================================================================================
SECURITIES 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 MARCH 31, 2000
OR
[ ] 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 33-0633413
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3501 JAMBOREE ROAD, NEWPORT BEACH, CA 92660
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (949) 854-0300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
COMMON STOCK, $0.01 PAR VALUE 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 March 31, 2000, 28,148,409 shares of the Registrant's Common Stock,
$0.01 par value were outstanding.
================================================================================
DOWNEY FINANCIAL CORP.
MARCH 31, 2000 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I
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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................... 8
PART II
OTHER INFORMATION.......................................................... 27
Item 6 Exhibits and Reports on Form 8-K................................. 27
i
PART I - FINANCIAL INFORMATION
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31, March 31,
(Dollars in Thousands, Except Per Share Data) 2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash ........................................................................... $ 84,459 $ 121,146 $ 50,664
Federal funds .................................................................. 20,200 1 39,204
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents .................................................. 104,659 121,147 89,868
U.S. Treasury securities and agency obligations available for sale, at fair
value....................................................................... 191,085 171,823 115,317
Municipal securities held to maturity, at amortized cost (estimated market value
of $6,709 at March 31, 2000 and December 31, 1999 and $6,745
at March 31, 1999) ......................................................... 6,727 6,728 6,764
Loans held for sale, at lower of cost or market ................................ 157,717 136,005 309,933
Mortgage-backed securities available for sale, at fair value ................... 18,818 21,719 28,957
Loans receivable held for investment ........................................... 9,104,094 8,588,339 5,763,657
Investments in real estate and joint ventures .................................. 40,571 42,172 52,155
Real estate acquired in settlement of loans .................................... 7,115 5,899 4,686
Premises and equipment ......................................................... 106,526 107,978 103,795
Federal Home Loan Bank stock, at cost .......................................... 107,637 102,392 50,105
Other assets ................................................................... 114,060 103,338 68,855
- ----------------------------------------------------------------------------------------------------------------------------
$9,959,009 $9,407,540 $6,594,092
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ....................................................................... $6,961,378 $6,562,761 $5,205,282
Federal Home Loan Bank advances ................................................ 2,248,964 2,122,407 842,677
Other borrowings ............................................................... 329 373 8,638
Accounts payable and accrued liabilities ....................................... 45,327 45,682 41,901
Deferred income taxes .......................................................... 26,160 23,899 5,188
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities .......................................................... 9,282,158 8,755,122 6,103,686
- ----------------------------------------------------------------------------------------------------------------------------
Company obligated mandatorily redeemable capital securities of subsidiary trust
holding solely junior subordinated debentures of the Company
("Capital Securities") ..................................................... 120,000 120,000 --
STOCKHOLDERS' EQUITY
Preferred stock, par value of $0.01 per share; authorized 5,000,000 shares;
outstanding none ........................................................... -- -- --
Common stock, par value of $0.01 per share; authorized 50,000,000 shares;
outstanding 28,148,409 shares at March 31, 2000 and
at December 31, 1999 and 28,146,342 shares at March 31, 1999 ............... 281 281 281
Additional paid-in capital ..................................................... 92,385 92,385 92,357
Accumulated other comprehensive income (loss) - unrealized gains (losses) on
securities available for sale .............................................. (2,038) (1,568) 305
Retained earnings .............................................................. 466,223 441,320 397,463
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity ................................................. 556,851 532,418 490,406
- ----------------------------------------------------------------------------------------------------------------------------
$9,959,009 $9,407,540 $6,594,092
============================================================================================================================
See accompanying notes to consolidated financial statements.
1
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended
March 31,
------------------------
(Dollars in Thousands, Except Per Share Data) 2000 1999
- -----------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans receivable ...................................................... $172,470 $110,731
U.S. Treasury securities and agency obligations ....................... 2,914 1,617
Mortgage-backed securities ............................................ 352 464
Other investments ..................................................... 1,779 1,082
- -----------------------------------------------------------------------------------------------------------
Total interest income ............................................... 177,515 113,894
- -----------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits .............................................................. 81,233 55,489
Borrowings ............................................................ 30,478 9,449
Capital securities .................................................... 3,041 --
- -----------------------------------------------------------------------------------------------------------
Total interest expense .............................................. 114,752 64,938
- -----------------------------------------------------------------------------------------------------------
NET INTEREST INCOME ................................................... 62,763 48,956
PROVISION FOR LOAN LOSSES .................................................. 791 2,381
- -----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses ................... 61,972 46,575
- -----------------------------------------------------------------------------------------------------------
OTHER INCOME, NET:
Loan and deposit related fees ......................................... 5,823 4,448
Real estate and joint ventures held for investment, net:
Net gains on sales of wholly owned real estate ...................... 1,421 --
Reduction of (provision for) losses on real estate and joint ventures 43 (53)
Operations, net ..................................................... 1,624 1,218
Secondary marketing activities:
Loan servicing fees ................................................. 251 574
Net gains on sales of loans and mortgage-backed securities .......... 1,793 3,987
Net gains on sales of investment securities ........................... -- 97
Gain on sale of subsidiary ............................................ 9,762 --
Other ................................................................. 760 1,071
- -----------------------------------------------------------------------------------------------------------
Total other income, net ............................................. 21,477 11,342
- -----------------------------------------------------------------------------------------------------------
OPERATING EXPENSE:
Salaries and related costs ............................................ 21,525 20,811
Premises and equipment costs .......................................... 5,635 4,735
Advertising expense ................................................... 1,873 2,199
Professional fees ..................................................... 820 540
SAIF insurance premiums and regulatory assessments .................... 620 989
Other general and administrative expense .............................. 4,888 6,975
- -----------------------------------------------------------------------------------------------------------
Total general and administrative expense ............................ 35,361 36,249
- -----------------------------------------------------------------------------------------------------------
Net operation of real estate acquired in settlement of loans .......... 247 90
Amortization of excess of cost over fair value of net assets acquired . 117 118
- -----------------------------------------------------------------------------------------------------------
Total operating expense ............................................. 35,725 36,457
- -----------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES ................................................. 47,724 21,460
Income taxes ............................................................... 20,288 9,112
- -----------------------------------------------------------------------------------------------------------
NET INCOME ............................................................ $ 27,436 $ 12,348
===========================================================================================================
PER SHARE INFORMATION:
BASIC ................................................................. $ 0.97 $ 0.44
===========================================================================================================
DILUTED ............................................................... $ 0.97 $ 0.44
===========================================================================================================
CASH DIVIDENDS DECLARED AND PAID ...................................... $ 0.09 $ 0.08
===========================================================================================================
Weighted average diluted shares outstanding ........................... 28,173,883 28,170,268
===========================================================================================================
See accompanying notes to consolidated financial statements.
2
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months Ended
March 31,
--------------------
(In Thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------
NET INCOME ........................................................................... $27,436 $12,348
- --------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
Unrealized gains (losses) on securities available for sale:
U.S. Treasury securities and agency obligations available for sale, at fair value (424) (418)
Mortgage-backed securities available for sale, at fair value .................... (55) 26
Less reclassification of net realized gains (losses) included in net income ....... (9) 56
- --------------------------------------------------------------------------------------------------------------
Total other comprehensive loss, net of income taxes ............................... (470) (448)
- --------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME ................................................................. $26,966 $11,900
==============================================================================================================
See accompanying notes to consolidated financial statements.
3
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
---------------------------
(In Thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................................ $ 27,436 $ 12,348
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization ................................................... 6,595 1,871
Provision for losses on loans, real estate acquired in settlement
of loans, investments in real estate and joint ventures and other assets ...... 823 2,507
Net gains on sales of loans and mortgage-backed securities, investment
securities, real estate and other assets ...................................... (3,553) (4,371)
Gain on sale of subsidiary ...................................................... (9,762) --
Interest capitalized on loans (negative amortization) ........................... (15,884) (6,015)
Federal Home Loan Bank stock dividends .......................................... (1,215) (675)
Loans originated for sale ......................................................... (367,916) (646,786)
Proceeds from sales of loans originated for sale .................................. 116,301 172,370
Other, net ........................................................................ (12,548) (2,301)
- --------------------------------------------------------------------------------------------------------------------
Net cash used for operating activities ............................................... (259,723) (471,052)
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Sale of subsidiary, net ......................................................... 373,442 --
Sales of U.S. Treasury securities and agency obligations available for sale ..... -- 50,014
Sales of mortgage-backed securities available for sale .......................... 213,855 600,219
Sales of wholly owned real estate and real estate acquired in settlement of loans 3,232 909
Purchase of:
U.S. Treasury securities and agency obligations available for sale .............. (20,000) (50,000)
Loans receivable held for investment ............................................ (12,560) (302)
Federal Home Loan Bank stock .................................................... (4,030) --
Loans receivable originated held for investment (net of refinances of
$33,564 at March 31, 2000 and $51,506 at March 31, 1999) ........................ (1,155,505) (855,169)
Principal payments on loans receivable held for investment and mortgage-backed
securities available for sale ................................................... 345,901 386,525
Net change in undisbursed loan funds .............................................. (23,047) 30,670
Proceeds from (investments in) real estate held for investment .................... 1,271 (2,999)
Other, net ........................................................................ (1,921) (2,292)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities ............................................ (279,362) 157,575
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Three Months Ended
March 31,
---------------------------
(In Thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits .................................................... $ 398,617 $ 165,549
Proceeds from Federal Home Loan Bank advances ............................... 2,004,500 1,126,800
Repayments of Federal Home Loan Bank advances ............................... (1,877,943) (979,135)
Net decrease in other borrowings ............................................ (44) (70)
Proceeds from exercise of stock options ..................................... -- 191
Cash dividends .............................................................. (2,533) (2,251)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities ...................................... 522,597 311,084
- --------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents ...................................... (16,488) (2,393)
Cash and cash equivalents at beginning of year ................................. 121,147 92,261
- --------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 104,659 $ 89,868
==============================================================================================================
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the period for:
Interest .................................................................. $ 113,604 $ 65,304
Income taxes .............................................................. 12,684 (16)
Supplemental disclosure of non-cash investing:
Loans transferred to held for investment from held for sale ................. 14,951 7,095
Loans exchanged for mortgage-backed securities .............................. 213,981 600,379
Real estate acquired in settlement of loans ................................. 4,692 2,428
Loans to facilitate the sale of real estate acquired in settlement of loans . 1,957 1,463
==============================================================================================================
See accompanying notes to consolidated financial statements.
5
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 March 31, 2000, December 31,
1999 and March 31, 1999 and the results of operations, comprehensive income, and
changes in cash flows for the three months ended March 31, 2000 and 1999.
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 generally accepted accounting principles for interim financial
operations 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 is
written with the presumption 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, 1999, 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, 1999, 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) - NET INCOME PER SHARE
Net income per share is calculated on both a basic and diluted basis. Basic
net income per share excludes dilution and is computed by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted net income 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 issuance of
common stock that then shared in earnings.
(Dollars in Thousands, Net Weighted Average Per Share
Except Per Share Data) Income Shares Outstanding Amount
- ---------------------------------------------------------------------------------
Three Months Ended March 31, 2000:
Basic earnings per share ....... $27,436 28,148,409 $0.97
Effect of dilutive stock options -- 25,474 0.00
- ---------------------------------------------------------------------------------
Diluted earnings per share ..... $27,436 28,173,883 $0.97
=================================================================================
Three Months Ended March 31, 1999:
Basic earnings per share ....... $12,348 28,135,065 $0.44
Effect of dilutive stock options -- 35,203 0.00
- ---------------------------------------------------------------------------------
Diluted earnings per share ..... $12,348 28,170,268 $0.44
=================================================================================
NOTE (3) - DERIVATIVES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as:
o a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized firm commitment;
o a hedge of the exposure to variable cash flows of a forecasted
transaction; or
o a hedge of the foreign currency exposure of a net investment in a
foreign operation, an unrecognized firm commitment, an available for
sale security, or a foreign-currency-denominated forecasted
transaction.
6
Under SFAS 133, an entity that elects to apply hedge accounting is required
to establish at the inception of the hedge the method it will use for assessing
the effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk.
This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. It is not anticipated that the financial impact
of this statement will have a material impact on Downey.
As part of its secondary marketing activities, Downey utilizes forward sale
and purchase contracts to hedge the value of loans originated for sale against
adverse changes in interest rates. At March 31, 2000, sales contracts amounted
to approximately $261 million while no purchase contracts were outstanding.
These contracts have a high correlation to the price movement of the loans being
hedged. There is no recognition of unrealized gains or losses on these contracts
in the balance sheet or statement of income. When the related loans are sold,
the deferred gains or losses from these contracts are recognized in the
statement of income as a component of net gains or losses on sales of loans and
mortgage-backed securities.
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 1995 and are currently reviewing
returns filed for the 1996 tax year. Adjustments proposed by the Internal
Revenue Service have been protested by Downey and are currently moving through
the government appeals process. Downey believes it has established appropriate
liabilities for any resultant deficiencies. Tax years subsequent to 1996 remain
open to review by federal and state tax authorities.
NOTE (5) - SALE OF SUBSIDIARY
On January 21, 2000, Downey Savings and Loan Association, F.A. signed a
definitive agreement to sell during the first quarter of 2000 its indirect
automobile finance subsidiary, Downey Auto Finance Corp., to Auto One Acceptance
Corp., a subsidiary of California Federal Bank. As of December 31, 1999, Downey
Auto Finance Corp. had loans totaling $366 million and total assets of $373
million. The sale closed on February 29, 2000, and Downey recognized a pre-tax
gain from the sale of $9.8 million.
7
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 first quarter of 2000 totaled $27.4 million or $0.97
per share on a diluted basis, more than double the $12.3 million or $0.44 per
share reported in the same period a year ago.
Included in the current quarter net income was a $5.6 million after-tax
gain from the sale of our indirect automobile finance subsidiary, Downey Auto
Finance Corp. Net income would have been $21.8 million, if adjusted to exclude
the gain, up $9.5 million or 76.7% over a year ago due to the following:
o Net income from our banking operations increased $8.1 million or 67.5%
primarily due to higher net interest income. Net interest income
increased $13.8 million or 28.1% due to an increase in average earning
assets as our effective interest spread declined.
o Net income from our real estate investment activities increased by
$1.4 million due to higher net gains from sales of real estate
investments.
For the first quarter of 2000, our return on average assets was 1.14% and
our return on average equity was 20.21%. Excluding the gain from the subsidiary
sale, our return on assets would have been 0.91% and our return on equity would
have been 16.07%.
At March 31, 2000, our assets totaled $10.0 billion, up $3.4 billion or
51.0% from a year ago. Our single family loan originations totaled $1.499
billion in the first quarter of 2000, up 5.2% from the $1.424 billion originated
in the first quarter of 1999. Of the current quarter total, $1.131 billion
represented originations of loans for portfolio, of which $89 million
represented subprime credits as part of our continuing strategy to enhance the
portfolio's net yield. In addition to single family loans, $73 million of other
loans were originated in the quarter including $39 million of automobile loans
and $22 million of construction and land loans.
Between first quarters, we funded our asset growth with a $1.8 billion or
33.7% increase in deposits and a $1.5 billion increase in borrowings and capital
securities. As we enter the second quarter, we have substantially completed
leveraging the additional capital raised from our capital securities issued in
July of last year. During the quarter, no new branches were opened, leaving
total branches unchanged at 104, of which 40 were in-store.
Non-performing assets were virtually unchanged during the quarter at $40
million or 0.40% of total assets.
At March 31, 2000, our primary subsidiary, Downey Savings and Loan
Association, F.A. (the "Bank") had core and tangible capital ratios of 6.17% and
a risk-based capital ratio of 12.30%. These capital levels were well above the
"well capitalized" standards defined by regulation of 5.00% for core capital and
10.00% for risk-based capital.
8
RESULTS OF OPERATIONS
NET INTEREST INCOME
Our net interest income totaled $62.8 million in the first quarter of 2000,
up $13.8 million or 28.2% from the same period last year. The improvement
between first quarters reflected an increase in average earning assets. Our
average earning assets increased by $3.2 billion or 53.3% between first quarters
to $9.3 billion. Our effective interest rate spread of 2.71% in the current
quarter was down from the year-ago quarter level of 3.23%. This primarily
reflected a higher proportion of our earning assets being funded with higher
cost certificates of deposit and borrowings thereby resulting in our cost of
funds increasing more rapidly than our yield on earning assets. Although below a
year ago, our effective interest rate spread in the current quarter was above
the fourth quarter 1999 level of 2.59%.
The following table presents for the periods indicated the total dollar
amount of:
o interest income from average interest-earning assets and resultant
yields; and
o interest expense on average interest-bearing liabilities and the
resultant costs, expressed as rates.
The table also sets forth our net interest income, interest rate spread and
effective interest rate spread. The effective interest rate spread reflects the
relative level of interest-earning assets to interest-bearing liabilities and
equals:
o the difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities, divided by
o average interest-earning assets for the period.
The table also sets forth our net interest-earning balance--the difference
between the average balance of interest-earning assets and the average balance
of interest-bearing liabilities--for the periods indicated. We included
non-accrual loans in the average interest-earning assets balance. We included
interest from non-accrual loans in interest income only to the extent we
received payments and to the extent we believe we will recover the remaining
principal balance of the loans. We computed average balances for the quarter
using the average of each month's daily average balance during the period
indicated.
Three Months Ended
---------------------------------------------------------------------------------------------
March 31, 2000 December 31, 1999 March 31, 1999
---------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans ............................ $8,946,021 $172,470 7.71% $8,392,613 $156,771 7.47% $5,818,860 $110,731 7.61%
Mortgage-backed securities ....... 20,877 352 6.74 22,663 364 6.42 30,599 464 6.07
Investment securities ............ 313,481 4,693 6.02 277,453 4,109 5.88 205,844 2,699 5.32
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ... 9,280,379 177,515 7.65 8,692,729 161,244 7.42 6,055,303 113,894 7.52
Non-interest-earning assets ......... 336,592 324,486 273,867
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets .................... $9,616,971 $9,017,215 $6,329,170
===================================================================================================================================
Interest-bearing liabilities:
Deposits ......................... $6,750,162 $81,233 4.84% $6,451,071 $ 75,713 4.66% $5,062,152 $ 55,489 4.45%
Borrowings ....................... 2,108,736 30,478 5.81 1,836,878 26,208 5.66 715,572 9,449 5.36
Capital securities ............... 120,000 3,041 10.14 120,000 3,041 10.14 -- -- -
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities ................. 8,978,898 114,752 5.14 8,407,949 104,962 4.95 5,777,724 64,938 4.56
Non-interest-bearing liabilities .... 94,980 86,806 67,338
Stockholders' equity ................ 543,093 522,460 484,108
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity ........ $9,616,971 $9,017,215 $6,329,170
===================================================================================================================================
Net interest income/interest rate
spread .......................... $62,763 2.51% $ 56,282 2.47% $ 48,956 2.96%
Excess of interest-earning assets
over interest-bearing liabilities $ 301,481 $ 284,780 $ 277,579
Effective interest rate spread ...... 2.71 2.59 3.23
===================================================================================================================================
9
Changes in our net interest income are a function of both changes in rates
and changes in volumes of interest-earning assets and interest-bearing
liabilities. The following table sets forth information regarding changes in our
interest income and expense for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, we have provided
information on changes attributable to:
o changes in volume--changes in volume multiplied by prior period rate;
o changes in rate--changes in rate multiplied by prior period volume;
and
o changes in rate/volume--changes in rate multiplied by changes in
volume.
Interest-earning asset and interest-bearing liability balances used in the
calculations represent quarterly average balances computed using the average of
each month's daily average balance during the period indicated.
Three Months Ended
--------------------------------------------
March 31, 2000 Versus March 31, 1999
Changes Due To
--------------------------------------------
Rate/
(In Thousands) Volume Rate Volume Net
- --------------------------------------------------------------------------------
Interest income:
Loans ...................... $59,502 $ 1,455 $ 782 $61,739
Mortgage-backed securities . (147) 51 (16) (112)
Investment securities ...... 1,442 363 189 1,994
- --------------------------------------------------------------------------------
Change in interest income 60,797 1,869 955 63,621
- --------------------------------------------------------------------------------
Interest expense:
Deposits ................... 19,000 5,058 1,686 25,744
Borrowings ................. 18,620 817 1,592 21,029
Capital securities ......... -- -- 3,041 3,041
- --------------------------------------------------------------------------------
Change in interest expense 37,620 5,875 6,319 49,814
- --------------------------------------------------------------------------------
Change in net interest income .. $23,177 $(4,006) $(5,364) $13,807
================================================================================
PROVISION FOR LOAN LOSSES
Provision for loan losses was $0.8 million in the current quarter, down
from $2.4 million in the first quarter of 1999. For information regarding the
allowance for loan losses, see Financial Condition--Problem Loans and Real
Estate--Allowance for Losses on Loans and Real Estate on page 23.
OTHER INCOME
Our total other income was $21.5 million in the first quarter of 2000, of
which $9.8 million represented the pre-tax gain from the sale of the automobile
finance subsidiary. Excluding the gain, total other income would have been $11.7
million, up $0.4 million or 3.3% from a year ago. Our income from real estate
held for investment increased $1.9 million of which $1.8 million was associated
with gains from sales and declines in valuation allowances, while our loan and
deposit related fees increased by $1.4 million. Those increases, however, where
partially offset by declines of $2.2 million in net gains on sales of loans due
to a lower volume of loan sales, $0.3 million in loan servicing fees, and $0.3
million in miscellaneous other income.
10
The following table presents a breakdown of the key components comprising
our income from real estate and joint venture operations for the periods
indicated.
Three Months Ended
--------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2000 1999 1999 1999 1999
- -----------------------------------------------------------------------------------------------------------------
Operations, net:
Rental operations, net of expenses ................. $ 975 $ 772 $ 975 $1,094 $ 981
Equity in net income (loss) from joint ventures .... 377 4,333 (36) 1,008 47
Interest from joint venture advances ............... 272 271 593 202 190
- -----------------------------------------------------------------------------------------------------------------
Total operations, net ............................ 1,624 5,376 1,532 2,304 1,218
Net gains on sales of wholly owned real estate ........ 1,421 3,969 1,037 200 --
Reduction of (provision for) losses on real estate and
joint ventures ..................................... 43 292 3,162 265 (53)
- -----------------------------------------------------------------------------------------------------------------
Income from real estate and joint venture operations $3,088 $9,637 $5,731 $2,769 $1,165
=================================================================================================================
OPERATING EXPENSE
Operating expense totaled $35.7 million in the current quarter, down $0.7
million from the first quarter of 1999. The decline was due to lower general and
administrative costs, which decreased $0.9 million or 2.4% due primarily to
lower costs associated with residential lending activities.
PROVISION FOR INCOME TAXES
Income taxes for the first quarter totaled $20.3 million, up from $9.1
million a year ago. Our effective tax rate was 42.5% in both periods. For
further information regarding income taxes see, Notes To Consolidated Financial
Statements--Note (4)--Income Taxes on page 7.
BUSINESS SEGMENT REPORTING
The previous sections of the Results of Operations discussed our
consolidated results. The purpose of this section is to present data on the
results of our two business segments--banking and real estate investment.
The following table presents by business segment our net income for the
periods indicated, followed by a discussion of the results of operations of each
segment.
Three Months Ended
-------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2000 1999 1999 1999 1999
- -------------------------------------------------------------------------------------------
Banking net income .............. $25,767 $14,520 $13,545 $13,702 $12,029
Real estate investment net income 1,669 5,316 3,017 1,356 319
- -------------------------------------------------------------------------------------------
Total net income ............. $27,436 $19,836 $16,562 $15,058 $12,348
===========================================================================================
Banking
Net income from our banking operations for the first quarter of 2000
totaled $25.8 million, up from $12.0 million in the first quarter of 1999.
The increase between first quarters included the $5.6 million after-tax
gain from the previously mentioned sale of our indirect automobile finance
subsidiary. Excluding the gain, the net income from our banking operations would
have been $20.2 million, up $8.1 million or 67.5% from a year ago.
The adjusted increase between first quarters primarily reflected higher net
interest income. Net interest income increased $13.8 million or 28.1% due to an
increase in our average earning assets as our effective interest rate spread
declined. Also favorably impacting our banking net income was a $1.6 million
decline in provision for loan losses and a $0.4 million decline in operating
expense. These favorable items were partially offset by a decline of $1.5
million in all
11
other income. The decline in all other income was primarily due to lower gains
from the sales of loans and mortgage-backed securities which more than offset
higher loan and deposit related fees.
The table below sets forth our banking operational results and selected
financial data for the periods indicated.
Three Months Ended
---------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2000 1999 1999 1999 1999
- ---------------------------------------------------------------------------------------------------------
Net interest income ................... $ 62,715 $ 56,374 $ 51,220 $ 51,242 $ 48,948
Provision for loan losses ............. 791 3,253 2,838 2,798 2,381
Other income:
Gain on sale of subsidiary ......... 9,762 -- -- -- --
All other .......................... 8,585 8,734 10,503 10,408 10,110
Operating expense ..................... 35,484 36,639 35,491 35,112 35,839
Net intercompany income ............... 108 107 102 102 82
- ---------------------------------------------------------------------------------------------------------
Income before income taxes ............ 44,895 25,323 23,496 23,842 20,920
Income taxes .......................... 19,128 10,803 9,951 10,140 8,891
- ---------------------------------------------------------------------------------------------------------
Net income (1) ................... $ 25,767 $ 14,520 $ 13,545 $ 13,702 $ 12,029
=========================================================================================================
AT PERIOD END:
Assets:
Loans and mortgage-backed securities $9,280,629 $8,746,063 $7,900,601 $6,818,129 $6,102,547
Other .............................. 675,124 654,745 578,871 490,523 473,476
- ---------------------------------------------------------------------------------------------------------
Total assets ..................... 9,955,753 9,400,808 8,479,472 7,308,652 6,576,023
- ---------------------------------------------------------------------------------------------------------
Equity ................................ $ 556,851 $ 532,418 $ 515,945 $ 502,133 $ 490,406
=========================================================================================================
<FN>
(1) Included in the quarter ending March 31, 2000 was a $5.6 million after-tax
gain related to the sale of subsidiary.
</FN>
12
Real Estate Investment
Net income from our real estate investment operations totaled $1.7 million
in the first quarter of 2000, up $1.4 million from the year-ago quarter due to
higher net gains on sales of real estate investments.
The table below sets forth real estate investment operational results and
selected financial data for the periods indicated.
Three Months Ended
----------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2000 1999 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------
Net interest income (expense) ................. $ 48 $ (92) $ (177) $ (45) $ 8
Other income .................................. 3,130 9,672 5,768 2,851 1,232
Operating expense ............................. 241 453 314 409 618
Net intercompany expense ...................... 108 107 102 102 82
- ------------------------------------------------------------------------------------------------------------
Income before income taxes .................... 2,829 9,020 5,175 2,295 540
Income taxes .................................. 1,160 3,704 2,158 939 221
- ------------------------------------------------------------------------------------------------------------
Net income ................................. $ 1,669 $ 5,316 $ 3,017 $ 1,356 $ 319
============================================================================================================
AT PERIOD END:
Assets:
Investment in real estate and joint ventures $40,571 $42,172 $54,036 $57,460 $52,155
Other ...................................... 7,193 7,399 13,204 8,294 7,564
- ------------------------------------------------------------------------------------------------------------
Total assets ............................. 47,764 49,571 67,240 65,754 59,719
- ------------------------------------------------------------------------------------------------------------
Equity ........................................ $44,508 $42,839 $46,023 $43,006 $41,650
============================================================================================================
Our investment in real estate and joint ventures amounted to $41 million at
March 31, 2000, compared to $42 million at December 31, 1999 and $52 million at
March 31, 1999.
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 23.
13
FINANCIAL CONDITION
LOANS AND MORTGAGE-BACKED SECURITIES
Total loans and mortgage-backed securities, including those we hold for
sale, increased $535 million during the first quarter to a total of $9.3 billion
or 93.2% of assets at March 31, 2000. The increase primarily occurred in single
family loans we hold for investment which increased $867 million or 11.1% during
the quarter. Of that increase, $807 million represented prime loans while
subprime loans increased $60 million. Partially offsetting the increase during
the quarter was the elimination of our indirect automobile loan portfolio of
$366 million due to the sale of our subsidiary involved in that activity.
The following table sets forth loans originated, including purchases, for
investment and for sale during the periods indicated.
Three Months Ended
--------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2000 1999 1999 1999 1999
- -----------------------------------------------------------------------------------------------------------
Loans originated for investment:
Residential, one-to-four units:
Adjustable .......................... $1,126,995 $1,207,517 $1,571,163 $ 964,408 $ 568,891
Fixed ............................... 3,860 3,269 4,920 81,080 208,504
Other ................................. 72,731 126,756 136,173 136,155 131,045
- -----------------------------------------------------------------------------------------------------------
Total loans originated for investment 1,203,586 1,337,542 1,712,256 1,181,643 908,440
Loans originated for sale (1) ............ 367,916 343,603 420,389 631,496 646,786
- -----------------------------------------------------------------------------------------------------------
Total loans originated ................ $1,571,502 $1,681,145 $2,132,645 $1,813,139 $1,555,226
===========================================================================================================
<FN>
(1) One-to-four unit residential loans, primarily fixed.
</FN>
Originations of one-to-four unit residential loans totaled $1.499 billion
in the first quarter of 2000, of which $1.131 billion were for portfolio and
$368 million were for sale. This was 3.6% below the $1.554 billion originated in
the fourth quarter of 1999, but 5.2% higher than the $1.424 billion we
originated in the year-ago first quarter. Of the current quarter total, $89
million represented originations of subprime credits for portfolio as part of
our continuing strategy to enhance the portfolio's net yield. During the current
quarter, 45% of our residential one-to-four unit originations represented
refinancing transactions. This is down from 52% during the 1999 fourth quarter
and 76% in the year-ago first quarter. In addition to single family loans, $73
million of other loans were originated in the quarter including $39 million of
automobile loans and $22 million of construction and land loans.
During the current quarter, loan originations for investment consisted
primarily of adjustable rate mortgages tied to the Federal Home Loan Bank
("FHLB") Eleventh District Cost of Funds Index ("COFI"), an index which lags the
movement in market interest rates. This experience is similar to that of recent
quarters.
Our adjustable rate mortgages generally:
o begin with an incentive interest rate, which is an interest rate below
the current market rate, that adjusts to the applicable index plus a
defined margin, subject to periodic and lifetime caps, after one,
three, six or twelve months;
o provide that the maximum interest rate we can charge borrowers cannot
exceed the incentive rate by more than six to nine percentage points,
depending on the type of loan and the initial rate offered; and
o limit interest rate adjustments to 1% per adjustment period for those
that adjust semi-annually and 2% per adjustment period for those that
adjust annually.
Most of our adjustable rate mortgages adjust monthly instead of
semi-annually or annually. These monthly adjustable rate mortgages:
o have a lifetime interest rate cap, but no specified periodic interest
rate adjustment cap;
o have a periodic cap on changes in required monthly payments, which
adjust annually; and
o allow for negative amortization, which is the addition to loan
principal of accrued interest that exceeds the required monthly loan
payments.
14
Regarding negative amortization, if a loan incurs significant negative
amortization, then there is an increased risk that the market value of the
underlying collateral on the loan would be insufficient to satisfy fully the
outstanding principal and capitalized interest. We impose a limit on the amount
of negative amortization, so that the principal plus the added amount cannot
exceed:
o 125% of the original loan amount on loans having a loan-to-value ratio
of 80% or less; and
o 110% on loans having a loan-to-value ratio over 80%.
At March 31, 2000, $6.0 billion of the adjustable rate mortgages in our loan
portfolio were subject to negative amortization, of which $91 million
represented the amount of negative amortization included in the loan balance.
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 $331 million of loans in the first quarter of 2000, compared to
$408 million in the previous quarter and $777 million in the first quarter of
1999. All were secured by residential one-to-four unit property and at March 31,
2000, loans held for sale totaled $158 million.
At March 31, 2000, we had commitments to fund loans amounting to $977
million, of which $230 million were fixed rate one-to-four unit residential
loans being originated for sale in the secondary market, as well as undrawn
lines of credit of $94 million and loans in process of $93 million. We believe
our current sources of funds will enable us to meet these obligations while
exceeding all regulatory liquidity requirements.
15
The following table sets forth the origination, purchase and sale activity
relating to our loans and mortgage-backed securities during the periods
indicated.
Three Months Ended
-----------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2000 1999 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO:
Loans originated:
Loans secured by real estate:
Residential one-to-four units:
Adjustable ........................................ $1,034,226 $ 883,056 $1,180,474 $ 656,718 $ 382,562
Adjustable - subprime ............................. 81,559 303,677 384,856 307,690 186,329
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjustable ................................ 1,115,785 1,186,733 1,565,330 964,408 568,891
Fixed ............................................. 2,510 1,587 907 54,671 205,758
Fixed - subprime .................................. -- 1,653 3,840 4,301 2,444
Residential five or more units:
Adjustable ........................................ -- 247 -- -- --
Fixed ............................................. -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total residential ............................... 1,118,295 1,190,220 1,570,077 1,023,380 777,093
Commercial real estate ............................. 1,220 -- 750 2,915 6,398
Construction ....................................... 16,412 27,346 46,128 45,082 30,587
Land ............................................... 5,565 18,820 -- 8,950 29,081
Non-mortgage:
Commercial ......................................... 565 7,895 7,850 6,278 2,925
Automobile ......................................... 39,255 56,484 66,550 60,620 50,294
Other consumer ..................................... 9,714 15,704 14,895 12,130 11,760
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans originated ............................ 1,191,026 1,316,469 1,706,250 1,159,355 908,138
Real estate loans purchased:
One-to-four units .................................... 4,670 9,879 4,028 22,108 302
One-to-four units - subprime ......................... 7,890 10,934 1,978 -- --
Other (1) ............................................ -- 260 -- 180 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans originated and purchased ............... 1,203,586 1,337,542 1,712,256 1,181,643 908,440
Loan repayments ......................................... (378,211) (439,238) (443,503) (506,048) (434,796)
Other net changes (2) ................................... (309,620) 24,084 (35,096) (6,958) (18,824)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in loans held for investment ............ 515,755 922,388 1,233,657 668,637 454,820
- ------------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO:
Residential, one-to-four units:
Originated whole loans ............................... 319,556 329,731 420,389 631,496 646,786
Originated whole loans - subprime .................... 48,360 13,872 -- -- --
Loans transferred from (to) the investment portfolio . (14,951) (5,711) 55,138 238 (7,095)
Originated whole loans sold .......................... (116,970) (228,746) (313,589) (281,120) (176,139)
Loans exchanged for mortgage-backed securities ....... (213,981) (179,031) (310,096) (297,858) (600,379)
Other net changes .................................... (302) (5,177) (827) (2,637) (622)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for sale ..... 21,712 (75,062) (148,985) 50,119 (137,449)
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, net:
Received in exchange for loans ....................... 213,981 179,031 310,096 297,858 600,379
Sold ................................................. (215,547) (179,031) (310,096) (297,858) (600,379)
Repayments ........................................... (1,254) (1,532) (2,300) (2,869) (3,235)
Other net changes .................................... (81) (332) 100 (305) 46
- ------------------------------------------------------------------------------------------------------------------------------------
Net decrease in mortgage-backed securities available
for sale ........................................ (2,901) (1,864) (2,200) (3,174) (3,189)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans and mortgage-backed
securities held for sale and available for sale . 18,811 (76,926) (151,185) 46,945 (140,638)
- ------------------------------------------------------------------------------------------------------------------------------------
Total net increase in loans and
mortgage-backed securities ...................... $ 534,566 $ 845,462 $1,082,472 $ 715,582 $ 314,182
====================================================================================================================================
<FN>
(1) Primarily five or more unit residential loans.
(2) Primarily includes borrowings against and repayments of lines of credit and
construction loans, changes in loss allowances, loans transferred to real
estate acquired in settlement of loans or transferred from (to) the held
for sale portfolio, and interest capitalized on loans (negative
amortization). For the three months ended March 31, 2000, also includes
$367 million of net automobile loans sold as part of the sale of
subsidiary.
</FN>
16
The following table sets forth the composition of our loan and
mortgage-backed securities portfolios at the dates indicated.
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2000 1999 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO:
Loans secured by real estate:
Residential one-to-four units:
Adjustable ............................... $6,461,852 $5,644,883 $4,984,300 $4,118,763 $3,800,552
Adjustable - subprime .................... 1,680,205 1,620,624 1,354,771 1,017,699 745,843
Fixed .................................... 500,132 510,516 532,934 550,035 507,357
Fixed - subprime ......................... 19,751 18,777 18,027 14,748 10,932
- ------------------------------------------------------------------------------------------------------------------------------
Total one-to-four units ................ 8,661,940 7,794,800 6,890,032 5,701,245 5,064,684
Residential five or more units:
Adjustable ............................... 15,254 15,889 18,301 18,409 18,516
Fixed .................................... 5,038 5,166 5,243 6,232 7,904
Commercial real estate:
Adjustable ............................... 37,148 37,419 37,647 38,483 39,641
Fixed .................................... 111,772 110,908 111,265 111,076 111,606
Construction ................................ 147,910 176,487 190,441 178,526 147,246
Land ........................................ 72,139 67,631 61,263 71,314 74,959
Non-mortgage:
Commercial .................................. 26,922 26,667 27,605 26,884 28,182
Automobile (1) .............................. 35,469 399,789 391,975 375,138 363,168
Other consumer .............................. 52,447 49,344 44,764 42,475 40,607
- ------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment .......... 9,166,039 8,684,100 7,778,536 6,569,782 5,896,513
Increase (decrease) for:
Undisbursed loan funds ...................... (103,203) (125,159) (136,355) (146,603) (133,785)
Net deferred costs and premiums ............. 73,787 67,740 59,732 43,460 33,515
Allowance for estimated loss ................ (32,529) (38,342) (35,962) (34,345) (32,586)
- ------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment, net ..... 9,104,094 8,588,339 7,665,951 6,432,294 5,763,657
- ------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO, NET:
Loans held for sale:
One-to-four units ........................... 131,896 122,133 62,635 5,711 --
One-to-four units - subprime ................ 25,821 13,872 148,432 354,341 309,933
- ------------------------------------------------------------------------------------------------------------------------------
Total loans held for sale ................ 157,717 136,005 211,067 360,052 309,933
Mortgage-backed securities available for sale:
Adjustable .................................. 7,451 7,700 8,260 8,822 9,887
Fixed ....................................... 11,367 14,019 15,323 16,961 19,070
- ------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities available
for sale ............................... 18,818 21,719 23,583 25,783 28,957
- ------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities
held for sale and available for sale ... 176,535 157,724 234,650 385,835 338,890
- ------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities $9,280,629 $8,746,063 $7,900,601 $6,818,129 $6,102,547
==============================================================================================================================
<FN>
(1) The decline between March 31, 2000 and December 31, 1999 primarily reflects
the sale of subsidiary.
</FN>
We carry loans for sale at the lower of cost or market. At March 31, 2000,
no valuation allowance was required as the market value exceeded book value on
an aggregate basis.
We carry mortgage-backed securities available for sale at fair value which,
at March 31, 2000, reflected an unrealized loss of $0.2 million. The current
quarter-end unrealized loss, less the associated tax effect is reflected within
a separate component of other comprehensive income (loss) until realized.
17
DEPOSITS
At March 31, 2000, deposits totaled $7.0 billion, up $1.8 billion or 33.7%
from a year-ago and up $399 million or 6.1% from year-end 1999. Compared to the
year-ago period, transaction accounts--i.e., checking, regular passbook and
money market--increased $211 million or 16.1%, and our certificates of deposit
increased $1.5 billion or 39.7%. The following table sets forth information
concerning our deposits and average rates paid at the dates indicated.
March 31, 2000 December 31, 1999 September 30, 1999 June 30, 1999 March 31, 1999
--------------------------------------------------------------------------------------------------------
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 ... 2.39% $1,524,720 2.46% $1,489,939 2.36% $1,444,515 2.40% $1,362,880 2.34% $1,313,707
Certificates of deposit:
Less than 3.00% ..... 2.50 7,946 2.47 8,717 2.49 11,084 2.58 23,239 2.60 23,324
3.00-3.49 ........... 3.41 1 3.02 16 3.02 15 3.01 268 3.01 323
3.50-3.99 ........... 3.92 324 3.92 3,786 3.94 2,236 3.91 44,532 3.91 47,813
4.00-4.49 ........... 4.30 80,555 4.32 210,127 4.37 436,442 4.40 578,371 4.39 604,692
4.50-4.99 ........... 4.81 601,590 4.78 939,858 4.78 1,189,830 4.80 1,208,190 4.80 1,004,947
5.00-5.99 ........... 5.61 3,440,320 5.56 3,623,632 5.53 3,138,246 5.38 2,181,871 5.41 2,015,702
6.00-6.99 ........... 6.27 1,305,922 6.07 284,984 6.17 86,490 6.11 71,254 6.06 192,320
7.00 and greater .... - -- 7.32 1,702 7.24 2,454 7.25 2,319 7.24 2,454
- --------------------------------------------------------------------------------------------------------------------------------
Total certificates
of deposit ...... 5.66 5,436,658 5.39 5,072,822 5.25 4,866,797 5.05 4,110,044 5.09 3,891,575
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits .... 4.95% $6,961,378 4.72% $6,562,761 4.59% $6,311,312 4.39% $5,472,924 4.40% $5,205,282
================================================================================================================================
BORROWINGS
During the 2000 first quarter, our borrowings increased $127 million to
$2.2 billion, due to an increase in FHLB advances. This followed an increase of
$637 million during the fourth quarter of 1999. The following table sets forth
information concerning our FHLB advances and other borrowings at the dates
indicated.
March 31, December 31, September 30, June 30, March 31,
(Dollars in Thousands) 2000 1999 1999 1999 1999
- --------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances ................ $2,248,964 $2,122,407 $1,477,207 $1,298,438 $842,677
Other borrowings ............................... 329 373 8,501 8,794 8,638
- --------------------------------------------------------------------------------------------------------------------
Total borrowings ............................ $2,249,293 $2,122,780 $1,485,708 $1,307,232 $851,315
- --------------------------------------------------------------------------------------------------------------------
Weighted average rate on borrowings during
the period ................................. 5.81% 5.66% 5.35% 5.21% 5.36%
Total borrowings as a percentage of total assets 22.59 22.56 17.48 17.83 12.91
====================================================================================================================
CAPITAL SECURITIES
On July 23, 1999, we issued $120 million in capital securities, of which
$108 million was invested as additional common stock in the Bank. The capital
securities pay quarterly cumulative cash distributions at an annual rate of
10.00% of the liquidation value of $25 per share. Interest expense including the
amortization of deferred issuance costs on our capital securities was $3.0
million for the first quarter of 2000.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
interest rates. Our market risk arises primarily from interest rate risk in our
lending and deposit taking activities. This interest rate risk occurs to the
degree that interest-bearing liabilities reprice or mature more rapidly or on a
different basis than interest-earning assets. Since our earnings depend
primarily on our net interest income, which is the difference between the
interest and dividends earned on interest-earning assets and the interest paid
on interest-bearing liabilities, one of our principal objectives is to actively
monitor and manage the effects of adverse changes in interest rates on net
interest income while maintaining asset quality. Our primary strategy to manage
interest rate risk is to emphasize the origination of adjustable rate mortgages
or loans with relatively short maturities. Interest rates on adjustable rate
mortgages are primarily tied to COFI. There has been no significant change in
market risk since December 31, 1999.
18
The following table sets forth the repricing frequency of our major asset
and liability categories as of March 31, 2000, as well as other information
regarding the repricing and maturity differences between interest-earning assets
and interest-bearing liabilities 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 certain of our assets are subject to limitations, like caps on the amount
that interest rates and payments on our loans may adjust. 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
shown.
March 31, 2000
------------------------------------------------------------------------------
Within 7 - 12 2 - 5 6 - 10 Over Total
(Dollars in Thousands) 6 Months Months Years Years 10 Years Balance
- --------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Investment securities and FHLB stock ...(1) $ 134,465 $ 24,775 $ 166,339 $ 70 $ -- $ 325,649
Loans and mortgage-backed securities:
Loans secured by real estate:
Residential:
Adjustable ........................(2) 7,828,050 281,274 127,060 -- -- 8,236,384
Fixed .............................(2) 156,253 26,662 169,805 134,149 165,504 652,373
Commercial real estate ..............(2) 42,978 8,709 87,337 4,860 2,320 146,204
Construction ........................(2) 75,358 -- -- -- -- 75,358
Land ................................(2) 47,567 14 114 152 610 48,457
Non-mortgage loans:
Commercial ..........................(2) 15,980 -- -- -- -- 15,980
Consumer ............................(2) 59,420 6,553 21,082 -- -- 87,055
Mortgage-backed securities ............(2) 13,146 2,839 1,380 1,041 412 18,818
- --------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed
securities .......................... 8,238,752 326,051 406,778 140,202 168,846 9,280,629
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ......... $8,373,217 $ 350,826 $ 573,117 $ 140,272 $168,846 $9,606,278
================================================================================================================================
Deposits, borrowings and capital securities:
Interest-bearing deposits:
Certificates of deposit ...............(1) $2,649,976 $ 1,369,107 $1,417,575 $ -- $ -- $5,436,658
Transaction accounts ..................(3) 1,309,121 -- -- -- -- 1,309,121
Non-interest-bearing transaction
accounts .............................. 215,599 -- -- -- -- 215,599
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits ........................ 4,174,696 1,369,107 1,417,575 -- -- 6,961,378
Borrowings ............................. 1,740,064 11,042 67,187 431,000 -- 2,249,293
Capital securities ..................... -- -- -- -- 120,000 120,000
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits, borrowings and
capital securities ................. $5,914,760 $ 1,380,149 $1,484,762 $ 431,000 $120,000 $9,330,671
================================================================================================================================
Excess (shortfall) of interest-earning
assets over interest-bearing liabilities ... $2,458,457 $(1,029,323) $ (911,645) $(290,728) $ 48,846 $ 275,607
Cumulative gap ............................. 2,458,457 1,429,134 517,489 226,761 275,607
Cumulative gap - as a % of total assets:
March 31, 2000 ......................... 24.69% 14.35% 5.20% 2.28% 2.77%
December 31, 1999 ...................... 21.29 10.20 4.97 1.92 2.35
March 31, 1999 ......................... 19.62 3.92 7.74 2.93 3.90
================================================================================================================================
<FN>
(1) Based upon contractual maturity and repricing date.
(2) Based upon contractual maturity, repricing date and projected repayment and
prepayments of principal.
(3) Subject to immediate repricing.
</FN>
Our six-month gap at March 31, 2000 was a positive 24.69%. This means more
interest-earning assets reprice within six months than interest-bearing
liabilities. This compares to a positive six-month gap of 21.29% at December 31,
1999 and 19.62% at March 31, 1999. We continue to pursue our strategy of
emphasizing the origination of adjustable rate mortgages. For the twelve months
ended March 31, 2000, we originated and purchased for investment $5.1 billion of
19
adjustable rate loans which represented approximately 94% of all loans we
originated and purchased for investment during the period.
At March 31, 2000, 97% of our interest-earning assets mature, reprice or
are estimated to prepay within five years, remaining the same as it was for both
December 31, 1999 and March 31, 1999. At March 31, 2000, loans held for
investment and mortgage-backed securities with adjustable interest rates
represented 92% of those portfolios. During the first quarter of 2000, 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 for
originating adjustable rate mortgages and generating fee 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.
At March 31, 2000, $8.7 billion or 93% of our total loan portfolio,
including mortgage-backed securities, consisted of adjustable rate loans,
construction loans, and loans with a due date of five years or less, compared to
$8.1 billion or 92% at December 31, 1999 and $5.3 billion or 86% at March 31,
1999.
The following table sets forth on a consolidated basis the interest rate
spread between our interest-earning assets and interest-bearing liabilities at
the dates indicated.
March 31, December 31, September 30, June 30, March 31,
2000 1999 1999 1999 1999
- -------------------------------------------------------------------------------------------------------
Weighted average yield:
Loans and mortgage-backed securities 7.70% 7.67% 7.33% 7.47% 7.59%
Federal Home Loan Bank stock ....... 5.69 5.60 5.24 5.29 5.29
Investment securities .............. 6.12 6.12 5.85 5.84 5.61
- -------------------------------------------------------------------------------------------------------
Earning assets yield ............. 7.64 7.62 7.28 7.41 7.52
- -------------------------------------------------------------------------------------------------------
Weighted average cost:
Deposits ........................... 4.95 4.72 4.59 4.39 4.40
Borrowings:
Federal Home Loan Bank advances .. 5.95 5.77 5.45 5.24 5.30
Other borrowings ................. 7.88 7.88 8.68 8.67 8.70
- -------------------------------------------------------------------------------------------------------
Combined borrowings .......... 5.95 5.99 5.46 5.26 5.33
Capital securities ................. 10.00 10.00 10.00 - -
- -------------------------------------------------------------------------------------------------------
Combined funds cost .............. 5.25 5.05 4.84 4.56 4.53
- -------------------------------------------------------------------------------------------------------
Interest rate spread ......... 2.39% 2.57% 2.44% 2.85% 2.99%
=======================================================================================================
The period end weighted average yield on our loan portfolio increased to
7.70% at March 31, 2000, from 7.67% at December 31, 1999 and 7.59% at March 31,
1999. At March 31, 2000, our adjustable rate mortgage portfolio of single family
residential loans, including mortgage-backed securities, totaled $8.2 billion
with a weighted average rate of 7.63%, compared to $7.3 billion with a weighted
average rate of 7.52% at December 31, 1999, and $4.6 billion with a weighted
average rate of 7.35% at March 31, 1999.
PROBLEM LOANS AND REAL ESTATE
Non-Performing Assets
Non-performing assets consist of loans on which we have ceased the accrual
of interest, which we refer to as non-accrual loans, loans restructured at a
below market rate, real estate acquired in settlement of loans and repossessed
automobiles. Non-performing assets were virtually unchanged during the quarter
at $40 million or 0.40% of total assets. Non-performing assets at quarter end
include non-accrual loans aggregating $1.3 million which were not contractually
past due, but were deemed non-accrual due to management's assessment of the
borrower's ability to pay.
20
The following table summarizes our non-performing assets at the dates
indicated.
March 31, December 31, September 30, June 30, March 31,
(Dollars in Thousands) 2000 1999 1999 1999 1999
- ---------------------------------------------------------------------------------------------------------------
Non-accrual loans:
Residential one-to-four units ................... $15,546 $15,590 $16,318 $15,522 $16,579
Residential one-to-four units - subprime ........ 15,426 13,914 9,719 6,010 4,379
Other ........................................... 1,479 3,477 3,563 4,281 4,127
- ---------------------------------------------------------------------------------------------------------------
Total non-accrual loans ....................... 32,451 32,981 29,600 25,813 25,085
Trouble debt restructure - below market rate (2) .... 210 -- -- -- --
Real estate acquired in settlement of loans ......... 7,115 5,899 5,213 4,015 4,686
Repossessed automobiles ............................. -- 314 335 256 319
- ---------------------------------------------------------------------------------------------------------------
Total non-performing assets ..................... $39,776 $39,194 $35,148 $30,084 $30,090
- ---------------------------------------------------------------------------------------------------------------
Allowance for loan losses (1):
Amount .......................................... $32,529 $38,342 $35,962 $34,345 $32,586
As a percentage of non-performing loans ......... 99.60% 116.25% 121.49% 133.05% 129.90%
Non-performing assets as a percentage of total assets 0.40 0.42 0.41 0.41 0.46
===============================================================================================================
<FN>
(1) Allowance for loan losses does not include the allowance for real estate
and real estate acquired in settlement of loans.
(2) Represents one one-to-four unit residential loan.
</FN>
At March 31, 2000, the recorded investment in loans for which we recognized
impairment totaled $13 million. The total allowance for losses related to these
loans was $0.8 million. During the first quarter of 2000, total interest
recognized on the impaired loan portfolio was $0.5 million.
Delinquent Loans
During the 2000 first quarter, our delinquencies as a percentage of total
loans outstanding declined from 0.58% at year-end 1999 to 0.53%, and were below
the 0.58% of a year ago. This decline primarily occurred in our automobile loan
category due to the sale of the subsidiary.
21
The following table indicates the amounts of our past due loans at the
dates indicated.
March 31, 2000 December 31, 1999
-------------------------------------------------------------------------------------
30-59 60-89 90+ 30-59 60-89 90+
(Dollars in Thousands) Days Days Days (1) Total Days Days Days (1) Total
- ------------------------------------------------------------------------------------------------------------------------------
Loans secured by real estate:
Residential:
One-to-four units .............. $10,388 $4,389 $12,974 $27,751 $ 8,630 $3,889 $12,793 $25,312
One-to-four units - subprime ... 11,037 3,127 7,092 21,256 7,867 3,069 7,935 18,871
Five or more units ............. -- -- -- -- -- -- -- --
Commercial real estate ........... -- -- -- -- -- -- -- --
Construction ..................... -- -- -- -- -- -- -- --
Land ............................. -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total real estate loans ........ 21,425 7,516 20,066 49,007 16,497 6,958 20,728 44,183
Non-mortgage:
Commercial ....................... -- -- -- -- -- -- -- --
Automobile ....................... 150 33 14 197 4,758 674 717 6,149
Other consumer ................... 356 44 137 537 679 42 114 835
- ------------------------------------------------------------------------------------------------------------------------------
Total loans .................... $21,931 $7,593 $20,217 $49,741 $21,934 $7,674 $21,559 $51,167
==============================================================================================================================
Delinquencies as a percentage of total
loans ............................ 0.23% 0.08% 0.22% 0.53% 0.25% 0.09% 0.24% 0.58%
==============================================================================================================================
September 30, 1999 June 30, 1999
-------------------------------------------------------------------------------------
Loans secured by real estate:
Residential:
One-to-four units .............. $11,306 $ 3,441 $12,804 $27,551 $ 5,834 $ 3,812 $11,910 $21,556
One-to-four units - subprime ... 3,669 3,278 3,697 10,644 2,328 1,235 3,092 6,655
Five or more units ............. -- -- -- -- -- -- -- --
Commercial real estate ........... -- -- -- -- -- -- -- --
Construction ..................... -- -- -- -- -- -- -- --
Land ............................. -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total real estate loans ........ 14,975 6,719 16,501 38,195 8,162 5,047 15,002 28,211
Non-mortgage:
Commercial ....................... -- -- -- -- -- -- -- --
Automobile ....................... 4,548 367 571 5,486 3,133 489 895 4,517
Other consumer ................... 161 33 175 369 169 36 233 438
- ------------------------------------------------------------------------------------------------------------------------------
Total loans .................... $19,684 $ 7,119 $17,247 $44,050 $11,464 $ 5,572 $16,130 $33,166
==============================================================================================================================
Delinquencies as a percentage of total
loans ............................ 0.25% 0.09% 0.22% 0.55% 0.17% 0.08% 0.23% 0.48%
==============================================================================================================================
March 31, 1999
-----------------------------------------
Loans secured by real estate:
Residential:
One-to-four units .............. $ 8,463 $4,700 $13,180 $26,343
One-to-four units - subprime ... 1,177 2,281 1,385 4,843
Five or more units ............. -- -- -- --
Commercial real estate ........... -- -- -- --
Construction ..................... -- -- -- --
Land ............................. -- -- -- --
- ----------------------------------------------------------------------------------
Total real estate loans ........ 9,640 6,981 14,565 31,186
Non-mortgage:
Commercial ....................... -- -- -- --
Automobile ....................... 3,248 383 1,000 4,631
Other consumer ................... 144 76 226 446
- ----------------------------------------------------------------------------------
Total loans .................... $13,032 $7,440 $15,791 $36,263
==================================================================================
Delinquencies as a percentage of total
loans ............................ 0.21% 0.12% 0.25% 0.58%
==================================================================================
<FN>
(1) All 90 day or greater delinquencies are on non-accrual status and reported
as part of non-performing assets.
</FN>
22
Allowance for Losses on Loans and Real Estate
We establish valuation allowances for losses on loans and real estate on a
specific and general basis. We determine specific allowances based on the
difference between the carrying value of the asset and our net fair value. We
determine general valuation allowances based on historical loss experience,
current and anticipated levels and trends of delinquent and non-performing
loans, and the economic environment in our market areas.
Allowances for losses on all assets were $35 million at March 31, 2000, $41
million at December 31, 1999 and $41 million at March 31, 1999.
Our total allowance for possible loan losses was $33 million at March 31,
2000, down from $38 million at year-end 1999, and virtually identical to the
year-ago level. The decline from year-end was associated with the sale of our
automobile finance subsidiary. Included in the current quarter-end total
allowance was $32 million of general loan valuation allowances, of which $3
million represents an unallocated portion. These general loan valuation
allowances may be included as a component of risk-based capital, up to a maximum
of 1.25% of our risk-weighted assets. Net charge-offs totaled $0.8 million in
the 2000 first quarter, compared to $1.3 million in the year-ago quarter.
Included in our current quarter net charge-offs were $0.2 million associated
with one-to-four unit residential loans and $0.6 million associated with
automobile loans.
The following table is a summary of the activity in our allowance for loan
losses during the periods indicated.
Three Months Ended
----------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2000 1999 1999 1999 1999
- -------------------------------------------------------------------------------------------
Balance at beginning of period $38,342 $35,962 $34,345 $32,586 $31,517
Provision .................... 791 3,253 2,838 2,798 2,381
Charge-offs .................. (932) (1,312) (1,423) (1,280) (1,520)
Recoveries ................... 139 439 202 241 208
Transfers (1) ................ (5,811) -- -- -- --
- -------------------------------------------------------------------------------------------
Balance at end of period ..... $32,529 $38,342 $35,962 $34,345 $32,586
===========================================================================================
<FN>
(1) Reduction due to the sale of subsidiary.
</FN>
23
The following table indicates our allocation of the allowance for loan
losses to the various categories of loans at the dates indicated.
March 31, 2000 December 31, 1999 September 30, 1999
----------------------------------------------------------------------------------------------------
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 ...... $14,120 $6,961,984 0.20% $12,913 $6,155,399 0.21% $12,556 $5,517,234 0.23%
One-to-four units -
subprime ............. 9,036 1,699,956 0.53 9,876 1,639,401 0.60 6,940 1,372,798 0.51
Five or more units ..... 178 20,292 0.88 184 21,055 0.87 276 23,544 1.17
Commercial real estate ... 2,634 148,920 1.77 2,439 148,327 1.64 2,463 148,912 1.65
Construction ............. 1,747 147,910 1.18 2,075 176,487 1.18 2,242 190,441 1.18
Land ..................... 899 72,139 1.25 843 67,631 1.25 764 61,263 1.25
Non-mortgage:
Commercial ............... 293 26,922 1.09 334 26,667 1.25 227 27,605 0.82
Automobile (1) ........... 184 35,469 0.52 6,259 399,789 1.57 7,099 391,975 1.81
Other consumer ........... 638 52,447 1.22 619 49,344 1.25 595 44,764 1.33
Not specifically allocated .. 2,800 -- - 2,800 -- - 2,800 -- -
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans held for
investment ............. $32,529 $9,166,039 0.35% $38,342 $8,684,100 0.44% $35,962 $7,778,536 0.46%
=================================================================================================================================
June 30, 1999 March 31, 1999
---------------------------------------------------------------
Loans secured by real estate:
Residential:
One-to-four units ...... $11,580 $4,668,798 0.25% $11,581 $4,307,909 0.27%
One-to-four units -
subprime ............. 5,316 1,032,447 0.51 4,154 756,775 0.55
Five or more units ..... 285 24,641 1.16 299 26,420 1.13
Commercial real estate ... 2,808 149,559 1.88 2,729 151,247 1.80
Construction ............. 2,082 178,526 1.17 1,732 147,246 1.18
Land ..................... 900 71,314 1.26 944 74,959 1.26
Non-mortgage:
Commercial ............... 193 26,884 0.72 202 28,182 0.72
Automobile ............... 7,832 375,138 2.09 7,566 363,168 2.08
Other consumer ........... 549 42,475 1.29 579 40,607 1.43
Not specifically allocated .. 2,800 -- - 2,800 -- -
- ---------------------------------------------------------------------------------------------
Total loans held for
investment ............. $34,345 $6,569,782 0.52% $32,586 $5,896,513 0.55%
=============================================================================================
<FN>
(1) The decline between March 31, 2000 and December 31, 1999 primarily reflects
the sale of subsidiary.
</FN>
The following table is a summary of the activity in our allowance for real
estate and joint ventures held for investment during the periods indicated.
Three Months Ended
-------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2000 1999 1999 1999 1999
- ----------------------------------------------------------------------------------------
Balance at beginning of period $2,131 $2,435 $7,389 $7,770 $7,717
Provision (reduction) ........ (43) (292) (3,162) (265) 53
Charge-offs .................. -- (12) (1,792) (116) --
Recoveries ................... -- -- -- -- --
- ----------------------------------------------------------------------------------------
Balance at end of period ..... $2,088 $2,131 $2,435 $7,389 $7,770
========================================================================================
24
In addition to losses charged against the allowance for loan losses, we
have recorded losses on real estate acquired in settlement of loans by direct
write-off to net operations of real estate acquired in settlement of loans and
against an allowance for losses specifically established for these assets. As of
September 30, 1999, we are no longer maintaining an allowance for real estate
acquired in settlement of loans as the related individual assets are recorded at
the lower of cost or fair value. The following table is a summary of the
activity in our allowance for real estate acquired in settlement of loans during
the periods indicated.
Three Months Ended
--------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2000 1999 1999 1999 1999
- ----------------------------------------------------------------------------------------
Balance at beginning of period $-- $-- $ 509 $547 $533
Provision (reduction) ........ 74 56 (136) 9 26
Charge-offs .................. (74) (56) (373) (47) (12)
- ----------------------------------------------------------------------------------------
Balance at end of period ..... $-- $-- $-- $509 $547
========================================================================================
CAPITAL RESOURCES AND LIQUIDITY
Our primary sources of funds generated in the first quarter of 2000 were
from:
o a net increase in deposits of $399 million;
o net proceeds from the sale of our indirect automobile finance
subsidiary of $373 million; and
o principal repayments--including prepayments, but excluding refinances
of our existing loans--on loans and mortgage-backed securities of $346
million.
We used these funds primarily to originate loans held for investment of
$1.2 billion.
At March 31, 2000, the Bank's ratio of regulatory liquidity was 4.0%,
compared to 4.2% at December 31, 1999 and 4.0% at March 31, 1999.
Stockholders' equity totaled $557 million at March 31, 2000, up from $532
million at December 31, 1999 and $490 million at March 31, 1999.
25
REGULATORY CAPITAL
The following table is a reconciliation of the Bank's stockholder's equity
to federal regulatory capital as of March 31, 2000. The core and tangible
capital ratios were 6.17% and the risk-based capital ratio was 12.30%. 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.
Tangible Capital Core Capital Risk-Based Capital
-------------------- ------------------ ----------------------
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------------
Stockholder's equity ................................. $659,498 $659,498 $659,498
Adjustments:
Deductions:
Investment in subsidiary, primarily real estate .. (44,142) (44,142) (44,142)
Goodwill ......................................... (3,952) (3,952) (3,952)
Non-permitted mortgage servicing rights .......... (3,695) (3,695) (3,695)
Additions:
Unrealized losses on securities available for sale 2,038 2,038 2,038
General loss allowance - investment in DSL Service
Company 1,079 1,079 1,079
General loan valuation allowances (1) ............ - - 32,235
- --------------------------------------------------------------------------------------------------------------------------
Regulatory capital ................................... 610,826 6.17% 610,826 6.17% 643,061 12.30%
Well capitalized requirement ......................... 148,494 1.50 (2) 494,982 5.00 522,678 10.00 (3)
- --------------------------------------------------------------------------------------------------------------------------
Excess ............................................... $462,332 4.67% $115,844 1.17% $120,383 2.30%
==========================================================================================================================
<FN>
(1) Limited to 1.25% of risk-weighted assets.
(2) Represents the minimum requirement for tangible capital, as no "well
capitalized" requirement has been established for this category.
(3) A third requirement is Tier 1 capital to risk-weighted assets of 6.00%,
which the Bank meets and exceeds with a ratio of 11.69%.
</FN>
26
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits.
27 Financial Data Schedule.
(B) There were no reports on Form 8-K for the three months ended March 31,
2000.
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.
Date: May 4, 2000 /s/ DANIEL D. ROSENTHAL
-------------------------------------
Daniel D. Rosenthal
President and Chief Executive Officer
Date: May 4, 2000 /s/ THOMAS E. PRINCE
-------------------------------------
Thomas E. Prince
Executive Vice President and
Chief Financial Officer
27