Edgar Filing: DOWNEY FINANCIAL CORP

Securities and Exchange Commission Form 10-Q dated June 30, 2003

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SECURITITES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

___________________________

FORM 10-Q

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED

For the quarterly period ended June 30, 2003

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________

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)	33-0633413 (I.R.S. Employer Identification No.)
3501 Jamboree Road, Newport Beach, CA (Address of principal executive office)	92660 (Zip Code)
Registrant's telephone number, including area code	(949) 854-0300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Common Stock, $0.01 Par Value	Name of each exchange on which registered New York Stock Exchange Pacific Exchange

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

None

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

At June 30, 2003, 27,928,722 shares of the Registrant's Common Stock, $0.01 par value were outstanding.

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DOWNEY FINANCIAL CORP.

JUNE 30, 2003 QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

PART I

ITEM 1. –

FINANCIAL INFORMATION

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income

Consolidated Statements of Cash Flows

Notes To Consolidated Financial Statements

ITEM 2. –

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3. –

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. –

CONTROLS AND PROCEDURES

PART II

ITEM 1. –

LEGAL PROCEEDINGS

ITEM 2. –

CHANGES IN SECURITIES AND USE OF PROCEEDS

ITEM 3. –

DEFAULTS UPON SENIOR SECURITIES

ITEM 4. –

SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS

ITEM 5. –

OTHER INFORMATION

ITEM 6. –

EXHIBITS AND REPORTS ON FORM 8-K

AVAILABILITY OF REPORTS

SIGNATURES

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PART I

ITEM 1. – FINANCIAL INFORMATION

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES

Consolidated Balance Sheets

			June 30,			December 31,			June 30,
(Dollars in Thousands, Except Per Share Data)			2003			2002			2002

Assets
Cash			$	136,423		$	123,524		$	117,788
Federal funds				89,210			2,555			16,401

	Cash and cash equivalents			225,633			126,079			134,189
Trading securities, at fair value				201,781			-			-
U.S. Treasury securities, agency obligations and other investment
	securities available for sale, at fair value			276,904			457,797			292,832
Municipal securities held to maturity, at amortized cost (estimated
	fair value of $6,202 at June 30, 2003 and December 31, 2002,
	and $6,373 at June 30, 2002)			6,215			6,216			6,387
Loans and securities purchased under resale agreements				60,000			-			-
Loans held for sale, at lower of cost or fair value				721,929			652,052			381,465
Mortgage-backed securities available for sale, at fair value				1,736			2,253			58,122
Loans receivable held for investment				10,049,361			10,322,637			9,846,446
Investments in real estate and joint ventures				36,297			33,890			40,283
Real estate acquired in settlement of loans				9,464			12,360			13,528
Premises and equipment				113,434			113,536			113,417
Federal Home Loan Bank stock, at cost				120,517			117,563			114,452
Mortgage servicing rights, net				48,722			57,729			59,771
Other assets				75,557			76,039			69,536

			$	11,947,550		$	11,978,151		$	11,130,428

Liabilities and Stockholders’ Equity
Deposits			$	8,895,452		$	9,238,350		$	8,690,558
Federal Home Loan Bank advances and other borrowings				1,675,971			1,624,084			1,413,607
Company obligated mandatorily redeemable capital securities of
	subsidiary trust holding solely junior subordinated debentures
	of the Company ("Capital Securities")			120,000			120,000			120,000
Accounts payable and accrued liabilities				303,921			102,533			64,709
Deferred income taxes				82,841			70,080			54,118

	Total liabilities			11,078,185			11,155,047			10,342,992

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; issued 28,235,022 shares at June 30, 2003, December 31, 2002
	and June 30, 2002			282			282			282
Additional paid-in capital				93,792			93,792			93,792
Accumulated other comprehensive income (loss)				1,135			(1,422	)		236
Retained earnings				786,326			742,622			693,126
Treasury stock, at cost, 306,300 shares at June 30, 2003 and
		December 31, 2002		(12,170	)		(12,170	)		-

	Total stockholders’ equity			869,365			823,104			787,436

			$	11,947,550		$	11,978,151		$	11,130,428

See accompanying notes to consolidated financial statements.

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DOWNEY FINANCIAL CORP. AND SUBSIDIARIES

Consolidated Statements of Income

		Three Months Ended						Six Months Ended
		June 30,						June 30,

(Dollars in Thousands, Except Per Share Data)		2003			2002			2003			2002

Interest income
Loans receivable		$	130,884		$	148,448		$	273,373		$	308,725
U.S. Treasury securities and agency obligations			1,886			2,163			5,023			5,196
Mortgage-backed securities			19			942			35			2,216
Other investments			1,485			1,872			3,140			3,686

	Total interest income		134,274			153,425			281,571			319,823

Interest expense
Deposits			42,369			60,397			90,219			128,756
Borrowings			14,559			14,859			29,976			29,912
Capital securities			3,041			3,041			6,082			6,082

	Total interest expense		59,969			78,297			126,277			164,750

Net interest income			74,305			75,128			155,294			155,073
Provision for (reduction of) loan losses			(624	)		(1,106	)		(2,333	)		341

	Net interest income after provision for (reduction of) loan losses		74,929			76,234			157,627			154,732

Other income, net
Loan and deposit related fees			13,649			11,396			25,627			22,914
Real estate and joint ventures held for investment, net			2,069			1,016			3,012			4,013
Secondary marketing activities:
	Loan servicing loss, net		(21,692	)		(15,617	)		(35,378	)		(16,205	)
	Net gains on sales of loans and mortgage-backed securities		12,652			6,896			32,415			23,097
	Net gains on sales of mortgage servicing rights		18			12			23			306
Net gains on trading securities			591			-			591			-
Net gains on sales of investment securities			-			19			8			209
Litigation award			265			-			2,717			-
Other			845			380			1,331			1,121

	Total other income, net		8,397			4,102			30,346			35,455

Operating expense
Salaries and related costs			33,028			28,315			67,154			57,752
Premises and equipment costs			7,971			7,754			15,684			14,887
Advertising expense			1,016			1,582			1,809			2,626
SAIF insurance premiums and regulatory assessments			825			762			1,656			1,548
Professional fees			418			233			1,046			797
Other general and administrative expense			8,111			6,350			16,004			12,561

	Total general and administrative expense		51,369			44,996			103,353			90,171
Net operation of real estate acquired in settlement of loans			(111	)		27			186			(31	)

	Total operating expense		51,258			45,023			103,539			90,140

Income before income taxes			32,068			35,313			84,434			100,047
Income taxes			13,553			14,938			35,702			42,294

	Net income	$	18,515		$	20,375		$	48,732		$	57,753

PER SHARE INFORMATION

Basic		$	0.66		$	0.72		$	1.74		$	2.04

Diluted		$	0.66		$	0.72		$	1.74		$	2.04

Cash dividends declared and paid		$	0.09		$	0.09		$	0.18		$	0.18

Weighted average diluted shares outstanding		27,970,022			28,284,493			27,968,194			28,277,833

See accompanying notes to consolidated financial statements.

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DOWNEY FINANCIAL CORP. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

			Three Months Ended						Six Months Ended
			June 30,						June 30,

(In Thousands)			2003			2002			2003			2002

Net income			$	18,515		$	20,375		$	48,732		$	57,753

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		97			811			(639	)		(545	)
	Mortgage-backed securities available for sale, at fair value			(5	)		1,862			(12	)		924
	Less reclassification of realized gains included in net income			-			(11	)		(5	)		(121	)
Unrealized losses on cash flow hedges:
	Net derivative instruments			(4,437	)		(3,108	)		(7,735	)		(3,625	)
	Less reclassification of realized losses included in net income			6,059			1,970			10,948			3,842

Total other comprehensive income, net of income taxes				1,714			1,524			2,557			475

Comprehensive income			$	20,229		$	21,899		$	51,289		$	58,228

See accompanying notes to consolidated financial statements.

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DOWNEY FINANCIAL CORP. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

			Six Months Ended
			June 30,

(In Thousands)			2003			2002

Cash flows from operating activities
Net income			$	48,732		$	57,753
Adjustments to reconcile net income to net cash used for operating activities:
	Depreciation and amortization			43,378			29,046
	Provision for losses on loans, real estate acquired in settlement of loans, investments
		in real estate and joint ventures, mortgage servicing rights and other assets		22,737			16,458
	Net gains on sales of loans and mortgage-backed securities, mortgage servicing rights,
		trading and investment securities, real estate and other assets		(35,283	)		(26,597	)
	Interest capitalized on loans (negative amortization)			(5,584	)		(15,844	)
	Federal Home Loan Bank stock dividends			(2,954	)		(1,313	)
Loans originated for sale				(3,768,301	)		(2,331,790	)
Proceeds from sales of loans held for sale, including those sold
	as mortgage-backed securities			3,724,399			2,473,447
Other, net				(33,039	)		(2,287	)

Net cash provided by (used for) operating activities				(5,915	)		198,873

Cash flows from investing activities
Proceeds from sales of:
	U.S. Treasury securities, agency obligations and other investment securities
		available for sale		5,255			88,531
	Wholly owned real estate and real estate acquired in settlement of loans			9,398			20,234
Proceeds from maturities of U.S. Treasury securities, agency obligations
	and other investment securities available for sale			452,630			268,980
Purchase of:
	U.S. Treasury securities, agency obligations and other investment securities
		available for sale		(273,618	)		(250,355	)
	Loans and securities under resale agreements			(60,000	)		-
	Loans receivable held for investment			(667,194	)		(7,302	)
	Premises and equipment			(9,022	)		(11,226	)
Originations of loans receivable held for investment (net of refinances of $ 136,471 for the
	six months ended June 30, 2003 and $144,176 for the six months ended June 30, 2002)			(1,392,818	)		(2,112,320	)
Principal payments on loans receivable held for investment and mortgage-backed
	securities available for sale			2,343,957			1,794,576
Net change in undisbursed loan funds				(6,008	)		55,822
Investments in real estate held for investment				(2,979	)		(14,806	)
Other, net				1,907			2,903

Net cash provided by (used for) investing activities				401,508			(164,963	)

See accompanying notes to consolidated financial statements.

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DOWNEY FINANCIAL CORP. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Continued)

			Six Months Ended
			June 30,

(In Thousands)			2003			2002

Cash flows from financing activities
Net increase (decrease) in deposits			$	(342,898	)	$	70,992
Proceeds from Federal Home Loan Bank advances				6,016,721			2,213,400
Repayments of Federal Home Loan Bank advances and other borrowings				(5,964,834	)		(2,322,505	)
Proceeds from exercise of stock options				-			392
Cash dividends				(5,028	)		(5,080	)

Net cash used for financing activities				(296,039	)		(42,801	)

Net increase (decrease) in cash and cash equivalents				99,554			(8,891	)
Cash and cash equivalents at beginning of period				126,079			143,080

Cash and cash equivalents at end of period			$	225,633		$	134,189

Supplemental disclosure of cash flow information:
	Cash paid during the period for:
		Interest	$	126,592		$	160,925
		Income taxes		42,550			18,509
Supplemental disclosure of non-cash investing:
	Loans transferred to held for investment from held for sale			647			2,015
	Loans transferred from held for investment to held for sale			3,655			-
	Loans exchanged for mortgage-backed securities			3,205,813			2,169,126
	Trading and investment securities purchased and not settled			205,125			-
	Real estate acquired in settlement of loans			8,532			12,973
	Loans to facilitate the sale of real estate acquired in settlement of loans			3,171			8,275

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE (1) – Basis of Financial Statement Presentation

In the opinion of Downey Financial Corp. and subsidiaries ("Downey," "we," "us" and "our"), the accompanying consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of Downey’s financial condition as of June 30, 2003, December 31, 2002 and June 30, 2002, the results of operations and comprehensive income for the three months and six months ended June 30, 2003 and 2002, and changes in cash flows for the six months ended June 30, 2003 and 2002. Certain prior period amounts have been reclassified to conform to the current period presentation.

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and are in compliance with the instructions for Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial condition, results of operations, comprehensive income and cash flows. The following information under the heading Management’s Discussion and Analysis of Financial Condition and Results of Operations presumes that the interim consolidated financial statements will be read in conjunction with Downey’s Annual Report on Form 10-K for the year ended December 31, 2002, which contains among other things, a description of the business, the latest audited consolidated financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2002 and for the year then ended. Therefore, only material changes in financial condition and results of operations are discussed in the remainder of Part I.

NOTE (2) – Mortgage Servicing Rights

The following table summarizes the activity in mortgage servicing rights and its related allowance for the periods indicated and other related financial data.

			Three Months Ended

			June 30,			March 31,			December 31,			September 30,			June 30,
(Dollars in Thousands)			2003			2003			2002			2002			2002

Gross balance at beginning of period			$	92,178		$	90,584		$	83,705		$	81,100		$	74,914
Additions				15,405			14,954			18,779			9,304			10,156
Amortization				(9,951	)		(4,771	)		(4,146	)		(4,120	)		(3,253	)
Sales				-			-			(1,319	)		-			-
Impairment write-down				(7,684	)		(8,589	)		(6,435	)		(2,579	)		(717	)

	Gross balance at end of period			89,948			92,178			90,584			83,705			81,100

Allowance balance at beginning of period				35,672			32,855			36,793			21,329			6,333
Provision for impairment				13,238			11,406			2,497			18,043			15,713
Impairment write-down				(7,684	)		(8,589	)		(6,435	)		(2,579	)		(717	)

	Allowance balance at end of period			41,226			35,672			32,855			36,793			21,329

		Total mortgage servicing rights, net	$	48,722		$	56,506		$	57,729		$	46,912		$	59,771

As a percentage of associated mortgage loans				0.55	%		0.67	%		0.72	%		0.64	%		0.88	%
Estimated fair value ^(a)			$	48,722		$	56,506		$	57,736		$	46,986		$	59,771
Weighted average expected life (in months)				31			39			43			39			61
Custodial account earnings rate				1.26	%		1.58	%		1.61	%		2.06	%		3.82	%
Weighted average discount rate				7.47			7.39			8.35			8.19			9.10

At period end
Mortgage loans serviced for others:
	Total		$	8,980,037		$	8,535,480		$	8,316,236		$	7,502,157		$	6,962,403
	With capitalized mortgage servicing rights:^(a)
		Amount		8,916,259			8,460,152			8,036,393			7,355,700			6,807,306
		Weighted average interest rate		6.12	%		6.35	%		6.51	%		6.71	%		6.80	%

Custodial escrow balances			$	16,527		$	7,578		$	15,243		$	21,628		$	13,044

^(a) The estimated fair value may exceed book value for certain asset strata and excluded loans sold or securitized prior to 1996 and loans temporarily sub-serviced without capitalized mortgage servicing rights.

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			Six Months Ended June 30,

(Dollars in Thousands)			2003			2002

Gross balance at beginning of period			$	90,584		$	65,630
Additions				30,359			25,153
Amortization				(14,722	)		(6,169	)
Sales				-			(35	)
Impairment write-down				(16,273	)		(3,479	)

	Gross balance at end of period			89,948			81,100

Allowance balance at beginning of period				32,855			8,735
Provision for impairment				24,644			16,073
Impairment write-down				(16,273	)		(3,479	)

	Allowance balance at end of period			41,226			21,329

		Total mortgage servicing rights, net	$	48,722		$	59,771

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

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

		Expected			Custodial
		Prepayment			Accounts			Discount
(Dollars in Thousands)		Speeds			Rate			Rate			Combination

Increase rates 100 basis points:^(a)
	Increase (decrease) in fair value	$	41,245		$	4,607		$	(405	)	$	41,579
	Reduction of (increase in) valuation allowance		36,316			4,365			(405	)		36,605

Decrease rates 100 basis points:^(b)
	Increase (decrease) in fair value		(14,003	)		(4,292	)		729			(17,815	)
	Reduction of (increase in) valuation allowance		(14,003	)		(4,292	)		729			(17,815	)

^(a) The weighted-average expected life of the mortgage servicing rights portfolio is 84 months.
^(b) The weighted-average expected life of the mortgage servicing rights portfolio is 31 months.

The following table presents a breakdown of the components of loan servicing loss included in Downey’s results of operations for the periods indicated.

		Three Months Ended

		June 30,			March 31,			December 31,			September 30,			June 30,
(In Thousands)		2003			2003			2002			2002			2002

Net cash servicing fees		$	5,117		$	5,016		$	4,680		$	4,382		$	4,020
Payoff and curtailment interest cost ^(a)			(3,620	)		(2,525	)		(2,498	)		(1,182	)		(671	)
Amortization of MSRs			(9,951	)		(4,771	)		(4,146	)		(4,120	)		(3,253	)
Provision for impairment of MSRs			(13,238	)		(11,406	)		(2,497	)		(18,043	)		(15,713	)

	Total loan servicing loss, net	$	(21,692	)	$	(13,686	)	$	(4,461	)	$	(18,963	)	$	(15,617	)

^(a) Represents Downey’s contractual obligation to pay interest at the borrower’s loan rate from the date the loan is repaid until the funds are remitted to the investor. This does not include the benefit of the use of repaid loan funds to reduce borrowings and its associated interest expense, which is reported in net interest income.

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		Six Months Ended June 30,

(In Thousands)		2003			2002

Net cash servicing fees		$	10,133		$	7,474
Payoff and curtailment interest cost ^(a)			(6,145	)		(1,437	)
Amortization of MSRs			(14,722	)		(6,169	)
Provision for impairment of MSRs			(24,644	)		(16,073	)

	Total loan servicing loss, net	$	(35,378	)	$	(16,205	)

NOTE (3) – Derivatives, Hedging Activities, Off-Balance Sheet Arrangements and Contractual Obligations

Derivatives

Downey offers short-term interest rate lock commitments to help attract potential home loan borrowers. The commitments guarantee a specified interest rate for a loan if underwriting standards are met, but do not obligate the potential borrower. Accordingly, some commitments never become loans and merely expire. The residential one-to-four unit rate lock commitments Downey ultimately expects to result in loans and sell in the secondary market are treated as derivatives. Consequently, as derivatives, the hedging of the expected rate lock commitments do not qualify for hedge accounting. Associated fair value adjustments to the notional amount of the expected rate lock commitments are recorded in current earnings under net gains (losses) on sales of loans and mortgage-backed securities with an offset to the balance sheet in either other assets, or accounts payable and accrued liabilities. Fair values for the notiona l amount of expected rate lock commitments are based on observable market prices acquired from third parties. The carrying amount of loans held for sale includes a basis adjustment to the loan balance at funding resulting from the change in fair value of the rate lock derivative from the date of commitment to the date of funding. At June 30, 2003, Downey had a notional amount of expected rate lock commitments identified to sell as part of its secondary marketing activities of $951 million, with a change in fair value resulting in a gain of $7.0 million.

Hedging Activities

As part of secondary marketing activities, Downey typically utilizes short-term forward sale and purchase contracts—derivatives—that mature in less than one year to offset the impact of changes in market interest rates on the value of residential one-to-four unit expected rate lock commitments and loans held for sale. Downey does not generally enter into derivative transactions for purely speculative purposes. Contracts designated as hedges for the forecasted sale of loans from our held for sale portfolio are accounted for as cash flow hedges because these contracts have a high correlation to the price movement of the loans being hedged (within a range of 80% - 125%). The measurement approach for determining the ineffective aspects of the hedge is established at the inception of the hedge. Changes in fair value of the notional amount of forward sale contracts not designated as cash flow hedges and the in effectiveness of hedge transactions that are not perfectly correlated are recorded in net gains (losses) on sales of loans and mortgage-backed securities. Changes in fair value of the notional amount of forward sale contracts designated as cash flow hedges for loans held for sale are recorded in other comprehensive income, net of tax, provided cash flow hedge requirements are met. The offset to these changes in fair value of the notional amount of forward sale contracts are recorded in the balance sheet as either other assets, or accounts payable and accrued liabilities. The amounts recorded in accumulated other comprehensive income will be recognized in the income statement when the hedged forecasted transactions settle. Downey estimates that all of the related unrealized gains or losses in accumulated other comprehensive income will be reclassified into earnings within the next three months. Fair values for the notional amount of forward sale contracts are based on observable market prices acquired fr om third parties. At June 30, 2003, the notional amount of forward sale contracts amounted to $1.7 billion, with a change in fair value resulting in a loss of $7.1 million, of which $710 million were designated as cash flow hedges. The notional amount of forward purchase contracts amounted to $139 million, with an estimated fair value loss of $0.5 million.

Downey has not discontinued any designated derivative instruments associated with loans held for sale due to a change in the probability of settling a forecasted transaction.

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The following table shows the impact from non-qualifying hedges and the ineffectiveness of cash flow hedges on net gains (losses) on sales of loans and mortgage-backed securities (i.e., SFAS 133 effect), as well as the impact to other comprehensive income (loss) from qualifying cash flow transactions for the periods indicated. Also shown is the notional amount of expected rate lock commitment derivatives for loans originated for sale, loans held for sale and the notional amounts of their associated hedging derivatives (i.e., forward sale contracts).

				Three Months Ended

				June 30,			March 31,			December 31,			September 30,			June 30,
(In Thousands)				2003			2003			2002			2002			2002

Net gains (losses) on non-qualifying hedge transactions				$	(2,936	)	$	(139	)	$	4,287		$	(2,663	)	$	(390	)
Net gains (losses) on qualifying cash flow hedge transactions:
	Unrealized hedge ineffectiveness				-			-			-			-			-
	Less reclassification of realized hedge ineffectiveness				-			-			-			-			-

		Total net gains (losses) recognized in sales of loans and
			mortgage-backed securities (SFAS 133 effect)		(2,936	)		(139	)		4,287			(2,663	)		(390	)
Other comprehensive loss					(1,622	)		(1,591	)		(1,272	)		(840	)		(1,138	)

Notional amount at period end
Non-qualifying hedge transactions:
	Expected rate lock commitments			$	950,703		$	957,549		$	614,592		$	892,429		$	503,359
	Associated forward sale contracts				985,094			913,034			624,062			1,024,586			501,292
	Associated forward purchase contracts				139,000			6,000			50,000			165,000			3
Qualifying cash flow hedge transactions:
	Loans held for sale, at lower of cost or fair value				721,929			633,676			652,052			665,587			381,465
	Associated forward sale contracts				710,099			624,002			623,975			659,305			378,238

				Six Months Ended June 30,

(In Thousands)				2003			2002

Net gains (losses) on non-qualifying hedge transactions				$	(3,075	)	$	4,474
Net gains (losses) on qualifying cash flow hedge transactions:
	Unrealized hedge ineffectiveness				-			-
	Less reclassification of realized hedge ineffectiveness				-			-

		Total net gains (losses) recognized in sales of loans and
			mortgage-backed securities (SFAS 133 effect)		(3,075	)		4,474
Other comprehensive income (loss)					(3,213	)		217

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

Financial Instruments with Off-Balance Sheet Risk

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

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 commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Undisbursed loan funds and unused lines of credit include funds not disbursed, but committed to construction projects and home equity and commercial lines of credit. Letters of credit are conditional commitments issued by Downey to guarantee the performance of a customer to a third party. We also have entered onto commitments to purchase loans and mortgage-backed securities and to invest in affordable housing funds.

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The following is a summary of commitments and contingent liabilities with off-balance sheet risk at the dates indicated.

		June 30,			March 31,		December 31,		September 30,		June 30,
(In Thousands)		2003			2003		2002		2002		2002

Commitments to originate loans held for investment:
	Adjustable		$	336,303	$	190,737	$	249,121	$	261,365	$	324,686
	Fixed			235		117		716		1,459		2,112
Undisbursed loan funds and unused lines of credit				183,720		178,754		189,283		184,074		188,472
Letters of credit and other contingent liabilities				6,044		6,031		2,662		2,534		2,514
Commitments to purchase loans				40,816		5,200		-		294,476		-
Commitments to invest in affordable housing funds				2,400		2,400		2,400		2,400		2,400

Downey uses the same credit policies in making commitments to originate loans held for investment, lines of credit and letters of credit as it does for on-balance sheet instruments. For commitments to originate loans held for investment, the contract amounts represent exposure to loss from market fluctuations as well as credit loss. In regard to these commitments, adverse changes from market fluctuations are generally not hedged. Downey controls the credit risk of its commitments to originate loans held for investment through credit approvals, limits and monitoring procedures. 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.

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.

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. These swap contracts reduce Downey’s interest rate risk between repricing assets and liabilities. No swap contracts were outstanding at June 30, 2003, December 31, 2002 or June 30, 2002.

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.

NOTE (4) – Income Taxes

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 1997. Downey’s management believes it has adequately provided for potential exposure to issues that may be raised in the years subsequent to 1997, which remain open to review.

NOTE (5) – Employee Stock Option Plans

Downey has a Long Term Incentive Plan (the "LTIP"), which 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 common stock to be available for issuance. 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. No shares have been granted under the LTIP since 1998. At June 30, 2003, Downey had 306,300 shares of treasury stock that may be used to satisfy the exercise of options or for payment of other awards. No other stock based plan exists.

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Downey measures its employee stock-based compensation arrangements under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Accordingly, no compensation expense has been recognized for the stock option plan, as stock options were granted at fair value at the date of grant. Had compensation expense for Downey’s stock option plan been determined based on the fair value estimated using the Black-Scholes model at the grant date for previous awards, Downey’s net income and income per share would have been reduced to the pro forma amounts indicated for the periods below:

		June 30,		March 31,		December 31,			September 30,			June 30,
(In Thousands, Except Per Share Data)		2003		2003		2002			2002			2002

Net income:
	As reported	$	18,515	$	30,217	$	39,972		$	14,568		$	20,375
	Stock-based compensation expense, net of tax		-		-		(4	)		(3	)		(3	)

	Pro forma		18,515		30,217		39,968			14,565			20,372
Earnings per share – Basic:
	As reported	$	0.66	$	1.08	$	1.43		$	0.52		$	0.72
	Pro forma		0.66		1.08		1.43			0.52			0.72
Earnings per share – Diluted:
	As reported		0.66		1.08		1.43			0.52			0.72
	Pro forma		0.66		1.08		1.43			0.52			0.72

		Six Months Ended June 30,

(In Thousands, Except Per Share Data)		2003		2002

Net income:
	As reported	$	48,732	$	57,753
	Stock-based compensation expense, net of tax		-		(6	)

	Pro forma		48,732		57,747
Earnings per share – Basic:
	As reported	$	1.74	$	2.04
	Pro forma		1.74		2.04
Earnings per share – Diluted:
	As reported		1.74		2.04
	Pro forma		1.74		2.04

As of December 31, 2002, stock-based compensation would have been fully expensed over the expected life of the stock options granted, if Downey had recorded stock-based compensation expense.

NOTE (6) – Earnings Per Share

Earnings per share is calculated on both a basic and diluted basis. Basic earnings per share 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 earnings per share 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 the issuance of common stock that then shared in earnings, excluding common shares in treasury.

The following table presents a reconciliation of the components used to derive basic and diluted earnings per share for the periods indicated.

		Three Months Ended June 30,

		2003					2002

				Weighted					Weighted
				Average					Average
		Net		Shares	Per Share		Net		Shares	Per Share
(Dollars in Thousands, Except Per Share Data)		Income		Outstanding	Amount		Income		Outstanding	Amount

Basic earnings per share		$	18,515	27,928,722	$	0.66	$	20,375	28,232,787	$	0.72
Effect of dilutive stock options			-	41,300		-		-	51,706		-

	Diluted earnings per share	$	18,515	27,970,022	$	0.66	$	20,375	28,284,493	$	0.72

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		Six Months Ended June 30,

		2003					2002

				Weighted					Weighted
				Average					Average
		Net		Shares	Per Share		Net		Shares	Per Share
(Dollars in Thousands, Except Per Share Data)		Income		Outstanding	Amount		Income		Outstanding	Amount

Basic earnings per share		$	48,732	27,928,722	$	1.74	$	57,753	28,222,918	$	2.04
Effect of dilutive stock options			-	39,472		-		-	54,915		-

	Diluted earnings per share	$	48,732	27,968,194	$	1.74	$	57,753	28,277,833	$	2.04

There were no options excluded from the computation of earnings per share due to anti-dilution.

NOTE (7) – Business Segment Reporting

The following table presents the operating results and selected financial data by major business segments for the periods indicated.

						Real Estate
(In Thousands)			Banking			Investment			Elimination			Totals

Three months ended June 30, 2003
Net interest income (loss)			$	74,325		$	(20	)	$	-		$	74,305
Reduction of loan losses				(624	)		-			-			(624	)
Other income				5,746			2,651			-			8,397
Operating expense				50,985			273			-			51,258
Net intercompany income (expense)				40			(40	)		-			-

Income before income taxes				29,750			2,318			-			32,068
Income taxes				12,605			948			-			13,553

	Net income		$	17,145		$	1,370		$	-		$	18,515

At June 30, 2003
Assets:
	Loans and mortgage-backed securities		$	10,773,026		$	-		$	-		$	10,773,026
	Investments in real estate and joint ventures			-			36,297			-			36,297
	Other			1,165,355			8,279			(35,407	)		1,138,227

		Total assets		11,938,381			44,576			(35,407	)		11,947,550

Equity			$	869,365		$	35,407		$	(35,407	)	$	869,365

Three months ended June 30, 2002
Net interest income			$	75,115		$	13		$	-		$	75,128
Reduction of loan losses				(1,106	)		-			-			(1,106	)
Other income				2,803			1,299			-			4,102
Operating expense				44,779			244			-			45,023
Net intercompany income (expense)				86			(86	)		-			-

Income before income taxes				34,331			982			-			35,313
Income taxes				14,541			397			-			14,938

	Net income		$	19,790		$	585		$	-		$	20,375

At June 30, 2002
Assets:
	Loans and mortgage-backed securities		$	10,286,033		$	-		$	-		$	10,286,033
	Investments in real estate and joint ventures			-			40,283			-			40,283
	Other			840,641			1,919			(38,448	)		804,112

		Total assets		11,126,674			42,202			(38,448	)		11,130,428

Equity			$	787,436		$	38,448		$	(38,448	)	$	787,436

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					Real Estate
(In Thousands)		Banking			Investment			Elimination		Totals

Six months ended June 30, 2003
Net interest income (loss)		$	155,299		$	(5	)	$	-	$	155,294
Reduction of loan losses			(2,333	)		-			-		(2,333	)
Other income			26,284			4,062			-		30,346
Operating expense			103,091			448			-		103,539
Net intercompany income (expense)			84			(84	)		-		-

Income before income taxes			80,909			3,525			-		84,434
Income taxes			34,259			1,443			-		35,702

	Net income	$	46,650		$	2,082		$	-	$	48,732

Six months ended June 30, 2002
Net interest income		$	155,055		$	18		$	-	$	155,073
Provision for loan losses			341			-			-		341
Other income			30,865			4,590			-		35,455
Operating expense			89,674			466			-		90,140
Net intercompany income (expense)			179			(179	)		-		-

Income before income taxes			96,084			3,963			-		100,047
Income taxes			40,673			1,621			-		42,294

	Net income	$	55,411		$	2,342		$	-	$	57,753

NOTE (8) – Current Accounting Issues

Statement of Financial Accounting Standards No. 148.

Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation – Transition and Disclosure" ("SFAS 148"), amends Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of transition for an entity that voluntarily changes to the fair value method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure provisions of SFAS 123 to require prominent disclosure about the effects on reported net income of Downey’s accounting policy decisions with respect to stock-based employee compensation. Finally, SFAS 148 amends APB Opinion No. 28, "Interim Financial Reporting," to require disclosure about those effects in interim financial information. Presently, Downey does not intend to adopt the fair value method. For further information regarding Downey’s accounting for stock options, See Note 5 on page 10.

Statement of Financial Accounting Standards No. 149.

Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"), clarifies and amends financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). In general, SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. It is anticipated that the financial impact of SFAS 149 will not have a material effect on Downey.

Statement of Financial Accounting Standards No. 150.

Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"), establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity that have been presented either entirely as equity or between the liabilities section and the equity section of the statement of financial position. SFAS 150 clarifies that Downey’s Capital Securities be classified as a liability, whereas previously they were classified between the liabilities and equity sections. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is anticipated that the financial impact of SFAS 150 will not have a material effect on Downey.

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Financial Accounting Standards Board Interpretation 46.

Financial Accounting Standards Board Interpretation 46, "Provides Guidance to Improve Financial Reporting for SPEs, Off-Balance Sheet Structures and Similar Entities" ("FIN 46"), requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns or both. Prior to FIN 46, a company included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidated requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidated requirements apply to older entities in the first fiscal year or interim period after June 15, 2003. Certain disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. Certain of Downey’s real estate joint venture partnerships established prior to January 31, 2003 will likely require consolidation as a result of applying the provisions of FIN 46. There has been no variable interest entities established since January 31, 2003. While consolidation may require reclassification of certain financial statement items, the overall financial impact is considered immaterial.

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ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

Certain statements under this caption may 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.

OVERVIEW

Our net income for the second quarter of 2003 totaled $18.5 million or $0.66 per share on a diluted basis, down from $20.4 million or $0.72 per share in the second quarter of 2002.

The decline in net income between second quarters reflected lower net income from our banking operations, as net income from our real estate operations increased $0.8 million to $1.4 million due primarily to a reduction in provision for losses and higher gains from sales. Net income from our banking activities declined $2.6 million, primarily reflecting:

a $6.2 million increase in operating expense due to higher costs associated with the increased number of branch locations and higher loan origination activity;
a $6.1 million increase in the loss from loan servicing activities;
a $0.8 million decline in net interest income; and
a $0.5 million decline in the reversal of provision for loan losses.

Those unfavorable items were partially offset by:

a $5.8 million increase in gains from sales of loans and mortgage-backed securities;
a $2.0 million increase in loan and deposit related fees;
a $0.6 million increase in gains from trading securities; and
a $0.5 million sales tax refund.

For the first six months of 2003, our net income totaled $48.7 million or $1.74 per share on a diluted basis, down from $57.8 million or $2.04 per share for the first six months of 2002. The decline between six-month periods primarily reflected lower net income from our banking operations. The decline reflected an increased loss from loan servicing activities and higher operating expense, partially offset by higher gains from sales of loans and mortgage-backed securities, a litigation award, higher loan and deposit related fees and a favorable change in provision for loan losses.

For the second quarter of 2003, our return on average assets was 0.65%, down from 0.75% a year ago, while our return on average equity was 8.64%, down from 10.51% a year ago. For the first six-month periods, our return on average assets declined from 1.06% a year ago to 0.84%, while our return on average equity declined from 15.16% to 11.49%.

Our single family loan originations, including purchases, totaled a record $3.448 billion in the second quarter of 2003, up 58.2% from the $2.179 billion we originated in the second quarter of 2002 and 44.3% above the $2.390 billion we originated in the first quarter of 2003. Of the current quarter total, $1.287 billion represented originations of loans for portfolio, of which $64 million were subprime credits. In addition to single family loans, we originated $78 million of other loans in the quarter.

At quarter end, our assets totaled $11.9 billion, up 7.3% from a year ago, but virtually unchanged from year-end 2002. Continued low interest rates caused refinance activity to remain high, as borrowers were attracted to low fixed rate mortgages. As a result, loan repayments exceeded portfolio originations and loans held for investment declined by $273 million since year end. That decline, however, was essentially offset by increases of $202 million in trading securities and $70 million in loans held for sale.

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Our deposits totaled $8.9 billion at June 30, 2003, up 2.4% from the year-ago level, but down 3.7% from year-end 2002. During the quarter, we opened five new in-store branches, bringing our total branches at quarter end to 170, of which 98 are in-store. A year ago, branches totaled 148, of which 78 were in-store.

Our non-performing assets declined $9 million during the quarter to $66 million or 0.56% of total assets. The decline was primarily in our residential category, of which $5 million was associated with prime loans and $4 million with subprime loans.

At June 30, 2003, our primary subsidiary, Downey Savings and Loan Association, F.A. (the "Bank") exceeded all regulatory capital tests, with capital-to-asset ratios of 7.20% for both tangible and core capital and 14.23% for risk-based capital. These capital levels are significantly above the "well capitalized" standards defined by the federal banking regulators of 5% for core and tangible capital and 10% for risk-based capital.

Critical Accounting Policies

We have established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of our financial statements. Our significant accounting policies are described in Downey’s Annual Report on Form 10-K for the year ended December 31, 2002. Certain accounting policies require us to make significant estimates and assumptions which have a material impact on the carrying value of certain assets and liabilities, and we consider these to be critical accounting policies. The estimates and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Actual results could differ significantly from these estimates and assumptions which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods. Management has discussed the development and selection of these critical accounting policies with the Audit Committee of our Board of Directors.

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

Valuation of mortgage servicing rights. For further information, see Note 2 on page 6 of Notes to Consolidated Financial Statements.
Valuation of expected rate lock commitments. For further information, see Note 3 on page 8 of Notes to Consolidated Financial Statements.
Allowance for losses on loans and real estate. For further information, see Financial Condition—Problem Loans and Real Estate—Allowance for Losses on Loans and Real Estate on page 39.

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RESULTS OF OPERATIONS

Net Interest Income

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

Our net interest income totaled $74.3 million in the current quarter, down $0.8 million or 1.1% from the same period last year. Our interest-earning assets averaged $11.0 billion during the quarter, up 4.9% from the year-ago level. The favorable impact of our higher interest-earning assets was more than offset by a decline in our effective interest rate spread. The effective interest rate spread averaged 2.70% in the current quarter, down from 2.86% a year ago and 2.87% in the previous quarter. The decline between second quarters was due to our yield on interest-earning assets declining more than our cost of funds, as more assets repriced to current lower interest rate levels than did liabilities.

For the first six months of 2002, net interest income totaled $155.3 million, up $0.2 million from a year ago. The increase reflected higher interest-earning asset levels, partially offset by a decline in our effective interest rate spread.

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

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

the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities, divided by
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 quarters 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 quarter using the average of each month’s daily average balance during the periods indicated.

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			Three Months Ended June 30,

			2003						2002

			Average				Average		Average				Average
(Dollars in Thousands)			Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate

Interest-earning assets:
	Loans		$	10,517,236	$	130,884	4.98	%	$	10,035,071	$	148,448	5.92	%
	Mortgage-backed securities			1,802		19	4.22			80,873		942	4.66
	Trading and investment securities			492,782		3,371	2.74			385,738		4,035	4.20

		Total interest-earning assets		11,011,820		134,274	4.88			10,501,682		153,425	5.84
Non-interest-earning assets				408,167						392,072

	Total assets		$	11,419,987					$	10,893,754

Transaction accounts:
	Non-interest-bearing checking		$	402,183	$	-	-	%	$	295,568	$	-	-	%
	Interest-bearing checking ^(a)			439,909		283	0.26			425,609		329	0.31
	Money market			127,162		355	1.12			113,231		503	1.78
	Regular passbook			3,896,717		13,253	1.36			2,962,758		18,543	2.51

		Total transaction accounts		4,865,971		13,891	1.15			3,797,166		19,375	2.05
Certificates of deposit				4,018,803		28,478	2.84			4,763,479		41,022	3.45

	Total deposits			8,884,774		42,369	1.91			8,560,645		60,397	2.83
Borrowings				1,384,203		14,559	4.22			1,299,644		14,859	4.59
Capital securities				120,000		3,041	10.14			120,000		3,041	10.14

	Total deposits, borrowings and capital securities			10,388,977		59,969	2.32			9,980,289		78,297	3.15
Other liabilities				173,404						137,735
Stockholders’ equity				857,606						775,730

	Total liabilities and stockholders’ equity		$	11,419,987					$	10,893,754

Net interest income/interest rate spread					$	74,305	2.56	%			$	75,128	2.69	%
Excess of interest-earning assets over
	deposits, borrowings and capital securities		$	622,843					$	521,393
Effective interest rate spread							2.70						2.86


			Six Months Ended June 30,

			2003						2002

			Average				Average		Average				Average
(Dollars in Thousands)			Balance		Interest		Yield/Rate		Balance		Interest		Yield/Rate

Interest-earning assets:
	Loans		$	10,638,317	$	273,373	5.14	%	$	10,004,439	$	308,725	6.17	%
	Mortgage-backed securities			1,907		35	3.67			93,624		2,216	4.73
	Trading and investment securities			515,083		8,163	3.20			425,093		8,882	4.21

		Total interest-earning assets		11,155,307		281,571	5.05			10,523,156		319,823	6.08
Non-interest-earning assets				405,916						395,318

	Total assets		$	11,561,223					$	10,918,474

Transaction accounts:
	Non-interest-bearing checking		$	393,135	$	-	-	%	$	290,362	$	-	-	%
	Interest-bearing checking ^(a)			432,860		582	0.27			425,386		744	0.35
	Money market			125,678		769	1.23			111,973		1,010	1.82
	Regular passbook			3,830,620		28,082	1.48			2,702,876		33,936	2.53

		Total transaction accounts		4,782,293		29,433	1.24			3,530,597		35,690	2.04
Certificates of deposit				4,147,842		60,786	2.96			5,011,329		93,066	3.75

	Total deposits			8,930,135		90,219	2.04			8,541,926		128,756	3.04
Borrowings				1,491,649		29,976	4.05			1,362,761		29,912	4.43
Capital securities				120,000		6,082	10.14			120,000		6,082	10.14

	Total deposits, borrowings and capital securities			10,541,784		126,277	2.42			10,024,687		164,750	3.31
Other liabilities				171,317						131,929
Stockholders’ equity				848,122						761,858

	Total liabilities and stockholders’ equity		$	11,561,223					$	10,918,474

Net interest income/interest rate spread					$	155,294	2.63	%			$	155,073	2.77	%
Excess of interest-earning assets over
	deposits, borrowings and capital securities		$	613,523					$	498,469
Effective interest rate spread							2.78						2.95

^(a) Included amounts swept into money market deposit accounts.

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Changes in our net interest income are a function of changes in both rates and 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 periods indicated. For each category of interest-earning assets and interest-bearing liabilities, we have provided information on changes attributable to:

changes in volume—changes in volume multiplied by comparative period rate;
changes in rate—changes in rate multiplied by comparative period volume; and
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 quarterly average balances computed using the average of each month’s daily average balance during the period indicated.

				Three Months Ended June 30,													Six Months Ended June 30,
				2003 Versus 2002													2003 Versus 2002
				Changes Due To													Changes Due To

											Rate/												Rate/
(In Thousands)				Volume			Rate				Volume			Net			Volume			Rate			Volume			Net

Interest income:
	Loans			$	7,133		$	(23,565	)	$		(1,132	)	$	(17,564	)	$	19,561		$	(51,641	)	$	(3,272	)	$	(35,352	)
	Mortgage-backed securities				(921	)		(89	)			87			(923	)		(2,171	)		(498	)		488			(2,181	)
	Investment securities				1,122			(1,398	)			(388	)		(664	)		1,880			(2,145	)		(454	)		(719	)

		Change in interest income			7,334			(25,052	)			(1,433	)		(19,151	)		19,270			(54,284	)		(3,238	)		(38,252	)

Interest expense:
	Transaction accounts:
		Interest-bearing checking ^(a)			11			(55	)			(2	)		(46	)		13			(172	)		(3	)		(162	)
		Money market			62			(187	)			(23	)		(148	)		124			(325	)		(40	)		(241	)
		Regular passbook			5,845			(8,466	)			(2,669	)		(5,290	)		14,159			(14,121	)		(5,892	)		(5,854	)

			Total transaction accounts		5,918			(8,708	)			(2,694	)		(5,484	)		14,296			(14,618	)		(5,935	)		(6,257	)
	Certificates of deposit				(6,413	)		(7,267	)			1,136			(12,544	)		(16,036	)		(19,626	)		3,382			(32,280	)

		Total interest-bearing deposits			(495	)		(15,975	)			(1,558	)		(18,028	)		(1,740	)		(34,244	)		(2,553	)		(38,537	)
	Borrowings				945			(1,206	)			(39	)		(300	)		10,407			(2,542	)		(7,801	)		64
	Capital securities				-			-				-			-			-			-			-			-

		Change in interest expense			450			(17,181	)			(1,597	)		(18,328	)		8,667			(36,786	)		(10,354	)		(38,473	)

Change in net interest income				$	6,884		$	(7,871	)	$		164		$	(823	)	$	10,603		$	(17,498	)	$	7,116		$	221

^(a) Included amounts swept into money market deposit accounts.

Provision for Loan Losses

During the current quarter, $0.6 million of provision for loan losses was reversed, compared to a reversal of $1.1 million in the year-ago second quarter. The current quarter reversal reflected an improvement in credit quality.

For the first six months of 2003, $2.3 million of provision for loan losses was reversed, compared to a provision for loan losses of $0.3 million in the year-ago period. For further information regarding our allowance for loan losses, see Financial Condition—Problem Loans and Real Estate—Allowance for Losses on Loans and Real Estate on page 39.

Other Income

Our total other income was $8.4 million in the current quarter, up from $4.1 million in the year-ago second quarter. The $4.3 million increase between second quarters primarily reflected:

a $5.8 million increase in net gains from sales of loans and mortgage-backed securities;
a $2.3 million increase in loan and deposit related fees;
a $1.1 million increase in income from real estate and joint ventures held for investment;
a $0.6 million increase in gains from trading securities, which served as a partial hedge against mortgage servicing rights; and
a $0.5 million sales tax refund related to the lending activities of Downey Auto Finance , a former subsidiary that was sold in 2000.

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Partially offsetting those items was an increase of $6.1 million in the loss on our loan servicing activity.

For the first six months of 2003, total other income was $30.3 million, down $5.1 million from a year ago. The decline from a year ago primarily reflected an increased loss from loan servicing activities and lower income from real estate and joint ventures held for investment, partially offset by higher gains from sales of loans and mortgage-backed securities, a litigation award and higher 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 $13.6 million in the current quarter, up $2.3 million from a year ago. Our deposit related fees were up $1.2 million or 22.2% between second quarters, due to higher fees from both our checking accounts and automated teller machines, while our loan related fees increased $1.1 million or 17.7% from a year ago.

The following table presents a breakdown of loan and deposit related fees for the quarters indicated.

			Three Months Ended

			June 30,		March 31,		December 31,		September 30,		June 30,
(In Thousands)			2003		2003		2002		2002		2002

Loan related fees:
	Prepayment fees		$	4,291	$	3,413	$	3,650	$	3,523	$	4,140
	Other fees			2,925		2,574		2,733		2,366		1,992
Deposit related fees:
	Automated teller machine fees			2,180		2,086		2,066		2,051		1,668
	Other fees			4,253		3,905		4,009		3,908		3,596

		Total loan and deposit related fees	$	13,649	$	11,978	$	12,458	$	11,848	$	11,396

For the six months of 2003, loan and deposit related fees totaled $25.6 million, up $2.7 million from the same period of 2002. The increase was primarily due to an increase in our deposit related fees of $2.5 million as a result of higher fees from both our checking accounts and automated teller machines.

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

			Six Months Ended June 30,

(In Thousands)			2003		2002

Loan related fees:
	Prepayment fees		$	7,704	$	8,826
	Other fees			5,499		4,159
Deposit related fees:
	Automated teller machine fees			4,266		3,211
	Other fees			8,158		6,718

		Total loan and deposit related fees	$	25,627	$	22,914

Real Estate and Joint Ventures Held for Investment

Income from our real estate and joint ventures held for investment totaled $2.1 million in the current quarter, up $1.1 million from the year-ago quarter. The increase reflected a decline in our provision for losses on real estate and joint ventures of $0.7 million and an increase in net gains from sales of $0.3 million. Gains associated with the sale of wholly owned real estate increased $1.0 million, while gains associated with joint venture projects declined $0.7 million and is reported in the category equity in net income from joint ventures.

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The following table sets forth the key components comprising our income from real estate and joint venture operations for the quarters indicated.

			Three Months Ended

			June 30,			March 31,			December 31,			September 30,		June 30,
(In Thousands)			2003			2003			2002			2002		2002

Rental operations, net of expenses			$	224		$	531		$	489		$	269	$	521
Equity in net income from joint ventures				604			16			2,096			1,634		1,001
Interest from joint venture advances				388			280			303			306		304
Net gains on sales of wholly owned real estate				1,000			157			1,093			99		8
(Provision for) reduction of losses on real estate
	and joint ventures			(147	)		(41	)		(151	)		99		(818	)

	Total income from real estate and joint ventures
		held for investment, net	$	2,069		$	943		$	3,830		$	2,407	$	1,016

For the first six months of 2003, income from real estate and joint ventures held for investment totaled $3.0 million, down $1.0 million from the same period of 2002. The decline reflected a $0.7 million unfavorable change in provision for losses on real estate and joint ventures and a $0.2 million decline in gains from sales. While gains from wholly owned projects increased $1.1 million, gains from joint ventures declined by $1.3 million.

The following table sets forth the key components comprising our income from real estate and joint venture operations during the year-to-date periods indicated.

		Six Months Ended June 30,

(In Thousands)		2003			2002

Rental operations, net of expenses		$	755		$	1,344
Equity in net income from joint ventures			620			1,746
Interest from joint venture advances			668			415
Net gains on sales of wholly owned real estate			1,157			8
(Provision for) reduction of losses on real estate and joint ventures			(188	)		500

	Total income from real estate and joint ventures held for investment, net	$	3,012		$	4,013

Secondary Marketing Activities

A loss of $21.7 million was recorded in loan servicing from our portfolio of loans serviced for others during the current quarter, $6.1 million higher than the loss of $15.6 million in the year-ago period. Negatively impacting our loan servicing between second quarters were increases of $6.7 million in amortization of mortgage servicing rights and $3.0 million in payoff and curtailment interest costs. When a loan we service for others prepays, most of our loan servicing agreements require us to pay interest to the investor up to the date we remit funds to them. That additional interest cost is what we call payoff and curtailment interest costs. However, we benefit from the use of those proceeds from the time of repayment until we are required to remit the funds to the investor. That benefit results in a reduction of our borrowing costs within net interest income. Those two unfavorable items were partially offset by a $2.5 million reduction in the addition to the valuation allowance for mortgage servicing rights and a $1.1 million increase in net cash servicing fees.

During the current quarter, $13.2 million was added to the valuation allowance for mortgage servicing rights. This addition reflected higher actual loan prepayments than originally projected as well as a higher projected rate at which loans we service for others are expected to prepay in the future, thereby shortening their expected average life.

At June 30, 2003, we serviced $9.0 billion of loans for others, compared to $8.3 billion at December 31, 2002, and $7.0 billion at June 30, 2002.

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The following table presents a breakdown of the components of our loan servicing loss for the quarters indicated.

		Three Months Ended

		June 30,			March 31,			December 31,			September 30,			June 30,
(In Thousands)		2003			2003			2002			2002			2002

Net cash servicing fees		$	5,117		$	5,016		$	4,680		$	4,382		$	4,020
Payoff and curtailment interest cost ^(a)			(3,620	)		(2,525	)		(2,498	)		(1,182	)		(671	)
Amortization of MSRs			(9,951	)		(4,771	)		(4,146	)		(4,120	)		(3,253	)
Provision for impairment of MSRs			(13,238	)		(11,406	)		(2,497	)		(18,043	)		(15,713	)

	Total loan servicing loss, net	$	(21,692	)	$	(13,686	)	$	(4,461	)	$	(18,963	)	$	(15,617	)

^(a) Represents our contractual obligation to pay interest at the borrower’s loan rate from the date the loan is repaid until the funds are remitted to the investor. This does not include the benefit of the use of repaid loan funds to reduce borrowings and its associated interest expense, which is reported in net interest income.

For the first six months of 2003, a loss of $35.4 million was recorded in loan servicing, compared to a loss of $16.2 million from the same period of 2002. The higher loss reflected a larger addition to the valuation allowance for mortgage servicing rights, increased amortization of mortgage servicing rights and higher payoff and curtailment interest losses, partially offset by an increase in net cash servicing fees.

The following table presents a breakdown of the components of our loan servicing loss during the year-to-date periods indicated.

		Six Months Ended June 30,

(In Thousands)		2003			2002

Net cash servicing fees		$	10,133		$	7,474
Payoff and curtailment interest cost ^(a)			(6,145	)		(1,437	)
Amortization of MSRs			(14,722	)		(6,169	)
Provision for impairment of MSRs			(24,644	)		(16,073	)

	Total loan servicing loss, net	$	(35,378	)	$	(16,205	)

For further information regarding mortgage servicing rights, see Notes To Consolidated Financial Statements—Note (2)—Mortgage Servicing Rights on page 6.

Sales of loans and mortgage-backed securities increased in the current quarter to $2.078 billion from $1.093 billion a year ago. Net gains associated with these sales totaled $12.7 million in the current quarter, up from $6.9 million a year ago. Net gains in the current quarter included the capitalization of mortgage servicing rights of $15.4 million, compared to $10.2 million a year ago. Excluding the impact of SFAS 133, a gain of 0.75% of secondary market sales was realized which compares favorably to 0.68% a year-ago.

The following table presents a breakdown of the components of our net gains (losses) on sales of loans and mortgage-backed securities for the quarters indicated.

			Three Months Ended

			June 30,			March 31,			December 31,			September 30,			June 30,
(In Thousands)			2003			2003			2002			2002			2002

Mortgage servicing rights			$	15,405		$	14,954		$	18,779		$	9,304		$	10,156
All other components excluding SFAS 133 ^(a)				183			4,948			668			(7,612	)		(2,870	)
SFAS 133				(2,936	)		(139	)		4,287			(2,663	)		(390	)

	Total net gains (losses) on sales of loans
		and mortgage-backed securities	$	12,652		$	19,763		$	23,734		$	(971	)	$	6,896

Secondary marketing gain excluding SFAS
	133 as a percentage of associated sales			0.75	%		1.23	%		0.94	%		0.10	%		0.68	%

^(a) Included a $0.2 million gain in the fourth quarter of 2002 associated with the treasury operation’s sale of $1.0 billion of mortgage-backed securities.

For the first six months of 2003, sales of loans and mortgage-backed securities totaled $3.703 billion, up from $2.475 billion a year ago. Net gains associated with these sales totaled $32.4 million, $9.3 million higher than the prior year amount.

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The following table presents a breakdown of the components of our net gains on sales of loans and mortgage-backed securities during the year-to-date periods indicated.

		Six Months Ended June 30,

(In Thousands)		2003			2002

Mortgage servicing rights		$	30,359		$	25,153
All other components excluding SFAS 133			5,131			(6,530	)
SFAS 133			(3,075	)		4,474

	Total net gains on sales of loans and mortgage-backed securities	$	32,415		$	23,097

Secondary marketing gain excluding SFAS 133 as a percentage of associated sales			0.96	%		0.76	%

Trading Securities

Trading securities were purchased in the current quarter as a partial economic hedge against the value of our mortgage servicing rights. These securities are carried at fair value, with any changes in fair value reflected in earnings. Our gains on trading securities totaled $0.6 million in the current quarter.

Operating Expense

Our operating expense totaled $51.3 million in the current quarter, up $6.2 million or 13.8% from a year ago. That increase was due primarily to higher general and administrative costs associated with an increased number of branch locations and higher loan origination activity.

The following table presents a breakdown of key components comprising operating expense for the quarters indicated.

		Three Months Ended

		June 30,			March 31,		December 31,			September 30,		June 30,
(In Thousands)		2003			2003		2002			2002		2002

Salaries and related costs		$	33,028		$	34,126	$	32,695		$	29,067	$	28,315
Premises and equipment costs			7,971			7,713		7,891			7,916		7,754
Advertising expense			1,016			793		726			1,066		1,582
SAIF insurance premiums and regulatory
	assessments		825			831		765			765		762
Professional fees			418			628		547			91		233
Other general and administrative expense			8,111			7,893		7,470			7,474		6,350

	Total general and administrative expense		51,369			51,984		50,094			46,379		44,996
Net operation of real estate acquired in
	settlement of loans		(111	)		297		(68	)		110		27

	Total operating expense	$	51,258		$	52,281	$	50,026		$	46,489	$	45,023

For the first six months of 2003, operating expenses totaled $103.5 million, up $13.4 million or 14.9% from the same period of 2002, and also reflected higher costs associated with the increased number of branch locations and higher loan origination activity.

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

		Six Months Ended June 30,

(In Thousands)		2003		2002

Salaries and related costs		$	67,154	$	57,752
Premises and equipment costs			15,684		14,887
Advertising expense			1,809		2,626
SAIF insurance premiums and regulatory assessments			1,656		1,548
Professional fees			1,046		797
Other general and administrative expense			16,004		12,561

	Total general and administrative expense		103,353		90,171
Net operation of real estate acquired in settlement of loans			186		(31	)

	Total operating expense	$	103,539	$	90,140

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Provision for Income Taxes

Income taxes for the current quarter totaled $13.6 million compared to $14.9 million a year ago. Our effective tax rate was unchanged at 42.3%, for both the second quarter and year-to-date periods. For further information regarding income taxes, see Notes to Consolidated Financial Statements—Note (4)—Income Taxes on page 10.

Business Segment Reporting

The previous discussion and analysis of the Results of Operations pertained to our consolidated results. This section discusses and analyzes the results of operations of our two business segments—banking and real estate investment. For further information regarding business segments, see Notes To Consolidated Financial Statements—Note (7)—Business Segment Reporting on page 12.

The following table presents by business segment our net income for the periods indicated.

		Three Months Ended

		June 30,		March 31,		December 31,		September 30,		June 30,
(In Thousands)		2003		2003		2002		2002		2002

Banking net income		$	17,145	$	29,505	$	37,563	$	13,100	$	19,790
Real estate investment net income			1,370		712		2,409		1,468		585

	Total net income	$	18,515	$	30,217	$	39,972	$	14,568	$	20,375

		Six Months Ended June 30,

(In Thousands)		2003		2002

Banking net income		$	46,650	$	55,411
Real estate investment net income			2,082		2,342

	Total net income	$	48,732	$	57,753

Banking

Net income from our banking operations for the current quarter totaled $17.1 million, down $2.6 million or 13.4% from a year ago. The decline between second quarters reflected:

a $6.2 million increase in operating expense due to higher costs associated with the increased number of branch locations and higher loan origination activity;
a $6.1 million increase in the loss from loan servicing activities;
a $0.8 million decline in net interest income; and
a $0.5 million decline in the reversal of provision for loan losses.

Those unfavorable items were partially offset by:

a $5.8 million increase in gains from sales of loans and mortgage-backed securities;
a $2.0 million increase in loan and deposit related fees;
a $0.6 million increase in gains from trading securities; and
a $0.5 million sales tax refund.

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The following table sets forth our banking operational results and selected financial data for the quarters indicated.

			Three Months Ended

			June 30,			March 31,			December 31,		September 30,			June 30,
(In Thousands)			2003			2003			2002		2002			2002

Net interest income			$	74,325		$	80,974		$	83,338	$	76,960		$	75,115
Provision for (reduction of) loan losses				(624	)		(1,709	)		127		471			(1,106	)
Other income (loss)				5,746			20,538			31,693		(7,507	)		2,803
Operating expense				50,985			52,106			49,857		46,328			44,779
Net intercompany income				40			44			64		100			86

Income before income taxes				29,750			51,159			65,111		22,754			34,331
Income taxes				12,605			21,654			27,548		9,654			14,541

	Net income		$	17,145		$	29,505		$	37,563	$	13,100		$	19,790

At period end
Assets:
	Loans and mortgage-backed securities		$	10,773,026		$	10,675,557		$	10,976,942	$	11,685,037		$	10,286,033
	Other			1,165,355			756,455			995,470		828,836			840,641

		Total assets		11,938,381			11,432,012			11,972,412		12,513,873			11,126,674

Equity			$	869,365		$	851,650		$	823,104	$	790,807		$	787,436

For the first six months of 2003, our net income from banking operations totaled $46.7 million, down $8.8 million from the same period a year ago. The decline reflected an increased loss from loan servicing activities and higher operating expense, partially offset by higher gains from sales of loans and mortgage-backed securities, a litigation award, higher loan and deposit related fees and a favorable change in provision for loan losses.

The following table sets forth our banking operational results for the year-to-date periods indicated.

		Six Months Ended June 30,

(In Thousands)		2003			2002

Net interest income		$	155,299		$	155,055
Provision for (reduction of) loan losses			(2,333	)		341
Other income			26,284			30,865
Operating expense			103,091			89,674
Net intercompany income			84			179

Income before income taxes			80,909			96,084
Income taxes			34,259			40,673

	Net income	$	46,650		$	55,411

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Real Estate Investment

Net income from our real estate investment operations totaled $1.4 million in the current quarter, compared to net income of $0.6 million a year ago. The increase primarily reflected a decline in our provision for losses on real estate and joint ventures of $0.7 million and an increase in net gains from sales of $0.3 million.

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

			Three Months Ended

			June 30,			March 31,		December 31,		September 30,		June 30,
(In Thousands)			2003			2003		2002		2002		2002

Net interest income (loss)			$	(20	)	$	15	$	15	$	12	$	13
Other income				2,651			1,411		4,300		2,741		1,299
Operating expense				273			175		169		161		244
Net intercompany expense				40			44		64		100		86

Income before income taxes				2,318			1,207		4,082		2,492		982
Income taxes				948			495		1,673		1,024		397

	Net income		$	1,370		$	712	$	2,409	$	1,468	$	585

At period end
Assets:
	Investments in real estate and joint ventures		$	36,297		$	34,307	$	33,890	$	40,371	$	40,283
	Other			8,279			5,641		14,174		4,090		1,919

		Total assets		44,576			39,948		48,064		44,461		42,202

Equity			$	35,407		$	34,037	$	42,325	$	39,916	$	38,448

For the first six months of 2003, our net income from real estate investment operations totaled $2.1 million, down $0.3 million from the same period of 2002. The decline primarily reflected an unfavorable change in provision for losses on real estate and joint ventures and a decline in gains from sales, which were partially offset by higher trustee and reconveyance fees.

The following table sets forth our real estate investment operational results for the year-to-date periods indicated.

		Six Months Ended June 30,

(In Thousands)		2003			2002

Net interest income (loss)		$	(5	)	$	18
Other income			4,062			4,590
Operating expense			448			466
Net intercompany expense			84			179

Income before income taxes			3,525			3,963
Income taxes			1,443			1,621

	Net income	$	2,082		$	2,342

Our investments in real estate and joint ventures amounted to $36 million at June 30, 2003, $34 million at December 31, 2002, and $40 million at June 30, 2002.

For information on valuation allowances associated with real estate and joint venture loans, see Financial Condition—Problem Loans and Real Estate—Allowances for Losses on Loans and Real Estate on page 39.

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FINANCIAL CONDITION

Loans and Mortgage-Backed Securities

Total loans and mortgage-backed securities, including those we hold for sale, increased $97 million during the current quarter to a total of $10.8 billion or 90.2% of assets at June 30, 2003. The increase primarily represents a higher level of loans held for sale reflecting continued borrower preference for fixed rate loans, as loans held for investment were essentially unchanged. Our annualized prepayment speed in the current quarter increased to 53%, compared to 38% a year ago and 43% during the previous quarter.

The following table sets forth loans originated, including purchases, for investment and for sale for the periods indicated.

			Three Months Ended

			June 30,		March 31,		December 31,		September 30,		June 30,
(In Thousands)			2003		2003		2002		2002		2002

Loans originated and purchased
Investment portfolio:
	Residential one-to-four units:
		Adjustable	$	1,280,845	$	769,461	$	1,320,491	$	1,028,635	$	1,109,982
		Fixed		6,499		13,287		28,596		3,473		3,940
	Other			78,407		51,155		61,109		42,576		119,970

		Total for investment portfolio		1,365,751		833,903		1,410,196		1,074,684		1,233,892
Sale portfolio^(a)				2,161,154		1,607,147		2,041,109		1,799,673		1,065,360

	Total for investment and sale portfolios		$	3,526,905	$	2,441,050	$	3,451,305	$	2,874,357	$	2,299,252

^(a) Residential one-to-four unit loans, primarily fixed.

			Six Months Ended June 30,

(In Thousands)			2003		2002

Loans originated and purchased
Investment portfolio:
	Residential one-to-four units:
		Adjustable	$	2,050,306	$	2,098,045
		Fixed		19,786		8,306
	Other			129,562		165,722

		Total for investment portfolio		2,199,654		2,272,073
Sale portfolio^(a)				3,768,301		2,331,790

	Total for investment and sale portfolios		$	5,967,955	$	4,603,863

^(a) Residential one-to-four unit loans, primarily fixed.

Originations of residential one-to-four unit loans, including loans purchased, totaled $3.448 billion in the current quarter, 44.3% higher than the $2.390 billion we originated in the first quarter of 2003, and 58.2% higher than the $2.179 billion we originated a year ago. Single family loans originated for sale increased $1.096 billion from a year ago to $2.161 billion reflecting continued borrower preference for low fixed rate loans, while single family loans originated for portfolio increased by $173 million to $1.287 billion. Of the current quarter originations for portfolio, $64 million represented subprime credits as part of our continuing strategy to enhance the portfolio’s net yield. During the current quarter, 87% of our residential one-to-four unit originations represented refinancing transactions. This is unchanged from the first quarter 2003 level but up from the year-ago second quarter level of 67%. In addition to single family loans, we originated $78 million of other loans in the current quarter.

During the current quarter, 58% of residential one-to-four unit loans originated for portfolio, including loans purchased, represented adjustable rate loans where the initial rate is fixed for the first three or five years. At the conclusion of the initial fixed rate periods, those loans then adjust to the change in either the weekly average yield on one-year U.S. Treasury securities adjusted to a constant maturity ("CMT"), or the London Inter-Bank Offered Rate ("LIBOR). Monthly adjustable rate mortgages that provide for negative amortization represented 36% of residential one-to-four unit loans originated for portfolio, with 55% of those tied to the Federal Home Loan Bank ("FHLB") Eleventh District Cost of Funds Index ("COFI) and the remaining 45% tied to the 12-month moving average of annual yields on actively traded U.S. Treasury securities adjusted to a constant maturity of one year ("MTA"). The remaining 6% of originations represented adjustable rate mortgages that adjust less frequently than monthly or fixed rate loans.

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Our adjustable rate mortgages:

generally either 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, or are fixed for a period of three to five years then adjust semi-annually or annually thereafter;
generally 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
limit interest rate adjustments, for loans that adjust both the interest rate and payment amount simultaneously, 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 the interest rate monthly and the payment amount annually. These monthly adjustable rate mortgages:

have a lifetime interest rate cap, but no specified periodic interest rate adjustment cap;
have a periodic cap on changes in required monthly payments; and
allow for negative amortization, which is the addition to loan principal of accrued interest that exceeds the required monthly loan payments.

If a loan incurs significant negative amortization, the loan-to-value ratio could increase which creates an increased risk that the fair value of the underlying collateral could be insufficient to satisfy fully the outstanding principal and interest. A loan-to-value ratio is the ratio of the principal amount of the loan to the lower of the sales price or appraised value of the property securing the loan at origination. We currently impose a limit on the amount of negative amortization. The principal plus the negative amortization cannot exceed 125% of the original loan amount, except for subprime loans and loans with loan-to-value ratios of greater than 80% where the borrower has obtained private mortgage insurance to reduce the effective loan-to-value ratio to between 67% and 80%. In those two instances, the principal plus negative amortization cannot exceed 110% of the original loan amount. At June 30, 2003, loans with the higher 125% limit on negative amortization represented 37% of our adjustable rate one-to-four unit residential portfolio.

At June 30, 2003, $6.8 billion or 71% of the adjustable rate mortgages in our loan portfolio were subject to negative amortization, of which $79 million represented the amount of negative amortization included in the loan balance. The amount of negative amortization is $17 million or 18.2% below the March 31, 2003 level.

We also continue to originate residential fixed interest rate mortgage loans to meet consumer demand, but we intend to sell the majority of these loans. We sold through our secondary marketing activities $2.078 billion of loans and mortgage-backed securities in the current quarter, compared to $1.624 billion in the first quarter of 2003 and $1.093 billion a year ago. All were secured by residential one-to-four unit property, and at June 30, 2003, loans held for sale totaled $722 million.

At June 30, 2003, our unfunded loan application pipeline totaled $3.0 billion. Within that pipeline, we had commitments to borrowers for short-term interest rate locks, not including expected fallout, of $1.6 billion, of which $1.2 billion were related to residential one-to-four unit loans being originated for sale in the secondary market. Furthermore, at June 30, 2003, we had commitments on undrawn lines and letters of credit of $121 million, loans in process of $66 million and commitments to purchase loans of $41 million. We believe our current sources of funds will enable us to meet these obligations.

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

					Three Months Ended

					June 30,			March 31,			December 31,			September 30,			June 30,
(In Thousands)					2003			2003			2002			2002			2002

Investment Portfolio
Loans originated:
	Loans secured by real estate:
		Residential one-to-four units:
			Adjustable		$	468,337		$	479,506		$	589,314		$	675,280		$	868,022
			Adjustable – subprime			63,903			62,268			86,613			123,263			148,876
			Adjustable – fixed for 3-5 years			178,325			132,143			186,256			181,439			85,679
			Adjustable – fixed for 3-5 years – subprime			-			11,683			22,810			24,851			133

				Total adjustable residential one-to-four units		710,565			685,600			884,993			1,004,833			1,102,710
			Fixed			5,721			11,865			28,596			3,373			3,940
			Fixed – subprime			73			1,395			-			-			-
		Residential five or more units (all adjustable)				17,956			4,400			2,806			-			-

				Total residential		734,315			703,260			916,395			1,008,206			1,106,650
		Commercial real estate				3,272			-			600			557			-
		Construction				21,511			10,345			28,048			17,418			65,030
		Land				-			-			-			-			37,820
	Non-mortgage:
		Commercial				-			125			3,710			8,000			600
		Automobile				18			79			86			64			329
		Other consumer				31,117			28,418			25,859			16,537			16,191

			Total loans originated			790,233			742,227			974,698			1,050,782			1,226,620
Real estate loans purchased:
	One-to-four units					570,985			82,746			432,289			21,485			6,459
	One-to-four units – subprime					-			1,142			3,209			2,417			813
	Other ^(a)					4,533			7,788			-			-			-

		Total real estate loans purchased				575,518			91,676			435,498			23,902			7,272

			Total loans originated and purchased			1,365,751			833,903			1,410,196			1,074,684			1,233,892
Loan repayments						(1,352,321	)		(1,127,612	)		(1,090,307	)		(927,653	)		(950,438	)
Other net changes ^(b)						(4,075	)		11,078			2,328			6,943			(45,850	)

	Net increase (decrease) in loans held for investment					9,355			(282,631	)		322,217			153,974			237,604

Sale Portfolio
Residential one-to-four units:
	Originated whole loans					2,161,154			1,606,085			2,038,678			1,792,091			1,060,399
	Loans purchased					-			1,062			2,431			7,582			4,961
	Loans transferred from (to) the investment portfolio					3,549			(541	)		(453	)		(460	)		(1,401	)
	Originated whole loans sold					(250,027	)		(246,697	)		(349,605	)		(280,786	)		(132,614	)
	Loans exchanged for mortgage-backed securities					(1,828,344	)		(1,377,469	)		(1,702,481	)		(1,232,826	)		(943,883	)
	Other net changes					(1,116	)		(1,143	)		(898	)		(3,105	)		(594	)
	Capitalized basis adjustment ^(c)					3,037			327			(1,207	)		1,626			6,129

		Net increase (decrease) in loans held for sale				88,253			(18,376	)		(13,535	)		284,122			(7,003	)

Mortgage-backed securities, net:
	Received in exchange for loans					1,828,344			1,377,469			1,702,481			1,232,826			943,883
	Sold					(1,828,344	)		(1,377,469	)		(2,715,467	)		(1,283,100	)		(960,840	)
	Purchased					-			-			-			1,014,098			-
	Repayments					(129	)		(366	)		(2,195	)		(4,258	)		(18,950	)
	Other net changes					(10	)		(12	)		(1,596	)		1,342			3,226

		Net increase (decrease) in mortgage-backed
			securities available for sale			(139	)		(378	)		(1,016,777	)		960,908			(32,681	)

		Net increase (decrease) in loans held for sale and
			mortgage-backed securities available for sale			88,114			(18,754	)		(1,030,312	)		1,245,030			(39,684	)

		Total net increase (decrease) in loans and
			mortgage-backed securities		$	97,469		$	(301,385	)	$	(708,095	)	$	1,399,004		$	197,920

^(a) Included five or more unit residential loans.
^(b) Primarily included changes in undisbursed funds for lines of credit and construction loans, changes in loss allowances, loans transferred to real estate acquired in settlement of loans or from (to) the held for sale portfolio, and the change in interest capitalized on loans (negative amortization).
^(c) Reflected the change in fair value of the rate lock derivative from the date of commitment to the date of funding.

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The following table sets forth the composition of our loan and mortgage-backed securities portfolio at the dates indicated.

				June 30,			March 31,			December 31,			September 30,			June 30,
(In Thousands)				2003			2003			2002			2002			2002

Investment Portfolio
Loans secured by real estate:
	Residential one-to-four units:
		Adjustable		$	6,444,574		$	6,711,548		$	6,739,243		$	6,746,906		$	6,590,943
		Adjustable – subprime			1,119,780			1,212,905			1,297,280			1,345,644			1,357,098
		Adjustable – fixed for 3-5 years			1,942,446			1,543,478			1,697,953			1,313,391			1,271,031
		Adjustable – fixed for 3-5 years – subprime			70,780			80,247			81,421			64,808			48,835
		Fixed			157,256			187,888			210,001			225,701			260,934
		Fixed – subprime			5,602			7,266			7,412			9,629			11,982

			Total residential one-to-four units		9,740,438			9,743,332			10,033,310			9,706,079			9,540,823
	Residential five or more units:
		Adjustable			41,004			19,048			6,964			4,693			4,952
		Fixed			2,251			2,292			3,676			3,737			3,775
	Commercial real estate:
		Adjustable			37,524			34,530			40,373			39,553			40,200
		Fixed			15,507			23,613			31,042			38,112			41,522
	Construction				105,858			100,767			103,547			110,125			124,318
	Land				20,090			39,962			53,538			53,885			62,182
Non-mortgage:
	Commercial				6,493			14,922			15,021			17,792			17,371
	Automobile				6,959			9,165			11,641			14,475			17,667
	Other consumer				68,012			61,744			56,782			54,779			50,101

		Total loans held for investment			10,044,136			10,049,375			10,355,894			10,043,230			9,902,911
Increase (decrease) for:
	Undisbursed loan funds				(67,921	)		(72,765	)		(95,002	)		(99,309	)		(106,557	)
	Net deferred costs and premiums				105,393			96,499			96,744			91,379			85,926
	Allowance for losses				(32,247	)		(33,103	)		(34,999	)		(34,880	)		(35,834	)

		Total loans held for investment, net			10,049,361			10,040,006			10,322,637			10,000,420			9,846,446

Sale Portfolio, Net
Loans held for sale:
	Residential one-to-four units				716,477			631,261			649,964			662,292			379,796
	Capitalized basis adjustment ^(a)				5,452			2,415			2,088			3,295			1,669

		Total loans held for sale			721,929			633,676			652,052			665,587			381,465
Mortgage-backed securities available for sale:
	Adjustable				1,736			1,875			2,253			3,385			58,122
	Fixed				-			-			-			1,015,645			-

		Total mortgage-backed securities available for sale			1,736			1,875			2,253			1,019,030			58,122

		Total loans held for sale and mortgage-backed
			securities available for sale		723,665			635,551			654,305			1,684,617			439,587

		Total loans and mortgage-backed securities		$	10,773,026		$	10,675,557		$	10,976,942		$	11,685,037		$	10,286,033

^(a) Reflected the change in fair value of the rate lock derivative from the date of commitment to the date of funding.

We carry loans for sale at the lower of cost or fair value. At June 30, 2003, no valuation allowance was required as the fair value exceeded book value on an aggregate basis.

At June 30, 2003, our residential one-to-four units subprime portfolio consisted of approximately 89% "A-" credit, 9% "B" credit and 2% "C" credit loans. The average loan-to-value ratio at origination for these loans was approximately 74%.

We carry mortgage-backed securities available for sale at fair value which, at June 30, 2003, reflected an unrealized gain of $22,000. The current quarter-end unrealized gain, less the associated tax effect, is reflected within a separate component of other comprehensive income until realized.

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Trading and Investment Securities

The following table sets forth the composition of our trading and investment securities portfolios at the dates indicated.

		June 30,		March 31,		December 31,		September 30,		June 30,
(In Thousands)		2003		2003		2002		2002		2002

Federal funds		$	89,210	$	1,201	$	2,555	$	16,702	$	16,401
U.S. Treasury securities held for trading			201,781		-		-		-		-
U.S. Treasury and agency securities available for sale			276,904		214,449		457,797		264,743		290,297
Corporate bonds available for sale			-		-		-		2,500		2,535
Municipal securities held to maturity			6,215		6,215		6,216		6,387		6,387
Securities purchased under resale agreements			60,000		-		-		-		-

	Total trading and investment securities	$	634,110	$	221,865	$	466,568	$	290,332	$	315,620

The following table sets forth the maturities of our trading and investment securities and the weighted average yield of those securities at June 30, 2003.

							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

Federal funds			$	89,210	1.01	%	$	-	-	%	$	-	-	%	$	89,210	1.01	%
U.S. Treasury securities held for
	trading			-	-			-	-			201,781	3.57			201,781	3.57
U.S. Treasury and agency securities
	available for sale			-	-			233,118	2.12			43,786	1.98			276,904	2.10
Municipal securities held to maturity ^(a)				-	-			-	-			6,215	3.36			6,215	3.36
Securities purchased under resale
	agreements			60,000	0.95			-	-			-	-			60,000	0.95

		Total	$	149,210	0.99	%	$	233,118	2.12	%	$	251,782	3.29	%	$	634,110	2.32	%

^(a) Yield on a fully tax-equivalent basis is 5.82%.

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Deposits

At June 30, 2003, our deposits totaled $8.9 billion, up $205 million or 2.4% from the year-ago level, but down $102 million or 1.1% from the previous quarter. Compared to the year-ago period, our lower-rate transaction accounts—i.e., checking, money market and regular passbook—increased $1.1 billion or 27.5%, which was partially offset by a decrease in our certificates of deposit of $869 million or 18.2%. As depositors seemed more interested in liquidity given the relatively low level of interest rates, they continued to move monies from certificates of deposit to transaction accounts, primarily regular passbook accounts. At June 30, 2003, the average deposit size of our traditional branches was $103 million, while the average size of our in-store branches was $15 million, or $18 million excluding the 20 new in-store branches opened within the past 12 months.

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

				June 30, 2003				March 31, 2003				December 31, 2002				September 30, 2002				June 30, 2002

				Weighted				Weighted				Weighted				Weighted				Weighted
				Average				Average				Average				Average				Average
(Dollars in Thousands)				Rate		Amount		Rate		Amount		Rate		Amount		Rate		Amount		Rate		Amount

Transaction accounts:
	Non-interest-bearing
		checking		-	%	$	403,264	-	%	$	446,668	-	%	$	388,376	-	%	$	312,338	-	%	$	295,788
	Interest-bearing
		checking ^(a)		0.21			439,408	0.21			434,148	0.25			422,417	0.25			410,095	0.25			418,310
	Money market			1.05			127,194	1.19			127,257	1.37			120,105	1.64			113,746	1.80			114,618
	Regular passbook			1.28			4,015,045	1.45			3,872,525	1.70			3,639,798	2.04			3,413,891	2.42			3,082,356

		Total transaction
			accounts	1.08			4,984,911	1.20			4,880,598	1.41			4,570,696	1.71			4,250,070	1.99			3,911,072
Certificates of deposit:
	Less than 2.00%			1.35			1,479,928	1.45			1,292,664	1.57			919,864	1.75			452,965	1.83			123,651
	2.00-2.49			2.23			416,718	2.24			241,833	2.28			401,657	2.32			766,889	2.33			840,677
	2.50-2.99			2.76			277,926	2.80			436,352	2.79			528,557	2.78			722,442	2.77			800,658
	3.00-3.49			3.32			602,691	3.32			706,952	3.38			1,188,078	3.36			1,213,176	3.33			1,258,969
	3.50-3.99			3.85			254,400	3.89			545,453	3.89			700,250	3.88			664,344	3.84			588,142
	4.00-4.49			4.25			361,212	4.25			368,490	4.25			374,424	4.25			376,386	4.25			563,298
	4.50-4.99			4.80			469,279	4.80			471,542	4.80			473,399	4.80			492,254	4.80			456,618
	5.00 and greater			5.58			48,387	5.57			53,674	5.63			81,425	5.78			118,406	5.84			147,473

		Total certificates
			of deposit	2.74			3,910,541	2.97			4,116,960	3.19			4,667,654	3.30			4,806,862	3.41			4,779,486

			Total deposits	1.81	%	$	8,895,452	2.01	%	$	8,997,558	2.31	%	$	9,238,350	2.55	%	$	9,056,932	2.77	%	$	8,690,558

^(a) Included amounts swept into money market deposit accounts.

Borrowings

During the current quarter, our borrowings increased $375 million to $1.7 billion, due primarily to an increase in FHLB advances. This followed a decrease of $323 million during the first quarter of 2003.

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

		June 30,			March 31,			December 31,			September 30,			June 30,
(Dollars in Thousands)		2003			2003			2002			2002			2002

Federal Home Loan Bank advances		$	1,672,850		$	1,300,850		$	1,624,084		$	1,687,431		$	1,413,607
Securities sold under agreements to repurchase			-			-			-			182,358			-
Other borrowings			3,121			-			-			-			-

	Total borrowings	$	1,675,971		$	1,300,850		$	1,624,084		$	1,869,789		$	1,413,607

Weighted average rate on borrowings during
	the quarter		4.22	%		3.91	%		4.10	%		4.35	%		4.59	%
Total borrowings as a percentage of total assets			14.03			11.37			13.56			14.94			12.70

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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 on our capital securities, including the amortization of deferred issuance costs, was $3.0 million for the second quarter of both 2003 and 2002. These securities may be called at our option at $25 per share beginning in July of 2004.

Off-Balance Sheet Arrangements

We consolidate majority-owned subsidiaries that we control. We account for other affiliates, including joint ventures, in which we do not exhibit significant control or have majority ownership, by the equity method of accounting. For those relationships in which we own less than 20%, we generally carry them at cost. In the course of our business, we participate as a partner in real estate joint venture relationships through our wholly-owned subsidiary, DSL Service Company. It is possible that certain of our real estate joint venture partnerships will likely require consolidation as a result of applying the provisions of the recently issued Financial Accounting Standards Board Interpretation 46. The financial impact of this interpretation is expected to be immaterial. For further information, see Note 8 of Notes to the Consolidated Financial Statements on page 13.

We enter into derivative financial instruments as part of our interest rate risk management process, primarily related to our sale of loans in the secondary market. The associated fair value changes to the notional amount of the derivative instrument are recorded on-balance sheet. For further information regarding our derivative instruments, see Asset/Liability Management and Market Risk on page 34, Capital Resources and Liquidity—Contractual Obligations and Other Commitments on page 43 and Note 3 of Notes to the Consolidated Financial Statements on page 8.

We also utilize financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to originate fixed and variable rate mortgage loans held for investment, undisbursed loan funds, lines of credit and letters of credit, and commitments to purchase loans and mortgage-backed securities for our portfolio. The contract or notional amounts of these instruments reflect the extent of involvement we have in particular classes of financial instruments. For further information regarding these commitments, see Asset/Liability Management and Market Risk on page 34, Capital Resources and Liquidity—Contractual Obligations and Other Commitments on page 43 and Note 3 of Notes to the Consolidated Financial Statements on page 8.

We use the same credit policies in making commitments to originate or purchase loans, lines of credit and letters of credit as we do for on-balance sheet instruments. For commitments to originate loans held for investment, the contract amounts represent exposure to loss from market fluctuations as well as credit loss. In regard to these commitments, adverse changes from market fluctuations are generally not hedged. We control the credit risk of our commitments to originate loans held for investment through credit approvals, limits and monitoring procedures.

We do not dispose of troubled loans or problem assets by means of unconsolidated special purpose entities.

Transactions with Related Parties

There are no related party transactions required to be disclosed in accordance with FASB Statement No. 57, Related Party Disclosures. Loans to our executive officers and directors were made in the ordinary course of business and were made on substantially the same terms as comparable transactions.

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Asset/Liability Management and Market Risk

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

In addition to the market risk associated with our lending and deposit taking activities, we also have market risk associated with our secondary marketing activities. Changes in mortgage interest rates, primarily fixed rate mortgages, impact the fair value of loans held for sale as well as our interest rate lock commitment derivatives, where we have committed to an interest rate with a potential borrower for a loan we intend to sell. Our objective is to hedge against fluctuations in interest rates through use of forward sale and purchase contracts with government-sponsored enterprises and whole loan sale contracts with various parties. These contracts are typically obtained at the time the interest rate lock commitments are made. Therefore, as interest rates fluctuate, the changes in the fair value of our interest rate lock commitments and loans held for sale tend to be offset by changes in the fair value of the hedge contracts. The method used for assessing the effectiveness of a hedging derivative, as well as the measurement approach for determining the ineffective aspects of the hedge, is established at the inception of the hedge. Although we continue to hedge as previously done, SFAS 133, as applied to our risk management strategies, may increase or decrease reported net income and stockholders’ equity, depending on levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on the overall economics of the transactions. We generally do not enter into hedging type contracts for speculative purposes.

Changes in mortgage interest rates also impact the value of our mortgage servicing rights. Rising interest rates typically result in slower prepayment speeds on the loans being serviced for others which increase the value of mortgage servicing rights. Declining interest rates typically result in faster prepayment speeds which decrease the value of mortgage servicing rights. Previously, we have not hedged our mortgage servicing rights. However, in light of the Federal Reserve’s change in bias towards weakness at their May 6, 2003 meeting and the potential for further declines in market interest rates, we purchased during the current quarter 10-year U.S. Treasury securities as a partial economic hedge against the value of our mortgage servicing rights. These securities are classified in a trading account and are carried at fair value, with any changes in fair value reflected in earnings. This partial economic hedge may be closed at any time or other financial instruments may be substituted.

There has been no significant change in our market risk since December 31, 2002.

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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 June 30, 2003, as well as other information regarding the repricing and maturity differences between our interest-earning assets and total deposits, borrowings and capital securities in future periods. We refer to these differences as "gap." We have determined the repricing frequencies by reference to projected maturities, based upon contractual maturities as adjusted for scheduled repayments and "repricing mechanisms"—provisions for changes in the interest and dividend rates of assets and liabilities. We assume prepayment rates on substantially all of our loan portfolio based upon our historical loan prepayment experience and anticipated future prepayments. Repricing mechanisms on a number of our assets are subject to limitations, such as caps on the amount that interest rates and payments on our loans may adjust, and accordingly, these assets do not normally respond to changes in market interest rates as completely or rapidly as our liabilities. The interest rate sensitivity of our assets and liabilities illustrated in the following table would vary substantially if we used different assumptions or if actual experience differed from the assumptions set forth.

					June 30, 2003

					Within			7 – 12			1 – 5			6 – 10			Over			Total
(Dollars in Thousands)					6 Months			Months			Years			Years			10 Years			Balance

Interest-earning assets:
	Trading securities				$	201,781		$	-		$	-		$	-		$	-		$	201,781
	Investment securities and FHLB stock^(a)					455,904			61,857			35,018			67			-			552,846
	Loans and mortgage-backed securities:^(b)
		Loans secured by real estate:
			Residential:
				Adjustable		8,110,597			312,786			1,406,217			-			-			9,829,600
				Fixed		628,668			28,803			84,762			11,118			1,596			754,947
			Commercial real estate			29,245			4,736			11,267			5,654			-			50,902
			Construction			50,388			-			-			-			-			50,388
			Land			6,975			7			51			610			-			7,643
		Non-mortgage loans:
			Commercial			4,039			-			-			-			-			4,039
			Consumer			68,801			1,663			3,307			-			-			73,771
		Mortgage-backed securities				1,736			-			-			-			-			1,736

	Total loans and mortgage-backed securities					8,900,449			347,995			1,505,604			17,382			1,596			10,773,026

		Total interest-earning assets			$	9,558,134		$	409,852		$	1,540,622		$	17,449		$	1,596		$	11,527,653

Transaction accounts:
	Non-interest-bearing checking				$	403,264		$	-		$	-		$	-		$	-		$	403,264
	Interest-bearing checking^(c)					439,408			-			-			-			-			439,408
	Money market ^(d)					127,194			-			-			-			-			127,194
	Regular passbook ^(d)					4,015,045			-			-			-			-			4,015,045

		Total transaction accounts				4,984,911			-			-			-			-			4,984,911
Certificates of deposit^(a)						1,900,122			614,520			1,395,899			-			-			3,910,541

	Total deposits					6,885,033			614,520			1,395,899			-			-			8,895,452
Borrowings						465,821			60,000			691,150			459,000			-			1,675,971
Capital securities						-			-			-			-			120,000			120,000

	Total deposits, borrowings and
		capital securities			$	7,350,854		$	674,520		$	2,087,049		$	459,000		$	120,000		$	10,691,423

Excess (shortfall) of interest-earning assets over
	deposits, borrowings and capital securities				$	2,207,280		$	(264,668	)	$	(546,427	)	$	(441,551	)	$	(118,404	)	$	836,230
Cumulative gap						2,207,280			1,942,612			1,396,185			954,634			836,230
Cumulative gap–as a percentage of total assets:
	June 30, 2003					18.47	%		16.26	%		11.69	%		7.99	%		7.00	%
	December 31, 2002					16.80			12.54			9.33			5.80			4.83
	June 30, 2002					21.95			12.73			9.31			5.45			4.42

^(a) Based upon contractual maturity and repricing date.
^(b) Based upon contractual maturity, repricing date and projected repayment and prepayments of principal.
^(c) Included amounts swept into money market deposit accounts and is subject to immediate repricing.
^(d) Subject to immediate repricing.

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Our six-month gap at June 30, 2003 was a positive 18.47%. This means that more interest-earning assets mature or reprice within six months than total deposits, borrowings and capital securities. This compares to a positive six-month gap of 16.80% at December 31, 2002 and 21.95% a year ago.

We continue to pursue our strategy of emphasizing the origination of adjustable rate mortgages. For the twelve months ended June 30, 2003, we originated and purchased for investment $4.6 billion of adjustable rate loans which represented approximately 99% of all loans we originated and purchased for investment during the period.

At June 30, 2003, December 31, 2002 and June 30, 2002, essentially all of our interest-earning assets mature, reprice or are estimated to prepay within five years. At June 30, 2003, $9.9 billion or 98% of our loans held for investment and mortgage-backed securities portfolios consisted of adjustable rate loans and loans with a due date of five years or less, compared to $10.1 billion or 98% at December 31, 2002, and $9.7 billion or 97% a year ago. During the second quarter, we continued to offer residential fixed rate loan products to our customers primarily for sale in the secondary market. We price and originate fixed rate mortgage loans for sale into the secondary market to increase opportunities to originate adjustable rate mortgages and to generate fees and servicing income. We also originate fixed rate loans for portfolio to facilitate the sale of real estate acquired in settlement of loans and which meet specific yield and other approved guidelines.

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

				June 30,		March 31,		December 31,		September 30,		June 30,
				2003		2003		2002		2002		2002

Weighted average yield: ^(a)
	Loans and mortgage-backed securities			5.24	%	5.53	%	5.83	%	6.00	%	6.01	%
	Federal Home Loan Bank stock			4.80		5.31		5.24		2.87		5.56
	Trading and investment securities			2.32		2.34		3.07		3.12		3.44

		Interest-earning assets yield		5.08		5.46		5.72		5.90		5.93

Weighted average cost:
	Deposits			1.81		2.01		2.31		2.55		2.77
	Borrowings:
		Federal Home Loan Bank advances		3.68		4.50		3.88		3.95		4.32
		Other borrowings		6.63		-		-		2.02		-

			Total borrowings	3.68		4.50		3.88		3.76		4.32
	Capital securities			10.00		10.00		10.00		10.00		10.00

		Combined funds cost		2.20		2.42		2.63		2.84		3.07

			Interest rate spread	2.88	%	3.04	%	3.09	%	3.06	%	2.86	%

^(a) Excludes adjustments for non-accrual loans, and amortization of net deferred costs to originate loans, premiums and discounts.

The period-end weighted average yield on our loan portfolio declined to 5.24% at June 30, 2003, down from 5.83% at December 31, 2002 and 6.01% at June 30, 2002. At June 30, 2003, our adjustable rate mortgage portfolio of single family residential loans, including mortgage-backed securities, totaled $9.8 billion with a weighted average rate of 5.16%, compared to $9.9 billion with a weighted average rate of 5.75% at December 31, 2002, and $9.4 billion with a weighted average rate of 5.91% at June 30, 2002.

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Problem Loans and Real Estate

Non-Performing Assets

Non-performing assets consist of loans on which we have ceased accruing 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. Our non-performing assets declined $9 million during the current quarter to $66 million or 0.56% of total assets. The decline was primarily in the residential category, of which $5 million was associated with prime loans and $4 million was associated with subprime loans.

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

			June 30,			March 31,			December 31,			September 30,			June 30,
(Dollars in Thousands)			2003			2003			2002			2002			2002

Non-accrual loans:
	Residential one-to-four units		$	29,758		$	34,426		$	34,504		$	36,068		$	33,827
	Residential one-to-four units – subprime			26,568			30,086			32,263			36,304			31,540
	Other			646			683			681			823			4,305

		Total non-accrual loans		56,972			65,195			67,448			73,195			69,672
Troubled debt restructure – below market rate ^(a)				-			-			-			203			203
Real estate acquired in settlement of loans				9,464			10,205			12,360			15,441			13,528
Repossessed automobiles				3			-			6			15			16

	Total non-performing assets		$	66,439		$	75,400		$	79,814		$	88,854		$	83,419

Allowance for loan losses:
	Amount		$	32,247		$	33,103		$	34,999		$	34,880		$	35,834
	As a percentage of non-performing loans			56.60	%		50.78	%		51.89	%		47.52	%		51.28	%
Non-performing assets as a percentage of total assets				0.56			0.66			0.67			0.71			0.75

^(a) Represented one residential one-to-four unit loan.

Delinquent Loans

Loans delinquent 30 days or more as a percentage of total loans declined to 0.69% at June 30, 2003, from 0.80% at March 31, 2003, and 0.91% a year ago. The decline primarily occurred in our residential one-to-four units category.

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

			June 30, 2003												March 31, 2003

			30-59			60-89			90+						30-59			60-89			90+
(Dollars in Thousands)			Days			Days			Days ^(a)			Total			Days			Days			Days ^(a)			Total

Loans secured by real estate:
	Residential:
		One-to-four units	$	17,488		$	5,482		$	23,500		$	46,470		$	18,566		$	7,771		$	26,054		$	52,391
		One-to-four units – subprime		4,785			4,350			18,302			27,437			7,835			6,943			17,496			32,274
		Five or more units		-			-			-			-			-			-			-			-
	Commercial real estate			-			-			-			-			-			-			-			-
	Construction			-			-			-			-			-			-			-			-
	Land			-			-			-			-			-			-			-			-

		Total real estate loans		22,273			9,832			41,802			73,907			26,401			14,714			43,550			84,665
Non-mortgage:
	Commercial			-			-			428			428			-			-			428			428
	Automobile			94			18			44			156			158			23			15			196
	Other consumer			77			16			174			267			141			70			240			451

		Total delinquent loans	$	22,444		$	9,866		$	42,448		$	74,758		$	26,700		$	14,807		$	44,233		$	85,740

Delinquencies as a percentage of total loans				0.21	%		0.09	%		0.39	%		0.69	%		0.25	%		0.14	%		0.41	%		0.80	%


			December 31, 2002												September 30, 2002

Loans secured by real estate:
	Residential:
		One-to-four units	$	19,881		$	8,066		$	27,333		$	55,280		$	17,835		$	10,454		$	25,487		$	53,776
		One-to-four units – subprime		8,971			5,944			23,831			38,746			11,606			6,565			22,275			40,446
		Five or more units		-			-			-			-			-			-			-			-
	Commercial real estate			-			-			-			-			-			-			-			-
	Construction			-			-			-			-			-			-			-			-
	Land			-			-			-			-			-			-			-			-

		Total real estate loans		28,852			14,010			51,164			94,026			29,441			17,019			47,762			94,222
Non-mortgage:
	Commercial			-			-			466			466			-			1,235			548			1,783
	Automobile			98			13			4			115			126			9			26			161
	Other consumer			48			47			211			306			147			36			249			432

		Total delinquent loans	$	28,998		$	14,070		$	51,845		$	94,913		$	29,714		$	18,299		$	48,585		$	96,598

Delinquencies as a percentage of total loans				0.26	%		0.13	%		0.47	%		0.86	%		0.28	%		0.17	%		0.45	%		0.90	%


			June 30, 2002

Loans secured by real estate:
	Residential:
		One-to-four units	$	20,531		$	6,461		$	27,472		$	54,464
		One-to-four units – subprime		10,694			3,308			24,228			38,230
		Five or more units		-			-			-			-
	Commercial real estate			-			-			-			-
	Construction			-			-			-			-
	Land			-			-			-			-

		Total real estate loans		31,225			9,769			51,700			92,694
Non-mortgage:
	Commercial			-			-			428			428
	Automobile			190			13			54			257
	Other consumer			314			132			180			626

		Total delinquent loans	$	31,729		$	9,914		$	52,362		$	94,005

Delinquencies as a percentage of total loans				0.31	%		0.10	%		0.50	%		0.91	%

^(a) All 90 day or greater delinquencies are on non-accrual status and reported as part of non-performing assets.

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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. Management evaluates the adequacy of the allowance quarterly to maintain the allowance at levels sufficient to provide for inherent losses.

We use an internal asset review system and loss allowance methodology to provide for timely recognition of problem assets and adequate general valuation allowances to cover asset losses. The amount of the allowance is based upon the total of general valuation allowances, allocated allowances and an unallocated allowance. General valuation allowances relate to assets with no well-defined deficiency or weakness and takes into consideration loss that is imbedded within the portfolio but has not yet been realized. Allocated allowances relate to assets with well-defined deficiencies or weaknesses. 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 our carrying value of the asset exceeds the net fair value and no alternative payment source exists, then a specific allowance is recorded for the amount of that difference. The unallocated allowance 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.

Allowances for losses on all assets were $33 million at June 30, 2003, compared to $36 million at December 31, 2002, and $38 million a year ago.

In the current quarter, we reversed $0.6 million of provision for loan losses and net loan charge-offs totaled $0.2 million, resulting in a decrease in the allowance for loan losses to $32 million at June 30, 2003. The current quarter decline in the allowance reflected decreases of $0.7 million in the general valuation allowances due to change of mix in the loan portfolio and $0.1 million in allocated allowances to $4.6 million due to declines in various loan categories. There was no change in our unallocated allowance of $2.8 million.

The following table summarizes the activity in our allowance for loan losses for the quarters indicated.

		Three Months Ended

		June 30,			March 31,			December 31,			September 30,			June 30,
(In Thousands)		2003			2003			2002			2002			2002

Balance at beginning of period		$	33,103		$	34,999		$	34,880		$	35,834		$	37,307
Provision (reduction)			(624	)		(1,709	)		127			471			(1,106	)
Charge-offs			(236	)		(191	)		(118	)		(1,450	)		(387	)
Recoveries			4			4			110			25			20

	Balance at end of period	$	32,247		$	33,103		$	34,999		$	34,880		$	35,834

Since year-end 2002, our allowance for loan losses declined by $2.8 million, from decreases in the general valuation allowances of $2.0 million and allocated allowances of $0.8 million.

The following table summarizes the activity in our allowance for loan losses during the year-to-date periods indicated.

		Six Months Ended June 30,

(In Thousands)		2003			2002

Balance at beginning of period		$	34,999		$	36,120
Provision (reduction)			(2,333	)		341
Charge-offs			(427	)		(663	)
Recoveries			8			36

	Balance at end of period	$	32,247		$	35,834

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

			Three Months Ended															Six Months Ended

			June 30,			March 31,			December 31,			September 30,			June 30,			June 30,
(Dollars in Thousands)			2003			2003			2002			2002			2002			2003			2002

Gross loan charge-offs
Loans secured by real estate:
	Residential:
		One-to-four units	$	130		$	17		$	-		$	113		$	197		$	147		$	322
		One-to-four units – subprime		39			82			17			69			63			121			80
		Five or more units		-			-			-			-			-			-			-
	Commercial real estate			-			-			-			1,188			-			-			-
	Construction			-			-			-			-			-			-			-
	Land			-			-			-			-			-			-			-
Non-mortgage:
	Commercial			-			20			-			-			-			20			-
	Automobile			8			10			16			3			33			18			85
	Other consumer			59			62			85			77			94			121			176

		Total gross loan charge-offs		236			191			118			1,450			387			427			663

Gross loan recoveries
Loans secured by real estate:
	Residential:
		One-to-four units		-			-			102			-			-			-			9
		One-to-four units – subprime		-			-			-			-			-			-			-
		Five or more units		-			-			-			-			-			-			-
	Commercial real estate			-			-			-			-			-			-			-
	Construction			-			-			-			-			-			-			-
	Land			-			-			-			-			-			-			-
Non-mortgage:
	Commercial			-			-			-			-			-			-			-
	Automobile			1			1			5			21			16			2			21
	Other consumer			3			3			3			4			4			6			6

		Total gross loan recoveries		4			4			110			25			20			8			36

Net loan charge-offs
Loans secured by real estate:
	Residential:
		One-to-four units		130			17			(102	)		113			197			147			313
		One-to-four units – subprime		39			82			17			69			63			121			80
		Five or more units		-			-			-			-			-			-			-
	Commercial real estate			-			-			-			1,188			-			-			-
	Construction			-			-			-			-			-			-			-
	Land			-			-			-			-			-			-			-
Non-mortgage:
	Commercial			-			20			-			-			-			20			-
	Automobile			7			9			11			(18	)		17			16			64
	Other consumer			56			59			82			73			90			115			170

		Total net loan charge-offs	$	232		$	187		$	8		$	1,425		$	367		$	419		$	627

Net loan charge-offs as a
	percentage of average loans			0.01	%		0.01	%		-	%		0.05	%		0.01	%		0.01	%		0.01	%

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The following table indicates our allocation of the allowance for loan losses to the various categories of loans at the dates indicated.

			June 30, 2003						March 31, 2003						December 31, 2002

					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

Loans secured by real estate:
	Residential:
		One-to-four units	$	17,447	$	8,544,276	0.20	%	$	17,553	$	8,442,914	0.21	%	$	18,562	$	8,647,197	0.21	%
		One-to-four units – subprime		7,315		1,196,162	0.61			7,965		1,300,418	0.61			8,642		1,386,113	0.62
		Five or more units		324		43,255	0.75			160		21,340	0.75			80		10,640	0.75
	Commercial real estate			1,171		53,031	2.21			1,226		58,143	2.11			1,364		71,415	1.91
	Construction			1,256		105,858	1.19			1,197		100,767	1.19			1,223		103,547	1.18
	Land			250		20,090	1.24			498		39,962	1.25			636		53,538	1.19
Non-mortgage:
	Commercial			504		6,493	7.76			564		14,922	3.78			586		15,021	3.90
	Automobile			94		6,959	1.35			82		9,165	0.89			100		11,641	0.86
	Other consumer			1,086		68,012	1.60			1,058		61,744	1.71			1,006		56,782	1.77
Not specifically allocated				2,800		-	-			2,800		-	-			2,800		-	-

	Total loans held for investment		$	32,247	$	10,044,136	0.32	%	$	33,103	$	10,049,375	0.33	%	$	34,999	$	10,355,894	0.34	%


			September 30, 2002						June 30, 2002

Loans secured by real estate:
	Residential:
		One-to-four units	$	17,951	$	8,285,998	0.22	%	$	17,291	$	8,122,908	0.21	%
		One-to-four units – subprime		8,873		1,420,081	0.62			8,697		1,417,915	0.61
		Five or more units		63		8,430	0.75			65		8,727	0.74
	Commercial real estate			1,448		77,665	1.86			2,905		81,722	3.55
	Construction			1,292		110,125	1.17			1,459		124,318	1.17
	Land			665		53,885	1.23			769		62,182	1.24
Non-mortgage:
	Commercial			634		17,792	3.56			596		17,371	3.43
	Automobile			127		14,475	0.88			250		17,667	1.42
	Other consumer			1,027		54,779	1.87			1,002		50,101	2.00
Not specifically allocated				2,800		-	-			2,800		-	-

	Total loans held for investment		$	34,880	$	10,043,230	0.35	%	$	35,834	$	9,902,911	0.36	%

At June 30, 2003, the recorded investment in loans for which we recognized impairment totaled $13 million, unchanged from December 31, 2002, but down from $17 million a year ago. The allowance for losses related to these loans was $1 million at both June 30, 2003 and December 31, 2002, and $2 million a year ago. During the second quarter, total interest recognized on the impaired loan portfolio was $0.3 million.

The following table summarizes the activity in our allowance for loan losses associated with impaired loans for the quarters indicated.

		Three Months Ended

		June 30,			March 31,			December 31,			September 30,			June 30,
(In Thousands)		2003			2003			2002			2002			2002

Balance at beginning of period		$	720		$	725		$	747		$	2,203		$	2,356
Reduction			(4	)		(5	)		(22	)		(268	)		(153	)
Charge-offs			-			-			-			(1,188	)		-
Recoveries			-			-			-			-			-

	Balance at end of period	$	716		$	720		$	725		$	747		$	2,203

For the first six months of 2003, total interest recognized on the impaired loan portfolio was $0.6 million.

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The following table summarizes the activity in our allowance for loan losses associated with impaired loans for the year-to-date periods indicated.

		Six Months Ended June 30,

(In Thousands)		2003			2002

Balance at beginning of period		$	725		$	759
Provision (reduction)			(9	)		1,444
Charge-offs			-			-
Recoveries			-			-

	Balance at end of period	$	716		$	2,203

The following table summarizes the activity in our allowance for real estate and joint ventures held for investment for the quarters indicated.

		Three Months Ended

		June 30,		March 31,		December 31,			September 30,			June 30,
(In Thousands)		2003		2003		2002			2002			2002

Balance at beginning of period		$	949	$	908	$	1,752		$	1,851		$	1,033
Provision (reduction)			147		41		151			(99	)		818
Charge-offs			-		-		(995	)		-			-
Recoveries			-		-		-			-			-

	Balance at end of period	$	1,096	$	949	$	908		$	1,752		$	1,851

The following table summarizes the activity in our allowance for real estate and joint ventures held for investment for the year-to-date periods indicated.

		Six Months Ended June 30,

(In Thousands)		2003		2002

Balance at beginning of period		$	908	$	2,690
Provision (reduction)			188		(500	)
Charge-offs			-		(339	)
Recoveries			-		-

	Balance at end of period	$	1,096	$	1,851

Capital Resources and Liquidity

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

Our primary sources of funds generated in the second quarter of 2003 were from:

principal repayments of $1.3 billion—including prepayments, but excluding refinances of our existing loans—on loans and mortgage-backed securities;
a net increase in FHLB advances and other borrowings of $375 million; and
maturities of U.S. Treasury securities, agency obligations and other investment securities available for sale of $74 million.

We used these funds for the following purposes:

to originate and purchase loans held for investment, excluding refinances of our existing loans, of $1.3 billion;
to purchase U.S. Treasury securities, agency obligations and other investment securities available for sale of $132 million;
to fund a net decline in deposits of $102 million;

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to increase our loans held for sale a net $88 million; and
to purchase loans and securities under resale agreements of $60 million.

Our principal source of liquidity is our ability to utilize borrowings, as needed. Our primary source of borrowings is from the FHLB. At June 30, 2003, our FHLB borrowings totaled $1.7 billion, representing 14% of total assets. We currently are approved by the FHLB to borrow up to 40% of total assets to the extent we provide qualifying collateral and hold sufficient FHLB stock. That approved limit would have permitted us, as of quarter end, to borrow an additional $3.1 billion. To the extent deposit growth over the remainder of 2003 falls short of satisfying ongoing commitments to fund maturing and withdrawable deposits, repay maturing borrowings, fund existing and future loans, make investments, and continue branch improvement programs, we may utilize our FHLB borrowing arrangement or possibly other sources. As of June 30, 2003, we had commitments to borrowers for short-term rate locks, not including expected fallout, of $1.6 billion, undisbursed loan funds and unused lines and letters of credit of $187 million, operating leases of $17 million, commitments to purchase loans of $41 million, other contingent liabilities of $3 million and commitments to invest in affordable housing funds of $2 million. We believe our current sources of funds, including repayments of existing loans, enable us to meet our obligations while maintaining liquidity at appropriate levels.

Another measure of liquidity in the savings and loan industry is the ratio of cash and eligible investments to the sum of withdrawable savings and borrowings due within one year. The Bank’s ratio was 5.8% at June 30, 2003, 5.4% at December 31, 2002 and 4.3% a year ago.

The holding company currently has adequate liquid assets to meet its obligations and can obtain further funds by means of dividends from subsidiaries, subject to certain limitations, or issuance of further debt or equity. At June 30, 2003, the holding company’s liquid assets, including due from Bank—interest bearing balances, totaled $68 million.

On July 24, 2002, the Board of Directors of Downey authorized a share repurchase program of up to $50 million of our common stock. To fund this program, the Bank paid a special $50 million dividend during the third quarter of 2002 to the holding company. The shares are being repurchased from time-to-time in open market transactions. The timing, volume and price of purchases will be made at our discretion, and will also be contingent upon our overall financial condition, as well as market conditions in general. To-date, a total of 306,300 shares have been repurchased at an average price of $39.73. There have been no shares repurchased since the fourth quarter of 2002 and, at June 30, 2003, $38 million of the original authorization remains available for future purchases.

Stockholders’ equity totaled $869 million at June 30, 2003, up from $823 million at December 31, 2002 and $787 million a year ago.

Contractual Obligations and Other Commitments

Through the normal course of operations, we have entered into certain contractual obligations and other commitments. Our obligations generally relate to funding of our operations through deposits and borrowings as well as leases for premises and equipment, and our commitments generally relate to our lending operations.

We have obligations under long term operating leases, principally for building space and land. Lease terms generally cover a five-year period, with options to extend, and are non-cancelable.

Our 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 commitment. Undisbursed loan funds and unused lines of credit include funds not disbursed, but committed to construction projects and home equity and commercial lines of credit. Letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party.

Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some commitments 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. We evaluate each customer’s creditworthiness.

We receive 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 us.

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We enter into derivative financial instruments as part of our interest rate risk management process, primarily related to our sale of loans in the secondary market. For further information regarding our derivative instruments, see Asset/Liability Management and Market Risk on page 34 and Note 3 of Notes to the Consolidated Financial Statements on page 8.

At June 30, 2003, scheduled maturities of certificates of deposit and FHLB advances, secondary marketing activities, loans held for investment, future operating minimum lease commitments and other contractual obligations were as follows:

			Within		1 – 3		4 – 5		Over		Total
(In Thousands)			1 Year		Years		Years		5 Years		Balance

Certificates of deposit			$	2,514,642	$	825,480	$	570,419	$	-	$	3,910,541
FHLB advances and other borrowings				525,821		564,850		126,300		459,000		1,675,971
Secondary marketing activities:
	Non-qualifying hedge transactions:
		Expected rate lock commitments		950,703		-		-		-		950,703
		Associated forward sale contracts		985,094		-		-		-		985,094
		Associated forward purchase contracts		139,000		-		-		-		139,000
	Qualifying cash flow hedge transactions:
		Loans held for sale, at lower of cost or fair value		721,929		-		-		-		721,929
		Associated forward sale contracts		710,099		-		-		-		710,099
Commitments to originate loans held for investment:
	Adjustable			336,303		-		-		-		336,303
	Fixed			235		-		-		-		235
Undisbursed loan funds and unused lines of credit				57,578		10,343		-		115,799		183,720
Operating leases				4,317		7,139		3,791		2,108		17,355
Letters of credit and other contingent liabilities				-		-		-		6,044		6,044
Commitments to purchase loans				40,816		-		-		-		40,816
Commitments to invest in affordable housing funds				-		-		-		2,400		2,400

	Total obligations and commitments		$	6,986,537	$	1,407,812	$	700,510	$	585,351	$	9,680,210

Regulatory Capital Compliance

Our core and tangible capital ratios were both 7.20% and our risk-based capital ratio was 14.23% at June 30, 2003. The Bank’s capital ratios exceed the "well capitalized" standards of 5.00% for core capital and 10.00% for risk-based capital, as defined by regulation.

The following table is a reconciliation of the Bank’s stockholder’s equity to federal regulatory capital as of June 30, 2003.

				Tangible Capital						Core Capital					Risk-Based Capital

(Dollars in Thousands)				Amount			Ratio			Amount			Ratio		Amount			Ratio

Stockholder’s equity				$	917,824					$	917,824				$	917,824
Adjustments:
	Deductions:
		Investment in subsidiary, primarily real estate			(34,806	)					(34,806	)				(34,806	)
		Loans to subsidiary joint ventures			(19,415	)					(19,415	)				(19,415	)
		Excess cost over fair value of branch acquisitions			(3,150	)					(3,150	)				(3,150	)
		Non-permitted mortgage servicing rights			(4,872	)					(4,872	)				(4,872	)
		Unrealized gains on securities available for sale			(1,135	)					(1,135	)				(1,135	)
	Additions:
		General loss allowance – investment in DSL
			Service Company		390						390					390
		Allowance for loan losses,
			net of specific allowances ^(a)		-						-					31,704

Regulatory capital					854,836		7.20	%			854,836		7.20	%		886,540		14.23	%
Well capitalized requirement					178,063		1.50		^(b)		593,544		5.00			622,880		10.00		^(c)

Excess				$	676,773		5.70	%		$	261,292		2.20	%	$	263,660		4.23	%

^(a) Limited to 1.25% of risk-weighted assets.
^(b) Represents the minimum requirement for tangible capital, as no "well capitalized" requirement has been established for this category.
^(c) A third requirement is Tier 1 capital to risk-weighted assets of 6.00%, which the Bank met and exceeded with a ratio of 13.72%.

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ITEM 3. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For information regarding quantitative and qualitative disclosures about market risk, see Financial Condition—Asset/Liability Management and Market Risk on page 34.

ITEM 4. – CONTROLS AND PROCEDURES

Within 90 days of the date of this report, Downey carried out an evaluation, under the supervision and with the participation of Downey’s management, including Downey’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Downey’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Downey’s disclosure controls and procedures are effective in timely alerting them to material information relating to Downey required to be included in Downey’s periodic Securities and Exchange Commission filings. There has been no significant changes in Downey’s internal controls or in other factors that could significantly affect these controls subsequent to the evaluation date.

Disclosure controls and procedures are defined in Rule 13a-14 of the Exchange Act as controls and other procedures designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Downey’s disclosure controls and procedures were designed to ensure that material information related to Downey, including subsidiaries, is made known to management, including the Chief Executive Officer and Chief Financial Officer, in a timely manner.

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PART II – OTHER INFORMATION

ITEM 1 – 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 2 – Changes in Securities and Use of Proceeds

None.

ITEM 3 – Defaults Upon Senior Securities

None.

ITEM 4 – Submission of Matters to a Vote of Security Holders

On April 23, 2003, Downey held its annual meting of shareholders to elect three Class 2 Directors for terms of three years each and to ratify the Board of Directors’ appointment of KPMG LLP as auditors for the year ending December 31, 2003. The number of votes cast at the meeting as to each matter acted upon was as follows:

1.	Election of Directors:

		Nominees	Votes For	Votes Withheld	Unvoted

		Cheryl E. Olson	22,225,715	406,355	5,296,652
		Lester C. Smull	18,974,357	3,657,713	5,296,652
		Michael B. Abrahams	22,225,676	406,394	5,296,652

	The Directors whose terms continued and the years their terms expire are as follows:

		Continuing Directors	Year Term Expires

		Dr. Paul Kouri	2004
		Brent McQuarrie	2004
		James H. Hunter	2004
		Gerald E. Finnell	2005
		Maurice L. McAlister	2005
		Daniel D. Rosenthal	2005

2.	Ratification of appointment of KPMG LLP as auditors for the year ending December 31, 2003:

		Votes For	Votes Against	Abstain	Unvoted

		21,893,941	328,421	409,708	5,296,652

ITEM 5 – Other Information

None.

ITEM 6 – Exhibits and Reports on Form 8-K

(A) Exhibits

Exhibit

Number

Description

3.1 ^(b)

Certificate of Incorporation of Downey Financial Corp.

3.2 ^(a)

Bylaws of Downey Financial Corp.

4.1 ^(d)

Junior Subordinated Indenture dated as of July 23, 1999 between Downey Financial Corp. and Wilmington

Trust Company as Indenture Trustee.

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(A) Exhibits (Continued)

Exhibit

Number

Description

4.2 ^(d)

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

4.3 ^(d)

Certificate of Trust of Downey Financial Capital Trust I, dated as of May 25, 1999.

4.4 ^(d)

Trust Agreement of Downey Financial Capital Trust I, dated May 25, 1999.

4.5 ^(d)

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 ^(d)

Certificate Evidencing Common Securities of Downey Financial Capital Trust I, 10% Common Securities.

4.7 ^(d)

Certificate Evidencing Capital Securities of Downey Financial Capital Trust I, 10% Capital Securities (Global

Certificate).

4.8 ^(d)

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

4.9 ^(d)

Capital Securities Guarantee Agreement of Downey Financial Corp. and Wilmington Trust Company, dated as

of July 23, 1999.

10.1 ^(c)

Downey Savings and Loan Association, F.A. Employee Stock Purchase Plan (Amended and Restated as of

January 1, 1996).

10.2 ^(c)

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 ^(c)

Downey Savings and Loan Association, F.A. Employees’ Retirement and Savings Plan (October 1, 1997

Restatement).

10.4 ^(c)

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 ^(c)

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 ^(b)

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

10.10 ^(a)

Founder Retirement Agreement of Maurice L. McAlister, dated December 21, 1989.

10.11 ^(e)

Amendment No. 1, Founders Retirement Agreement of Maurice L. McAlister, dated December 21, 1989.

Amendment No. 1, Effective and Adopted July 26, 2000.

10.13 ^(f)

Deferred Compensation Program.

10.14 ^(f)

Director Retirement Benefits.

10.15 ^(g)

Director Retirement Benefits Agreement of Sam Yellen, dated January 15, 2003.

31.1

Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

31.2

Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002.

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(A) Exhibits (Continued)

Exhibit

Number

Description

32.1

Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

32.2

Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

^(a) Filed as part of Downey’s Registration Statement on Form 8-B/A filed January 17, 1995.
^(b) Filed as part of Downey’s Registration Statement on Form S-8 filed February 3, 1995.
^(c) Filed as part of Downey’s report on Form 10-K filed March 16, 1998.
^(d) Filed as part of Downey’s report on Form 10-Q filed November 2, 1999.
^(e) Filed as part of Downey’s report on Form 10-Q filed August 2, 2000.
^(f) Filed as part of Downey’s report on Form 10-K filed March 7, 2001.
^(g) Filed as part of Downey’s report on Form 10-K filed March 6, 2003.

(B) Reports on Form 8-K

1) Form 8-K filed April 16, 2003, with respect to a press release reporting its results of operations during the three months ended March 31, 2003.

2) Form 8-K filed May 15, 2003, with respect to a press release reporting monthly selected financial data for the thirteen months ended April 30, 2003.

3) Form 8-K filed June 16, 2003, with respect to a press release reporting monthly selected financial data for the thirteen months ended May 31, 2003.

AVAILABILITY OF REPORTS

Annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge from our internet site, www.downeysavings.com, by clicking on "Investor Relations" located on our home page and proceeding to "Corporate Filings."

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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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.

/s/ Daniel D. Rosenthal

Date: July 31, 2003

Daniel D. Rosenthal

President and Chief Executive Officer

/s/ Thomas E. Prince

Date: July 31, 2003

Thomas E. Prince

Executive Vice President and Chief Financial Officer

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