Downey Announces Third Quarter 2008 Results

NEWPORT BEACH, Calif., Oct. 22 /PRNewswire-FirstCall/ -- Downey Financial
Corp. (NYSE: DSL) reported a net loss for third quarter 2008 of $81.1 million
or $2.89 per share on a diluted basis, compared to a net loss of $23.4 million
or $0.84 per share on a diluted basis in the year-ago third quarter.
The $45.5 million unfavorable change in pre-tax loss between third
quarters was due primarily to:
-- A $48.7 million or 59.7% increase in provision for credit losses
primarily due to a higher level of delinquent loans and an increase in
loss severity from the continuing decline in housing values that
provide the underlying collateral for our loans;
-- A $40.0 million or 63.8% increase in operating expense, of which
approximately 69% was due to higher costs related to the operation of
real estate acquired in settlement of loans, with the balance of the
increase primarily associated with higher deposit insurance premiums,
and professional fees and consulting fees; and
-- A $21.9 million or 22.4% decline in net interest income due to both a
lower level of interest-earning assets and a lower effective interest
rate spread.

These unfavorable items were partially offset by an increase in other income
of $65.2 million primarily due to the sale of non-core real estate related
contracts.
For the first nine months of 2008, the net loss totaled $547.7 million or
$19.64 per share on a diluted basis, compared with net income of $52.2 million
or $1.87 per share on a diluted basis for the first nine months of 2007.
Charles Rinehart, CEO, commented, "At quarter end, our core capital ratio
was 7.48% and our risk-based capital ratio was 14.50%, in each case exceeding
the minimum regulatory capital ratio required to be maintained by the Bank.
We continue to work with our financial advisor towards raising additional
external capital and we are reviewing the recently announced governmental
programs to determine which programs, if any, might be available and
appropriate for us. Finally, given depositor and marketplace concerns as
various banks failed during the third quarter, we increased our cash-related
assets as a cautionary measure relative to Downey's liquidity despite the
additional costs associated with doing so."
NET INTEREST INCOME
Net interest income totaled $76.0 million in the third quarter of 2008,
down $21.9 million or 22.4% from a year ago, reflecting a $1.828 billion or
13.0% decline in average interest-earning assets to $12.214 billion and a
decline in the effective interest rate spread. The average effective interest
rate spread was 2.49% in the current quarter, down 0.30% from a year ago and
0.24% from the second quarter of 2008. The decline in the current quarter
effective interest spread from a year ago primarily reflected the negative
impact of a higher proportion of non-performing assets. The decline in the
effective interest spread from the second quarter of 2008 reflected both a
higher level of non-performing assets as well as an increase in non-interest
bearing cash related assets for liquidity purposes funded with
interest-bearing liabilities.
For the first nine months of 2008, net interest income totaled
$242.7 million, down $91.9 million or 27.5% from the year-ago period.
PROVISION FOR CREDIT LOSSES
During the current quarter, the provision for credit losses totaled
$130.3 million, up $48.7 million from a year ago.
At September 30, 2008, the allowance for credit losses was $763 million,
comprised of $762 million for loan losses and $1 million for unfunded loan
commitments which is reported within accounts payable and accrued liabilities.
The allowance for credit losses increased $29.3 million this quarter, of
which $24.3 million was related to specific allowances associated with certain
troubled debt restructurings pursuant to our borrower retention program which
is discussed more fully below in the section entitled "Non-Performing Assets."
These specific allowances will be accreted into interest income over the
remaining life of the modified loans as long as they remain on accrual status.
The balance of the increase in the allowance for credit losses was primarily
due to loan workout modifications.
Downey's allowance methodology incorporates assumptions related to default
probabilities, loss severities and loss horizons based on historical
experience, current market conditions, and the unique characteristics of each
borrower, loan and underlying collateral. On a comparative basis, these
factors individually increase or decrease the amount of the allowance for loan
losses from prior periods. In the current quarter, loss severities continued
to increase and loss horizons continued to shorten. Further, as a result of
deteriorating conditions facing the residential housing market, borrower
equity continues to decline. Partially offsetting this unfavorable trend was a
small decrease in default probabilities due to lower mortgage interest rates
and a lower proportion of option ARM loans in our portfolio that have a higher
loss experience.
Net loan charge-offs totaled $97.6 million in the current quarter,
compared with $8.3 million a year ago. Net charge-offs in the current quarter
are primarily related to residential one-to-four unit loans compared with the
year-ago quarter which included a $4.0 million net charge-off associated with
a land loan that was foreclosed upon. The annualized net charge-off ratio in
the current quarter grew to 3.62% from 0.28% a year ago.
For the first nine months of 2008, the provision for credit losses totaled
$626.0 million and net charge-offs were $204.9 million. This compares with a
$91.7 million provision for credit losses and net charge-offs of $10.0 million
a year ago.
OTHER INCOME
Other income totaled $68.2 million in the current quarter, up
$65.2 million from a year ago primarily due to a $70.0 million gain from the
previously reported sale of certain non-core real estate contracts to a third
party. Offsetting contributors to this increase between third quarters was:
-- A $2.9 million unfavorable change in income from investments in real
estate and joint ventures primarily due to losses from sales in the
current quarter of $2.4 million, compared with a gain of $0.7 million
a year ago. Writedowns in the value of single family home lots in
which the company is a joint venture partner totaled $8.1 million in
the current quarter, down from $9.0 million a year ago; and
-- A $1.8 million decline in net gains on sale of loans and
mortgage-backed securities, reflecting a decline in loans sold,
partially offset by a higher gain per dollar of loan sold. Net gains in
the current quarter totaled $0.7 million, including a $1.6 million loss
due to the impact of valuing derivatives associated with the sale of
loans. Excluding the impact of the SFAS 133 derivative valuation, a
gain was realized equal to 1.03% on secondary market sales of $221
million, compared with the year-ago gain of 0.91% on secondary market
sales of $337 million.

For the first nine months of 2008, other income totaled $89.2 million, up
$51.0 million or 133.3% from a year ago.
OPERATING EXPENSE
Operating expense totaled $102.7 million in the current quarter, up
$40.0 million or 63.8% from a year ago. The increase primarily reflected an
increase of $27.8 million in net operations of real estate acquired in the
settlement of loans due to a higher number of foreclosed properties and
general and administrative expense of $12.2 million or 20.7%. The increase in
general and administrative expense between third quarters was primarily a
result of increases of:
-- $5.7 million in deposit insurance premiums and regulatory assessments
due, in part, to a special credit received in the year-ago period and
higher premium rates in the current quarter;
-- $6.0 million in professional, consulting, and executive search fees;
and
-- $0.9 million in salaries and related costs due, in part, to the
year-ago reversal of certain management incentive plan accruals.

For the first nine months of 2008, operating expense totaled
$280.2 million, up $89.5 million or 46.9% from a year ago.
INCOME TAXES
A tax benefit of $7.6 million was recorded in the current quarter,
reflecting an effective tax rate benefit of 8.6%, compared with the year-ago
effective tax rate benefit of 46.0%. For the first nine months of 2008, an
effective tax rate benefit of 4.6% was recorded, compared with effective tax
rate of 42.2% a year ago.
The decline in the effective tax rate benefit between third quarters
relates to the valuation allowance established against the deferred tax asset.
The deferred tax asset resulted from a significant increase in the loan loss
allowance due, in part, to the factors discussed above in "Provision for
Credit Losses." To the extent the loan loss allowance is not allocable to
specific loans, it represents future tax benefits which would be realized when
actual charge-offs are made against the allowance. To the extent available
sources of taxable income, including prior years' tax returns, are deemed per
generally accepted accounting principles to be insufficient to absorb tax
losses, the establishment of a valuation allowance against the tax asset is
necessary. The valuation allowance increased by $33 million in the current
quarter to $216 million against tax assets of $235 million.
Since generally accepted accounting principles require Downey to spread
its expected annual tax benefit across the entire year through an effective
tax rate, we expect to continue realizing a tax benefit for the remainder of
the current year.
ASSETS, LOAN ORIGINATIONS AND DEPOSITS
At September 30, 2008, assets totaled $12.781 billion, down $1.637 billion
or 11.4% from a year ago. During the current quarter, assets increased
$149 million primarily due to increases of $460 million in cash and cash
equivalents, $118 million in loans held for investment, $54 million in Federal
Home Loan Bank stock, and $33 million in other assets. Those asset increases
were partially offset by declines of $406 million in investment securities,
$78 million in loans held for sale and $48 million in investments in real
estate and joint ventures. Included within loans held for investment at
quarter end were $5.715 billion of single family adjustable rate mortgages
subject to negative amortization, down $527 million from June 30, 2008. These
loans comprised 52% of the single family residential loan portfolio held for
investment at quarter end, compared with 74% a year ago. The amount of
negative amortization included in loan balances declined $27 million during
the current quarter to $318 million or 5.6% of loans subject to negative
amortization. During the current quarter, approximately 10% of loan interest
income represented negative amortization, down from 15% in the second quarter
2008 and 26% in the year-ago third quarter.
Loan originations (including purchases) totaled $804 million in the
current quarter, up $110 million or 15.8% from $694 million originated a year
ago but down from $1.027 billion originated in the second quarter of 2008.
Single family residential loans originated for portfolio increased
$128 million or 29.6% from a year ago to $560 million, while other loans
originated for portfolio increased $79 million to $96 million in the current
quarter. Those increases were partially offset by a decline in loans
originated for sale, which declined $98 million or 39.8% to $147 million.
Not included in the above originations are loans for which we modify the
terms of a borrower's loan. During the current quarter, we modified
$157 million of loans associated with our borrower retention program, wherein
the borrower was current with their loan payments and the new interest rate
was no less than that afforded new borrowers, and an additional $149 million
of loans at below market interest rates in loan workout situations. All of the
portfolio retention modifications were adjustable rate loans, which permitted
negative amortization, that were modified into five-year interest-only
adjustable rate loans with interest rates that adjust semi-annually but do not
permit negative amortization. Most of the other modifications were modified
for a two year period into a fixed rate interest-only product.
Deposits totaled $9.618 billion at quarter end, down $1.044 billion or
9.8% from a year ago. At quarter end, the number of branches totaled 175 (170
in California and five in Arizona). At quarter end, the average deposit size
of our 85 traditional branches was $89 million, while the average deposit size
of our 90 in-store branches was $23 million. During the current quarter,
borrowings increased by $487 million and represented 18% of total assets at
quarter end.
NON-PERFORMING ASSETS
Non-performing assets increased during the quarter by $44 million to
$2.002 billion and represented 15.66% of total assets, compared with 7.77% at
year-end 2007 and 2.94% a year ago.
A borrower retention program was initiated at the beginning of the third
quarter of 2007 to provide borrowers who are current with their loan payments
a cost effective means to change from an adjustable rate loan that permits
negative amortization to a less costly financing alternative. Those loans are
considered troubled debt restructurings and have been placed on non-accrual
status even though the interest rate following modification was no less than
that afforded new borrowers. The reason for this is because the modified
interest rate was lower than the interest rate on the original loan and the
loan was not re-underwritten to prove that the new interest rate was, in fact,
a market interest rate for a borrower with similar credit quality. Interest
income is recorded as these borrowers make their loan payments and in the
current quarter $8.7 million of interest income was recognized, including
$1.1 million of amortization of the associated impairment allowance. If these
borrowers perform pursuant to the modified terms for six consecutive months,
the loans will be placed back on accrual status and, while still reported as
troubled debt restructurings, they will no longer be classified as
non-performing assets because the borrower will have demonstrated an ability
to perform in accordance with the loan modification and the interest rate was
no less than those afforded new borrowers at the time of modification.
To the extent borrowers whose loans were modified pursuant to the borrower
retention program are current with their loan payments and included in
non-performing assets, it is relevant to distinguish those loans from total
non-performing assets because, unlike other loans classified as non-performing
assets, these loans are paying interest at interest rates no less than those
afforded new borrowers. At September 30, 2008, $409 million or 72% of the
borrowers whose loans were modified subject to the program had made all loan
payments due. Accordingly, the 15.66% ratio of non-performing assets to total
assets includes 3.20% related to performing troubled debt restructurings,
resulting in an adjusted ratio of 12.46%.
At September 30, 2008, $578 million of loans modified pursuant to our
borrower retention program have been removed from non-performing status
because they met the six-month payment performance threshold and have
continued to perform. Of all loans modified pursuant to the borrower
retention program, including those classified as non-performing as well as
those removed from non-performing status, 82% have made all payments due.
At September 30, 2008, real estate acquired in settlement of loans totaled
$278 million. Included are 1,080 single family homes, one property consisting
of 113 single family lots and one property consisting of raw land for
approximately 545 single family lots. During the quarter, 596 new single
family homes were acquired, while 404 were sold. As of quarter end, 167 single
family homes were in escrow to be sold and offers were being negotiated on an
additional 96 homes.
REGULATORY CAPITAL RATIOS
At September 30, 2008, Downey Financial Corp.'s primary subsidiary, Downey
Savings and Loan Association, F.A., had core and tangible capital ratios of
7.48%, and a total risk-based capital ratio of 14.50%. The Bank's regulatory
capital position was enhanced during the current quarter by a $39 million
dividend from DSL Service Company, the Bank's wholly-owned real estate
subsidiary, and a $30 million contribution of equity from the holding company.
These were more than offset by the net loss recorded in the current quarter.
Certain statements in this release may constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995, which
involve risks and uncertainties. Forward-looking statements do not relate
strictly to historical information or current facts. Some forward-looking
statements may be identified by use of terms such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," or words of similar
meaning, or future or conditional verbs such as "will," "would," "should,"
"could" or "may." Downey's 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 Downey conducts its
operations, new, changed or increased regulatory restrictions, pending or
threatened litigation, a decrease in Downey's customers, including a decrease
in Downey's deposit base, the possible loss of key personnel, the inability to
successfully implement strategic initiatives, changes in deposit flows and
loan demand, risks associated with industry concentration with respect to
deposits, risk of credit losses, risk associated with residential mortgage
lending, risk associated with a slowdown in the housing market or high
interest rates, fluctuations in interest rates, credit quality, the outcome of
ongoing audits by taxing authorities and government regulation. Downey does
not update forward-looking statements to reflect the impact of circumstances
or events that arise after the date the forward-looking statements were made,
except as required by law. Downey is not able to make any assurances,
including but not limited to any assurances that the increased rate of sale of
foreclosed homes will continue in future periods, the percentage of unsold
homes in escrow or under negotiation will be representative of the number or
percentage of homes sold in future periods, we will have adequate liquidity in
future periods, capital levels will exceed levels required by our regulators
in future periods or that we will be able to meet other requirements imposed
by our regulators.

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)

Sep. 30, Dec. 31, Sep. 30,
2008 2007 2007
ASSETS
Cash $ 451,815 $ 83,840 $ 86,072
Federal funds and interest
earning due from banks 101,129 5,900 1,551

Cash and cash equivalents 552,944 89,740 87,623
U.S. Treasury, government
sponsored entities and other
investment securities
available for sale, at fair
value 592,542 1,549,879 2,142,278
Loans held for sale, at lower
of cost or fair value 7,673 103,384 90,228
Mortgage-backed securities
available for sale, at fair
value 104 111 112
Loans held for investment 11,511,330 11,381,327 11,744,063
Allowance for loan losses (761,824) (348,167) (142,218)

Loans held for investment,
net 10,749,506 11,033,160 11,601,845
Investments in real estate and
joint ventures 15,606 68,679 58,715
Real estate acquired in
settlement of loans 278,091 115,623 59,773
Premises and equipment, net 113,663 115,846 117,535
Federal Home Loan Bank stock,
at cost 133,255 70,964 70,058
Mortgage servicing rights:
Measured at fair value 22,814 -- --
Amortized -- 19,512 21,849
Other assets 161,884 113,761 130,889
Income tax receivable 133,852 6,312 27,900
Deferred tax asset 19,265 122,086 8,912

$12,781,199 $13,409,057 $14,417,717
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits $ 9,618,384 $10,496,041 $10,662,618
Securities sold under
agreements to repurchase -- -- 566,350
Federal Home Loan Bank
advances 2,110,061 1,197,100 1,308,867
Senior notes 198,593 198,445 198,398
Accounts payable and accrued
liabilities 82,447 183,054 237,258

Total liabilities 12,009,485 12,074,640 12,973,491

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
29,080,777 shares at
Sep. 30, 2008 and 28,235,022
shares at Dec. 31, 2007 and
Sep. 30, 2007; outstanding
29,080,777 shares at
Sep. 30, 2008 and 27,853,783
at Dec. 31, 2007 and
Sep. 30, 2007 291 282 282
Additional paid-in capital 93,835 93,792 93,792
Accumulated other
comprehensive income (loss) (6,231) 2,768 388
Retained earnings 683,819 1,254,367 1,366,556
Treasury stock, at cost,
381,239 at Dec. 31, 2007
and Sep. 30, 2007 -- (16,792) (16,792)

Total stockholders' equity 771,714 1,334,417 1,444,226

$12,781,199 $13,409,057 $14,417,717
=========== =========== ===========

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Dollars in Thousands, Except Per Share Data)

Three Months Ended Nine Months Ended
Sep. 30, Sep. 30,
2008 2007 2008 2007
INTEREST INCOME
Loans $154,479 $208,314 $ 493,193 $690,869
U.S. Treasury and
government sponsored
entities securities 12,977 26,350 49,330 65,644
Mortgage-backed
securities 2 3 8 9
Other investment
securities 1,610 1,207 3,713 5,396

Total interest income 169,068 235,874 546,244 761,918

INTEREST EXPENSE
Deposits 67,726 108,514 243,047 333,977
Federal Home Loan Bank
advances and other
borrowings 22,010 26,088 50,601 83,494
Senior notes 3,305 3,302 9,913 9,904

Total interest expense 93,041 137,904 303,561 427,375
NET INTEREST INCOME 76,027 97,970 242,683 334,543
PROVISION FOR CREDIT
LOSSES 130,291 81,562 626,035 91,684

Net interest income
(loss) after
provision for credit
losses (54,264) 16,408 (383,352) 242,859

OTHER INCOME, NET
Loan and deposit
related fees 8,152 8,913 24,595 27,087
Real estate and joint
ventures held for
investment, net (10,749) (7,892) (16,625) (7,527)
Net gain on sale of
real estate related
contracts 69,972 -- 69,972 --
Secondary marketing
activities:
Loan servicing income
(loss), net (56) (294) 2,724 (1,519)
Net gains on sales of
loans and mortgage-
backed securities 677 2,506 6,898 20,224
Net gains on sales of
investment securities -- -- 837 --
Other 219 (197) 817 (16)

Total other income,
net 68,215 3,036 89,218 38,249

OPERATING EXPENSE
Salaries and related
costs 37,611 36,699 118,197 119,931
Premises and equipment
costs 9,224 9,736 27,402 27,667
Advertising expense 1,473 1,400 2,750 4,469
Deposit insurance
premiums and
regulatory assessments 8,117 2,413 15,509 7,659
Professional fees 3,000 489 4,146 1,779
Impairment writedown of
goodwill -- -- 3,149 --
Other general and
administrative
expense 11,802 8,275 29,256 24,271

Total general and
administrative
expense 71,227 59,012 200,409 185,776
Net operation of real
estate acquired in
settlement of loans 31,428 3,664 79,763 4,903

Total operating
expense 102,655 62,676 280,172 190,679

INCOME (LOSS) BEFORE
INCOME TAXES (TAX
BENEFITS) (88,704) (43,232) (574,306) 90,429
Income taxes (tax
benefits) (7,634) (19,871) (26,620) 38,183

NET INCOME (LOSS) $(81,070) $(23,361) $(547,686) $ 52,246
========= ========= ========== ========
PER SHARE INFORMATION
Basic $ (2.89) $ (0.84) $ (19.64) $ 1.87
Diluted $ (2.89) $ (0.84) $ (19.64) $ 1.87
Cash dividends declared
and paid $ 0.01 $ 0.12 $ 0.25 $ 0.36
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic 27,960,478 27,853,783 27,889,608 27,853,783
Diluted 27,960,478 27,853,783 27,889,608 27,882,804

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Dollars in Thousands)

Three Months Ended Nine Months Ended
Sep. 30, Sep. 30,
2008 2007 2008 2007
NET INCOME (LOSS) BY
BUSINESS SEGMENT
Banking $(69,026) $(18,851) $ (531,991) $ 56,186
Real estate investment (12,044) (4,510) (15,695) (3,940)

Total net income
(loss) $(81,070) $(23,361) $ (547,686) $ 52,246
========= ========= =========== ==========
SELECTED FINANCIAL
RATIOS
Effective interest
rate spread 2.49% 2.79% 2.61% 3.05%
Efficiency ratio (a) 83.78 54.19 70.82 48.85
Return on average
assets (2.42) (0.64) (5.51) 0.46
Return on average
equity (39.04) (6.36) (69.68) 4.82

ASSET AND LIABILITY
ACTIVITY
Loans for investment
portfolio:
Originations: (b)
Residential one-to-
four units $560,258 $432,262 $1,746,162 $1,734,112
All other 95,953 16,743 164,100 49,119
Repayments (297,790) (979,625) (1,263,483) (4,029,811)

Loans originated for
sale portfolio (b) 147,292 244,831 596,374 1,380,371

Loans and mortgage-
backed securities
sold (221,161) (337,320) (685,261) (1,621,690)

Increase (decrease) in
loans and mortgage-
backed securities 40,607 (699,881) (379,372) (2,478,565)

Increase (decrease) in
assets 148,880 (485,253) (627,858) (1,789,665)

Decrease in deposits (262,594) (584,188) (877,657) (1,122,251)

Increase (decrease) in
borrowings 487,239 183,347 913,109 (735,401)

Sep. 30, Dec. 31, Sep. 30,
2008 2007 2007
CAPITAL RATIOS (BANK ONLY)
Tangible and core 7.48% 9.98% 10.21%
Risk-based 14.50 19.82 21.34

BOOK VALUE PER SHARE $26.54 $47.91 $51.85

NUMBER OF BRANCHES INCLUDING
IN-STORE LOCATIONS 175 172 172

(a) The amount of general and administrative expense, excluding the
impairment writedown of goodwill, expressed as a percentage of
net interest income plus other income, excluding income
associated with real estate held for investment.
(b) Included loans purchased.

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
SELECTED FINANCIAL DATA - (Continued)
(Dollars in Thousands)

Three Months Ended Sep. 30, 2008
Average
Average Yield/
Balance Interest Rate
AVERAGE BALANCE SHEET DATA
Interest-earning assets:
Loans:
Loan prepayment fees $ 463 0.02%
Write-off of deferred costs and
premiums from loan payoffs (3,391) (0.13)
All other 157,407 5.84

Total loans $10,783,449 154,479 5.73
Mortgage-backed securities 105 2 4.78
Investment securities (a) 1,430,431 14,587 4.06

Total interest-earnings assets 12,213,985 $169,068 5.54%
Non-interest-earning assets 1,158,650

Total assets $13,372,635
===========
Transaction accounts:
Non-interest-bearing checking (b) $ 766,544 $ -- -%
Interest-bearing checking (b) 400,758 1,142 1.13
Money market 108,361 280 1.03
Regular passbook 864,663 1,952 0.90

Total transaction accounts 2,140,326 3,374 0.63
Certificates of deposit 7,564,088 64,352 3.38

Total deposits 9,704,414 67,726 2.78
FHLB advances and other
borrowings (c) 2,538,497 22,010 3.45
Senior notes 198,565 3,305 6.66

Total deposits and borrowings 12,441,476 93,041 2.98
Other liabilities 100,624
Stockholders' equity 830,535

Total liabilities and stockholders'
equity $13,372,635
===========
Net interest income/interest rate
spread $ 76,027 2.56%
========
Excess (deficiency) of interest-
earning assets over deposits and
borrowings $ (227,491)
Effective interest rate spread 2.49

Three Months Ended Sep. 30, 2007
Average
Average Yield/
Balance Interest Rate
AVERAGE BALANCE SHEET DATA
Interest-earning assets:
Loans:
Loan prepayment fees $ 8,542 0.29%
Write-off of deferred costs and
premiums from loan payoffs (16,315) (0.55)
All other 216,087 7.22

Total loans $11,973,516 208,314 6.96
Mortgage-backed securities 113 3 5.77
Investment securities (a) 2,068,187 27,557 5.29

Total interest-earnings assets 14,041,816 $235,874 6.72%
Non-interest-earning assets 485,648

Total assets $14,527,464
===========
Transaction accounts:
Non-interest-bearing checking (b) $ 730,179 $ -- -%
Interest-bearing checking (b) 470,516 340 0.29
Money market 139,808 367 1.04
Regular passbook 1,117,084 2,660 0.94

Total transaction accounts 2,457,587 3,367 0.54
Certificates of deposit 8,455,461 105,147 4.93

Total deposits 10,913,048 108,514 3.94
FHLB advances and other
borrowings (c) 1,766,933 26,088 5.86
Senior notes 198,381 3,302 6.66

Total deposits and borrowings 12,878,362 137,904 4.25
Other liabilities 179,944
Stockholders' equity 1,469,158

Total liabilities and stockholders'
equity $14,527,464
===========
Net interest income/interest rate
spread $ 97,970 2.47%
========
Excess of interest-earning assets
over deposits and borrowings $ 1,163,454
Effective interest rate spread 2.79

Nine Months Ended Sep. 30, 2008
Average
Average Yield/
Balance Interest Rate
AVERAGE BALANCE SHEET DATA
Interest-earning assets:
Loans:
Loan prepayment fees $ 3,632 0.04%
Write-off of deferred costs and
premiums from loan payoffs (15,669) (0.19)
All other 505,230 6.21

Total loans $10,854,805 493,193 6.06
Mortgage-backed securities 108 8 5.45
Investment securities (a) 1,520,402 53,043 4.66

Total interest-earnings assets 12,375,315 $546,244 5.89%
Non-interest-earning assets 874,532

Total assets $13,249,847

Transaction accounts:
Non-interest-bearing checking (b) $ 704,296 $ -- -%
Interest-bearing checking (b) 436,960 2,208 0.67
Money market 126,724 982 1.04
Regular passbook 973,320 6,687 0.92

Total transaction accounts 2,241,300 9,877 0.59
Certificates of deposit 7,793,586 233,170 4.00

Total deposits 10,034,886 243,047 3.24
FHLB advances and other
borrowings (c) 1,832,461 50,601 3.69
Senior notes 198,520 9,913 6.66

Total deposits and borrowings 12,065,867 303,561 3.36
Other liabilities 135,922
Stockholders' equity 1,048,058

Total liabilities and stockholders'
equity $13,249,847
===========
Net interest income/interest rate
spread $242,683 2.53%
========
Excess of interest-earning assets
over deposits and borrowings $ 309,448
Effective interest rate spread 2.61

Nine Months Ended Sep. 30, 2007
Average
Average Yield/
Balance Interest Rate
AVERAGE BALANCE SHEET DATA
Interest-earning assets:
Loans:
Loan prepayment fees $ 47,937 0.50%
Write-off of deferred costs and
premiums from loan payoffs (66,454) (0.69)
All other 709,386 7.37

Total loans $12,829,398 690,869 7.18
Mortgage-backed securities 127 9 5.85
Investment securities (a) 1,781,837 71,040 5.33

Total interest-earnings assets 14,611,362 $761,918 6.95%
Non-interest-earning assets 478,398

Total assets $15,089,760

Transaction accounts:
Non-interest-bearing checking (b) $ 762,050 $ -- -%
Interest-bearing checking (b) 481,867 1,117 0.31
Money market 145,141 1,128 1.04
Regular passbook 1,183,810 8,423 0.95

Total transaction accounts 2,572,868 10,668 0.55
Certificates of deposit 8,742,787 323,309 4.94

Total deposits 11,315,655 333,977 3.95
FHLB advances and other
borrowings (c) 1,909,513 83,494 5.85
Senior notes 198,334 9,904 6.66

Total deposits and borrowings 13,423,502 427,375 4.26
Other liabilities 219,667
Stockholders' equity 1,446,591

Total liabilities and stockholders'
equity $15,089,760
===========
Net interest income/interest rate
spread $334,543 2.69%
========
Excess of interest-earning assets
over deposits and borrowings $ 1,187,860
Effective interest rate spread 3.05

(a) Yields for securities available for sale are calculated using
historical cost balances and are not adjusted for changes in
fair value that are reflected as a separate component of
stockholders' equity.
(b) Included amounts swept into money market deposit accounts.
(c) The impact of interest rate swap contracts was included, with
notional amounts totaling $430 million of receive-fixed,
pay-3-month London Inter-Bank Offered Rate ("LIBOR") variable
interest, which contracts serve as a permitted hedge against a
portion of our FHLB advances.

Three Months Ended Nine Months Ended
Sep. 30, Sep. 30,
2008 2007 2008 2007
LOAN AND DEPOSIT RELATED FEES
Loan related fees $ 445 $ 572 $ 1,244 $ 2,233
Deposit related fees:
Automated teller machine
fees 1,747 2,287 5,603 7,032
Other fees 5,960 6,054 17,748 17,822

Total loan and deposit
related fees $ 8,152 $ 8,913 $24,595 $27,087
======= ======= ======= =======
NET GAINS (LOSSES) ON SALES
OF LOANS AND MORTGAGE-
BACKED SECURITIES
Mortgage servicing rights $ 901 $ 1,394 $ 3,580 $ 4,661
All other components
excluding SFAS 133 1,377 1,665 2,889 14,999
SFAS 133 (1,601) (553) 429 564

Total net gains on sales
of loans and mortgage
-backed securities $ 677 $ 2,506 $ 6,898 $20,224
======= ======= ======= =======
Secondary marketing gain
excluding SFAS 133 as a
percentage of associated
sales 1.03% 0.91% 0.94% 1.21%

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
SELECTED FINANCIAL DATA - (Continued)
(Dollars in Thousands)

Three Months Ended Nine Months Ended
Sep. 30, Sep. 30,
2008 2007 2008 2007
LOAN SERVICING INCOME
(LOSS), NET
Net cash servicing fees $ 1,797 $ 1,657 $ 5,312 $ 4,862
Payoff and curtailment
interest cost (a) (208) (787) (1,029) (3,241)
Change in fair value of
mortgage servicing
rights due to: (b)
Change in valuation
model inputs or
assumptions (c) (1,038) -- 536 --
Other changes (d) (607) -- (2,095) --
Amortization of mortgage
servicing rights -- (950) -- (2,941)
Provision for impairment
of mortgage servicing
rights -- (214) -- (199)

Total loan servicing
income (loss), net $ (56) $ (294) $ 2,724 $(1,519)
======== ======== ======= ========
MORTGAGE SERVICING RIGHTS
ACTIVITY
Balance at beginning of
period $23,558 $21,707 $21,973 $21,435
Remeasurement of mortgage
servicing rights to fair
value (b) -- -- (918) --

Adjusted balance at
beginning of period 23,558 21,707 21,055 21,435
Additions (e) 901 1,394 3,580 4,661
Amortization -- (950) -- (2,941)
Sales -- -- (262) (868)
Impairment write-down -- (37) -- (173)
Change in fair value due
to:
Change in valuation
model inputs or
assumptions (c) (1,038) -- 536 --
Other changes (d) (607) -- (2,095) --

Balance at end of period 22,814 22,114 22,814 22,114

Allowance balance at
beginning of period -- 88 2,461 239
Remeasurement of mortgage
servicing rights to fair
value -- -- (2,461) --
Adjusted balance at
beginning of period -- 88 -- 239
Provision for impairment -- 214 -- 199
Impairment write-down -- (37) -- (173)

Allowance balance at end
of period -- 265 -- 265

Total mortgage servicing
rights, net $22,814 $21,849 $22,814 $21,849
======= ======= ======= =======
As a percentage of
associated mortgage loans 0.91% 0.90% 0.91% 0.90%
Fair value (f) $22,814 $23,935 $22,814 $23,935
Weighted average expected
life (in months) 67 69 67 69
Custodial account earnings
rate 3.23% 4.57% 3.23% 4.57%
Weighted average discount
rate 11.74 11.63 11.74 11.63

Sep. 30, Dec. 31, Sep. 30,
(Dollars in Thousands) 2008 2007 2007
MORTGAGE LOANS SERVICED FOR
OTHERS
Total $5,347,377 $5,525,357 $5,622,331
With capitalized mortgage
servicing rights: (f)
Amount 2,495,492 2,436,278 2,419,432
Weighted average interest
rate 5.89% 5.88% 5.83%
Total loans sub-serviced
without mortgage servicing
rights: (g)
Term - less than six months $ 96,428 $ 81,123 $ 76,870
Term - indefinite 2,751,711 2,995,119 3,112,895

Custodial account balances $ 75,452 $ 81,778 $ 84,819

(a) Represents the difference between the contractual obligation to
pay interest to the investor for an entire month and the actual
interest received when a loan prepays prior to the end of the
month. However, loan servicing activities do not include the
benefit of the use of total loan repayments to increase net
interest income.
(b) Effective January 1, 2008, Downey adopted the fair value
provision of Statement of Financial Accounting Standards No.
156, Accounting for Servicing of Financial Assets -- an
amendment of FASB Statement No. 140 ("SFAS 156") and remeasured
its mortgage servicing rights ("MSRs") at fair value. Downey
recorded a pretax adjustment to increase MSRs by $1.5 million
and a corresponding cumulative effect adjustment of
$0.9 million, after tax, to increase the 2008 beginning balance
of retained earnings in stockholders' equity.
(c) Reflects changes in assumptions for such items as discount
rates and prepayment speeds.
(d) Represents changes due to realization of expected cash flows
over time.
(e) Included minor amounts repurchased.
(f) Excludes loans sub-serviced without capitalized mortgage
servicing rights. The estimated fair values for periods
presented prior to 2008 may exceed book value for certain asset
strata and excluded loans sold or securitized prior to 1996.
(g) Servicing is performed for a fixed fee per loan each month.

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
SELECTED FINANCIAL DATA - (Continued)
(Dollars in Thousands)

Sep. 30, Dec. 31, Sep. 30,
2008 2007 2007
LOANS HELD FOR INVESTMENT
Loans secured by real
estate:
Residential one-to-four
units $10,959,601 $10,877,228 $11,227,561
Home equity loans and lines
of credit 132,907 138,305 143,948
Residential five or more
units 204,172 100,963 104,672
Commercial real estate 29,838 26,427 26,598
Construction 97,907 81,098 58,231
Land 10,708 49,521 50,864
Non-mortgage:
Commercial 5,305 5,000 5,000
Consumer 5,993 5,989 6,057

Total loans held for
investment 11,446,431 11,284,531 11,622,931
Increase (decrease) for:
Undisbursed loan funds and
net deferred costs and
premiums 64,899 96,796 121,132
Allowance for losses (761,824) (348,167) (142,218)

Total loans held for
investment, net $10,749,506 $11,033,160 $11,601,845
=========== =========== ===========
LOANS HELD FOR SALE
Residential one-to-four
units $ 7,624 $ 103,320 $ 89,794
Net deferred costs and
premiums (16) (109) 53
Capitalized basis
adjustment (a) 65 173 381

Total loans held for sale,
net $ 7,673 $ 103,384 $ 90,228
=========== =========== ===========
RESIDENTIAL ONE-TO-FOUR UNIT
LOANS SUBJECT TO NEGATIVE
AMORTIZATION
Held for investment:
Amount $ 5,715,066 $ 7,530,590 $ 8,255,389
Amount as a percentage of
total residential one-to-
four unit loans 52% 69% 74%
Negative amortization
included in the loan
balance 317,502 378,664 387,984
Negative amortization as a
percentage of the
associated loan balance 5.56% 5.03% 4.70%

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

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
SELECTED FINANCIAL DATA - (Continued)
(Dollars in Thousands)

Sep. 30, Dec. 31, Sep. 30,
2008 2007 2007
NON-PERFORMING ASSETS
Non-accrual loans:
Residential one-to-four
units:
Performing troubled debt
restructurings (a) $ 408,976 $ 400,562 $ 96,984
Other troubled debt
restructurings 410,260 31,218 5,173
All other 888,644 448,516 253,259
Residential five or more
units 2,900 - -
Construction 12,195 15,933 7,808
Land - 29,080 -
Other 448 837 511

Total non-accrual loans 1,723,423 926,146 363,735
Real estate acquired in
settlement of loans 278,091 115,623 59,773

Total non-performing
assets $ 2,001,514 $ 1,041,769 $ 423,508
=========== =========== ===========
Non-performing assets as a
percentage of total assets:
Performing troubled debt
restructurings (a) 3.20% 2.99% 0.67%
All other non-performing
assets 12.46 4.78 2.27
Total non-performing
assets 15.66% 7.77% 2.94%
====== ===== =====
Performing troubled debt
restructurings excluded
from non-performing
assets (b) $ 620,903 $ -- $ --

DELINQUENT LOANS
30-59 days $ 274,876 $ 239,338 $ 129,563
60-89 days 205,212 135,177 75,958
90+ days (c) 941,179 314,365 180,933
Total delinquent loans $ 1,421,267 $ 688,880 $ 386,454
=========== =========== ===========
Delinquencies as a
percentage of total loans 12.41% 6.05% 3.30%

(a) Represents troubled debt restructurings (TDRs) associated with
Downey's borrower retention program wherein all loan payments
were current and interest rates were modified to no less than
that offered new borrowers at the time of loan modification.
These TDR loans will be on non-accrual status until six
consecutive months of successful payment history has been
established, at which time they will be removed from
non-accrual status and will no longer be reported as non-performing
assets, just TDRs. Interest income is being recognized on
these TDR loans as paid on a cash basis.
(b) Represents loans where the borrower has made six consecutive months
of successful loan payments and the loan has been placed on accrual
status, including $578 million associated with our borrower retention
program and $43 million related to loans modified in loan workout
situations.
(c) All 90 day or greater delinquencies are on non-accrual status
and reported as part of non-performing assets.
Note: Certain prior period amounts have been reclassified to conform
to the current presentation.

SOURCE Downey Financial Corp.

Brian E. Cote, CFO of Downey Financial Corp., +1-949-509-4420