of 6.27% in tangible and core capital and 12.14% in
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 12, Financial  Condition--Investments  in Real Estate and Joint Ventures
on page 38 and Financial Condition--Regulatory Capital Compliance on page 56.

                                       25
<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 interest income.

     Our net interest  income was $207.5  million in 1999,  up $33.1  million or
19.0%  from  1998  and  $53.3  million  or 34.6%  greater  than  1997.  The 1999
improvement over 1998 primarily  reflected an increase in average earning assets
as the effective interest rate spread declined. Average earning assets increased
by $1.5 billion or 27.1% to $7.2  billion.  The  effective  interest rate spread
averaged 2.88% in 1999,  down from 3.08% in 1998, but up from 2.83% in 1997. The
decline in our 1999  effective  interest  rate spread was due  primarily  to two
factors.  First, the significant  growth in single family  adjustable rate loans
during  1999  resulted in a higher  proportion  of our  portfolio  being at low,
introductory  incentive rates thereby  contributing to a decline in the yield on
average   earning  assets   between  years.   As  these  new  loans  reprice  to
fully-indexed  rates in future periods and loans with  incentive  rates become a
lower proportion of earning assets,  this downward pressure on our earning asset
yield should lessen.  Second,  a higher  proportion of earning assets was funded
with higher cost certificates of deposit and borrowings  thereby resulting in an
increase in our cost of funds.

     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  interest-bearing   liabilities--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 that we
received  payments  and to the  extent  that  we  believe  we will  recover  the
remaining  principal  balance of the loan. We computed  average balances for the
year using the average of each month's daily average  balance  during the period
indicated.

                                       26
<PAGE>


<TABLE>
<CAPTION>
                                                      1999                         1998                           1997
                                         ----------------------------------------------------------------------------------------
                                                               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 ..............................  $6,937,342  $519,006   7.48%  $5,345,380 $421,942   7.89%  $5,174,767  $404,081   7.81%
   Mortgage-backed securities .........      26,361     1,638   6.21       42,075    2,780   6.61       55,045     3,633   6.60
   Investment securities ..............     232,746    13,107   5.63      276,139   15,682   5.68      217,272    12,704   5.85
---------------------------------------------------------------------------------------------------------------------------------
     Total interest-earning assets ....   7,196,449   533,751   7.42    5,663,594  440,404   7.78    5,447,084   420,418   7.72
Non-interest-earning assets ...........     304,779                       254,913                      246,785
---------------------------------------------------------------------------------------------------------------------------------
   Total assets .......................  $7,501,228                    $5,918,507                   $5,693,869
=================================================================================================================================
Interest-bearing liabilities:
   Deposits ...........................  $5,697,292  $256,764   4.51%  $5,102,045 $248,337   4.87%  $4,588,320  $227,521   4.96%
   Borrowings .........................   1,175,704    64,161   5.46      292,044   17,720   6.07      638,661    38,739   6.07
   Capital securities .................      52,903     5,348  10.14         --       --        -         --        --        -
---------------------------------------------------------------------------------------------------------------------------------
     Total interest-bearing liabilities   6,925,899   326,273   4.71    5,394,089  266,057   4.93    5,226,981   266,260   5.09
Non-interest-bearing liabilities ......      72,917                        68,181                       58,415
Stockholders' equity ..................     502,412                       456,237                      408,473
---------------------------------------------------------------------------------------------------------------------------------
   Total liabilities and stockholders'
     equity ...........................  $7,501,228                    $5,918,507                   $5,693,869
=================================================================================================================================
Net interest income/interest rate
   spread .............................              $207,478   2.71%             $174,347   2.85%              $154,158   2.63%
Excess of interest-earning assets over
   interest-bearing liabilities .......  $  270,550                    $  269,505                   $  220,103
Effective interest rate spread ........                         2.88                         3.08                          2.83
=================================================================================================================================
</TABLE>

     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 prior period rate;

     o    changes in rate - changes in rate  multiplied by prior 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  average  balances  computed  using the  average of each
month's daily average balance during the period indicated.

<TABLE>
<CAPTION>
                                                1999 versus 1998                              1998 versus 1997
                                                 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 ......................   $125,663   $(22,036)  $(6,563)   $97,064     $ 13,322   $ 4,394   $ 145   $ 17,861
   Mortgage-backed securities .     (1,038)      (166)       62     (1,142)        (856)        4      (1)      (853)
   Investment securities ......     (2,465)      (131)       21     (2,575)       3,442      (365)    (99)     2,978
---------------------------------------------------------------------------------------------------------------------
     Change in interest income     122,160    (22,333)   (6,480)    93,347       15,908     4,033      45     19,986
---------------------------------------------------------------------------------------------------------------------
Interest expense:
   Deposits ...................     28,973    (18,399)   (2,147)     8,427       25,474    (4,189)   (469)    20,816
   Borrowings .................     53,612     (1,781)   (5,390)    46,441      (21,019)     --      --      (21,019)
   Capital securities .........       --         --       5,348      5,348         --        --      --         --
---------------------------------------------------------------------------------------------------------------------
     Change in interest expense     82,585    (20,180)   (2,189)    60,216        4,455    (4,189)   (469)      (203)
---------------------------------------------------------------------------------------------------------------------
Change in net interest income .   $ 39,575   $ (2,153)  $(4,291)   $33,131     $ 11,453   $ 8,222   $ 514   $ 20,189
=====================================================================================================================
</TABLE>

                                       27
<PAGE>


PROVISION FOR LOAN LOSSES

     Provision  for loan losses was $11.3  million in 1999, up from $3.9 million
in 1998 and $8.6 million in 1997.  The increase in our provision for loan losses
in 1999 is  primarily  due to the  significant  increase  during the year in our
single family  residential  loan  portfolio.  Also,  1998  benefited from a $1.4
million  recovery  of a prior  loan  charge-off  as a result  of the  previously
mentioned settlement.

     For further information,  see Financial  Condition--Problem  Loans and Real
Estate--Allowance for Losses on Loans and Real Estate on page 51.

OTHER INCOME

     Our total other income was $59.3  million in 1999, up from $47.4 million in
1998 and $35.2 million in 1997.  All  categories of other income were above year
ago levels  except for our income from real estate held for  investment.  Income
from real estate held for investment  declined by $3.1 million,  as the year-ago
amount  included $4.4 million from the  previously  mentioned  settlement.  That
decline  was more than offset by  increases  in the other  categories,  the more
significant  of which  were  $8.3  million  in net  gains on sales of loans  and
mortgage  backed  securities,  $4.5 million in loan and deposit related fees and
$1.4 million in loan servicing fees. Below is a further  discussion of the major
other income categories.

LOAN AND DEPOSIT RELATED FEES

     Loan and deposit  related fees totaled $20.1 million in 1999, up from $15.6
million in 1998 and $10.9 million in 1997.  As depicted in the following  table,
our loan related fees  increased by $3.4 million or 46.6% in 1999 due  primarily
to higher  prepayment  and wire  transfer  fees from funding a higher  volume of
loans, while our deposit related fees increased by $1.1 million or 12.9%.

<TABLE>
<CAPTION>
 (In Thousands)                                    1999        1998        1997
--------------------------------------------------------------------------------
<S>                                              <C>         <C>         <C>
Loan related fees .............................  $10,589     $ 7,225     $ 3,837
Deposit related fees ..........................    9,508       8,420       7,084
--------------------------------------------------------------------------------
    Total loan and deposit related fees .......  $20,097     $15,645     $10,921
================================================================================
</TABLE>

REAL ESTATE AND JOINT VENTURE OPERATIONS HELD FOR INVESTMENT

     Income from our real estate and joint ventures held for investment  totaled
$19.3  million  in 1999,  down from  $22.4  million  in 1998,  but up from $14.2
million in 1997.  The table below sets forth the key  components  comprising our
income from real estate and joint venture operations.

<TABLE>
<CAPTION>
(In Thousands)                                                        1999     1998     1997
---------------------------------------------------------------------------------------------
<S>                                                                 <C>      <C>      <C>
Operations, net:
    Rental operations, net of expenses ...........................  $ 3,822  $ 3,723  $ 2,317
    Equity in net income from joint ventures .....................    5,352    9,203    3,931
    Interest from joint venture advances .........................    1,256    1,584    1,880
---------------------------------------------------------------------------------------------
      Total operations, net ......................................   10,430   14,510    8,128
Net gains on sales of wholly owned real estate ...................    5,206    2,557    2,904
Reduction of losses on real estate and joint ventures ............    3,666    5,296    3,190
---------------------------------------------------------------------------------------------
    Income from real estate and joint ventures held for investment  $19,302  $22,363  $14,222
=============================================================================================
</TABLE>

     Our income from real estate and joint ventures would have increased by $1.3
million if our 1998  results had not included  $4.4 million from the  previously
mentioned settlement.  That adjusted increase primarily reflected an increase in
net gains from sales and declines in valuation losses.

                                       28
<PAGE>


     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 51 and Note 8
of Notes to the Consolidated Financial Statements on page 77.

SECONDARY MARKETING ACTIVITIES

     Sales of loans and  mortgage-backed  securities we originated  increased in
1999 to $2.4 billion  from $1.7  billion in 1998 and $558  million in 1997.  Net
gains  associated  with these sales  totaled $14.8 million in 1999, up from $6.5
million in 1998 and $2.7 million in 1997. The net gains include $29.3 million in
1999,   $7.3   million  in  1998  and  $1.2  million  in  1997  related  to  the
capitalization of mortgage servicing rights.

     Loan servicing fees from our portfolio of loans serviced for others totaled
$1.7  million for 1999,  up from $0.3  million in 1998 and $1.3 million in 1997.
The increase in 1999 reflects both an increase in our servicing  portfolio and a
decrease in the valuation allowance for mortgage servicing rights. The valuation
allowance was  established  during 1998 due to higher than expected  prepayments
from the low interest rate environment that existed at that time. As rates began
to increase during 1999,  expected  prepayment  rates declined  permitting us to
reverse  during 1999 most of the allowance  established in 1998. At December 31,
1999, we serviced $2.9 billion of loans for others,  compared to $1.0 billion at
December 31, 1998, and $613 million at December 31, 1997.

OTHER CATEGORY

     The all other  category of other income  totaled  $3.1 million in 1999,  up
from $2.6 million in 1998,  but down from $6.1 million in 1997. We included $1.0
million of proceeds from the previously  mentioned settlement in the 1998 total.
Excluding  that  amount,  the adjusted  increase  from 1998 would have been $1.5
million.

OPERATING EXPENSES

     Our  operating  expenses  totaled  $144.9  million in 1999,  up from $116.7
million in 1998 and $101.3 million in 1997. The current year increase was due to
higher general and administrative  expense,  as the net operation of real estate
acquired  in  settlement  of  loans  declined  by  $0.2  million.   General  and
administrative  expense  increased  $28.5  million  or  24.6%  in  1999  due  to
significantly higher lending volumes,  branch expansion and 1998 included a $1.6
million  reduction  to  professional  fees  due  to  the  previously   mentioned
settlement. In addition, our year 2000 computer compliance related costs totaled
$2.7 million for 1999, up from $1.8 million in 1998 and $0.1 million in 1997.

<TABLE>
<CAPTION>
(In Thousands)                                                           1999      1998      1997
---------------------------------------------------------------------------------------------------
<S>                                                                    <C>       <C>       <C>
Salaries and related costs ..........................................  $ 86,163  $ 66,152  $ 54,366
Premises and equipment costs ........................................    20,617    16,834    15,272
Advertising expense .................................................     8,595     5,954     6,847
Professional fees ...................................................     2,502     2,867     5,113
SAIF insurance premiums and regulatory assessments ..................     3,937     3,832     3,439
Other general and administrative expense ............................    22,568    20,251    14,519
---------------------------------------------------------------------------------------------------
    Total general and administrative expense ........................   144,382   115,890    99,556
Net operation of real estate acquired in settlement of loans ........        19       260     1,184
Amortization of excess of cost over fair value of net assets acquired       474       510       532
---------------------------------------------------------------------------------------------------
    Total operating expense .........................................  $144,875  $116,660  $101,272
===================================================================================================
</TABLE>

PROVISION FOR INCOME TAXES

     Our  effective  tax rate for 1999 was 42.3%,  compared to 42.7% in 1998 and
43.1%  in  1997.  See  Note 1 on page 65 and  Note 18 on page 85 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.

                                       29
<PAGE>


BUSINESS SEGMENT REPORTING

     The  previous   sections  of  the  Results  of  Operations   discussed  our
consolidated  results.  The  purpose of this  section is to present  data 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 65 and Note 26 on page
95 of Notes to the Consolidated Financial Statements.

     The following  table presents by business  segment our net income for 1999,
1998 and 1997,  followed by a discussion  of the results of  operations  of each
segment.

<TABLE>
<CAPTION>
(In Thousands)                                           1999   1998 (1)   1997
--------------------------------------------------------------------------------
<S>                                                    <C>      <C>      <C>
Banking net income ..................................  $53,796  $46,736  $38,662
Real estate investment net income ...................   10,008   11,237    6,572
--------------------------------------------------------------------------------
   Total net income .................................  $63,804  $57,973  $45,234
================================================================================
<FN>
(1)  The net income impact of a settlement  with a former joint venture  partner
     totaled $4.8 million, of which $1.9 million was in banking and $2.9 million
     was in real estate investment.
</FN>
</TABLE>

BANKING

     Net income from our banking  operations  totaled  $53.8 million in 1999, up
from $46.7 million in 1998 and $38.7 million in 1997. The  previously  mentioned
settlement benefited our year-ago net income by $1.9 million. The pre-tax amount
of the settlement was $3.4 million of which:

     o    $1.4  million was recorded as a reduction  to the  provision  for loan
          losses;

     o    $1.0 million was recorded in miscellaneous other income; and

     o    $1.0 million was recorded as a reduction to  professional  fees within
          operating expense.

Excluding the settlement from year-ago results, our 1999 net income from banking
operations would have increased $9.0 million or 20.0%.

     The increase in our adjusted 1999 net income reflected several factors. Net
interest  income  increased $32.8 million or 18.8% due to an increase in average
earning assets as the effective interest rate spread declined. Also contributing
to the increase  between years was an adjusted  $16.1 million  increase in other
income.  The  increase in  adjusted  other  income  reflected  increases  in all
categories,  the largest  being $8.3  million in net gains on sales of loans and
mortgage-backed securities, followed by $4.5 million in loan and deposit related
fees and $1.4  million  in loan  servicing  fees.  Adjusted  increases  of $28.1
million in  operating  expense  and $6.0  million in  provision  for loan losses
partially  offset the favorable impact of those items. The increase in operating
expense  primarily  reflected  significantly  higher lending  volumes and branch
expansion.

                                       30
<PAGE>


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

<TABLE>
<CAPTION>
(In Thousands)                                1999         1998          1997
--------------------------------------------------------------------------------
<S>                                       <C>          <C>           <C>
Net interest income ....................  $  207,784   $  174,967    $  154,799
Provision for loan losses ..............      11,270        3,918         8,522
Other income ...........................      39,755       24,617        20,783
Operating expense ......................     143,081      113,954        98,803
Net intercompany income (expense) ......         393         (107)         (357)
--------------------------------------------------------------------------------
Income before income taxes .............      93,581       81,605        67,900
Income taxes ...........................      39,785       34,869        29,238
--------------------------------------------------------------------------------
   Net income ..........................  $   53,796   $   46,736    $   38,662
================================================================================
AT DECEMBER 31:
Assets:
   Loans and mortgage-backed securities   $8,746,063   $5,788,365    $5,366,396
   Other ...............................     654,745      464,097       449,318
--------------------------------------------------------------------------------
     Total assets ......................   9,400,808    6,252,462     5,815,714
--------------------------------------------------------------------------------
Equity .................................  $  532,418   $  480,566    $  430,346
================================================================================
</TABLE>

REAL ESTATE INVESTMENT

     Net income from our real estate investment operations totaled $10.0 million
in 1999,  down from $11.2 million in 1998, but up from $6.6 million in 1997. The
previously  mentioned  settlement  benefited  our  year-ago  net  income by $2.9
million. The pre-tax amount of the settlement was $5.0 million of which:

     o    $4.4  million  was  recorded  in other  income of which  $4.3  million
          reflected a reduction of loss on real estate and joint ventures; and

     o    $0.6 million was recorded as a reduction to professional fees in other
          expense.

Excluding the settlement  from year-ago  results,  our 1999 net income from real
estate  investment  would have  increased  $1.6 million or 19.7% due to a higher
level of net gains from sales and declines in valuation losses.

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

<TABLE>
<CAPTION>
(In Thousands)                                      1999       1998       1997
--------------------------------------------------------------------------------
<S>                                               <C>        <C>        <C>
Net interest expense ...........................  $  (306)   $  (620)   $  (641)
Provision for (reduction of) loan losses .......     --          (19)       118
Other income ...................................   19,523     22,736     14,405
Operating expense ..............................    1,794      2,706      2,469
Net intercompany income (expense) ..............     (393)       107        357
--------------------------------------------------------------------------------
Income before income taxes .....................   17,030     19,536     11,534
Income taxes ...................................    7,022      8,299      4,962
--------------------------------------------------------------------------------
   Net income ..................................  $10,008    $11,237    $ 6,572
================================================================================
AT DECEMBER 31:
Assets:
   Investments in real estate and joint ventures  $42,172    $49,447    $41,356
   Other .......................................    7,399      9,841     12,849
--------------------------------------------------------------------------------
     Total assets ..............................   49,571     59,288     54,205
--------------------------------------------------------------------------------
Equity .........................................  $42,839    $41,331    $34,094
================================================================================
</TABLE>

                                       31
<PAGE>


     For a further discussion regarding income from real estate investment,  see
Other  Income--Real  Estate and Joint Venture  Operations 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

     Loans and  mortgage-backed  securities,  including  those we hold for sale,
totaled $8.7 billion or 93.0% of assets at December 31, 1999. This represents an
increase of $3.0 billion or 51.1% from year-end 1998. The increase  represents a
higher  level  of  loans  held  for  investment,   primarily   one-to-four  unit
residential loans.

     Our loan  originations,  including loans  purchased,  totaled a record $7.2
billion in 1999,  up from $4.1  billion in 1998 and $2.4  billion in 1997.  This
increase  primarily  reflected an increase in originations  of one-to-four  unit
residential  loans. Of the $6.7 billion of one-to-four unit residential loans we
originated,  approximately  70% or $4.6  billion were for  portfolio,  while the
balance was  originated  for sale in the secondary  market.  Our  origination of
subprime loans totaled $1.2 billion in 1999, up from $380 million in 1998.

     The table below  presents  information  regarding  interest  rates and fees
collected on loans originated during the periods indicated.

<TABLE>
<CAPTION>
(Dollars in Thousands)                                   1999        1998        1997       1996      1995
----------------------------------------------------------------------------------------------------------
<S>                                                   <C>         <C>         <C>         <C>        <C>
Average interest rate on new loans .................      5.92%       6.45%       6.04%      6.06%   6.99%
Total loan fees (net of costs) and discounts (net of
    premiums) deferred during the year .............  $(53,181)   $(30,621)   $(11,505)   $(4,525)   $880
==========================================================================================================
</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 except in 1995, which included  increases in interest buydowns,
or discounts, on new real estate loans.

     Residential   one-to-four  unit  adjustable  rate  mortgage   originations,
including loans purchased,  were $4.4 billion during 1999, up significantly from
$1.4 billion in 1998 and $1.7 billion in 1997. Refinancing activities related to
residential one-to-four unit loans, including new loans to refinance loans which
we and other lenders originated, constituted 63% of originations during the year
compared  to  71%  during  1998  and  45%  during  1997.  Although   residential
one-to-four  unit  refinancing  activities  fell  in  1999  as a  percentage  of
originations, in dollar terms refinancing activities increased from $2.6 billion
in 1998 to  $4.2  billion  in 1999 as  borrowers  took  advantage  of the  lower
interest rate environment that existed,  particularly in the earlier part of the
year. In addition, the majority of residential originations were adjustable rate
mortgages tied to the FHLB Eleventh  District Cost of Funds Index  ("COFI"),  an
index which lags the movement in market  interest  rates.  For the year,  68% of
one-to-four unit originations for investment  represented monthly adjusting COFI
adjustable  rate  mortgages  which  provide  for  negative   amortization,   14%
represented COFI adjustable rate mortgages which reprice every six months but do
not provide for negative amortization, with the balance represented by a variety
of other pricing terms.  At December 31, 1999,  $5.2 billion of our  one-to-four
unit  adjustable  rate mortgages were subject to negative  amortization of which
$75 million represented the amount of negative  amortization added to the unpaid
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 $10  million in 1999,  compared to $11 million in 1998 and $8 million in
1997. Originations of loans secured by multi-family properties,  including loans
purchased,  totaled $1 million in 1999,  compared  to $15 million in 1998 and $6
million in 1997.

     During 1999, we originated $149 million of construction loans,  principally
for entry level and first time move-up residential tracts. This compares to $112
million in 1998 and $80 million in 1997.  Our  origination  of land  development
loans  totaled  $57  million in 1999,  compared  to $48  million in 1998 and $20
million in 1997.

     Origination of  non-mortgage  commercial  loans increased to $25 million in
1999 from $6 million in 1998 and $14 million in 1997. The vast majority of these
originations represented secured loans.

                                       33
<PAGE>


     Origination of automobile  loans totaled $234 million in 1999,  compared to
$175  million  in  1998  and  $259  million  in  1997.  The  majority  of  these
originations represent our indirect lending program that was conducted by Downey
Auto  Finance  Corp.  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 Subsequent Event on page
57.

                                       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)                                                       1999          1998          1997          1996         1995
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>           <C>           <C>           <C>           <C>
INVESTMENT PORTFOLIO:
Loans originated:
   Loans secured by real estate:
     Residential one-to-four units:
      Adjustable ..............................................  $ 3,102,810   $   943,736   $ 1,384,442   $ 1,026,812   $ 396,111
      Adjustable - subprime ...................................    1,182,552       372,286       218,399        33,030        --
-----------------------------------------------------------------------------------------------------------------------------------
        Total adjustable ......................................    4,285,362     1,316,022     1,602,841     1,059,842     396,111
      Fixed ...................................................      262,923       192,436        22,265        33,073      13,888
      Fixed - subprime ........................................       12,238         6,020         2,786           545        --
     Residential five or more units:
      Adjustable ..............................................          247           875         4,600        17,409         128
      Fixed ...................................................         --          13,229          --           2,253         419
-----------------------------------------------------------------------------------------------------------------------------------
        Total residential .....................................    4,560,770     1,528,582     1,632,492     1,113,122     410,546
     Commercial real estate ...................................       10,063        10,363         7,830         1,548      10,629
     Construction .............................................      149,143       111,534        80,014        71,678      28,931
     Land .....................................................       56,851        48,357        20,295        10,468      12,906
   Non-mortgage:
     Commercial ...............................................       24,948         6,376        14,336        11,835       1,115
     Automobile ...............................................      233,948       175,193       259,040       200,966      62,234
     Other consumer ...........................................       54,489        28,274        25,988        14,226      17,633
-----------------------------------------------------------------------------------------------------------------------------------
      Total loans originated ..................................    5,090,212     1,908,679     2,039,995     1,423,843     543,994
Real estate loans purchased:
   One-to-four units ..........................................       36,317         4,343        32,241           223      44,194
   One-to-four units - subprime ...............................       12,912         1,833         2,243          --          --
   Other (1) ..................................................          440         1,287         1,344          --          --
-----------------------------------------------------------------------------------------------------------------------------------
   Total loans originated and purchased .......................    5,139,881     1,916,142     2,075,823     1,424,066     588,188
Loan repayments ...............................................   (1,823,585)   (1,855,157)   (1,130,357)     (832,713)   (538,217)
Other net changes (2), (3) ....................................      (36,794)      (34,145)     (319,183)      (39,978)    (50,544)
-----------------------------------------------------------------------------------------------------------------------------------
   Net increase (decrease) in loans held for investment .......    3,279,502        26,840       626,283       551,375        (573)
-----------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities held to maturity, net:
   Repayments .................................................         --            --            --            --        (5,588)
   Transferred to mortgage-backed securities available for sale         --            --            --            --       (33,555)
-----------------------------------------------------------------------------------------------------------------------------------
     Net decrease in mortgage-backed securities, net ..........         --            --            --            --       (39,143)
-----------------------------------------------------------------------------------------------------------------------------------
      Net increase (decrease) in loans and mortgage-backed
         securities  held for investment ......................    3,279,502        26,840       626,283       551,375     (39,716)
-----------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO:
Residential, one-to-four units:
   Originated whole loans .....................................    2,028,402     2,162,583       289,271       159,941      93,496
   Originated whole loans - subprime ..........................       13,872          --            --            --          --
   Loans transferred from (to) the investment portfolio (3) ...       42,570        (3,056)      290,558         1,791        (100)
   Originated whole loans sold (3) ............................     (999,594)   (1,130,303)     (467,989)     (135,426)    (80,725)
   Loans exchanged for mortgage-backed securities .............   (1,387,364)     (608,831)      (89,522)      (26,452)       --
   Other net changes ..........................................       (9,263)       (8,111)          (83)          (48)        (10)
-----------------------------------------------------------------------------------------------------------------------------------
     Net increase (decrease) in loans held for sale ...........     (311,377)      412,282        22,235          (194)     12,661
-----------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, net:
   Received in exchange for loans .............................    1,387,364       608,831        89,522        26,452        --
   Purchased ..................................................         --            --            --          30,073        --
   Transferred from mortgage-backed securities held to maturity         --            --            --            --        33,555
   Sold .......................................................   (1,387,364)     (610,113)      (89,522)      (31,077)    (21,372)
   Repayments .................................................       (9,936)      (15,129)      (12,560)      (15,661)     (6,862)
   Other net changes ..........................................         (491)         (742)          592          (596)      2,669
-----------------------------------------------------------------------------------------------------------------------------------
     Net increase (decrease) in mortgage-backed securities
        available for sale ....................................      (10,427)      (17,153)      (11,968)        9,191       7,990
-----------------------------------------------------------------------------------------------------------------------------------
     Net increase (decrease) in loans and mortgage-backed
        securities held for sale and available for sale .......     (321,804)      395,129        10,267         8,997      20,651
-----------------------------------------------------------------------------------------------------------------------------------
     Total net increase (decrease) in loans and
        mortgage-backed securities ............................  $ 2,957,698   $   421,969   $   636,550   $   560,372   $ (19,065)
===================================================================================================================================
<FN>
(1)  Primarily  five or more unit  residential  loans except for $0.6 million of
     commercial real estate loans in 1998.
(2)  Primarily includes borrowings against and repayments of lines of credit and
     construction  loans,  changes in loss allowances,  loans  transferred to or
     from real estate  acquired in  settlement  of loans or to the held for sale
     portfolio, and interest capitalized on loans (negative amortization).
(3)  Included  in  1999  are  $49.2  million  of  one-to-four  unit  residential
     adjustable  rate  mortgages   transferred  from  the  held  for  investment
     portfolio and sold serving  retained,  and in 1997 are $290.5  million sold
     servicing released.
</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,
1999,  approximately  93% of our real estate  loans were  secured by real estate
located in California,  principally  in Los Angeles,  Orange,  Santa Clara,  San
Diego and San Mateo counties.

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                      -------------------------------------------------------------------
(In Thousands)                                            1999          1998          1997          1996          1995
-------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>           <C>           <C>           <C>           <C>
INVESTMENT PORTFOLIO:
    Loans secured by real estate:
       Residential:
       Residential one-to-four units:
         Adjustable ...............................   $5,644,883    $3,721,728    $4,190,160    $3,840,862    $3,486,774
         Adjustable - subprime ....................    1,620,624       580,232       245,749        32,715          --
         Fixed ....................................      510,516       325,454       168,315       172,328       169,738
         Fixed - subprime .........................       18,777         8,719         3,321           543          --
-------------------------------------------------------------------------------------------------------------------------
            Total one-to-four units ...............    7,794,800     4,636,133     4,607,545     4,046,448     3,656,512
       Residential five or more units:
         Adjustable ...............................       15,889        18,617        29,246        43,050        44,438
         Fixed ....................................        5,166        21,412         9,032        13,857        12,883
       Commercial real estate:
         Adjustable ...............................       37,419        39,360        87,604       158,656       170,498
         Fixed ....................................      110,908       101,430       114,821       101,953       100,085
       Construction ...............................      176,487       127,761        70,865        66,651        28,593
       Land .......................................       67,631        44,859        25,687        21,177        21,867
    Non-mortgage:
       Commercial .................................       26,667        28,293        26,024        22,136        12,864
       Automobile .................................      399,789       357,988       342,326       202,186        56,127
       Other consumer .............................       49,344        41,894        47,735        47,281        50,945
-------------------------------------------------------------------------------------------------------------------------
         Total loans held for investment ..........    8,684,100     5,417,747     5,360,885     4,723,395     4,154,812
    Increase (decrease) for:
       Undisbursed loan funds .....................     (125,159)     (108,414)      (64,884)      (49,250)      (29,942)
       Net deferred costs and premiums ............       67,740        31,021        18,088        11,663         7,412
       Allowance for estimated loss ...............      (38,342)      (31,517)      (32,092)      (30,094)      (27,943)
-------------------------------------------------------------------------------------------------------------------------
         Total loans held for investment, net .....    8,588,339     5,308,837     5,281,997     4,655,714     4,104,339
-------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO, NET:
    Loans held for sale:
       One-to-four units ..........................      122,133       447,382        35,100        12,865        13,059
       One-to-four units - subprime ...............       13,872          --            --            --            --
-------------------------------------------------------------------------------------------------------------------------
         Total loans held for sale ................      136,005       447,382        35,100        12,865        13,059
    Mortgage-backed securities available for sale:
       Adjustable .................................        7,700        10,996        17,751        23,620        34,355
       Fixed ......................................       14,019        21,150        31,548        37,647        17,721
-------------------------------------------------------------------------------------------------------------------------
         Total mortgage-backed securities available
            for sale ..............................       21,719        32,146        49,299        61,267        52,076
-------------------------------------------------------------------------------------------------------------------------
         Total loans and mortgage-backed securities
            held for sale and available for sale ..      157,724       479,528        84,399        74,132        65,135
-------------------------------------------------------------------------------------------------------------------------
         Total loans and mortgage-backed securities   $8,746,063    $5,788,365    $5,366,396    $4,729,846    $4,169,474
=========================================================================================================================
</TABLE>

                                       36
<PAGE>


     The table  below sets forth the  scheduled  contractual  maturities  of our
total loan and mortgage-backed securities portfolio as of December 31, 1999.

<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) ........  $ 58,655  $ 63,221  $ 68,143  $152,612  $498,440  $725,099  $5,721,628  $7,287,798
        Fixed (1) .............     7,058     7,639     8,270    18,645    61,890    92,051     447,454     643,007
      Five or more units:
        Adjustable ............       330       356       383       856     2,785     4,029       7,150      15,889
        Fixed .................       186       201       218       493     1,648     2,420        --         5,166
      Commercial real estate:
        Adjustable ............     1,963     2,125     2,300     5,187    17,211     8,633        --        37,419
        Fixed .................     7,898     8,604     9,373    21,332    63,701      --          --       110,908
      Construction - adjustable   176,487      --        --        --        --        --          --       176,487
      Land:
        Adjustable ............    66,726      --        --        --        --        --          --        66,726
        Fixed .................        10        11        12        27        94       149         602         905
Non-mortgage:
    Commercial ................    23,001     1,572     1,538       556      --        --          --        26,667
    Automobile ................    93,642   102,568   112,346    91,233      --        --          --       399,789
    Other consumer (2) ........     2,830     3,110     3,418     2,784    37,202      --          --        49,344
-------------------------------------------------------------------------------------------------------------------
      Total loans .............   438,786   189,407   206,001   293,725   682,971   832,381   6,176,834   8,820,105
Mortgage-backed securities, net       534     9,158       478     1,075     3,529     2,827       4,118      21,719
-------------------------------------------------------------------------------------------------------------------
    Total loans and mortgage-
      backed securities .......  $439,320  $198,565  $206,479  $294,800  $686,500  $835,208  $6,180,952  $8,841,824
===================================================================================================================
<FN>
(1)  Includes loans held for sale.
(2)  Includes  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, 1999,  the maximum amount the Bank could have loaned to any
one borrower, and related entities, under regulatory limits was $100 million, or
$167 million for loans secured by readily marketable collateral, compared to $75
million or $124 million for loans  secured by readily  marketable  collateral at
year-end 1998. The Bank does not expect that these  regulatory  limitations will
adversely impact its proposed lending activities during 2000.

INVESTMENT SECURITIES

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

<TABLE>
<CAPTION>
                                                                            December 31,
                                                          ------------------------------------------------
(In Thousands)                                              1999      1998      1997      1996      1995
----------------------------------------------------------------------------------------------------------
<S>                                                       <C>       <C>       <C>       <C>       <C>
Federal funds ..........................................  $      1  $ 33,751  $  6,095  $  6,038  $  7,249
U.S. Treasury and agency securities - available for sale   171,823   116,061   159,398   141,999   164,880
Municipal bonds - held to maturity .....................     6,728     6,764     6,885     6,997     7,194
----------------------------------------------------------------------------------------------------------
    Total investment securities ........................  $178,552  $156,576  $172,378  $155,034  $179,323
==========================================================================================================
</TABLE>

                                       37
<PAGE>


     As of December 31, 1999, 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 .....................  $     1     1.69     $   --          -%     $ --          -%    $      1     1.69%
U.S. Treasury and agency securities   24,724     5.13      147,099     6.27        --          -      171,823     6.10
Municipal bonds (1) ...............       30     6.75         --          -       6,698     6.61        6,728     6.61
-----------------------------------------------------------------------------------------------------------------------
     Total ........................  $24,755     5.13     $147,099     6.27      $6,698     6.61     $178,552     6.12%
=======================================================================================================================
<FN>
(1)  Yield on a fully tax-equivalent basis is 11.59%.
</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 8
of Notes to the Consolidated  Financial Statements on page 77. We have completed
and substantially  leased most of the real estate  development  projects--with a
weighted average  occupancy of 87% for retail  neighborhood  shopping centers at
December 31, 1999. At December 31, 1999, the Bank had  outstanding  loans of $35
million to these joint ventures.

     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. 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, 1999,  DSL Service  Company was involved with four joint
venture  partners.  Three  of  these  partners  were  operators  of four  retail
neighborhood  shopping centers, a commercial  building,  two residential housing
developments  and vacant land held for sale. The other joint venture  partner is
involved in the development of two new industrial buildings. DSL Service Company
has  eight  wholly  owned  retail  neighborhood   shopping  centers  located  in
California and Arizona.

                                       38
<PAGE>


     The following table sets forth the condensed balance sheets of DSL Service
Company's  joint ventures by property type at December 31, 1999, on a historical
cost basis. None of the joint venture  investments have valuation  allowances as
the fair market value of the associated property exceeds its carrying value. 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 51.

<TABLE>
<CAPTION>
                                                                Retail
                                                             Neighborhood
                                                               Shopping
(Dollars in Thousands)                                          Centers    Commercial  Residential      Total
---------------------------------------------------------------------------------------------------------------
<S>                                                            <C>           <C>         <C>           <C>
Cash .......................................................   $   216       $  162      $ 1,492       $ 1,870
Projects under development .................................      --          1,268       11,255        12,523
Completed projects .........................................    20,652        4,503         --          25,155
Other assets ...............................................     2,220          495          188         2,903
---------------------------------------------------------------------------------------------------------------
       Total assets ........................................    23,088        6,428       12,935        42,451
---------------------------------------------------------------------------------------------------------------
Secured notes payable to the Bank ..........................    24,854          427        9,416        34,697
Secured notes payable to others ............................      --          3,230         --           3,230
Other liabilities ..........................................     4,710           54        1,411         6,175
Equity (deficit):
    DSL Service Company (1) ................................     2,065        1,618        1,032         4,715
    Allowance for losses recorded by DSL Service Company (2)      --           --           --            --
    Other partners' (2) ....................................    (8,541)       1,099        1,076        (6,366)
---------------------------------------------------------------------------------------------------------------
       Total liabilities and equity ........................   $23,088       $6,428      $12,935       $42,451
---------------------------------------------------------------------------------------------------------------
Number of joint venture projects ...........................         4            3            2             9
===============================================================================================================
<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' deficit of $6 million represents their equity
     interest in the accumulated  retained earnings  (deficit) of the respective
     joint ventures.  Those results include not only the net profit on sales and
     the operating results of the real estate assets,  but depreciation  expense
     and funding costs as well.  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. There were no
     allowances  at  December  31,  1999,  as the fair value of the real  estate
     assets  of the joint  venture  partnerships  in which  the other  partners'
     equity  was a deficit  exceeded  the  amount of third  party  notes and DSL
     Service Company's  investment thereby  eliminating the need for a valuation
     allowance since the sale of the real estate would allow DSL Service Company
     to realize its investment.
</FN>
</TABLE>

                                       39
<PAGE>


     The  following   table  sets  forth  by  property  type  our  wholly  owned
investments  in real estate and related  allowances  for losses at December  31,
1999.

<TABLE>
<CAPTION>
                                             Retail
                                          Neighborhood
(Dollars in Thousands)                  Shopping Centers    Land         Total
--------------------------------------------------------------------------------
<S>                                        <C>           <C>            <C>
Wholly Owned Properties:
     Investment in wholly owned projects   $33,443 (1)   $ 6,145 (2)    $39,588
     Allowance for losses ..............    (1,069)       (1,062)        (2,131)
--------------------------------------------------------------------------------
Net investment in wholly owned projects    $32,374       $ 5,083        $37,457
--------------------------------------------------------------------------------
Number of projects .....................         8             8             16
================================================================================
<FN>
(1)  Includes eight free-standing stores that are part of neighborhood  shopping
     centers totaling $1 million and which we counted as one project.
(2)  Includes five properties totaling $6 million.
</FN>
</TABLE>

     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 a record $1.5 billion or 30.2% in 1999 and totaled
$6.6 billion at December 31, 1999. Our  certificates  of deposit  increased $1.3
billion or 33.4%, while our lower-rate transaction  accounts--checking,  regular
passbook  and  money  market--increased  $252  million  or  20.3%.  Of the total
increase in our deposits,  $105 million was  associated  with 14 new branches we
opened  during 1999.  The  following  table sets forth the amount of deposits by
classification at the dates indicated.

<TABLE>
<CAPTION>
                                                                December 31,
                                     -----------------------------------------------------------------
                                             1999                  1998                   1997
                                     -----------------------------------------------------------------
                                     Weighted              Weighted               Weighted
                                      Average               Average                Average
(Dollars in Thousands)                 Rate     Amount       Rate      Amount       Rate      Amount
------------------------------------------------------------------------------------------------------
<S>                                    <C>    <C>            <C>     <C>            <C>     <C>
Transaction accounts .............     2.46%  $1,489,939     2.30%   $1,238,062     2.15%   $  935,869
Certificates of deposit:
   Less than 3.00% ...............     2.47        8,717     2.62        25,126     2.64        30,623
   3.00-3.49 .....................     3.02           16     3.01           593     3.02           766
   3.50-3.99 .....................     3.92        3,786     3.88        51,474        -          --
   4.00-4.49 .....................     4.32      210,127     4.39       428,316     4.31        60,095
   4.50-4.99 .....................     4.78      939,858     4.80       668,204     4.87        40,356
   5.00-5.99 .....................     5.56    3,623,632     5.53     2,421,333     5.63     2,896,291
   6.00-6.99 .....................     6.07      284,984     6.06       204,065     6.06       901,920
   7.00 and greater ..............     7.32        1,702     7.24         2,560     7.22         4,058
------------------------------------------------------------------------------------------------------
     Total certificates of deposit     5.39    5,072,822     5.26     3,801,671     5.68     3,934,109
------------------------------------------------------------------------------------------------------
     Total deposits ..............     4.72%  $6,562,761     4.53%   $5,039,733     5.00%   $4,869,978
======================================================================================================
</TABLE>

                                       40
<PAGE>


     The  following  table shows as of December 31, 1999,  our  certificates  of
deposit maturities by interest rate category.

<TABLE>
<CAPTION>
                           Less
                           Than    4.00% -   4.50% -    5.00% -    6.00% -    7.00%                   Percent
(Dollars in Thousands)    4.00%     4.49%     4.99%      5.99%      6.99%  and Greater   Total (1)    of Total
--------------------------------------------------------------------------------------------------------------
<S>                      <C>      <C>       <C>       <C>         <C>        <C>        <C>            <C>
Within 3 months .......  $10,623  $162,042  $353,922  $  659,715  $  8,023   $1,702     $1,196,027      23.58%
3 to 6 months .........      722    29,121   364,185     741,513     2,549     --        1,138,090      22.44
6 to 12 months ........      959    13,971   178,338   1,123,934   242,797     --        1,559,999      30.75
12 to 24 months .......      197     4,951    37,473   1,069,074    15,137     --        1,126,832      22.21
24 to 36 months .......        6        28     1,101      12,964    13,495     --           27,594       0.54
36 to 60 months .......       12        14     4,832      16,222     2,818     --           23,898       0.47
Over 60 months ........     --        --           7         210       165     --              382       0.01
--------------------------------------------------------------------------------------------------------------
    Total .............  $12,519  $210,127  $939,858  $3,623,632  $284,984   $1,702     $5,072,822     100.00%
==============================================================================================================
<FN>
(1)  Includes jumbo ($100,000 and over)  certificates of deposit of $430 million
     with maturities of 3 months or less, $371 million with maturities of 3 to 6
     months and $523 million with  maturities of 6 to 12 months and $388 million
     with a remaining term of over 12 months.
</FN>
</TABLE>

BORROWINGS

     At December 31, 1999,  borrowings  totaled $2.1 billion,  up  significantly
from $704  million at  year-end  1998 and $484  million at  year-end  1997.  The
increase in 1999  primarily  reflected  increases 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)                                    1999        1998       1997       1996       1995
--------------------------------------------------------------------------------------------------------------
<S>                                                    <C>          <C>        <C>        <C>        <C>
Federal Home Loan Bank advances .....................  $2,122,407   $695,012   $352,458   $386,883   $220,715
Other borrowings: ...................................        --
    Reverse repurchase agreements ...................        --         --       34,803       --       16,099
    Commercial paper ................................        --         --       83,811    198,113    196,602
    Real estate notes ...............................         373      8,708     12,663     10,349      2,802
--------------------------------------------------------------------------------------------------------------
      Total borrowings ..............................  $2,122,780   $703,720   $483,735   $595,345   $436,218
==============================================================================================================
Weighted average rate on borrowings during the period        5.46%      6.07%      6.07%      5.98%      6.39%
Total borrowings as a percentage of total assets ....       22.56      11.22       8.29      11.45       9.37
==============================================================================================================
</TABLE>

                                       41
<PAGE>


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

<TABLE>
<CAPTION>
(Dollars in Thousands)                                                       1999        1998       1997
-----------------------------------------------------------------------------------------------------------
<S>                                                                       <C>          <C>        <C>
FHLB advances with original maturities less than one year:
    Balance at end of year .............................................  $1,590,500   $120,000   $214,300
    Average balance outstanding during the year ........................     616,199     38,393    328,886
    Maximum amount outstanding at any month-end during the year ........   1,590,500    120,000    427,100
    Weighted average interest rate during the year .....................        5.42%      5.96%      5.83%
    Weighted average interest rate at the end of year ..................        5.88       5.36       5.81
Securities sold under agreement to repurchase:
    Balance at end of year .............................................  $     --     $   --     $ 34,803
    Average balance outstanding during the year ........................       1,987      1,877      4,029
    Maximum amount outstanding at any month-end during the year ........      24,875     50,088     34,803
    Weighted average interest rate during the year .....................        5.42%      5.90%      5.61%
    Weighted average interest rate at the end of year ..................        --         --         6.65
Commercial paper sold:
    Balance at end of year .............................................  $     --     $   --     $ 83,811
    Average balance outstanding during the year ........................        --       30,589    182,296
    Maximum amount outstanding at any month-end during the year ........        --      103,749    272,818
    Weighted average interest rate during the year .....................          -%       6.32%      5.75%
    Weighted average interest rate at the end of year ..................        --         --         5.61
Total short-term borrowings:
    Total average short-term borrowings outstanding during the year ....  $  618,186   $ 70,859   $515,211
    Total weighted average rate on short-term borrowings during the year        5.42%      6.11%      5.80%
===========================================================================================================
</TABLE>

     At year-end  1999,  total  intermediate  and  long-term  advances were $532
million,  down from $575 million at December 31, 1998. The weighted average rate
on our  intermediate and long-term FHLB advances at year-end 1999 was 5.44%. The
following table sets forth the associated maturities at December 31, 1999.

<TABLE>
<CAPTION>
(In Thousands)
---------------------------------------------------------------
<S>                                                    <C>
2000 ..............................................    $ 28,796
2001 ..............................................      16,056
2002 ..............................................      55,921
2003 ..............................................         134
2004 ..............................................        --
Thereafter ........................................     431,000
---------------------------------------------------------------
     Total intermediate and long-term FHLB advances    $531,907
===============================================================
</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 $5.3 million for 1999. For further
information regarding our capital securities, see Note 19 on page 87 of Notes To
Consolidated Financial Statements.

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 occurs to the
degree that interest-bearing  liabilities reprice or mature more rapidly or on a
different  basis  than  interest-earning   assets.  Since  our  earnings  depend
primarily on our net interest income, which is the difference between

                                       42
<PAGE>


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.

     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  on  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.

     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, 1999, as well as  information  regarding our gap position.  Our gap
position   represents  the  repricing  and  maturity   difference   between  our
interest-earning assets and interest-bearing  liabilities in future periods. The
repricing frequencies have been determined 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  as  completely  or  rapidly  as our  liabilities  to  changes in market
interest  rates.  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.

                                       43
<PAGE>


<TABLE>
<CAPTION>
                                                                                    December 31, 1999
                                                    --------------------------------------------------------------------------
                                                       Within        7 - 12        2 - 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)    $  109,021   $    24,754   $  147,099   $      70   $   --     $  280,944
    Loans and mortgage-backed securities:
     Mortgage-backed securities ..............(2)        12,628         4,691        2,328       1,670        402       21,719
     Loans secured by real estate:
       Residential:
         Adjustable ..........................(2)     6,840,189       379,900      122,151        --          --     7,342,240
         Fixed ...............................(2)       148,075        28,589      179,994     136,315    157,625      650,598
       Commercial real estate ................(2)        44,005         8,437       85,298       6,223      1,824      145,787
       Construction ..........................(2)        86,151          --           --          --         --         86,151
       Land ..................................(2)        37,004            14          113         150        614       37,895
     Non-mortgage:
       Commercial ............................(2)        17,259          --           --          --         --         17,259
       Consumer ..............................(2)       139,096        83,679      221,639        --         --        444,414
------------------------------------------------------------------------------------------------------------------------------
    Total loans and mortgage-backed securities        7,324,407       505,310      611,523     144,358    160,465    8,746,063
------------------------------------------------------------------------------------------------------------------------------
     Total interest-earning assets............       $7,433,428   $   530,064   $  758,622   $ 144,428   $160,465   $9,027,007
==============================================================================================================================
Deposits, borrowings and capital securities:
    Interest-bearing deposits:
     Fixed maturity deposits .................(1)    $2,334,117   $ 1,559,999   $1,178,324   $     382 $     --     $5,072,822
     Transaction accounts ....................(3)     1,307,689          --           --          --         --      1,307,689
    Non-interest-bearing transaction accounts           182,250          --           --          --         --        182,250
------------------------------------------------------------------------------------------------------------------------------
     Total deposits ..........................        3,824,056     1,559,999    1,178,324         382       --      6,562,761
    Borrowings ...............................        1,606,689        12,790       72,301     431,000       --      2,122,780
    Capital securities .......................             --            --           --          --      120,000      120,000
------------------------------------------------------------------------------------------------------------------------------
     Total deposits, borrowings and
       capital securities ....................       $5,430,745   $ 1,572,789   $1,250,625   $ 431,382   $120,000   $8,805,541
==============================================================================================================================
Excess (shortfall) of interest-earning assets
    over interest-bearing liabilities ........       $2,002,683   $(1,042,725)  $ (492,003)  $(286,954)  $ 40,465   $  221,466
Cumulative gap ...............................        2,002,683       959,958      467,955     181,001    221,466
Cumulative gap - as a % of total assets:
    December 31, 1999 ........................            21.29%        10.20%        4.97%       1.92%      2.35%
    December 31, 1998 ........................            23.84          7.48         9.07        3.40       4.00
    December 31, 1997 ........................            24.82          1.35         2.71        3.54       3.93
==============================================================================================================================
<FN>
(1)  Based upon contractual maturity and repricing date.
(2)  Based upon contractual maturity, repricing date and projected repayment and
     prepayments of principal.
(3)  Subject to immediate repricing.
</FN>
</TABLE>

     Our six-month gap at December 31, 1999, was a positive  21.29%.  This means
that   more   interest-earning   assets   reprice   within   six   months   than
interest-bearing  liabilities.  This  compares  to a positive  six-month  gap of
23.84% at  December  31,  1998 and 24.82% at  December  31,  1997.  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  $4.7 billion during 1999, $1.5 billion during 1998 and
$2.0  billion  during  1997,  of  loans  and  mortgage-backed   securities  with
adjustable  interest  rates or  maturities  of five years or less.  These  loans
represented  approximately 92% during 1999, 80% during 1998 and 96% during 1997,
of all  loans  and  mortgage-backed  securities  originated  and  purchased  for
investment during these periods.

     At December 31, 1999, 97% of our interest-earning assets mature, reprice or
are estimated to prepay within five years,  compared to 98% at December 31, 1998
and 99% at December 31, 1997.  At December 31, 1999,  loans held for  investment
with adjustable interest rates represented 87% of our loan and mortgage-backed

                                       44
<PAGE>


securities  portfolio.  During 2000, 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  certain  yield and other  approved  guidelines.  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 the 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, is
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  1999  and  1998.   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>
                                              1999                           1998
                                  -------------------------------------------------------------
                                      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 .............      (13.8)%        (9.7)%           (10.0)%           1.2%
             +100 .............       (6.8)         (1.5)             (4.4)            2.0
             (100) ............        3.9          (2.2)              2.9            (1.0)
             (200) ............        7.1          (4.3)              3.9            (0.6)
-----------------------------------------------------------------------------------------------
<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,  1999.  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.

<TABLE>
<CAPTION>
                                                           Expected Maturity Date at December 31, 1999 (1)
                                  -------------------------------------------------------------------------------------------------
                                                                                                               Total        Fair
(Dollars in Thousands)                2000         2001         2002        2003       2004     Thereafter    Balance       Value
-----------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>          <C>          <C>          <C>        <C>        <C>          <C>          <C>
INTEREST-SENSITIVE ASSETS:
Investment securities ..........  $  127,147   $   12,343   $   85,539   $ 22,218   $ 26,999   $    6,698   $  280,944   $  280,926
   Average interest rate .......        5.51%        6.32%        5.98%      6.70%      6.79%        6.61%        5.93%
Loans held for sale ............     136,005         --           --         --         --           --        136,005      136,298
   Average interest rate .......        8.10%           -%           -%         -%         -%           -%        8.10%
Mortgage-backed securities
   Available for sale ..........      10,516        1,495        1,333      1,185      1,053        6,137       21,719       21,719
   Average interest rate .......        6.96%        7.41%        7.40%      7.38%      7.37%        7.36%        7.17%
Loans held for investment:
   Loans secured by real estate:
     Residential:
      Adjustable ...............   1,359,513    1,194,967      970,704    758,010    589,064    2,447,691    7,319,949    7,308,374
        Average interest rate ..        7.49%        7.47%        7.45%      7.44%      7.43%        7.43%        7.45%
      Fixed ....................      59,418       52,803       47,383     42,566     38,059      296,655      536,884      533,673
        Average interest rate ..        7.93%        7.92%        7.91%      7.90%      7.90%        7.89%        7.90%
     Other .....................     143,649       20,366       43,735     21,177     13,153       27,753      269,833      276,140
      Average interest rate ....        8.72%        8.30%        8.27%      8.20%      8.00%        7.87%        8.45%
   Non-mortgage:
     Commercial ................      12,516           25        2,316      2,402       --           --         17,259       17,912
      Average interest rate ....        9.28%        9.55%        9.72%     10.06%         -%           -%        9.45%
     Consumer ..................     175,179      141,875       78,534     48,826       --           --        444,414      453,425
      Average interest rate ....        9.11%        9.08%        9.07%      9.12%         -%           -%        9.09%
Interest bearing advances to
   joint ventures ..............      15,613         --           --         --         --           --         15,613       15,613
   Average interest rate .......        4.64%           -%           -%         -%         -%           -%        4.64%
Mortgage servicing assets ......       6,803        6,240        5,578      4,916      4,294        6,432       34,263       47,363
-------------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive assets   $2,046,359   $1,430,114   $1,235,122   $901,300   $672,622   $2,791,366   $9,076,883   $9,091,443
-------------------------------------------------------------------------------------------------------------------------------
INTEREST-SENSITIVE
LIABILITIES:
Deposits:
   Transaction accounts ........  $  272,134   $  222,430     $181,803   $148,597   $121,456$     543,519   $1,489,939   $1,489,939
     Average interest rate .....        2.46%        2.46%        2.46%      2.46%      2.46%        2.46%        2.46%
   Certificates of deposit .....   3,894,116    1,126,832       27,594     19,943      3,955          382    5,072,822    5,025,389
     Average interest rate .....        5.29%        5.72%        5.83%      5.42%      5.08%        5.71%        5.39%
Borrowings .....................   1,619,480       16,245       55,921        134       --        431,000    2,122,780    2,055,493
   Average interest rate .......        5.89%        5.87%        4.77%      5.76%         -%        5.42%        5.77%
Capital securities .............        --           --           --         --         --        120,000      120,000      102,000
   Average interest rate .......           -%           -%           -%         -%         -%       10.14%       10.14%
-------------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive
   liabilities .................  $5,785,730   $1,365,507     $265,318   $168,674   $125,411   $1,094,901   $8,805,541   $8,672,821
-------------------------------------------------------------------------------------------------------------------------------
<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  constant  prepayment rate ("CPR") is 10.9% on our
     fixed-rate  and  19.2%  on  our  adjustable  rate  mortgage  portfolio  for
     interest-earning assets, excluding investment securities, which do not have
     prepayment features.  For deposit liabilities,  in accordance with standard
     industry practice and our own historical experience, we have applied "decay
     factors,"  used to estimate  deposit  runoff,  of 20% per year.  The actual
     maturities  of  these  instruments  could  vary   substantially  if  future
     prepayments differ from our historical experience.
</FN>
</TABLE>

                                       46
<PAGE>


     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,
                                              -------------------------------------
                                              1999    1998    1997    1996    1995
-----------------------------------------------------------------------------------
<S>                                           <C>     <C>     <C>     <C>     <C>
Weighted average yield:
    Loans and mortgage-backed securities      7.67%   7.72%   7.95%   7.77%   7.67%
    Federal Home Loan Bank stock .......      5.60    5.44    5.88    6.45    5.16
    Investment securities ..............      6.12    5.40    5.63    6.02    6.46
-----------------------------------------------------------------------------------
      Earning assets yield .............      7.62    7.65    7.87    7.71    7.60
-----------------------------------------------------------------------------------
Weighted average cost:
    Deposits ...........................      4.72    4.53    5.00    4.86    4.81
    Borrowings:
      Federal Home Loan Bank advances ..      5.77    5.47    6.11    5.80    6.07
      Other borrowings .................      7.88    8.69    6.15    5.60    5.62
-----------------------------------------------------------------------------------
          Combined borrowings ..........      5.99    5.51    6.12    5.73    5.84
    Capital securities .................     10.00       -       -       -       -
-----------------------------------------------------------------------------------
      Combined funds cost ..............      5.05    4.66    5.11    4.97    4.92
-----------------------------------------------------------------------------------
          Interest rate spread .........      2.57%   2.99%   2.76%   2.74%   2.68%
===================================================================================
</TABLE>

     The year-end  weighted  average  yield on our loan  portfolio  decreased to
7.67% at December 31, 1999,  from 7.72% at year-end 1998.  The weighted  average
rate on new loans  originated  during 1999 was 5.92%,  compared to 6.45%  during
1998 and 6.04% during 1997.  Although  interest rates increased  during 1999, we
experienced  a  decline  in  rates  on new  loans  primarily  due to the  higher
proportion of residential  one-to-four  unit adjustable rate loans originated at
low introductory rates than in prior years. At December 31, 1999, our adjustable
rate  mortgage  portfolio  of  single  family   residential   loans,   including
mortgage-backed securities, totaled $7.3 billion with a weighted average rate of
7.52%,  compared  to $4.3  billion  with a  weighted  average  rate of  7.53% at
December  31, 1998 and $4.5  billion  with a weighted  average  rate of 7.58% at
December 31, 1997.

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,  real estate  acquired in
settlement of loans and repossessed  automobiles.  Non-performing assets totaled
$39 million at December 31, 1999,  compared to $27 million at December 31, 1998,
and $52 million at December 31, 1997. The increase in our non-performing  assets
during 1999 was primarily  attributed to one-to-four unit  residential  subprime
loans. When measured as a percentage of total assets, our non-performing  assets
fell to 0.42% at year-end  1999  compared to 0.44% at year-end 1998 and 0.89% at
year-end 1997.

                                       47
<PAGE>


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

<TABLE>
<CAPTION>
                                                                         December 31,
                                                       ------------------------------------------------
(Dollars in Thousands)                                   1999      1998      1997      1996      1995
-------------------------------------------------------------------------------------------------------
<S>                                                    <C>       <C>       <C>       <C>       <C>
Non-accrual loans:
    Residential, one-to-four units ..................  $15,590   $15,571   $20,816   $22,885   $25,587
    Residential, one-to-four units - subprime .......   13,914     1,975      --        --        --
    Other ...........................................    3,477     4,829    20,883    22,136    52,754
-------------------------------------------------------------------------------------------------------
      Total non-accrual loans .......................   32,981    22,375    41,699    45,021    78,341
Real estate acquired in settlement of loans .........    5,899     4,475     9,626    16,078    18,854
Repossessed automobiles .............................      314       569       795       928      --
-------------------------------------------------------------------------------------------------------
   Total non-performing assets ......................  $39,194   $27,419   $52,120   $62,027   $97,195
=======================================================================================================
Allowance for loan losses (1):
    Amount ..........................................  $38,342   $31,517   $32,092   $30,094   $27,943
    As a percentage of non-performing loans .........   116.25%   140.86%    76.96%    66.84%    35.67%
Non-performing assets as a percentage of total assets     0.42      0.44      0.89      1.19      2.09
=======================================================================================================
<FN>
(1)  Allowance  for loan losses does not include the  allowance  for real estate
     and real estate acquired in settlement of loans.
</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 51.

     All but $4.3 million of our non-performing assets at December 31, 1999 were
located in California.

     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 1999, 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, 1999, 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, 1999,  non-accrual  loans
aggregating  $9  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.

     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

                                       48
<PAGE>


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 $1 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, 1999,  the recorded  investment  in
loans for which we have  recognized  impairment  totaled $13 million,  unchanged
from December 31, 1998.  The total  allowance for losses  related to these loans
was $1 million  for both  December  31, 1999 and 1998.  For further  information
regarding impaired loans, see Note 6 of the Notes to the Consolidated  Financial
Statements on page 74.

     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.  There were no troubled debt  restructurings
on accrual status at either December 31, 1999 or 1998.

     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 $6 million at December 31, 1999.

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. If we have elected to pursue a non-judicial  foreclosure,  we
are not  permitted  under  applicable  California  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, 1999,  loans  delinquent 30 days or more as a percentage of
total loans was 0.58%,  down from 0.65% at  year-end  1998 and 0.79% at year-end
1997. Although total loan delinquencies  declined in 1999, subprime  residential
loan  delinquencies  increased  from 0.34% at year-end 1998 to 1.15% at year-end
1999. A higher  incidence of delinquency is expected on these subprime loans as,
by definition,  these borrowers have a history of delinquencies  and that is why
higher interest rates are charged on these loans 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.

                                       49
<PAGE>


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

<TABLE>
<CAPTION>
                                                                              December 31,
                                              ----------------------------------------------------------------------------
                                                              1999                                   1998
                                              ----------------------------------------------------------------------------
                                               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 ....................  $ 8,630   $3,889   $12,793   $25,312   $ 9,841   $6,014   $12,832   $28,687
      One-to-four units - subprime (2) .....    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 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%
==========================================================================================================================
                                                              1997                                   1996
                                              ----------------------------------------------------------------------------
<S>                                           <C>       <C>      <C>       <C>       <C>       <C>      <C>       <C>
Loans secured by real estate:
    Residential:
      One-to-four units ....................  $12,099   $4,101   $18,579   $34,779   $14,519   $5,502   $18,549   $38,570
      One-to-four units - subprime (2) .....      185     --        --         185       198     --        --         198
      Five or more units ...................     --        222      --         222      --       --        --        --
    Commercial real estate .................     --       --         279       279      --       --        --        --
    Construction ...........................     --       --        --        --        --       --        --        --
    Land ...................................     --       --        --        --        --       --         566       566
--------------------------------------------------------------------------------------------------------------------------
      Total real estate loans ..............   12,284    4,323    18,858    35,465    14,717    5,502    19,115    39,334
Non-mortgage:
    Commercial .............................     --       --        --        --        --       --        --        --
    Automobile .............................    4,167      981       961     6,109     2,080      328       274     2,682
    Other consumer .........................      218       54       533       805       158       15       181       354
--------------------------------------------------------------------------------------------------------------------------
      Total loans ..........................  $16,669   $5,358   $20,352   $42,379   $16,955   $5,845   $19,570   $42,370
==========================================================================================================================
Delinquencies as a percentage of total loans     0.31%    0.10%     0.38%     0.79%     0.36%    0.12%     0.41%     0.89%
==========================================================================================================================
                                                              1995
                                              -------------------------------------
<S>                                           <C>       <C>      <C>       <C>
Loans secured by real estate:
    Residential:
      One-to-four units ....................  $14,047   $6,645   $22,303   $42,995
      One-to-four units - subprime (2) .....     --       --        --        --
      Five or more units ...................       89     --         447       536
    Commercial real estate .................     --       --      30,675    30,675
    Construction ...........................     --       --        --        --
    Land ...................................     --       --       6,516     6,516
-----------------------------------------------------------------------------------
      Total real estate loans ..............   14,136    6,645    59,941    80,722
Non-mortgage:
    Commercial .............................     --       --         115       115
    Automobile .............................      667      249       540     1,456
    Other consumer .........................      257      410       170       837
-----------------------------------------------------------------------------------
      Total loans ..........................  $15,060   $7,304   $60,766   $83,130
===================================================================================
Delinquencies as a percentage of total loans     0.36%    0.18%     1.46%     1.99%
===================================================================================
<FN>
(1)  All 90 day or greater delinquencies are on non-accrual status and we report
     them as part of non-performing  assets. (2) We commenced  one-to-four units
     subprime lending in the first quarter of 1996.
</FN>
</TABLE>

                                       50
<PAGE>


ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE

     We establish valuation  allowances for losses on loans and real estate on a
specific  and general  basis.  We  determine  specific  allowances  based on the
difference  between the carrying  value of the asset and our net fair value.  We
determine  general  valuation  allowances  based on historical loss  experience,
current and anticipated levels and trends of delinquent and non-performing loans
and the economic  environment  in our market  areas.  See Note 1 of Notes to the
Consolidated Financial Statements on page 65.

     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 Operating  Officer,  Chief Financial
Officer,  Chief Lending Officer,  General Counsel,  Director of  Compliance/Risk
Management,  Credit Administrator and Chief Appraiser. 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 general
valuation  allowances 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 we do not correct the deficiencies.

     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.

                                       51
<PAGE>


     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 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 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 $1 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.

     Our  provision  for loan losses was $11.3  million in 1999, up $7.4 million
from 1998. The provision for loan losses  exceeded net loan  charge-offs by $6.8
million  resulting  in an  increase  in the  allowance  for loan losses to $38.3
million at December 31, 1999. This increase  reflects an increase in the overall
loan  portfolio in 1999.  Included in the current  year-end  allowance was $38.0
million of general valuation allowances of which $2.8 million was unallocated to
any specific loan category.

     A summary of activity in the  allowance  for loan losses is shown below for
the years indicated.

<TABLE>
<CAPTION>
(In Thousands)                     1999       1998       1997       1996       1995
-------------------------------------------------------------------------------------
<S>                              <C>        <C>        <C>        <C>        <C>
Balance at beginning of period   $31,517    $32,092    $30,094    $27,943    $25,650
Provision for loan losses ....    11,270      3,899      8,640      9,137      9,293
Charge-offs ..................    (5,535)    (7,372)    (7,773)    (7,660)    (8,017)
Recoveries ...................     1,090      2,898      1,131        674      1,017
-------------------------------------------------------------------------------------
Balance at end of period .....   $38,342    $31,517    $32,092    $30,094    $27,943
=====================================================================================
</TABLE>

                                       52
<PAGE>


     Net loan  charge-offs  were $4.4 million in 1999, down from $4.5 million in
1998 and $6.6 million in 1997.  Net  charge-offs in 1998 included a $1.4 million
recovery from the previously mentioned settlement.  Excluding that recovery, net
loan  charge-offs  would  have  declined  by  $1.5  million  in  1999  primarily
reflecting  declines of $1.0 million in net charge-offs of automobile  loans and
$0.3 million in net  charge-offs  of one-to-four  unit  residential  loans.  The
decline in automobile loan net charge-offs reflects an improvement in the credit
quality of the portfolio combined with improved collection methods. The ratio of
automobile  net  charge-offs  to the  average of these  loans was 1.05% in 1999,
compared to 1.40% in 1998 and 1.58% in 1997.  Charge-offs net of recoveries,  by
category of loan are as follows for the years indicated

<TABLE>
<CAPTION>
(Dollars in Thousands)                                   1999       1998        1997       1996       1995
-----------------------------------------------------------------------------------------------------------
<S>                                                     <C>       <C>         <C>        <C>        <C>
Loans secured by real estate:
    Residential:
       One-to-four units (1) ........................   $  580    $   910     $2,165     $4,982     $5,165
       Five or more units ...........................     --           68       --          102        469
    Commercial real estate ..........................     (250)    (1,610)      (261)      (250)       807
    Land ............................................     --         --         --         --            4
Non-mortgage:
    Commercial ......................................     --         --         --          115       (152)
    Automobile ......................................    3,964      4,959      4,468      1,791        398
    Other consumer ..................................      151        147        270        246        309
-----------------------------------------------------------------------------------------------------------
       Total net loan charge-offs ...................   $4,445    $ 4,474     $6,642     $6,986     $7,000
===========================================================================================================
Net loan charge-offs as a percentage of average loans     0.06%      0.08%      0.13%      0.16%      0.17%
===========================================================================================================
<FN>
(1)  Includes  net  charge-offs  associated  with the  January  1994  Northridge
     earthquake of $1.0 million in 1996 and $1.1 million in 1995.
</FN>
</TABLE>

                                       53
<PAGE>


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

<TABLE>
<CAPTION>
                                                                           December 31,
                                 -------------------------------------------------------------------------------------------------
                                               1999                            1998                            1997
                                 -------------------------------------------------------------------------------------------------
                                              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 .........  $12,913  $6,155,399   0.21%     $11,244  $4,047,182   0.28%     $13,396  $4,358,475     0.31%
     One-to-four units--subprime    9,876   1,639,401   0.60        3,055     588,951   0.52        1,256     249,070     0.50
     Five or more units ........      184      21,055   0.87          401      40,029   1.00          314      38,278     0.82
   Commercial real estate ......    2,439     148,327   1.64        2,632     140,790   1.87        4,112     202,425     2.03
   Construction ................    2,075     176,487   1.18        1,508     127,761   1.18          847      70,865     1.20
   Land ........................      843      67,631   1.25          568      44,859   1.27          331      25,687     1.29
Non-mortgage:
   Commercial ..................      334      26,667   1.25          218      28,293   0.77          196      26,024     0.75
   Automobile ..................    6,259     399,789   1.57        8,344     357,988   2.33        8,016     342,326     2.34
   Other consumer ..............      619      49,344   1.25          747      41,894   1.78          824      47,735     1.73
Not specifically allocated .....    2,800        --        -        2,800        --        -        2,800        --          -
----------------------------------------------------------------------------------------------------------------------------------
     Total loans held for
        investment .............  $38,342  $8,684,100   0.44%     $31,517  $5,417,747   0.58%     $32,092  $5,360,885     0.60%
==================================================================================================================================
                                               1996                            1995
                                 ---------------------------------------------------------------
<S>                               <C>      <C>          <C>       <C>      <C>          <C>
Loans secured by real estate:
   Residential:
     One-to-four units .........  $12,960  $4,013,190   0.32%     $12,254  $3,656,512   0.34%
     One-to-four--subprime .....      281      33,258   0.84         --          --        -
     Five or more units ........      517      56,907   0.91          895      57,321   1.56
   Commercial real estate ......    6,956     260,609   2.67        8,456     270,583   3.13
   Construction ................      773      66,651   1.16          335      28,593   1.17
   Land ........................      466      21,177   2.20          973      21,867   4.45
Non-mortgage:
   Commercial ..................      236      22,136   1.07          259      12,864   2.01
   Automobile ..................    4,303     202,186   2.13          849      56,127   1.51
   Other consumer ..............      802      47,281   1.70        1,122      50,945   2.20
Not specifically allocated .....    2,800        --        -        2,800        --        -
------------------------------------------------------------------------------------------------
     Total loans held for
        investment .............  $30,094  $4,723,395   0.64%     $27,943  $4,154,812   0.67%
================================================================================================
</TABLE>


     The following  table is a summary of the activity in our allowance for real
estate held for investment for the years indicated.  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.  In 1998, $4.3 million of the provision  reduction and $7.1 million
of charge-offs related to the previously mentioned settlement.

<TABLE>
<CAPTION>
(In Thousands)                     1999       1998       1997       1996       1995
-------------------------------------------------------------------------------------
<S>                              <C>        <C>        <C>        <C>        <C>
Balance at beginning of period   $ 7,717    $21,244    $30,071    $34,338    $37,198
Reduction of real estate losses   (3,666)    (5,296)    (3,190)    (3,306)    (2,916)
Charge-offs ...................   (1,920)    (8,231)    (5,637)    (1,035)      --
Recoveries ....................     --         --         --           74         56
-------------------------------------------------------------------------------------
Balance at end of period ......  $ 2,131    $ 7,717    $21,244    $30,071    $34,338
=====================================================================================
</TABLE>

                                       54
<PAGE>


     In addition to losses  charged  against the allowance  for loan losses,  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 for
the years indicated.

<TABLE>
<CAPTION>
(In Thousands)                                     1999     1998      1997       1996       1995
--------------------------------------------------------------------------------------------------
<S>                                               <C>      <C>      <C>        <C>        <C>
Balance at beginning of period ................   $ 533    $ 839    $ 1,078    $ 1,217    $   743
Provision for (reduction of) real estate losses     (45)     455      1,107      1,658      2,498
Charge-offs ...................................    (488)    (761)    (1,346)    (1,797)    (2,024)
--------------------------------------------------------------------------------------------------
Balance at end of period ......................   $--      $ 533    $   839    $ 1,078    $ 1,217
==================================================================================================
</TABLE>

CAPITAL RESOURCES AND LIQUIDITY

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

     Our primary sources of funds generated during 1999 were from:

     o    principal   repayments--including   prepayments,   but  excluding  our
          refinances  of  our  existing  loans--on  loans  and   mortgage-backed
          securities of $1.7 billion;

     o    a net deposit inflow of $1.5 billion, of which certificate of deposits
          represented $1.3 billion of the total;

     o    a net increase in borrowings of $1.4 billion; and

     o    net  proceeds  related to the issuance of capital  securities  of $115
          million.

We used these funds  primarily to originate  loans held for  investment  of $4.9
billion.

     To the  extent  2000  deposit  growth  falls  short of  satisfying  ongoing
commitments to fund maturing and withdrawable deposits,  repay borrowings,  fund
existing  and future  loan and other  investment  commitments,  continue  branch
improvement  programs and maintenance of regulatory liquidity  requirements,  we
will utilize borrowing arrangements with the FHLB and other sources. At December
31,  1999,  we  had  commitments  to  fund  loans  amounting  to  $607  million,
undisbursed  loan funds and unused lines of credit of $209 million,  commitments
to purchase investment securities of $15 million,  commitments to purchase loans
and mortgage-backed  securities of $14 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.

     The principal  measure of liquidity in the savings and loan industry is the
regulatory  ratio of cash and eligible  investments  to the sum of  withdrawable
savings  and  borrowings  due within one year.  Federal  regulators  reduced the
minimum  liquidity ratio in 1997 from 5% to 4%. At December 31, 1999, the Bank's
ratio was 4.2%  compared to 4.0% at December 31, 1998,  and 4.8% at December 31,
1997.

     Downey  currently  has liquid  assets,  including  due from  Bank--interest
bearing  balances,  of $13  million  and can  obtain  further  funds by means of
dividends  from  subsidiaries,  subject to certain  limitations,  or issuance of
further debt or equity.

                                       55
<PAGE>


REGULATORY CAPITAL COMPLIANCE

     The following table is a reconciliation of the Bank's  stockholder's equity
to federal  regulatory  capital as of December 31,  1999.  The core and tangible
capital  ratios were 6.27% and the  risk-based  capital ratio was 12.14%.  These
levels are down slightly from  comparable  ratios of 6.83% for core and tangible
capital and 12.88% for risk-based  capital at December 31, 1998, but continue to
exceed  the  "well  capitalized"  standards  of 5.00%  for core and  10.00%  for
risk-based,  as defined by  regulation.  During  1999,  the amount of the Bank's
non-includable investment in real estate required to be deducted from regulatory
capital increased by $4 million due primarily to DSL Service Company's growth in
retained earnings.

<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 .................................    $636,213                $636,213                 $636,213
Adjustments:
   Deductions:
    Investment in subsidiary, primarily real estate ..     (45,498)                (45,498)                 (45,498)
    Goodwill .........................................      (4,070)                 (4,070)                  (4,070)
    Non-permitted mortgage servicing rights ..........      (3,426)                 (3,426)                  (3,426)
   Additions:
    Unrealized losses on securities available for sale       1,568                   1,568                    1,568
    General loss allowance - Investment in DSL
       Service Company ...............................       1,122                   1,122                    1,122
    General loan valuation allowances (1) ............        --                      --                     37,954
-------------------------------------------------------------------------------------------------------------------------------
Regulatory capital ...................................     585,909   6.27%         585,909   6.27%          623,863   12.14%
Well capitalized requirement .........................     140,191   1.50 (2)      467,304   5.00           513,693   10.00 (3)
-------------------------------------------------------------------------------------------------------------------------------
Excess ...............................................    $445,718   4.77%        $118,605   1.27%         $110,170    2.14%
===============================================================================================================================
<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 11.41%.
</FN>
</TABLE>

CURRENT ACCOUNTING ISSUE

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging Activities" ("SFAS 133").

     SFAS 133  establishes  accounting  and reporting  standards for  derivative
instruments,  including  a number of  derivative  instruments  embedded in other
contracts,  collectively referred to as derivatives, and for hedging activities.
It  requires  that an entity  recognize  all  derivatives  as  either  assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If specific  conditions are met, a derivative may be specifically
designated as:

     o    a hedge of the  exposure to changes in the fair value of a  recognized
          asset or liability or an unrecognized firm commitment;

     o    a hedge  of the  exposure  to  variable  cash  flows  of a  forecasted
          transaction; or

     o    a hedge of the  foreign  currency  exposure of a net  investment  in a
          foreign operation,  an unrecognized firm commitment,  an available for
          sale   security   or   a    foreign-currency-denominated    forecasted
          transaction.

     Under SFAS 133, an entity that elects to apply hedge accounting is required
to establish at the  inception of the hedge the method it will use for assessing
the  effectiveness  of the hedging  derivative and the measurement  approach for
determining  the  ineffective  aspect  of  the  hedge.  Those  methods  must  be
consistent with the entity's approach to managing risk.

                                       56
<PAGE>


     As part of our secondary marketing activities,  we utilize forward sale and
purchase  contracts  to hedge the  value of loans  originated  for sale  against
adverse  changes in  interest  rates.  At December  31,  1999,  sales  contracts
amounted to approximately $210 million.  These contracts have a high correlation
to the price  movement of the loans being  hedged.  There is no  recognition  of
unrealized gains and losses on these contracts in the balance sheet or statement
of income.  When the related loans are sold, we recognize the deferred  gains or
losses from these  contracts  in our  statement  of income as a component of net
gains or losses on sales of loans and mortgage-backed securities.

     This  statement  is  effective  for all  fiscal  quarters  of fiscal  years
beginning after June 15, 2000. We do not anticipate that the financial impact of
this statement will have a material impact on us.

YEAR 2000

     Downey was  successful in its four phase approach to the year 2000 computer
compliance  project.  The  year-end  transition  from  1999 to year 2000 has not
presented  any issues to date.  Although  considered  unlikely,  Downey could be
affected by third party systems that were not as well prepared.  Management will
continue to monitor the  situation and take action as necessary to remediate any
problems  which  might  occur and  ensure all  business  processes  continue  to
function properly.

     We estimate  that year 2000 project  costs will  approximate  $6.3 million.
This cost is in addition to existing personnel who have been working on the year
2000 compliance  project.  Approximately 50% of the year 2000 compliance project
cost represents costs to migrate to a new personal  computer  environment and to
replace  specific  older  automated  teller  machines,  both of  which  we might
otherwise have  implemented or replaced  during the period  notwithstanding  the
year 2000 issue.  Thus,  that portion of year 2000 costs will be amortized  over
the useful life of the equipment. Of the estimated total expense,  approximately
$4.6 million was incurred through 1999.

     The table below  summarizes  by year the estimated  amount and  anticipated
timing of the planned year 2000 expense.

<TABLE>
<CAPTION>
(In Millions)                 1997     1998     1999     2000  Thereafter  Total
--------------------------------------------------------------------------------
<S>                           <C>      <C>      <C>      <C>      <C>      <C>
Estimated Year 2000 expense   $0.1     $1.8     $2.7     $0.9     $0.8     $6.3
================================================================================
</TABLE>

SUBSEQUENT EVENT

     On January 21,  2000,  the Bank signed a  definitive  agreement to sell its
indirect automobile finance  subsidiary,  Downey Auto Finance Corp., to Auto One
Acceptance  Corp.,  a subsidiary of California  Federal Bank. The sale closed on
February 29,  2000.  Downey Auto Finance  Corp.'s  loan  portfolio  totaled $366
million at December 31, 1999. The proceeds from the sale will provide additional
capital to further the growth of our residential lending business.

                                       57
<PAGE>


ITEM 8. FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                        Page

         Independent Auditors' Report................................    59
         Consolidated Balance Sheets.................................    60
         Consolidated Statements of Income...........................    61
         Consolidated Statements of Comprehensive Income.............    62
         Consolidated Statements of Stockholders' Equity.............    62
         Consolidated Statements of Cash Flows.......................    63
         Notes to Consolidated Financial Statements..................    65

                                       58
<PAGE>


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, 1999 and 1998,  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,   1999.   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  generally   accepted  auditing
standards.  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, 1999 and 1998,  and the results of
their  operations  and their cash flows for each of the years in the  three-year
period ended December 31, 1999, in conformity with generally accepted accounting
principles.



/s/  KPMG LLP

Los Angeles, California
January 21, 2000

                                       59
<PAGE>


DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                    -----------------------
(Dollars in Thousands, Except Per Share Data)                                          1999         1998
-----------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>          <C>
ASSETS
Cash ............................................................................   $  121,146   $   58,510
Federal funds ...................................................................            1       33,751
-----------------------------------------------------------------------------------------------------------
    Cash and cash equivalents ...................................................      121,147       92,261
U.S. Treasury securities and agency obligations available for sale, at fair value      171,823      116,061
Municipal securities held to maturity, at amortized cost (estimated market value
    of $6,710 at December 31, 1999, and $6,745 at December 31, 1998) ............        6,728        6,764
Loans held for sale, at lower of cost or market .................................      136,005      447,382
Mortgage-backed securities available for sale, at fair value ....................       21,719       32,146
Loans receivable held for investment ............................................    8,588,339    5,308,837
Investments in real estate and joint ventures ...................................       42,172       49,447
Real estate acquired in settlement of loans .....................................        5,899        4,475
Premises and equipment ..........................................................      107,978      103,979
Federal Home Loan Bank stock, at cost ...........................................      102,392       49,430
Other assets ....................................................................      103,338       59,637
-----------------------------------------------------------------------------------------------------------
                                                                                    $9,407,540   $6,270,419
===========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ........................................................................   $6,562,761   $5,039,733
Federal Home Loan Bank advances .................................................    2,122,407      695,012
Other borrowings ................................................................          373        8,708
Accounts payable and accrued liabilities ........................................       45,682       40,989
Deferred income taxes ...........................................................       23,899        5,411
-----------------------------------------------------------------------------------------------------------
    Total liabilities ...........................................................    8,755,122    5,789,853
-----------------------------------------------------------------------------------------------------------
Company obligated mandatorily  redeemable capital securities of subsidiary trust
    holding solely junior subordinated debentures of the Company
    ("Capital Securities") ......................................................      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 28,148,409 shares at December 31, 1999, and 28,131,776
    shares at December 31, 1998 .................................................          281          281
Additional paid-in capital ......................................................       92,385       92,166
Accumulated other comprehensive income (loss) - unrealized gains (losses)
    on securities available for sale ............................................       (1,568)         753
Retained earnings ...............................................................      441,320      387,366
-----------------------------------------------------------------------------------------------------------
    Total stockholders' equity ..................................................      532,418      480,566
-----------------------------------------------------------------------------------------------------------
                                                                                    $9,407,540   $6,270,419
===========================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.

                                       60
<PAGE>


DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                           --------------------------------------
(Dollars in Thousands, Except Per Share Data)                                 1999          1998          1997
-----------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>           <C>           <C>
INTEREST INCOME:
    Loans receivable ....................................................    $519,006      $421,942      $404,081
    U.S. Treasury securities and agency obligations .....................       8,025         7,078         8,300
    Mortgage-backed securities ..........................................       1,638         2,780         3,633
    Other investments ...................................................       5,082         8,604         4,404
-----------------------------------------------------------------------------------------------------------------
       Total interest income ............................................     533,751       440,404       420,418
-----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
    Deposits ............................................................     256,764       248,337       227,521
    Borrowings ..........................................................      64,161        17,720        38,739
    Capital securities ..................................................       5,348          --            --
-----------------------------------------------------------------------------------------------------------------
       Total interest expense ...........................................     326,273       266,057       266,260
-----------------------------------------------------------------------------------------------------------------
    NET INTEREST INCOME .................................................     207,478       174,347       154,158
PROVISION FOR LOAN LOSSES ...............................................      11,270         3,899         8,640
-----------------------------------------------------------------------------------------------------------------
    Net interest income after provision for loan losses .................     196,208       170,448       145,518
-----------------------------------------------------------------------------------------------------------------
OTHER INCOME, NET:
    Loan and deposit related fees .......................................      20,097        15,645        10,921
    Real estate and joint ventures held for investment, net:
       Net gains on sales of wholly owned real estate ...................       5,206         2,557         2,904
       Reduction of losses on real estate and joint ventures ............       3,666         5,296         3,190
       Operations, net ..................................................      10,430        14,510         8,128
    Secondary marketing activities:
       Loan servicing fees ..............................................       1,672           259         1,276
       Net gains on sales of loans and mortgage-backed securities .......      14,806         6,462         2,675
    Net gains on sales of investment securities .........................         288            68          --
    Other ...............................................................       3,113         2,556         6,094
-----------------------------------------------------------------------------------------------------------------
       Total other income, net ..........................................      59,278        47,353        35,188
-----------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE:
    Salaries and related costs ..........................................      86,163        66,152        54,366
    Premises and equipment costs ........................................      20,617        16,834        15,272
    Advertising expense .................................................       8,595         5,954         6,847
    Professional fees ...................................................       2,502         2,867         5,113
    SAIF insurance premiums and regulatory assessments ..................       3,937         3,832         3,439
    Other general and administrative expense ............................      22,568        20,251        14,519
-----------------------------------------------------------------------------------------------------------------
       Total general and administrative expense .........................     144,382       115,890        99,556
-----------------------------------------------------------------------------------------------------------------
    Net operation of real estate acquired in settlement of loans ........          19           260         1,184
    Amortization of excess of cost over fair value of net assets acquired         474           510           532
-----------------------------------------------------------------------------------------------------------------
       Total operating expense ..........................................     144,875       116,660       101,272
-----------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES ..............................................     110,611       101,141        79,434
Income taxes ............................................................      46,807        43,168        34,200
-----------------------------------------------------------------------------------------------------------------
    NET INCOME ..........................................................    $ 63,804      $ 57,973      $ 45,234
=================================================================================================================
PER SHARE INFORMATION:
    BASIC ...............................................................    $   2.27      $   2.06      $   1.61
=================================================================================================================
    DILUTED .............................................................    $   2.26      $   2.05      $   1.61
=================================================================================================================
    CASH DIVIDENDS DECLARED AND PAID ....................................    $  0.350      $  0.316      $  0.301
=================================================================================================================
    Weighted average diluted shares outstanding .........................  28,175,537    28,176,243    28,140,200
=================================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.

                                       61
<PAGE>


DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
                                                                                     Years Ended December 31,
                                                                                  -----------------------------
(In Thousands)                                                                       1999       1998      1997
---------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>        <C>       <C>
NET INCOME .....................................................................   $63,804    $57,973   $45,234
---------------------------------------------------------------------------------------------------------------
OTHER  COMPREHENSIVE  INCOME  (LOSS),  NET OF  INCOME  TAXES:  Unrealized  gains
   (losses) on securities available for sale:
     U.S. Treasury securities and agency obligations
       available for sale, at fair value .......................................    (1,874)     1,104     1,331
     Less reclassification of realized gains, net of losses included in income .      (166)       (39)     --
     Mortgage-backed securities available for sale, at fair value ..............      (281)      (422)      338
---------------------------------------------------------------------------------------------------------------
   Total other comprehensive income (loss), net of income taxes ................    (2,321)       643     1,669
---------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME ...........................................................   $61,483    $58,616   $46,903
===============================================================================================================
</TABLE>


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<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, 1996 ..................  $255     $22,607     $(1,559)     $370,268      $391,571
Cash dividends, $0.301 per share ...............   --         --          --          (8,454)       (8,454)
Stock dividend .................................    13      23,012        --         (23,034)           (9)
Exercise of stock options ......................   --          335        --            --             335
Unrealized gain on securities available for sale   --         --         1,669          --           1,669
Net income .....................................   --         --          --          45,234        45,234
-----------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 ..................   268      45,954         110       384,014       430,346
Cash dividends, $0.316 per share ...............   --         --          --          (8,889)       (8,889)
Stock dividend .................................    13      45,702        --         (45,732)          (17)
Exercise of stock options ......................   --          510        --            --             510
Unrealized gain on securities available for sale   --         --           643          --             643
Net income .....................................   --         --          --          57,973        57,973
-----------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 ..................   281      92,166         753       387,366       480,566
Cash dividends, $0.350 per share ...............   --         --          --          (9,850)       (9,850)
Exercise of stock options ......................   --          219        --            --             219
Unrealized loss 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
===========================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.

                                       62
<PAGE>


DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                             Years Ended December 31,
                                                                                   ----------------------------------------
(In Thousands)                                                                         1999          1998          1997
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income ...................................................................  $    63,804   $    57,973   $    45,234
   Adjustments to reconcile net income to net cash used for operating activities:
      Depreciation and amortization .............................................        8,631         7,052         9,389
      Provision for (recovery of) losses on loans, real estate acquired in
        settlement of loans, investments in real estate and joint ventures and
        other assets ............................................................        7,640        (1,017)        6,780
      Net gains on sales of loans and mortgage-backed securities, investment
        securities, real estate and other assets ................................      (27,086)      (20,365)       (9,210)
      Interest capitalized on loans (negative amortization) .....................      (29,429)      (18,953)      (12,885)
      Federal Home Loan Bank stock dividends ....................................       (2,941)       (2,728)       (2,638)
   Loans originated for sale ....................................................   (2,042,274)   (2,162,583)     (289,271)
   Proceeds from sales of loans originated for sale .............................      935,485     1,130,164       179,046
   Other, net ...................................................................          967         4,314         1,559
---------------------------------------------------------------------------------------------------------------------------
Net cash used for operating activities ..........................................   (1,085,203)   (1,006,143)      (71,996)
---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Proceeds from:
      Maturities of U.S. Treasury securities and agency obligations .............         --          10,001         9,875
      Sales of U.S. Treasury securities and agency obligations available for sale       67,195        60,319          --
      Sales of mortgage-backed securities available for sale ....................    1,386,151       608,158        88,723
      Sales of loans held for investment ........................................       50,856          --         294,469
      Sales of wholly owned real estate and real estate acquired in settlement
        of loans ................................................................       25,863        14,035        15,043
   Purchase of:
      U.S. Treasury securities and agency obligations available for sale ........     (126,403)      (25,000)      (25,000)
      Federal Home Loan Bank stock ..............................................      (50,021)       (2,617)         --
      Loans receivable held for investment ......................................      (49,669)       (7,463)      (35,828)
   Loans  receivable  originated  held  for  investment  (net of  refinances  of
      $145,316, at December 31, 1999, $120,638 at December 31, 1998 and $56,366
        at December 31, 1997) ...................................................   (4,938,395)   (1,854,801)   (1,961,710)
   Principal payments on loans receivable held for investment and mortgage-backed
      securities available for sale .............................................    1,688,205     1,830,492     1,086,551
   Net change in undisbursed loan funds .........................................       38,154        43,222        13,356
   Proceeds from (investments in) real estate held for investment ...............      (10,712)       (4,074)        5,115
   Other, net ...................................................................      (14,655)      (10,147)      (14,086)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities ............................   (1,933,431)      662,125      (523,492)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>


See accompanying notes to consolidated financial statements.

                                       63
<PAGE>


DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>
                                                                                             Years Ended December 31,
                                                                                   ----------------------------------------
(In Thousands)                                                                         1999          1998          1997
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>             <C>           <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net increase in deposits .....................................................  $ 1,523,028     $ 169,755     $ 696,876
   Net increase (decrease) in securities sold under agreements to repurchase ....         --         (34,803)       34,803
   Proceeds from Federal Home Loan Bank advances ................................    7,166,737       857,200       872,900
   Repayments of Federal Home Loan Bank advances ................................   (5,739,342)     (514,646)     (907,325)
   Net decrease in other borrowings .............................................       (8,335)      (87,766)     (111,988)
   Proceeds from issuance of capital securities, net ............................      115,063          --            --
   Proceeds from exercise of stock options ......................................          219           510           335
   Cash dividends ...............................................................       (9,850)       (8,889)       (8,454)
---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities .......................................    3,047,520       381,361       577,147
---------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ............................       28,886        37,343       (18,341)
Cash and cash equivalents at beginning of year ..................................       92,261        54,918        73,259
---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................................  $   121,147     $  92,261     $  54,918
===========================================================================================================================
Supplemental  disclosure of cash flow  information:  Cash paid during the period
   for:
     Interest ...................................................................  $   325,769     $ 266,407     $ 267,589
     Income taxes ...............................................................       22,064        52,784        23,572
Supplemental disclosure of non-cash investing:
   Loans transferred from held for investment to held for sale ..................       55,754          --         290,558
   Loans transferred to held for investment from held for sale ..................       13,184         3,056          --
   Loans exchanged for mortgage-backed securities ...............................    1,387,364       608,831        89,522
   Real estate acquired in settlement of loans ..................................       11,263        14,958        23,686
   Loans to facilitate the sale of real estate acquired in settlement of loans ..        6,501        14,084        21,919
===========================================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.

                                       64
<PAGE>


DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997

(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   through   subsidiaries   and  branches  located  in
     California.   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 consolidated financial statements have been prepared in conformity with
     generally  accepted  accounting  principles.  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
     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  allowance for loan
     losses and the  valuation  of real  estate.  Management  believes  that the
     allowances  established  for losses on loans and real estate are  adequate.
     While  management uses available  information to recognize  losses on loans
     and real estate,  future additions 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 and real  estate.  Such
     agencies may require Downey to recognize  additions 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 and real  estate  held for
     investment  or under  development  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.

     Cash and Cash Equivalents

     For purposes of the  statements  of cash flows,  cash and cash  equivalents
     include  cash on hand,  amounts  due from  banks and  Federal  funds  sold.
     Generally, Federal funds are purchased and sold for one-day periods.

                                       65
<PAGE>


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

     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 market value.
     Realized and unrealized gains and losses are reflected in earnings.

     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 market  value.  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.  Effective January 1, 1997, Downey began
     capitalizing mortgage servicing rights ("MSRs") acquired through either the
     purchase or origination of mortgage loans for sale or  securitization  with
     servicing rights retained. The total cost of the

                                       66
<PAGE>


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

     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 in other  assets and 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 fees.

     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 Downey's  estimated
     net servicing income, market prepayment rates and market-adjusted  discount
     rates. Impairment is measured on a disaggregated basis based on predominant
     risk   characteristics   of  the  underlying   mortgage  loans.   The  risk
     characteristics  used by Downey  for the  purposes  of  capitalization  and
     impairment  evaluation include loan type, interest rate tranche,  loan term
     and collateral type.  Impairment losses are recognized  through a valuation
     allowance,  with any associated  provision  recorded as a component of loan
     servicing fees.

     Derivative Financial Instruments

     As part of its secondary marketing activities, Downey utilizes forward sale
     contracts to hedge the value of loans  originated for sale against  adverse
     changes in interest rates.  These contracts have a high  correlation to the
     price  movement  of the loans  being  hedged.  There is no  recognition  of
     unrealized  gains and losses on these  contracts  in the  balance  sheet or
     statement of income. When the related loans are sold, the deferred gains or
     losses from these  contracts are recognized in the statement of income as a
     component  of net gains or  losses  on sales of loans  and  mortgage-backed
     securities.

     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.

     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.

     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 estimated  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  adequate
     general  valuation  allowances  to cover loan losses.  In  determining  the
     allowance for loan losses related to specific

                                       67
<PAGE>


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

     major loans,  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 $1 million by analyzing
     their  performance and composition of their collateral as a whole,  because
     of the relatively homogeneous nature of the portfolios.  Specific valuation
     allowances  for secured loans are  determined by the excess of the recorded
     investment  in the loan  over the fair  value,  where  appropriate,  of the
     collateral.  In  determining  overall  general  valuation  allowances to be
     maintained and the loan loss allowance  ratios,  management  evaluates many
     factors including  prevailing and forecasted economic  conditions,  regular
     reviews  of  the  quality  of  loans  by  Downey's  Internal  Asset  Review
     Committee,  industry  experience,   historical  loss  experience,  year  of
     origination,   composition  and  geographic   concentrations  of  the  loan
     portfolio,  the  borrowers'  ability  to repay and  repayment  performance,
     credit grade and estimated collateral values.

     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.

     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

                                       68
<PAGE>


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

     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 and  delinquent
     property taxes) at the date of foreclosure,  and a writedown is recorded or
     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.

     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.

                                       69
<PAGE>


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

     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 Pronouncement

     In June 1998, the FASB issued Statement of Financial  Accounting  Standards
     No. 133,  "Accounting for Derivative  Instruments  and Hedging  Activities"
     ("SFAS 133").

     SFAS 133  establishes  accounting  and reporting  standards for  derivative
     instruments,  including certain  derivative  instruments  embedded in other
     contracts,  (collectively  referred  to as  derivatives)  and  for  hedging
     activities.  It requires that an entity recognize all derivatives as either
     assets or  liabilities  in the statement of financial  position and measure
     those  instruments  at  fair  value.  If  certain  conditions  are  met,  a
     derivative may be specifically designated as (a) a hedge of the exposure to
     changes  in the  fair  value  of a  recognized  asset  or  liability  or an
     unrecognized firm commitment,  (b) a hedge of the exposure to variable cash
     flows of a forecasted  transaction  or (c) a hedge of the foreign  currency
     exposure of a net investment in a foreign  operation,  an unrecognized firm
     commitment,     an     available     for     sale     security     or     a
     foreign-currency-denominated forecasted transaction.

     Under SFAS 133, an entity that elects to apply hedge accounting is required
     to  establish  at the  inception  of the hedge  the  method it will use for
     assessing the  effectiveness of the hedging  derivative and the measurement
     approach for determining the ineffective aspect of the hedge. Those methods
     must be consistent with the entity's approach to managing risk.

     As part of its secondary marketing activities, Downey utilizes forward sale
     and  purchase  contracts  to hedge the value of loans  originated  for sale
     against  adverse changes in interest  rates.  Sales  contracts  amounted to
     approximately  $210 million at December 31, 1999.  These  contracts  have a
     high correlation to the price movement of the loans being hedged.  There is
     no  recognition  of unrealized  gains and losses on these  contracts in the
     balance sheet or statement of income.  When the related loans are sold, the
     deferred  gains or  losses  from  these  contracts  are  recognized  in the
     statement of income as a component of net gains or losses on sales of loans
     and mortgage-backed securities.

     This  statement  is  effective  for all  fiscal  quarters  of fiscal  years
     beginning  after June 15, 2000.  It is not  anticipated  that the financial
     impact of this statement will have a material impact on Downey.

                                       70
<PAGE>


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

(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  competed 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.

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

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

<TABLE>
<CAPTION>
                                                  Gross       Gross    Estimated
                                    Amortized  Unrealized  Unrealized   Market
     (In Thousands)                   Cost        Gains      Losses      Value
     ---------------------------------------------------------------------------
<S>                                 <C>          <C>         <C>       <C>
     December 31, 1999 ..........   $174,223     $ --        $2,400    $171,823
     ===========================================================================
     December 31, 1998 ..........   $114,882     $1,193      $   14    $116,061
     ===========================================================================
</TABLE>

     The amortized cost and estimated market value of U.S.  Treasury  securities
     and  agency  obligations  available  for  sale at  December  31,  1999,  by
     contractual maturity, are shown below.

<TABLE>
<CAPTION>
                                                            Amortized    Market
     (In Thousands)                                           Cost        Value
     ---------------------------------------------------------------------------
<S>                                                         <C>         <C>
     Due in one year or less ...........................    $ 25,000    $ 24,724
     Due after one year through five years (1) .........     149,223     147,099
     ---------------------------------------------------------------------------
        Total ..........................................    $174,223    $171,823
     ===========================================================================
<FN>
     (1)  No investment matures beyond five years.
</FN>
</TABLE>

                                       71
<PAGE>


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

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

<TABLE>
<CAPTION>
     (In Thousands)                                  1999       1998      1997
     ---------------------------------------------------------------------------
<S>                                                <C>        <C>        <C>
     Proceeds .................................    $67,195    $60,319    $  --
     ===========================================================================
     Gross realized gains .....................    $   288    $    68    $  --
     ===========================================================================
     Gross realized losses ....................    $  --      $  --      $  --
     ===========================================================================
</TABLE>

     Net  unrealized  losses on  investment  securities  available for sale were
     recognized  in  stockholders'  equity as  accumulated  other  comprehensive
     income in the amount of $2.4 million,  or $1.4 million net of income taxes,
     at December 31, 1999,  compared to net unrealized gains of $1.2 million, or
     $0.7 million net of income taxes, at December 31, 1998.

(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, 1999 or 1998. The average interest
     rate  and  balance  of  such   transactions   was  5.16%  and  $4  million,
     respectively,  during 1999 and 5.67% and $73 million, respectively,  during
     1998. There was no amount outstanding at any month-end during 1999 compared
     to the maximum  amount  outstanding  at any  month-end  during 1998 of $110
     million.

     Municipal Securities Held to Maturity

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

<TABLE>
<CAPTION>
                                                 Gross       Gross     Estimated
                                    Amortized  Unrealized  Unrealized   Market
     (In Thousands)                   Cost       Gains       Losses      Value
     ---------------------------------------------------------------------------
<S>                                  <C>        <C>           <C>       <C>
     December 31, 1999 ...........   $6,728     $  --         $18       $6,710
     ===========================================================================
     December 31, 1998 ...........   $6,764     $  --         $19       $6,745
     ===========================================================================
</TABLE>

     All  but  $30,000  of the  investment  at  December  31,  1999  and all the
     investment  in 1998  represents  an  industrial  revenue  bond on which the
     interest income is not subject to federal income taxes and matures in 2015.

                                       72
<PAGE>


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

(5)  MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE

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

<TABLE>
<CAPTION>
                                                Gross       Gross      Estimated
                                 Amortized   Unrealized   Unrealized     Market
     (In Thousands)                 Cost        Gains       Losses       Value
     ---------------------------------------------------------------------------
<S>                               <C>           <C>          <C>        <C>
     December 31, 1999:
        GNMA certificates .....   $ 5,112       $100         $  1       $ 5,211
        FNMA certificates .....       125          3          --            128
        FHLMC certificates ....     8,936        --           257         8,679
        Non-agency certificates     7,897         10          206         7,701
     ---------------------------------------------------------------------------
           Total ..............   $22,070       $113         $464       $21,719
     ===========================================================================
     December 31, 1998:
        GNMA certificates .....   $ 7,027       $309         $--        $ 7,336
        FNMA certificates .....       145          6          --            151
        FHLMC certificates ....    13,668        --             6        13,662
        Non-agency certificates    11,164          1          168        10,997
     ---------------------------------------------------------------------------
           Total ..............   $32,004       $316         $174       $32,146
     ===========================================================================
</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 $0.4 million,  or $0.2 million net of income taxes,
     at December 31,  1999.  At December 31,  1998,  net  unrealized  gains were
     recognized  in  stockholders'  equity as  accumulated  other  comprehensive
     income in the amount of $0.1 million, or $81,400 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)                               1999         1998        1997
     ---------------------------------------------------------------------------
<S>                                            <C>           <C>         <C>
     Proceeds .............................    $1,386,151    $608,158    $88,723
     ===========================================================================
     Gross realized gains .................    $   14,017    $  3,490    $   728
     ===========================================================================
     Gross realized losses ................    $    2,504    $  3,814    $   928
     ===========================================================================
</TABLE>

                                       73
<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)                                                1999           1998
     -------------------------------------------------------------------------------------
<S>                                                             <C>            <C>
     Held for investment:
        Loans secured by real estate:
           Residential:
             One-to-four units .............................    $6,155,399     $4,047,182
             One-to-four units - subprime ..................     1,639,401        588,951
             Five or more units ............................        21,055         40,029
           Commercial real estate ..........................       148,327        140,790
           Construction ....................................       176,487        127,761
           Land ............................................        67,631         44,859
        Non-mortgage:
           Commercial ......................................        26,667         28,293
           Automobile ......................................       399,789        357,988
           Other consumer ..................................        49,344         41,894
     -------------------------------------------------------------------------------------
             Total loans receivable held for investment ....     8,684,100      5,417,747
        Less:
           Undisbursed loan funds ..........................      (125,159)      (108,414)
           Net deferred costs and premiums .................        67,740         31,021
           Allowance for estimated losses ..................       (38,342)       (31,517)
     -------------------------------------------------------------------------------------
             Total loans receivable held for investment, net    $8,588,339     $5,308,837
     =====================================================================================
     Held for sale:
        Loans secured by residential one-to-four units .....    $  136,005     $  447,382
     =====================================================================================
</TABLE>

     Over  93%  of the  real  estate  securing  Downey's  loans  is  located  in
     California.

                                       74
<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 1999, 1998 and 1997 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, 1996 ...........     $21,953     $ 236      $ 4,303     $ 802      $2,800     $30,094
     Provision for (reduction of) loan losses         207       (40)       8,181       292        --         8,640
     Charge-offs ............................      (2,389)     --         (5,109)     (275)       --        (7,773)
     Recoveries .............................         485      --            641         5        --         1,131
     --------------------------------------------------------------------------------------------------------------
     Balance at December 31, 1997 ...........      20,256       196        8,016       824       2,800      32,092
     Provision for (reduction of) loan losses      (1,480)       22        5,287        70        --         3,899
     Charge-offs ............................      (1,103)     --         (6,118)     (151)       --        (7,372)
     Recoveries .............................       1,735      --          1,159         4        --         2,898
     --------------------------------------------------------------------------------------------------------------
     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
     ==============================================================================================================
</TABLE>

     Net  charge-offs  represented  0.06%,  0.08% and 0.13% of average loans for
     1999, 1998 and 1997, respectively.

     All impaired loans at December 31, 1999 and 1998 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, 1999:
        Loans with specific allowances ..    $  --           $  --       $  --
        Loans without specific allowances     13,049            --        13,049
     ---------------------------------------------------------------------------
        Total impaired loans ............    $13,049         $  --       $13,049
     ===========================================================================
     December 31, 1998:
        Loans with specific allowances ..    $  --           $  --       $  --
        Loans without specific allowances     13,302            --        13,302
     ---------------------------------------------------------------------------
        Total impaired loans ............    $13,302         $  --       $13,302
     ===========================================================================
</TABLE>

     The average  recorded  investment in impaired loans during 1999 totaled $13
     million,  $14 million in 1998 and $15 million in 1997.  During 1999,  total
     interest  recognized  on the  impaired  loan  portfolio  was $1.9  million,
     compared to $2.0 million in both 1998 and 1997.

     The combined  weighted  average interest yield on loans receivable held for
     investment  and sale was 7.67% and 7.73% as of December  31, 1999 and 1998,
     respectively,  and averaged  7.48%,  7.89% and 7.81% during 1999,  1998 and
     1997, respectively.

                                       75
<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
     $33 million and $22 million as of December 31, 1999 and 1998, respectively.
     There were no troubled debt restructurings on accrual status as of December
     31, 1999 and 1998.

     Interest due on non-accrual  loans, but excluded from interest income,  was
     approximately $1.1 million for 1999, $0.5 million for 1998 and $1.8 million
     for 1997.

     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. Those transactions
     neither involve more than the normal risk of collectibility nor present any
     unfavorable  features. At December 31, 1999 and 1998, the Bank had extended
     loans  to a  director  and his  associates  totaling  $27  million  and $26
     million,  respectively.  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, 1999 and 1998:

<TABLE>
<CAPTION>
     (In Thousands)                                          1999         1998
     ---------------------------------------------------------------------------
<S>                                                        <C>          <C>
     Balance at beginning of period ...................    $25,763      $27,094
     Additions ........................................      4,149         --
     Repayments .......................................     (3,255)      (1,331)
     ---------------------------------------------------------------------------
     Balance at end of period .........................    $26,657      $25,763
     ===========================================================================
</TABLE>

(7)  LOAN SERVICING

     Mortgage  loans  serviced for others are not  included in the  accompanying
     consolidated  balance  sheets.  The unpaid  principal  balances of mortgage
     loans serviced for others was $2.9 billion and $1.0 billion at December 31,
     1999 and 1998, respectively.

     Custodial escrow balances  maintained in connection with the foregoing loan
     servicing,  and included in demand deposits, were $5 million and $3 million
     at December 31, 1999 and 1998, respectively.

     Mortgage  servicing rights of $29.3 million,  $7.3 million and $1.2 million
     related to loans sold with servicing  rights  retained were  capitalized in
     1999,  1998 and 1997,  respectively.  Mortgage  servicing  rights have been
     written  down to their fair value of $34.3  million,  $7.8 million and $2.0
     million at December 31, 1999, 1998 and 1997, respectively.  Amortization of
     mortgage  servicing  rights was $3.1 million in 1999,  $0.7 million in 1998
     and $0.3 million in 1997.

     A summary of activity in the allowance for mortgage servicing rights during
     1999, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
     (In Thousands)                                  1999        1998      1997
     ---------------------------------------------------------------------------
<S>                                                 <C>        <C>        <C>
     Balance at beginning of period .............   $ 464      $  206     $ 101
     Additions ..................................     195       1,350       249
     Reductions .................................    (446)       (581)     (144)
     Impairment write-down ......................    (210)       (511)     --
     ---------------------------------------------------------------------------
     Balance at end of period ...................   $   3      $  464     $ 206
     ===========================================================================
</TABLE>

                                       76
<PAGE>


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

(8)  INVESTMENTS IN REAL ESTATE AND JOINT VENTURES

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

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                        ---------------------
     (In Thousands)                                                       1999         1998
     ----------------------------------------------------------------------------------------
<S>                                                                     <C>          <C>
     Gross investments in real estate .............................     $46,715      $57,084
     Accumulated depreciation .....................................      (7,127)      (9,215)
     Allowance for estimated losses ...............................      (2,131)      (6,305)
     ----------------------------------------------------------------------------------------
        Investments in real estate ................................      37,457       41,564
     ----------------------------------------------------------------------------------------
     Investments in and interest bearing advances to joint ventures       4,715        9,295
     Joint venture valuation allowance ............................        --         (1,412)
     ----------------------------------------------------------------------------------------
        Investments in joint ventures .............................       4,715        7,883
     ----------------------------------------------------------------------------------------
        Total investments in real estate and joint ventures .......     $42,172      $49,447
     =======================================================================================
</TABLE>

     The table set forth below describes the type,  location and amount invested
     in real estate and joint ventures,  net of specific valuation allowances of
     $1 million and general valuation  allowances of $1 million, at December 31,
     1999:

<TABLE>
<CAPTION>
     (In Thousands)                                             California   Arizona   Other    Total
     --------------------------------------------------------------------------------------------------
<S>                                                             <C>          <C>       <C>     <C>
     Shopping centers ......................................    $ 28,750     $6,758    $--     $35,508
     Office buildings ......................................         713        450     --       1,163
     Residential ...........................................       1,032       --       --       1,032
     Land ..................................................       4,956        176     459      5,591
     --------------------------------------------------------------------------------------------------
        Total real estate before general valuation allowance    $ 35,451     $7,384    $459    $43,294
     ==================================================================================================
     General valuation allowance ...........................                                    (1,122)
     --------------------------------------------------------------------------------------------------
     Net investment in real estate and joint ventures ......                                   $42,172
     ==================================================================================================
</TABLE>

                                       77
<PAGE>


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

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

<TABLE>
<CAPTION>
     (In Thousands)                                               1999         1998         1997
     ---------------------------------------------------------------------------------------------
<S>                                                             <C>          <C>          <C>
     Wholly owned operations:
        Rental operations:
           Rental income ..................................     $ 4,950      $ 5,189      $ 4,689
           Costs and expenses .............................      (1,128)      (1,466)      (2,372)
     ---------------------------------------------------------------------------------------------
             Net rental operations ........................       3,822        3,723        2,317
        Net gains on sales of real estate .................       5,206        2,557        2,904
        Reduction of losses on real estate ................       2,266        5,081          985
     ---------------------------------------------------------------------------------------------
           Total wholly owned operations ..................      11,294       11,361        6,206
     ---------------------------------------------------------------------------------------------
     Joint venture operations:
        Equity in net income from joint ventures ..........       5,352        9,203        3,931
        Reduction of losses provided by DSL Service Company       1,400          215        2,205
     ---------------------------------------------------------------------------------------------
           Net joint venture operations ...................       6,752        9,418        6,136
     Interest from joint venture advances .................       1,256        1,584        1,880
     ---------------------------------------------------------------------------------------------
        Total joint venture operations ....................       8,008       11,002        8,016
     ---------------------------------------------------------------------------------------------
           Total ..........................................     $19,302      $22,363      $14,222
     =============================================================================================
</TABLE>

     Activity  in the  allowance  for losses on real estate and  investments  in
     joint ventures for 1999, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
                                                     Real Estate  Commercial    Residential
                                                      Held for    Real Estate   Real Estate  Investments
                                                      or Under     Held for      Held for     In Joint
     (In Thousands)                                  Development  Investment    Investment    Ventures      Total
     --------------------------------------------------------------------------------------------------------------
<S>                                                   <C>          <C>           <C>          <C>          <C>
     Balance at December 31, 1996 ................    $ 5,337      $ 5,116       $11,841      $ 7,777      $30,071
     Provision for (reduction of) estimated losses        492       (1,403)          (74)      (2,205)      (3,190)
     Charge-offs .................................       --         (1,692)         --         (3,945)      (5,637)
     Recoveries ..................................       --           --            --           --           --
     --------------------------------------------------------------------------------------------------------------
     Balance at December 31, 1997 ................      5,829        2,021        11,767        1,627       21,244
     Provision for (reduction of) estimated losses         33         (427)       (4,687)        (215)      (5,296)
     Charge-offs .................................     (1,151)        --          (7,080)        --         (8,231)
     Recoveries ..................................       --           --            --           --           --
     --------------------------------------------------------------------------------------------------------------
     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
     ==============================================================================================================
</TABLE>

                                       78
<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:

     Condensed Combined Balance Sheets - Joint Ventures

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                     ---------------------
     (In Thousands)                                                    1999        1998
     -------------------------------------------------------------------------------------
<S>                                                                  <C>         <C>
     ASSETS
     Cash ......................................................     $ 1,870     $  2,776
     Projects under development ................................      12,523       18,526
     Completed projects ........................................      25,155       31,372
     Other assets ..............................................       2,903        3,509
     -------------------------------------------------------------------------------------
                                                                     $42,451     $ 56,183
     =====================================================================================
     LIABILITIES AND EQUITY
     Liabilities:
        Notes payable to the Bank ..............................     $34,697     $ 46,544
        Notes payable to others ................................       3,230        3,633
        Other ..................................................       6,175        6,996
     Equity (deficit):
        DSL Service Company (1) ................................       4,715        7,883
        Allowance for losses recorded by DSL Service Company (2)        --          1,412
        Other partners' (2) ....................................      (6,366)     (10,285)
     -------------------------------------------------------------------------------------
          Net deficit ..........................................      (1,651)        (990)
     -------------------------------------------------------------------------------------
                                                                     $42,451     $ 56,183
     =====================================================================================
<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' deficit of $6 million and $10 million at
          December  31, 1999 and 1998,  respectively,  represents  their  equity
          interest  in  the  accumulated  retained  earnings  (deficit)  of  the
          respective  joint  ventures.  Those  results  include not only the net
          profit on sales and the operating  results of the real estate  assets,
          but  depreciation  expense and funding  costs as well.  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.  There  were no
          allowances at December 31, 1999,  and $1 million at December 31, 1998.
          These valuation  allowances are less than the other partners'  deficit
          as the fair value of the real estate  assets of certain  joint venture
          partnerships  in  which  the  other  partners'  equity  was a  deficit
          exceeded  the amount of third party  notes and DSL  Service  Company's
          investment  thereby  eliminating  the need for a  valuation  allowance
          since the sale of the real estate  would allow DSL Service  Company to
          realize its investment and provide a profit to the partners.
</FN>
</TABLE>

                                       79
<PAGE>

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

     Condensed Combined Statements of Operations - Joint Ventures

<TABLE>
<CAPTION>
     (In Thousands)                                            1999         1998         1997
     ------------------------------------------------------------------------------------------
<S>                                                         <C>          <C>          <C>
     Real estate sales:
         Sales .........................................    $ 40,096     $ 59,095     $ 82,696
         Cost of sales .................................     (31,770)     (39,261)     (72,255)
     ------------------------------------------------------------------------------------------
          Net gains on sales ...........................       8,326       19,834       10,441
     ------------------------------------------------------------------------------------------
     Rental operations:
         Rental income .................................       5,825        6,252        8,280
         Operating expenses ............................      (2,192)      (2,409)      (1,729)
         Interest, depreciation and other expenses .....      (4,236)      (5,271)      (9,130)
     ------------------------------------------------------------------------------------------
          Net loss on rental operations ................        (603)      (1,428)      (2,579)
     ------------------------------------------------------------------------------------------
     Net income ........................................       7,723       18,406        7,862
     Less other partners' share of net income ..........       2,371        9,203        3,931
     ------------------------------------------------------------------------------------------
     DSL Service Company's share of net income .........       5,352        9,203        3,931
     Reduction of losses provided by DSL Service Company       1,400          215        2,205
     ------------------------------------------------------------------------------------------
     DSL Service Company's share of net income .........    $  6,752     $  9,418     $  6,136
     ==========================================================================================
</TABLE>

(9)  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)                                               1999       1998
     ------------------------------------------------------------------------------
<S>                                                              <C>       <C>
     One-to-four unit residential ............................   $4,973    $ 4,708
     One-to-four unit residential - subprime .................      926        300
     ------------------------------------------------------------------------------
        Total real estate acquired in settlement of loans ....    5,899      5,008
     Allowance for estimated losses ..........................     --         (533)
     ------------------------------------------------------------------------------
        Total real estate acquired in settlement of loans, net   $5,899    $ 4,475
     ==============================================================================
</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)                                                       1999       1998        1997
     --------------------------------------------------------------------------------------------------
<S>                                                                      <C>       <C>         <C>
     Net gains on sales (1) .........................................    $(704)    $(1,417)    $(1,299)
     Net operating expense ..........................................      768       1,222       1,376
     Provision for (reduction of) estimated losses ..................      (45)        455       1,107
     --------------------------------------------------------------------------------------------------
        Net operations of real estate acquired in settlement of loans    $  19     $   260     $ 1,184
     ==================================================================================================
<FN>
     (1)  Includes $1.1 million in 1997  associated  with the sale of a shopping
          center.
</FN>
</TABLE>

                                       80
<PAGE>


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

     Activity in the  allowance  for  estimated  losses on real estate  acquired
     through foreclosure for 1999, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
     (In Thousands)                                       1999      1998       1997
     --------------------------------------------------------------------------------
<S>                                                      <C>       <C>       <C>
     Balance at beginning of period .................    $ 533     $ 839     $ 1,078
     Provision for  (reduction of) real estate losses      (45)      455       1,107
     Charge-offs ....................................     (488)     (761)     (1,346)
     --------------------------------------------------------------------------------
     Balance at end of period .......................    $--       $ 533     $   839
     ================================================================================
</TABLE>

(10) PREMISES AND EQUIPMENT

     Premises and equipment are summarized as follows:

<TABLE>
<CAPTION>
                                                               December 31,
                                                         -----------------------
     (In Thousands)                                         1999          1998
     ---------------------------------------------------------------------------
<S>                                                      <C>           <C>
     Land ..........................................     $ 23,653      $ 24,471
     Building and improvements .....................       90,591        88,384
     Furniture, fixtures and equipment .............       64,693        52,080
     Construction in progress ......................           18           196
     Other .........................................           62            62
     ---------------------------------------------------------------------------
        Total premises and equipment ...............      179,017       165,193
     Accumulated depreciation and amortization .....      (71,039)      (61,214)
     ---------------------------------------------------------------------------
        Total premises and equipment, net ..........     $107,978      $103,979
     ===========================================================================
</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 $2.1  million in 1999,  $1.7  million in 1998 and $1.4
     million in 1997.  The following  table  summarizes  future  minimum  rental
     commitments under noncancelable leases.

<TABLE>
<CAPTION>
     (In Thousands)
     ---------------------------------------------------------------------------
<S>                                                                       <C>
     2000 ............................................................    $2,117
     2001 ............................................................     1,917
     2002 ............................................................     1,227
     2003 ............................................................       857
     2004 ............................................................       507
     Thereafter (1) ..................................................       432
     ---------------------------------------------------------------------------
     Total future lease commitments ..................................    $7,057
     ===========================================================================
<FN>
     (1)  There are no lease commitments  beyond the year 2009 though options to
          renew at that time are available.
</FN>
</TABLE>

(11) FEDERAL HOME LOAN BANK STOCK

     The Bank's  required  investment in FHLB stock,  based on December 31, 1999
     financial data, was $104 million.  The investment in FHLB stock amounted to
     $102 million and $49 million at December  31, 1999 and 1998,  respectively.
     The Bank received a $1 million stock dividend and will purchase  additional
     stock  amounting  to $1  million  in the  first  quarter  of  2000  thereby
     increasing the Bank's investment to the required amount.

                                       81
<PAGE>


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

(12) OTHER ASSETS

     Other assets are summarized as follows:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                             -------------------
     (In Thousands)                                             1999       1998
     ---------------------------------------------------------------------------
<S>                                                          <C>         <C>
     Accounts receivable ................................    $  3,338    $ 4,151
     Accrued interest receivable:
        Loans ...........................................      43,240     27,949
        Mortgage-backed securities ......................         123        182
        Investment securities ...........................       3,360      2,618
     Prepaid expenses ...................................      12,362     10,172
     Excess of purchase price over fair value of assets
        acquired and liabilities assumed, net ...........       4,070      4,543
     Mortgage servicing rights, net .....................      34,263      7,793
     Repossessed automobiles, net .......................         314        569
     Other ..............................................       2,268      1,660
     ---------------------------------------------------------------------------
        Total other assets ..............................    $103,338    $59,637
     ===========================================================================
</TABLE>

(13) DEPOSITS

     Deposits are summarized as follows:

<TABLE>
<CAPTION>
                                                              December 31,
                                             --------------------------------------------
                                                     1999                     1998
                                             --------------------------------------------
                                             Weighted                 Weighted
                                             Average                  Average
     (Dollars in Thousands)                    Rate     Amount          Rate     Amount
     ------------------------------------------------------------------------------------
<S>                                           <C>     <C>              <C>     <C>
     Transaction accounts (1) .........       2.46%   $1,489,939       2.30%   $1,238,062
     Certificates of deposit:
        Less than 3.00% ...............       2.47         8,717       2.62        25,126
        3.00-3.49 .....................       3.02            16       3.01           593
        3.50-3.99 .....................       3.92         3,786       3.88        51,474
        4.00-4.49 .....................       4.32       210,127       4.39       428,316
        4.50-4.99 .....................       4.78       939,858       4.80       668,204
        5.00-5.99 .....................       5.56     3,623,632       5.53     2,421,333
        6.00-6.99 .....................       6.07       284,984       6.06       204,065
        7.00 and greater ..............       7.32         1,702       7.24         2,560
     ------------------------------------------------------------------------------------
          Total certificates of deposit       5.39     5,072,822       5.26     3,801,671
     ------------------------------------------------------------------------------------
          Total deposits ..............       4.72%   $6,562,761       4.53%   $5,039,733
     ====================================================================================
<FN>
     (1)  Included  in  these  amounts  is $182  million  and  $155  million  of
          non-interest   bearing   accounts  at  December  31,  1999  and  1998,
          respectively.
</FN>
</TABLE>

     The  aggregate  amount  of jumbo  certificates  of  deposit  with a minimum
     denomination  of $100,000 was $1.7 billion and $1.3 billion at December 31,
     1999 and 1998, respectively.

                                       82
<PAGE>


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

     At December 31, 1999,  scheduled  maturities of certificates of deposit are
     as follows:

<TABLE>
<CAPTION>
                                                          Weighted
     (Dollars in Thousands)                             Average Rate    Amount
     ---------------------------------------------------------------------------
<S>                                                         <C>       <C>
     2000 ..............................................    5.28%     $3,894,116
     2001 ..............................................    5.72       1,126,832
     2002 ..............................................    5.83          27,594
     2003 ..............................................    5.42          19,943
     2004 ..............................................    5.08           3,955
     Thereafter ........................................    5.71             382
     ---------------------------------------------------------------------------
       Total ...........................................    5.39%     $5,072,822
     ===========================================================================
</TABLE>

     The  weighted  average  cost of deposits  averaged  4.51%,  4.87% and 4.96%
     during 1999, 1998 and 1997, respectively.

     As of December 31, 1999 and 1998 public funds of  approximately  $3 million
     and $5 million, respectively, are secured by mortgage loans with a carrying
     value of  approximately  $5 million and $7 million at December 31, 1999 and
     1998, respectively.

     Interest expense on deposits by type is summarized as follows:

<TABLE>
<CAPTION>
     (In Thousands)                               1999        1998        1997
     ---------------------------------------------------------------------------
<S>                                             <C>         <C>         <C>
     Transaction accounts ..................    $ 32,376    $ 22,866    $ 18,239
     Certificate accounts ..................     224,388     225,471     209,282
     ---------------------------------------------------------------------------
        Total deposit interest expense .....    $256,764    $248,337    $227,521
     ===========================================================================
</TABLE>

     Accrued  interest on  deposits,  which is included in accounts  payable and
     accrued liabilities, was $2 million at both December 31, 1999 and 1998.

(14) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

     Securities sold under agreements to repurchase are summarized as follows:

<TABLE>
<CAPTION>
     (Dollars in Thousands)                                           1999        1998        1997
     -----------------------------------------------------------------------------------------------
<S>                                                                 <C>         <C>         <C>
     Balance at year end .......................................    $  --       $  --       $34,803
     Average balance outstanding during the year ...............      1,987       1,877       4,029
     Maximum amount outstanding at any month-end during the year     24,875      50,088      34,803
     Weighted average interest rate during the year ............       5.42%       5.90%       5.61%
     Weighted average interest rate at year end ................          -           -        6.65
     As of year end secured by:
        U.S. Treasury note .....................................    $  --       $  --       $34,798
     ===============================================================================================
</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.

                                       83
<PAGE>


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

(15) FEDERAL HOME LOAN BANK ADVANCES

     FHLB advances are summarized as follows:

<TABLE>
<CAPTION>
     (Dollars in Thousands)                                            1999           1998         1997
     ----------------------------------------------------------------------------------------------------
<S>                                                                 <C>            <C>          <C>
     Balance at year end .......................................    $2,122,407     $695,012     $352,458
     Average balance outstanding during the year ...............     1,169,474      247,521      444,408
     Maximum amount outstanding at any month-end during the year     2,122,407      695,012      550,736
     Weighted average interest rate during the year ............          5.44%        5.85%        6.02%
     Weighted average interest rate at year end ................          5.77         5.47         6.11
     As of year end secured by:
        Loans receivable .......................................    $2,395,599     $789,588     $368,480
        Mortgage-backed securities .............................          --           --         25,527
     ====================================================================================================
</TABLE>

     In addition to the collateral  securing  existing  advances,  Downey had an
     additional  $621 million in loans  available as  collateral  for any future
     advances as of December 31, 1999.

     FHLB advances have the following maturities at December 31, 1999:

<TABLE>
<CAPTION>
     (In Thousands)
     ---------------------------------------------------------------------------
<S>                                                                   <C>
     2000 ........................................................    $1,619,296
     2001 ........................................................        16,056
     2002 ........................................................        55,921
     2003 ........................................................           134
     2004 ........................................................          --
     Thereafter ..................................................       431,000
     ---------------------------------------------------------------------------
       Total .....................................................    $2,122,407
     ===========================================================================
</TABLE>

(16) COMMERCIAL PAPER

     Commercial paper borrowings are summarized as follows:

<TABLE>
<CAPTION>
     (Dollars in Thousands)                                          1999       1998         1997
     ----------------------------------------------------------------------------------------------
<S>                                                                <C>       <C>          <C>
     Balance at year end .......................................   $  --     $   --       $ 83,811
     Average balance outstanding during the year ...............      --       30,589      182,296
     Maximum amount outstanding at any month-end during the year      --      103,749      272,818
     Weighted average interest rate during the year ............       -         6.32%        5.75%
     Weighted average interest rate at end of year .............       -            -         5.61
     As of year end secured by:
        FHLB Letter of Credit ..................................   $  --     $   --       $300,000
     ==============================================================================================
</TABLE>

     The commercial paper program was discontinued during 1998.

                                       84
<PAGE>


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

(17) OTHER BORROWINGS

     Other borrowings are summarized as follows:

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                                 --------------
     (Dollars In Thousands)                                                      1999     1998
     ------------------------------------------------------------------------------------------
<S>                                                                              <C>     <C>
     Long-term  notes  payable to banks,  secured by real estate and mortgage
        loans with a carrying value of $769 at December 31, 1999,  bearing an
        interest
        rate of 7.88% .......................................................    $373    $8,708
     ==========================================================================================
</TABLE>

     Other borrowings have the following maturities at December 31, 1999:

<TABLE>
<CAPTION>
     (In Thousands)
     ---------------------------------------------------------------------------
<S>                                                                         <C>
     2000 .............................................................     $184
     2001 .............................................................      189
     ---------------------------------------------------------------------------
     Total ............................................................     $373
     ===========================================================================
</TABLE>

(18) INCOME TAXES

     Income taxes (benefits) are summarized as follows:

<TABLE>
<CAPTION>
                                                          December 31,
                                               ---------------------------------
     (In Thousands)                              1999        1998         1997
     ---------------------------------------------------------------------------
<S>                                            <C>         <C>          <C>
     Federal:
          Current .........................    $18,382     $38,474      $26,681
          Deferred ........................     19,821      (5,848)        (886)
     ---------------------------------------------------------------------------
                                               $38,203     $32,626      $25,795
     ===========================================================================
     State:
          Current .........................    $ 8,186     $10,955      $ 7,373
          Deferred ........................        418        (413)       1,032
     ---------------------------------------------------------------------------
                                               $ 8,604     $10,542      $ 8,405
     ===========================================================================
     Total:
          Current .........................    $26,568     $49,429      $34,054
          Deferred ........................     20,239      (6,261)         146
     ---------------------------------------------------------------------------
             Total ........................    $46,807     $43,168      $34,200
     ===========================================================================
</TABLE>

     Current  income  taxes  payable were $12 million and $8 million at December
     31, 1999 and 1998, respectively.

                                       85
<PAGE>


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

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

<TABLE>
<CAPTION>
                                                                        December 31,
                                                                   ----------------------
     (In Thousands)                                                  1999         1998
     ------------------------------------------------------------------------------------
<S>                                                                <C>          <C>
     Deferred tax liabilities:
         Tax reserves in excess of base year ..................    $ 21,904     $ 16,438
         Mortgage servicing rights, net of allowances .........      14,818         --
         FHLB stock dividends .................................       8,197        5,607
         Deferred loan fees ...................................       5,344       (1,564)
         Depreciation on premises and equipment ...............       2,737        3,812
         Capitalized interest .................................        --            978
         Installment sales ....................................        --            268
         Accrual to cash adjustment ...........................        --            164
         SAIF insurance premiums ..............................        --             86
     ------------------------------------------------------------------------------------
                                                                     53,000       25,789
     ------------------------------------------------------------------------------------
     Deferred tax assets:
         Loan valuation allowances, net of bad debt charge-offs     (18,017)     (14,447)
         California franchise tax .............................      (3,959)      (3,704)
         Real estate and joint venture valuation allowances ...      (2,180)      (4,010)
         Deferred compensation ................................      (1,895)      (1,924)
         Other deferred income items ..........................      (1,217)        (721)
         Unrealized gains (losses) on investment securities ...      (1,183)         568
         Mark to market adjustment on loans held for sale .....        (357)        (923)
         Equity in joint ventures .............................        (293)       4,783
     ------------------------------------------------------------------------------------
                                                                    (29,101)     (20,378)
     Deferred tax assets valuation allowance ..................        --           --
     ------------------------------------------------------------------------------------
     Net deferred tax liability ...............................    $ 23,899     $  5,411
     ====================================================================================
</TABLE>

     A  reconciliation  of income taxes  (benefits)  to the  expected  statutory
     federal corporate income taxes follows:

<TABLE>
<CAPTION>
                                                                1999                   1998                   1997
                                                          ---------------------------------------------------------------
     (Dollars in Thousands)                               Amount    Percent      Amount    Percent       Amount   Percent
     --------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>         <C>        <C>         <C>        <C>         <C>
     Expected statutory income taxes ...............     $38,714     35.0%      $35,399     35.0%      $27,802     35.0%
     California franchise tax, net of federal income
        tax benefit ................................       7,606      6.9         6,880      6.8         5,461      6.9
     Increase (decrease) resulting from:
        Amortization of goodwill ...................         166      0.2           253      0.3           291      0.4
        Interest on municipal bonds ................        (105)    (0.1)         (107)    (0.1)         (103)    (0.1)
        Other ......................................         426      0.3           743      0.7           749      0.9
     --------------------------------------------------------------------------------------------------------------------
     Income taxes ..................................     $46,807     42.3%      $43,168     42.7%      $34,200     43.1%
     ====================================================================================================================
</TABLE>

     The Small  Business Job  Protection Act of 1996 repealed the reserve method
     of accounting  for bad debts by savings  institutions  for years  beginning
     after 1995. Under prior law, savings  associations  calculated additions to
     reserves  using either a  percentage-of-taxable-income  or historical  loan
     loss experience. The new law allows deductions for bad debts only when such
     debts are actually  charged off against income (the  "specific  charge-off"
     method).  Downey  calculated its bad debt deduction for 1999, 1998 and 1997
     under the specific charge-off method.

                                       86
<PAGE>


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

     Downey  made  income  tax  payments,  net of  refunds,  amounting  to $22.1
     million,   $52.8  million  and  $23.6  million  in  1999,  1998  and  1997,
     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 tax  year.  Adjustments
     proposed by the Internal  Revenue Service have been protested by Downey and
     are  currently  moving  through  the  government  appeals  process.  Downey
     believes  it has  established  appropriate  liabilities  for any  resultant
     deficiencies. Tax years subsequent to 1996 remain open to review by federal
     and state tax authorities.

(19) 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  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.

                                       87
<PAGE>


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

(20) 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, 1999 and 1998.

<TABLE>
<CAPTION>
                                                                                                       To Be Well
                                                                                                   Capitalized Under
                                                                        For Capital                Prompt Corrective
                                                  Actual              Adequacy Purposes            Action Provisions
                                          ----------------------   -----------------------   ---------------------------
     (Dollars in Thousands)                   Amount     Ratio         Amount     Ratio          Amount         Ratio
     -------------------------------------------------------------------------------------------------------------------
<S>                                          <C>        <C>           <C>         <C>           <C>            <C>
     1999
         Risk-based capital
           (to risk-weighted assets)         $623,863   12.14%        $410,955    8.00%         $513,693       10.00%
         Core capital
           (to adjusted assets) ....          585,909    6.27          280,382    3.00           467,304        5.00
         Tangible capital
           (to adjusted assets) ....          585,909    6.27          140,191    1.50              --             - (1)
         Tier I capital
           (to risk-weighted assets)          585,909   11.41             --         - (1)       308,216        6.00
     ------------------------------------------------------------------------------------------------------------------
     1998
         Risk-based capital
           (to risk-weighted assets)         $454,960   12.88%        $282,556    8.00%         $353,195       10.00%
         Core capital
           (to adjusted assets) ....          423,693    6.83          186,107    3.00           310,178        5.00
         Tangible capital
           (to adjusted assets) ....          423,693    6.83           93,053    1.50              --             - (1)
         Tier I capital
           (to risk-weighted assets)          423,693   12.00             --         -  (1)      211,917        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,  however,  to the
     extent the Bank would not be considered well  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,  1999,  the Bank had the capacity to declare a dividend
     totaling $110 million without obtaining prior OTS approval.

     Stock Dividend

     On April 22,  1998,  the Board of Directors  declared a five percent  stock
     dividend on Downey's common

                                       88
<PAGE>


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

     stock payable on May 22, 1998 to stockholders of record on May 7, 1998. The
     stock  dividend  resulted in the issuance of  1,337,271  shares and the par
     value of the common stock remained at $0.01. Accordingly, $13,000 and $45.7
     million  were  transferred  from  retained  earnings  to  common  stock and
     additional paid-in-capital,  respectively.  On April 23, 1997, the Board of
     Directors  declared a five percent stock dividend on Downey's  common stock
     payable on May 22, 1997 to stockholders of record on May 8, 1997. The stock
     dividend  resulted in the issuance of 1,272,542 shares and the par value of
     the common stock remained at $0.01. Accordingly,  $13,000 and $23.0 million
     were  transferred  from  retained  earnings to common stock and  additional
     paid-in-capital,  respectively.  All share and per  share  data,  including
     stock  option  plan  information,   have  been  restated  to  reflect  this
     distribution.

     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 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.

     During 1999, no shares were granted under the LTIP, while in 1998,  120,335
     shares were granted.

     Options  outstanding  under  the  LTIP at  December  31,  1999 and 1998 are
     summarized as follows:

<TABLE>
<CAPTION>
                                                            Outstanding Options
                                                          ----------------------
                                                            Number       Average
                                                              of         Option
                                                            Shares        Price
     ---------------------------------------------------------------------------
<S>                                                       <C>            <C>
     December 31, 1996 ...............................     343,159       $12.82
     Options granted .................................        --              -
     Options canceled and exercised ..................    (199,273)       12.40
     ---------------------------------------------------------------------------
     December 31, 1997 ...............................     143,886        13.40
     Options granted .................................     120,335        25.44
     Options canceled and exercised ..................     (44,770)       13.28
     ---------------------------------------------------------------------------
     December 31, 1998 ...............................     219,451        20.03
     Options granted .................................        --              -
     Options canceled and exercised ..................     (18,701)       13.18
     ---------------------------------------------------------------------------
     December 31, 1999 ..............................      200,750       $20.66
     ===========================================================================
</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,  1999,  100,344  options  were  exercisable  at a weighted
     average option price per share of $16.30, with 127,722 shares available for
     future  grants under the LTIP.  At December 31, 1998 and 1997,  exercisable
     options of 78,439 and 76,692, respectively,  were exercisable at a weighted
     average option price per share of $13.26 and $13.21, respectively.

                                       89
<PAGE>


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

     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 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)           1999       1998       1997
     ---------------------------------------------------------------------------
<S>                                                <C>        <C>        <C>
     Net income:
          As reported ......................       $63,804    $57,973    $45,234
          Pro forma ........................        63,611     57,954     45,195
     Earnings per share - Basic:
          As reported ......................       $  2.27    $  2.06    $  1.61
          Pro forma ........................          2.26       2.06       1.61
     Earnings per share - Diluted:
          As reported ......................          2.26       2.05       1.61
          Pro forma ........................          2.26       2.05       1.61
     ===========================================================================
</TABLE>

     The  weighted  average  fair value at date of grant of options  granted was
     $7.77 during 1998. The fair value of options at date of grant was estimated
     using  the  Black-Scholes   model  with  the  following   weighted  average
     assumptions:

<TABLE>
<CAPTION>
                                                    1999 (1)   1998     1997 (1)
     ---------------------------------------------------------------------------
<S>                                                   <C>     <C>          <C>
     Expected life (years) ....................       -        3.11        -
     Interest rate ............................       -%       4.65%       -%
     Volatility ...............................       -       40.31        -
     Dividend yield ...........................       -        1.23        -
     ===========================================================================
<FN>
     (1)  No options were granted during the period.
</FN>
</TABLE>

(21) EARNINGS PER SHARE

     A  reconciliation  of the  components  used to  derive  basic  and  diluted
     earnings per share for 1999, 1998 and 1997 follows:

<TABLE>
<CAPTION>
                                                        Net       Weighted Average   Per Share
     (Dollars in Thousands, Except Per Share Data)     Income    Shares Outstanding    Amount
     -----------------------------------------------------------------------------------------
<S>                                                   <C>            <C>               <C>
     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
     =========================================================================================
     1998:
        Basic earnings per share .................    $57,973        28,111,855        $2.06
        Effect of dilutive stock options .........       --              64,388         0.01
     -----------------------------------------------------------------------------------------
        Diluted earnings per share ...............    $57,973        28,176,243        $2.05
     =========================================================================================
     1997:
        Basic earnings per share .................    $45,234        28,076,556        $1.61
        Effect of dilutive stock options .........       --              63,644            -
     -----------------------------------------------------------------------------------------
        Diluted earnings per share ...............    $45,234        28,140,200        $1.61
     =========================================================================================
</TABLE>

                                       90
<PAGE>


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

(22) EMPLOYEE BENEFIT PLANS

     Retirement and Savings Plan

     In August 1993, Downey amended its profit sharing plan so that it qualifies
     as a profit  sharing and savings plan under Section  401(k) of the Internal
     Revenue Code ("the Plan"),  covering  substantially all salaried employees.
     Under the Plan,  employee  contributions  are partially  matched by Downey.
     Downey's  matching  contribution  is equal to 25% of an  employee's  pretax
     contributions which do not exceed 4% of the employee's annual compensation.
     In  addition,  Downey  makes an  annual  retirement  contribution  based on
     Downey's  net income and the  employee's  age,  vested years of service and
     salary.  Downey's  contributions to the Plan totaled $1.9 million for 1999,
     compared to $1.9 million in 1998 and $1.5 million in 1997.

     During 1995, Downey approved the implementation of 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. Currently, 74 management
     employees and seven  directors are eligible to  participate in the program.
     During 1999,  25  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.

     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
     $3.6  million,  $3.1  million  and $2.5  million  in 1999,  1998 and  1997,
     respectively.

(23) 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 is a party to 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,  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. Downey controls the credit risk of its
     commitments to originate fixed rate loans through credit approvals,  limits
     and monitoring procedures.

                                       91
<PAGE>


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

     The following is a summary of commitments and contingent liabilities:

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                       --------------------
     (In Thousands)                                                      1999        1998
     --------------------------------------------------------------------------------------
<S>                                                                    <C>         <C>
     Commitments to sell loans and mortgage-backed securities .....    $210,092    $621,753
     Commitments to purchase investment securities ................      15,000        --
     Commitments to purchase loans and mortgage-backed securities .      13,992      34,000
     Commitments to originate loans and mortgage-backed securities:
         Adjustable ...............................................     422,145     390,556
         Fixed ....................................................     184,695     550,339
     Undisbursed loan funds and unused lines of credit ............     209,414     169,738
     Standby letters of credit and other contingent liabilities ...       2,423       3,851
     ======================================================================================
</TABLE>

     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, 1999, 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  occasionally
     enters 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, 1999, no swap contracts
     were outstanding.

(24) RISK MANAGEMENT

     Derivative  financial  instruments  are  utilized to minimize the effect of
     future  fluctuations  in interest rates as part of its secondary  marketing
     activities.  Downey utilizes  forward sale and purchase  contracts to hedge
     the value of loans  originated for sale against adverse changes in interest
     rates. At December 31, 1999, sales contracts amounted to $210 million.

                                       92
<PAGE>


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

(25) 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.

     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  variable rate
     loans which reprice  frequently,  fair values approximate  carrying values.
     For non-residential  fixed rate loans, fair values are based on discounting
     future contractual cash flows using the current rate 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.

     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 the current rate 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

                                       93
<PAGE>


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

     carrying  values.  For  fixed  rate  borrowings,  fair  value  is  based on
     discounting  future contractual cash flows by the current rate 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 sell  loans  and  mortgage-backed  securities,
     commitments  to purchase  mortgage-backed  securities,  standby  letters of
     credit  and  other   contingent   liabilities,   unused  lines  of  credit,
     commitments  to  originate   loans  and   mortgage-backed   securities  are
     essentially  carried at zero which  approximates fair value. See Note 23 on
     page 91, for  information  concerning the notional amount of such financial
     instruments.

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

<TABLE>
<CAPTION>
                                                            December 31, 1999          December 31, 1998
                                                         --------------------------------------------------
                                                          Carrying      Estimated    Carrying     Estimated
     (In Thousands)                                      Amount (1)    Fair Value   Amount (1)   Fair Value
     ------------------------------------------------------------------------------------------------------
<S>                                                      <C>           <C>          <C>          <C>
     ASSETS:
     Cash ...........................................    $  121,146    $  121,146   $   58,510   $   58,510
     Federal funds ..................................             1             1       33,751       33,751
     U.S. Government and agency obligations and other
         investment securities available for sale ...       171,823       171,823      116,061      116,061
     Municipal securities held to maturity ..........         6,728         6,710        6,764        6,745
     Loans held for sale ............................       136,005       136,298      447,382      447,468
     Mortgage-backed securities available for sale ..        21,719        21,719       32,146       32,146
     Loans receivable held for investment:
         Loans secured by real estate:
           Residential:
             Adjustable .............................     7,319,949     7,308,374    4,333,023    4,474,114
             Fixed ..................................       536,884       533,673      356,209      368,737
           Other ....................................       269,833       276,140      207,728      210,172
         Non-mortgage loans:
           Commercial ...............................        17,259        17,912       19,154       19,154
           Consumer .................................       444,414       453,425      392,723      396,421
     Interest-bearing advances to joint ventures ....        15,613        15,613       25,540       25,540
     Federal Home Loan Bank stock ...................       102,392       102,392       49,430       49,430
     MSRs and loan servicing portfolio ..............        34,263        47,363        7,793       11,976

     LIABILITIES:
     Deposits:
         Transaction accounts .......................     1,489,939     1,489,939    1,238,062    1,238,062
         Certificates of deposit ....................     5,072,822     5,025,389    3,801,671    3,804,269
     Borrowings .....................................     2,122,780     2,055,493      703,720      709,223
     Capital securities .............................       120,000       102,000         --           --
     ======================================================================================================
<FN>
     (1)  The carrying amount of loans is stated net of undisbursed  loan funds,
          unearned fees and discounts and allowances for losses.
</FN>
</TABLE>

                                       94
<PAGE>


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

(26) 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 65. 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.

                                       95
<PAGE>


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

     Operating Results and Assets

     The following presents the operating results and selected financial data by
     major business segments for 1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                Real Estate
     (In Thousands)                                 Banking      Investment   Elimination     Totals
     -------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>          <C>          <C>
     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 tax expense .......         93,581       17,030          --          110,611
     Income tax expense .....................         39,785        7,022          --           46,807
     -------------------------------------------------------------------------------------------------
         Net income .........................     $   53,796      $10,008      $   --       $   63,804
     =================================================================================================
     ASSETS AT DECEMBER 31 1999:
         Loans and mortgage-backed securities     $8,746,063      $  --        $   --       $8,746,063
         Real estate held for investment ....           --         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
     =================================================================================================
     YEAR ENDED DECEMBER 31 1998:
     Net interest income (expense) ..........     $  174,967      $  (620)     $   --       $  174,347
     Provision (reduction) for loan losses ..          3,918          (19)         --            3,899
     Other income ...........................         24,617       22,736          --           47,353
     Operating expense ......................        113,954        2,706          --          116,660
     Net intercompany income (expense) ......           (107)         107          --             --
     -------------------------------------------------------------------------------------------------
     Income before income tax expense .......         81,605       19,536          --          101,141
     Income tax expense .....................         34,869        8,299          --           43,168
     -------------------------------------------------------------------------------------------------
         Net income .........................     $   46,736      $11,237      $   --       $   57,973
     =================================================================================================
     ASSETS AT DECEMBER 31 1998:
         Loans and mortgage-backed securities     $5,788,365      $  --        $   --       $5,788,365
         Real estate held for investment ....           --         49,447          --           49,447
         Other ..............................        464,097        9,841       (41,331)       432,607
     -------------------------------------------------------------------------------------------------
            Total assets ....................      6,252,462       59,288       (41,331)     6,270,419
     -------------------------------------------------------------------------------------------------
     Equity .................................     $  480,566      $41,331      $(41,331)    $  480,566
     =================================================================================================
     YEAR ENDED DECEMBER 31 1997:
     Net interest income (expense) ..........     $  154,799      $  (641)     $   --       $  154,158
     Provision for loan losses ..............          8,522          118          --            8,640
     Other income ...........................         20,783       14,405          --           35,188
     Operating expense ......................         98,803        2,469          --          101,272
     Net intercompany income (expense) ......           (357)         357          --             --
     -------------------------------------------------------------------------------------------------
     Income before income tax expense .......         67,900       11,534          --           79,434
     Income tax expense .....................         29,238        4,962          --           34,200
     -------------------------------------------------------------------------------------------------
         Net income .........................     $   38,662      $ 6,572      $   --       $   45,234
     =================================================================================================
     ASSETS AT DECEMBER 31 1997:
         Loans and mortgage-backed securities     $5,366,396      $  --        $   --       $5,366,396
         Real estate held for investment ....           --         41,356          --           41,356
         Other ..............................        449,318       12,849       (34,094)       428,073
     -------------------------------------------------------------------------------------------------
            Total assets ....................      5,815,714       54,205       (34,094)     5,835,825
     -------------------------------------------------------------------------------------------------
     Equity .................................     $  430,346      $34,094      $(34,094)    $  430,346
     =================================================================================================
</TABLE>

                                       96
<PAGE>


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

(27) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

     Selected  quarterly  financial data are presented  below by quarter for the
     years ended December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                             December 31,  September 30,   June 30,      March 31,
     (In Thousands, Except Per Share Data)                       1999          1999          1999          1999
     -------------------------------------------------------------------------------------------------------------
<S>                                                            <C>           <C>           <C>           <C>
     Total interest income ................................    $161,244      $136,404      $122,209      $113,894
     Total interest expense ...............................     104,962        85,361        71,012        64,938
     -------------------------------------------------------------------------------------------------------------
        Net interest income ...............................      56,282        51,043        51,197        48,956
     Provision for loan losses ............................       3,253         2,838         2,798         2,381
     -------------------------------------------------------------------------------------------------------------
        Net interest income after provision for loan losses      53,029        48,205        48,399        46,575
     Total other income ...................................      18,406        16,271        13,259        11,342
     Total operating expense ..............................      37,092        35,805        35,521        36,457
     -------------------------------------------------------------------------------------------------------------
     Income before income taxes ...........................      34,343        28,671        26,137        21,460
     Income  taxes ........................................      14,507        12,109        11,079         9,112
     -------------------------------------------------------------------------------------------------------------
     Net income ...........................................    $ 19,836      $ 16,562      $ 15,058      $ 12,348
     =============================================================================================================
     Net income per share:
        Basic .............................................    $   0.71      $   0.59      $   0.53      $   0.44
        Diluted ...........................................        0.70          0.59          0.53          0.44
     =============================================================================================================
     Market range:
        High bid ..........................................    $  22.94      $  24.13      $  23.00      $  25.75
        Low bid ...........................................       19.06         19.81         18.13         18.25
        End of period .....................................       20.19         20.13         21.94         18.31
     =============================================================================================================
</TABLE>

<TABLE>
<CAPTION>
                                                             December 31,  September 30,   June 30,      March 31,
                                                                 1998          1998          1998          1998
     -------------------------------------------------------------------------------------------------------------
<S>                                                            <C>           <C>           <C>           <C>
     Total interest income ................................    $111,902      $108,982      $109,797      $109,723
     Total interest expense ...............................      66,158        66,195        66,607        67,097
     -------------------------------------------------------------------------------------------------------------
        Net interest income ...............................      45,744        42,787        43,190        42,626
     Provision for loan losses ............................       1,180           985         1,462           272
     -------------------------------------------------------------------------------------------------------------
        Net interest income after provision for loan losses      44,564        41,802        41,728        42,354
     Total other income ...................................      10,806         9,672        11,949        14,926
     Total operating expense ..............................      33,834        28,949        27,280        26,597
     -------------------------------------------------------------------------------------------------------------
     Income before income taxes ...........................      21,536        22,525        26,397        30,683
     Income taxes .........................................       8,884         9,757        11,409        13,118
     -------------------------------------------------------------------------------------------------------------
     Net income ...........................................    $ 12,652      $ 12,768      $ 14,988      $ 17,565
     =============================================================================================================
     Net income per share:
        Basic .............................................    $   0.45      $   0.45      $   0.53      $   0.63
        Diluted ...........................................        0.45          0.45          0.53          0.62
     =============================================================================================================
     Market range:
        High bid ..........................................    $  26.38      $  35.00      $  34.50      $  30.95
        Low bid ...........................................       17.75         23.06         30.83         23.58
        End of period .....................................       25.44         23.81         32.69         30.83
     =============================================================================================================
</TABLE>

                                       97
<PAGE>


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

(28) 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  under  generally  accepted
     accounting  principles.  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:

     Condensed Balance Sheets
<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                                  --------------------
     (In Thousands)                                                                 1999        1998
     -------------------------------------------------------------------------------------------------
<S>                                                                               <C>         <C>
     ASSETS
     Cash ....................................................................    $      7    $      5
     Due from Bank - interest bearing ........................................      12,686       8,521
     Investment in subsidiaries:
        Bank .................................................................     636,213     470,504
        Downey Financial Capital Trust I .....................................       3,711        --
        Downey Affiliated Insurance Agency ...................................         204         213
     Real estate held for investment .........................................        --           458
     Other assets ............................................................       5,016       1,124
     -------------------------------------------------------------------------------------------------
                                                                                  $657,837    $480,825
     =================================================================================================
     LIABILITIES AND STOCKHOLDERS' EQUITY
     Junior subordinated debentures ..........................................    $123,711    $   --
     Accounts payable and accrued expenses ...................................       1,708         259
     -------------------------------------------------------------------------------------------------
        Total liabilities ....................................................     125,419         259
     Stockholders' equity ....................................................     532,418     480,566
     -------------------------------------------------------------------------------------------------
                                                                                  $657,837    $480,825
     =================================================================================================
</TABLE>

                                       98
<PAGE>


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

     Condensed Statements of Income
     and Other Comprehensive Income
<TABLE>
<CAPTION>
                                                                                      Years Ended December 31,
                                                                                  --------------------------------
     (In Thousands)                                                                1999         1998        1997
     -------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>          <C>         <C>
     INCOME:
        Dividends from the Bank .............................................     $ 5,011      $ 9,537     $ 8,891
        Interest income .....................................................       1,635          374         380
        Other income ........................................................         104           60          57
     -------------------------------------------------------------------------------------------------------------
           Total income .....................................................       6,750        9,971       9,328
     -------------------------------------------------------------------------------------------------------------
     EXPENSE:
        Interest expense ....................................................       5,353         --          --
        Provision for (reduction of) losses on real estate ..................      (1,720)          24         153
        General and administrative expense ..................................         896          793         805
     -------------------------------------------------------------------------------------------------------------
           Total expense ....................................................       4,529          817         958
     -------------------------------------------------------------------------------------------------------------
     INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED
        NET INCOME OF SUBSIDIARIES ..........................................       2,221        9,154       8,370
     Income tax benefit .....................................................       1,162          157         215
     -------------------------------------------------------------------------------------------------------------
     INCOME BEFORE EQUITY IN UNDISTRIBUTED NET INCOME
        OF SUBSIDIARIES .....................................................       3,383        9,311       8,585
     Equity in undistributed net income of subsidiaries .....................      60,421       48,662      36,649
     -------------------------------------------------------------------------------------------------------------
        NET INCOME ..........................................................      63,804       57,973      45,234

     OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES: Unrealized gains
        (losses) on securities available for sale:
           U.S. Treasury securities and agency obligations available
             for sale, at fair value ........................................      (1,874)       1,104       1,331
           Less reclassification of realized gains, net of losses
             included in income .............................................        (166)         (39)       --
           Mortgage-backed securities available for sale, at fair value .....        (281)        (422)        338
     -------------------------------------------------------------------------------------------------------------
        Total other comprehensive income (loss), net of income taxes ........      (2,321)         643       1,669
     -------------------------------------------------------------------------------------------------------------
        COMPREHENSIVE INCOME ................................................     $61,483      $58,616     $46,903
     =============================================================================================================
</TABLE>

                                       99
<PAGE>


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

     Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                                                   ------------------------------------
     (In Thousands)                                                   1999         1998         1997
     --------------------------------------------------------------------------------------------------
<S>                                                                <C>           <C>          <C>
     CASH FLOWS FROM OPERATING ACTIVITIES:
        Net income ............................................    $  63,804     $ 57,973     $ 45,234
        Equity in undistributed net income of subsidiaries ....      (60,421)     (48,662)     (36,649)
        Provision for (recovery of) losses on real estate .....       (1,720)          24          153
        Increase in liabilities ...............................        1,449          134            7
        Other, net ............................................        1,022          807       (1,304)
     --------------------------------------------------------------------------------------------------
           Net cash provided by operating activities ..........        4,134       10,276        7,441
     --------------------------------------------------------------------------------------------------
     CASH FLOWS FROM INVESTING ACTIVITIES:
        Capital contribution to the Bank ......................     (107,600)        --           --
        (Increase) decrease in due from Bank - interest bearing       (4,165)      (1,886)         698
        Sales of wholly owned real estate .....................        2,201         --           --
     --------------------------------------------------------------------------------------------------
           Net cash provided by (used for) investing activities     (109,564)      (1,886)         698
     --------------------------------------------------------------------------------------------------
     CASH FLOWS FROM FINANCING ACTIVITIES:
        Issuance of junior subordinated debentures ............      115,063         --           --
        Exercise of stock options .............................          219          510          335
        Dividends on common stock .............................       (9,850)      (8,889)      (8,454)
        Other .................................................         --            (17)          (9)
     --------------------------------------------------------------------------------------------------
           Net cash provided by (used for) financing activities      105,432       (8,396)      (8,128)
     --------------------------------------------------------------------------------------------------
     Net increase (decrease) in cash and cash equivalents .....            2           (6)          11
     Cash and cash equivalents at beginning of year ...........            5           11         --
     --------------------------------------------------------------------------------------------------
     CASH AND CASH EQUIVALENTS AT END OF PERIOD ...............    $       7     $      5     $     11
     ==================================================================================================
</TABLE>

(29) SUBSEQUENT EVENT

     On January 21, 2000, the Bank signed a definitive  agreement to sell during
     the first  quarter  of 2000 its  indirect  automobile  finance  subsidiary,
     Downey Auto Finance Corp.,  to Auto One  Acceptance  Corp., a subsidiary of
     California  Federal Bank. The proceeds of the sale will provide  additional
     capital to further the growth of our residential lending business.

                                      100
<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 26, 2000, 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  "Securities  Ownership of
Certain Beneficial Owners and Management" 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 1999.

          None.

                                      101
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(c)  Exhibits.

   EXHIBIT
    NUMBER                         DESCRIPTION
   -------                         -----------
     3.1  (2) Certificate of Incorporation of Downey Financial Corp.

     3.3  (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, 1997).

    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).

                                      102
<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  (1)  Founder  Retirement  Agreement  of  Gerald  H.  McQuarrie,  dated
          December 21, 1989.

   22.    (1) Subsidiaries.

   23.1   Consent of Independent Auditors.

   27.    Financial Data Schedule.

(1) Filed as part of Downey's report on Form 8-B/A filed January 17, 1995.
(2) Filed as part of Downey's report on Form S-8 filed February 3, 1995.
(3) Filed as part of Downey's report on Form 10-K filed March 14, 1997.
(4) Filed as part of Downey's report on Form 10-Q filed November 2, 1999.

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


                                      103
<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, 2000

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, 2000
-------------------------            Director
    Maurice L. McAlister

/s/ CHERYL E. OLSON         Vice Chairman of the Board          March 7, 2000
-------------------------            Director
    Cheryl E. Olson

/s/ DANIEL D. ROSENTHAL            President and                March 7, 2000
-------------------------     Chief Executive Officer
    Daniel D. Rosenthal              Director


/s/ THOMAS E. PRINCE          Executive Vice President          March 7, 2000
-------------------------      Chief Financial Officer
    Thomas E. Prince          (Principal Financial and
                                 Accounting Officer)


/s/ MICHAEL ABRAHAMS                 Director                   March 7, 2000
-------------------------
    Michael Abrahams

/s/ DR. PAUL KOURI                   Director                   March 7, 2000
-------------------------
    Dr. Paul Kouri

/s/ BRENT MCQUARRIE                  Director                   March 7, 2000
-------------------------
    Brent McQuarrie

/s/ LESTER C. SMULL                  Director                   March 7, 2000
-------------------------
    Lester C. Smull

/s/ SAM YELLEN                       Director                   March 7, 2000
-------------------------
    Sam Yellen

                                      104
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