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

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

PART I

ITEM 1. –

FINANCIAL INFORMATION           

1

Consolidated Balance Sheets          

1

Consolidated Statements of Income           

2

Consolidated Statements of Comprehensive Income          

3

Consolidated Statements of Cash Flows           

4

Notes To Consolidated Financial Statements           

6

ITEM 2. –

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

15

ITEM 3. –

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK           

47

ITEM 4. –

CONTROLS AND PROCEDURES           

47

PART II

ITEM 1. –

LEGAL PROCEEDINGS           

48

ITEM 2. –

CHANGES IN SECURITIES AND USE OF PROCEEDS           

48

ITEM 3. –

DEFAULTS UPON SENIOR SECURITIES           

48

ITEM 4. –

SUBMISSION OF MATTERS TO A VOTE OF SECURITIY HOLDERS           

48

ITEM 5. –

OTHER INFORMATION           

48

ITEM 6. –

EXHIBITS AND REPORTS ON FORM 8-K           

49

AVAILABILITY OF REPORTS           

50

SIGNATURES           

50

September 30,

December 31,

September 30,

(Dollars in Thousands, Except Per Share Data)

2004

2003

2003

Assets

Cash

$

107,038

$

111,667

$

113,075

Federal funds

-

1,500

4,001

Cash and cash equivalents

107,038

113,167

117,076

U.S. Treasury securities, agency obligations and other investment

securities available for sale, at fair value

732,878

690,347

635,825

Loans held for sale, at lower of cost or fair value

845,913

279,657

335,437

Mortgage-backed securities available for sale, at fair value

315

334

1,590

Loans receivable held for investment

13,411,146

10,116,519

9,650,441

Investments in real estate and joint ventures

44,242

35,716

32,435

Real estate acquired in settlement of loans

2,819

5,803

7,436

Premises and equipment

107,429

110,316

111,201

Federal Home Loan Bank stock, at cost

209,063

123,089

121,813

Investment in Downey Financial Capital Trust I

-

3,711

3,711

Mortgage servicing rights, net

82,295

82,175

70,400

Other assets

96,326

85,146

75,729

$

15,639,464

$

11,645,980

$

11,163,094

Liabilities and Stockholders’ Equity

Deposits

$

9,551,333

$

8,293,758

$

8,608,068

Securities sold under agreements to repurchase

251,875

-

-

Federal Home Loan Bank advances

4,418,729

2,125,150

1,259,150

Real estate notes

-

4,161

4,178

Senior notes

197,886

-

-

Junior subordinated debentures

-

123,711

123,711

Accounts payable and accrued liabilities

115,971

63,584

180,885

Deferred income taxes

138,045

118,598

92,892

Total liabilities

14,673,839

10,728,962

10,268,884

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 September 30, 2004, December 31, 2003 and

September 30, 2003; outstanding 27,853,783 shares at September 30, 2004

and 27,928,722 shares at both December 31, 2003 and September 30, 2003

282

282

282

Additional paid-in capital

93,792

93,792

93,792

Accumulated other comprehensive income (loss)

1,926

807

(757

)

Retained earnings

886,417

834,307

813,063

Treasury stock, at cost, 381,239 shares at September 30, 2004 and 306,300

shares at both December 31, 2003 and September 30, 2003

(16,792

)

(12,170

)

(12,170

)

Total stockholders’ equity

965,625

917,018

894,210

$

15,639,464

$

11,645,980

$

11,163,094

Three Months Ended

Nine Months Ended

September 30,

September 30,

(Dollars in Thousands, Except Per Share Data)

2004

2003

2004

2003

Interest income

Loans receivable

$

141,458

$

119,990

$

380,301

$

393,363

U.S. Treasury securities and agency obligations

5,765

2,497

16,161

7,520

Mortgage-backed securities

3

16

9

51

Other investments

1,975

1,196

4,767

4,336

Total interest income

149,201

123,699

401,238

405,270

Interest expense

Deposits

40,715

38,010

107,977

128,229

Federal Home Loan Bank advances and other borrowings

22,490

14,304

54,738

44,280

Senior notes

3,294

-

3,586

-

Junior subordinated debentures

765

3,133

7,033

9,401

Total interest expense

67,264

55,447

173,334

181,910

Net interest income

81,937

68,252

227,904

223,360

Provision for (reduction of) loan losses

1,186

(1,104

)

4,448

(3,437

)

Net interest income after provision for (reduction of) loan losses

80,751

69,356

223,456

226,797

Other income, net

Loan and deposit related fees

15,828

14,405

42,703

40,032

Real estate and joint ventures held for investment, net

365

5,864

8,339

8,876

Secondary marketing activities:

Loan servicing income (loss), net

(16,890

)

1,550

(17,349

)

(33,828

)

Net gains on sales of loans and mortgage-backed securities

14,637

23,467

31,684

55,882

Net gains on sales of mortgage servicing rights

-

-

-

23

Net losses on trading securities

-

(11,040

)

-

(10,449

)

Net gains (losses) on sales of investment securities

-

-

(19,159

)

8

Litigation award

-

-

-

2,717

Loss on extinguishment of debt

(4,111

)

-

(4,111

)

-

Other

393

(654

)

1,248

863

Total other income, net

10,222

33,592

43,355

64,124

Operating expense

Salaries and related costs

36,629

34,312

109,773

101,466

Premises and equipment costs

8,771

8,291

25,179

23,975

Advertising expense

1,494

835

4,367

2,644

SAIF insurance premiums and regulatory assessments

825

787

2,326

2,443

Professional fees

387

798

1,111

1,844

Other general and administrative expense

9,909

7,718

27,823

23,722

Total general and administrative expense

58,015

52,741

170,579

156,094

Net operation of real estate acquired in settlement of loans

36

(376

)

(273

)

(190

)

Total operating expense

58,051

52,365

170,306

155,904

Income before income taxes

32,922

50,583

96,505

135,017

Income taxes

8,412

21,332

35,262

57,034

Net income

$

24,510

$

29,251

$

61,243

$

77,983

PER SHARE INFORMATION

Basic

$

0.88

$

1.05

$

2.19

$

2.79

Diluted

$

0.88

$

1.05

$

2.19

$

2.79

Cash dividends declared and paid

$

0.10

$

0.09

$

0.30

$

0.27

Weighted average diluted shares outstanding

27,943,512

27,963,374

27,970,788

27,962,012

Three Months Ended

Nine Months Ended

September 30,

September 30,

(In Thousands)

2004

2003

2004

2003

Net income

$

24,510

$

29,251

$

61,243

$

77,983

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

6,849

536

562

(103

)

Mortgage-backed securities available for sale, at fair value

-

(4

)

(1

)

(16

)

Reclassification of realized amounts included in net income

-

-

173

(5

)

Unrealized gains (losses) on cash flow hedges:

Net derivative instruments

144

8,786

2,651

1,051

Reclassification of realized amounts included in net income

678

(11,210

)

(2,266

)

(262

)

Total other comprehensive income (loss), net of income taxes (benefits)

7,671

(1,892

)

1,119

665

Comprehensive income

$

32,181

$

27,359

$

62,362

$

78,648

Nine Months Ended

September 30,

(In Thousands)

2004

2003

Cash flows from operating activities

Net income

$

61,243

$

77,983

Adjustments to reconcile net income to net cash used for operating activities:

Depreciation and amortization

68,474

65,989

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

19,811

16,979

Net gains on sales of loans and mortgage-backed securities, mortgage servicing rights,

trading and investment securities, real estate and other assets

(19,194

)

(62,866

)

Interest capitalized on loans (negative amortization)

(11,555

)

(7,284

)

Federal Home Loan Bank stock dividends

(4,027

)

(4,250

)

Loans originated for sale

(4,261,617

)

(5,334,724

)

Proceeds from sales of loans held for sale, including those sold

as mortgage-backed securities

3,697,463

5,673,264

Other, net

(108,295

)

(61,914

)

Net cash provided by (used for) operating activities

(557,697

)

363,177

Cash flows from investing activities

Proceeds from sales of:

U.S. Treasury securities, agency obligations and other investment securities

available for sale

1,259,216

15,275

Wholly owned real estate and real estate acquired in settlement of loans

19,406

21,327

Redemption of common securities in Downey Financial Capital Trust I

3,711

-

Proceeds from maturities of U.S. Treasury securities, agency obligations

and other investment securities available for sale

540,086

558,474

Purchase of:

U.S. Treasury securities, agency obligations and other investment securities

available for sale

(1,845,066

)

(645,822

)

Loans receivable held for investment

(198,609

)

(694,719

)

Federal Home Loan Bank stock