================================================================================
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 JUNE 30, 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 June 30, 2000, 28,170,388 shares of the Registrant's Common Stock,
$0.01 par value were outstanding.
================================================================================
DOWNEY FINANCIAL CORP.
JUNE 30, 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................................................... 31
Item 6 Exhibits and Reports on Form 8-K.............. 31
i
PART I - FINANCIAL INFORMATION
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31, June 30,
(Dollars in Thousands, Except Per Share Data) 2000 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash ........................................................................... $ 85,681 $ 121,146 $ 56,936
Federal funds .................................................................. 9,600 1 3,900
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents .................................................. 95,281 121,147 60,836
U.S. Treasury securities, agency obligations and other investment securities
available for sale, at fair value .......................................... 196,441 171,823 134,091
Municipal securities held to maturity, at amortized cost (estimated market
value of $6,709 at June 30, 2000, $6,710 at December 31, 1999 and
$6,845 at June 30, 1999) ................................................... 6,727 6,728 6,864
Loans held for sale, at lower of cost or market ................................ 220,619 136,005 360,052
Mortgage-backed securities available for sale, at fair value ................... 17,302 21,719 25,783
Loans receivable held for investment ........................................... 9,549,740 8,588,339 6,432,294
Investments in real estate and joint ventures .................................. 39,256 42,172 57,460
Real estate acquired in settlement of loans .................................... 5,657 5,899 4,015
Premises and equipment ......................................................... 105,766 107,978 105,957
Federal Home Loan Bank stock, at cost .......................................... 119,764 102,392 64,943
Other assets ................................................................... 120,037 103,338 79,105
- -----------------------------------------------------------------------------------------------------------------------------
$10,476,590 $ 9,407,540 $ 7,331,400
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ....................................................................... $ 7,289,509 $ 6,562,761 $ 5,472,924
Federal Home Loan Bank advances ................................................ 2,411,808 2,122,407 1,298,438
Other borrowings ............................................................... 285 373 8,794
Accounts payable and accrued liabilities ....................................... 47,804 45,682 40,728
Deferred income taxes .......................................................... 29,688 23,899 8,383
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities .......................................................... 9,779,094 8,755,122 6,829,267
- -----------------------------------------------------------------------------------------------------------------------------
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 28,170,388 shares at June 30, 2000 and 28,148,409 shares
at December 31, 1999 and June 30, 1999 ..................................... 282 281 281
Additional paid-in capital ..................................................... 92,760 92,385 92,385
Accumulated other comprehensive loss - unrealized losses on securities
available for sale ......................................................... (1,717) (1,568) (521)
Retained earnings .............................................................. 486,171 441,320 409,988
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity ................................................. 577,496 532,418 502,133
- -----------------------------------------------------------------------------------------------------------------------------
$10,476,590 $ 9,407,540 $ 7,331,400
=============================================================================================================================
See accompanying notes to consolidated financial statements.
1
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------
(Dollars in Thousands, Except Per Share Data) 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans receivable ............................................. $186,648 $118,818 $359,118 $229,549
U.S. Treasury securities and agency obligations .............. 3,138 1,798 6,052 3,415
Mortgage-backed securities ................................... 300 423 652 887
Other investments ............................................ 2,614 1,170 4,393 2,252
- -------------------------------------------------------------------------------------------------------------------
Total interest income .................................... 192,700 122,209 370,215 236,103
- -------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits ..................................................... 90,219 58,084 171,452 113,573
Borrowings ................................................... 35,875 12,928 66,353 22,377
Capital securities ........................................... 3,041 -- 6,082 --
- -------------------------------------------------------------------------------------------------------------------
Total interest expense ................................... 129,135 71,012 243,887 135,950
- -------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME .......................................... 63,565 51,197 126,328 100,153
PROVISION FOR LOAN LOSSES ....................................... 942 2,798 1,733 5,179
- -------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses .......... 62,623 48,399 124,595 94,974
- -------------------------------------------------------------------------------------------------------------------
OTHER INCOME, NET:
Loan and deposit related fees ................................ 7,007 4,904 12,830 9,352
Real estate and joint ventures held for investment, net:
Net gains on sales of wholly owned real estate ............. -- 200 1,421 200
(Provision for) reduction of losses on real estate and joint
ventures ................................................. (1,473) 265 (1,430) 212
Operations, net ............................................ 2,213 2,304 3,837 3,522
Secondary marketing activities:
Loan servicing fees ........................................ 313 292 564 866
Net gains on sales of loans and mortgage-backed securities . 723 4,058 2,516 8,045
Net gains (losses) on sales of investment securities ......... (89) 191 (89) 288
Gain on sale of subsidiary ................................... -- -- 9,762 --
Other ........................................................ 773 1,045 1,533 2,116
- -------------------------------------------------------------------------------------------------------------------
Total other income, net .................................. 9,467 13,259 30,944 24,601
- -------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE:
Salaries and related costs ................................... 19,974 21,251 41,499 42,062
Premises and equipment costs ................................. 5,803 5,068 11,438 9,803
Advertising expense .......................................... 812 2,571 2,685 4,770
Professional fees ............................................ 688 471 1,508 1,011
SAIF insurance premiums and regulatory assessments ........... 627 942 1,247 1,931
Other general and administrative expense ..................... 4,817 4,979 9,705 11,954
- -------------------------------------------------------------------------------------------------------------------
Total general and administrative expense ................... 32,721 35,282 68,082 71,531
- -------------------------------------------------------------------------------------------------------------------
Net operation of real estate acquired in settlement of loans . 87 121 334 211
Amortization of excess of cost over fair value of net assets
acquired ................................................... 116 118 233 236
- -------------------------------------------------------------------------------------------------------------------
Total operating expense .................................... 32,924 35,521 68,649 71,978
- -------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES ...................................... 39,166 26,137 86,890 47,597
Income taxes .................................................... 16,684 11,079 36,972 20,191
- -------------------------------------------------------------------------------------------------------------------
NET INCOME ................................................... $ 22,482 $ 15,058 $ 49,918 $ 27,406
===================================================================================================================
PER SHARE INFORMATION:
BASIC ........................................................ $ 0.80 $ 0.53 $ 1.77 $ 0.97
===================================================================================================================
DILUTED ...................................................... $ 0.80 $ 0.53 $ 1.77 $ 0.97
===================================================================================================================
CASH DIVIDENDS DECLARED AND PAID ............................. $ 0.09 $ 0.09 $ 0.18 $ 0.17
===================================================================================================================
Weighted average diluted shares outstanding .................. 28,204,302 28,179,984 28,189,100 28,175,126
===================================================================================================================
See accompanying notes to consolidated financial statements.
2
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------
(In Thousands) 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME ..................................................................... $22,482 $15,058 $49,918 $27,406
- ----------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
Unrealized gains (losses) on securities available for sale:
U.S. Treasury securities, agency obligations and other investment
securities available for sale, at fair value ........................... 244 (542) (180) (960)
Mortgage-backed securities available for sale, at fair value ............. 26 (174) (29) (148)
Less reclassification of realized gains (losses) included in net income .... (51) 110 (60) 166
- ----------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss), net of income taxes ............... 321 (826) (149) (1,274)
- ----------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME ........................................................... $22,803 $14,232 $49,769 $26,132
============================================================================================================================
See accompanying notes to consolidated financial statements.
3
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
---------------------------
(In Thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................................. $ 49,918 $ 27,406
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization ......................................................... 14,454 3,631
Provision for losses on loans, real estate acquired in settlement of loans, investments
in real estate and joint ventures and other assets .................................. 3,394 5,086
Net gains on sales of loans and mortgage-backed securities, investment securities,
real estate and other assets ........................................................ (5,754) (10,591)
Gain on sale of subsidiary ............................................................ (9,762) --
Interest capitalized on loans (negative amortization) ................................. (34,272) (11,387)
Federal Home Loan Bank stock dividends ................................................ (3,414) (1,327)
Loans originated for sale ............................................................... (910,899) (1,278,282)
Proceeds from sales of loans originated for sale ........................................ 280,409 450,595
Other, net .............................................................................. (20,116) (6,518)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used for operating activities ..................................................... (636,042) (821,387)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Sale of subsidiary, net ............................................................... 379,234 --
Sales of U.S. Treasury securities, agency obligations and other investment securities
available for sale .................................................................. 9,911 65,195
Sales of mortgage-backed securities available for sale ................................ 512,894 897,124
Sales of wholly owned real estate and real estate acquired in settlement of loans ..... 5,659 2,268
Purchase of:
U.S. Treasury securities, agency obligations and other investment securities
available for sale .................................................................. (35,025) (99,190)
Loans receivable held for investment .................................................. (16,036) (22,590)
Federal Home Loan Bank stock .......................................................... (13,958) --
Loans receivable originated held for investment (net of refinances of $62,778 at
June 30, 2000 and $96,983 at June 30, 1999) ........................................... (2,008,704) (1,967,214)
Principal payments on loans receivable held for investment and mortgage-backed
securities available for sale ......................................................... 814,807 849,965
Net change in undisbursed loan funds .................................................... (47,643) 47,719
Proceeds from (investments in) real estate held for investment .......................... 1,790 (8,491)
Other, net .............................................................................. (4,123) (6,962)
- --------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities ..................................................... (401,194) (242,176)
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Six Months Ended
June 30,
---------------------------
(In Thousands) 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ................................................................ $ 726,748 $ 433,191
Proceeds from Federal Home Loan Bank advances ........................................... 3,746,508 2,704,237
Repayments of Federal Home Loan Bank advances ........................................... (3,457,107) (2,100,811)
Net increase (decrease) in other borrowings ............................................. (88) 86
Proceeds from exercise of stock options ................................................. 376 219
Cash dividends .......................................................................... (5,067) (4,784)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities .................................................. 1,011,370 1,032,138
- --------------------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents .................................................. (25,866) (31,425)
Cash and cash equivalents at beginning of year ............................................. 121,147 92,261
- --------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................................. $ 95,281 $ 60,836
==========================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .............................................................................. $ 242,385 $ 136,190
Income taxes .......................................................................... 33,525 16,454
Supplemental disclosure of non-cash investing:
Loans transferred to held for investment from held for sale ............................. 26,426 6,857
Loans exchanged for mortgage-backed securities .......................................... 516,343 898,237
Real estate acquired in settlement of loans ............................................. 7,260 4,715
Loans to facilitate the sale of real estate acquired in settlement of loans ............. 3,713 3,296
==========================================================================================================================
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 June 30, 2000, December 31,
1999 and June 30, 1999, the results of operations and comprehensive income for
the three months and six months ended June 30, 2000 and 1999 and changes in cash
flows for the six months ended June 30, 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.
The following table presents a reconciliation of the components used to
derive basic and diluted earnings per share for the periods indicated.
June 30, 2000 June 30, 1999
------------------------------------------------------------------
Weighted Per Weighted Per
Net Average Shares Share Net Average Shares Share
(Dollars in Thousands, Except Per Share Data) Income Outstanding Amount Income Outstanding Amount
- ----------------------------------------------------------------------------------------------------------------
Three months ended:
Basic earnings per share ....... $22,482 28,160,371 $0.80 $15,058 28,147,520 $0.53
Effect of dilutive stock options -- 43,931 -- -- 32,464 --
- ----------------------------------------------------------------------------------------------------------------
Diluted earnings per share ... $22,482 28,204,302 $0.80 $15,058 28,179,984 $0.53
================================================================================================================
Six months ended:
Basic earnings per share ....... $49,918 28,154,390 $1.77 $27,406 28,141,293 $0.97
Effect of dilutive stock options -- 34,710 -- -- 33,833 --
- ----------------------------------------------------------------------------------------------------------------
Diluted earnings per share ... $49,918 28,189,100 $1.77 $27,406 28,175,126 $0.97
================================================================================================================
NOTE (3) - DERIVATIVES
The Financial Accounting Standards Board, issued Statements of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") in June 1998 and No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities an Amendment of FASB
Statement No. 133" (SFAS "138") in June 2000.
6
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.
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.
SFAS 138 addresses a limited number of issues causing implementation
difficulties for numerous entities that apply SFAS 133 and amends the accounting
and reporting standards of SFAS 133 for certain derivative instruments and
certain hedging activities.
These statements are effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. It is not anticipated that the financial impact
of these statements 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 June 30, 2000, sales contracts amounted to
approximately $393 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 February 29, 2000, Downey Savings and Loan Association, F.A. sold its
indirect automobile finance subsidiary, Downey Auto Finance Corp., to Auto One
Acceptance Corp., a subsidiary of California Federal Bank and recognized a
pre-tax gain from the sale of $9.8 million. As of December 31, 1999, Downey Auto
Finance Corp. had loans totaling $366 million and total assets of $373 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 second quarter of 2000 totaled $22.5 million or
$0.80 per share on a diluted basis, up 49.3% from the $15.1 million or $0.53 per
share in the second quarter of 1999.
The increase in our net income between second quarters was due to higher
net income from our banking operations, as net income from our real estate
investment activities declined from $1.4 million in the second quarter of 1999
to $0.2 million in the current quarter. Net income from our banking operations
increased $8.5 million or 62.3% to $22.2 million reflecting the following:
o Net interest income increased $12.3 million or 23.9% due to an
increase in average earning assets as our effective interest spread
declined.
o Operating expense declined $2.6 million due to the sale of our
indirect auto finance subsidiary and lower costs associated with
residential lending activities.
o The sale of our indirect auto finance subsidiary was primarily
responsible for a decline of $1.9 million in provision for loan
losses.
These favorable items were partially offset by a $1.8 million decline in other
income, as lower gains from the sale of loans and mortgage-backed securities
more than offset higher loan and deposit related fees.
For the first six months of 2000, our net income totaled $49.9 million or
$1.77 per share on a diluted basis, up from $27.4 million or $0.97 per share in
the year-ago period. Included in the year-to-date net income was a $5.6 million
after-tax gain from the sale of our indirect automobile finance subsidiary in
February 2000. Excluding the gain, net income would have been $44.3 million or
$1.57 per share on a diluted basis, up 61.7% over the year-ago $27.4 million or
$0.97 per share. This adjusted increase primarily reflected higher net income
from our banking operations.
For the second quarter of 2000, our return on average assets was 0.87% and
our return on average equity was 15.88%. For the first six months of 2000, our
return on average assets was 1.00% and return on average equity was 18.00%.
Excluding the gain on our subsidiary sale from the first six months, our return
on average assets would have been 0.89%, while our return on average equity
would have been 15.98%.
At June 30, 2000 our assets totaled $10.5 billion, up $3.1 billion or 42.9%
from a year ago and up $1.1 billion or 11.4% from year-end 1999. Our single
family loan originations totaled $1.390 billion in the second quarter of 2000,
down 17.1% from the $1.677 billion we originated in the second quarter of 1999.
Of the current quarter total, $847 million represented originations of loans for
portfolio, of which $61 million represented subprime credits. In addition to
single family loans, we originated $41 million of other loans in the quarter.
Between second quarters, we funded our asset growth with a $1.8 billion or
33.2% increase in deposits and a $1.2 billion increase in borrowings and capital
securities. At quarter-end, our deposits totaled $7.3 billion. No new branches
were opened during the quarter, leaving total branches unchanged at 104, of
which 40 were in-store. A year ago, branches totaled 99, of which 37 were
in-store.
Our non-performing assets increased $6 million during the quarter to $46
million or 0.44% of total assets. The increase was due to a rise in residential
non-performers of which $4 million was in the subprime category.
At June 30, 2000, our primary subsidiary, Downey Savings and Loan
Association, F.A. (the "Bank"), had core and tangible capital ratios of 6.04%
and a risk-based capital ratio of 12.11%. These capital levels were
substantially above the "well capitalized" standards defined by regulation of
5.00% for core capital and 10.00% for risk-based capital. As we enter
8
the third quarter, we have substantially completed leveraging the additional
capital raised from the capital securities we issued in July of last year.
Therefore, we do not anticipate that our asset growth will continue at the same
pace in future periods.
9
RESULTS OF OPERATIONS
NET INTEREST INCOME
Our net interest income totaled $63.6 million in the second quarter of
2000, up $12.4 million or 24.2% from the same period last year. The improvement
between second quarters reflected an increase in average earning assets. Our
average earning assets increased by $3.3 billion or 50.8% between second
quarters to $9.9 billion. Our effective interest rate spread of 2.56% in the
current quarter was down from the year-ago quarter level of 3.11% and the first
quarter 2000 level of 2.71%. The decline in the effective interest rate spread
primarily reflected a higher proportion of earning assets in the current quarter
being funded with higher cost certificates of deposit and borrowings thereby
resulting in the cost of funds increasing more rapidly than the yield on earning
assets. To a lesser extent, the sale of our indirect auto lending subsidiary
also contributed to the decline in the effective interest rate spread as loan
yields on that portfolio were higher than the average of the remaining loan
portfolio. For the first six months of 2000, our net interest income totaled
$126.3 million, up $26.2 million or 26.1% from a year ago.
The following table presents for the periods indicated the total dollar
amount of:
o interest income from average interest-earning assets and the 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 the 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.
10
Three Months Ended
-----------------------------------------------------------------
June 30, 2000 June 30, 1999
-----------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans ............................... $ 9,581,579 $186,648 7.79% $6,343,011 $118,818 7.49%
Mortgage-backed securities .......... 17,963 300 6.68 27,623 423 6.13
Investment securities ............... 331,885 5,752 6.97 214,077 2,968 5.56
- -------------------------------------------------------------------------------------------------------------
Total interest-earning assets ..... 9,931,427 192,700 7.76 6,584,711 122,209 7.42
Non-interest-earning assets ............. 349,115 293,641
- -------------------------------------------------------------------------------------------------------------
Total assets ........................ $10,280,542 $6,878,352
=============================================================================================================
Interest-bearing liabilities:
Deposits ............................ $ 7,131,952 $ 90,219 5.09% $5,328,264 $ 58,084 4.37%
Borrowings .......................... 2,361,491 35,875 6.11 996,140 12,928 5.21
Capital securities .................. 120,000 3,041 10.14 -- -- --
- -------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 9,613,443 129,135 5.40 6,324,404 71,012 4.50
Non-interest-bearing liabilities ........ 100,853 58,859
Stockholders' equity .................... 566,246 495,089
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity ............................ $10,280,542 $6,878,352
=============================================================================================================
Net interest income/interest rate spread $ 63,565 2.36% $ 51,197 2.92%
Excess of interest-earning assets over
interest-bearing liabilities ........ $ 317,984 $ 260,307
Effective interest rate spread .......... 2.56 3.11
=============================================================================================================
Six Months Ended
-----------------------------------------------------------------
June 30, 2000 June 30, 1999
-----------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans ............................... $9,263,800 $359,118 7.75% $6,080,936 $229,549 7.55%
Mortgage-backed securities .......... 19,420 652 6.71 29,111 887 6.09
Investment securities ............... 322,682 10,445 6.51 209,961 5,667 5.44
- -------------------------------------------------------------------------------------------------------------
Total interest-earning assets ..... 9,605,902 370,215 7.71 6,320,008 236,103 7.47
Non-interest-earning assets ............. 342,854 283,754
- -------------------------------------------------------------------------------------------------------------
Total assets ........................ $9,948,756 $6,603,762
=============================================================================================================
Interest-bearing liabilities:
Deposits ............................ $6,941,058 $171,452 4.97% $5,195,208 $113,573 4.41%
Borrowings .......................... 2,235,113 66,353 5.97 855,857 22,377 5.27
Capital securities .................. 120,000 6,082 10.14 -- -- --
- -------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 9,296,171 243,887 5.28 6,051,065 135,950 4.53
Non-interest-bearing liabilities ........ 97,915 63,099
Stockholders' equity .................... 554,670 489,598
- -------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity ............................ $9,948,756 $6,603,762
=============================================================================================================
Net interest income/interest rate spread $126,328 2.43% $100,153 2.94%
Excess of interest-earning assets over
interest-bearing liabilities ........ $ 309,731 $ 268,943
Effective interest rate spread .......... 2.63 3.17
=============================================================================================================
11
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 assets and interest-bearing liabilities, we have provided
information on changes attributable to:
o changes in volume--changes in volume multiplied by comparative period
rate;
o changes in rate--changes in rate multiplied by comparative 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 Six Months Ended
-----------------------------------------------------------------------------------------
June 30, 2000 Versus June 30, 1999 June 30, 2000 Versus June 30, 1999
Changes Due To Changes Due To
-----------------------------------------------------------------------------------------
Rate/ Rate/
(In Thousands) Volume Rate Volume Net Volume Rate Volume Net
- ----------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans ...................... $60,644 $ 4,757 $ 2,429 $67,830 $120,150 $ 6,183 $ 3,236 $129,569
Mortgage-backed securities . (148) 38 (13) (123) (295) 90 (30) (235)
Investment securities ...... 1,624 748 412 2,784 3,061 1,117 600 4,778
- ----------------------------------------------------------------------------------------------------------------------------
Change in interest income 62,120 5,543 2,828 70,491 122,916 7,390 3,806 134,112
- ----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits ................... 19,512 9,431 3,192 32,135 38,482 14,518 4,879 57,879
Borrowings ................. 17,645 2,236 3,066 22,947 36,196 2,979 4,801 43,976
Capital securities ......... -- -- 3,041 3,041 -- -- 6,082 6,082
- ----------------------------------------------------------------------------------------------------------------------------
Change in interest expense 37,157 11,667 9,299 58,123 74,678 17,497 15,762 107,937
- ----------------------------------------------------------------------------------------------------------------------------
Change in net interest income .. $24,963 $(6,124) $(6,471) $12,368 $ 48,238 $(10,107) $(11,956) $ 26,175
============================================================================================================================
PROVISION FOR LOAN LOSSES
Provision for loan losses was $0.9 million in the current quarter, down
from $2.8 million in the year-ago quarter. The decline was primarily associated
with the sale of the indirect auto finance subsidiary. For information regarding
our allowance for loan losses, see Financial Condition--Problem Loans and Real
Estate--Allowance for Losses on Loans and Real Estate on page 27.
OTHER INCOME
Our other income was $9.5 million in the second quarter of 2000, down $3.8
million or 28.6% from a year-ago. The decline reflected decreases of $3.3
million in net gains on sales of loans and mortgage-backed securities and $2.0
million in income from real estate held for investment. The decline in income
from real estate investment primarily reflected a $1.5 million provision for
loss in the current quarter whereas the year-ago second quarter included a $0.3
million recovery of a prior loss provision. Partially offsetting those declines
was a $2.1 million increase in loan and deposit related fees, reflecting
increases of $1.4 million in loan prepayment fees and $0.6 million in automated
teller machine fees. For the first six months of 2000, total other income was
$30.9 million, up $6.3 million from a year ago, of which $9.8 million
represented a pre-tax gain from the sale of subsidiary.
12
The following table presents a breakdown of the key components comprising
income from real estate and joint venture operations for the periods indicated.
Three Months Ended
-----------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2000 2000 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------
Operations, net:
Rental operations, net of expenses ........ $ 866 $ 975 $ 772 $ 975 $ 1,094
Equity in net income (loss) from joint
ventures ................................ 1,147 377 4,333 (36) 1,008
Interest from joint venture advances ...... 200 272 271 593 202
- ------------------------------------------------------------------------------------------------------------
Total operations, net ................... 2,213 1,624 5,376 1,532 2,304
Net gains on sales of wholly owned real estate -- 1,421 3,969 1,037 200
(Provision for) reduction of losses on real
estate and joint ventures ................. (1,473) 43 292 3,162 265
- ------------------------------------------------------------------------------------------------------------
Income from real estate and joint venture
operations ................................ $ 740 $ 3,088 $ 9,637 $ 5,731 $ 2,769
============================================================================================================
OPERATING EXPENSE
Operating expense totaled $32.9 million in the current quarter, down from
$35.5 million in the second quarter of 1999. The decrease was due to lower
general and administrative costs which declined by $2.6 million or 7.3%. That
decline was primarily due to the sale of our indirect auto finance subsidiary
and lower costs associated with our residential lending activities. For the
first six months of 2000, operating expenses totaled $68.6 million, down $3.3
million from the same period of 1999.
PROVISION FOR INCOME TAXES
Income taxes for the current quarter totaled $16.7 million, resulting in an
effective tax rate of 42.6%, compared to $11.1 million and 42.4% for the like
quarter of a year ago. For the first six months of 2000, our effective tax rate
was 42.6%, compared to 42.4% for the same period of 1999. 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 operations of our two business segments--banking and real estate
investment.
13
The following table presents our net income by business segment for the
periods indicated, followed by a discussion of the results of operations of each
segment.
Three Months Ended
-------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2000 2000 1999 1999 1999
- -------------------------------------------------------------------------------------------------
Banking net income .............. $22,237 $25,767 $14,520 $13,545 $13,702
Real estate investment net income 245 1,669 5,316 3,017 1,356
- -------------------------------------------------------------------------------------------------
Total net income ............. $22,482 $27,436 $19,836 $16,562 $15,058
=================================================================================================
Six Months Ended June 30,
--------------------------
2000 1999
- -------------------------------------------------------------------------------------------------
Banking net income .............. $48,004 $25,731
Real estate investment net income 1,914 1,675
- -------------------------------------------------------------------------------------------------
Total net income ............. $49,918 $27,406
=================================================================================================
Banking
Net income from our banking operations for the second quarter of 2000
totaled $22.2 million, up 62.3% from $13.7 million in the second quarter of
1999.
The increase between second quarters primarily reflected higher net
interest income. Net interest income increased $12.3 million or 23.9% due to an
increase in our average earning assets as our effective interest rate spread
declined. Also favorably impacting our banking net income were decreases of $2.6
million in operating expense and $1.9 million in provision for loan losses.
These favorable items were partially offset by a decline of $1.8 million in all
other income. The decline in all other income was primarily due to lower gains
from the sale of loans and mortgage-backed securities which more than offset
higher loan and deposit related fees.
14
The table below sets forth our banking operational results and selected
financial data for the periods indicated.
Three Months Ended
--------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2000 2000 1999 1999 1999
- --------------------------------------------------------------------------------------------------------------
Net interest income ................... $ 63,501 $ 62,715 $ 56,374 $ 51,220 $ 51,242
Provision for loan losses ............. 942 791 3,253 2,838 2,798
Other income:
Gain on sale of subsidiary ......... -- 9,762 -- -- --
All other .......................... 8,640 8,585 8,734 10,503 10,408
Operating expense ..................... 32,558 35,484 36,639 35,491 35,112
Net intercompany income ............... 107 108 107 102 102
- --------------------------------------------------------------------------------------------------------------
Income before income taxes ............ 38,748 44,895 25,323 23,496 23,842
Income taxes .......................... 16,511 19,128 10,803 9,951 10,140
- --------------------------------------------------------------------------------------------------------------
Net income (1) ..................... $ 22,237 $ 25,767 $ 14,520 $ 13,545 $ 13,702
==============================================================================================================
AT PERIOD END:
Assets:
Loans and mortgage-backed securities $ 9,787,661 $ 9,280,629 $ 8,746,063 $ 7,900,601 $ 6,818,129
Other .............................. 688,440 675,124 654,745 578,871 490,523
- --------------------------------------------------------------------------------------------------------------
Total assets ..................... 10,476,101 9,955,753 9,400,808 8,479,472 7,308,652
- --------------------------------------------------------------------------------------------------------------
Equity ................................ $ 577,496 $ 556,851 $ 532,418 $ 515,945 $ 502,133
==============================================================================================================
<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>
For the first six months of 2000, our net income from banking totaled $48.0
million, up $22.3 million from the same period a year ago. The increase between
first half periods included the $5.6 million after-tax gain from the previously
mentioned sale of our indirect auto finance subsidiary. Excluding the gain, the
net income from our banking operations would have been $42.4 million, up $16.7
million or 64.7% from a year ago.
The table below sets forth our banking operational results for the periods
indicated.
Six Months Ended June 30,
-------------------------
(In Thousands) 2000 1999
- ---------------------------------------------------------
Net interest income ......... $126,216 $100,190
Provision for loan losses ... 1,733 5,179
Other income:
Gain on sale of subsidiary 9,762 --
All other ................ 17,225 20,518
Operating expense ........... 68,042 70,951
Net intercompany income ..... 215 184
- ---------------------------------------------------------
Income before income taxes .. 83,643 44,762
Income taxes ................ 35,639 19,031
- ---------------------------------------------------------
Net income (1) ........... $ 48,004 $ 25,731
========================================================
<FN>
(1) Included in the current year was a $5.6 million after-tax gain related to
the sale of subsidiary.
</FN>
15
Real Estate Investment
Net income from our real estate investment operations totaled $0.2 million
in the second quarter of 2000, down from $1.4 million in the year-ago quarter
due primarily to a $1.5 million provision for loss in the current quarter within
the other income category, compared to a $0.3 million recovery of a prior loss
provision in the year-ago quarter.
The table below sets forth real estate investment operational results and
selected financial data for the periods indicated.
Three Months Ended
------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2000 2000 1999 1999 1999
- ------------------------------------------------------------------------------------------------------
Net interest income (expense) ......... $ 64 $ 48 $ (92) $ (177) $ (45)
Other income .......................... 827 3,130 9,672 5,768 2,851
Operating expense ..................... 366 241 453 314 409
Net intercompany expense .............. 107 108 107 102 102
- ------------------------------------------------------------------------------------------------------
Income before income taxes ............ 418 2,829 9,020 5,175 2,295
Income taxes .......................... 173 1,160 3,704 2,158 939
- ------------------------------------------------------------------------------------------------------
Net income ......................... $ 245 $ 1,669 $ 5,316 $ 3,017 $ 1,356
======================================================================================================
AT PERIOD END:
Assets:
Investments in real estate and joint
ventures ......................... $ 39,256 $ 40,571 $ 42,172 $ 54,036 $ 57,460
Other .............................. 7,655 7,193 7,399 13,204 8,294
- ------------------------------------------------------------------------------------------------------
Total assets ..................... 46,911 47,764 49,571 67,240 65,754
- ------------------------------------------------------------------------------------------------------
Equity ................................ $ 44,753 $ 44,508 $ 42,839 $ 46,023 $ 43,006
======================================================================================================
For the first six months of 2000, our net income from real estate
investment operations totaled $1.9 million, up from $1.7 million from the same
period a year ago. The increase primarily reflects lower operating expense.
The table below sets forth our real estate investment operational results
for the periods indicated.
Six Months Ended June 30,
-------------------------
(In Thousands) 2000 1999
- ---------------------------------------------------------
Net interest income (expense) $ 112 $ (37)
Other income ................ 3,957 4,083
Operating expense ........... 607 1,027
Net intercompany expense .... 215 184
- ---------------------------------------------------------
Income before income taxes .. 3,247 2,835
Income taxes ................ 1,333 1,160
- ---------------------------------------------------------
Net income ............... $ 1,914 $ 1,675
=========================================================
Our investment in real estate and joint ventures amounted to $39 million at
June 30, 2000, compared to $42 million at December 31, 1999 and $57 million at
June 30, 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 27.
16
FINANCIAL CONDITION
LOANS AND MORTGAGE-BACKED SECURITIES
Total loans and mortgage-backed securities, including those we hold for
sale, increased $507 million during the second quarter to a total of $9.8
billion or 93.4% of assets at June 30, 2000. The increase primarily occurred in
the single family loans we hold for investment which increased $476 million or
5.5% during the quarter. All of that increase represented prime loans.
The following table sets forth loans originated, including purchases, for
investment and for sale during the periods indicated.
Three Months Ended
---------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2000 2000 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------
Loans originated for investment:
Residential, one-to-four units:
Adjustable .......................... $ 842,899 $1,126,995 $1,207,517 $1,571,163 $ 964,408
Fixed ............................... 4,192 3,860 3,269 4,920 81,080
Other ................................. 40,554 72,731 126,756 136,173 136,155
- ------------------------------------------------------------------------------------------------------------
Total loans originated for investment 887,645 1,203,586 1,337,542 1,712,256 1,181,643
Loans originated for sale (1) ............ 542,983 367,916 343,603 420,389 631,496
- ------------------------------------------------------------------------------------------------------------
Total loans originated ................ $1,430,628 $1,571,502 $1,681,145 $2,132,645 $1,813,139
============================================================================================================
<FN>
(1) One-to-four unit residential loans, primarily fixed.
</FN>
Originations of one-to-four unit residential loans totaled $1.390 billion
in the second quarter of 2000, of which $847 million were for portfolio and $543
million were for sale. This was 7.3% lower than the $1.499 billion we originated
in the first quarter of 2000 and 17.1% lower than the $1.677 billion we
originated in the year-ago second quarter. Of the current quarter originations
for portfolio, $61 million represented originations of subprime credits as part
of our continuing strategy to enhance the portfolio's net yield. During the
current quarter, 34% of our residential one-to-four unit originations
represented refinancing transactions. This is down from 45% during the previous
quarter and 65% in the year-ago second quarter. In addition to single family
loans, we originated $41 million of other loans in the current quarter.
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.
17
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 fully satisfy 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 110% of the original loan amount.
At June 30, 2000, $6.6 billion of the adjustable rate mortgages in our loan
portfolio were subject to negative amortization of which $110 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 $467 million of loans in the second quarter of 2000, compared to
$331 million in the previous quarter and $579 million in the second quarter of
1999. All were secured by residential one-to-four unit property and at June 30,
2000, loans held for sale totaled $221 million.
At June 30, 2000, we had commitments to fund loans amounting to $609
million, of which $267 million were 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 $67 million. We believe our current
sources of funds will enable us to meet these obligations while exceeding all
regulatory liquidity requirements.
18
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
------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2000 2000 1999 1999 1999
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO:
Loans originated:
Loans secured by real estate:
Residential one-to-four units:
Adjustable ...................................... $ 781,444 $1,034,226 $ 883,056 $1,180,474 $ 656,718
Adjustable - subprime ........................... 61,455 81,559 303,677 384,856 307,690
- ----------------------------------------------------------------------------------------------------------------------------
Total adjustable .............................. 842,899 1,115,785 1,186,733 1,565,330 964,408
Fixed ........................................... 716 2,510 1,587 907 54,671
Fixed - subprime ................................ -- -- 1,653 3,840 4,301
Residential five or more units:
Adjustable ...................................... -- -- 247 -- --
Fixed ........................................... -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total residential ............................. 843,615 1,118,295 1,190,220 1,570,077 1,023,380
Commercial real estate ........................... -- 1,220 -- 750 2,915
Construction ..................................... 15,658 16,412 27,346 46,128 45,082
Land ............................................. 155 5,565 18,820 -- 8,950
Non-mortgage:
Commercial ....................................... 6,060 565 7,895 7,850 6,278
Automobile ....................................... 6,744 39,255 56,484 66,550 60,620
Other consumer ................................... 11,937 9,714 15,704 14,895 12,130
- ----------------------------------------------------------------------------------------------------------------------------
Total loans originated .......................... 884,169 1,191,026 1,316,469 1,706,250 1,159,355
Real estate loans purchased:
One-to-four units .................................. 3,476 4,670 9,879 4,028 22,108
One-to-four units - subprime ....................... -- 7,890 10,934 1,978 --
Other (1) .......................................... -- -- 260 -- 180
- ----------------------------------------------------------------------------------------------------------------------------
Total loans originated and purchased ............. 887,645 1,203,586 1,337,542 1,712,256 1,181,643
Loan repayments ....................................... (496,561) (378,211) (439,238) (443,503) (506,048)
Other net changes (2) ................................. 54,562 (309,620) 24,084 (35,096) (6,958)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase in loans held for investment .......... 445,646 515,755 922,388 1,233,657 668,637
- ----------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO:
Residential, one-to-four units:
Originated whole loans ............................. 518,457 319,556 329,731 420,389 631,496
Originated whole loans - subprime .................. 24,526 48,360 13,872 -- --
Loans transferred from (to) the investment portfolio (11,475) (14,951) (5,711) 55,138 238
Originated whole loans sold ........................ (165,031) (116,970) (228,746) (313,589) (281,120)
Loans exchanged for mortgage-backed securities ..... (302,362) (213,981) (179,031) (310,096) (297,858)
Other net changes .................................. (1,213) (302) (5,177) (827) (2,637)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for sale ... 62,902 21,712 (75,062) (148,985) 50,119
- ----------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, net:
Received in exchange for loans ..................... 302,362 213,981 179,031 310,096 297,858
Sold ............................................... (302,362) (215,547) (179,031) (310,096) (297,858)
Repayments ......................................... (1,559) (1,254) (1,532) (2,300) (2,869)
Other net changes .................................. 43 (81) (332) 100 (305)
- ----------------------------------------------------------------------------------------------------------------------------
Net decrease in mortgage-backed securities
available for sale .............................. (1,516) (2,901) (1,864) (2,200) (3,174)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans and
mortgage-backed securities held for sale and
available for sale .............................. 61,386 18,811 (76,926) (151,185) 46,945
- ----------------------------------------------------------------------------------------------------------------------------
Total net increase in loans and mortgage-backed
securities ...................................... $ 507,032 $ 534,566 $ 845,462 $1,082,472 $ 715,582
============================================================================================================================
<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). Also included in the three months ended March 31, 2000 was
$367 million of net automobile loans sold as part of the sale of
subsidiary.
</FN>
19
The following table sets forth the composition of our loan and
mortgage-backed securities portfolios at the dates indicated.
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2000 2000 1999 1999 1999
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO:
Loans secured by real estate:
Residential one-to-four units:
Adjustable ............................... $6,956,084 $6,461,852 $5,644,883 $4,984,300 $4,118,763
Adjustable - subprime .................... 1,676,546 1,680,205 1,620,624 1,354,771 1,017,699
Fixed .................................... 486,323 500,132 510,516 532,934 550,035
Fixed - subprime ......................... 18,806 19,751 18,777 18,027 14,748
- -------------------------------------------------------------------------------------------------------------------------
Total one-to-four units ................ 9,137,759 8,661,940 7,794,800 6,890,032 5,701,245
Residential five or more units:
Adjustable ............................... 14,917 15,254 15,889 18,301 18,409
Fixed .................................... 4,983 5,038 5,166 5,243 6,232
Commercial real estate:
Adjustable ............................... 36,838 37,148 37,419 37,647 38,483
Fixed .................................... 110,914 111,772 110,908 111,265 111,076
Construction ................................ 121,602 147,910 176,487 190,441 178,526
Land ........................................ 37,222 72,139 67,631 61,263 71,314
Non-mortgage:
Commercial .................................. 24,511 26,922 26,667 27,605 26,884
Automobile (1) .............................. 38,935 35,469 399,789 391,975 375,138
Other consumer .............................. 56,627 52,447 49,344 44,764 42,475
- -------------------------------------------------------------------------------------------------------------------------
Total loans held for investment .......... 9,584,308 9,166,039 8,684,100 7,778,536 6,569,782
Increase (decrease) for:
Undisbursed loan funds ...................... (77,563) (103,203) (125,159) (136,355) (146,603)
Net deferred costs and premiums ............. 76,232 73,787 67,740 59,732 43,460
Allowance for losses ........................ (33,237) (32,529) (38,342) (35,962) (34,345)
- -------------------------------------------------------------------------------------------------------------------------
Total loans held for investment, net ..... 9,549,740 9,104,094 8,588,339 7,665,951 6,432,294
- -------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO, NET:
Loans held for sale:
One-to-four units ........................... 209,248 131,896 122,133 62,635 5,711
One-to-four units - subprime ................ 11,371 25,821 13,872 148,432 354,341
- -------------------------------------------------------------------------------------------------------------------------
Total loans held for sale ................ 220,619 157,717 136,005 211,067 360,052
Mortgage-backed securities available for sale:
Adjustable .................................. 6,783 7,451 7,700 8,260 8,822
Fixed ....................................... 10,519 11,367 14,019 15,323 16,961
- -------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities available
for sale ................................ 17,302 18,818 21,719 23,583 25,783
- -------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities
held for sale and available for sale .... 237,921 176,535 157,724 234,650 385,835
- -------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities $9,787,661 $9,280,629 $8,746,063 $7,900,601 $6,818,129
=========================================================================================================================
<FN>
(1) The decline between March 31, 2000 and December 31, 1999 primarily
reflected the sale of subsidiary.
</FN>
We carry loans for sale at the lower of cost or market. At June 30, 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 June 30, 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.
20
DEPOSITS
At June 30, 2000, our deposits totaled $7.3 billion, up $1.8 billion or
33.2% from the year-ago quarter end and up $727 million or 11.1% from year-end
1999. Compared to the year-ago period, our certificates of deposit increased
$1.7 billion or 41.7% and our transaction accounts--i.e., checking, regular
passbook and money market--increased $104 million or 7.7%.
The following table sets forth information concerning our deposits and
average rates paid at the dates indicated.
June 30, 2000 March 31, 2000 December 31, 1999 September 30, 1999 June 30, 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 .... 2.24% $1,467,215 2.39% $1,524,720 2.46% $1,489,939 2.36% $1,444,515 2.40% $1,362,880
Certificates of deposit:
Less than 3.00% ...... 2.48 7,708 2.50 7,946 2.47 8,717 2.49 11,084 2.58 23,239
3.00-3.49 ............ 3.41 1 3.41 1 3.02 16 3.02 15 3.01 268
3.50-3.99 ............ 3.82 1 3.92 324 3.92 3,786 3.94 2,236 3.91 44,532
4.00-4.49 ............ 4.29 41,648 4.30 80,555 4.32 210,127 4.37 436,442 4.40 578,371
4.50-4.99 ............ 4.81 263,352 4.81 601,590 4.78 939,858 4.78 1,189,830 4.80 1,208,190
5.00-5.99 ............ 5.66 3,011,284 5.61 3,440,320 5.56 3,623,632 5.53 3,138,246 5.38 2,181,871
6.00-6.99 ............ 6.49 2,493,154 6.27 1,305,922 6.07 284,984 6.17 86,490 6.11 71,254
7.00 and greater ..... 7.02 5,146 -- -- 7.32 1,702 7.24 2,454 7.25 2,319
- ---------------------------------------------------------------------------------------------------------------------------
Total certificates of
deposit ............ 5.96 5,822,294 5.66 5,436,658 5.39 5,072,822 5.25 4,866,797 5.05 4,110,044
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits ..... 5.22% $7,289,509 4.95% $6,961,378 4.72% $6,562,761 4.59% $6,311,312 4.39% $5,472,924
===========================================================================================================================
BORROWINGS
During the 2000 second quarter, our borrowings increased $163 million to
$2.4 billion, due to an increase in FHLB advances. This followed an increase of
$127 million during the first quarter of 2000.
The following table sets forth information concerning our FHLB advances and
other borrowings at the dates indicated.
June 30, March 31, December 31, September 30, June 30,
(Dollars in Thousands) 2000 2000 1999 1999 1999
- ----------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances .......... $2,411,808 $2,248,964 $2,122,407 $1,477,207 $1,298,438
Other borrowings ......................... 285 329 373 8,501 8,794
- ----------------------------------------------------------------------------------------------------------------
Total borrowings ...................... $2,412,093 $2,249,293 $2,122,780 $1,485,708 $1,307,232
================================================================================================================
Weighted average rate on borrowings during
the period ........................... 6.11% 5.81% 5.66% 5.35% 5.21%
Total borrowings as a percentage of total
assets ............................... 23.02 22.59 22.56 17.48 17.83
================================================================================================================
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 second 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 our interest-bearing liabilities reprice or mature more rapidly or
on a different basis than our interest-earning assets. Since
21
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 our market risk since December 31, 1999.
22
The following table sets forth the repricing frequency of our major asset
and liability categories as of June 30, 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.
June 30, 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) $ 150,922 $ -- $ 181,540 $ 70 $ -- $ 332,532
Loans and mortgage-backed securities:
Loans secured by real estate:
Residential:
Adjustable .....................(2) 8,456,278 172,649 122,380 -- -- 8,751,307
Fixed ..........................(2) 194,197 25,516 163,124 130,139 163,624 676,600
Commercial real estate ...........(2) 44,084 9,344 86,291 3,501 1,776 144,996
Construction .....................(2) 60,179 -- -- -- -- 60,179
Land .............................(2) 28,156 9 69 816 -- 29,050
Non-mortgage loans:
Commercial .......................(2) 13,619 -- -- -- -- 13,619
Consumer .........................(2) 64,790 7,609 22,209 -- -- 94,608
Mortgage-backed securities .........(2) 14,379 215 1,345 999 364 17,302
- ------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed
securities ......................... 8,875,682 215,342 395,418 135,455 165,764 9,787,661
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ...... $9,026,604 $ 215,342 $ 576,958 $ 135,525 $165,764 $10,120,193
==============================================================================================================================
Interest-bearing liabilities:
Interest-bearing deposits:
Certificates of deposit ............(1) $2,238,217 $ 2,145,630 $1,438,447 $ -- $ -- $ 5,822,294
Transaction accounts ...............(3) 1,266,303 -- -- -- -- 1,266,303
Non-interest-bearing transaction
accounts ........................... 200,912 -- -- -- -- 200,912
- ------------------------------------------------------------------------------------------------------------------------------
Total deposits ..................... 3,705,432 2,145,630 1,438,447 -- -- 7,289,509
Borrowings .......................... 1,908,791 9,730 62,572 431,000 -- 2,412,093
Capital securities .................. -- -- -- -- 120,000 120,000
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities . $5,614,223 $ 2,155,360 $1,501,019 $ 431,000 $120,000 $ 9,821,602
==============================================================================================================================
Excess (shortfall) of interest-earning
assets over interest-bearing liabilities $3,412,381 $(1,940,018) $ (924,061) $(295,475) $ 45,764 $ 298,591
Cumulative gap .......................... 3,412,381 1,472,363 548,302 252,827 298,591
Cumulative gap - as a % of total assets:
June 30, 2000 ....................... 32.57% 14.05% 5.23% 2.41% 2.85%
December 31, 1999 ................... 21.29 10.20 4.97 1.92 2.35
June 30, 1999 ....................... 21.85 0.59 4.88 1.10 3.38
==============================================================================================================================
<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 June 30, 2000 was a positive 32.57%. This means that
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 21.85% at June 30, 1999. We continue to pursue our strategy of
emphasizing the origination of adjustable rate
23
mortgages. For the twelve months ended June 30, 2000, we originated and
purchased for investment $4.9 billion of adjustable rate loans which represented
approximately 96% of all loans we originated and purchased for investment during
the period.
At June 30, 2000, 97% of our interest-earning assets mature, reprice or are
estimated to prepay within five years, unchanged from December 31, 1999 and up
from 95% at June 30, 1999. At June 30, 2000, loans held for investment and
mortgage-backed securities with adjustable interest rates represented 91% of
those portfolios. During the second 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 June 30, 2000, $9.1 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 $5.9 billion or 84% at June 30,
1999.
The following table sets forth on a consolidated basis the interest rate
spread on our interest-earning assets and interest-bearing liabilities at the
dates indicated.
June 30, March 31, December 31, September 30, June 30,
2000 2000 1999 1999 1999
- -------------------------------------------------------------------------------------------------------
Weighted average yield:
Loans and mortgage-backed securities 8.03% 7.70% 7.67% 7.33% 7.47%
Federal Home Loan Bank stock ....... 5.52 5.69 5.60 5.24 5.29
Investment securities .............. 6.35 6.12 6.12 5.85 5.84
- -------------------------------------------------------------------------------------------------------
Earning assets yield ............. 7.97 7.64 7.62 7.28 7.41
- -------------------------------------------------------------------------------------------------------
Weighted average cost:
Deposits ........................... 5.22 4.95 4.72 4.59 4.39
Borrowings:
Federal Home Loan Bank advances .. 6.31 5.95 5.77 5.45 5.24
Other borrowings ................. 7.88 7.88 7.88 8.68 8.67
- -------------------------------------------------------------------------------------------------------
Combined borrowings ........... 6.31 5.95 5.99 5.46 5.26
Capital securities ................. 10.00 10.00 10.00 10.00 --
- -------------------------------------------------------------------------------------------------------
Combined funds cost .............. 5.55 5.25 5.05 4.84 4.56
- -------------------------------------------------------------------------------------------------------
Interest rate spread .......... 2.42% 2.39% 2.57% 2.44% 2.85%
=======================================================================================================
The period-end weighted average yield on our loan portfolio increased to
8.03% at June 30, 2000, up from 7.67% at December 31, 1999 and 7.47% at June 30,
1999. At June 30, 2000, our adjustable rate mortgage portfolio of single family
residential loans, including mortgage-backed securitites, totaled $8.7 billion
with a weighted average rate of 8.00% compared to $7.3 billion with a weighted
average rate of 7.52% at December 31, 1999 and $5.2 billlion with a weighted
average rate of 7.19% at June 30, 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 increased during the quarter by $6 million to
$46 million or 0.44% of total assets. The increase was due to a rise in
residential non-performers of which $4 million was in the subprime category.
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.
24
The following table summarizes our non-performing assets at the dates
indicated.
June 30, March 31, December 31, September 30, June 30,
(Dollars in Thousands) 2000 2000 1999 1999 1999
- --------------------------------------------------------------------------------------------------------------
Non-accrual loans:
Residential one-to-four units .............. $18,692 $15,546 $15,590 $16,318 $15,522
Residential one-to-four units - subprime ... 19,725 15,426 13,914 9,719 6,010
Other ...................................... 1,537 1,479 3,477 3,563 4,281
- --------------------------------------------------------------------------------------------------------------
Total non-accrual loans .................. 39,954 32,451 32,981 29,600 25,813
Trouble debt restructure - below market rate (1) 210 210 -- -- --
Real estate acquired in settlement of loans .... 5,657 7,115 5,899 5,213 4,015
Repossessed automobiles ........................ -- -- 314 335 256
- --------------------------------------------------------------------------------------------------------------
Total non-performing assets ................ $45,821 $39,776 $39,194 $35,148 $30,084
==============================================================================================================
Allowance for loan losses (2):
Amount ..................................... $33,237 $32,529 $38,342 $35,962 $34,345
As a percentage of non-performing loans .... 83.19% 99.60% 116.25% 121.49% 133.05%
Non-performing assets as a percentage of total
assets ........................................ 0.44 0.40 0.42 0.41 0.41
==============================================================================================================
<FN>
(1) Represents one one-to-four unit residential loan.
(2) Allowance for loan losses does not include the allowance for real estate
and real estate acquired in settlement of loans.
</FN>
At June 30, 2000, the recorded investment in loans for which we recognized
impairment totaled $12.9 million. The total allowance for losses related to
these loans was $0.8 million. During the second quarter of 2000, total interest
recognized on the impaired loan portfolio was $0.5 million, increasing the
year-to-date total to $1.0 million.
Delinquent Loans
During the 2000 second quarter, our delinquencies remained virtually
unchanged from the end of the first quarter. As a percentage of total loans
outstanding, delinquencies totaled 0.51%, down slightly from 0.53% at March 31,
2000 and 0.58% at year-end 1999.
25
The following table indicates the amounts of our past due loans at the
dates indicated.
June 30, 2000 March 31, 2000
-------------------------------------------------------------------------------------
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 .............. $ 7,519 $ 4,970 $14,805 $27,294 $10,388 $ 4,389 $12,974 $27,751
One-to-four units - subprime ... 6,270 4,590 11,054 21,914 11,037 3,127 7,092 21,256
Five or more units ............. -- -- -- -- -- -- -- --
Commercial real estate ........... -- -- -- -- -- -- -- --
Construction ..................... -- -- -- -- -- -- -- --
Land ............................. -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total real estate loans ........ 13,789 9,560 25,859 49,208 21,425 7,516 20,066 49,007
Non-mortgage:
Commercial ....................... -- -- -- -- -- -- -- --
Automobile ....................... 158 -- 6 164 150 33 14 197
Other consumer ................... 372 30 208 610 356 44 137 537
- ------------------------------------------------------------------------------------------------------------------------------
Total loans .................... $14,319 $ 9,590 $26,073 $49,982 $21,931 $ 7,593 $20,217 $49,741
==============================================================================================================================
Delinquencies as a percentage of total
loans ............................... 0.15% 0.10% 0.27% 0.51% 0.23% 0.08% 0.22% 0.53%
==============================================================================================================================
December 31, 1999 September 30, 1999
-------------------------------------------------------------------------------------
Loans secured by real estate:
Residential:
One-to-four units .............. $ 8,630 $ 3,889 $12,793 $25,312 $11,306 $ 3,441 $12,804 $27,551
One-to-four units - subprime ... 7,867 3,069 7,935 18,871 3,669 3,278 3,697 10,644
Five or more units ............. -- -- -- -- -- -- -- --
Commercial real estate ........... -- -- -- -- -- -- -- --
Construction ..................... -- -- -- -- -- -- -- --
Land ............................. -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total real estate loans ........ 16,497 6,958 20,728 44,183 14,975 6,719 16,501 38,195
Non-mortgage:
Commercial ....................... -- -- -- -- -- -- -- --
Automobile ....................... 4,758 674 717 6,149 4,548 367 571 5,486
Other consumer ................... 679 42 114 835 161 33 175 369
- ------------------------------------------------------------------------------------------------------------------------------
Total loans .................... $21,934 $ 7,674 $21,559 $51,167 $19,684 $ 7,119 $17,247 $44,050
==============================================================================================================================
Delinquencies as a percentage of total
loans ............................... 0.25% 0.09% 0.24% 0.58% 0.25% 0.09% 0.22% 0.55%
==============================================================================================================================
June 30, 1999
-----------------------------------------
Loans secured by real estate:
Residential:
One-to-four units .............. $ 5,834 $ 3,812 $11,910 $21,556
One-to-four units - subprime ... 2,328 1,235 3,092 6,655
Five or more units ............. -- -- -- --
Commercial real estate ........... -- -- -- --
Construction ..................... -- -- -- --
Land ............................. -- -- -- --
- ----------------------------------------------------------------------------------
Total real estate loans ........ 8,162 5,047 15,002 28,211
Non-mortgage:
Commercial ....................... -- -- -- --
Automobile ....................... 3,133 489 895 4,517
Other consumer ................... 169 36 233 438
- ----------------------------------------------------------------------------------
Total loans .................... $11,464 $ 5,572 $16,130 $33,166
==================================================================================
Delinquencies as a percentage of total
loans ............................... 0.17% 0.08% 0.23% 0.48%
==================================================================================
<FN>
(1) All 90 day or greater delinquencies are on non-accrual status and reported
as part of non-performing assets.
</FN>
26
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 $37 million at June 30, 2000, $41
million at December 31, 1999 and $43 million at June 30, 1999.
Our total allowance for possible loan losses was $33 million at June 30,
2000, down from $38 million at year-end 1999, due to the sale of our indirect
auto finance subsidiary, and $34 million at June 30, 1999. Virtually all of our
current quarter-end total allowance represented 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
$0.2 million in the 2000 second quarter, down from $1.0 million in the year-ago
quarter. For the first six months of 2000, our net charge-offs were $1.0
million, compared to net charge-offs of $2.4 million in the year-ago period.
The following table is a summary of the activity of our allowance for loan
losses during the periods indicated.
Three Months Ended
----------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2000 2000 1999 1999 1999
- -------------------------------------------------------------------------------------------
Balance at beginning of period $32,529 $38,342 $35,962 $34,345 $32,586
Provision .................... 942 791 3,253 2,838 2,798
Charge-offs .................. (237) (932) (1,312) (1,423) (1,280)
Recoveries ................... 3 139 439 202 241
Transfers (1) ................ -- (5,811) -- -- --
- -------------------------------------------------------------------------------------------
Balance at end of period ..... $33,237 $32,529 $38,342 $35,962 $34,345
===========================================================================================
<FN>
(1) Reduction in first quarter 2000 due to the sale of subsidiary.
</FN>
27
The following table indicates our allocation of the allowance for loan
losses to the various categories of loans at the dates indicated.
June 30, 2000 March 31, 2000 December 31, 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 ...... $14,622 $7,442,407 0.20% $14,120 $6,961,984 0.20% $12,913 $6,155,399 0.21%
One-to-four units -
subprime ............. 9,862 1,695,352 0.58 9,036 1,699,956 0.53 9,876 1,639,401 0.60
Five or more units ..... 175 19,900 0.88 178 20,292 0.88 184 21,055 0.87
Commercial real estate ... 2,690 147,752 1.82 2,634 148,920 1.77 2,439 148,327 1.64
Construction ............. 1,433 121,602 1.18 1,747 147,910 1.18 2,075 176,487 1.18
Land ..................... 463 37,222 1.24 899 72,139 1.25 843 67,631 1.25
Non-mortgage:
Commercial ............... 283 24,511 1.15 293 26,922 1.09 334 26,667 1.25
Automobile (1) ........... 203 38,935 0.52 184 35,469 0.52 6,259 399,789 1.57
Other consumer ........... 706 56,627 1.25 638 52,447 1.22 619 49,344 1.25
Not specifically allocated .. 2,800 -- -- 2,800 -- -- 2,800 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans held for
investment ............. $33,237 $9,584,308 0.35% $32,529 $9,166,039 0.35% $38,342 $8,684,100 0.44%
===================================================================================================================================
September 30, 1999 June 30, 1999
--------------------------------------------------------------
Loans secured by real estate:
Residential:
One-to-four units ...... $12,556 $5,517,234 0.23% $11,580 $4,668,798 0.25%
One-to-four units -
subprime ............. 6,940 1,372,798 0.51 5,316 1,032,447 0.51
Five or more units ..... 276 23,544 1.17 285 24,641 1.16
Commercial real estate ... 2,463 148,912 1.65 2,808 149,559 1.88
Construction ............. 2,242 190,441 1.18 2,082 178,526 1.17
Land ..................... 764 61,263 1.25 900 71,314 1.26
Non-mortgage:
Commercial ............... 227 27,605 0.82 193 26,884 0.72
Automobile ............... 7,099 391,975 1.81 7,832 375,138 2.09
Other consumer ........... 595 44,764 1.33 549 42,475 1.29
Not specifically allocated .. 2,800 -- -- 2,800 -- --
- ----------------------------------------------------------------------------------------------
Total loans held for
investment ............. $35,962 $7,778,536 0.46% $34,345 $6,569,782 0.52%
==============================================================================================
<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 of our allowance for real
estate and joint ventures held for investment during the periods indicated.
Three Months Ended
----------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2000 2000 1999 1999 1999
- ------------------------------------------------------------------------------------------
Balance at beginning of period $2,088 $2,131 $2,435 $ 7,389 $7,770
Provision (reduction) ........ 1,473 (43) (292) (3,162) (265)
Charge-offs .................. -- -- (12) (1,792) (116)
Recoveries ................... -- -- -- -- --
- ------------------------------------------------------------------------------------------
Balance at end of period ..... $3,561 $2,088 $2,131 $ 2,435 $7,389
==========================================================================================
28
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
----------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2000 2000 1999 1999 1999
- ------------------------------------------------------------------------------------------
Balance at beginning of period $-- $-- $-- $ 509 $ 547
Provision (reduction) ........ 154 74 56 (136) 9
Charge-offs .................. (154) (74) (56) (373) (47)
- ------------------------------------------------------------------------------------------
Balance at end of period ..... $-- $-- $-- $-- $ 509
==========================================================================================
CAPITAL RESOURCES AND LIQUIDITY
Our primary sources of funds generated in the second quarter of 2000 were
from:
o principal repayments--including prepayments, but excluding refinances
of our existing loans--on loans and mortgage-backed securities of $469
million;
o a net increase in deposits of $328 million; and
o a net increase in our borrowings of $163 million.
We used these funds primarily to originate loans held for investment of
$853 million.
At June 30, 2000, the Bank's ratio of regulatory liquidity was 4.1%,
compared to 4.2% at December 31, 1999 and 4.0% at June 30, 1999.
Stockholders' equity totaled $577 million at June 30, 2000, up from $532
million at December 31, 1999 and $502 million at June 30, 1999.
29
REGULATORY CAPITAL COMPLIANCE
The following table is a reconciliation of the Bank's stockholder's equity
to federal regulatory capital as of June 30, 2000. The core and tangible capital
ratios were 6.04% and the risk-based capital ratio was 12.11%. 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 $678,598 $678,598 $678,598
Adjustments:
Deductions:
Investment in subsidiary, primarily real
estate ................................ (44,369) (44,369) (44,369)
Goodwill ................................. (3,836) (3,836) (3,836)
Non-permitted mortgage servicing rights .. (4,091) (4,091) (4,091)
Additions:
Unrealized losses on securities available
for sale .............................. 1,717 1,717 1,717
General loss allowance - investment in DSL
Service Company ....................... 1,047 1,047 1,047
General loan valuation allowances (1) .... -- -- 32,982
- ------------------------------------------------------------------------------------------------------------------------
Regulatory capital ........................... 629,066 6.04% 629,066 6.04% 662,048 12.11%
Well capitalized requirement ................. 156,263 1.50 (2) 520,876 5.00 546,678 10.00 (3)
- ------------------------------------------------------------------------------------------------------------------------
Excess ....................................... $472,803 4.54% $108,190 1.04% $115,370 2.11%
========================================================================================================================
<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 met and exceeded with a ratio of 11.51%.
</FN>
30
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
10.11 Amendment No. 1, Founder Retirement Agreement of Maurice L.
McAlister, dated December 21, 1989. Amendment No. 1, Effective
and Adopted July 26, 2000.
27 Financial Data Schedule.
(B) There were no reports on Form 8-K filed for the three months ended
June 30, 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: August 2, 2000 /s/ Daniel D. Rosenthal
----------------------------------------------------
Daniel D. Rosenthal
President and Chief Executive Officer
Date: August 2, 2000 /s/ Thomas E. Prince
----------------------------------------------------
Thomas E. Prince
Executive Vice President and Chief Financial Officer
31