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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, 2000.

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

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

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

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

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

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

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

Securities   registered   pursuant   to   Section   12(g)  of  the   Act:   None
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     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

     Indicate by a check mark if  disclosure of  delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  Registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. |_|

     The aggregate  market value of the voting stock held by  non-affiliates  of
the  registrant,  based  upon the  closing  sale  price of its  Common  Stock on
February 28, 2001, on the New York Stock Exchange was $923,319,826.

     At February 28, 2001,  28,211,048 shares of the Registrant's  Common Stock,
$0.01 par value were outstanding.

     DOCUMENTS  INCORPORATED BY REFERENCE:  Portions of the  Registrant's  Proxy
Statement to be filed with the Securities and Exchange  Commission in connection
with  the  Annual  Meeting  of  Stockholders  to be  held  April  25,  2001  are
incorporated by reference in Part III hereof.

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<PAGE>

TABLE OF CONTENTS

ITEM                                                                      PAGE
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PART I
   1.  BUSINESS..........................................................    1
          General........................................................    1
          Banking Activities.............................................    2
            Lending Activities...........................................    2
              Loan and Mortgage-Backed Securities Portfolio..............    3
              Residential Real Estate Lending............................    3
              Secondary Marketing and Loan Servicing Activities..........    5
              Commercial Real Estate and Multi-Family Lending............    6
              Construction Lending.......................................    6
              Commercial Lending.........................................    6
              Consumer Lending...........................................    6
            Investment Activities........................................    7
            Deposit Activities...........................................    7
            Borrowing Activities.........................................    7
            Capital Securities...........................................    8
            Asset/Liability Management...................................    8
            Earnings Spread..............................................    8
            Insurance Agency Activities..................................    9
          Real Estate Investment Activities..............................    9
          Competition....................................................    9
          Employees......................................................   10
          Regulation.....................................................   10
            General......................................................   10
            Regulation of Downey.........................................   10
            Regulation of the Bank.......................................   12
            Regulation of DSL Service Company............................   19
          Taxation.......................................................   20
          Factors That May Affect Future Results.........................   20
   2.  PROPERTIES........................................................   22
          Branches.......................................................   22
          Electronic Data Processing.....................................   22
   3.  LEGAL PROCEEDINGS.................................................   22
   4.  SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS...................   22

PART II
   5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS............................................   23
   6.  SELECTED FINANCIAL DATA...........................................   24
   7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS......................................   26
          Overview.......................................................   26
          Results of Operations..........................................   28
             Net Interest Income.........................................   28
             Provision for Loan Losses...................................   30
             Other Income................................................   31
                Loan and Deposit Related Fees............................   31
                Real Estate and Joint Ventures Held for Investment.......   31
                Secondary Marketing Activities ..........................   32
                Other Category...........................................   32


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<PAGE>

TABLE OF CONTENTS

ITEM                                                                      PAGE
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PART II----(CONTINUED)

             Operating Expenses..........................................   32
             Provision for Income Taxes..................................   32
             Business Segment Reporting..................................   33
                Banking..................................................   33
                Real Estate Investment...................................   34
          Financial Condition............................................   35
             Loans and Mortgage-Backed Securities........................   35
             Investment Securities.......................................   38
             Investments in Real Estate and Joint Ventures...............   39
             Deposits....................................................   41
             Borrowings..................................................   43
             Capital Securities..........................................   44
             Asset/Liability Management and Market Risk..................   44
             Problem Loans and Real Estate...............................   48
                Non-Performing Assets....................................   48
                Delinquent Loans.........................................   50
                Allowance for Losses on Loans and Real Estate............   52
             Capital Resources and Liquidity.............................   57
             Regulatory Capital Compliance...............................   58
             Current Accounting Issues...................................   59
             Sale of Subsidiary..........................................   61
   8.  FINANCIAL STATEMENTS..............................................   62
   9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
          ACCOUNTING AND FINANCIAL DISCLOSURES...........................  108

PART III

  10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................  108
  11.  EXECUTIVE COMPENSATION............................................  108
  12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT.....................................................  108
  13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................  108

PART IV

  14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
          ON FORM 8-K....................................................  108
SIGNATURES ................................................................111


                                       ii
<PAGE>

PART I

     Certain   matters   discussed   in  this  Annual   Report  may   constitute
forward-looking   statements  within  the  meaning  of  the  Private  Securities
Litigation Reform Act of 1995 (the "Reform Act") and, as such, may involve risks
and  uncertainties.  These  forward-looking  statements  relate to,  among other
things, expectations of the business environment in which Downey Financial Corp.
("Downey,"  "we," "us" and "our") operates,  projections of future  performance,
perceived  opportunities in the market and statements regarding Downey's mission
and vision.  Downey's  actual results,  performance or  achievements  may differ
significantly from the results, performance or achievements expressed or implied
in such  forward-looking  statements.  For  discussion of the factors that might
cause such a difference, see Business--Factors That May Affect Future Results on
page 20.

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, 2000,
it conducts  its  business  through 114 retail  deposit  branches,  including 49
full-service in-store branches.  Residential loans are originated by residential
loan  officers  who  work  out of 46 of the  Bank's  California  retail  deposit
branches. Residential loan officers also originate residential loans through the
Internet from two California call centers. Wholesale loans submitted by mortgage
brokers are originated  from six California  loan  origination  centers,  two of
which are located in or by a Bank office.

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

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

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

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

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

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

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

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

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


                                       1
<PAGE>

BANKING ACTIVITIES

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

     o    attracting funds from the general public and institutions; and

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

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

     Our primary sources of revenue from our banking business are:

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

     o    fees we earn in connection with loans and deposits;

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

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

     Our principal expenses in connection with our banking business are:

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

     o    general and administrative costs.

     Our primary sources of funds from our banking business are:

     o    deposits;

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

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

     o    borrowings and capital securities.

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

LENDING ACTIVITIES

     Historically,   our  lending  activities  have  primarily   emphasized  our
origination of first mortgage loans secured by residential properties and retail
neighborhood  shopping centers.  To a lesser extent, our lending activities have
emphasized  our  origination  of real estate loans secured by  multi-family  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,
with other  participants.  We also  originate  loans to  businesses  through our
commercial banking operations.

     We originate  automobile loans directly through our branch network. We also
conducted an indirect  auto-lending  program through our purchase of new or used
automobile  sales  contracts  from auto dealers in California  and other western
states.  Downey Auto Finance  Corp., a previous  wholly owned  subsidiary of the
Bank,  operated this  indirect  auto-lending  program,  but was sold in February
2000.  For  more  information,  see  Management's  Discussion  and  Analysis  of
Financial  Condition  and Results of  Operations--Financial  Condition--Sale  of
Subsidiary on page 61.

     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


                                       2
<PAGE>

     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  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
35.

LOAN AND MORTGAGE-BACKED SECURITIES PORTFOLIO

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

     We identify  loans that may be sold before their  maturity.  In our balance
sheets, we classify these as loans held for sale and record them at the lower of
amortized  cost or 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 in
stockholders'  equity and as a  separate  component  of our other  comprehensive
income until realized.

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

RESIDENTIAL REAL ESTATE LENDING

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

     Our adjustable rate mortgages generally:

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

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


                                       3
<PAGE>

     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 currently impose a limit on the amount of
negative amortization, so that the principal plus the added amount cannot exceed
110% of the original loan amount.  In the past, the limit was 125% on loans with
an original  loan-to-value  ratio of 80% or less. 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. At year-end 2000, loans with the higher limit
on negative  amortization  represented  about  one-third of our adjustable  rate
one-to-four unit residential  portfolio.  We permit adjustable rate mortgages to
be assumed by qualified borrowers.

     During 2000,  approximately  87% of our one-to-four  unit  residential real
estate loans were obtained by our wholesale loan  representatives but originated
through outside mortgage brokers. We pay our wholesale loan representatives on a
commission  basis. We consider the  compensation we pay outside mortgage brokers
when we set the overall  price of our mortgage  loan  products.  These  mortgage
brokers do not operate  from our offices and are not our  employees.  Our retail
loan account representatives generated approximately 13% of our one-to-four unit
residential   loans  during  2000.  We   compensate   our  retail  loan  account
representatives  located  in our call  centers  on a salary  basis  plus a fixed
amount per loan they originate.  Retail loan account  representatives located in
our branch  offices are  compensated  on a  commission  only basis.  Retail loan
account  representatives  typically  receive  loan  referrals  from real  estate
agents,  builders and  customers.  Our call centers  receive loan referrals from
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 2000,
our average loan size was $260,210.  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 the borrower obtains
private  mortgage  insurance  to reduce  the  effective  loan-to-value  ratio to
between  70% to  78%,  consistent  with  secondary  marketing  requirements.  In
addition,  we require that borrowers obtain hazard insurance for all residential
real estate loans covering the lower of the loan amount or the replacement value
of the residence.

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

           o    the initial incentive interest rate; or

           o    the fully indexed interest rate.

     o    for loan programs  that include  negative  amortization  and are owner
          occupied, at the minimum qualifying interest rate of 7.50%.


                                       4
<PAGE>

     o    for loan programs that include negative amortization and are non-owner
          occupied, at the minimum qualifying interest rate of 7.75%.

     Late in 1996,  we began  offering  one-to-four  unit  residential  loans to
borrowers who have or, in the case of purchases, will have equity in their homes
but whose credit rating contains  exceptions which preclude them from qualifying
for lower or better  market  interest  rates and terms.  We refer to these lower
grade credits,  which we  characterize  as "A-," "B" and "C" loans,  as subprime
loans in our loan  portfolio.  Our  subprime  loans are  characterized  by lower
loan-to-value  ratios and higher average interest rates than higher credit grade
loans or "A" loans. We believe these lower credit grade  borrowers  represent an
opportunity for us to earn a higher net return for the risks we assume.  We have
developed specific  underwriting  guidelines for each classification of subprime
credit and qualify  these  applicants  at the fully  indexed  rate.  For further
information,   see   Regulation--Regulation   of  the  Bank--Regulatory  Capital
Requirements on page 13.

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.

     Generally, we use various hedging programs to manage the interest rate risk
of our fixed rate mortgage origination  process.  For further  information,  see
Asset/Liability Management 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 and the  opportunity to
offer our other financial  services in servicing loans for others can provide us
with additional income with minimal additional overhead costs.

     Depending upon market pricing for servicing, we sell loans either servicing
retained or servicing released. When we sell loans servicing retained, we record
gains or losses  from these  loans at the time of sale.  We  calculate  gains or
losses from our sale as the  difference  between the net sales  proceeds and the
allocated basis of the loans sold. We capitalize  mortgage  servicing  rights we
acquire  through  either our purchase or origination of mortgage loans we intend
to sell with  servicing  rights  retained.  We  allocate  the total  cost of the
mortgage loans designated for sale to both the mortgage  servicing rights and to
the mortgage  loans without  mortgage  servicing  rights based on their relative
fair  values.  We  disclose  our  mortgage  servicing  rights  in our  financial
statements  and  include  them as a component  of the gain on sale of loans.  We
recognize impairment losses on the mortgage servicing rights through a valuation
allowance and record any  associated  provision as a component of loan servicing
fees. At December 31, 2000, our mortgage servicing rights totaled $41 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
stockholders'  equity as accumulated other  comprehensive  income, net of income
taxes.


                                       5
<PAGE>

COMMERCIAL REAL ESTATE AND MULTI-FAMILY LENDING

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

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

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

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

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

CONSTRUCTION LENDING

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

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

     o    construction costs;

     o    potential delays in construction time;

     o    market demand; and

     o    the accuracy of the estimate of value on the completed project.

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

COMMERCIAL LENDING

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

CONSUMER LENDING

     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--Sale of Subsidiary on page 61.


                                       6
<PAGE>

     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  19 and
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations--Financial  Condition--Capital Resources and Liquidity on page 57. 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 to maturity at amortized  cost.  We adjust these
costs  for  amortization  of  premiums  and  accretion  of  discounts,  which we
recognize  as interest  income using the interest  method.  We carry  securities
available  for sale at fair  value.  We  exclude  unrealized  holding  gains and
losses, or valuation allowances  established for net unrealized losses, from our
earnings and report them as a separate component of our stockholders'  equity as
accumulated other comprehensive income, net of income taxes, unless the security
is deemed other than temporarily  impaired.  If the security is determined to be
other than  temporarily  impaired,  we charge the  amount of the  impairment  to
operations.  For  further  information  on the  composition  of  our  investment
portfolio,  see Management's  Discussion and Analysis of Financial Condition and
Results of Operations--Financial Condition--Investment Securities on page 38.

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 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 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 41.

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


                                       7
<PAGE>

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 43.

CAPITAL SECURITIES

     On July 23,  1999,  we issued $120  million in capital  securities  through
Downey  Financial  Capital  Trust  I.  The  capital   securities  pay  quarterly
cumulative  cash  distributions  at an annual rate of 10.00% of the  liquidation
value of $25 per share.  Of the $115 million of net  proceeds,  we invested $108
million as  additional  common stock of the Bank thereby  increasing  the Bank's
regulatory  core/tangible  capital by that same  amount.  The balance of the net
proceeds have been used for general corporate purposes.  For further information
regarding  our  capital  securities,  see  Note  19  on  page  93  of  Notes  to
Consolidated Financial Statements.

ASSET/LIABILITY MANAGEMENT

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

     For further  information see Lending  Activities on page 2 and Management's
Discussion    and   Analysis   of   Financial    Condition    and   Results   of
Operations--Financial  Condition--Asset/Liability  Management and Market Risk on
page 44.

EARNINGS SPREAD

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

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

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

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

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

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

     o    our average interest-earning assets for the period.

     For information regarding our net income and the components thereof and for
management's analysis of our financial condition and results of operations,  see
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations  beginning on page 26. For  information  regarding  the return on our
assets and other selected financial data see Selected Financial Data on page 24.


                                       8
<PAGE>

INSURANCE AGENCY ACTIVITIES

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

REAL ESTATE INVESTMENT ACTIVITIES

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

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

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

     For  further  information,  see  Management's  Discussion  and  Analysis of
Financial Condition and Results of Operations--Financial  Condition--Investments
in Real Estate and Joint Ventures on page 39.

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


                                       9
<PAGE>

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, 2000, we had  approximately  1,294 full-time  employees and
489  part-time  employees.  We provide  our  employees  with  health and welfare
benefits and a retirement and savings plan.  Additionally,  we offer  qualifying
employees  participation  in our stock  purchase  plan.  Our  employees  are not
represented  by any union or collective  bargaining  group,  and we consider our
employee relations to be good.

REGULATION

GENERAL

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

REGULATION OF DOWNEY

     General.  We are a savings  and loan  holding  company.  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
acquisition  and each also  satisfies the qualified  thrift lender test or meets
the definition of a domestic building and loan association.  Furthermore,  if we
were in the  future  to sell  control  of the Bank to any  other  company,  such
company  would not  succeed  to our  grandfathered  status  as a unitary  thrift
holding company and would be subject to the same business activity  restrictions
as a bank holding company. For more information,  see Recent Legislation on page
11 and Regulation of the Bank--Qualified Thrift Lender Test on page 15.

     On October 27, 2000, the OTS issued a proposed rule that would require some
savings and loan holding companies to notify the OTS 30 days before  undertaking
certain  significant new business  activities.  As proposed,  holding  companies
would have to give the OTS advance notice of:

     o    the incurrence of debt,  when combined with all other  transactions by
          the company or any subsidiaries  other than the thrift during the past
          12 months,  increases non-thrift liabilities by 5 percent or more; and
          non-thrift liabilities,  after the debt transaction,  equal 50 percent
          or more of the company's consolidated core capital;

     o    an asset  acquisition or series of such transactions by the company or
          non-thrift  subsidiary  during the past 12 months that involves assets
          other than cash, cash equivalents and securities or other  obligations
          guaranteed  by the U.S.  Government  and  exceeds  15  percent  of the
          company's consolidated assets; and


                                       10
<PAGE>

     o    any transaction that, when combined with all other transactions during
          the past 12 months,  reduces  the  company's  capital by 10 percent or
          more.

     Exempt  from the  notice  requirement  would be any  holding  company  with
consolidated subsidiary thrift assets of less than 20 percent of total assets or
consolidated  holding  company  capital  of at least 10  percent.  The OTS could
object to or  conditionally  approve an  activity or  transaction  if it finds a
material  risk to the safety and  soundness  and  stability  of the thrift.  The
review period could be extended an additional 30 days if necessary.

     The OTS  proposal  also would  codify  current  practices  and the  factors
relevant to a holding company's need for capital.  To determine the need for and
level of an explicit holding company capital  requirement,  the OTS will look at
overall  risk at the thrift and the  consolidated  entity,  their  tangible  and
equity capital,  whether the holding company's  debt-to-capital ratio is rising,
what  investments  or activities are funded by debt, its cash flow, how much the
holding  company relies on dividends from its subsidiary  thrift to service debt
or fulfill other obligations,  earnings  volatility and the thrift's standing in
the corporate structure.

     The comment  period for the proposed rule was extended to February 9, 2001.
It is not  possible at this time to predict the impact of the  proposed  rule on
our financial condition or results of operation.

     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, the  Gramm-Leach-Bliley  Act of
1999 (the  "Financial  Services  Modernization  Act") was signed  into law.  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  to engage in a full  range of  financial  activities
through  a  new  entity  known  as a  "Financial  Holding  Company."  "Financial
activities"  is broadly  defined  to include  not only  banking,  insurance  and
securities activities,  but also merchant banking and additional activities that
the Federal Reserve Board,  in consultation  with the Secretary of the Treasury,
determines to be financial in nature,  related or  incidental to such  financial
activities,  or complementary  activities that do not pose a substantial risk to
the safety and soundness of  depository  institutions  or the  financial  system
generally.

     The  Financial  Services  Modernization  Act  provides  that no company may
acquire control of an insured savings association,  unless that company engages,
and continues to engage,  only in the  financial  activities  permissible  for a
Financial  Holding Company,  unless  grandfathered as a unitary savings and loan
holding company.  The Financial  Institution  Modernization Act grandfathers any
company that was a unitary  savings and loan  holding  company on May 4, 1999 or
became a unitary  savings and loan holding  company  pursuant to an  application
pending on that date. Downey is a grandfathered unitary savings and loan holding
company and we


                                       11
<PAGE>

may continue to operate under present law as long as we continue to control only
the Bank and the Bank continues to meet the qualified thrift lender test.

     We do not believe that 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  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
greater  financial  resources  than we do. 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, 2000, 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.

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


                                       12
<PAGE>

     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, 2000,  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; or

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

The Bank is not  required  to meet any  individual  minimum  regulatory  capital
requirement.  At December 31, 2000, the Bank's  regulatory  capital exceeded all
minimum regulatory capital requirements.

     As a  result  of a  number  of  federally  insured  financial  institutions
extending  their risk  selection  standards  to  attract  lower  credit  quality
accounts due to their having higher interest rates and fees, the federal banking
regulatory agencies jointly issued Interagency Guidelines on Subprime Lending in
March 1999.  In  addition,  expanded  guidelines  were issued by the agencies on
January 31, 2001. Subprime lending involves extending credit to individuals with
less than perfect credit histories.

     The agencies'  guidelines  consider  subprime lending a high-risk  activity
that is unsafe and unsound if the risks associated with subprime lending are not
properly controlled. Specifically, the 2001 guidelines direct examiners to


                                       13
<PAGE>

expect  regulatory  capital one and  one-half  to three  times  higher than that
typically set aside for prime assets for institutions that:

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

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

     Our subprime  portfolio,  pursuant to our definition,  represented  250% of
Tier  1  capital  as of  year-end  2000.  Any  requirement  for  us to  maintain
additional  regulatory capital as a result of our activities in subprime lending
could have an adverse  affect on our future  prospects  and  operations  and may
restrict  our  ability to grow.  If we are unable to comply with any new capital
requirements  imposed  upon  regulatory  examination,  we may be  subject to the
prompt corrective action regulations of the OTS. Although we believe we maintain
appropriate  controls and  regulatory  capital for our subprime  activities,  we
cannot determine whether,  or to what extent,  additional  capital  requirements
will be imposed on us after periodic examinations by the OTS.

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

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

     The regulation establishes five categories of capital classification:

     o    "well capitalized;"

     o    "adequately capitalized;"

     o    "undercapitalized;"

     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, 2000,  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;


                                       14
<PAGE>

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

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

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

     At  December  31,  2000,  the Bank's  loans-to-one-borrower  limit was $112
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, 2000, 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.


                                       15
<PAGE>

In addition, under the OTS regulations:

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

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

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

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

     o    with some  exceptions,  each loan or  extension of credit by a savings
          association  to an  affiliate  must be  secured by  collateral  with a
          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  regulations   generally  exclude  all  non-bank  and  non-savings
association  subsidiaries of savings  associations from treatment as affiliates,
except to the extent that the OTS or the Federal  Reserve decides to treat these
subsidiaries as affiliates. The regulations also require savings associations to
make and retain records that reflect affiliate transactions in reasonable detail
and provides that specified  classes of savings  associations may be required to
give the OTS prior notice of affiliate transactions.

     Capital Distribution  Limitations.  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  retained  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


                                       16
<PAGE>

          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.

     Privacy.  Under the Financial  Services  Modernization Act, federal banking
regulators  are required to adopt rules that will limit the ability of banks and
other financial  institutions to disclose non-public information about consumers
to nonaffiliated third parties. Federal banking regulators issued final rules on
May 10, 2000. Pursuant to those rules, financial institutions must provide:

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

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

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

The rules were  effective  November 13, 2000,  but  compliance is optional until
July 1, 2001. These privacy  provisions will affect how consumer  information is
transmitted  through  diversified  financial  companies  and conveyed to outside
vendors.  Although  it is not  possible at this time to assess the impact of the
privacy  provisions on our financial  condition or results of operations,  we do
not believe that the Privacy  provisions will have a material  adverse impact on
our operations in the near term.

     Consumer Protection Rules - Sale of Insurance  Products.  In December 2000,
pursuant to the requirements of the Financial  Services  Modernization  Act, the
federal bank and thrift  regulatory  agencies adopted consumer  protection rules
for the sale of  insurance  products  by  depository  institutions.  The rule is
effective on April 1, 2001. The final rule applies to any depository institution
or any person selling, soliciting, advertising or offering insurance products or
annuities  to a  consumer  at an office of the  institution  or on behalf of the
institution. Before an institution can complete the sale of an insurance product
or  annuity,  the  regulation  requires  oral and written  disclosure  that such
product:

     o    is not a  deposit  or other  obligation  of,  or  guaranteed  by,  the
          depository institution or its affiliate;

     o    is not insured by the FDIC or any other  agency of the United  States,
          the depository institution or its affiliate; and

     o    has certain risks in investment, including the possible loss of value.

     Finally,  the  depository  institution  may not  condition  an extension of
credit:

     o    on the consumer's purchase of an insurance product or annuity from the
          depository institution or from any of its affiliates, or

     o    on the  consumer's  agreement not to obtain,  or a prohibition  on the
          consumer  from  obtaining,  an  insurance  product or annuity  from an
          unaffiliated entity.

     The rule  also  requires  formal  acknowledgement  from the  consumer  that
disclosures were received.

     In addition, to the extent practicable,  a depository institution must keep
insurance  and annuity sales  activities  physically  segregated  from the areas
where retail deposits are routinely accepted from the general public.


                                       17
<PAGE>

     Safeguarding  Confidential  Customer  Information.  In  January  2000,  the
banking  agencies  adopted  guidelines   requiring  financial   institutions  to
establish an information security program to:

     o    identify and assess the risks that may threaten customer information;

     o    develop a written plan  containing  policies and  procedures to manage
          and control these risks;

     o    implement and test the plan; and

     o    adjust  the plan on a  continuing  basis to  account  for  changes  in
          technology,  the sensitivity of customer information,  and internal or
          external threats to information security.

Each  institution may implement a security  program  appropriate to its size and
complexity and the nature and scope of its operations.

     The guidelines outline specific security measures that institutions  should
consider in implementing a security program. A financial  institution must adopt
those security measures determined to be appropriate. The guidelines require the
board of directors to oversee an institution's efforts to develop, implement and
maintain  an  effective   information   security  program  and  approve  written
information security policies and programs. The guidelines are effective July 1,
2001.

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

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

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

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

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

     o    5% of its FHLB advances or borrowings; or

     o    $500.

     The Bank's  required  investment in FHLB stock,  based on December 31, 2000
financial data, was $99 million. At December 31, 2000, the Bank had $106 million
of FHLB stock.


                                       18
<PAGE>

     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, 2000,  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, 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.


                                       19
<PAGE>

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

TAXATION

     Federal. A savings institution is taxed like other corporations for federal
income tax purposes,  though  savings  institutions  have  historically  enjoyed
favorable  treatment  under  the  Internal  Revenue  Code in  determining  their
deductions for bad debts.

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

     In addition  to the regular  corporate  income tax,  corporations  might be
required to pay an  alternative  minimum tax. This tax is computed at 20% of the
corporation's  regular  taxable  income,  after  taking  some  adjustments  into
account.  This  alternative  tax applies to  corporations  to the extent that it
exceeds a corporation's regular tax liability.

     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 exceeds the
corporation's alternative minimum tax.

     State. The Bank uses California's  financial corporation income tax rate to
compute its  California  franchise tax  liability.  This rate is higher than the
California  non-financial  corporation  income tax rate  because  the  financial
corporation  income  tax rate  reflects  an amount  "in lieu" of local  personal
property and business license taxes that are paid by non-financial corporations,
but not by banks or other  financial  corporations.  The  financial  corporation
income tax rate was 10.84% for both 2000 and 1999.

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

     The Internal Revenue Service and 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.  The Bank made a payment  of $10.7  million  during
2000 to settle  federal tax claims related to the sale and leaseback of computer
equipment in 1990. This amount had been  previously  reflected in the Bank's tax
accrual,  and therefore  had no adverse  impact upon current year  earnings.  In
addition,  the  Bank's  management  believes  it  has  adequately  provided  for
potential  exposure  with regard to other  issues in the years  currently  under
examination.  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 and its  operations  are  concentrated  in  California.  As a result  of this
geographic concentration, our results depend largely upon economic conditions in
the state.  Leading  business  forecasters and economists  predict that economic
growth  may slow  substantially  from 2000.  A  significant  contributor  to the
projected 2001 slowdown is California's current energy crisis. The expected hike
in energy rates could impede growth by reducing business investment and consumer
spending within the state. Other issues facing the state's economy are potential
job losses as California "dot.com" companies continue to reduce their workforce.
A deterioration  in economic  conditions could have a material adverse impact on
the  quality  of our loan and real  estate  portfolios  and the  demand  for our
products and services.

     Interest Rates.  We anticipate  that  short-term  interest rate levels will
likely decline in 2001, and if interest  rates vary  substantially  from present
levels,  our results  may differ  materially  from  current  levels.  Changes in
interest rates will influence the growth of loans,  investments and deposits and
affect  the  rates  received  on loans  and  investment  securities  and paid on
deposits. Changes in interest rates also affect the value of our recorded


                                       20
<PAGE>

mortgage servicing rights on loans we service for others,  generally  increasing
in value as  interest  rates rise and  declining  as  interest  rates  fall.  If
interest rates were to increase significantly,  the economic feasibility of real
estate investment activities also could be adversely affected.

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

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

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


                                       21
<PAGE>

ITEM 2. PROPERTIES

BRANCHES

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

     At December 31, 2000, we had 114  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 57  locations  (including  49 in-store  locations)  with
leases or licenses  expiring at various dates through October 2010, with options
to extend the term.

     The net book value of our owned branches, including the one on leased land,
totaled $82  million at  December  31, 2000 and the net book value of our leased
branch  offices  totaled $2 million at December 31, 2000.  The net book value of
our furniture and fixtures,  including electronic data processing equipment, was
$20 million at December 31, 2000.

     For additional information regarding our offices and equipment,  see Note 1
on page 69 and Note 9 on page 85 of Notes to Consolidated Financial Statements.

ELECTRONIC DATA PROCESSING

     We utilize a  mainframe  computer  system  with use of various  third-party
vendors' software for retail deposit operations, loan servicing,  accounting and
loan  origination  functions,   including  our  operations  conducted  over  the
Internet.  The net  book  value of our  electronic  data  processing  equipment,
including personal computers and software, was $12 million at December 31, 2000.

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS

     No matters were  submitted  to  shareholders  during the fourth  quarter of
2000.


                                       22
<PAGE>

PART II

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

     Our common stock is traded on the New York Stock Exchange  ("NYSE") and the
Pacific Exchange ("PCX") with the trading symbol "DSL." At February 28, 2001, we
had  approximately  873  stockholders  of record  (not  including  the number of
persons or  entities  holding  stock in nominee or street name  through  various
brokerage firms) and 28,211,048 outstanding shares of common stock.

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

<TABLE>
<CAPTION>
                                   2000                                 1999
                    -----------------------------------------------------------------------
                      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 ........       $60.88   $40.94   $33.00   $21.44    $22.94   $24.13   $23.00   $25.75
Low .........        33.13    29.94    20.44    18.75     19.06    19.81    18.13    18.25
End of period        55.00    39.50    28.98    21.25     20.19    20.13    21.94    18.31
===========================================================================================
</TABLE>

     During 2000, we paid  quarterly  cash  dividends  totaling $0.36 per share,
aggregating $10.1 million compared to $0.35 per share,  aggregating $9.9 million
during  1999.  On February 23, 2001,  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.


                                       23
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Amounts)                       2000         1999         1998         1997          1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>           <C>          <C>          <C>           <C>
INCOME STATEMENT DATA:
Total interest income ..........................................  $   784,360   $  533,751   $  440,404   $  420,418    $  346,360
Total interest expense .........................................      521,885      326,273      266,057      266,260       211,765
------------------------------------------------------------------------------------------------------------------------------------
    Net interest income ........................................      262,475      207,478      174,347      154,158       134,595
Provision for loan losses ......................................        3,251       11,270        3,899        8,640         9,137
------------------------------------------------------------------------------------------------------------------------------------
    Net interest income after provision for loan losses ........      259,224      196,208      170,448      145,518       125,458
------------------------------------------------------------------------------------------------------------------------------------
Other income, net:
    Loan and deposit related fees ..............................       30,089       20,097       15,645       10,921         7,435
    Real estate and joint ventures held for investment, net ....        8,798       19,302       22,363       14,222         8,241
    Secondary marketing activities:
      Loan servicing fees ......................................       (3,628)       1,672          259        1,276         1,415
      Net gains on sales of loans and mortgage-backed securities        3,297       14,806        6,462        2,675         1,543
    Net gains (losses) on sales of investment securities .......         (106)         288           68         --           4,473
    Gain on sale of subsidiary (1) .............................        9,762         --           --           --            --
    Other ......................................................        2,342        3,113        2,556        6,094         2,092
------------------------------------------------------------------------------------------------------------------------------------
      Total other income, net ..................................       50,554       59,278       47,353       35,188        25,199
------------------------------------------------------------------------------------------------------------------------------------
Operating expense:
    General and administrative expense .........................      136,189      144,382      115,890       99,556        86,460
    SAIF special assessment (2) ................................         --           --           --           --          24,644
    Net operation of real estate acquired in settlement of loans          818           19          260        1,184         2,567
    Amortization of excess of cost over fair value of net assets
      acquired..................................................          462          474          510          532           532
------------------------------------------------------------------------------------------------------------------------------------
      Total operating expense ..................................      137,469      144,875      116,660      101,272       114,203
------------------------------------------------------------------------------------------------------------------------------------
Net income (1) (2) .............................................  $    99,251   $   63,804   $   57,973   $   45,234    $   20,704

PER SHARE DATA:
Earnings per share--Basic (1) (2) ..............................  $      3.52   $     2.27   $     2.06   $     1.61    $     0.74
Earnings per share--Diluted (1) (2) ............................         3.51         2.26         2.05         1.61          0.74
Book value per share at end of period ..........................        22.15        18.91        17.08        15.32         13.95
Stock price at end of period ...................................        55.00        20.19        25.44        27.08         17.80
Cash dividends paid ............................................         0.36         0.35         0.32         0.30          0.29

SELECTED FINANCIAL RATIOS:
Effective interest rate spread .................................         2.66%        2.88%        3.08%        2.83%         2.96%
Return on average assets (1) (2) ...............................         0.97         0.85         0.98         0.79          0.43
Return on average equity (1) (2) ...............................        17.17        12.70        12.71        11.07          5.33
Dividend payout ratio ..........................................        10.22        15.44        15.33        18.69         39.35

LOAN ACTIVITY:
Loans originated ...............................................  $ 5,218,368   $7,132,486   $4,071,262   $2,329,266    $1,583,784
Loans and mortgage-backed securities purchased .................       18,828       49,669        7,463       35,828        30,296
Loans and mortgage-backed securities sold ......................    1,662,600    2,386,958    1,740,416      557,511       166,503

BALANCE SHEET SUMMARY (END OF PERIOD):
Total assets ...................................................  $10,893,863   $9,407,540   $6,270,419   $5,835,825    $5,198,157
Loans and mortgage-backed securities ...........................   10,084,353    8,746,063    5,788,365    5,366,396     4,729,846
Investments and cash equivalents ...............................      439,968      299,698      215,086      221,201       222,255
Deposits .......................................................    8,082,689    6,562,761    5,039,733    4,869,978     4,173,102
Borrowings .....................................................    1,978,572    2,122,780      703,720      483,735       595,345
Capital securities .............................................      120,000      120,000         --           --            --
Stockholders' equity ...........................................      624,636      532,418      480,566      430,346       391,571
Loans serviced for others ......................................    3,964,462    2,923,778    1,040,264      612,529       576,044

AVERAGE BALANCE SHEET DATA:
Assets .........................................................  $10,217,371   $7,501,228   $5,918,507   $5,693,869    $4,789,648
Loans ..........................................................    9,514,978    6,937,342    5,345,380    5,174,767     4,269,136
Deposits .......................................................    7,290,850    5,697,292    5,102,045    4,588,320     3,892,981
Stockholders' equity ...........................................      577,979      502,412      456,237      408,473       388,187

</TABLE>


                                       24
<PAGE>


ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Amounts)                       2000         1999         1998         1997          1996
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>           <C>          <C>          <C>           <C>
CAPITAL RATIOS:
Average stockholders' equity to average assets .................         5.66%       6.70%        7.71%        7.17%         8.10%
Bank only--end of period (3):
    Core and tangible capital ..................................         6.42        6.27         6.83         6.61          6.56
    Risk-based capital .........................................        12.94       12.14        12.88        12.64         12.66

SELECTED ASSET QUALITY DATA (END OF PERIOD):
Total non-performing assets ....................................  $    54,974   $  39,194    $  27,419    $  52,120     $  62,027
Non-performing assets as a percentage of total assets ..........         0.50%       0.42%        0.44%        0.89%         1.19%
Allowance for loan losses:
    Amount .....................................................  $    34,452   $  38,342    $  31,517    $  32,092     $  30,094
    As a percentage of non-performing loans ....................        76.63%     116.25%      140.86%       76.96%        66.84%
====================================================================================================================================
<FN>
(1)  In 2000,  a $5.6 million  after-tax  gain was  recognized  from the sale of
     Downey Auto Finance Corp.  Excluding  the gain,  2000 net income would have
     been $93.6  million or $3.33 per share on a basic basis and $3.32 per share
     on a diluted basis,  the return on average assets would have been 0.92% and
     the return on average equity would have been 16.20%.
(2)  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%.
(3)  For more information  regarding these ratios,  see Management's  Discussion
     and Analysis of Financial  Condition  and Results of  Operations--Financial
     Condition--Regulatory Capital Compliance on page 58.
</FN>
</TABLE>


                                       25
<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 20.

OVERVIEW

     Our net income for 2000 totaled a record  $99.2  million or $3.51 per share
on a diluted  basis.  Included in the results was a $5.6 million  after-tax gain
from the sale of our indirect  automobile  finance  subsidiary in February 2000.
Excluding the gain, our net income for the year would have been $93.6 million or
$3.32 per share on a diluted  basis,  up 46.8% from  $63.8  million or $2.26 per
share in 1999.

     The increase in our adjusted net income between years was due to higher net
income  from  our  banking  operations,  as net  income  from  our  real  estate
investment  activities  declined  $5.6 million to $4.4 million due  primarily to
lower net gains from sales of properties.  On an adjusted basis, net income from
our banking operations  increased $35.4 million or 65.8% to $89.2 million due to
the following:

     o    net  interest  income  increased  $54.4  million  or  26.2%  due to an
          increase in average  interest-earning assets as our effective interest
          rate spread declined;

     o    provision  for loan losses  declined by $8.0 million due  primarily to
          lower growth in our loan portfolio than a year ago and the sale of our
          indirect automobile finance subsidiary; and

     o    operating  expense  declined by $7.1 million due to lower  general and
          administrative  costs primarily  associated with  residential  lending
          activities and the sale of our indirect automobile finance subsidiary.
          Our efficiency  ratio (the  percentage of our net interest  income and
          other income excluding income from real estate  investment  activities
          and  investment  securities  gains or losses used to cover our general
          and  administrative  costs)  improved  from  58.4% in 1999 to 46.2% in
          2000.

Those favorable  items were partially  offset by a $8.1 million decline in other
income,  as an increase of $10.0  million in loan and deposit  related fees were
unable to offset the following:

     o    a  $11.5  million   decline  in  net  gains  on  sales  of  loans  and
          mortgage-backed  securities due to a lower volume of loans being sold;
          and

     o    a $3.6 million loss in loan  servicing fees compared to income of $1.7
          million in 1999.  Our current year loss  resulted  from a $6.1 million
          addition to the valuation  allowance for mortgage servicing rights due
          to an increase in expected  prepayments  from the drop in late 2000 in
          mortgage interest rates.

     For 2000,  our return on average assets was 0.97% and our return on average
equity  was  17.17%.  Excluding  the gain on sale of  subsidiary,  our  adjusted
returns were 0.92% on average  assets and 16.20% on average  equity.  Both these
performance  ratios compare  favorably to 1999 when our return on average assets
was 0.85% and our return on average equity was 12.70%.

     Our assets  increased $1.5 billion or 15.8% during 2000 to $10.9 billion at
year-end, following a record 50.0% increase during 1999. Assets expanded in 2000
primarily from loan growth.  Our single family loan originations  decreased from
$6.7  billion  in 1999 to $5.0  billion  in 2000,  of which  $1.7  billion  were
originated for sale in the secondary  market.  Of the current year's total, $405
million  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 $254 million of other loans during the year,
including  $115  million  of  construction  and land  loans and $57  million  of
automobile loans.

     We funded our asset  growth  with  deposits  that  increased  23.2% to $8.1
billion at December 31, 2000.

     Non-performing assets totaled $55 million at December 31, 2000, up from $39
million a year ago.  This  increase was due  primarily to a rise in  residential
non-performers, of which $11 million was in the subprime


                                       26
<PAGE>

category.  When  measured as a percentage of total  assets,  our  non-performing
assets rose from 0.42% at year-end 1999 to 0.50% at year-end 2000.

     At December 31, 2000, the Bank exceeded all three regulatory capital tests,
with capital-to-asset ratios of 6.42% in tangible and core capital and 12.94% 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 39 and Financial Condition--Regulatory Capital Compliance on page 58.


                                       27
<PAGE>

RESULTS OF OPERATIONS

NET INTEREST INCOME

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

     Our net interest  income was $262.5  million in 2000,  up $55.0  million or
26.5%  from  1999  and  $88.1  million  or 50.5%  greater  than  1998.  The 2000
improvement over 1999 primarily  reflected an increase in average earning assets
as our  effective  interest rate spread  declined.  Our average  earning  assets
increased by $2.7 billion or 37.3% to $9.9 billion.  Our effective interest rate
spread  averaged  2.66% in 2000,  down from 2.88% in 1999 and 3.08% in 1998. The
decline in the  effective  interest  rate  spread  primarily  reflected a higher
proportion  of earning  assets in the current year being funded with higher cost
certificates  of deposit and borrowings  thereby  resulting in the cost of funds
increasing  more rapidly than the yield on earning  assets.  To a lesser extent,
the sale of our indirect  automobile  lending subsidiary also contributed to the
decline  in the  effective  interest  rate  spread,  as the  loan  yield on that
portfolio was higher than the yield on our remaining loan portfolio.

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

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

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

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

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

     o    average interest-earning assets for the period.

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


                                       28
<PAGE>

<TABLE>
<CAPTION>

                                                      2000                         1999                          1998
                                        --------------------------------------------------------------------------------------------
                                                              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 .............................  $ 9,514,978  $760,538   7.99% $6,937,342  $519,006    7.48% $5,345,380  $421,942   7.89%
   Mortgage-backed securities ........       15,959     1,060   6.64      26,361     1,638    6.21      42,075     2,780   6.61
   Investment securities .............      346,192    22,762   6.57     232,746    13,107    5.63     276,139    15,682   5.68
------------------------------------------------------------------------------------------------------------------------------------
    Total interest-earning assets ....    9,877,129   784,360   7.94   7,196,449   533,751    7.42   5,663,594   440,404   7.78
Non-interest-earning assets ..........      340,242                      304,779                       254,913
------------------------------------------------------------------------------------------------------------------------------------
   Total assets ......................  $10,217,371                   $7,501,228                    $5,918,507
====================================================================================================================================
Transaction accounts:
   Non-interest-bearing checking .....  $   209,221  $   --      -- % $  165,271  $   --       -- % $  129,469  $   --      -- %
   Interest-bearing checking (1) .....      381,269     3,520   0.92     336,604     3,517    1.04     292,279     3,142   1.08
   Money market ......................       89,495     2,544   2.84      95,282     2,641    2.77      94,792     2,626   2.77
   Regular passbook ..................      796,212    27,841   3.50     767,238    26,224    3.42     531,492    17,102   3.22
------------------------------------------------------------------------------------------------------------------------------------
    Total transaction accounts .......    1,476,197    33,905   2.30   1,364,395    32,382    2.37   1,048,032    22,870   2.18
Certificates of deposit ..............    5,814,653   345,398   5.94   4,332,897   224,382    5.18   4,054,013   225,467   5.56
------------------------------------------------------------------------------------------------------------------------------------
   Total deposits ....................    7,290,850   379,303   5.20   5,697,292   256,764    4.51   5,102,045   248,337   4.87
Borrowings ...........................    2,118,497   130,419   6.16   1,175,704    64,161    5.46     292,044    17,720   6.07
Capital securities ...................      120,000    12,163  10.14      52,903     5,348   10.14        --        --      --
------------------------------------------------------------------------------------------------------------------------------------
   Total deposits, borrowings and
    capital securities ...............    9,529,347   521,885   5.48   6,925,899   326,273    4.71   5,394,089   266,057   4.93
Other liabilities ....................      110,045                       72,917                        68,181
Stockholders' equity .................      577,979                      502,412                       456,237
------------------------------------------------------------------------------------------------------------------------------------
   Total liabilities and
    stockholders' equity .............  $10,217,371                   $7,501,228                    $5,918,507
====================================================================================================================================
Net interest income/interest rate
   spread ............................               $262,475   2.46%             $207,478    2.71%             $174,347   2.85%
Excess of interest-earning assets over
   deposits, borrowings and capital
   securities ........................  $   347,782                   $  270,550                    $  269,505
Effective interest rate spread .......                          2.66                          2.88                         3.08
====================================================================================================================================
<FN>
(1) Includes amounts swept into money market deposit accounts.
</FN>
</TABLE>


                                       29
<PAGE>

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

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

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

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

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

<TABLE>
<CAPTION>
                                                  2000 Versus 1999                             1999 Versus 1998
                                                   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 ...........................  $192,842   $35,500   $13,190    $241,532    $125,663   $(22,036)  $(6,563)  $97,064
   Mortgage-backed securities ......      (646)      113       (45)       (578)     (1,038)      (166)       62    (1,142)
   Investment securities ...........     6,389     2,196     1,070       9,655      (2,465)      (131)       21    (2,575)
--------------------------------------------------------------------------------------------------------------------------
     Change in interest income .....   198,585    37,809    14,215     250,609     122,160    (22,333)   (6,480)   93,347
--------------------------------------------------------------------------------------------------------------------------
Interest expense:
   Transaction accounts:
     Interest-bearing checking (1) .       466      (409)      (54)          3         476        (88)      (13)      375
     Money market ..................      (161)       68        (4)        (97)         14          1      --          15
     Regular passbook ..............       990       604        23       1,617       7,586      1,064       472     9,122
--------------------------------------------------------------------------------------------------------------------------
       Total transaction accounts ..     1,295       263       (35)      1,523       8,076        977       459     9,512
   Certificates of deposit .........    76,733    32,998    11,285     121,016      20,897    (19,376)   (2,606)   (1,085)
--------------------------------------------------------------------------------------------------------------------------
     Total interest-bearing deposits    78,028    33,261    11,250     122,539      28,973    (18,399)   (2,147)    8,427
   Borrowings ......................    51,433     8,927     5,898      66,258      53,612     (1,781)   (5,390)   46,441
   Capital securities ..............     6,815      --        --         6,815        --         --       5,348     5,348
--------------------------------------------------------------------------------------------------------------------------
     Change in interest expense ....   136,276    42,188    17,148     195,612      82,585    (20,180)   (2,189)   60,216
--------------------------------------------------------------------------------------------------------------------------
Change in net interest income ......  $ 62,309   $(4,379)  $(2,933)   $ 54,997    $ 39,575   $ (2,153)  $(4,291)  $33,131
==========================================================================================================================
<FN>
(1) Includes amounts swept into money market deposit accounts.
</FN>
</TABLE>

PROVISION FOR LOAN LOSSES

     Provision for loan losses was $3.3 million in 2000, down from $11.3 million
in 1999 and $3.9 million in 1998.  The decrease in our provision for loan losses
in 2000 is due primarily to lower growth in our loan  portfolio  than a year ago
and the previously mentioned sale of the indirect automobile finance subsidiary.

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


                                       30
<PAGE>

OTHER INCOME

     Our total other income was $50.6  million in 2000,  down from $59.3 million
in 1999 but up from $47.4 million in 1998.  Other income in 2000 included a $9.8
million pre-tax gain associated with our sale of the indirect automobile finance
subsidiary.  Excluding that gain, our other income  declined by $18.5 million in
2000 primarily due to:

     o    a  $11.5  million   decline  in  net  gains  on  sales  of  loans  and
          mortgage-backed securities;

     o    a  $10.5  million  decline  in  income  from  real  estate  investment
          activities; and

     o    a $3.6 million loss in loan  servicing fees compared to income of $1.7
          million in 1999.

Those declines were partially offset by a $10.0 million increase in our loan and
deposit  related fees.  Below is a further  discussion of the major other income
categories.

LOAN AND DEPOSIT RELATED FEES

     Loan and deposit  related fees totaled $30.1 million in 2000, up from $20.1
million in 1999 and $15.6  million in 1998.  Our loan related fees  increased by
$6.1 million or 57.9% in 2000 due primarily to higher prepayment fees, while our
deposit  related fees increased by $3.9 million or 40.6% due primarily to a $2.6
million increase in fees from automated teller machines.

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

<TABLE>
<CAPTION>
 (In Thousands)                                    2000        1999        1998
--------------------------------------------------------------------------------
<S>                                              <C>         <C>         <C>
Loan related fees .............................  $16,722     $10,589     $ 7,225
Deposit related fees ..........................   13,367       9,508       8,420
--------------------------------------------------------------------------------
    Total loan and deposit related fees .......  $30,089     $20,097     $15,645
================================================================================
</TABLE>

REAL ESTATE AND JOINT VENTURES HELD FOR INVESTMENT

     Income from our real estate and joint ventures held for investment  totaled
$8.8 million in 2000, down from $19.3 million in 1999 and $22.4 million in 1998.

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

<TABLE>
<CAPTION>
(In Thousands)                                                           2000     1999     1998
------------------------------------------------------------------------------------------------
<S>                                                                    <C>      <C>      <C>
Operations, net:
   Rental operations, net of expenses ...............................  $2,572   $ 3,822  $ 3,723
   Equity in net income from joint ventures .........................   3,224     5,352    9,203
   Interest from joint venture advances .............................     887     1,256    1,584
------------------------------------------------------------------------------------------------
      Total operations, net .........................................   6,683    10,430   14,510
Net gains on sales of wholly owned real estate ......................   2,981     5,206    2,557
Reduction of (provision for) losses on real estate and joint ventures    (866)    3,666    5,296
------------------------------------------------------------------------------------------------
    Income from real estate and joint ventures held for investment ..  $8,798   $19,302  $22,363
================================================================================================
</TABLE>

     Our income from real estate held for investment  decreased by $10.5 million
due to several factors. First, our net gains from sales declined by $4.5 million
to $6.1  million.  Of the  decline,  $2.3  million was related to joint  venture
projects  reported in the  category  equity in net income  from joint  ventures.
Second,  we provided  $0.9 million in 2000 to our  allowance  for losses on real
estate  and joint  ventures,  while in 1999 our  allowance  was  reduced by $3.7
million.  Finally,  net rental  income  declined  by $1.3  million  due to fewer
properties owned.


                                       31
<PAGE>

     For additional information,  see Financial  Condition--Investments  in Real
Estate and Joint  Ventures on page 39,  Financial  Condition--Problem  Loans and
Real Estate--Allowance for Losses on Loans and Real Estate on page 52 and Note 7
of Notes to Consolidated Financial Statements on page 80.

SECONDARY MARKETING ACTIVITIES

     Sales of loans and  mortgage-backed  securities we originated  decreased in
2000 to $1.7 billion from $2.4 billion in 1999 but were the same as in 1998. Net
gains  associated with these sales totaled $3.3 million in 2000, down from $14.8
million in 1999 and $6.5 million in 1998.  The net gains  included $18.5 million
in  2000,  $29.3  million  in 1999  and  $7.3  million  in 1998  related  to the
capitalization of mortgage servicing rights.

     A loss of $3.6  million  was  recorded  in loan  servicing  fees  from  our
portfolio of loans  serviced for others during 2000,  compared to income of $1.7
million in 1999 and $0.3 million in 1998.  The loss in 2000 reflects an increase
of $6.1 million in the valuation  allowance for mortgage servicing rights due to
an increase in expected  prepayments from the drop in mortgage interest rates in
late 2000.  At December 31, 2000,  we serviced $4.0 billion of loans for others,
compared to $2.9  billion at December  31, 1999 and $1.0 billion at December 31,
1998.

     For additional  information  concerning mortgage servicing rights, see Note
11 of Notes to Consolidated Financial Statements on page 86.

OTHER CATEGORY

     The all other category of other income  totaled $2.3 million in 2000,  down
from $3.1 million in 1999 and $2.6 million in 1998.

OPERATING EXPENSES

     Our operating  expenses  totaled $137.5  million in 2000,  down from $144.9
million in 1999 and up from $116.7  million in 1998.  The current year  decrease
was due to lower  general and  administrative  expense,  which  declined by $8.2
million or 5.7%.  That decline was primarily due to lower costs  associated with
our  residential  lending  activities  and the sale of our  indirect  automobile
finance subsidiary.

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

<TABLE>
<CAPTION>
(In Thousands)                                                           2000      1999      1998
---------------------------------------------------------------------------------------------------
<S>                                                                    <C>       <C>       <C>
Salaries and related costs ..........................................  $ 82,522  $ 86,163  $ 66,152
Premises and equipment costs ........................................    23,220    20,617    16,834
Advertising expense .................................................     4,786     8,595     5,954
Professional fees ...................................................     3,319     2,502     2,867
SAIF insurance premiums and regulatory assessments ..................     2,626     3,937     3,832
Other general and administrative expense ............................    19,716    22,568    20,251
---------------------------------------------------------------------------------------------------
    Total general and administrative expense ........................   136,189   144,382   115,890
Net operation of real estate acquired in settlement of loans ........       818        19       260
Amortization of excess of cost over fair value of net assets acquired       462       474       510
---------------------------------------------------------------------------------------------------
    Total operating expense .........................................  $137,469  $144,875  $116,660
===================================================================================================
</TABLE>

PROVISION FOR INCOME TAXES

     Our  effective  tax rate for 2000 was 42.4%,  compared to 42.3% in 1999 and
42.7%  in  1998.  See  Note 1 on page 69 and  Note  18 on  page 91 of  Notes  to
Consolidated  Financial  Statements for a further discussion of income taxes and
an explanation of the factors which impact Downey's effective tax rate.


                                       32
<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 69 and Note 26 on page
102 of Notes to Consolidated Financial Statements.

     The following  table presents by business  segment our net income for 2000,
1999 and 1998,  followed by a discussion  of the results of  operations  of each
segment.

<TABLE>
<CAPTION>
 (In Thousands)                                           2000 (1)   1999   1998 (2)
 -----------------------------------------------------------------------------------
<S>                                                     <C>        <C>      <C>
 Banking net income ..................................  $94,822    $53,796  $46,736
 Real estate investment net income ...................    4,429     10,008   11,237
 -----------------------------------------------------------------------------------
    Total net income .................................  $99,251    $63,804  $57,973
====================================================================================
<FN>
(1)  Banking  includes  a $5.6  million  after-tax  gain  related to the sale of
     subsidiary.
(2)  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  $94.8 million in 2000, up
from $53.8 million in 1999 and $46.7 million in 1998. The  previously  mentioned
sale of our indirect automobile finance subsidiary benefited our net income from
banking  operations  by $5.6 million.  Excluding  the gain,  our net income from
banking operations would have increased during 2000 by $35.4 million or 65.8%.

     The increase in our adjusted 2000 net income reflected several factors. Net
interest  income  increased  $54.4  million or 26.2% due to an  increase  in our
average  earning  assets as our effective  interest rate spread  declined.  Also
contributing  to the increase  between  years were  decreases of $8.0 million in
provision for loan losses and $7.1 million in operating expense. These decreases
were  primarily  associated  with the sale of our  indirect  automobile  finance
subsidiary as well as lower loan  origination  volumes and costs associated with
residential lending activities. These favorable items were partially offset by a
decline of $8.1 million in adjusted other income.  The decline in adjusted other
income  was  primarily  due to lower  net  gains/losses  on  sales of loans  and
mortgage-backed securities and loan servicing fees which more than offset higher
loan and deposit related fees.

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

<TABLE>
<CAPTION>
(In Thousands)                               2000 (1)        1999          1998
----------------------------------------------------------------------------------
<S>                                       <C>            <C>           <C>
Net interest income ....................  $   262,232    $  207,784    $  174,967
Provision for loan losses ..............        3,251        11,270         3,918
Other income:
    Gain on sale of subsidiary .........        9,762          --            --
    All other ..........................       31,644        39,755        24,617
Operating expense ......................      135,996       143,081       113,954
Net intercompany income (expense) ......          397           393          (107)
----------------------------------------------------------------------------------
Income before income taxes .............      164,788        93,581        81,605
Income taxes ...........................       69,966        39,785        34,869
----------------------------------------------------------------------------------
   Net income ..........................  $    94,822    $   53,796    $   46,736
==================================================================================
AT DECEMBER 31:
Assets:
   Loans and mortgage-backed securities   $10,084,353    $8,746,063    $5,788,365
   Other ...............................      806,201       654,745       464,097
----------------------------------------------------------------------------------
     Total assets ......................   10,890,554     9,400,808     6,252,462
----------------------------------------------------------------------------------
Equity .................................  $   624,636    $  532,418    $  480,566
==================================================================================
<FN>
(1) Includes a $5.6 million after-tax gain related to the sale of subsidiary.
</FN>
</TABLE>


                                       33
<PAGE>

REAL ESTATE INVESTMENT

     Net income from our real estate investment  operations totaled $4.4 million
in 2000,  down from $10.0 million in 1999 and $11.2 million in 1998. The decline
was  primarily  attributed  to lower net gains on sales  and to an  increase  to
valuation  allowances  in the current year  compared to a reduction in valuation
allowances in 1999.  Also  contributing  to the decline was a lower level of net
rental income due to fewer properties being owned.

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

<TABLE>
<CAPTION>
(In Thousands)                                      2000       1999       1998
--------------------------------------------------------------------------------
<S>                                               <C>        <C>        <C>
Net interest income (expense) ..................  $   243    $  (306)   $  (620)
Reduction of loan losses .......................     --         --          (19)
Other income ...................................    9,148     19,523     22,736
Operating expense ..............................    1,473      1,794      2,706
Net intercompany income (expense) ..............     (397)      (393)       107
--------------------------------------------------------------------------------
Income before income taxes .....................    7,521     17,030     19,536
Income taxes ...................................    3,092      7,022      8,299
--------------------------------------------------------------------------------
   Net income ..................................  $ 4,429    $10,008    $11,237
--------------------------------------------------------------------------------
AT DECEMBER 31:
Assets:
   Investments in real estate and joint ventures  $17,641    $42,172    $49,447
   Other .......................................    3,584      7,399      9,841
--------------------------------------------------------------------------------
     Total assets ..............................   21,225     49,571     59,288
--------------------------------------------------------------------------------
Equity .........................................  $17,916    $42,839    $41,331
================================================================================
</TABLE>

     For a further discussion regarding income from real estate investment,  see
Other Income--Real Estate and Joint Ventures Held For Investment on page 31, and
for information  regarding related assets, see Financial  Condition--Investments
in Real Estate and Joint Ventures on page 39.


                                       34
<PAGE>

FINANCIAL CONDITION

LOANS AND MORTGAGE-BACKED SECURITIES

     Loans and  mortgage-backed  securities,  including  those we hold for sale,
totaled $10.1 billion or 92.6% of assets at December 31, 2000.  This  represents
an increase of $1.3 billion or 15.3% from year-end 1999. 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 $5.2 billion in
2000,  down from $7.2  billion in 1999 but up from $4.1  billion  in 1998.  This
current  year  decrease   primarily   reflects  a  decline  in  originations  of
one-to-four  unit  residential  loans.  Of the $5.0 billion of one-to-four  unit
residential  loans we  originated,  approximately  65% or $3.3  billion were for
portfolio,  while the balance was originated  for sale in the secondary  market.
Our  origination of subprime loans totaled $492 million in 2000,  down from $1.2
billion in 1999.

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

<TABLE>
<CAPTION>
(Dollars in Thousands)                                     2000        1999        1998        1997        1996
----------------------------------------------------------------------------------------------------------------
<S>                                                      <C>         <C>         <C>         <C>         <C>
Average interest rate on new loans ....................     6.10%       5.92%       6.45%       6.04%      6.06%
Total loan origination costs (net of fees) and premiums
    (net of discounts) deferred during the year .......  $34,797     $53,181     $30,621     $11,505     $4,525
================================================================================================================
</TABLE>

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

     Residential   one-to-four  unit  adjustable  rate  mortgage   originations,
including loans purchased, were $3.5 billion during 2000, down from $4.4 billion
in 1999 but up from $1.4  billion  in 1998.  Refinancing  activities  related to
residential  one-to-four unit loans,  including new loans to refinance  existing
loans which we or other  lenders  originated,  constituted  42% of  originations
during the year  compared  to 63% during 1999 and 71% during  1998.  Refinancing
activities  decreased  from $4.2  billion  in 1999 to $2.1  billion in 2000 as a
higher  interest  rate  environment  existed  throughout  most 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,  86% of
one-to-four unit originations for investment  represented monthly adjusting COFI
rate mortgages which provide for negative  amortization,  11%  represented  COFI
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, 2000,  $6.9 billion of our  one-to-four  unit  adjustable  rate
mortgages  were  subject  to  negative   amortization   of  which  $148  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 $24 million in 2000,  compared to $10 million in 1999 and $11 million in
1998. Originations of loans secured by multi-family properties,  including loans
purchased,  totaled $1 million in both 2000 and 1999, compared to $15 million in
1998.

     During 2000, we originated $99 million of construction  loans,  principally
for entry level and first time move-up residential tracts. This compares to $149
million in 1999 and $112 million in 1998. Our  origination  of land  development
loans  totaled  $17  million in 2000,  compared  to $57  million in 1999 and $48
million in 1998.

     Origination of  non-mortgage  commercial  loans decreased to $19 million in
2000 from $25 million in 1999 but were up from $6 million in 1998. A substantial
majority of these originations represented secured loans.

     Origination  of automobile  loans totaled $57 million in 2000,  compared to
$234  million in 1999 and $175 million in 1998.  Prior to 2000,  the majority of
these  originations  represented our indirect lending program that was conducted
by Downey Auto Finance Corp., a former subsidiary,  whereby loans to finance the
purchase of new or used automobiles were obtained through preapproved automobile
dealers.  For further information  regarding Downey Auto Finance Corp., see Sale
of Subsidiary on page 61.


                                       35
<PAGE>

     At December 31, 2000, we had  commitments  to fund loans  amounting to $694
million,  of which $239 million were one-to-four  unit  residential  loans being
originated for sale in the secondary  market, as well as undrawn lines of credit
of $81  million  and loans in process of $67  million.  We believe  our  current
sources of funds will enable us to meet these  obligations  while  exceeding all
regulatory liquidity requirements.

     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)                                                 2000          1999         1998         1997          1996
---------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>          <C>           <C>          <C>          <C>
INVESTMENT PORTFOLIO:
Loans originated:
   Loans secured by real estate:
     Residential one-to-four units:
      Adjustable ......................................... $ 2,831,596  $ 3,102,810   $   943,736  $ 1,384,442  $1,026,812
      Adjustable - subprime ..............................     395,911    1,182,552       372,286      218,399      33,030
---------------------------------------------------------------------------------------------------------------------------
        Total adjustable .................................   3,227,507    4,285,362     1,316,022    1,602,841   1,059,842
      Fixed ..............................................       9,167      262,923       192,436       22,265      33,073
      Fixed - subprime ...................................        --         12,238         6,020        2,786         545
     Residential five or more units:
      Adjustable .........................................        --            247           875        4,600      17,409
      Fixed ..............................................         678         --          13,229         --         2,253
---------------------------------------------------------------------------------------------------------------------------
        Total residential ................................   3,237,352    4,560,770     1,528,582    1,632,492   1,113,122
     Commercial real estate ..............................      23,720       10,063        10,363        7,830       1,548
     Construction ........................................      98,330      149,143       111,534       80,014      71,678
     Land ................................................      16,530       56,851        48,357       20,295      10,468
   Non-mortgage:
     Commercial ..........................................      18,504       24,948         6,376       14,336      11,835
     Automobile ..........................................      56,576      233,948       175,193      259,040     200,966
     Other consumer ......................................      38,136       54,489        28,274       25,988      14,226
---------------------------------------------------------------------------------------------------------------------------
      Total loans originated .............................   3,489,148    5,090,212     1,908,679    2,039,995   1,423,843
Real estate loans purchased:
   One-to-four units .....................................       9,178       36,317         4,343       32,241         223
   One-to-four units - subprime ..........................       8,595       12,912         1,833        2,243        --
   Other (1) .............................................       1,055          440         1,287        1,344        --
---------------------------------------------------------------------------------------------------------------------------
     Total real estate loans purchased ...................      18,828       49,669         7,463       35,828         223
---------------------------------------------------------------------------------------------------------------------------
       Total loans originated and purchased ..............   3,507,976    5,139,881     1,916,142    2,075,823   1,424,066
Loan repayments ..........................................  (1,981,802)  (1,823,585)   (1,855,157)  (1,130,357)   (832,713)
Other net changes (2) ....................................    (291,935)     (36,794)      (34,145)    (319,183)    (39,978)
---------------------------------------------------------------------------------------------------------------------------
   Net increase in loans held for investment .............   1,234,239    3,279,502        26,840      626,283     551,375
---------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO:
Residential, one-to-four units:
   Originated whole loans ................................   1,642,046    2,028,402     2,162,583      289,271     159,941
   Originated whole loans - subprime .....................      87,174       13,872          --           --          --
   Loans transferred from (to) the investment portfolio ..      54,993       42,570        (3,056)     290,558       1,791
   Originated whole loans sold ...........................    (687,512)    (999,594)   (1,130,303)    (467,989)   (135,426)
   Loans exchanged for mortgage-backed securities ........    (970,319)  (1,387,364)     (608,831)     (89,522)    (26,452)
   Other net changes .....................................     (10,815)      (9,263)       (8,111)         (83)        (48)
---------------------------------------------------------------------------------------------------------------------------
     Net increase (decrease) in loans held for sale ......     115,567     (311,377)      412,282       22,235        (194)
---------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, net:
   Received in exchange for loans ........................     970,319    1,387,364       608,831       89,522      26,452
   Purchased .............................................        --           --            --           --        30,073
   Sold ..................................................    (975,088)  (1,387,364)     (610,113)     (89,522)    (31,077)
   Repayments ............................................      (7,031)      (9,936)      (15,129)     (12,560)    (15,661)
   Other net changes .....................................         284         (491)         (742)         592        (596)
---------------------------------------------------------------------------------------------------------------------------
     Net increase (decrease) in mortgage-backed securities
        available for sale ...............................     (11,516)     (10,427)      (17,153)     (11,968)      9,191
---------------------------------------------------------------------------------------------------------------------------
     Net increase (decrease) in loans held for sale and
        mortgage-backed securities available for sale ....     104,051     (321,804)      395,129       10,267       8,997
---------------------------------------------------------------------------------------------------------------------------
    Total net increase in loans and
        mortgage-backed securities ....................... $ 1,338,290  $ 2,957,698   $   421,969  $   636,550  $  560,372
===========================================================================================================================
<FN>
(1)  Primarily  five or more unit  residential  loans except for $1.1 million of
     construction loans in 2000 and $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 from (to) the held for
     sale portfolio,  and interest capitalized on loans (negative amortization).
     Also included in 2000 was $367 million of net automobile loans sold as part
     of the sale of subsidiary.
</FN>
</TABLE>


                                       36
<PAGE>

     The  following   table  sets  forth  the   composition   of  our  loan  and
mortgage-backed  securities  portfolio at the dates  indicated.  At December 31,
2000,  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)                                              2000          1999         1998         1997         1996
------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>           <C>          <C>          <C>          <C>
INVESTMENT PORTFOLIO:
    Loans secured by real estate:
       Residential one-to-four units:
         Adjustable ..................................  $ 7,200,400   $5,644,883   $3,721,728   $4,190,160   $3,840,862
         Adjustable - subprime .......................    1,726,526    1,620,624      580,232      245,749       32,715
         Fixed .......................................      454,838      510,516      325,454      168,315      172,328
         Fixed - subprime ............................       17,388       18,777        8,719        3,321          543
------------------------------------------------------------------------------------------------------------------------
            Total one-to-four units ..................    9,399,152    7,794,800    4,636,133    4,607,545    4,046,448
       Residential five or more units:
         Adjustable ..................................       14,203       15,889       18,617       29,246       43,050
         Fixed .......................................        5,257        5,166       21,412        9,032       13,857
       Commercial real estate:
         Adjustable ..................................       37,374       37,419       39,360       87,604      158,656
         Fixed .......................................      127,230      110,908      101,430      114,821      101,953
       Construction ..................................      118,165      176,487      127,761       70,865       66,651
       Land ..........................................       26,880       67,631       44,859       25,687       21,177
    Non-mortgage:
       Commercial ....................................       21,721       26,667       28,293       26,024       22,136
       Automobile (1) ................................       39,614      399,789      357,988      342,326      202,186
       Other consumer ................................       60,653       49,344       41,894       47,735       47,281
------------------------------------------------------------------------------------------------------------------------
         Total loans held for investment .............    9,850,249    8,684,100    5,417,747    5,360,885    4,723,395
    Increase (decrease) for:
       Undisbursed loan funds ........................      (72,328)    (125,159)    (108,414)     (64,884)     (49,250)
       Net deferred costs and premiums ...............       79,109       67,740       31,021       18,088       11,663
       Allowance for losses ..........................      (34,452)     (38,342)     (31,517)     (32,092)     (30,094)
------------------------------------------------------------------------------------------------------------------------
         Total loans held for investment, net ........    9,822,578    8,588,339    5,308,837    5,281,997    4,655,714
------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO, NET:
    Loans held for sale:
       One-to-four units .............................      251,014      122,133      447,382       35,100       12,865
       One-to-four units - subprime ..................          558       13,872         --           --           --
------------------------------------------------------------------------------------------------------------------------
         Total loans held for sale ...................      251,572      136,005      447,382       35,100       12,865
    Mortgage-backed securities available for sale:
       Adjustable ....................................        6,050        7,700       10,996       17,751       23,620
       Fixed .........................................        4,153       14,019       21,150       31,548       37,647
------------------------------------------------------------------------------------------------------------------------
         Total mortgage-backed securities available
            for sale .................................       10,203       21,719       32,146       49,299       61,267
------------------------------------------------------------------------------------------------------------------------
         Total loans held for sale and mortgage-backed
            securities available for sale ............      261,775      157,724      479,528       84,399       74,132
------------------------------------------------------------------------------------------------------------------------
         Total loans and mortgage-backed securities ..  $10,084,353   $8,746,063   $5,788,365   $5,366,396   $4,729,846
========================================================================================================================
<FN>
(1) The decline during 2000 primarily reflected the sale of subsidiary.
</FN>
</TABLE>

     At December 31, 2000, our residential  one-to-four units subprime portfolio
consisted  of  approximately  71% A-,  23% B and 6% C loans.  At year  end,  the
average  loan-to-value  ratio at origination  for these loans was  approximately
75%.

     We carry mortgage-backed securities available for sale at fair value which,
at December 31, 2000, reflected an unrealized loss of $65,000, or $37,000 net of
income taxes.  The current  year-end  unrealized  loss,  less the associated tax
effect, is reflected within a separate component of other  comprehensive  income
(loss) until realized.


                                       37
<PAGE>

     The table below sets forth the scheduled contractual maturities of our loan
and mortgage-backed securities portfolio at December 31, 2000.

<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) ........  $ 61,539  $ 66,956  $ 72,850  $165,506  $559,374  $852,933  $7,148,326   $ 8,927,484
        Fixed (1) .............     7,751     8,399     9,103    20,548    68,432   102,251     506,756       723,240
      Five or more units:
        Adjustable ............       279       304       330       746     2,502     3,771       6,271        14,203
        Fixed .................       206       221       237       525     1,672     2,350          46         5,257
      Commercial real estate:
        Adjustable ............     2,185     2,402     2,639     6,086    21,324     2,738        --          37,374
        Fixed .................    13,044    14,203    15,464    35,167    49,352      --          --         127,230
      Construction - adjustable   118,165      --        --        --        --        --          --         118,165
      Land:
        Adjustable ............    20,520     5,474      --        --        --        --          --          25,994
        Fixed .................        70        77        84       193       462      --          --             886
Non-mortgage:
    Commercial ................    20,188       892       641      --        --        --          --          21,721
    Automobile ................     9,264    10,158    11,138     9,054      --        --          --          39,614
    Other consumer (2) ........     4,148     4,587     5,074     4,156    42,688      --          --          60,653
---------------------------------------------------------------------------------------------------------------------
      Total loans .............   257,359   113,673   117,560   241,981   745,806   964,043   7,661,399    10,101,821
Mortgage-backed securities, net     4,262       118       127       286       939     1,379       3,092        10,203
---------------------------------------------------------------------------------------------------------------------
    Total loans and mortgage-
      backed securities .......  $261,621  $113,791  $117,687  $242,267  $746,745  $965,422  $7,664,491   $10,112,024
=====================================================================================================================
<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, 2000,  the maximum amount the Bank could have loaned to any
one borrower, and related entities, under regulatory limits was $112 million, or
$187 million for loans  secured by readily  marketable  collateral,  compared to
$100 million or $167 million for loans secured by readily marketable  collateral
at  year-end  1999.  We do not expect  that these  regulatory  limitations  will
adversely impact our proposed lending activities during 2001.

INVESTMENT SECURITIES

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

<TABLE>
<CAPTION>
                                                                          December 31,
                                                        ------------------------------------------------
(In Thousands)                                            2000      1999      1998      1997       1996
--------------------------------------------------------------------------------------------------------
<S>                                                     <C>       <C>       <C>       <C>       <C>
Federal funds ........................................  $ 19,601  $      1  $ 33,751  $  6,095  $  6,038
U.S. Treasury and agency securities available for sale   284,102   171,823   116,061   159,398   141,999
Corporate bonds available for sale ...................    21,513      --        --        --        --
Municipal bonds held to maturity .....................     6,550     6,728     6,764     6,885     6,997
--------------------------------------------------------------------------------------------------------
    Total investment securities ......................  $331,766  $178,552  $156,576  $172,378  $155,034
========================================================================================================
</TABLE>


                                       38
<PAGE>

     At December 31, 2000, 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 .....................  $19,601     3.36%    $   --        -- %    $ --        --  %  $ 19,601     3.36%
U.S. Treasury and agency securities    5,008     6.51      279,094     6.60       --        --      284,102     6.60
Corporate bonds available for sale      --        --        21,513     7.41       --        --       21,513     7.41
Municipal bonds (1) ...............     --        --          --        --       6,550     5.90       6,550     5.90
---------------------------------------------------------------------------------------------------------------------
     Total ........................  $24,609     4.00%    $300,607     6.66%    $6,550     5.90%   $331,766     6.45%
=====================================================================================================================
<FN>
(1) Yield on a fully tax-equivalent basis is 10.35%.
</FN>
</TABLE>

INVESTMENTS IN REAL ESTATE AND JOINT VENTURES

     DSL Service Company participates as an owner of, or a partner in, a variety
of real estate development  projects,  principally retail neighborhood  shopping
center  developments,  most of which are located in  California.  For additional
information  regarding the location of these real estate  investments see Note 7
of Notes to the Consolidated  Financial Statements on page 80. We have completed
and substantially  leased most of the real estate  development  projects--with a
weighted average  occupancy of 82% for retail  neighborhood  shopping centers at
December 31, 2000. At December 31, 2000, the Bank had  outstanding  loans of $23
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, 2000, DSL Service  Company was involved with three joint
venture  partners.  These partners were  operators of three retail  neighborhood
shopping centers, a commercial  building,  three residential housing development
projects,  of which two are  substantially  completed,  and vacant land held for
sale. DSL Service  Company has seven wholly owned retail  neighborhood  shopping
centers located in California and Arizona.


                                       39
<PAGE>

     The following table sets forth the condensed  balance sheets of DSL Service
Company's  joint ventures by property type at December 31, 2000, on a historical
cost  basis.  For one of the joint  venture  investments,  DSL  Service  Company
established a valuation  allowance  totaling $2 million as the carrying value of
the associated  property exceeded its fair market 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 52.

<TABLE>
<CAPTION>
                                                               Retail
                                                            Neighborhood
                                                              Shopping
(Dollars in Thousands)                                         Centers    Commercial  Residential      Total
--------------------------------------------------------------------------------------------------------------
<S>                                                           <C>           <C>          <C>          <C>
ASSETS
Cash .......................................................  $   190       $  825       $1,167       $ 2,182
Projects under development .................................     --           --          6,879         6,879
Completed projects .........................................   15,317        5,151         --          20,468
Other assets ...............................................      874          568           32         1,474
--------------------------------------------------------------------------------------------------------------
                                                              $16,381       $6,544       $8,078       $31,003
==============================================================================================================
LIABILITIES AND EQUITY
Liabilities:
    Notes payable to the Bank ..............................  $19,245       $ --         $4,153       $23,398
    Notes payable to others ................................     --          4,282         --           4,282
    Other ..................................................    3,131          324        1,300         4,755
Equity (deficit):
    DSL Service Company (1) ................................     (606)         930        2,174         2,498
    Allowance for losses recorded by DSL Service Company (2)    1,505         --           --           1,505
    Other partners' (2) ....................................   (6,894)       1,008          451        (5,435)
--------------------------------------------------------------------------------------------------------------
       Net equity (deficit) ................................   (5,995)       1,938        2,625        (1,432)
--------------------------------------------------------------------------------------------------------------
                                                              $16,381       $6,544       $8,078       $31,003
==============================================================================================================
Number of joint venture projects ...........................        3            2            3             8
==============================================================================================================
<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 $5 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. The allowance
     at December 31, 2000 totaled $2 million.
</FN>
</TABLE>


                                       40
<PAGE>

     The  following  table sets forth by property type our  investments  in real
estate and related allowances for losses at December 31, 2000.

<TABLE>
<CAPTION>
                                                             Retail
                                                          Neighborhood
(Dollars in Thousands)                   Residential    Shopping Centers    Land         Total
------------------------------------------------------------------------------------------------
<S>                                       <C>               <C>          <C>            <C>
Investment in wholly owned projects ..... $ --              $8,874 (1)   $ 6,872 (2)    $15,746
Investment in California Affordable
   Housing Fund .........................    889              --            --              889
Allowance for losses ....................   --                (430)       (1,062)        (1,492)
------------------------------------------------------------------------------------------------
   Net investment in real estate projects $  889            $8,444       $ 5,810        $15,143
================================================================================================
Number of projects ......................      1                 7             8             16
================================================================================================
<FN>
(1)  Includes seven free-standing stores that are part of neighborhood  shopping
     centers totaling $1 million and which we counted as one project.
(2)  Includes three 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  $1.5  billion or 23.2% in 2000 and  totaled  $8.1
billion at December 31, 2000. Our certificates of deposit increased $1.5 billion
or 30.1%, while our lower-rate  transaction  accounts--i.e.,  checking,  regular
passbook  and  money  market--were   virtually  unchanged.   Within  transaction
accounts,  our total  checking  accounts  (non-interest  and  interest  bearing)
increased $74 million or 13.0%. That increase,  however,  was essentially offset
by  declines  in regular  passbook  and money  market  accounts,  as  depositors
transferred  funds into  higher-yielding  certificates of deposit.  Of the total
increase in our  deposits,  $12 million was  associated  with 10 new branches we
opened during 2000.


                                       41
<PAGE>

     The following table sets forth the amount of deposits by  classification at
the dates indicated.

<TABLE>
<CAPTION>
                                                               December 31,
                                     -----------------------------------------------------------------
                                             2000                  1999                   1998
                                     -----------------------------------------------------------------
                                     Weighted              Weighted               Weighted
                                      Average               Average                Average
(Dollars in Thousands)                 Rate     Amount       Rate      Amount       Rate      Amount
------------------------------------------------------------------------------------------------------
<S>                                    <C>    <C>            <C>     <C>            <C>     <C>
Transaction accounts:
   Non-interest-bearing checking .      -- %  $  244,311      -- %   $  182,165      -- %   $  155,267
   Interest-bearing checking (1) .     0.78      395,640     1.00       383,973     1.00       317,452
   Money market ..................     2.88       89,408     2.91        95,947     2.92        98,389
   Regular passbook ..............     3.41      754,127     3.62       827,854     3.36       666,954
------------------------------------------------------------------------------------------------------
     Total transaction accounts ..     2.12    1,483,486     2.46     1,489,939     2.30     1,238,062
Certificates of deposit:
   Less than 3.00% ...............     2.41        6,357     2.47         8,717     2.62        25,126
   3.00-3.49 .....................     3.45           25     3.02            16     3.01           593
   3.50-3.99 .....................     3.97          384     3.92         3,786     3.88        51,474
   4.00-4.49 .....................     4.19       26,916     4.32       210,127     4.39       428,316
   4.50-4.99 .....................     4.82       80,844     4.78       939,858     4.80       668,204
   5.00-5.99 .....................     5.71    1,901,166     5.56     3,623,632     5.53     2,421,333
   6.00-6.99 .....................     6.63    4,558,730     6.07       284,984     6.06       204,065
   7.00 and greater ..............     7.02       24,781     7.32         1,702     7.24         2,560
------------------------------------------------------------------------------------------------------
     Total certificates of deposit     6.33    6,599,203     5.39     5,072,822     5.26     3,801,671
------------------------------------------------------------------------------------------------------
       Total deposits ............     5.56%  $8,082,689     4.72%   $6,562,761     4.53%   $5,039,733
======================================================================================================
<FN>
(1)  Includes amounts swept into money market deposit accounts.
</FN>
</TABLE>

     The following table shows at December 31, 2000 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 .......  $6,216   $25,706   $61,804   $  488,051  $  863,100  $13,602  $1,458,479      22.10%
3 to 6 months .........      72     1,018    12,818      291,800   1,529,257    2,444   1,837,409      27.84
6 to 12 months ........     249       155     1,784    1,059,402   1,589,153    8,505   2,659,248      40.30
12 to 24 months .......     213        23     1,043       46,130     567,193      230     614,832       9.32
24 to 36 months .......    --          14     1,661       12,734       5,280     --        19,689       0.30
36 to 60 months .......      18      --       1,734        3,047       4,747     --         9,546       0.14
Over 60 months ........    --        --        --           --          --       --          --          --
-------------------------------------------------------------------------------------------------------------
    Total .............  $6,768   $26,916   $80,844   $1,901,164  $4,558,730  $24,781  $6,599,203     100.00%
=============================================================================================================
<FN>
(1)  Includes jumbo ($100,000 and over)  certificates of deposit of $496 million
     with maturities of 3 months or less, $653 million with maturities of 3 to 6
     months,  $981  million with  maturities  of 6 to 12 months and $196 million
     with a remaining term of over 12 months.
</FN>
</TABLE>


                                       42
<PAGE>

BORROWINGS

     At December  31, 2000,  borrowings  totaled  $2.0  billion,  down from $2.1
billion at year-end 1999 but up from $704 million at year-end 1998. The decrease
in 2000 primarily occurred in advances from the FHLB.

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

<TABLE>
<CAPTION>
                                                                               December 31,
                                                       ----------------------------------------------------------
(Dollars in Thousands)                                    2000        1999        1998        1997        1996
-----------------------------------------------------------------------------------------------------------------
<S>                                                    <C>          <C>         <C>         <C>         <C>
Federal Home Loan Bank advances .....................  $1,978,348   $2,122,407  $695,012    $352,458    $386,883
Other borrowings:
    Reverse repurchase agreements ...................        --           --        --        34,803        --
    Commercial paper ................................        --           --        --        83,811     198,113
    Real estate notes ...............................         224          373     8,708      12,663      10,349
-----------------------------------------------------------------------------------------------------------------
      Total borrowings ..............................  $1,978,572   $2,122,780  $703,720    $483,735    $595,345
=================================================================================================================
Weighted average rate on borrowings during the period        6.16%        5.46%     6.07%       6.07%       5.98%
Total borrowings as a percentage of total assets ....       18.16        22.56     11.22        8.29       11.45
=================================================================================================================
</TABLE>

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

<TABLE>
<CAPTION>
(Dollars in Thousands)                                                       2000         1999         1998
--------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>          <C>           <C>
FHLB advances with original maturities less than one year:
    Balance at end of year .............................................  $1,475,000   $1,590,500    $120,000
    Average balance outstanding during the year ........................   1,601,732      616,199      38,393
    Maximum amount outstanding at any month-end during the year ........   1,942,000    1,590,500     120,000
    Weighted average interest rate during the year .....................        6.38%        5.42%       5.96%
    Weighted average interest rate at the end of year ..................        6.55         5.88        5.36
Securities sold under agreement to repurchase:
    Balance at end of year .............................................  $     --     $     --      $   --
    Average balance outstanding during the year ........................         753        1,987       1,877
    Maximum amount outstanding at any month-end during the year ........      39,250       24,875      50,088
    Weighted average interest rate during the year .....................        6.10%        5.42%       5.90%
    Weighted average interest rate at the end of year ..................        --           --          --
Commercial paper sold:
    Balance at end of year .............................................  $     --     $     --      $   --
    Average balance outstanding during the year ........................        --           --        30,589
    Maximum amount outstanding at any month-end during the year ........        --           --       103,749
    Weighted average interest rate during the year .....................        --  %        --  %       6.32%
    Weighted average interest rate at the end of year ..................        --           --          --
Total short-term borrowings:
    Total average short-term borrowings outstanding during the year ....  $1,602,485   $  618,186    $ 70,859
    Total weighted average rate on short-term borrowings during the year        6.38%        5.42%       6.11%
==============================================================================================================
</TABLE>


                                       43
<PAGE>

     At year-end  2000,  total  intermediate  and  long-term  advances were $503
million,  down from $532 million at December 31, 1999. The weighted average rate
on our intermediate and long-term FHLB advances at year-end 2000 was 5.39%.

     The following  table sets forth the  associated  maturities at December 31,
2000.

<TABLE>
<CAPTION>

(In Thousands)
 --------------------------------------------------------------
<S>                                                    <C>
 2001 ..............................................   $ 16,293
 2002 ..............................................     55,921
 2003 ..............................................        134
 2004 ..............................................       --
 2005 ..............................................      1,000
 Thereafter ........................................    430,000
 --------------------------------------------------------------
      Total intermediate and long-term FHLB advances   $503,348
===============================================================
</TABLE>

CAPITAL SECURITIES

     On July 23,  1999,  we issued $120  million in capital  securities  through
Downey  Financial  Capital  Trust  I.  The  capital   securities  pay  quarterly
cumulative  cash  distributions  at an annual rate of 10.00% of the  liquidation
value of $25 per share. Interest expense, including the amortization of deferred
issuance  costs,  on our capital  securities  was $12.2  million  for 2000.  For
further information regarding our capital securities,  see Note 19 on page 93 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 our  interest-bearing  liabilities  reprice or mature on a different
basis--generally  more rapidly--  than our  interest-earning  assets.  Since our
earnings depend  primarily on our net interest  income,  which is the difference
between the interest and  dividends  earned on  interest-earning  assets and the
interest paid on interest-bearing  liabilities,  one of our principal objectives
is to actively  monitor  and manage the  effects of adverse  changes in interest
rates on net interest income while maintaining asset quality.

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

     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, 2000,  as well as other  information  regarding  the  repricing and
maturity  difference  between our  interest-earning  assets and total  deposits,
borrowings  and  capital  securities  in  future  periods.  We  refer  to  these
differences as "gap." We have determined the repricing  frequencies by reference
to  projected  maturities,  based upon  contractual  maturities  as adjusted for
scheduled repayments and "repricing  mechanisms"--provisions  for changes in the
interest  and dividend  rates of assets and  liabilities.  We assume  prepayment
rates on substantially  all of our loan portfolio based upon our historical loan
prepayment  experience and anticipated future prepayments.  Repricing mechanisms
on a number of our assets are subject to limitations, such as caps on the amount
that interest rates and payments on our loans may adjust, and accordingly, these
assets do not normally respond to changes in market interest rates as completely
or rapidly as our liabilities. The interest rate sensitivity of our


                                       44
<PAGE>

assets  and   liabilities   illustrated  in  the  following   table  would  vary
substantially if we used different  assumptions or if actual experience differed
from the assumptions set forth.

<TABLE>
<CAPTION>
                                                                                     December 31, 2000
                                                      -------------------------------------------------------------------------
                                                         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)  $  229,409  $    55,169   $ 153,475    $      69   $   --    $   438,122
   Loans and mortgage-backed securities:
     Loans secured by real estate:
       Residential:
         Adjustable ..............................(2)   8,653,459      216,643     120,994         --         --      8,991,096
         Fixed ...................................(2)     287,289       29,294     173,780      121,947    118,581      730,891
       Commercial real estate ....................(2)      47,024       12,053      99,919          886      1,721      161,603
       Construction ..............................(2)      54,527         --          --           --         --         54,527
       Land ......................................(2)      19,652            9          67          801       --         20,529
     Non-mortgage loans:
       Commercial ................................(2)      16,275         --          --           --         --         16,275
       Consumer ..................................(2)      68,539        7,472      23,218         --         --         99,229
     Mortgage-backed securities ..................         10,203         --          --           --         --         10,203
-------------------------------------------------------------------------------------------------------------------------------
   Total loans and mortgage-backed securities ....      9,156,968      265,471     417,978      123,634    120,302   10,084,353
-------------------------------------------------------------------------------------------------------------------------------
     Total interest-earning assets ...............     $9,386,377  $   320,640   $ 571,453    $ 123,703   $120,302  $10,522,475
===============================================================================================================================
Transaction accounts:
   Non-interest-bearing checking .................     $  244,311  $      --     $    --      $    --     $   --    $   244,311
   Interest-bearing checking .....................(3)     395,640         --          --           --         --        395,640
   Money market ..................................(4)      89,408         --          --           --         --         89,408
   Regular passbook ..............................(4)     754,127         --          --           --         --        754,127
-------------------------------------------------------------------------------------------------------------------------------
     Total transaction accounts ..................      1,483,486         --          --           --         --      1,483,486
Certificates of deposit ..........................(1)   3,295,888    2,659,248     644,067         --         --      6,599,203
-------------------------------------------------------------------------------------------------------------------------------
   Total deposits ................................      4,779,374    2,659,248     644,067         --         --      8,082,689
Borrowings .......................................      1,484,993        6,517      57,062      430,000       --      1,978,572
Capital securities ...............................           --           --          --           --      120,000      120,000
-------------------------------------------------------------------------------------------------------------------------------
   Total deposits, borrowings and
     capital securities ..........................     $6,264,367  $ 2,665,765   $ 701,129    $ 430,000   $120,000  $10,181,261
===============================================================================================================================
Excess (shortfall) of interest-earning assets over
   deposits, borrowings and capital securities ...     $3,122,010  $(2,345,125)  $(129,676)   $(306,297)  $    302  $   341,214
Cumulative gap ...................................      3,122,010      776,885     647,209      340,912    341,214
Cumulative gap - as a % of total assets:
   December 31, 2000 .............................          28.66%        7.13%       5.94%        3.13%      3.13%
   December 31, 1999 .............................          21.29        10.20        4.97         1.92       2.35
   December 31, 1998 .............................          23.84         7.48        9.07         3.40       4.00
===============================================================================================================================
<FN>
(1)  Based upon contractual maturity and repricing date.
(2)  Based upon contractual maturity, repricing date and projected repayment and
     prepayments of principal.
(3)  Includes amounts swept into money market deposit accounts and is subject to
     immediate repricing.
(4)  Subject to immediate repricing.
</FN>
</TABLE>

     Our  six-month gap at December 31, 2000 was a positive  28.66%.  This means
that more interest-earning assets reprice within six months than total deposits,
borrowings and capital securities.  This compares to a positive six-month gap of
21.29% at  December  31,  1999 and 23.84% at  December  31,  1998.  Our  primary
strategy  to  manage  interest  rate risk is to  emphasize  the  origination  of
adjustable rate mortgages or loans with relatively  short  maturities.  Interest
rates on adjustable rate mortgages are primarily tied to COFI. We originated and
purchased  approximately  $3.4 billion during 2000, $4.7 billion during 1999 and
$1.5 billion during 1998 of loans and mortgage-backed securities with adjustable
interest  rates or  maturities  of five years or less.  These loans  represented
approximately  97% during 2000, 92% during 1999 and 80% during 1998 of all loans
and  mortgage-backed  securities  originated and purchased for investment during
these periods.


                                       45
<PAGE>

     At December 31, 2000, 98% of our interest-earning assets mature, reprice or
are estimated to prepay within five years,  compared to 97% at December 31, 1999
and 98% at December 31, 1998.  At December 31, 2000,  loans held for  investment
and mortgage-backed securities with adjustable interest rates represented 91% of
those portfolios.  During 2001, 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  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  2000  and  1999.   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>
                                              2000                          1999
                                  -------------------------------------------------------------
                                      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 ..................      (7.5)%         (3.0)%           (13.8)%          (9.7)%
        +100 ..................      (3.4)           0.9              (6.8)           (1.5)
        (100) .................       0.7           (4.8)              3.9            (2.2)
        (200) .................       2.1           (9.9)              7.1            (4.3)
===============================================================================================
<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>


                                       46
<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,  2000.  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, 2000 (1)
                                  --------------------------------------------------------------------------------------------------
                                                                                                               Total        Fair
(Dollars in Thousands)                2001         2002         2003        2004       2005    Thereafter     Balance       Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>         <C>          <C>         <C>          <C>       <C>          <C>           <C>
Investment securities ..........  $  278,097  $   85,931   $   24,707  $    9,904   $ 32,933  $    6,550   $   438,122   $   438,106
   Average interest rate .......        6.62%       6.21%        6.92%       6.66%      6.81%       5.90%         6.56%
Loans held for sale ............     251,572        --           --          --         --          --         251,572       254,545
   Average interest rate .......        8.29%       --  %        --  %       --  %      --  %       --  %         8.29%
Mortgage-backed securities
   available for sale ..........       5,371         942          747         596        479       2,068        10,203        10,203
   Average interest rate .......        6.91%       7.75%        7.74%       7.73%      7.72%       7.70%         7.29%
Loans held for investment:
   Loans secured by real estate:
     Residential:
      Adjustable ...............   2,265,459   2,448,067    1,790,709     908,947    476,854   1,100,502     8,990,538     9,104,257
        Average interest rate ..        8.42%       8.40%        8.36%       8.31%      8.23%       8.19%         8.35%
      Fixed ....................      61,593      52,947       46,157      40,291     35,257     243,632       479,877       481,616
        Average interest rate ..        7.88%       7.86%        7.85%       7.83%      7.82%       7.81%         7.83%
     Other .....................      81,649      64,015       27,637      28,852      8,934      25,572       236,659       243,585
      Average interest rate ....        9.11%       8.86%        8.79%       8.86%      8.94%       8.97%         8.95%
   Non-mortgage:
     Commercial ................      12,049       4,018          208        --         --          --          16,275        16,979
      Average interest rate ....       10.12%      10.37%        9.86%       --  %      --  %       --  %        10.18%
     Consumer ..................      16,226      11,283        7,683      64,037       --          --          99,229       100,533
      Average interest rate ....        9.95%      10.07%       10.19%      10.24%      --  %       --  %        10.17%
Interest bearing advances to
   joint ventures ..............      12,339        --           --          --         --          --          12,339        12,339
   Average interest rate .......        4.32%       --  %        --  %       --  %      --  %       --  %         4.32%
MSR's and loan servicing
   portfolio (2) ...............       9,006       7,993        6,827       5,751      4,823       6,331        40,731        43,168
------------------------------------------------------------------------------------------------------------------------------------
Total interest-sensitive assets   $2,993,361  $2,675,196   $1,904,675  $1,058,378   $559,280  $1,384,655   $10,575,545   $10,705,331
====================================================================================================================================
Transaction accounts:
   Non-interest-bearing checking  $   44,623  $   36,473   $   29,811  $   24,366   $ 19,916  $   89,122   $   244,311   $   244,311
   Interest-bearing checking (3)      72,263      59,064       48,276      39,459     32,252     144,326       395,640       395,640
   Money market ................      16,330      13,348       10,910       8,917      7,288      32,615        89,408        89,408
   Regular passbook ............     137,740     112,581       92,019      75,212     61,474     275,101       754,127       754,127
------------------------------------------------------------------------------------------------------------------------------------
    Total transaction accounts .     270,956     221,466      181,016     147,954    120,930     541,164     1,483,486     1,483,486
      Average interest rate ....        2.12%       2.12%        2.12%       2.12%      2.12%       2.12%         2.12%
Certificates of deposit ........   5,955,136     614,832       19,689       4,746      4,800        --       6,599,203     6,619,453
   Average interest rate .......        6.34%       6.30%        5.57%       5.43%      6.10%       --  %         6.33%
Borrowings .....................   1,491,510      55,928          134        --        1,000     430,000     1,978,572     1,978,808
   Average interest rate .......        6.55%       4.93%        5.76%       --  %      8.75%       5.42%         6.26%
Capital securities .............        --          --           --          --         --       120,000       120,000       122,400
   Average interest rate .......        --  %       --  %        --  %       --  %      --  %      10.00%        10.00%
------------------------------------------------------------------------------------------------------------------------------------
Total deposits, borrowings and
   capital securities ..........  $7,717,602  $  892,226   $  200,839  $  152,700   $126,730  $1,091,164   $10,181,261   $10,204,147
====================================================================================================================================
<FN>
(1)  Expected maturities are contractual  maturities adjusted for prepayments of
     principal.  We use a number of  assumptions  to  estimate  fair  values and
     expected   maturities.   For  assets,  we  base  expected  maturities  upon
     contractual  maturity,  projected  repayments and prepayments of principal.
     The  prepayment  experience  reflected  herein  is based on our  historical
     experience. Our average projected constant prepayment rate ("CPR") is 10.8%
     on our fixed-rate and 24.0% 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 20.0% per year. The actual
     maturities  of  these  instruments  could  vary   substantially  if  future
     prepayments differ from our historical experience.
(2)  Includes  mortgage  servicing rights acquired prior to January 1, 1996 when
     Downey began capitalizing the asset.
(3)  Includes amounts swept into money market deposit accounts.
</FN>
</TABLE>


                                       47
<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,
                                            -------------------------------------
                                             2000    1999   1998    1997    1996
---------------------------------------------------------------------------------
<S>                                         <C>     <C>     <C>     <C>     <C>
Weighted average yield:
    Loans and mortgage-backed securities     8.45%   7.67%  7.72%   7.95%   7.77%
    Federal Home Loan Bank stock .......     5.52    5.60   5.44    5.88    6.45
    Investment securities ..............     6.45    6.12   5.40    5.63    6.02
---------------------------------------------------------------------------------
      Earning assets yield .............     8.36    7.62   7.65    7.87    7.71
---------------------------------------------------------------------------------
Weighted average cost:
    Deposits ...........................     5.56    4.72   4.53    5.00    4.86
    Borrowings:
      Federal Home Loan Bank advances ..     6.26    5.77   5.47    6.11    5.80
      Other borrowings .................     6.79    7.88   8.69    6.15    5.60
---------------------------------------------------------------------------------
          Total borrowings .............     6.26    5.99   5.51    6.12    5.73
    Capital securities .................    10.00   10.00     --      --      --
---------------------------------------------------------------------------------
      Combined funds cost ..............     5.75    5.05   4.66    5.11    4.97
---------------------------------------------------------------------------------
          Interest rate spread .........     2.61%   2.57%  2.99%   2.76%   2.74%
=================================================================================
</TABLE>

     The year-end  weighted  average  yield on our loan  portfolio  increased to
8.45% at December 31, 2000,  from 7.67% at year-end 1999.  The weighted  average
rate on new loans  originated  during 2000 was 6.10%,  compared to 5.92%  during
1999 and 6.45% during 1998. At December 31, 2000, our  adjustable  rate mortgage
portfolio  of  single  family  residential  loans,   including   mortgage-backed
securities, totaled $9.0 billion with a weighted average rate of 8.47%, compared
to $7.3 billion  with a weighted  average rate of 7.52% at December 31, 1999 and
$4.3 billion with a weighted average rate of 7.53% at December 31, 1998.

PROBLEM LOANS AND REAL ESTATE

NON-PERFORMING ASSETS

     Non-performing  assets consist of loans on which we have ceased the accrual
of interest,  which we refer to as non-accrual  loans,  loans  restructured at a
below market rate,  real estate  acquired in settlement of loans and repossessed
automobiles.  Non-performing  assets  totaled $55 million at December  31, 2000,
compared  to $39 million at  December  31, 1999 and $27 million at December  31,
1998.  The  increase in our  non-performing  assets  during  2000 was  primarily
attributed to a rise in residential  non-performers of which $8.4 million was in
the subprime  category.  Of the total,  real estate  acquired in  settlement  of
loans, net of allowances,  represented $10 million at December 31, 2000, up from
$6 million at  December  31,  1999 and $4 million at  December  31,  1998.  When
measured as a percentage  of total  assets,  our  non-performing  assets rose to
0.50% at year-end 2000, compared to 0.42% at year-end 1999 and 0.44% at year-end
1998.


                                       48
<PAGE>

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

<TABLE>
<CAPTION>
                                                                         December 31,
                                                       ------------------------------------------------
(Dollars in Thousands)                                   2000      1999      1998      1997      1996
-------------------------------------------------------------------------------------------------------
<S>                                                    <C>       <C>       <C>       <C>       <C>
Non-accrual loans:
    Residential one-to-four units ...................  $20,746   $15,590   $15,571   $20,816   $22,885
    Residential one-to-four units - subprime ........   22,296    13,914     1,975      --        --
    Other ...........................................    1,708     3,477     4,829    20,883    22,136
-------------------------------------------------------------------------------------------------------
      Total non-accrual loans .......................   44,750    32,981    22,375    41,699    45,021
Troubled debt restructure - below market rate (1) ...      206      --        --        --        --
Real estate acquired in settlement of loans .........    9,942     5,899     4,475     9,626    16,078
Repossessed automobiles .............................       76       314       569       795       928
-------------------------------------------------------------------------------------------------------
   Total non-performing assets ......................  $54,974   $39,194   $27,419   $52,120   $62,027
=======================================================================================================
Allowance for loan losses (2):
    Amount ..........................................  $34,452   $38,342   $31,517   $32,092   $30,094
    As a percentage of non-performing loans .........    76.63%   116.25%   140.86%    76.96%    66.84%
Non-performing assets as a percentage of total assets     0.50      0.42      0.44      0.89      1.19
=======================================================================================================
<FN>
(1)  Represents a single one-to-four unit residential loan.
(2)  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 52.

     All but $7.2 million of our non-performing assets at December 31, 2000 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 2000, 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, 2000, 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, 2000,  non-accrual  loans
aggregating  $14  million  were less than 90 days  delinquent  relative to their
contractual   terms.   Additional   loans   aggregating   $1  million  were  not
contractually  past  due,  but  were  deemed  non-accrual  due  to  management's
assessment of the borrower's ability to pay.

     Troubled  Debt  Restructurings.  We  consider a  restructuring  of a debt a
troubled debt  restructuring  when we, for economic or legal reasons  related to
the borrower's financial  difficulties,  grant a concession to the borrower that
we would not otherwise grant.  Troubled debt restructurings may include changing
repayment  terms,  reducing the stated  interest rate or reducing the amounts of
principal and/or interest due or extending the maturity date. The  restructuring
of a loan is intended to recover as much of our  investment  as possible  and to
achieve the


                                       49
<PAGE>

highest  yield  possible.  At  December  31, 2000 we had less than $1 million of
troubled debt restructurings on accrual status representing a single one-to-four
unit residential loan.

     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 $10 million at December 31, 2000.

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 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, 2000,  loans  delinquent 30 days or more as a percentage of
total  loans was 0.66%,  up from 0.58% at  year-end  1999 and 0.65% at  year-end
1998.  The  increase  primarily  occurred in our  residential  one-to-four  unit
categories. As a percentage of its loan category,  residential one-to-four units
increased from 0.40% at year-end 1999 to 0.46% at year-end 2000,  while subprime
residential  one-to-four units increased from 1.15% at year-end 1999 to 1.68% at
year-end  2000. A higher  incidence of delinquency is expected on these subprime
loans as these  borrowers  have a history of  delinquencies  for which we charge
higher   interest  rates  to  compensate   for  that  risk.  In  addition,   the
loan-to-value  ratio on these loans is generally  lower thereby  providing  more
equity protection against loss. The increase in our residential one-to-four unit
categories was partially offset by a decline in our delinquent  automobile loans
attributed to the sale of our indirect automobile finance subsidiary.


                                       50
<PAGE>

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

<TABLE>
<CAPTION>
                                                                               December 31,
                                              ----------------------------------------------------------------------------
                                                              2000                                   1999
                                              ----------------------------------------------------------------------------
                                               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 ....................  $12,400   $ 8,611  $15,246   $36,257   $ 8,630   $3,889   $12,793   $25,312
      One-to-four units - subprime .........    7,300     7,658   14,427    29,385     7,867    3,069     7,935    18,871
      Five or more units ...................     --        --       --        --        --       --        --        --
    Commercial real estate .................     --        --       --        --        --       --        --        --
    Construction ...........................     --        --       --        --        --       --        --        --
    Land ...................................     --        --       --        --        --       --        --        --
--------------------------------------------------------------------------------------------------------------------------
      Total real estate loans ..............   19,700    16,269   29,673    65,642    16,497    6,958    20,728    44,183
Non-mortgage:
    Commercial .............................     --        --       --        --        --       --        --        --
    Automobile .............................      393        26      151       570     4,758      674       717     6,149
    Other consumer .........................       98        29      246       373       679       42       114       835
--------------------------------------------------------------------------------------------------------------------------
      Total delinquent loans ...............  $20,191   $16,324  $30,070   $66,585   $21,934   $7,674   $21,559   $51,167
==========================================================================================================================
Delinquencies as a percentage of total loans     0.20%     0.16%    0.30%     0.66%     0.25%    0.09%     0.24%     0.58%
==========================================================================================================================
                                                              1998                                   1997
                                              ----------------------------------------------------------------------------
<S>                                           <C>       <C>      <C>       <C>       <C>       <C>      <C>       <C>
Loans secured by real estate:
    Residential:
      One-to-four units ....................  $ 9,841   $6,014   $12,832   $28,687   $12,099   $4,101   $18,579   $34,779
      One-to-four units - subprime .........      244      784       947     1,975       185     --        --         185
      Five or more units ...................     --       --         155       155      --        222      --         222
    Commercial real estate .................     --       --        --        --        --       --         279       279
    Construction ...........................     --       --        --        --        --       --        --         --
    Land ...................................     --       --        --        --        --       --        --         --
--------------------------------------------------------------------------------------------------------------------------
      Total real estate loans ..............   10,085    6,798    13,934    30,817    12,284    4,323    18,858    35,465
Non-mortgage:
    Commercial .............................     --       --        --        --        --       --        --        --
    Automobile .............................    4,650      888     1,048     6,586     4,167      981       961     6,109
    Other consumer .........................      334       45       344       723       218       54       533       805
--------------------------------------------------------------------------------------------------------------------------
      Total delinquent loans ...............  $15,069   $7,731   $15,326   $38,126   $16,669   $5,358   $20,352   $42,379
==========================================================================================================================
Delinquencies as a percentage of total loans     0.26%    0.13%     0.26%     0.65%     0.31%    0.10%     0.38%     0.79%
==========================================================================================================================
                                                              1996
                                               ------------------------------------
<S>                                           <C>       <C>      <C>       <C>
Loans secured by real estate:
    Residential:
      One-to-four units ....................  $14,519   $5,502   $18,549   $38,570
      One-to-four units - subprime .........      198     --        --         198
      Five or more units ...................     --       --        --        --
    Commercial real estate .................     --       --        --        --
    Construction ...........................     --       --        --        --
    Land ...................................     --       --         566       566
-----------------------------------------------------------------------------------
      Total real estate loans ..............   14,717    5,502    19,115    39,334
Non-mortgage:
    Commercial .............................     --       --        --        --
    Automobile .............................    2,080      328       274     2,682
    Other consumer .........................      158       15       181       354
-----------------------------------------------------------------------------------
      Total delinquent loans ...............  $16,955   $5,845   $19,570   $42,370
===================================================================================
Delinquencies as a percentage of total loans     0.36%    0.12%     0.41%     0.89%
===================================================================================
<FN>
(1)  All 90 day or greater delinquencies are on non-accrual status and we report
     them as part of non-performing assets.
</FN>
</TABLE>


                                       51
<PAGE>

ALLOWANCE FOR LOSSES ON LOANS AND REAL ESTATE

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

     Our  Internal  Asset  Review  Department  conducts  independent  reviews to
evaluate  the risk and  quality of all our assets.  Our  Internal  Asset  Review
Committee  is  responsible  for the review  and  classification  of assets.  The
Internal Asset Review Committee  members include the Chief Internal Asset Review
Officer,  Chief  Executive  Officer,  Chief  Financial  Officer,  Chief  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 valuation
allowance at a point in time.  We  currently  use a six grade system to classify
our assets. The current grades are:

     o    pass;

     o    watch;

     o    special mention;

     o    substandard;

     o    doubtful; and

     o    loss.

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

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

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

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

     o    Substandard  assets have a well-defined  weakness or weaknesses.  They
          are  characterized  by the distinct  possibility  that we will sustain
          some loss if 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.

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


                                       52
<PAGE>

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

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

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

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

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

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

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

     Our provision  for loan losses was $3.3 million in 2000,  down $8.0 million
from  1999.  Although  the  provision  for  loan  losses  exceeded  our net loan
charge-offs  by $1.9 million,  the  allowance  for loan losses  declined by $3.9
million to $34.5  million at December  31,  2000.  The decline in the  allowance
reflected a decrease of $3.6 million in general  valuation  allowances  to $27.0
million due primarily to a reduction of $5.5 million associated with the sale of
the indirect  automobile  finance  subsidiary which more than offset an increase
related to increases in one-to-four unit residential loans. Allocated allowances
declined  by $0.2  million  of  which  $0.3  million  was  associated  with  the
subsidiary  sale.  There  was no  change in the  unallocated  allowance  of $2.8
million.   During  1999,  our  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. The allowance  increase  reflected
an increase of $6.2 million in general valuation allowances to $30.6 million due
primarily  to the  increase  during  the year in the  overall  one-to-four  unit
residential loan portfolio, while allocated allowances increased $0.6 million to
$4.9 million due primarily to an increase in loans classified substandard. There
was no change in the unallocated allowance.


                                       53
<PAGE>

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

<TABLE>
<CAPTION>
(In Thousands)                    2000       1999       1998       1997       1996
------------------------------------------------------------------------------------
<S>                             <C>        <C>        <C>        <C>        <C>
Balance at beginning of period  $38,342    $31,517    $32,092    $30,094    $27,943
Provision ....................    3,251     11,270      3,899      8,640      9,137
Charge-offs ..................   (1,749)    (5,535)    (7,372)    (7,773)    (7,660)
Recoveries ...................      419      1,090      2,898      1,131        674
Transfers (1) ................   (5,811)      --         --         --         --
------------------------------------------------------------------------------------
Balance at end of period .....  $34,452    $38,342    $31,517    $32,092    $30,094
====================================================================================
<FN>
(1) Reduction in 2000 was due to the sale of subsidiary.
</FN>
</TABLE>

     Net loan  charge-offs  were $1.3 million in 2000, down from $4.4 million in
1999 and $4.5  million  in 1998.  The  decline in net loan  charge-offs  in 2000
primarily  reflected a decline of $3.3 million in net  charge-offs of automobile
loans due to the previously mentioned sale of subsidiary,  partially offset by a
$0.1 million increase in net charge-offs of one-to-four unit residential loans.


                                       54
<PAGE>

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

<TABLE>
<CAPTION>
(Dollars in Thousands)                                   2000      1999      1998       1997      1996
-------------------------------------------------------------------------------------------------------
<S>                                                    <C>       <C>       <C>        <C>       <C>
Gross loan charge-offs:
    Loans secured by real estate:
      Residential:
        One-to-four units  (1) ......................  $  419    $  393    $ 1,035    $2,389    $5,098
        One-to-four units - subprime ................     316       187       --        --        --
        Five or more units ..........................    --        --           68      --         102
      Commercial real estate ........................    --        --         --        --        --
      Land ..........................................    --        --         --        --        --
    Non-mortgage:
      Commercial ....................................    --        --         --        --         115
      Automobile ....................................     832     4,795      6,118     5,109     2,096
      Other consumer ................................     182       160        151       275       249
-------------------------------------------------------------------------------------------------------
        Total gross loan charge-offs ................   1,749     5,535      7,372     7,773     7,660
-------------------------------------------------------------------------------------------------------
Gross loan recoveries:
    Loans secured by real estate:
      Residential:
        One-to-four units ...........................      19      --          125       224       116
        One-to-four units - subprime ................    --        --         --        --        --
        Five or more units ..........................    --        --         --        --        --
      Commercial real estate ........................     250       250      1,610       261       250
      Land ..........................................    --        --         --        --        --
    Non-mortgage:
      Commercial ....................................    --        --         --        --        --
      Automobile ....................................     136       831      1,159       641       305
      Other consumer ................................      14         9          4         5         3
-------------------------------------------------------------------------------------------------------
        Total gross loan recoveries .................     419     1,090      2,898     1,131       674
-------------------------------------------------------------------------------------------------------
Net loan charge-offs:
    Loans secured by real estate:
      Residential:
        One-to-four units ...........................     400       393        910     2,165     4,982
        One-to-four units - subprime ................     316       187       --        --        --
        Five or more units ..........................    --        --           68      --         102
      Commercial real estate ........................    (250)     (250)    (1,610)     (261)     (250)
      Land ..........................................    --        --         --        --        --
    Non-mortgage:
      Commercial ....................................    --        --         --        --         115
      Automobile ....................................     696     3,964      4,959     4,468     1,791
      Other consumer ................................     168       151        147       270       246
-------------------------------------------------------------------------------------------------------
        Total net loan charge-offs ..................  $1,330    $4,445    $ 4,474    $6,642    $6,986
=======================================================================================================
Net loan charge-offs as a percentage of average loans    0.01%     0.06%      0.08%     0.13%     0.16%
=======================================================================================================
<FN>
(1)  Includes amounts associated with the January 1994 Northridge  earthquake of
     $1.0 million in 1996.
</FN>
</TABLE>


                                       55
<PAGE>

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

<TABLE>
<CAPTION>
                                                                          December 31,
                                -------------------------------------------------------------------------------------------------
                                              2000                            1999                            1998
                                -------------------------------------------------------------------------------------------------
                                             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 ........  $15,254  $7,655,238   0.20%     $12,913  $6,155,399   0.21%     $11,244  $4,047,182     0.28%
     One-to-four units-subprime   10,157   1,743,914   0.58        9,876   1,639,401   0.60        3,055     588,951     0.52
     Five or more units .......      146      19,460   0.75          184      21,055   0.87          401      40,029     1.00
   Commercial real estate .....    2,935     164,604   1.78        2,439     148,327   1.64        2,632     140,790     1.87
   Construction ...............    1,390     118,165   1.18        2,075     176,487   1.18        1,508     127,761     1.18
   Land .......................      332      26,880   1.24          843      67,631   1.25          568      44,859     1.27
Non-mortgage:
   Commercial .................      442      21,721   2.03          334      26,667   1.25          218      28,293     0.77
   Automobile (1) .............      269      39,614   0.68        6,259     399,789   1.57        8,344     357,988     2.33
   Other consumer .............      727      60,653   1.20          619      49,344   1.25          747      41,894     1.78
Not specifically allocated ....    2,800        --       --        2,800        --       --        2,800        --         --
---------------------------------------------------------------------------------------------------------------------------------
     Total loans held for
        investment ............  $34,452  $9,850,249   0.35%     $38,342  $8,684,100   0.44%     $31,517  $5,417,747     0.58%
=================================================================================================================================
                                              1997                            1996
                                ------------------------------------------------------------
<S>                              <C>      <C>          <C>       <C>      <C>          <C>
Loans secured by real estate:
   Residential:
     One-to-four units ........  $13,396  $4,358,475   0.31%     $12,960  $4,013,190   0.32%
     One-to-four units-subprime    1,256     249,070   0.50          281      33,258   0.84
     Five or more units .......      314      38,278   0.82          517      56,907   0.91
   Commercial real estate .....    4,112     202,425   2.03        6,956     260,609   2.67
   Construction ...............      847      70,865   1.20          773      66,651   1.16
   Land .......................      331      25,687   1.29          466      21,177   2.20
Non-mortgage:
   Commercial .................      196      26,024   0.75          236      22,136   1.07
   Automobile .................    8,016     342,326   2.34        4,303     202,186   2.13
   Other consumer .............      824      47,735   1.73          802      47,281   1.70
Not specifically allocated ....    2,800        --       --        2,800        --       --
--------------------------------------------------------------------------------------------
     Total loans held for
        investment ............  $32,092  $5,360,885   0.60%     $30,094  $4,723,395   0.64%
============================================================================================
<FN>
(1)  The decline during 2000 primarily reflects the sale of subsidiary.
</FN>
</TABLE>

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

     In determining impairment, we consider large non-homogeneous loans with the
following characteristics: non-accrual loans, debt restructurings and performing
loans which exhibit, among other  characteristics,  high loan-to-value ratios or
delinquent taxes. We base the measurement of collateral dependent impaired loans
on the fair value of the loan's collateral.  We value  non-collateral  dependent
loans  based on a present  value  calculation  of  expected  future  cash flows,
discounted  at the loan's  effective  rate.  We generally  use cash  receipts on
impaired  loans not  performing  according  to  contractual  terms to reduce the
carrying  value of the loan,  unless we believe we will  recover  the  remaining
principal balance of the loan. We include impairment losses in the allowance for
loan  losses  through  a  charge  to  provision  for  loan  losses.  We  include
adjustments  to  impairment  losses  due to  changes  in the  fair  value of the
collateral of impaired loans in provision for loan losses.  Upon  disposition of
an  impaired  loan,  we record loss of  principal  through a  charge-off  to the
allowance  for loan losses.  At December 31, 2000,  the recorded  investment  in
loans for which we have recognized  impairment totaled $14 million,  up from $13
million at December 31, 1999.  The total  allowance for losses  related to these
loans was $1 million for both


                                       56
<PAGE>

December 31, 2000 and 1999.  During 2000, the total  interest  recognized on the
impaired  portfolio  was $2.9  million,  compared to $1.9  million in 1999.  For
further  information  regarding  impaired  loans,  see  Note 6 of the  Notes  to
Consolidated Financial Statements on page 78.

     A summary of the activity in the allowance for loan losses  associated with
impaired  loans  is  shown  below  for the  years  indicated.  We have  recorded
provisions  and  reductions  to  the  allowance   associated   with  changes  in
classification  of  loans  as  impaired  and  reductions  due to loan  principal
payments.

<TABLE>
<CAPTION>
(In Thousands)                   2000       1999       1998       1997       1996
-----------------------------------------------------------------------------------
<S>                             <C>        <C>        <C>        <C>        <C>
Balance at beginning of period  $ 797      $ 810      $1,301     $4,402     $5,292
Provision (reduction) ........      3        (13)       (491)    (3,101)      (890)
Charge-offs ..................   --         --          --         --         --
Recoveries ...................   --         --          --         --         --
-----------------------------------------------------------------------------------
Balance at end of period .....  $ 800      $ 797      $  810     $1,301     $4,402
===================================================================================
</TABLE>

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

<TABLE>
<CAPTION>
(In Thousands)                    2000     1999      1998     1997     1996
-----------------------------------------------------------------------------
<S>                              <C>     <C>       <C>      <C>      <C>
Balance at beginning of period   $2,131  $ 7,717   $21,244  $30,071  $34,338
Provision (reduction) ........      866   (3,666)   (5,296)  (3,190)  (3,306)
Charge-offs ..................     --     (1,920)   (8,231)  (5,637)  (1,035)
Recoveries ...................     --       --       --        --         74
-----------------------------------------------------------------------------
Balance at end of period .....   $2,997  $ 2,131   $ 7,717  $21,244  $30,071
=============================================================================
</TABLE>

     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 during the years indicated.

<TABLE>
<CAPTION>
(In Thousands)                    2000     1999     1998      1997       1996
-------------------------------------------------------------------------------
<S>                              <C>      <C>      <C>      <C>        <C>
Balance at beginning of period   $--      $ 533    $ 839    $ 1,078    $ 1,217
Provision (reduction) ........     412      (45)     455      1,107      1,658
Charge-offs ..................    (442)    (488)    (761)    (1,346)    (1,797)
Recoveries ...................      30     --       --         --         --
-------------------------------------------------------------------------------
Balance at end of period .....   $--      $--      $ 533    $   839    $ 1,078
===============================================================================
</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,  loans and  mortgage-backed
securities;  payments of loans and  mortgage-backed  securities and payments for
and sales of loan servicing; and income from other investments.  Interest rates,
real estate sales activity and general economic conditions  significantly affect
repayments  on loans and  mortgage-backed  securities  and  deposit  inflows and
outflows.


                                       57
<PAGE>

     Our primary sources of funds generated during 2000 were from:

     o    principal   repayments--including   prepayments,   but  excluding  our
          refinances  of  our  existing  loans--on  loans  and   mortgage-backed
          securities of $1.8 billion; and

     o    a net deposit inflow of $1.5 billion, all of which was in certificates
          of deposit.

We used these funds  primarily to originate  loans held for  investment  of $3.3
billion.

     To the  extent  2001  deposit  growth  falls  short of  satisfying  ongoing
commitments to fund maturing and withdrawable deposits,  repay borrowings,  fund
existing  and future loans and make  investments,  continue  branch  improvement
programs  and  maintain  regulatory  liquidity  requirements,  we  will  utilize
borrowing arrangements with the FHLB and other sources. At December 31, 2000, we
had commitments to fund loans amounting to $694 million,  undisbursed loan funds
and unused lines of credit of $148 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, 2000, the Bank's
ratio was 4.3%,  compared to 4.2% at December 31, 1999, and 4.0% at December 31,
1998.

     Downey  currently  has liquid  assets,  including  due from  Bank--interest
bearing  balances,  of $18  million  and can  obtain  further  funds by means of
dividends  from  subsidiaries,  subject to certain  limitations,  or issuance of
further debt or equity.

REGULATORY CAPITAL COMPLIANCE

     The core and tangible capital ratios were 6.42% and the risk-based  capital
ratio was  12.94% at  December  31,  2000.  These  levels are up  slightly  from
comparable  ratios  of 6.27%  for core  and  tangible  capital  and  12.14%  for
risk-based  capital at  December  31,  1999,  and  continue  to exceed the "well
capitalized"  standards  of 5.00% for core  capital  and 10.00%  for  risk-based
capital,  as  defined  by  regulation.  During  2000,  the  amount of the Bank's
non-includable investment in real estate required to be deducted from regulatory
capital was reduced by $28 million due primarily to DSL Service Company's return
of $32 million of capital to the Bank  associated  with the sale of certain real
estate investments.


                                       58
<PAGE>

     The following table is a reconciliation of the Bank's  stockholder's equity
to federal regulatory capital as of December 31, 2000.

<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 ................................   $722,829                $722,829                 $722,829
Adjustments:
   Deductions:
    Investment in subsidiary, primarily real estate .    (17,230)                (17,230)                 (17,230)
    Goodwill ........................................     (3,607)                 (3,607)                  (3,607)
    Non-permitted mortgage servicing rights .........     (4,073)                 (4,073)                  (4,073)
   Additions:
    Unrealized gains on securities available for sale       (687)                   (687)                    (687)
    General loss allowance - investment in DSL
       Service Company ..............................        483                     483                      483
    Allowance for loan losses,
      net of specific allowances (1) ................       --                      --                     34,129
-----------------------------------------------------------------------------------------------------------------------------
Regulatory capital ..................................    697,715   6.42%         697,715   6.42%          731,844   12.94%
Well capitalized requirement ........................    162,896   1.50 (2)      542,985   5.00           565,601   10.00 (3)
-----------------------------------------------------------------------------------------------------------------------------
Excess                                                  $534,819   4.92%        $154,730   1.42%         $166,243    2.94%
=============================================================================================================================
<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 12.34%.
</FN>
</TABLE>

CURRENT ACCOUNTING ISSUES

     Statement of Financial Accounting Standards No. 140. In September 2000, the
Financial  Accounting  Standards Board issued Statement of Financial  Accounting
Standards No. 140,  "Accounting for Transfers and Servicing of Financial  Assets
and  Extinguishments  of Liabilities - a replacement of FASB Statement No. 125,"
which  revises  the  standards  for  accounting  for  securitizations  and other
transfers of financial assets and collateral and requires  certain  disclosures.
Although it replaces  FASB  Statement No. 125, it carries over most of statement
125's provisions without reconsideration.

     The accounting  provisions are effective for fiscal years  beginning  after
March 15, 2001. The reclassification and disclosure provisions are effective for
fiscal years beginning  after December 15, 2000. It is not anticipated  that the
financial impact of this statement will have a material effect on Downey.

     Statement  of Financial  Accounting  Standards  No. 133. 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


                                       59
<PAGE>

approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk.

     This  statement  is  effective  for all  fiscal  quarters  of fiscal  years
beginning after June 15, 2000.

     As part of our secondary marketing activities,  we utilize forward sale and
purchase  derivative  contracts to hedge the value of loans  originated for sale
against adverse changes in interest rates. At December 31, 2000, sales contracts
amounted to approximately $150 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,  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.

     On January 1, 2001, we adopted SFAS 133, and at that time, designated those
sales  contracts as cash flow  derivative  instruments  in  accordance  with the
requirements of the new standard.  These cash flow derivative  instruments hedge
the  variability of forecasted  cash flows  attributable  to interest rate risk.
Cash flow hedges are  accounted  for by  recording  the value of the  derivative
instrument  on the  balance  sheet  as  either  an  asset  or  liability  with a
corresponding offset recorded in other comprehensive income within stockholders'
equity, net of tax. Amounts are reclassified from other comprehensive  income to
the income statement in the period the hedged cash flow occurs. Derivative gains
and losses not considered effective in hedging the change in expected cash flows
of the hedged item are recognized immediately in the income statement.

     With the  implementation  of SFAS 133,  we  recorded  after-tax  transition
amounts   associated  with  establishing  the  fair  values  of  the  derivative
instruments  and hedged items on the balance  sheet as an increase of $36,000 to
net income and a reduction of $388,000 in other comprehensive income.

<TABLE>
<CAPTION>
(In Thousands)                                                             2001
---------------------------------------------------------------------------------
<S>                                                                        <C>
SUMMARY OF TRANSITION ADJUSTMENT AT JANUARY 1:
      BALANCE SHEET
         ASSETS
           Other assets ..............................................     $ 244
           Deferred income tax benefit ...............................       260
---------------------------------------------------------------------------------
                                                                           $ 504
=================================================================================
         LIABILITIES AND STOCKHOLDERS' EQUITY
           Accounts payable and accrued liabilities                        $ 856
           Accumulated other comprehensive loss - unrealized losses on
            derivative instruments ...................................      (388)
           Retained earnings .........................................        36
---------------------------------------------------------------------------------
                                                                           $ 504
=================================================================================
      STATEMENT OF INCOME
         Cumulative effect of a change in accounting principle .......     $  62
         Income taxes ................................................        26
---------------------------------------------------------------------------------
           Net income ................................................     $  36
=================================================================================
</TABLE>

     The  transition  adjustment  will  be  presented  as  a  cumulative  effect
adjustment  as  described  in  Accounting   Principles  Board  Opinion  No.  20,
Accounting  Changes,  in our 2001 financial  statements.  The transition amounts
were  determined  based  on the  interpretive  guidance  issued  to  date by the
Financial  Accounting  Standards Board. The Financial Accounting Standards Board
continues to issue  interpretive  guidance  which could  require  changes in our
application of the standard and adjustment to the  transition  amounts.  We will
continue to hedge as we have previously done;  however,  SFAS 133, as applied to
our risk management strategies, may increase or decrease reported net income and
stockholders' equity prospectively, depending on future levels of interest rates
and other  variables  affecting  the fair values of derivative  instruments  and
hedged items, but will have no effect on cash flows or the overall  economics of
the transactions.  For further information  regarding current accounting issues,
see Note 1 of the Notes to Consolidated Financial Statements on page 69.


                                       60
<PAGE>

SALE OF SUBSIDIARY

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


                                       61
<PAGE>


ITEM 8. FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                            Page

         Independent Auditors' Report....................................    63
         Consolidated Balance Sheets.....................................    64
         Consolidated Statements of Income...............................    65
         Consolidated Statements of Comprehensive Income.................    66
         Consolidated Statements of Stockholders' Equity.................    66
         Consolidated Statements of Cash Flows...........................    67
         Notes to Consolidated Financial Statements......................    69



                                       62
<PAGE>


KPMG
  355 South Grand Avenue
  Los Angeles, CA 90071












INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Downey Financial Corp.:

We have audited the accompanying consolidated balance sheets of Downey Financial
Corp.  and  subsidiaries  ("Downey")  as of December 31, 2000 and 1999,  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,   2000.   These   consolidated   financial   statements   are  the
responsibility  of  Downey's  management.  Our  responsibility  is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the financial  position of Downey Financial
Corp.  and  subsidiaries  as of December  31, 2000 and 1999,  and the results of
their  operations  and their cash flows for each of the years in the  three-year
period  ended  December 31,  2000,  in  conformity  with  accounting  principles
generally accepted in the United States of America.



                                 /s/  KPMG LLP


Los Angeles, California
January 17, 2001


                                       63
<PAGE>


<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
                                                                                           December 31,
                                                                                   --------------------------
(Dollars in Thousands, Except Per Share Data)                                          2000           1999
-------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>           <C>
ASSETS

Cash ...........................................................................   $   108,202   $   121,146
Federal funds ..................................................................        19,601             1
-------------------------------------------------------------------------------------------------------------
    Cash and cash equivalents ..................................................       127,803       121,147
U.S. Treasury securities, agency obligations and other investment securities
    available for sale, at fair value ..........................................       305,615       171,823
Municipal securities held to maturity, at amortized cost (estimated market value
    of $6,534 at December 31, 2000, and $6,710 at December 31, 1999) ...........         6,550         6,728
Loans held for sale, at lower of cost or market ................................       251,572       136,005
Mortgage-backed securities available for sale, at fair value ...................        10,203        21,719
Loans receivable held for investment ...........................................     9,822,578     8,588,339
Investments in real estate and joint ventures ..................................        17,641        42,172
Real estate acquired in settlement of loans ....................................         9,942         5,899
Premises and equipment .........................................................       104,178       107,978
Federal Home Loan Bank stock, at cost ..........................................       106,356       102,392
Mortgage servicing rights, net .................................................        40,731        34,263
Other assets ...................................................................        90,694        69,075
-------------------------------------------------------------------------------------------------------------
                                                                                   $10,893,863   $ 9,407,540
=============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits .......................................................................   $ 8,082,689   $ 6,562,761
Federal Home Loan Bank advances ................................................     1,978,348     2,122,407
Other borrowings ...............................................................           224           373
Accounts payable and accrued liabilities .......................................        54,236        45,682
Deferred income taxes ..........................................................        33,730        23,899
-------------------------------------------------------------------------------------------------------------
    Total liabilities ..........................................................    10,149,227     8,755,122
-------------------------------------------------------------------------------------------------------------
Company obligated mandatorily  redeemable capital securities of subsidiary trust
    holding solely junior subordinated debentures of the Company
    ("Capital Securities") .....................................................       120,000       120,000

STOCKHOLDERS' EQUITY
Preferred stock, par value of $0.01 per share; authorized 5,000,000 shares;
    outstanding none ...........................................................          --            --
Common stock, par value of $0.01 per share; authorized 50,000,000 shares;
    outstanding 28,205,741 shares at December 31, 2000, and 28,148,409
    shares at December 31, 1999 ................................................           282           281
Additional paid-in capital .....................................................        93,239        92,385
Accumulated other comprehensive income (loss) - unrealized gains (losses)
    on securities available for sale ...........................................           687        (1,568)
Retained earnings ..............................................................       530,428       441,320
-------------------------------------------------------------------------------------------------------------
    Total stockholders' equity .................................................       624,636       532,418
-------------------------------------------------------------------------------------------------------------
                                                                                   $10,893,863   $ 9,407,540
=============================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.


                                       64
<PAGE>


<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
<CAPTION>
                                                                                          Years Ended December 31,
                                                                                 -----------------------------------------
(Dollars in Thousands, Except Per Share Data)                                       2000            1999           1998
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>             <C>            <C>
Interest income:
    Loans receivable .......................................................   $    760,538    $    519,006   $    421,942
    U.S. Treasury securities and agency obligations ........................         13,387           8,025          7,078
    Mortgage-backed securities .............................................          1,060           1,638          2,780
    Other investments ......................................................          9,375           5,082          8,604
--------------------------------------------------------------------------------------------------------------------------
       Total interest income ...............................................        784,360         533,751        440,404
--------------------------------------------------------------------------------------------------------------------------
Interest expense:
    Deposits ...............................................................        379,303         256,764        248,337
    Borrowings .............................................................        130,419          64,161         17,720
    Capital securities .....................................................         12,163           5,348           --
--------------------------------------------------------------------------------------------------------------------------
       Total interest expense ..............................................        521,885         326,273        266,057
--------------------------------------------------------------------------------------------------------------------------
    Net interest income ....................................................        262,475         207,478        174,347
Provision for loan losses ..................................................          3,251          11,270          3,899
--------------------------------------------------------------------------------------------------------------------------
    Net interest income after provision for loan losses ....................        259,224         196,208        170,448
--------------------------------------------------------------------------------------------------------------------------
Other income, net:
    Loan and deposit related fees ..........................................         30,089          20,097         15,645
    Real estate and joint ventures held for investment, net:
       Operations, net .....................................................          6,683          10,430         14,510
       Net gains on sales of wholly owned real estate ......................          2,981           5,206          2,557
       (Provision for) reduction of losses on real estate and joint ventures           (866)          3,666          5,296
    Secondary marketing activities:
       Loan servicing fees .................................................         (3,628)          1,672            259
       Net gains on sales of loans and mortgage-backed securities ..........          3,297          14,806          6,462
    Net gains (losses) on sales of investment securities ...................           (106)            288             68
    Gain on sale of subsidiary .............................................          9,762            --             --
    Other ..................................................................          2,342           3,113          2,556
--------------------------------------------------------------------------------------------------------------------------
       Total other income, net .............................................         50,554          59,278         47,353
--------------------------------------------------------------------------------------------------------------------------
Operating expense:
    Salaries and related costs .............................................         82,522          86,163         66,152
    Premises and equipment costs ...........................................         23,220          20,617         16,834
    Advertising expense ....................................................          4,786           8,595          5,954
    Professional fees ......................................................          3,319           2,502          2,867
    SAIF insurance premiums and regulatory assessments .....................          2,626           3,937          3,832
    Other general and administrative expense ...............................         19,716          22,568         20,251
--------------------------------------------------------------------------------------------------------------------------
       Total general and administrative expense ............................        136,189         144,382        115,890
--------------------------------------------------------------------------------------------------------------------------
    Net operation of real estate acquired in settlement of loans ...........            818              19            260
    Amortization of excess of cost over fair value of net assets acquired ..            462             474            510
--------------------------------------------------------------------------------------------------------------------------
       Total operating expense .............................................        137,469         144,875        116,660
--------------------------------------------------------------------------------------------------------------------------
Income before income taxes .................................................        172,309         110,611        101,141
Income taxes ...............................................................         73,058          46,807         43,168
--------------------------------------------------------------------------------------------------------------------------
    Net income .............................................................   $     99,251    $     63,804   $     57,973
==========================================================================================================================
PER SHARE INFORMATION:
    Basic ..................................................................   $       3.52    $       2.27   $       2.06
==========================================================================================================================
    Diluted ................................................................   $       3.51    $       2.26   $       2.05
==========================================================================================================================
    Cash dividends declared and paid .......................................   $       0.36    $       0.35   $       0.32
==========================================================================================================================
    Weighted average diluted shares outstanding ............................     28,225,551      28,175,537     28,176,243
==========================================================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.


                                       65
<PAGE>


<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
<CAPTION>

                                                                                          Years Ended December 31,
                                                                                   ------------------------------------
(In Thousands)                                                                        2000         1999         1998
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>          <C>          <C>
Net income .....................................................................   $  99,251    $  63,804    $  57,973
-----------------------------------------------------------------------------------------------------------------------
Other comprehensive  income (loss),  net of income taxes (benefits):
   Unrealized gains (losses) on securities available for sale:
     U.S. Treasury securities, agency obligations and other investment
       securities available for sale, at fair value ............................       2,032       (1,874)       1,104
     Mortgage-backed securities available for sale, at fair value ..............         173         (281)        (422)
     Less reclassification of realized gains (losses) included in net income ...         (50)         166           39
-----------------------------------------------------------------------------------------------------------------------
   Total other comprehensive income (loss), net of income taxes (benefits) .....       2,255       (2,321)         643
-----------------------------------------------------------------------------------------------------------------------
Comprehensive income ...........................................................   $ 101,506    $  61,483    $  58,616
=======================================================================================================================
</TABLE>

<TABLE>
Consolidated Statements of Stockholders' Equity
<CAPTION>
                                                                                Accumulated
                                                                   Additional      Other
                                                       Common       Paid-in    Comprehensive     Retained
(Dollars in Thousands, Except Per Share Data)          Stock        Capital     Income (Loss)    Earnings         Total
-------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>           <C>           <C>            <C>            <C>
Balances at December 31, 1997 ....................   $     268     $  45,954     $     110      $ 384,014      $ 430,346
Cash dividends, $0.32 per share ..................        --            --            --           (8,889)        (8,889)
Stock dividend ...................................          13        45,702          --          (45,732)           (17)
Exercise of stock options ........................        --             510          --             --              510
Unrealized gains 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, $0.35 per share ..................        --            --            --           (9,850)        (9,850)
Exercise of stock options ........................        --             219          --             --              219
Unrealized losses on securities available for sale        --            --          (2,321)          --           (2,321)
Net income .......................................        --            --            --           63,804         63,804
-------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1999 ....................         281        92,385        (1,568)       441,320        532,418
Cash dividends, $0.36 per share ..................        --            --            --          (10,143)       (10,143)
Exercise of stock options ........................           1           854          --             --              855
Unrealized gains on securities available for sale         --            --           2,255           --            2,255
Net income .......................................        --            --            --           99,251         99,251
-------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000 ....................   $     282     $  93,239     $     687      $ 530,428      $ 624,636
=========================================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.


                                       66
<PAGE>


<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows

<CAPTION>
                                                                                            Years Ended December 31,
                                                                                   ---------------------------------------
(In Thousands)                                                                         2000          1999          1998
--------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>          <C>           <C>
Cash flows from operating activities:
  Net income ...................................................................   $   99,251   $    63,804   $    57,973
  Adjustments to reconcile net income to net cash used for operating activities:
     Depreciation and amortization .............................................       32,957        22,427        16,660
     Provision for (recovery of) losses on loans, real estate acquired in
       settlement of loans, investments in real estate and joint ventures and
       other assets ............................................................        4,527         7,640        (1,017)
     Net gains on sales of loans and mortgage-backed securities, investment
       securities, real estate and other assets ................................      (10,111)      (27,086)      (20,365)
     Gain on sale of subsidiary ................................................       (9,762)         --            --
     Interest capitalized on loans (negative amortization) .....................      (72,641)      (29,429)      (18,953)
     Federal Home Loan Bank stock dividends ....................................       (7,522)       (2,941)       (2,728)
  Loans originated for sale ....................................................   (1,729,220)   (2,042,274)   (2,162,583)
  Proceeds from sales of:
     Loans held for sale .......................................................      586,728       935,485     1,130,164
     Mortgage-backed securities available for sale .............................      963,712     1,386,151       608,158
  Increase in other, net .......................................................      (27,160)      (12,829)       (5,294)
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities ...........................     (169,241)      300,948      (397,985)
--------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities: Proceeds from sales of:
     Subsidiary, net ...........................................................      379,234          --            --
     U.S. Treasury securities, agency obligations and other
       investment securities available for sale ................................       29,645        67,195        60,319
     Loans held for investment .................................................       99,751        50,856          --
     Wholly owned real estate and real estate acquired in settlement
       of loans ................................................................       38,707        25,863        14,035
     Federal Home Loan Bank stock ..............................................       17,516          --            --
  Proceeds from maturities of U.S. Treasury securities, agency obligations
     and other investment securities available for sale ........................       22,000          --          10,001
  Purchase of:
     U.S. Treasury securities, agency obligations and other investment
       securities available for sale ...........................................     (181,905)     (126,403)      (25,000)
     Loans receivable held for investment ......................................      (18,828)      (49,669)       (7,463)
     Federal Home Loan Bank stock ..............................................      (13,958)      (50,021)       (2,617)
  Loans receivable originated held for investment (net of refinances of $165,148
     at December 31, 2000, $145,316 at December 31, 1999 and
     $120,638 at December 31, 1998) ............................................   (3,317,104)   (4,938,395)   (1,854,801)
  Principal payments on loans receivable held for investment and
     mortgage-backed securities available for sale .............................    1,823,685     1,688,205     1,830,492
  Net change in undisbursed loan funds .........................................      (59,588)       38,154        43,222
  Investments in real estate held for investment ...............................       (1,356)      (10,712)       (4,074)
  Other, net ...................................................................       (8,334)      (14,655)      (10,147)
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities ...........................   (1,190,535)   (3,319,582)       53,967
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to consolidated financial statements.


                                       67
<PAGE>


<TABLE>

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
<CAPTION>
                                                                                             Years Ended December 31,
                                                                                    -----------------------------------------
(In Thousands)                                                                         2000           1999           1998
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>            <C>            <C>
Cash flows from financing activities:
   Net increase in deposits ....................................................   $ 1,519,928    $ 1,523,028    $   169,755
   Net decrease in securities sold under agreements to repurchase ..............          --             --          (34,803)
   Proceeds from Federal Home Loan Bank advances ...............................     6,059,445      7,166,737        857,200
   Repayments of Federal Home Loan Bank advances ...............................    (6,203,504)    (5,739,342)      (514,646)
   Net decrease in other borrowings ............................................          (149)        (8,335)       (87,766)
   Proceeds from issuance of capital securities, net ...........................          --          115,063           --
   Proceeds from exercise of stock options .....................................           855            219            510
   Cash dividends ..............................................................       (10,143)        (9,850)        (8,889)
-----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities ......................................     1,366,432      3,047,520        381,361
-----------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents ......................................         6,656         28,886         37,343
Cash and cash equivalents at beginning of period ...............................       121,147         92,261         54,918
-----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period .....................................   $   127,803    $   121,147    $    92,261
=============================================================================================================================
Supplemental  disclosure of cash flow  information:
   Cash paid during the period for:
     Interest ..................................................................   $   511,943    $   325,769    $   266,407
     Income taxes ..............................................................        73,744         22,064         52,784
Supplemental disclosure of non-cash investing:
   Loans transferred from (to) held for investment to (from) held for sale .....        54,993         42,570         (3,056)
   Loans exchanged for mortgage-backed securities ..............................       970,319      1,387,364        608,831
   Real estate acquired in settlement of loans .................................        18,389         11,263         14,958
   Loans to facilitate the sale of real estate acquired in settlement of loans .         6,896          6,501         14,084
=============================================================================================================================
</TABLE>


See accompanying notes to consolidated financial statements.


                                       68
<PAGE>


DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)
For the Years Ended December 31, 2000, 1999 and 1998


(1)  Summary of Significant Accounting Policies

     Principles of Consolidation

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

     Business

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

     Basis of Financial Statement Presentation

     The 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
     reporting  periods.  Actual results could differ  significantly  from those
     estimates.

     Material estimates that are particularly  susceptible to significant change
     in the near term relate to the  determination  of the allowances for losses
     on loans,  real estate and mortgage  servicing rights ("MSRs").  Management
     believes that the allowances  established for losses on loans,  real estate
     and MSRs are adequate.  While  management  uses  available  information  to
     recognize  losses on loans,  real estate and MSRs,  future 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,  real estate and MSRs. 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,  real  estate  held  for
     investment or under development and MSRs at the lower of cost or fair value
     or in certain  cases,  at fair value.  Fair value  estimates  are made at a
     specific  point in time based upon relevant  market  information  and other
     information about the asset. Such estimates related to the  mortgage-backed
     and investment  securities  portfolios  include published bid prices or bid
     quotations received from securities dealers.  Fair value estimates for real
     estate  acquired in settlement of loans and real estate held for investment
     or under  development  is determined by current  appraisals  and,  where no
     active market exists for a particular  property,  discounting a forecast of
     expected cash flows at a rate commensurate with the risk involved.

     Cash and Cash Equivalents

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


                                       69
<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. Downey capitalizes MSRs acquired through
     either  the  purchase  or   origination  of  mortgage  loans  for  sale  or
     securitization  with  servicing  rights  retained.  The  total  cost of the
     mortgage  loans  designated  for  sale is  allocated  to the  MSRs  and the
     mortgage  loans without the MSRs based on their  relative fair values.  The
     MSRs are  included  as a component  of gain on sale of loans.  The MSRs are
     amortized in proportion  to and over the estimated  period of net servicing
     income.  Such  amortization  is reflected as a component of loan  servicing
     fees.


                                       70
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


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

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

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

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

     Allowance for Loan Losses

     The allowance for loan losses is maintained at an amount  management  deems
     adequate to cover inherent losses. Downey has implemented and adheres to an
     internal asset review system and loan loss allowance  methodology  designed
     to provide for the detection of problem assets and an adequate allowance to
     cover loan losses.  In determining the allowance for loan losses related to
     specific  major loans (loans over $5  million),  management  evaluates  its
     allowance  on an  individual  loan  basis,  including  an  analysis  of the
     creditworthiness,  cash flows and financial status of the borrower, and the
     condition and the estimated  value of the  collateral.  Downey  reviews all
     loans under $5 million by analyzing their performance and


                                       71
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


     composition  of their  collateral  as a whole,  because  of the  relatively
     homogeneous  nature of the  portfolios.  Given the above  evaluations,  the
     amount of the  allowance is based upon the  summation of general  valuation
     allowances,  allocated  allowances  and an unallocated  allowance.  General
     valuation  allowances  relate to loans with no  well-defined  deficiency or
     weakness and are determined by applying against such loans factors for each
     major loan category that consider past loss  experience  and loan duration.
     Allocated  allowances  relate to loans with  well-defined  deficiencies  or
     weaknesses and are generally  determined by loss factors that consider past
     loss  experience  for such  loans or are  determined  by the  excess of the
     recorded  investment  in the loan  over the fair  value of the  collateral,
     where  appropriate.  The  unallocated  allowance is more  subjective and is
     reviewed quarterly to take into  consideration  estimation errors and other
     factors such as prevailing and forecasted economic conditions.

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

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

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

     Loan Servicing

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

     Investment in Real Estate and Joint Ventures

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

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

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


                                       72
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


     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) on 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.

     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.


                                       73
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


     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

     Statement of Financial Accounting Standards No. 140. In September 2000, the
     Financial   Accounting   Standards  Board  issued  Statement  of  Financial
     Accounting  Standards No. 140,  "Accounting  for Transfers and Servicing of
     Financial Assets and Extinguishments of Liabilities - a replacement of FASB
     Statement  No.  125,"  which  revises  the  standards  for  accounting  for
     securitizations  and other transfers of financial assets and collateral and
     requires certain disclosures.  Although it replaces FASB Statement No. 125,
     it carries over most of statement 125's provisions without reconsideration.

     The accounting  provisions are effective for fiscal years  beginning  after
     March  15,  2001.  The  reclassification  and  disclosure   provisions  are
     effective  for fiscal years  beginning  after  December 15, 2000. It is not
     anticipated  that  the  financial  impact  of this  statement  will  have a
     material effect on Downey.

     Statement  of Financial  Accounting  Standards  No. 133. 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 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.

     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.

     As part of secondary marketing activities, Downey utilizes forward sale and
     purchase  derivative  contracts to hedge the value of loans  originated for
     sale against adverse changes in interest rates. At December 31, 2000, sales
     contracts  amounted to approximately  $150 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, 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.

     On January 1, 2001,  Downey adopted SFAS 133, and at that time,  designated
     those sales  contracts as cash flow  derivative  instruments  in accordance
     with the  requirements  of the new  standard.  These  cash flow  derivative
     instruments hedge the variability of forecasted cash flows  attributable to
     interest rate risk.


                                       74
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


     Cash flow hedges are accounted for by recording the value of the derivative
     instrument  on the  balance  sheet as either an asset or  liability  with a
     corresponding   offset  recorded  in  other  comprehensive   income  within
     stockholders'  equity,  net of tax.  Amounts  are  reclassified  from other
     comprehensive  income to the income statement in the period the hedged cash
     flow  occurs.  Derivative  gains and losses  not  considered  effective  in
     hedging the change in expected cash flows of the hedged item are recognized
     immediately in the income statement.

     With the implementation of SFAS 133, Downey recorded  after-tax  transition
     amounts  associated  with  establishing  the fair values of the  derivative
     instruments and hedged items on the balance sheet as an increase of $36,000
     to net income and a reduction of $388,000 in other comprehensive income.

<TABLE>
<CAPTION>
     (In Thousands)                                                          2001
     -----------------------------------------------------------------------------
     <S>                                                                    <C>
     Summary of transition adjustment at January 1:
         Balance Sheet
            Assets
              Other assets ..............................................   $ 244
              Deferred income tax benefit ...............................     260
     -----------------------------------------------------------------------------
                                                                            $ 504
     =============================================================================
            Liabilities and Stockholders' Equity
              Accounts payable and accrued liabilities ..................   $ 856
              Accumulated other comprehensive loss - unrealized losses on
               derivative instruments ...................................    (388)
              Retained earnings .........................................      36
     -----------------------------------------------------------------------------
                                                                            $ 504
     =============================================================================
         Statement of Income
            Cumulative effect of a change in accounting principle .......   $  62
            Income taxes ................................................      26
     -----------------------------------------------------------------------------
              Net income ................................................   $  36
     =============================================================================
</TABLE>

     The  transition  adjustment  will  be  presented  as  a  cumulative  effect
     adjustment  as described in  Accounting  Principles  Board  Opinion No. 20,
     Accounting Changes, in Downey's 2001 financial  statements.  The transition
     amounts were determined based on the  interpretive  guidance issued to date
     by the Financial  Accounting  Standards  Board.  The  Financial  Accounting
     Standards  Board  continues  to issue  interpretive  guidance  which  could
     require  changes in Downey's  application of the standard and adjustment to
     the transition  amounts.  Downey will continue to hedge as previously done;
     however,  SFAS 133,  as  applied  to our risk  management  strategies,  may
     increase  or  decrease  reported  net  income  and   stockholders'   equity
     prospectively,  depending  on  future  levels of  interest  rates and other
     variables  affecting the fair values of derivative  instruments  and hedged
     items,  but will have no effect on cash flows or the overall  economics  of
     the transactions.

(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


                                       75
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


     Loan Bank ("FHLB") Eleventh District Cost of Funds Index ("COFI"). All such
     amounts received are nontaxable under the Internal Revenue Code.

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

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

(3)  U.S.  Treasury   Securities,   Agency   Obligations  and  Other  Investment
     Securities Available for Sale

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

<TABLE>
<CAPTION>
                                                        Gross      Gross    Estimated
                                          Amortized  Unrealized  Unrealized   Market
     (In Thousands)                          Cost       Gains      Losses     Value
     --------------------------------------------------------------------------------
    <S>                                    <C>        <C>         <C>        <C>
     U.S. Treasury and agency securities   $283,132   $  1,069    $     99   $284,102
     Corporate securities ..............     21,212        301        --       21,513
     --------------------------------------------------------------------------------
     December 31, 2000 .................   $304,344   $  1,370    $     99   $305,615
     ================================================================================
     U.S. Treasury and agency securities
       at December 31, 1999 ............   $174,223   $   --      $  2,400   $171,823
     ================================================================================
</TABLE>

     At December  31, 2000,  $283 million in amortized  cost and $284 million in
     estimated  market  value  of  these  investment   securities  contain  call
     provisions. The call dates range from January 5, 2001 to June 2, 2002.

     The amortized cost and estimated market value of U.S. Treasury  securities,
     agency  obligations and other investment  securities  available for sale at
     December 31, 2000, by contractual maturity, are shown below.

<TABLE>
<CAPTION>
                                                             Amortized   Market
     (In Thousands)                                            Cost       Value
     ---------------------------------------------------------------------------
    <S>                                                      <C>        <C>
     Due in one year or less .................               $  5,000   $  5,008
     Due after one year through five years (1)                299,344    300,607
     ---------------------------------------------------------------------------
     Total ...................................               $304,344   $305,615
     ===========================================================================
<FN>
     (1) No investment matures beyond five years.
</FN>
</TABLE>

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

<TABLE>
<CAPTION>
     (In Thousands)                                    2000      1999      1998
     ---------------------------------------------------------------------------
     <S>                                             <C>       <C>       <C>
     Proceeds ............                           $29,645   $67,195   $60,319
     ===========================================================================
     Gross realized gains                            $     4   $   288   $    68
     ===========================================================================
     Gross realized losses                           $   110   $  --     $  --
     ===========================================================================
</TABLE>

     Net  unrealized  gains on  investment  securities  available  for sale were
     recognized  in  stockholders'  equity as  accumulated  other  comprehensive
     income in the amount of $1.3 million, or $0.7 million net of income


                                       76
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


     taxes,  at December 31,  2000,  compared to net  unrealized  losses of $2.4
     million, or $1.4 million net of income taxes, at December 31, 1999.

(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, 2000 or 1999. The average interest
     rate  and  balance  of  such   transactions   was  6.70%  and  $3  million,
     respectively,  during 2000 and 5.16% and $4 million,  respectively,  during
     1999.  There was no amount  outstanding  at any  month-end  during 2000 and
     1999.

     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, 2000                 $6,550     $    --     $   16     $6,534
     ==========================================================================
     December 31, 1999                 $6,728     $    --     $   18     $6,710
     ==========================================================================
</TABLE>

     All of the  investment  at  December  31,  2000 and all but  $30,000 of the
     investment  in 1999  represents  an  industrial  revenue  bond on which the
     interest income is not subject to federal income taxes and matures in 2015.

(5)  Mortgage-Backed Securities Available for Sale

     The  amortized  cost and  estimated  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, 2000:
       FHLMC certificates ....      $ 4,182     $  --       $    29     $ 4,153
       Non-agency certificates        6,086           6          42       6,050
    ----------------------------------------------------------------------------
          Total ..............      $10,268     $     6     $    71     $10,203
    ============================================================================
     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
    ============================================================================
</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  $65,000,  or  $37,000  net of  income  taxes,  at
     December  31,  2000.  At December  31,  1999,  net  unrealized  losses were
     recognized in


                                       77
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


     stockholders'  equity  as  accumulated  other  comprehensive  income in the
     amount of $350,000, or $202,000 net of income taxes.

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

<TABLE>
<CAPTION>
     (In Thousands)                            2000         1999         1998
     ---------------------------------------------------------------------------
     <S>                                    <C>          <C>          <C>
     Proceeds ............                  $  963,712   $1,386,151   $  608,158
     ===========================================================================
     Gross realized gains                   $    4,788   $   14,017   $    3,490
     ===========================================================================
     Gross realized losses                  $    5,690   $    2,504   $    3,814
     ===========================================================================
</TABLE>

(6)  Loans Receivable

     Loans receivable are summarized as follows:

<TABLE>
<CAPTION>
                                                                      December 31,
                                                              ---------------------------
     (In Thousands)                                               2000           1999
     ------------------------------------------------------------------------------------
     <S>                                                      <C>            <C>
     Held for investment:
       Loans secured by real estate:
          Residential:
            One-to-four units .............................   $ 7,655,238    $ 6,155,399
            One-to-four units - subprime ..................     1,743,914      1,639,401
            Five or more units ............................        19,460         21,055
          Commercial real estate ..........................       164,604        148,327
          Construction ....................................       118,165        176,487
          Land ............................................        26,880         67,631
       Non-mortgage:
          Commercial ......................................        21,721         26,667
          Automobile ......................................        39,614        399,789
          Other consumer ..................................        60,653         49,344
     ------------------------------------------------------------------------------------
            Total loans receivable held for investment ....     9,850,249      8,684,100
       Less:
          Undisbursed loan funds ..........................       (72,328)      (125,159)
          Net deferred costs and premiums .................        79,109         67,740
          Allowance for estimated losses ..................       (34,452)       (38,342)
     ------------------------------------------------------------------------------------
            Total loans receivable held for investment, net   $ 9,822,578    $ 8,588,339
     ====================================================================================
     Held for sale:
       Loans secured by residential one-to-four units .....   $   251,572    $   136,005
     ====================================================================================
</TABLE>

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


                                       78
<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 2000, 1999 and 1998 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, 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
     Provision for loan losses ..............      2,350         108        517         276        --        3,251
     Charge-offs ............................       (735)       --         (832)       (182)       --       (1,749)
     Recoveries .............................        269        --          136          14        --          419
     Transfers (1) ..........................       --          --       (5,811)       --          --       (5,811)
     --------------------------------------------------------------------------------------------------------------
     Balance at December 31, 2000 ...........   $ 30,214    $    442   $    269    $    727    $  2,800   $ 34,452
     ==============================================================================================================
<FN>
     (1)  Reduction in 2000 was due to the sale of subsidiary.
</FN>
</TABLE>

     Net  charge-offs  represented  0.01%,  0.06% and 0.08% of average loans for
     2000, 1999 and 1998, respectively.

     All impaired loans at December 31, 2000 and 1999 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, 2000:
       Loans with specific allowances ..       $  --       $    --       $  --
       Loans without specific allowances        13,841          --        13,841
     ---------------------------------------------------------------------------
       Total impaired loans ............       $13,841     $    --       $13,841
     ===========================================================================
     December 31, 1999:
       Loans with specific allowances ..       $  --       $    --       $  --
       Loans without specific allowances        13,049          --        13,049
     ---------------------------------------------------------------------------
       Total impaired loans ............       $13,049     $    --       $13,049
     ===========================================================================
</TABLE>

     The average  recorded  investment in impaired  loans totaled $13 million in
     both 2000 and 1999. During 2000, total interest  recognized on the impaired
     loan portfolio was $2.9 million,  compared to $1.9 million in 1999 and $2.0
     million in 1998.

     The combined  weighted  average interest yield on loans receivable held for
     investment  and sale was 8.45% and 7.67% as of December  31, 2000 and 1999,
     respectively,  and averaged  7.99%,  7.48% and 7.89% during 2000,  1999 and
     1998, respectively.


                                       79
<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
     $45 million and $33 million as of December 31, 2000 and 1999, respectively.
     At  December  31,  2000  we had  less  than $1  million  of  troubled  debt
     restructurings  on accrual status  representing a single  one-to-four  unit
     residential loan.

     Interest due on non-accrual  loans, but excluded from interest income,  was
     approximately $1.8 million for 2000, $1.1 million for 1999 and $0.5 million
     for 1998.

     Downey has had,  and  expects in the  future to have,  transactions  in the
     ordinary  course of business with executive  officers,  directors and their
     associates  ("related parties") on substantially the same terms,  including
     interest  rates  and  collateral,  as  those  prevailing  at the  time  for
     comparable  transactions with other non-related  parties. In the opinion of
     management, those transactions neither involve more than the normal risk of
     collectibility nor present any unfavorable  features. At December 31, 2000,
     the Bank had extended  loans to two of its directors  and their  associates
     totaling $23 million.  At December 31, 1999, the Bank had extended loans to
     one director and his  associates  totaling $27 million.  All such loans are
     performing  in  accordance  with their  loan  terms.  Presented  below is a
     summary  of  activity  with  respect  to such  loans for the  years  ending
     December 31, 2000 and 1999:

<TABLE>
<CAPTION>
     (In Thousands)                                           2000        1999
     ---------------------------------------------------------------------------
     <S>                                                   <C>         <C>
     Balance at beginning of period                        $ 26,657    $ 25,763
     Additions ....................                             632       4,149
     Repayments ...................                          (4,222)     (3,255)
     ---------------------------------------------------------------------------
     Balance at end of period .....                        $ 23,067    $ 26,657
     ===========================================================================
</TABLE>

(7)  Investments in Real Estate and Joint Ventures

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

<TABLE>
<CAPTION>
                                                                           December 31,
     (In Thousands)                                                      2000        1999
     --------------------------------------------------------------------------------------
     <S>                                                              <C>         <C>
     Gross investments in real estate (1) .........................   $ 23,948    $ 46,715
     Accumulated depreciation .....................................     (7,313)     (7,127)
     Allowance for estimated losses ...............................     (1,492)     (2,131)
     --------------------------------------------------------------------------------------
       Investments in real estate .................................     15,143      37,457
     --------------------------------------------------------------------------------------
     Investments in and interest bearing advances to joint ventures      4,003       4,715
     Joint venture valuation allowance ............................     (1,505)       --
     --------------------------------------------------------------------------------------
       Investments in joint ventures ..............................      2,498       4,715
     --------------------------------------------------------------------------------------
       Total investments in real estate and joint ventures ........   $ 17,641    $ 42,172
     ======================================================================================
<FN>
     (1) Includes $0.9 million invested in low income housing.
</FN>
</TABLE>


                                       80
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


     The table set forth below describes the type,  location and amount invested
     in real estate and joint ventures,  net of specific valuation allowances of
     $3 million and general  valuation  allowances  of less than $1 million,  at
     December 31, 2000:

<TABLE>
<CAPTION>
     (In Thousands)                                          California    Arizona     Other      Total
     ----------------------------------------------------------------------------------------------------
     <S>                                                      <C>         <C>        <C>        <C>
     Shopping centers .....................................   $  1,916    $  6,351   $   --     $  8,267
     Office buildings .....................................        702        --         --          702
     Residential ..........................................      3,063        --         --        3,063
     Land .................................................      5,524         109        459      6,092
     ----------------------------------------------------------------------------------------------------
       Total real estate before general valuation allowance   $ 11,205    $  6,460   $    459     18,124
     General valuation allowance ..........................                                         (483)
     ----------------------------------------------------------------------------------------------------
     Net investment in real estate and joint ventures .....                                     $ 17,641
     ====================================================================================================
</TABLE>

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

<TABLE>
<CAPTION>
     (In Thousands)                                                     2000        1999        1998
     -------------------------------------------------------------------------------------------------
    <S>                                                              <C>         <C>         <C>
     Wholly owned operations:
       Rental operations:
          Rental income ..........................................   $  3,617    $  4,950    $  5,189
          Costs and expenses .....................................     (1,045)     (1,128)     (1,466)
     -------------------------------------------------------------------------------------------------
            Net rental operations ................................      2,572       3,822       3,723
       Net gains on sales of real estate .........................      2,981       5,206       2,557
       Reduction of losses on real estate ........................        639       2,266       5,081
     -------------------------------------------------------------------------------------------------
          Total wholly owned operations ..........................      6,192      11,294      11,361
     -------------------------------------------------------------------------------------------------
     Joint venture operations:
       Equity in net income from joint ventures ..................      3,224       5,352       9,203
       Reduction of (provision for) losses provided by DSL Service
          Company ................................................     (1,505)      1,400         215
     -------------------------------------------------------------------------------------------------
          Net joint venture operations ...........................      1,719       6,752       9,418
     Interest from joint venture advances ........................        887       1,256       1,584
     -------------------------------------------------------------------------------------------------
       Total joint venture operations ............................      2,606       8,008      11,002
     -------------------------------------------------------------------------------------------------
          Total ..................................................   $  8,798    $ 19,302    $ 22,363
     =================================================================================================
</TABLE>


                                       81
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


     Activity  in the  allowance  for losses on real estate and  investments  in
     joint ventures for 2000, 1999 and 1998 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, 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
     Provision for (reduction of) estimated losses       --          (639)         --          1,505         866
     Charge-offs .................................       --          --            --           --          --
     Recoveries ..................................       --          --            --           --          --
     ------------------------------------------------------------------------------------------------------------
     Balance at December 31, 2000 ................   $  1,062    $    430      $   --       $  1,505    $  2,997
     ============================================================================================================
</TABLE>


                                       82
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


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

<TABLE>
     Condensed Combined Balance Sheets - Joint Ventures
<CAPTION>
                                                                      December 31,
                                                                  ---------------------
     (In Thousands)                                                 2000        1999
     ----------------------------------------------------------------------------------
     <S>                                                          <C>         <C>
     Assets
     Cash .....................................................   $  2,182    $  1,870
     Projects under development ...............................      6,879      12,523
     Completed projects .......................................     20,468      25,155
     Other assets .............................................      1,474       2,903
     ----------------------------------------------------------------------------------
                                                                  $ 31,003    $ 42,451
     ==================================================================================
     Liabilities and Equity
     Liabilities:
       Notes payable to the Bank ..............................   $ 23,398    $ 34,697
       Notes payable to others ................................      4,282       3,230
       Other ..................................................      4,755       6,175
     Equity (deficit):
       DSL Service Company (1) ................................      2,498       4,715
       Allowance for losses recorded by DSL Service Company (2)      1,505        --
       Other partners' (2) ....................................     (5,435)     (6,366)
     ----------------------------------------------------------------------------------
         Net deficit ..........................................     (1,432)     (1,651)
     ----------------------------------------------------------------------------------
                                                                  $ 31,003    $ 42,451
     ==================================================================================
<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 $5 million and $6 million at
          December  31, 2000 and 1999,  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.  The  allowance at
          December 31, 2000 totaled $2 million.
</FN>
</TABLE>


                                       83
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


<TABLE>
     Condensed Combined Statements of Operations - Joint Ventures
<CAPTION>

     (In Thousands)                                       2000        1999        1998
     -----------------------------------------------------------------------------------
     <S>                                               <C>         <C>         <C>
     Real estate sales:
        Sales ......................................   $ 32,237    $ 40,096    $ 59,095
        Cost of sales ..............................    (26,021)    (31,770)    (39,261)
     -----------------------------------------------------------------------------------
         Net gains on sales ........................      6,216       8,326      19,834
     -----------------------------------------------------------------------------------
     Rental operations:
        Rental income ..............................      3,849       5,825       6,252
        Operating expenses .........................       (901)     (2,192)     (2,409)
        Interest, depreciation and other expenses ..     (3,131)     (4,236)     (5,271)
     -----------------------------------------------------------------------------------
         Net loss on rental operations .............       (183)       (603)     (1,428)
     -----------------------------------------------------------------------------------
     Net income ....................................      6,033       7,723      18,406
     Less other partners' share of net income ......      2,809       2,371       9,203
     -----------------------------------------------------------------------------------
     DSL Service Company's share of net income .....      3,224       5,352       9,203
     Reduction of (provision for) losses provided by
       DSL Service Company .........................     (1,505)      1,400         215
     -----------------------------------------------------------------------------------
     DSL Service Company's share of net income .....   $  1,719    $  6,752    $  9,418
     ===================================================================================
</TABLE>

(8)  Real Estate Acquired in Settlement of Loans

     Real  estate  acquired in  settlement  of loans is recorded at the lower of
     cost or fair value on an individual asset basis.

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

<TABLE>
<CAPTION>
                                                                   December 31,
                                                                 ---------------
     (In Thousands)                                               2000     1999
     ---------------------------------------------------------------------------
     <S>                                                         <C>      <C>
     Residential one-to-four units .....................         $6,651   $4,973
     Residential one-to-four units - subprime ..........          3,291      926
     ---------------------------------------------------------------------------
       Total real estate acquired in settlement of loans         $9,942   $5,899
     ===========================================================================
</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)                                                      2000       1999       1998
     ------------------------------------------------------------------------------------------------
     <S>                                                               <C>        <C>        <C>
     Net gains on sales ............................................   $  (669)   $  (704)   $(1,417)
     Net operating expense .........................................     1,075        768      1,222
     Provision for (reduction of) estimated losses .................       412        (45)       455
     ------------------------------------------------------------------------------------------------
       Net operations of real estate acquired in settlement of loans   $   818    $    19    $   260
     ================================================================================================
</TABLE>


                                       84
<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 2000, 1999 and 1998 is as follows:

<TABLE>
<CAPTION>
     (In Thousands)                                      2000     1999     1998
     ---------------------------------------------------------------------------
     <S>                                                <C>      <C>      <C>
     Balance at beginning of period .................   $--      $ 533    $ 839
     Provision for  (reduction of) real estate losses     412      (45)     455
     Charge-offs ....................................    (442)    (488)    (761)
     Recoveries .....................................      30     --       --
     ---------------------------------------------------------------------------
     Balance at end of period .......................   $--      $--      $ 533
     ===========================================================================
</TABLE>

(9)  Premises and Equipment

     Premises and equipment are summarized as follows:

<TABLE>
<CAPTION>
                                                               December 31,
                                                          ----------------------
     (In Thousands)                                         2000         1999
     ---------------------------------------------------------------------------
     <S>                                                 <C>          <C>
     Land ....................................           $  24,626    $  23,653
     Building and improvements ...............              91,361       90,591
     Furniture, fixtures and equipment .......              67,331       64,693
     Construction in progress ................                 769           18
     Other ...................................                  62           62
     ---------------------------------------------------------------------------
       Total premises and equipment ..........             184,149      179,017
     Accumulated depreciation and amortization             (79,971)     (71,039)
     ---------------------------------------------------------------------------
       Total premises and equipment, net .....           $ 104,178    $ 107,978
     ===========================================================================
</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 $2.3  million in 2000,  $2.1  million in 1999 and $1.7
     million in 1998.  The following  table  summarizes  future  minimum  rental
     commitments under noncancelable leases.

<TABLE>
<CAPTION>
     (In Thousands)
     ---------------------------------------------------------------------------
     <S>                                                                  <C>
     2001 .........                                                       $2,247
     2002 .........                                                        1,725
     2003 .........                                                        1,264
     2004 .........                                                          588
     2005 .........                                                          646
     Thereafter (1)                                                          769
     ---------------------------------------------------------------------------
       Total future lease commitments                                     $7,239
     ===========================================================================
<FN>
     (1)  There are no lease commitments  beyond the year 2010 though options to
          renew at that time are available.
</FN>
</TABLE>


                                       85
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


(10) Federal Home Loan Bank Stock

     The Bank's  required  investment in FHLB stock,  based on December 31, 2000
     financial  data, was $99 million.  The investment in FHLB stock amounted to
     $106 million and $102 million at December 31, 2000 and 1999, respectively.

(11) Mortgage Servicing Rights

     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 $4.0  billion at December 31, 2000 and $2.9
     billion at December 31, 1999.

     Custodial escrow balances  maintained in connection with the foregoing loan
     servicing,  and included in demand deposits, were $8 million and $5 million
     at December 31, 2000 and 1999, respectively.

     A summary of activity in mortgage  servicing  rights and the  allowance for
     mortgage  servicing  rights  during  2000,  1999  and  1998  as well as the
     estimated fair value of mortgage servicing rights at each period end are as
     follows:

<TABLE>
<CAPTION>
     (In Thousands)                                2000        1999        1998
     ----------------------------------------------------------------------------
     <S>                                        <C>         <C>         <C>
     Gross balance at beginning of period ...   $ 34,266    $  8,256    $  2,161
     Additions ..............................     18,510      29,271       7,276
     Amortization ...........................     (5,968)     (3,051)       (653)
     Sale of servicing ......................       --          --           (17)
     Impairment write-down ..................       (594)       (210)       (511)
     ----------------------------------------------------------------------------
        Gross balance at end of period ......     46,214      34,266       8,256
     ----------------------------------------------------------------------------
     Allowance balance at beginning of period          3         464         206
     Provision for (reduction of) impairment       6,074        (251)        769
     Impairment write-down ..................       (594)       (210)       (511)
     ----------------------------------------------------------------------------
        Allowance balance at end of period ..      5,483           3         464
     ----------------------------------------------------------------------------
        Mortgage servicing rights, net ......   $ 40,731    $ 34,263    $  7,792
     ============================================================================
     Estimated fair value (1) ...............   $ 41,826    $ 37,048    $  7,844
     ============================================================================
<FN>
     (1)  The  estimated  fair  value  exceeded  book  value for  certain  asset
          stratum.  Excludes  loans sold or  securitized  prior to 1996  without
          capitalized mortgage servicing rights.
</FN>
</TABLE>

     The unpaid  principal  balances of mortgage  loans serviced for others with
     capitalized mortgage servicing rights was $3.8 billion at December 31, 2000
     and $2.7 billion at December 31, 1999. The weighted  average  interest rate
     on the  associated  loans  was  7.56% at  December  31,  2000 and  7.23% at
     December 31, 1999.

     The  components  of loan  servicing  fees  included in Downey's  results of
     operations are summarized as follows:

<TABLE>
<CAPTION>
     (In Thousands)                              2000       1999       1998
     ------------------------------------------------------------------------
     <S>                                       <C>        <C>        <C>
     Income from servicing operations ......   $ 8,414    $ 4,472    $ 1,681
     Amortization of MSRs ..................    (5,968)    (3,051)      (653)
     (Provision for) reduction of impairment    (6,074)       251       (769)
     ------------------------------------------------------------------------
     Loan servicing fees ...................   $(3,628)   $ 1,672    $   259
     ========================================================================
</TABLE>


                                       86
<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)                                              2000      1999
     ---------------------------------------------------------------------------
     <S>                                                       <C>       <C>
     Accounts receivable ..........................            $ 2,406   $ 3,338
     Accrued interest receivable:
       Loans ......................................             61,131    43,240
       Mortgage-backed securities .................                 60       123
       Investment securities ......................              6,206     3,360
     Prepaid expenses .............................             14,210    12,362
     Excess of purchase price over fair value of
       assets acquired and liabilities assumed, net              3,608     4,070
     Repossessed automobiles, net .................                 76       314
     Other ........................................              2,997     2,268
     ---------------------------------------------------------------------------
       Total other assets .........................            $90,694   $69,075
     ===========================================================================
</TABLE>

(13) Deposits

     Deposits are summarized as follows:

<TABLE>
<CAPTION>
                                                          December 31,
                                         ---------------------------------------------
                                                 2000                   1999
                                         ---------------------------------------------
                                          Weighted               Weighted
                                          Average                Average
     (Dollars in Thousands)                 Rate       Amount      Rate        Amount
     ---------------------------------------------------------------------------------
     <S>                                    <C>     <C>             <C>     <C>
     Transaction accounts:
       Non-interest-bearing checking .         -%   $  244,311         -%   $  182,165
       Interest-bearing checking (1) .      0.78       395,640      1.00       383,973
       Money market ..................      2.88        89,408      2.91        95,947
       Regular passbook ..............      3.41       754,127      3.62       827,854
     ---------------------------------------------------------------------------------
          Total transaction accounts .      2.12     1,483,486      2.46     1,489,939
     Certificates of deposit:
       Less than 3.00% ...............      2.41         6,357      2.47         8,717
       3.00-3.49 .....................      3.45            25      3.02            16
       3.50-3.99 .....................      3.97           384      3.92         3,786
       4.00-4.49 .....................      4.19        26,916      4.32       210,127
       4.50-4.99 .....................      4.82        80,844      4.78       939,858
       5.00-5.99 .....................      5.71     1,901,166      5.56     3,623,632
       6.00-6.99 .....................      6.63     4,558,730      6.07       284,984
       7.00 and greater ..............      7.02        24,781      7.32         1,702
     ---------------------------------------------------------------------------------
         Total certificates of deposit      6.33     6,599,203      5.39     5,072,822
     ---------------------------------------------------------------------------------
         Total deposits ..............      5.56%   $8,082,689      4.72%   $6,562,761
     =================================================================================
<FN>
     (1)  Includes amounts swept into money market accounts.
</FN>
</TABLE>


                                       87
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


     The  aggregate  amount  of jumbo  certificates  of  deposit  with a minimum
     denomination  of $100,000 was $2.3 billion and $1.7 billion at December 31,
     2000 and 1999, respectively.

     At December 31, 2000,  scheduled  maturities of certificates of deposit are
     as follows:

<TABLE>
<CAPTION>
                                                       Weighted
     (Dollars in Thousands)                          Average Rate        Amount
     ---------------------------------------------------------------------------
     <S>                                                 <C>          <C>
     2001 .....                                          6.34%        $5,955,136
     2002 .....                                          6.30            614,832
     2003 .....                                          5.57             19,689
     2004 .....                                          5.43              4,746
     2005 .....                                          6.10              4,800
     Thereafter                                             -               --
     ---------------------------------------------------------------------------
       Total                                             6.33%        $6,599,203
     ===========================================================================
</TABLE>

     The  weighted  average  cost of deposits  averaged  5.20%,  4.51% and 4.87%
     during 2000, 1999 and 1998, respectively.

     As of December 31, 2000 and 1999 public funds of  approximately  $5 million
     and $3 million, respectively, are secured by mortgage loans with a carrying
     value of  approximately  $7 million and $5 million at December 31, 2000 and
     1999, respectively.

     Interest expense on deposits by type is summarized as follows:

<TABLE>
<CAPTION>
     (In Thousands)                                 2000       1999       1998
     ---------------------------------------------------------------------------
     <S>                                          <C>        <C>        <C>
     Interest-bearing checking (1) ..             $  3,520   $  3,517   $  3,142
     Money market ...................                2,544      2,641      2,626
     Regular passbook ...............               27,841     26,224     17,102
     Certificate accounts ...........              345,398    224,382    225,467
     ---------------------------------------------------------------------------
      Total deposit interest expense              $379,303   $256,764   $248,337
     ===========================================================================
<FN>
     (1)  Includes amounts swept into money market accounts.
</FN>
</TABLE>

     Accrued  interest on  deposits,  which is included in accounts  payable and
     accrued liabilities,  was $3 million at December 31, 2000 and $2 million at
     December 31, 1999.


                                       88
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


(14) Securities Sold Under Agreements to Repurchase

     Securities sold under agreements to repurchase are summarized as follows:

<TABLE>
<CAPTION>
     (Dollars in Thousands)                                          2000       1999       1998
     --------------------------------------------------------------------------------------------
     <S>                                                           <C>        <C>        <C>
     Balance at year end .......................................   $  --      $  --      $  --
     Average balance outstanding during the year ...............       753      1,987      1,877
     Maximum amount outstanding at any month-end during the year    39,250     24,875     50,088
     Weighted average interest rate during the year ............      6.10%      5.42%      5.90%
     Weighted average interest rate at year end ................         -          -          -
     ============================================================================================
</TABLE>

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

(15) Federal Home Loan Bank Advances

     FHLB advances are summarized as follows:

<TABLE>
<CAPTION>
     (Dollars in Thousands)                                           2000          1999          1998
     -----------------------------------------------------------------------------------------------------
     <S>                                                           <C>           <C>           <C>
     Balance at year end .......................................   $1,978,348    $2,122,407    $  695,012
     Average balance outstanding during the year ...............    2,117,787     1,169,474       247,521
     Maximum amount outstanding at any month-end during the year    2,460,276     2,122,407       695,012
     Weighted average interest rate during the year ............         6.15%         5.44%         5.85%
     Weighted average interest rate at year end ................         6.26          5.77          5.47
     As of year end secured by:
       Loans receivable ........................................   $2,222,863    $2,395,599    $  789,588
     =====================================================================================================
</TABLE>

     In addition to the collateral  securing  existing  advances,  Downey had an
     additional  $779 million in loans  available as  collateral  for any future
     advances as of December 31, 2000.

     FHLB advances have the following maturities at December 31, 2000:

<TABLE>
<CAPTION>
     (In Thousands)
     ---------------------------------------------------------------------------
     <S>                                                              <C>
     2001 .....                                                       $1,491,293
     2002 .....                                                           55,921
     2003 .....                                                              134
     2004 .....                                                             --
     2005 .....                                                            1,000
     Thereafter                                                          430,000
     ---------------------------------------------------------------------------
       Total ..                                                       $1,978,348
     ===========================================================================
</TABLE>


                                       89
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


(16) Commercial Paper

     Commercial paper borrowings are summarized as follows:

<TABLE>
<CAPTION>
     (Dollars in Thousands)                                          2000     1999       1998
     -------------------------------------------------------------------------------------------
     <S>                                                           <C>       <C>       <C>
     Balance at year end .......................................   $  --     $  --     $   --
     Average balance outstanding during the year ...............      --        --       30,589
     Maximum amount outstanding at any month-end during the year      --        --      103,749
     Weighted average interest rate during the year ............        -%        -%       6.32%
     Weighted average interest rate at end of year .............        -         -           -
     ===========================================================================================
</TABLE>

     The commercial paper program was discontinued during 1998.

(17) Other Borrowings

     Other borrowings are summarized as follows:

<TABLE>
<CAPTION>
                                                                               December 31,
                                                                              --------------
     (Dollars In Thousands)                                                   2000      1999
     ---------------------------------------------------------------------------------------
     <S>                                                                       <C>      <C>
     Long-term notes  payable to banks,  secured by real estate and mortgage
       loans with a carrying  value of $669 at December 31, 2000, bearing
       interest rates of 7.88% to 9.88% ....................................   $224     $373
     =======================================================================================
</TABLE>

     Other borrowings have the following maturities at December 31, 2000:

<TABLE>
<CAPTION>
     (In Thousands)
     ---------------------------------------------------------------------------
     <S>                                                                   <C>
     2001 .....                                                            $ 186
     2002 .....                                                                7
     2003 .....                                                             --
     2004 .....                                                             --
     2005 .....                                                             --
     Thereafter                                                               31
     ---------------------------------------------------------------------------
       Total ..                                                            $ 224
     ===========================================================================
</TABLE>


                                       90
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


(18) Income Taxes

     Current  income  taxes  payable were $4 million and $12 million at December
     31, 2000 and 1999, respectively.

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

<TABLE>
<CAPTION>
                                                                     December 31,
                                                                 ---------------------
     (In Thousands)                                                2000        1999
     ---------------------------------------------------------------------------------
     <S>                                                         <C>         <C>
     Deferred tax liabilities:
        Tax reserves in excess of base year ..................   $ 22,115    $ 21,904
        Mortgage servicing rights, net of allowances .........     17,783      14,818
        FHLB stock dividends .................................     11,588       8,197
        Deferred loan fees ...................................      6,882       5,344
        Depreciation on premises and equipment ...............      2,093       2,737
        Equity in joint ventures .............................      1,724        --
        Unrealized gains on investment securities ............        519        --
     ---------------------------------------------------------------------------------
           Total deferred tax liabilities ....................     62,704      53,000
     ---------------------------------------------------------------------------------
     Deferred tax assets:
        Loan valuation allowances, net of bad debt charge-offs    (16,172)    (18,017)
        California franchise tax .............................     (5,651)     (3,959)
        Real estate and joint venture valuation allowances ...     (2,734)     (2,180)
        Deferred compensation ................................     (2,289)     (1,895)
        Other deferred income items ..........................     (2,056)     (1,217)
        Unrealized losses on investment securities ...........       --        (1,183)
        Mark to market adjustment on loans held for sale .....        (72)       (357)
        Equity in joint ventures .............................       --          (293)
     ---------------------------------------------------------------------------------
           Total deferred tax assets .........................    (28,974)    (29,101)
     Deferred tax assets valuation allowance .................       --          --
     ---------------------------------------------------------------------------------
     Net deferred tax liability ..............................   $ 33,730    $ 23,899
     =================================================================================
</TABLE>


                                       91
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


     Income taxes (benefits) are summarized as follows:


<TABLE>
<CAPTION>
     (In Thousands)                                2000       1999       1998
     ---------------------------------------------------------------------------
     <S>                                         <C>        <C>        <C>
     Federal:
        Current .....................            $ 48,714   $ 18,382   $ 38,474
        Deferred ....................               5,567     19,821     (5,848)
     ---------------------------------------------------------------------------
           Total federal income taxes            $ 54,281   $ 38,203   $ 32,626
     ===========================================================================
     State:
        Current .....................            $ 16,214   $  8,186   $ 10,955
        Deferred ....................               2,563        418       (413)
     ---------------------------------------------------------------------------
           Total state income taxes .            $ 18,777   $  8,604   $ 10,542
     ===========================================================================
     Total:
        Current .....................            $ 64,928   $ 26,568   $ 49,429
        Deferred ....................               8,130     20,239     (6,261)
     ---------------------------------------------------------------------------
           Total income taxes .......            $ 73,058   $ 46,807   $ 43,168
     ===========================================================================
</TABLE>

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

<TABLE>
<CAPTION>
                                                               2000                1999                 1998
                                                       --------------------------------------------------------------
     (Dollars in Thousands)                             Amount      Percent  Amount      Percent  Amount      Percent
     ----------------------------------------------------------------------------------------------------------------
     <S>                                               <C>           <C>    <C>           <C>    <C>           <C>
     Expected statutory income taxes ...............   $ 60,308      35.0%  $ 38,714      35.0%  $ 35,399      35.0%
     California franchise tax, net of federal income
       tax benefit .................................     12,206       7.1      7,606       6.9      6,880       6.8
     Increase (decrease) resulting from:
       Amortization of goodwill ....................        162       0.1        166       0.2        253       0.3
       Interest on municipal bonds .................        (99)     (0.1)      (105)     (0.1)      (107)     (0.1)
       Other .......................................        481       0.3        426       0.3        743       0.7
     ----------------------------------------------------------------------------------------------------------------
     Income taxes ..................................   $ 73,058      42.4%  $ 46,807      42.3%  $ 43,168      42.7%
     ================================================================================================================
</TABLE>

     Downey  made  income  tax  payments,  net of  refunds,  amounting  to $73.7
     million,   $22.1  million  and  $52.8  million  in  2000,  1999  and  1998,
     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.  Downey  made a
     payment  of $10.7  million  during  the year to settle  federal  tax claims
     related to the sale and  leaseback  of  computer  equipment  in 1990.  This
     amount had been previously reflected in Downey's tax accrual, and therefore
     had no adverse  impact upon current year  earnings.  In addition,  Downey's
     management  believes it has adequately provided for potential exposure with
     regard to other tax issues in the years  currently under  examination.  Tax
     years  subsequent  to 1996  remain  open to review by federal and state tax
     authorities.


                                       92
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


(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  may  redeem,  in  whole or in  part,  the  junior
     subordinated debentures before their maturity at a redemption price of 100%
     of their principal amount plus accrued and unpaid interest on or after July
     23, 2004.

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


                                       93
<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, 2000 and 1999.

<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>
     2000
        Risk-based capital
          (to risk-weighted assets)         $731,844   12.94%        $452,480    8.00%         $565,601   10.00%
        Core capital
          (to adjusted assets) ....          697,715    6.42          325,791    3.00           542,985    5.00
        Tangible capital
          (to adjusted assets) ....          697,715    6.42          162,896    1.50              --         - (1)
        Tier I capital
          (to risk-weighted assets)          697,715   12.34             --         - (1)       339,360    6.00
     --------------------------------------------------------------------------------------------------------------
     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
     ==============================================================================================================
<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  adequately  capitalized  under the
     prompt corrective action  regulations of the OTS following the distribution
     or the amount of the  dividend  exceeds the Bank's  retained net income for
     that year to date plus retained net income for the preceding two years.

     As of December  31,  2000,  the Bank had the capacity to declare a dividend
     totaling $193 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 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,



                                       94
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


     $13,000 and $45.7 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 2000 and 1999, no shares were granted under the LTIP, while in 1998,
     120,335 shares were granted.

     Options  outstanding  under  the  LTIP at  December  31,  2000 and 1999 are
     summarized as follows:

<TABLE>
<CAPTION>
                                                             Outstanding Options
                                                             -------------------
                                                             Number     Average
                                                               of       Option
                                                             Shares      Price
     ---------------------------------------------------------------------------
     <S>                                                    <C>        <C>
     December 31, 1997                                      143,886    $   13.40
     Options granted .                                      120,335        25.44
     Options exercised                                      (38,567)       13.26
     Options canceled                                        (6,203)       13.39
     ---------------------------------------------------------------------------
     December 31, 1998                                      219,451        20.03
     Options granted .                                         --        --
     Options exercised                                      (16,633)       13.16
     Options canceled                                        (2,068)       13.39
     ---------------------------------------------------------------------------
     December 31, 1999                                      200,750        20.66
     Options granted .                                         --        --
     Options exercised                                      (57,332)       14.91
     Options canceled                                          --        --
     ---------------------------------------------------------------------------
     December 31, 2000                                      143,418    $   22.96
     ===========================================================================
</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,  2000,  143,418  were  outstanding  at a weighted  average
     remaining  contractual  life of six years,  of which  71,214  options  were
     exercisable  at a  weighted  average  option  price per share of $20.45 and
     127,722 shares were available for future grants under the LTIP. At December
     31,  1999 and 1998,  options  of 100,344  and  78,439,  respectively,  were
     exercisable  at a  weighted  average  option  price per share of $16.30 and
     $13.26, respectively.

     Downey measures its employee  stock-based  compensation  arrangements under
     the provisions of APB 25.  Accordingly,  no  compensation  expense has been
     recognized for the stock option plan. Had compensation expense for Downey's
     stock option plan been determined based on the fair value at the grant date
     for



                                       95
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


     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)       2000         1999         1998
     ---------------------------------------------------------------------------
     <S>                                       <C>          <C>          <C>
     Net income:
         As reported .............             $99,251      $63,804      $57,973
         Pro forma ...............              99,172       63,611       57,954
     Earnings per share - Basic:
         As reported .............               $3.52        $2.27        $2.06
         Pro forma ...............                3.52         2.26         2.06
     Earnings per share - Diluted:
         As reported .............                3.51         2.26         2.05
         Pro forma ...............                3.51         2.26         2.05
     ===========================================================================
</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>
                                           2000 (1)       1999 (1)        1998
     ---------------------------------------------------------------------------
     <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 2000, 1999 and 1998 follows:

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


                                       96
<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 $2.0 million for 2000,
     compared to $1.9 million in both 1999 and 1998.

     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, 66 management
     employees and seven  directors are eligible to  participate in the program.
     During 2000,  23  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
     $3.9  million,  $3.6  million  and $3.1  million  in 2000,  1999 and  1998,
     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,   commitments   to  sell  or  purchase   loans  and
     mortgage-backed securities, letters of credit, lines of credit and loans in
     process.  The contract or notional amounts of those instruments reflect the
     extent  of  involvement  Downey  has in  particular  classes  of  financial
     instruments.

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


                                       97
<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)                                                   2000       1999
     ----------------------------------------------------------------------------------
     <S>                                                            <C>        <C>
     Commitments to sell loans and mortgage-backed securities ...   $149,898   $210,092
     Commitments to purchase investment securities ..............       --       15,000
     Commitments to purchase loans and mortgage-backed securities       --       13,992
     Commitments to originate loans:
        Adjustable ..............................................    454,782    422,145
        Fixed ...................................................    239,415    184,695
     Undisbursed loan funds and unused lines of credit ..........    148,304    209,414
     Standby letters of credit and other contingent liabilities .      2,446      2,423
     ==================================================================================
</TABLE>

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

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

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

     Downey receives  collateral to support  commitments for which collateral is
     deemed  necessary.  The most significant  categories of collateral  include
     real  estate  properties  underlying  mortgage  loans,  liens  on  personal
     property and cash on deposit with Downey.  At December 31, 2000, the extent
     of  collateral  supporting  mortgage and other loans varied from nothing to
     100% of the maximum credit exposure.

     In connection with its interest rate risk management, Downey may enter into
     interest rate exchange  agreements ("swap contracts") with certain national
     investment  banking  firms  under  terms  that  provide  mutual  payment of
     interest  on the  outstanding  notional  amount of the swap.  The effect of
     these swaps serve to reduce Downey's  interest rate risk between  repricing
     assets and  liabilities.  At December  31,  2000,  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 our secondary  marketing
     activities.  Downey utilizes  forward sale and purchase  contracts to hedge
     the value of loans  designated for sale against adverse changes in interest
     rates. These contracts are used to secure an agreed upon price at a future,
     fixed delivery or receipt  settlement date and the contracts mature in less
     than one year.  Gains or losses are  recognized  at the time the  contracts
     mature  and are  recorded  as a  component  of gains on sales of loans  and
     mortgage-backed  securities.  At December 31, 2000, forward sales contracts
     to  hedge  loans  designated  for  sale  amounted  to $150  million.  These
     contracts  expose Downey to credit risk in the event of  nonperformance  by
     the  other  parties--primarily  government-sponsored  enterprises  such  as
     Federal  National  Mortgage  Association  or  Federal  Home  Loan  Mortgage
     Corporation  --to such  agreements.  This risk  consists  primarily  of the
     termination value of



                                       98
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


     agreements  where Downey is in a favorable  position.  Downey  controls the
     credit risk  associated  with its other  parties to the various  derivative
     agreements   through   credit  review,   exposure   limits  and  monitoring
     procedures. Downey does not anticipate nonperformance by the other parties.

(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.


                                       99
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


     Borrowings

     For short-term borrowings, fair value approximates carrying value. The fair
     value  of   long-term   borrowings   is  based  on  their   interest   rate
     characteristics.  For variable  rate  borrowings,  fair values  approximate
     carrying  values.  For  fixed  rate  borrowings,  fair  value  is  based on
     discounting  future contractual cash flows by 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 with a fair value of less than $1 million.  See
     Note 23 on page 97, for information  concerning the notional amount of such
     financial instruments.


                                      100
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


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

<TABLE>
<CAPTION>
                                                                              December 31, 2000         December 31, 1999
                                                                           -------------------------------------------------
                                                                            Carrying     Estimated    Carrying    Estimated
     (In Thousands)                                                         Amount (1)   Fair Value   Amount (1)  Fair Value
     -----------------------------------------------------------------------------------------------------------------------
     <S>                                                                   <C>           <C>         <C>          <C>
     Assets:
     Cash ..............................................................   $  108,202    $ 108,202   $  121,146   $  121,146
     Federal funds .....................................................       19,601       19,601            1            1
     U.S. Government and agency obligations and other
        investment securities available for sale .......................      305,615      305,615      171,823      171,823
     Municipal securities held to maturity .............................        6,550        6,534        6,728        6,710
     Loans held for sale ...............................................      251,572      254,545      136,005      136,298
     Mortgage-backed securities available for sale .....................       10,203       10,203       21,719       21,719
     Loans receivable held for investment: Loans secured by real estate:
          Residential:
            Adjustable .................................................    8,990,538    9,104,257    7,319,949    7,308,374
            Fixed ......................................................      479,877      481,616      536,884      533,673
          Other ........................................................      236,659      243,585      269,833      276,140
        Non-mortgage loans:
          Commercial ...................................................       16,275       16,979       17,259       17,912
          Consumer .....................................................       99,229      100,533      444,414      453,425
     Interest-bearing advances to joint ventures .......................       12,339       12,339       15,613       15,613
     Federal Home Loan Bank stock ......................................      106,356      106,356      102,392      102,392
     MSRs and loan servicing portfolio (2) .............................       40,731       43,168       34,263       38,807

     Liabilities:
     Deposits:
        Transaction accounts ...........................................    1,483,486    1,483,486    1,489,939    1,489,939
        Certificates of deposit ........................................    6,599,203    6,619,453    5,072,822    5,025,389
     Borrowings ........................................................    1,978,572    1,978,808    2,122,780    2,055,493
     Capital securities ................................................      120,000      122,400      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.
     (2)  Includes  mortgage  servicing rights acquired prior to January 1, 1996
          when Downey began capitalizing the asset.
</FN>
</TABLE>


                                      101
<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 69. 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.


                                      102
<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 2000, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                 Real Estate
     (In Thousands)                                Banking        Investment     Elimination      Totals
     -------------------------------------------------------------------------------------------------------
     <S>                                        <C>             <C>             <C>             <C>
     Year ended December 31 2000:
     Net interest income ....................   $    262,232    $        243    $       --      $    262,475
     Provision for loan losses ..............          3,251            --              --             3,251
     Other income ...........................         41,406           9,148            --            50,554
     Operating expense ......................        135,996           1,473            --           137,469
     Net intercompany income (expense) ......            397            (397)           --              --
     -------------------------------------------------------------------------------------------------------
     Income before income tax expense .......        164,788           7,521            --           172,309
     Income tax expense .....................         69,966           3,092            --            73,058
     -------------------------------------------------------------------------------------------------------
        Net income ..........................   $     94,822    $      4,429    $       --      $     99,251
     =======================================================================================================
     Assets at December 31 2000:
        Loans and mortgage-backed securities    $ 10,084,353    $       --      $       --      $ 10,084,353
        Real estate held for investment .....           --            17,641            --            17,641
        Other ...............................        806,201           3,584         (17,916)        791,869
     -------------------------------------------------------------------------------------------------------
           Total assets .....................     10,890,554          21,225         (17,916)     10,893,863
     -------------------------------------------------------------------------------------------------------
     Equity .................................   $    624,636    $     17,916    $    (17,916)   $    624,636
     =======================================================================================================
     Year ended December 31 1999:
     Net interest income (expense) ..........   $    207,784    $       (306)   $       --      $    207,478
     Provision for loan losses ..............         11,270            --              --            11,270
     Other income ...........................         39,755          19,523            --            59,278
     Operating expense ......................        143,081           1,794            --           144,875
     Net intercompany income (expense) ......            393            (393)           --              --
     -------------------------------------------------------------------------------------------------------
     Income before income 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 for (reduction of) 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
     =======================================================================================================
</TABLE>


                                      103
<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, 2000 and 1999:

<TABLE>
<CAPTION>
                                                           December 31, September 30,  June 30,    March 31,
     (In Thousands, Except Per Share Data)                     2000         2000         2000         2000
     -------------------------------------------------------------------------------------------------------
     <S>                                                     <C>          <C>          <C>          <C>
     Total interest income ...............................   $209,775     $204,370     $192,700     $177,515
     Total interest expense ..............................    140,838      137,160      129,135      114,752
     -------------------------------------------------------------------------------------------------------
       Net interest income ...............................     68,937       67,210       63,565       62,763
     Provision for loan losses ...........................        511        1,007          942          791
     -------------------------------------------------------------------------------------------------------
       Net interest income after provision for loan losses     68,426       66,203       62,623       61,972
     Total other income ..................................      7,545       12,065        9,467       21,477
     Total operating expense .............................     36,344       32,476       32,924       35,725
     -------------------------------------------------------------------------------------------------------
     Income before income taxes ..........................     39,627       45,792       39,166       47,724
     Income  taxes .......................................     16,632       19,454       16,684       20,288
     -------------------------------------------------------------------------------------------------------
     Net income ..........................................   $ 22,995     $ 26,338     $ 22,482     $ 27,436
     =======================================================================================================
     Net income per share:
       Basic .............................................   $   0.81     $   0.94     $   0.80     $   0.97
       Diluted ...........................................       0.81         0.93         0.80         0.97
     =======================================================================================================
     Market range:
       High bid ..........................................   $  60.88     $  40.94     $  33.00     $  21.44
       Low bid ...........................................      33.13        29.94        20.44        18.75
       End of period .....................................      55.00        39.50        28.98        21.25
     =======================================================================================================
</TABLE>


<TABLE>
<CAPTION>
                                                           December 31, September 30,  June 30,    March 31,
                                                               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>


                                      104
<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:

<TABLE>
     Condensed Balance Sheets
<CAPTION>
                                                                 December 31,
                                                             -------------------
     (In Thousands)                                            2000       1999
     ---------------------------------------------------------------------------
     <S>                                                     <C>        <C>
     Assets
     Cash ................................                   $     11   $      7
     Due from Bank - interest bearing ....                     17,635     12,686
     Investment in subsidiaries:
       Bank ..............................                    722,829    636,213
       Downey Financial Capital Trust I ..                      3,711      3,711
       Downey Affiliated Insurance Agency                         202        204
     Real estate held for investment .....                       --         --
     Other assets ........................                      5,028      5,016
     ---------------------------------------------------------------------------
                                                             $749,416   $657,837
     ===========================================================================
     Liabilities and Stockholders' Equity
     Junior subordinated debentures ......                   $123,711   $123,711
     Accounts payable and accrued expenses                      1,069      1,708
     ---------------------------------------------------------------------------
       Total liabilities .................                    124,780    125,419
     Stockholders' equity ................                    624,636    532,418
     ---------------------------------------------------------------------------
                                                             $749,416   $657,837
     ===========================================================================
</TABLE>


                                      105
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


<TABLE>
     Condensed Statements of Income and Other Comprehensive Income
<CAPTION>
                                                                                Years Ended December 31,
                                                                         ------------------------------------
     (In Thousands)                                                         2000         1999         1998
     --------------------------------------------------------------------------------------------------------
     <S>                                                                 <C>          <C>          <C>
     Income:
       Dividends from the Bank .......................................   $  21,985    $   5,011    $   9,537
       Interest income ...............................................         933        1,635          374
       Other income ..................................................          59          104           60
     --------------------------------------------------------------------------------------------------------
          Total income ...............................................      22,977        6,750        9,971
     --------------------------------------------------------------------------------------------------------
     Expense:
       Interest expense ..............................................      12,163        5,353         --
       Provision for (reduction of) losses on real estate ............        --         (1,720)          24
       General and administrative expense ............................         816          896          793
     --------------------------------------------------------------------------------------------------------
          Total expense ..............................................      12,979        4,529          817
     --------------------------------------------------------------------------------------------------------
     Income before income taxes and equity in undistributed
       net income of subsidiaries ....................................       9,998        2,221        9,154
     Income tax benefit ..............................................       4,895        1,162          157
     --------------------------------------------------------------------------------------------------------
     Income before equity in undistributed net income
       of subsidiaries ...............................................      14,893        3,383        9,311
     Equity in undistributed net income of subsidiaries ..............      84,358       60,421       48,662
     --------------------------------------------------------------------------------------------------------
       Net income ....................................................      99,251       63,804       57,973
     --------------------------------------------------------------------------------------------------------
     Other comprehensive income (loss), net of
       income taxes (benefits):
       Unrealized gains (losses) on securities available for sale:
          U.S. Treasury securities, agency obligations and other
            investment securities available for sale, at fair value ..       2,032       (1,874)       1,104
          Mortgage-backed securities available for sale, at fair value         173         (281)        (422)
          Less reclassification of realized gains (losses)
            included in net income ...................................         (50)         166           39
     --------------------------------------------------------------------------------------------------------
       Total other comprehensive income (loss), net of
          income taxes (benefits) ....................................       2,255       (2,321)         643
     --------------------------------------------------------------------------------------------------------
       Comprehensive income ..........................................   $ 101,506    $  61,483    $  58,616
     ========================================================================================================
</TABLE>


                                      106
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements----(Continued)


<TABLE>
     Condensed Statements of Cash Flows
<CAPTION>
                                                                        Years Ended December 31,
                                                                 ------------------------------------
     (In Thousands)                                                 2000         1999         1998
     ------------------------------------------------------------------------------------------------
     <S>                                                         <C>          <C>          <C>
     Cash flows from operating activities:
       Net income ............................................   $  99,251    $  63,804    $  57,973
       Equity in undistributed net income of subsidiaries ....     (84,358)     (60,421)     (48,662)
       Provision for (recovery of) losses on real estate .....        --         (1,720)          24
       Increase (decrease) in liabilities ....................        (639)       1,449          134
       Other, net ............................................         (13)       1,022          807
     ------------------------------------------------------------------------------------------------
          Net cash provided by operating activities ..........      14,241        4,134       10,276
     ------------------------------------------------------------------------------------------------
     Cash flows from investing activities:
       Capital contribution to the Bank ......................        --       (107,600)        --
       Increase in due from Bank - interest bearing ..........      (4,949)      (4,165)      (1,886)
       Sales of wholly owned real estate .....................        --          2,201         --
     ------------------------------------------------------------------------------------------------
          Net cash used for investing activities .............      (4,949)    (109,564)      (1,886)
     ------------------------------------------------------------------------------------------------
     Cash flows from financing activities:
       Issuance of junior subordinated debentures ............        --        115,063         --
       Exercise of stock options .............................         855          219          510
       Dividends on common stock .............................     (10,143)      (9,850)      (8,889)
       Other .................................................        --           --            (17)
     ------------------------------------------------------------------------------------------------
          Net cash provided by (used for) financing activities      (9,288)     105,432       (8,396)
     ------------------------------------------------------------------------------------------------
     Net increase (decrease) in cash and cash equivalents ....           4            2           (6)
     Cash and cash equivalents at beginning of period ........           7            5           11
     ------------------------------------------------------------------------------------------------
     Cash and cash equivalents at end of period ..............   $      11    $       7    $       5
     ================================================================================================
</TABLE>

(29) Sale of Subsidiary

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


                                      107
<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 25, 2001, 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 2000.

         None.


                                      108
<PAGE>


(c)  Exhibits.

    Exhibit
     Number                          Description
    -------                          -----------
     3.1  (2) Certificate of Incorporation of Downey Financial Corp.

     3.2  (1) Bylaws of Downey Financial Corp.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                      109
<PAGE>


(c)  Exhibits (Continued)

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

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

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

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

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

     10.13 Deferred Compensation Program.

     10.14 Director Retirement Benefits.

     22   Subsidiaries.

     23   Consent of Independent Auditors.

     27   Financial Data Schedule (Only filed as part of the EDGAR version).

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

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


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<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, 2001

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
     ---------                           -----                        ----

                                  Chairman of the Board           March 7, 2001
-------------------------                Director
     Maurice L. McAlister

 /s/ CHERYL E. OLSON             Vice Chairman of the Board       March 7, 2001
-------------------------                Director
     Cheryl E. Olson

 /s/ DANIEL D. ROSENTHAL              President and               March 7, 2001
-------------------------        Chief Executive Officer
     Daniel D. Rosenthal                 Director


 /s/ THOMAS E. PRINCE           Executive Vice President          March 7, 2001
-------------------------        Chief Financial Officer
     Thomas E. Prince           (Principal Financial and
                                  Accounting Officer)


 /s/ MICHAEL ABRAHAMS                    Director                 March 7, 2001
-------------------------
  Michael Abrahams

 /s/ DR. PAUL KOURI                      Director                 March 7, 2001
-------------------------
     Dr. Paul Kouri

 /s/ BRENT MCQUARRIE                     Director                 March 7, 2001
-------------------------
     Brent McQuarrie

 /s/ LESTER C. SMULL                     Director                 March 7, 2001
-------------------------
     Lester C. Smull

 /s/ SAM YELLEN                          Director                 March 7, 2001
-------------------------
     Sam Yellen


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