Downey Financial 8K Earnings Release and Table Listing | SEC 17 Oct 06

EXHIBIT 99.1

Earnings Release and Table Listing

Earnings Release Narrative
Consolidated Balance Sheets
Consolidated Statements of Income
Selected Financial Data

DOWNEY FINANCIAL CORP.
N E W S R E L E A S E		For further information contact: Brian E. Côté Chief Financial Officer (949) 509-4420

DOWNEY ANNOUNCES THIRD QUARTER EARNINGS

Newport Beach, California - October 17, 2006 - Downey Financial Corp. (NYSE: DSL) reported that net income for the third quarter of 2006 totaled $57.2 million or $2.05 per share on a diluted basis, down $2.6 million or 4.3% from the $59.7 million or $2.14 per share in the year-ago third quarter.

The decline in net income between third quarters primarily reflected:

A $14.7 million decline in net gains on sales of loans and mortgage-backed securities due to a lower volume of loans sold;
A $10.4 million increase in the provision for credit losses; and
A $2.5 million unfavorable change in income from loan servicing activities due primarily to changes in our valuation allowance for mortgage servicing rights.

Those unfavorable items were partially offset by:

A $20.2 million or 18.4% increase in net interest income reflecting both higher average interest-earning assets and effective interest rate spread;
A $2.0 million increase in income from real estate held for investment due to higher gains from sales; and
A $1.6 million litigation award received in the current quarter.

Both the current and year-ago third quarters included reductions to income tax expense from the settlement of prior-year tax returns. However, the current quarter reduction of $3.6 million was above the $3.2 million reduction of a year ago.

For the first nine months of 2006, net income totaled $151.5 million or $5.43 per share on a diluted basis, down $24.1 million or 13.7% from the $175.5 million or $6.30 per share for the first nine months of 2005.

Daniel D. Rosenthal, President and Chief Executive Officer, commented, "Back in March of this year, we increased the start rate on option ARMs originated for portfolio to reduce the potential for negative amortization. We acknowledged at the time the possibility our loan production might not fully offset payoffs, since our minimum start rate might remain higher than those of competition, and that has been the situation for the past two quarters. We also indicated that we would continue to closely monitor trends in the residential housing and lending markets and would make further pricing adjustments as deemed appropriate. In September, we increased the competitiveness of our option ARM pricing by lowering the start rate for borrowers who have high FICO credit scores and low loan-to-value ratios, with the goal of stimulating additional loan production for our portfolio, while at the same time limiting our credit exposure. However, we are not certain this pricing change will result in loan

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production completely offsetting portfolio payoffs, especially as we consider the implications of, and alternatives available to us in response to, the final guidance recently issued to depository institutions by the banking regulators regarding so-called non-traditional mortgage products, of which option ARMs are an example. At this time, we are assessing what impact, if any, this new lending guidance will have on our loan production volumes."

Net Interest Income

Net interest income totaled $130.2 million in the third quarter of 2006, up $20.2 million or 18.4% from a year ago. This increase reflected increases in both average interest-earning assets and effective interest rate spread. Interest-earning assets averaged $16.789 billion in the current quarter, up $656 million or 4.1% from the same period a year ago. The effective interest rate spread averaged 3.10% in the current quarter, up 0.37% from 2.73% a year ago, and up 0.03% from 3.07% in the second quarter of 2006. The increase in the effective interest rate spread between third quarters primarily reflected two items. First, interest-earning assets in the current quarter were funded with a higher proportion of interest free funds (non-interest bearing checking accounts and the excess of interest-earning assets over deposits and borrowings), and the value of those funds was worth more due to the higher interest rate levels prevalent in the quarter. Second, loan prepayment fees covered a higher proportion of the deferred loan costs that were written-off as a result of those payoffs.

For the first nine months of 2006, net interest income totaled $388.5 million, up $63.1 million or 19.4% from the year-ago period.

Provision for Credit Losses

Provision for credit losses totaled $9.6 million in the third quarter of 2006, compared with a reversal of $0.8 million a year ago. During the current quarter, the California residential real estate market continued to show signs of weakening, with a decline in prices beginning to emerge in certain segments for the first time. In addition, there were continuing increases in both negative amortization and capitalized interest balances as well as an upward trend in loan defaults. In consideration of these trends, an increase in the allowance for credit losses was deemed appropriate. At September 30, 2006, the allowance for credit losses was $62 million, comprised of $61 million for loan losses and $1 million for unfunded loan commitments which is reported in the category accounts payable and accrued liabilities. That compares with an allowance for credit losses of $36 million at year-end 2005. Net charge-offs totaled $0.2 million in the current quarter, compared with a net recovery of $0.4 million a year ago.

For the first nine months of 2006, provision for credit losses totaled $26.4 million and net charge-offs were $0.3 million. That compares with a $1.9 million provision for credit losses and net charge-offs of $0.6 million a year ago.

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Other Income

Other income totaled $30.7 million in the current quarter, down $14.9 million from a year ago. Contributing to the decline between third quarters was:

A $14.7 million decline in net gains from sales of loans and mortgage-backed securities due to a lower volume of loans sold. Net gains in the current quarter totaled $14.8 million, including a $0.3 million loss due to the SFAS 133 impact of valuing derivatives associated with the sale of loans. Excluding the impact of SFAS 133, a gain was realized equal to 1.68% on secondary market sales of $903 million, compared with the year-ago gain of 1.47% on secondary market sales of $2.108 billion.
A $2.5 million unfavorable change in loan servicing activities. The primary reason for this unfavorable change was an addition to the valuation allowance for mortgage servicing rights of $0.1 million in the current quarter, compared with a recapture of $1.9 million in the year-ago quarter. At September 30, 2006, mortgage servicing rights, net of a $0.2 million valuation allowance, totaled $20.3 million or 0.87% of the $2.346 billion of associated loans serviced for others. That amount excludes $4.249 billion of loans primarily sub-serviced for others for a fixed fee per loan.

Those unfavorable items were partially offset by:

A $2.0 million increase in income from real estate investment activities due primarily to higher gains from sales. Gains totaled $5.7 million in the current quarter.
A $1.6 million litigation award received in the current quarter.

For the first nine months of 2006, other income totaled $74.9 million, down $74.8 million from the same period a year ago.

Operating Expense

Operating expense totaled $58.7 million in the current quarter, virtually unchanged from a year ago. Increases in most major categories of general and administrative expense were offset primarily by a decline in the other expense category, which was influenced by two special items. The current quarter included a reversal of a litigation reserve established in prior periods due to the successful outcome of a legal matter involving real estate investment activities, while the year-ago quarter included a contribution to the American Red Cross to help victims of Hurricane Katrina. Excluding the impact of these two items, operating expense would have been up 3.8% between third quarters.

For the first nine months of 2006, operating expense totaled $181.2 million, up $6.0 million or 3.4% from a year ago.

Assets, Loan Originations and Deposits

At September 30, 2006, assets totaled $16.983 billion, up $415 million or 2.5% from a year ago but down $113 million or 0.7% from year-end 2005. During the current quarter, assets declined $482 million or 2.8% due primarily to declines of $709 million in loans held for investment and $94 million in loans held for sale, partially offset by a $270 million increase in securities available for sale. Included within loans held for investment at quarter end were $12.327 billion of one-to-four unit adjustable rate

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mortgages subject to negative amortization, down $895 million from June 30, 2006. The amount of negative amortization included in loan balances increased $48 million during the current quarter to $277 million or 2.25% of loans subject to negative amortization. During the current quarter, approximately 28% of loan interest income represented negative amortization, up from both 26% in the second quarter of 2006 and 18% in the year-ago third quarter. At origination, these loans had a weighted average loan-to-value ratio of 73%.

Loan originations (including purchases) totaled $1.605 billion in the current quarter, down $2.039 billion or 56.0% from $3.644 billion a year ago. Loans originated for sale declined $876 million or 51.5% to $824 million, while single family loans originated for portfolio declined $1.147 billion or 60.0% to $765 million. Of all loans originated for portfolio this quarter, $8 million represented subprime credits. At quarter end, the subprime portfolio totaled $692 million, with an average loan-to-value ratio at origination of 70% and, of the total, 97% represented "Alt. A and A-" credits. In addition to single family loans, $16 million of other loans were originated in the current quarter. For the first nine months of 2006, loan originations totaled $6.489 billion, down 46.0% from $12.026 billion in the same period a year ago.

Deposits totaled $11.946 billion at quarter end, up 1.6% from a year ago and up 0.6% from year-end 2005. At quarter end, the number of branches totaled 171 (167 in California and four in Arizona), unchanged from June 30, 2006. During the current quarter, one in-store branch was closed due to the closure of the store in which it was located and one traditional branch was opened. At quarter end, the average deposit size of our 81 traditional branches was $116 million, while the average deposit size of our 90 in-store branches was $28 million. Borrowings represented 19.7% of total assets at quarter-end and were down $413 million from year-end 2005.

Non-Performing Assets

Non-performing assets increased during the quarter by $27 million to $67 million and represented 0.39% of total assets, compared with 0.21% at year-end 2005.

Regulatory Capital Ratios

At September 30, 2006, Downey Financial Corp.’s primary subsidiary, Downey Savings and Loan Association, F.A., had core and tangible capital ratios of 8.47% and a risk-based capital ratio of 17.05%. These capital levels were well above the "well capitalized" standards of 5% and 10%, respectively, as defined by regulation.

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, fluctuations in interest rates, credit quality 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.

Earnings Release and Table Listing

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DOWNEY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		September 30,			December 31,			September 30,
(Dollars in Thousands, Except Per Share Data)		2006			2005			2005

Assets
Cash		$	179,780		$	190,396		$	171,225
Federal funds			1			-			2

	Cash and cash equivalents		179,781			190,396			171,227
U.S. Treasury, government sponsored entities and other investment
	securities available for sale, at fair value		1,162,614			626,313			550,621
Loans held for sale, at lower of cost or fair value			323,428			464,488			501,611
Mortgage-backed securities available for sale, at fair value			257			277			284
Loans held for investment			14,872,642			15,391,759			14,877,306
Allowance for loan losses			(60,784	)		(34,601	)		(34,565	)

	Loans held for investment, net		14,811,858			15,357,158			14,842,741
Investments in real estate and joint ventures			55,663			49,344			49,351
Real estate acquired in settlement of loans			5,761			908			2,323
Premises and equipment			115,442			109,574			105,996
Federal Home Loan Bank stock, at cost			187,186			179,844			222,228
Mortgage servicing rights, net			20,310			20,302			19,117
Other assets			120,493			97,059			101,795

		$	16,982,793		$	17,095,663		$	16,567,294

Liabilities and Stockholders’ Equity
Deposits		$	11,945,758		$	11,876,848		$	11,752,236
Securities sold under agreements to repurchase			463,678			-			-
Federal Home Loan Bank advances			2,680,546			3,557,515			3,162,808
Senior notes			198,216			198,087			198,045
Accounts payable and accrued liabilities			220,497			114,527			151,794
Deferred income taxes			121,869			140,467			130,883

	Total liabilities		15,630,564			15,887,444			15,395,766

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, 2006, December 31, 2005 and
	September 30, 2005; outstanding 27,853,783 shares at September 30, 2006,
	December 31, 2005 and September 30, 2005		282			282			282
Additional paid-in capital			93,792			93,792			93,792
Accumulated other comprehensive loss			(4,516	)		(5,408	)		(2,995	)
Retained earnings			1,279,463			1,136,345			1,097,241
Treasury stock, at cost, 381,239 shares at September 30, 2006,
	December 31, 2005 and September 30, 2005		(16,792	)		(16,792	)		(16,792	)

	Total stockholders’ equity		1,352,229			1,208,219			1,171,528

		$	16,982,793		$	17,095,663		$	16,567,294

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Earnings Release and Table Listing

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

		Three Months Ended						Nine Months Ended
		September 30,						September 30,

(Dollars in Thousands, Except Per Share Data)		2006			2005			2006		2005

Interest income
Loans		$	277,974		$	214,068		$	808,552	$	604,022
U.S. Treasury and government sponsored entities securities			11,404			5,331			27,670		15,198
Mortgage-backed securities			3			3			9		9
Other investment securities			2,419			2,374			6,941		8,032

	Total interest income		291,800			221,776			843,172		627,261

Interest expense
Deposits			110,033			74,900			301,666		184,885
Federal Home Loan Bank advances and other borrowings			48,229			33,554			143,109		107,106
Senior notes			3,299			3,296			9,895		9,887

	Total interest expense		161,561			111,750			454,670		301,878

Net interest income			130,239			110,026			388,502		325,383
Provision for (recovery of) credit losses			9,640			(751	)		26,359		1,870

	Net interest income after provision for (recovery of) credit losses		120,599			110,777			362,143		323,513

Other income, net
Loan and deposit related fees			9,279			9,573			27,008		27,419
Real estate and joint ventures held for investment, net			5,331			3,307			10,173		7,615
Secondary marketing activities:
	Loan servicing income (loss), net		(377	)		2,166			264		1,121
	Net gains on sales of loans and mortgage-backed securities		14,847			29,499			35,120		108,962
	Net gains on sales of mortgage servicing rights		-			19			-		1,000
Net gains on sales of investment securities			-			-			-		28
Litigation award			1,625			-			1,625		1,767
Other			(36	)		971			719		1,830

	Total other income, net		30,669			45,535			74,909		149,742

Operating expense
Salaries and related costs			38,943			38,155			120,596		116,352
Premises and equipment costs			8,804			8,079			25,752		23,970
Advertising expense			1,211			1,557			4,332		4,458
Deposit insurance premiums and regulatory assessments			2,224			957			4,246		2,811
Professional fees			254			(69	)		1,496		612
Other general and administrative expense			7,087			9,938			24,557		26,935

	Total general and administrative expense		58,523			58,617			180,979		175,138
Net operation of real estate acquired in settlement of loans			166			91			185		76

	Total operating expense		58,689			58,708			181,164		175,214

Income before income taxes			92,579			97,604			255,888		298,041
Income taxes			35,403			37,868			104,415		122,496

	Net income	$	57,176		$	59,736		$	151,473	$	175,545

Per share information
Basic		$	2.05		$	2.14		$	5.43	$	6.30
Diluted		$	2.05		$	2.14		$	5.43	$	6.30
Cash dividends declared and paid		$	0.10		$	0.10		$	0.30	$	0.30
Weighted average shares outstanding
Basic		27,853,783			27,853,783			27,853,783		27,853,783
Diluted		27,883,198			27,884,352			27,883,567		27,883,489

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Earnings Release and Table Listing

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES

SELECTED FINANCIAL DATA

			Three Months Ended						Nine Months Ended
			September 30,						September 30,

(Dollars in Thousands)			2006			2005			2006			2005

Net income by business segment
Banking			$	52,988		$	57,687		$	144,374		$	170,829
Real estate investment				4,188			2,049			7,099			4,716

	Total net income		$	57,176		$	59,736		$	151,473		$	175,545


Selected financial ratios
Effective interest rate spread				3.10	%		2.73	%		3.05	%		2.68	%
Efficiency ratio^(a)				38.01			38.50			40.07			37.60
Return on average assets				1.33			1.44			1.16			1.41
Return on average equity				17.32			20.92			15.87			21.56


Asset and liability activity
Loans for investment portfolio:
	Originations:^(b)
		Residential one-to-four units	$	756,811		$	1,809,817		$	3,532,330		$	4,692,567
		Residential one-to-four units – subprime		7,935			102,304			81,499			408,264
		All other		15,744			31,620			178,473			277,804
	Repayments			(1,563,517	)		(1,691,123	)		(4,553,476	)		(4,120,375	)

Loans originated for sale portfolio^(b)				824,072			1,699,900			2,696,550			6,647,339

Loans and mortgage-backed securities sold				(903,156	)		(2,108,001	)		(2,807,436	)		(7,230,561	)

Increase (decrease) in loans and mortgage-backed securities				(803,030	)		(64,138	)		(686,380	)		800,487

Increase (decrease) in assets				(481,987	)		(46,652	)		(112,870	)		917,115

Increase in deposits				58,019			710,164			68,910			2,094,258

Decrease in borrowings				(610,224	)		(839,908	)		(413,162	)		(1,396,693	)

Earnings Release and Table Listing

	September 30,			December 31,			September 30,
	2006			2005			2005

Capital ratios (Bank only)
Tangible and core		8.47	%		7.64	%		7.66	%
Risk-based		17.05			14.93			14.82

Book value per share	$	48.55		$	43.38		$	42.06

Number of branches including in-store locations		171			173			172

^(a) The amount of general and administrative expense expressed as a percentage of net interest income plus other income, excluding income associated with real estate held for investment and litigation award.
^(b) Includes loans purchased.

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Earnings Release and Table Listing

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES

SELECTED FINANCIAL DATA – (Continued)

				Three Months Ended September 30,

				2006							2005

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

Average balance sheet data
Interest-earning assets:
	Loans:
		Loan prepayment fees				$	26,451		0.68	%			$	21,947		0.57	%
		Write-off of deferred costs and
			premiums from loan payoffs				(26,248	)	(0.67	)				(24,081	)	(0.63	)
		All other					277,771		7.11					216,202		5.63

			Total loans	$	15,629,328		277,974		7.11		$	15,370,378		214,068		5.57
	Mortgage-backed securities				260		3		4.62			288		3		4.17
	Investment securities^(a)				1,159,674		13,823		4.73			762,543		7,705		4.01

		Total interest-earnings assets			16,789,262	$	291,800		6.95	%		16,133,209	$	221,776		5.50	%
Non-interest-earning assets					451,281							435,116

	Total assets			$	17,240,543						$	16,568,325

Transaction accounts:
	Non-interest-bearing checking			$	764,207	$	-		-	%	$	833,616	$	-		-	%
	Interest-bearing checking^(b)				487,811		426		0.35			527,892		474		0.36
	Money market				153,777		404		1.04			161,275		425		1.05
	Regular passbook				1,413,319		3,533		0.99			2,059,920		5,464		1.05

		Total transaction accounts			2,819,114		4,363		0.61			3,582,703		6,363		0.70
Certificates of deposit					9,168,872		105,670		4.57			7,916,147		68,537		3.43

	Total deposits				11,987,986		110,033		3.64			11,498,850		74,900		2.58
FHLB advances and other borrowings^(c)					3,386,019		48,229		5.65			3,485,347		33,554		3.82
Senior notes					198,199		3,299		6.66			198,031		3,296		6.66

	Total deposits and borrowings				15,572,204		161,561		4.12			15,182,228		111,750		2.92
Other liabilities					348,036							244,113
Stockholders’ equity					1,320,303							1,141,984

	Total liabilities and stockholders’ equity			$	17,240,543						$	16,568,325

Net interest income/interest rate spread						$	130,239		2.83	%			$	110,026		2.58	%
Excess of interest-earning assets over
	deposits and borrowings			$	1,217,058						$	950,981
Effective interest rate spread									3.10							2.73

^(a) Yields for securities available for sale are calculated using historical cost balances and do not give effect to changes in fair value that are reflected as a component of stockholders’ equity.
^(b) Included amounts swept into money market deposit accounts.
^(c) The impact of 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.

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DOWNEY FINANCIAL CORP. AND SUBSIDIARIES

SELECTED FINANCIAL DATA – (Continued)

				Nine Months Ended September 30,

				2006							2005

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

Average balance sheet data
Interest-earning assets:
	Loans:
		Loan prepayment fees				$	73,810		0.61	%			$	47,945		0.41	%
		Write-off of deferred costs and
			premiums from loan payoffs				(74,311	)	(0.62	)				(55,877	)	(0.48	)
		All other					809,053		6.74					611,954		5.30

			Total loans	$	16,016,713		808,552		6.73		$	15,404,317		604,022		5.23
	Mortgage-backed securities				268		9		4.48			295		9		4.07
	Investment securities^(a)				994,502		34,611		4.65			760,572		23,230		4.08

		Total interest-earnings assets			17,011,483	$	843,172		6.61	%		16,165,184	$	627,261		5.17	%
Non-interest-earning assets					432,356							410,747

	Total assets			$	17,443,839						$	16,575,931

Transaction accounts:
	Non-interest-bearing checking			$	736,206	$	-		-	%	$	715,853	$	-		-	%
	Interest-bearing checking^(b)				503,844		1,300		0.34			532,438		1,430		0.36
	Money market				159,842		1,248		1.04			159,176		1,246		1.05
	Regular passbook				1,568,114		11,857		1.01			2,328,477		18,759		1.08

		Total transaction accounts			2,968,006		14,405		0.65			3,735,944		21,435		0.77
Certificates of deposit					9,035,528		287,261		4.25			6,951,553		163,450		3.14

	Total deposits				12,003,534		301,666		3.36			10,687,497		184,885		2.31
FHLB advances and other borrowings^(c)					3,654,092		143,109		5.24			4,368,285		107,106		3.28
Senior notes					198,156		9,895		6.66			197,989		9,887		6.66

	Total deposits and borrowings				15,855,782		454,670		3.83			15,253,771		301,878		2.65
Other liabilities					315,311							236,472
Stockholders’ equity					1,272,746							1,085,688

	Total liabilities and stockholders’ equity			$	17,443,839						$	16,575,931

Net interest income/interest rate spread						$	388,502		2.78	%			$	325,383		2.52	%
Excess of interest-earning assets over
	deposits and borrowings			$	1,155,701						$	911,413
Effective interest rate spread									3.05							2.68

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

Page 9

Earnings Release and Table Listing

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES

SELECTED FINANCIAL DATA – (Continued)

			Three Months Ended						Nine Months Ended
			September 30,						September 30,

(Dollars in Thousands)			2006			2005			2006			2005

Loan and deposit related fees
Loan related fees			$	901		$	1,538		$	2,976		$	4,179
Deposit related fees:
	Automated teller machine fees			2,419			2,770			6,978			8,135
	Other fees			5,959			5,265			17,054			15,105

		Total loan and deposit related fees	$	9,279		$	9,573		$	27,008		$	27,419

Loan servicing income, net
Net cash servicing fees			$	1,583		$	1,968		$	4,723		$	5,348
Payoff and curtailment interest cost^(a)				(813	)		(315	)		(1,264	)		(797	)
Amortization of mortgage servicing rights				(1,056	)		(1,346	)		(3,283	)		(3,904	)
(Provision for) reduction of impairment of mortgage servicing rights				(91	)		1,859			88			474

	Total loan servicing income (loss), net		$	(377	)	$	2,166		$	264		$	1,121

Net gains (losses) on sales of loans and mortgage-backed securities
Mortgage servicing rights			$	837		$	1,858		$	3,144		$	4,684
All other components excluding SFAS 133				14,314			29,041			32,775			101,507
SFAS 133				(304	)		(1,400	)		(799	)		2,771

	Total net gains on sales of loans and mortgage-backed securities		$	14,847		$	29,499		$	35,120		$	108,962

Secondary marketing gain excluding SFAS 133 as a
	percentage of associated sales			1.68	%		1.47	%		1.28	%		1.47	%

Mortgage servicing rights activity
Gross balance at beginning of period			$	20,665		$	20,626		$	21,157		$	20,502
Additions^(b)				896			1,858			3,203			4,684
Amortization				(1,056	)		(1,346	)		(3,283	)		(3,904	)
Sales				-			(87	)		-			(101	)
Impairment write-down				(22	)		(134	)		(594	)		(264	)

	Gross balance at end of period			20,483			20,917			20,483			20,917

Allowance balance at beginning of period				104			3,793			855			2,538
Provision for (reduction of) impairment				91			(1,859	)		(88	)		(474	)
Impairment write-down				(22	)		(134	)		(594	)		(264	)

	Allowance balance at end of period			173			1,800			173			1,800

		Total mortgage servicing rights, net	$	20,310		$	19,117		$	20,310		$	19,117

As a percentage of associated mortgage loans				0.87	%		0.83	%		0.87	%		0.83	%
Estimated fair value^(c)			$	22,383		$	19,139		$	22,383		$	19,139
Weighted average expected life (in months)				51			47			51			47
Custodial account earnings rate				5.28	%		3.99	%		5.28	%		3.99	%
Weighted average discount rate				9.41			9.20			9.41			9.20

Earnings Release and Table Listing

		September 30,			December 31,			September 30,
(Dollars in Thousands)		2006			2005			2005

Mortgage loans serviced for others
Total		$	6,595,462		$	5,292,253		$	11,444,758
With capitalized mortgage servicing rights:^(c)
	Amount		2,345,880			2,362,539			2,310,726
	Weighted average interest rate		5.70	%		5.60	%		5.57	%
Total loans sub-serviced without mortgage servicing rights:^(d)
	Term – less than six months	$	981,883		$	123,552		$	292,480
	Term – indefinite		3,249,905			2,785,090			8,818,890

Custodial account balances		$	171,481		$	117,451		$	326,906

^(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. This does not include the benefit of the use of repaid loan funds to increase net interest income.
^(b) Includes minor amounts repurchased.
^(c) The estimated fair value may exceed book value for certain asset strata and excluded loans sold or securitized prior to 1996 and loans sub-serviced without capitalized mortgage servicing rights.
^(d) Servicing is performed for a fixed fee per loan each month.

Page 10

Earnings Release and Table Listing

DOWNEY FINANCIAL CORP. AND SUBSIDIARIES

SELECTED FINANCIAL DATA – (Continued)

			September 30,			December 31,			September 30,
(Dollars in Thousands)			2006			2005			2005

Loans held for investment
Loans secured by real estate:
	Residential one-to-four units		$	13,491,481		$	13,615,779		$	12,964,860
	Residential one-to-four units – subprime			691,724			1,058,911			1,175,043

		Total residential one-to-four units		14,183,205			14,674,690			14,139,903
	Home equity loans and lines of credit			211,713			274,014			300,300
	Residential five or more units			116,110			69,531			70,230
	Commercial real estate			26,910			28,791			29,023
	Construction			58,157			82,379			89,337
	Land			59,394			23,630			41,361
Non-mortgage:
	Commercial			3,400			3,981			4,223
	Automobile			23			116			204
	Other consumer			6,050			6,577			6,456

		Total loans held for investment		14,664,962			15,163,709			14,681,037
Increase (decrease) for:
	Undisbursed loan funds and net deferred costs and premiums			207,680			228,050			196,269
	Allowance for losses			(60,784	)		(34,601	)		(34,565	)

		Total loans held for investment, net	$	14,811,858		$	15,357,158		$	14,842,741


Loans held for sale
Residential one-to-four units			$	318,414		$	459,081		$	495,156
Net deferred costs and premiums				4,445			5,841			6,576
Capitalized basis adjustment^(a)				569			(434	)		(121	)

	Total loans held for sale, net		$	323,428		$	464,488		$	501,611


Residential one-to-four unit loans subject to negative amortization
Held for investment:
	Amount		$	12,327,000		$	13,419,322		$	12,660,520
	Negative amortization included in the loan balance			276,947			133,066			99,043
	Negative amortization as a percentage of the associated loan balance			2.25	%		0.99	%		0.78	%
Held for sale:
	Amount		$	213,123		$	248,260		$	293,995
	Negative amortization included in the loan balance			17			13			4


Non-performing assets
Non-accrual loans:
	Residential one-to-four units		$	46,589		$	23,497		$	18,373
	Residential one-to-four units – subprime			13,872			10,774			9,018
	Other			306			42			634

		Total non-accrual loans		60,767			34,313			28,025
Real estate acquired in settlement of loans				5,761			908			2,323

	Total non-performing assets		$	66,528		$	35,221		$	30,348

Non-performing assets as a percentage of total assets				0.39	%		0.21	%		0.18	%


Delinquent loans
30-59 days			$	42,585		$	25,122		$	20,268
60-89 days				21,055			7,272			10,596
90+ days^(b)				37,520			23,850			15,343

	Total delinquent loans		$	101,160		$	56,244		$	46,207

Delinquencies as a percentage of total loans				0.68	%		0.36	%		0.30	%

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

Page 11

Downey Financial Inactive 8-KEarnings Release and Table Listing