================================================================================
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 SEPTEMBER 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 September 30, 2000, 28,201,606 shares of the Registrant's Common Stock,
$0.01 par value were outstanding.
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DOWNEY FINANCIAL CORP.
SEPTEMBER 30, 2000 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION............................................... 1
Consolidated Balance Sheets............................. 1
Consolidated Statements of Income....................... 2
Consolidated Statements of Comprehensive Income......... 3
Consolidated Statements of Cash Flows................... 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................... 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................... 8
PART II
OTHER INFORMATION................................................... 31
Item 6 Exhibits and Reports on Form 8-K.............. 31
i
PART I - FINANCIAL INFORMATION
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31, September 30,
(Dollars in Thousands, Except Per Share Data) 2000 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
Cash ...........................................................................$ 106,132 $ 121,146 $ 86,391
Federal funds .................................................................. 11,102 1 26,501
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents .................................................. 117,234 121,147 112,892
U.S. Treasury securities, agency obligations and other investment securities
available for sale, at fair value .......................................... 216,812 171,823 143,020
Municipal securities held to maturity, at amortized cost (estimated market
value of $6,709 at September 30, 2000, $6,710 at December 31, 1999 and
$6,845 at September 30, 1999) .............................................. 6,726 6,728 6,863
Loans held for sale, at lower of cost or market ................................ 166,776 136,005 211,067
Mortgage-backed securities available for sale, at fair value ................... 12,431 21,719 23,583
Loans receivable held for investment ........................................... 9,467,534 8,588,339 7,665,951
Investments in real estate and joint ventures .................................. 15,851 42,172 54,036
Real estate acquired in settlement of loans .................................... 9,161 5,899 5,213
Premises and equipment ......................................................... 104,405 107,978 105,492
Federal Home Loan Bank stock, at cost .......................................... 121,845 102,392 69,380
Mortgage servicing rights, net ................................................. 45,014 34,263 30,443
Other assets ................................................................... 83,424 69,075 72,749
- ------------------------------------------------------------------------------------------------------------------------------
$10,367,213 $9,407,540 $8,500,689
==============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits .......................................................................$ 7,691,782 $6,562,761 $6,311,312
Federal Home Loan Bank advances ................................................ 1,860,255 2,122,407 1,477,207
Other borrowings ............................................................... 248 373 8,501
Accounts payable and accrued liabilities ....................................... 56,972 45,682 54,366
Deferred income taxes .......................................................... 35,332 23,899 13,358
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities .......................................................... 9,644,589 8,755,122 7,864,744
- ------------------------------------------------------------------------------------------------------------------------------
Company obligated mandatorily redeemable capital securities of subsidiary trust
holding solely junior subordinated debentures of the Company
("Capital Securities") ..................................................... 120,000 120,000 120,000
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 28,201,606 shares at September 30, 2000 and 28,148,409 shares
at December 31, 1999 and September 30, 1999 ................................ 282 281 281
Additional paid-in capital ..................................................... 93,176 92,385 92,385
Accumulated other comprehensive loss - unrealized losses on securities
available for sale ......................................................... (805) (1,568) (738)
Retained earnings .............................................................. 509,971 441,320 424,017
- ------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity ................................................. 602,624 532,418 515,945
- ------------------------------------------------------------------------------------------------------------------------------
$10,367,213 $9,407,540 $8,500,689
==============================================================================================================================
See accompanying notes to consolidated financial statements.
1
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------
(Dollars in Thousands, Except Per Share Data) 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans receivable ............................................. $198,084 $132,686 $557,202 $362,235
U.S. Treasury securities and agency obligations .............. 3,379 2,063 9,431 5,478
Mortgage-backed securities ................................... 224 387 876 1,274
Other investments ............................................ 2,683 1,268 7,076 3,520
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income .................................... 204,370 136,404 574,585 372,507
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits ..................................................... 98,957 67,478 270,409 181,051
Borrowings ................................................... 35,163 15,576 101,516 37,953
Capital securities ........................................... 3,040 2,307 9,122 2,307
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense ................................... 137,160 85,361 381,047 221,311
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME .......................................... 67,210 51,043 193,538 151,196
PROVISION FOR LOAN LOSSES ....................................... 1,007 2,838 2,740 8,017
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses .......... 66,203 48,205 190,798 143,179
- ----------------------------------------------------------------------------------------------------------------------------
OTHER INCOME, NET:
Loan and deposit related fees ................................ 7,959 5,323 20,789 14,675
Real estate and joint ventures held for investment, net:
Net gains on sales of wholly owned real estate ............. 1,257 1,037 2,678 1,237
(Provision for) reduction of losses on real estate and joint
ventures.................................................. 600 3,162 (830) 3,374
Operations, net ............................................ 2,168 1,532 6,005 5,054
Secondary marketing activities:
Loan servicing fees ........................................ (79) 383 485 1,249
Net gains (losses) on sales of loans and mortgage-backed
securities ................................................ (331) 4,395 2,185 12,440
Net gains (losses) on sales of investment securities ......... (19) - (108) 288
Gain on sale of subsidiary ................................... - - 9,762 -
Other ........................................................ 510 439 2,043 2,555
- ----------------------------------------------------------------------------------------------------------------------------
Total other income, net .................................. 12,065 16,271 43,009 40,872
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE:
Salaries and related costs ................................... 19,280 21,759 60,779 63,821
Premises and equipment costs ................................. 5,837 5,222 17,275 15,025
Advertising expense .......................................... 980 2,150 3,665 6,920
Professional fees ............................................ 537 553 2,045 1,564
SAIF insurance premiums and regulatory assessments ........... 683 975 1,930 2,906
Other general and administrative expense ..................... 4,823 5,252 14,528 17,206
- ----------------------------------------------------------------------------------------------------------------------------
Total general and administrative expense ................... 32,140 35,911 100,222 107,442
- ----------------------------------------------------------------------------------------------------------------------------
Net operation of real estate acquired in settlement of loans . 221 (224) 555 (13)
Amortization of excess of cost over fair value of net assets
acquired ................................................... 115 118 348 354
- ----------------------------------------------------------------------------------------------------------------------------
Total operating expense .................................... 32,476 35,805 101,125 107,783
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES ...................................... 45,792 28,671 132,682 76,268
Income taxes .................................................... 19,454 12,109 56,426 32,300
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME ................................................... $ 26,338 $ 16,562 $ 76,256 $ 43,968
============================================================================================================================
PER SHARE INFORMATION:
BASIC ........................................................ $ 0.94 $ 0.59 $ 2.71 $ 1.56
============================================================================================================================
DILUTED ...................................................... $ 0.93 $ 0.59 $ 2.70 $ 1.56
============================================================================================================================
CASH DIVIDENDS DECLARED AND PAID ............................. $ 0.09 $ 0.09 $ 0.27 $ 0.26
============================================================================================================================
Weighted average diluted shares outstanding .................. 28,247,953 28,179,561 28,208,718 28,175,104
============================================================================================================================
See accompanying notes to consolidated financial statements.
2
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------
(In Thousands) 2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME .................................................................... $26,338 $16,562 $76,256 $43,968
- ----------------------------------------------------------------------------------------------------------------------------
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 ........................... 850 (274) 670 (1,234)
Mortgage-backed securities available for sale, at fair value ............. 72 57 43 (91)
Less reclassification of realized gains (losses) included in net income .... 10 - (50) 166
- ----------------------------------------------------------------------------------------------------------------------------
Total other comprehensive income (loss), net of income taxes ............... 912 (217) 763 (1,491)
- ----------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME .......................................................... $27,250 $16,345 $77,019 $42,477
============================================================================================================================
See accompanying notes to consolidated financial statements.
3
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended
September 30,
------------------------------
(In Thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................................. $ 76,256 $ 43,968
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization ......................................................... 22,933 5,870
Provision for losses on loans, real estate acquired in settlement of loans, investments
in real estate and joint ventures and other assets .................................. 3,909 4,611
Net gains on sales of loans and mortgage-backed securities, investment securities,
real estate and other assets ........................................................ (8,354) (16,372)
Gain on sale of subsidiary ............................................................ (9,762) -
Interest capitalized on loans (negative amortization) ................................. (51,925) (18,149)
Federal Home Loan Bank stock dividends ................................................ (5,495) (2,021)
Loans originated for sale ............................................................... (1,393,494) (1,698,671)
Proceeds from sales of loans held for sale .............................................. 610,952 758,227
Other, net .............................................................................. (14,902) (4,511)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used for operating activities ..................................................... (769,882) (927,048)
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of:
Subsidiary, net ....................................................................... 379,234 -
U.S. Treasury securities, agency obligations and other investment securities
available for sale .................................................................. 13,892 65,195
Mortgage-backed securities available for sale ......................................... 797,127 1,209,178
Wholly owned real estate and real estate acquired in settlement of loans .............. 35,842 3,877
Purchase of:
U.S. Treasury securities, agency obligations and other investment securities
available for sale .................................................................. (58,025) (94,417)
Loans receivable held for investment .................................................. (18,221) (28,596)
Federal Home Loan Bank stock .......................................................... (13,958) (17,929)
Loans receivable originated held for investment (net of refinances of $89,667 at
September 30, 2000 and $123,932 at September 30, 1999) ................................ (2,447,826) (3,644,203)
Principal payments on loans receivable held for investment and mortgage-backed
securities available for sale ......................................................... 1,275,508 1,268,819
Net change in undisbursed loan funds .................................................... (53,073) 43,616
Proceeds from (investments in) real estate held for investment .......................... 1,155 (10,161)
Other, net .............................................................................. (5,617) (9,232)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities ..................................................... (93,962) (1,213,853)
- ----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Nine Months Ended
September 30,
------------------------------
(In Thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ................................................................ $ 1,129,021 $ 1,271,579
Proceeds from Federal Home Loan Bank advances ........................................... 4,793,708 4,910,237
Repayments of Federal Home Loan Bank advances ........................................... (5,055,860) (4,128,042)
Net decrease in other borrowings ........................................................ (125) (207)
Proceeds from issuance of capital securities, net ....................................... - 115,063
Proceeds from exercise of stock options ................................................. 792 219
Cash dividends .......................................................................... (7,605) (7,317)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities .................................................. 859,931 2,161,532
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ....................................... (3,913) 20,631
Cash and cash equivalents at beginning of year ............................................ 121,147 92,261
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................................ $ 117,234 $ 112,892
============================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest .............................................................................. $ 370,778 $ 220,678
Income taxes .......................................................................... 55,422 18,910
Supplemental disclosure of non-cash investing:
Loans transferred from (to) held for investment to (from) held for sale ................. 56,738 (48,281)
Loans exchanged for mortgage-backed securities .......................................... 802,682 1,208,333
Real estate acquired in settlement of loans ............................................. 13,599 8,497
Loans to facilitate the sale of real estate acquired in settlement of loans ............. 4,584 5,608
============================================================================================================================
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 September 30, 2000, December
31, 1999 and September 30, 1999, the results of operations and comprehensive
income for the three months and nine months ended September 30, 2000 and 1999
and changes in cash flows for the nine months ended September 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, as
amended, 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.
September 30, 2000 September 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 ....... $26,338 28,195,739 $0.94 $16,562 28,148,409 $0.59
Effect of dilutive stock options - 52,214 0.01 - 31,152 -
- ------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share ... $26,338 28,247,953 $0.93 $16,562 28,179,561 $0.59
========================================================================================================================
Nine months ended:
Basic earnings per share ....... $76,256 28,168,173 $2.71 $43,968 28,143,665 $1.56
Effect of dilutive stock options - 40,545 0.01 - 31,439 -
- ------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share ... $76,256 28,208,718 $2.70 $43,968 28,175,104 $1.56
========================================================================================================================
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 September 30, 2000, sales contracts
amounted to approximately $231 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 third quarter of 2000 totaled $26.3 million or $0.93
per share on a diluted basis, up 59.0% from the $16.6 million or $0.59 per share
in the third quarter of 1999.
The increase in our net income between third quarters was due to higher net
income from our banking operations, as net income from our real estate
investment activities declined from $3.0 million in the third quarter of 1999 to
$2.2 million in the current quarter. Net income from our banking operations
increased $10.5 million or 77.8% to $24.1 million reflecting the following:
o Net interest income increased $15.9 million or 31.1% due to an
increase in average earning assets as our effective interest rate
spread declined.
o Operating expense declined $3.3 million due to the sale of our
indirect auto finance subsidiary and lower costs associated with
residential lending activities.
o Provision for loan losses declined by $1.8 million.
These favorable items were partially offset by a $2.6 million decline in other
income, as lower net gains/losses on sales of loans and mortgage-backed
securities more than offset higher loan and deposit related fees.
For the first nine months of 2000, our net income totaled $76.3 million or
$2.70 per share on a diluted basis. 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
$70.6 million or $2.50 per share on a diluted basis, up 60.7% over the year-ago
$44.0 million or $1.56 per share. This adjusted increase primarily reflected
higher net income from our banking operations.
For the third quarter of 2000, our return on average assets was 1.01% and
our return on average equity was 17.88%. For the first nine months of 2000, our
return on average assets was 1.01% and return on average equity was 17.96%.
Excluding the gain on our subsidiary sale from the first nine months, our return
on average assets would have been 0.93%, while our return on average equity
would have been 16.63%.
At September 30, 2000, our assets totaled $10.4 billion, up $1.9 billion or
22.0% from a year ago and up $1.0 billion or 10.2% from year-end 1999. Our
single family loan originations totaled $869 million in the third quarter of
2000, down 56.5% from the $1.996 billion we originated in the third quarter of
1999. Of the current quarter total, $387 million represented originations of
loans for portfolio, of which $42 million represented subprime credits. In
addition to single family loans, we originated $82 million of other loans in the
quarter.
Between third quarters, we funded our asset growth with a $1.4 billion or
21.9% increase in deposits and a $375 million increase in borrowings. At
quarter-end, our deposits totaled $7.7 billion. Three new in-store branches were
opened during the quarter, bringing our total branches at quarter end to 107, of
which 43 are in-store. A year ago, branches totaled 103, of which 40 were
in-store.
Our non-performing assets increased $4 million during the quarter to $50
million or 0.48% of total assets. The increase was primarily due to a rise in
residential non-performers of which $2 million was in the subprime category.
At September 30, 2000, our primary subsidiary, Downey Savings and Loan
Association, F.A. (the "Bank"), had core and tangible capital ratios of 6.56%
and a risk-based capital ratio of 13.11%. 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. During the third
quarter, we sold certain real estate investments and were able to reallocate to
our banking operations $26 million of capital from our real estate investment
8
activities. Following this reallocation, only $16 million of capital remained
invested in real estate activities. Although we experienced no asset growth
during the third quarter, we ended the quarter with a substantially increased
loan production pipeline that positions us for further asset growth supported by
the capital that was reallocated and that being generated from our improved
earnings.
9
RESULTS OF OPERATIONS
NET INTEREST INCOME
Our net interest income totaled $67.2 million in the third quarter of 2000,
up $16.2 million or 31.7% from the same period last year. The improvement
between third quarters reflected an increase in average earning assets. Our
average earning assets increased by $2.7 billion or 35.6% between third quarters
to $10.1 billion. Our effective interest rate spread of 2.66% in the current
quarter was down from the year-ago level of 2.74%. 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. Although our effective interest rate spread was below
the year-ago level, it was above the second quarter 2000 level of 2.56%, as our
adjustable rate mortgage loans repriced more rapidly than our cost of funds. For
the first nine months of 2000, our net interest income totaled $193.5 million,
up $42.3 million or 28.0% 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 total deposits, borrowings and capital securities--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
----------------------------------------------------------------------------
September 30, 2000 September 30, 1999
----------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans ................................ $ 9,728,972 $198,084 8.14% $7,194,888 $132,686 7.38%
Mortgage-backed securities ........... 13,715 224 6.53 24,557 387 6.30
Investment securities ................ 361,046 6,062 6.68 233,609 3,331 5.66
- -------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ...... 10,103,733 204,370 8.09 7,453,054 136,404 7.32
Non-interest-earning assets .............. 333,522 327,121
- -------------------------------------------------------------------------------------------------------------------------
Total assets ......................... $10,437,255 $7,780,175
=========================================================================================================================
Transaction accounts:
Non-interest-bearing checking ........ $ 216,800 $ - - % $ 165,596 $ - - %
Interest-bearing checking (1) ........ 383,563 882 0.91 340,971 897 1.04
Money market ......................... 87,702 628 2.85 94,423 659 2.77
Regular passbook ..................... 793,046 6,845 3.43 793,664 6,818 3.41
- -------------------------------------------------------------------------------------------------------------------------
Total transaction accounts ......... 1,481,111 8,355 2.24 1,394,654 8,374 2.38
Certificates of deposit .................. 5,937,680 90,602 6.07 4,553,025 59,104 5.15
- -------------------------------------------------------------------------------------------------------------------------
Total deposits ....................... 7,418,791 98,957 5.31 5,947,679 67,478 4.50
Borrowings ............................... 2,189,570 35,163 6.39 1,154,230 15,576 5.35
Capital securities ....................... 120,000 3,040 10.14 91,613 2,307 10.14
- -------------------------------------------------------------------------------------------------------------------------
Total deposits, borrowings and capital
securities ......................... 9,728,361 137,160 5.61 7,193,522 85,361 4.71
Other liabilities ........................ 119,577 78,660
Stockholders' equity ..................... 589,317 507,993
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity ............................. $10,437,255 $7,780,175
=========================================================================================================================
Net interest income/interest rate spread . $ 67,210 2.48% $ 51,043 2.61%
Excess of interest-earning assets over
deposits, borrowings and capital
securities ........................... $ 375,372 $ 259,532
Effective interest rate spread ........... 2.66 2.74
=========================================================================================================================
Nine Months Ended
-----------------------------------------------------------------------------
September 30, 2000 September 30, 1999
-----------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans ................................ $ 9,418,857 $557,202 7.89% $6,452,253 $362,235 7.49%
Mortgage-backed securities ........... 17,518 876 6.67 27,593 1,274 6.16
Investment securities ................ 335,471 16,507 6.57 217,843 8,998 5.52
- -------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ...... 9,771,846 574,585 7.84 6,697,689 372,507 7.42
Non-interest-earning assets .............. 339,743 298,211
- -------------------------------------------------------------------------------------------------------------------------
Total assets ......................... $10,111,589 $6,995,900
=========================================================================================================================
Transaction accounts:
Non-interest-bearing checking ........ $ 202,844 $ - - % $ 160,000 $ - - %
Interest-bearing checking (1) ........ 379,592 2,741 0.96 328,631 2,581 1.05
Money market ......................... 89,675 1,908 2.84 95,298 1,971 2.77
Regular passbook ..................... 806,779 21,271 3.52 750,565 19,058 3.39
- -------------------------------------------------------------------------------------------------------------------------
Total transaction accounts ......... 1,478,890 25,920 2.34 1,334,494 23,610 2.37
Certificates of deposit .................. 5,621,411 244,489 5.81 4,111,538 157,441 5.12
- -------------------------------------------------------------------------------------------------------------------------
Total deposits ....................... 7,100,301 270,409 5.09 5,446,032 181,051 4.44
Borrowings ............................... 2,219,932 101,516 6.11 955,314 37,953 5.31
Capital securities ....................... 120,000 9,122 10.14 30,538 2,307 10.14
- -------------------------------------------------------------------------------------------------------------------------
Total deposits, borrowings and capital
securities ......................... 9,440,233 381,047 5.39 6,431,884 221,311 4.60
Other liabilities ........................ 105,137 68,286
Stockholders' equity ..................... 566,219 495,730
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity ............................. $10,111,589 $6,995,900
=========================================================================================================================
Net interest income/interest rate spread . $193,538 2.45% $151,196 2.82%
Excess of interest-earning assets over
deposits, borrowings and capital
securities ........................... $ 331,613 $ 265,805
Effective interest rate spread ........... 2.64 3.01
=========================================================================================================================
<FN>
(1) Includes amounts swept into money market deposit accounts.
</FN>
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 Nine Months Ended
--------------------------------------------------------------------------------------------
September 30, 2000 Versus September 30, 1999 September 30, 2000 Versus September 30, 1999
Changes Due To Changes Due To
--------------------------------------------------------------------------------------------
Rate/ Rate/
(In Thousands) Volume Rate Volume Net Volume Rate Volume Net
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans .............................. $46,869 $13,703 $4,826 $65,398 $176,021 $ 12,979 $ 5,967 $194,967
Mortgage-backed securities ......... (171) 14 (6) (163) (465) 106 (39) (398)
Investment securities .............. 1,808 597 326 2,731 4,884 1,705 920 7,509
- ------------------------------------------------------------------------------------------------------------------------------------
Change in interest income ........ 48,506 14,314 5,146 67,966 180,440 14,790 6,848 202,078
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Transaction accounts:
Interest-bearing checking (1) .... 109 (110) (14) (15) 403 (210) (33) 160
Money market ..................... (49) 19 (1) (31) (115) 55 (3) (63)
Regular passbook ................. (5) 32 - 27 1,452 708 53 2,213
- ------------------------------------------------------------------------------------------------------------------------------------
Total transaction accounts ..... 55 (59) (15) (19) 1,740 553 17 2,310
Certificates of deposit ............ 17,833 10,478 3,187 31,498 58,008 21,240 7,800 87,048
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits .. 17,888 10,419 3,172 31,479 59,748 21,793 7,817 89,358
Borrowings ......................... 13,903 2,997 2,687 19,587 50,268 5,721 7,574 63,563
Capital securities ................. 733 - - 733 6,815 - - 6,815
- ------------------------------------------------------------------------------------------------------------------------------------
Change in interest expense ....... 32,524 13,416 5,859 51,799 116,831 27,514 15,391 159,736
- ------------------------------------------------------------------------------------------------------------------------------------
Change in net interest income ......... $15,982 $ 898 $ (713) $16,167 $ 63,609 $(12,724) $(8,543) $ 42,342
====================================================================================================================================
<FN>
(1) Includes amounts swept into money market deposit accounts.
</FN>
PROVISION FOR LOAN LOSSES
Provision for loan losses was $1.0 million in the current quarter, down
from $2.8 million in the year-ago quarter. 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.
12
OTHER INCOME
Our other income was $12.1 million in the third quarter of 2000, down $4.2
million from a year ago. The decline was primarily in the categories of net
gains/losses on sales of loans and mortgage-backed securities and income from
real estate held for investment. For the current quarter, a net loss of $0.3
million was recorded on sales of loans and mortgage-backed securities, compared
to a net gain of $4.4 million in the year-ago period. The current period result
was due to a conversion to a new loan origination system that temporarily
affected the hedge position against our loans held for sale. By quarter end,
adequate hedging had been resumed. Income from real estate held for investment
declined by $1.7 million, as net gains on sales and declines in valuation
allowances totaled $3.3 million, compared to $4.2 million in the year-ago
quarter. Also contributing to the decline in income from real estate held for
investment was a lower level of net rental income due to fewer properties being
owned. Partially offsetting those declines was a $2.6 million increase in loan
and deposit related fees reflecting increases of $1.7 million in loan prepayment
fees and $0.8 million in automated teller machine fees. For the first nine
months of 2000, total other income was $43.0 million, up $2.1 million from a
year ago of which $9.8 million was attributable to the pre-tax gain from the
sale of the indirect auto finance subsidiary.
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
---------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2000 2000 2000 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
Operations, net:
Rental operations, net of expenses ........ $ 422 $ 866 $ 975 $ 772 $ 975
Equity in net income (loss) from joint
ventures ................................ 1,531 1,147 377 4,333 (36)
Interest from joint venture advances ...... 215 200 272 271 593
- -----------------------------------------------------------------------------------------------------------------------------
Total operations, net ................... 2,168 2,213 1,624 5,376 1,532
Net gains on sales of wholly owned real estate 1,257 - 1,421 3,969 1,037
(Provision for) reduction of losses on real
estate and joint ventures ................. 600 (1,473) 43 292 3,162
- -----------------------------------------------------------------------------------------------------------------------------
Income from real estate and joint venture
operations ................................ $4,025 $ 740 $3,088 $9,637 $5,731
=============================================================================================================================
OPERATING EXPENSE
Operating expense totaled $32.5 million in the current quarter, down $3.3
million from the third quarter of 1999. The decrease was due to lower general
and administrative costs which declined by $3.8 million or 10.5%. 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 nine
months of 2000, operating expenses totaled $101.1 million, down $6.7 million
from the same period of 1999.
PROVISION FOR INCOME TAXES
Income taxes for the current quarter totaled $19.5 million, resulting in an
effective tax rate of 42.5%, compared to $12.1 million and 42.2% for the like
quarter of a year ago. For the first nine months of 2000, our effective tax rate
was 42.5%, 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.
13
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.
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
--------------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2000 2000 2000 1999 1999
- -----------------------------------------------------------------------------------------------------------------------
Banking net income .............. $24,080 $22,237 $25,767 $14,520 $13,545
Real estate investment net income 2,258 245 1,669 5,316 3,017
- -----------------------------------------------------------------------------------------------------------------------
Total net income ............. $26,338 $22,482 $27,436 $19,836 $16,562
=======================================================================================================================
Nine Months Ended September 30,
-----------------------------------
2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Banking net income .............. $72,084 $39,276
Real estate investment net income 4,172 4,692
- -----------------------------------------------------------------------------------------------------------------------
Total net income ............. $76,256 $43,968
=======================================================================================================================
Banking
Net income from our banking operations for the third quarter of 2000
totaled $24.1 million, up 77.8% from $13.5 million in the third quarter of 1999.
The increase between third quarters primarily reflected higher net interest
income. Net interest income increased $15.9 million or 31.1% 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 $3.3 million
in operating expense and $1.8 million in provision for loan losses. These
favorable items were partially offset by a decline of $2.6 million in all other
income. The decline in all other income was primarily due to lower net
gains/losses on sales 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
----------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2000 2000 2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------------
Net interest income ................... $ 67,137 $ 63,501 $ 62,715 $ 56,374 $ 51,220
Provision for loan losses ............. 1,007 942 791 3,253 2,838
Other income:
Gain on sale of subsidiary ......... - - 9,762 - -
All other .......................... 7,953 8,640 8,585 8,734 10,503
Operating expense ..................... 32,216 32,558 35,484 36,639 35,491
Net intercompany income ............... 83 107 108 107 102
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes ............ 41,950 38,748 44,895 25,323 23,496
Income taxes .......................... 17,870 16,511 19,128 10,803 9,951
- ----------------------------------------------------------------------------------------------------------------------
Net income (1) ..................... $ 24,080 $ 22,237 $ 25,767 $ 14,520 $ 13,545
======================================================================================================================
AT PERIOD END:
Assets:
Loans and mortgage-backed securities $ 9,646,741 $ 9,787,661 $9,280,629 $8,746,063 $7,900,601
Other .............................. 715,933 683,771 672,124 654,745 578,871
- ----------------------------------------------------------------------------------------------------------------------
Total assets ..................... 10,362,674 10,471,432 9,952,753 9,400,808 8,479,472
- ----------------------------------------------------------------------------------------------------------------------
Equity ................................ $ 602,624 $ 577,496 $ 556,851 $ 532,418 $ 515,945
======================================================================================================================
<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 nine months of 2000, our net income from banking totaled
$72.1 million, up $32.8 million from the same period a year ago. The increase
between first nine-month periods included the $5.6 million after-tax gain from
the previously mentioned sale of our indirect auto finance subsidiary. Excluding
the gain, net income from our banking operations would have been $66.5 million,
up $27.2 million or 69.2% from a year ago.
The table below sets forth our banking operational results for the periods
indicated.
Nine Months Ended September 30,
-----------------------------------
(In Thousands) 2000 1999
- ------------------------------------------------------------------
Net interest income ......... $193,353 $151,410
Provision for loan losses ... 2,740 8,017
Other income:
Gain on sale of subsidiary 9,762 -
All other ................ 25,178 31,021
Operating expense ........... 100,258 106,442
Net intercompany income ..... 298 286
- ------------------------------------------------------------------
Income before income taxes .. 125,593 68,258
Income taxes ................ 53,509 28,982
- ------------------------------------------------------------------
Net income (1) ........... $ 72,084 $ 39,276
==================================================================
<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 $2.2 million
in the third quarter of 2000, down from $3.0 million in the year-ago quarter.
The decline was primarily attributed to lower net gains on sales and declines in
valuation allowances that totaled $3.3 million in the current quarter compared
to $4.2 million in the year-ago quarter. Also contributing to the decline in
income from real estate held for investment was a lower level of net rental
income due to fewer properties being owned.
The table below sets forth real estate investment operational results and
selected financial data for the periods indicated.
Three Months Ended
----------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2000 2000 2000 1999 1999
- -------------------------------------------------------------------------------------------------------------------
Net interest income (expense) ......... $ 73 $ 64 $ 48 $ (92) $ (177)
Other income .......................... 4,112 827 3,130 9,672 5,768
Operating expense ..................... 260 366 241 453 314
Net intercompany expense .............. 83 107 108 107 102
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes ............ 3,842 418 2,829 9,020 5,175
Income taxes .......................... 1,584 173 1,160 3,704 2,158
- -------------------------------------------------------------------------------------------------------------------
Net income ......................... $ 2,258 $ 245 $ 1,669 $ 5,316 $ 3,017
- -------------------------------------------------------------------------------------------------------------------
AT PERIOD END:
Assets:
Investments in real estate and joint
ventures ......................... $15,851 $39,256 $40,571 $42,172 $54,036
Other .............................. 6,347 7,655 7,193 7,399 13,204
- -------------------------------------------------------------------------------------------------------------------
Total assets ..................... 22,198 46,911 47,764 49,571 67,240
- -------------------------------------------------------------------------------------------------------------------
Equity ................................ $17,659 $41,753 $41,508 $42,839 $46,023
===================================================================================================================
Our investment in real estate and joint ventures amounted to $16 million at
September 30, 2000, compared to $42 million at December 31, 1999 and $54 million
at September 30, 1999. During the third quarter, we sold certain real estate
investments that enabled us to reallocate $26 million of capital allocated to
real estate investment to our banking operations.
For the first nine months of 2000, our net income from real estate
investment operations totaled $4.2 million, down from $4.7 million for the same
period a year ago. The decrease primarily reflects a lower level of net gains
from sales of real estate investments, partially offset by lower operating
expenses and higher net interest income.
The table below sets forth our real estate investment operational results
for the periods indicated.
Nine Months Ended September 30,
-----------------------------------
(In Thousands) 2000 1999
- ------------------------------------------------------------------
Net interest income (expense) $ 185 $ (214)
Other income ................ 8,069 9,851
Operating expense ........... 867 1,341
Net intercompany expense .... 298 286
- ------------------------------------------------------------------
Income before income taxes .. 7,089 8,010
Income taxes ................ 2,917 3,318
- ------------------------------------------------------------------
Net income ............... $4,172 $4,692
==================================================================
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, decreased $141 million during the third quarter to a total of $9.6 billion
or 93.1% of assets at September 30, 2000. The decrease primarily occurred in the
single family loans we hold for investment which decreased $92 million or 1.0%
during the quarter. Of that decrease, $43 million represented subprime loans.
The following table sets forth loans originated, including purchases, for
investment and for sale during the periods indicated.
Three Months Ended
----------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2000 2000 2000 1999 1999
- -------------------------------------------------------------------------------------------------------------------------
Loans originated for investment:
Residential, one-to-four units:
Adjustable .......................... $382,828 $ 842,899 $1,126,995 $1,207,517 $1,571,163
Fixed ............................... 3,896 4,192 3,860 3,269 4,920
Other ................................. 82,343 40,554 72,731 126,756 136,173
- -------------------------------------------------------------------------------------------------------------------------
Total loans originated for investment 469,067 887,645 1,203,586 1,337,542 1,712,256
Loans originated for sale (1) ............ 482,595 542,983 367,916 343,603 420,389
- -------------------------------------------------------------------------------------------------------------------------
Total loans originated ................ $951,662 $1,430,628 $1,571,502 $1,681,145 $2,132,645
=========================================================================================================================
<FN>
(1) One-to-four unit residential loans, primarily fixed.
</FN>
Originations of one-to-four unit residential loans totaled $869 million in
the third quarter of 2000, of which $387 million were for portfolio and $482
million were for sale. This was 37.5% lower than the $1.390 billion we
originated in the second quarter of 2000 and 56.5% lower than the $1.996 billion
we originated in the year-ago third quarter. Of the current quarter originations
for portfolio, $42 million represented originations of subprime credits as part
of our continuing strategy to enhance the portfolio's net yield. During the
current quarter, 35% of our residential one-to-four unit originations
represented refinancing transactions. This is similar to the previous quarter
level but down from 59% in the year-ago third quarter. In addition to single
family loans, we originated $82 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 September 30, 2000, $6.4 billion of the adjustable rate mortgages in our
loan portfolio were subject to negative amortization of which $127 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 $617 million of loans in the third quarter of 2000, compared to
$467 million in the previous quarter and $624 million in the third quarter of
1999. All were secured by residential one-to-four unit property and at September
30, 2000, loans held for sale totaled $167 million.
At September 30, 2000, we had commitments to fund loans amounting to $590
million, of which $205 million were one-to-four unit residential loans being
originated for sale in the secondary market, as well as undrawn lines of credit
of $92 million and loans in process of $64 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
-------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2000 2000 2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO:
Loans originated:
Loans secured by real estate:
Residential one-to-four units:
Adjustable ...................................... $ 339,983 $ 781,444 $1,034,226 $ 883,056 $1,180,474
Adjustable - subprime ........................... 41,982 61,455 81,559 303,677 384,856
- ----------------------------------------------------------------------------------------------------------------------------
Total adjustable .............................. 381,965 842,899 1,115,785 1,186,733 1,565,330
Fixed ........................................... 3,629 716 2,510 1,587 907
Fixed - subprime ................................ - - - 1,653 3,840
Residential five or more units:
Adjustable ...................................... - - - 247 -
Fixed ........................................... 515 - - - -
- ----------------------------------------------------------------------------------------------------------------------------
Total residential ............................. 386,109 843,615 1,118,295 1,190,220 1,570,077
Commercial real estate ............................ 22,500 - 1,220 - 750
Construction ...................................... 35,493 15,658 16,412 27,346 46,128
Land .............................................. 1,025 155 5,565 18,820 -
Non-mortgage:
Commercial ........................................ 4,850 6,060 565 7,895 7,850
Automobile ........................................ 6,135 6,744 39,255 56,484 66,550
Other consumer .................................... 10,770 11,937 9,714 15,704 14,895
- ----------------------------------------------------------------------------------------------------------------------------
Total loans originated .......................... 466,882 884,169 1,191,026 1,316,469 1,706,250
Real estate loans purchased:
One-to-four units .................................. 631 3,476 4,670 9,879 4,028
One-to-four units - subprime ....................... 499 - 7,890 10,934 1,978
Other (1) .......................................... 1,055 - - 260 -
- ----------------------------------------------------------------------------------------------------------------------------
Total loans originated and purchased .............. 469,067 887,645 1,203,586 1,337,542 1,712,256
Loan repayments ....................................... (485,831) (496,561) (378,211) (439,238) (443,503)
Other net changes (2) ................................. (65,442) 54,562 (309,620) 24,084 (35,096)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for investment (82,206) 445,646 515,755 922,388 1,233,657
- ----------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO:
Residential, one-to-four units:
Originated whole loans ............................. 469,101 518,457 319,556 329,731 420,389
Originated whole loans - subprime .................. 13,494 24,526 48,360 13,872 -
Loans transferred from (to) the investment portfolio 83,164 (11,475) (14,951) (5,711) 55,138
Originated whole loans sold ........................ (330,306) (165,031) (116,970) (228,746) (313,589)
Loans exchanged for mortgage-backed securities ..... (286,339) (302,362) (213,981) (179,031) (310,096)
Other net changes .................................. (2,957) (1,213) (302) (5,177) (827)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for sale .... (53,843) 62,902 21,712 (75,062) (148,985)
- ----------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, net:
Received in exchange for loans ..................... 286,339 302,362 213,981 179,031 310,096
Sold ............................................... (289,542) (302,362) (215,547) (179,031) (310,096)
Repayments ......................................... (1,759) (1,559) (1,254) (1,532) (2,300)
Other net changes .................................. 91 43 (81) (332) 100
- ----------------------------------------------------------------------------------------------------------------------------
Net decrease in mortgage-backed securities
available for sale ............................... (4,871) (1,516) (2,901) (1,864) (2,200)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans and
mortgage-backed securities held for sale and
available for sale ............................... (58,714) 61,386 18,811 (76,926) (151,185)
- ----------------------------------------------------------------------------------------------------------------------------
Total net increase (decrease) in loans and
mortgage-backed securities ....................... $(140,920) $ 507,032 $ 534,566 $ 845,462 $1,082,472
============================================================================================================================
<FN>
(1) Includes one construction loan for the three months ended September 30,
2000, and one five or more unit residential loan for the three months
ended December 31, 1999.
(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.
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2000 2000 2000 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO:
Loans secured by real estate:
Residential one-to-four units:
Adjustable ............................... $6,922,891 $6,956,084 $6,461,852 $5,644,883 $4,984,300
Adjustable - subprime .................... 1,634,342 1,676,546 1,680,205 1,620,624 1,354,771
Fixed .................................... 470,384 486,323 500,132 510,516 532,934
Fixed - subprime ......................... 18,120 18,806 19,751 18,777 18,027
- ------------------------------------------------------------------------------------------------------------------------------
Total one-to-four units ............... 9,045,737 9,137,759 8,661,940 7,794,800 6,890,032
Residential five or more units:
Adjustable ............................... 14,284 14,917 15,254 15,889 18,301
Fixed .................................... 5,444 4,983 5,038 5,166 5,243
Commercial real estate:
Adjustable ............................... 36,590 36,838 37,148 37,419 37,647
Fixed .................................... 127,715 110,914 111,772 110,908 111,265
Construction ............................... 120,179 121,602 147,910 176,487 190,441
Land ....................................... 26,294 37,222 72,139 67,631 61,263
Non-mortgage:
Commercial ................................. 23,454 24,511 26,922 26,667 27,605
Automobile (1) ............................. 40,303 38,935 35,469 399,789 391,975
Other consumer ............................. 60,362 56,627 52,447 49,344 44,764
- ------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment .......... 9,500,362 9,584,308 9,166,039 8,684,100 7,778,536
Increase (decrease) for:
Undisbursed loan funds ..................... (72,393) (77,563) (103,203) (125,159) (136,355)
Net deferred costs and premiums ............ 73,579 76,232 73,787 67,740 59,732
Allowance for losses ....................... (34,014) (33,237) (32,529) (38,342) (35,962)
- ------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment, net ..... 9,467,534 9,549,740 9,104,094 8,588,339 7,665,951
- ------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO, NET:
Loans held for sale:
One-to-four units .......................... 163,726 209,248 131,896 122,133 62,635
One-to-four units - subprime ............... 3,050 11,371 25,821 13,872 148,432
- ------------------------------------------------------------------------------------------------------------------------------
Total loans held for sale ................ 166,776 220,619 157,717 136,005 211,067
Mortgage-backed securities available for sale:
Adjustable ................................. 6,240 6,783 7,451 7,700 8,260
Fixed ...................................... 6,191 10,519 11,367 14,019 15,323
- ------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities available
for sale ................................ 12,431 17,302 18,818 21,719 23,583
- ------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities
held for sale and available for sale .... 179,207 237,921 176,535 157,724 234,650
- ------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities $9,646,741 $9,787,661 $9,280,629 $8,746,063 $7,900,601
==============================================================================================================================
<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 September 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 September 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 September 30, 2000, our deposits totaled $7.7 billion, up $1.4 billion
or 21.9% from the year-ago quarter end and up $1.1 billion or 17.2% from
year-end 1999. Compared to the year-ago period, our certificates of deposit
increased $1.4 billion or 27.8% and our transaction accounts--i.e., checking,
regular passbook and money market--increased $28 million or 1.9%. Within
transaction accounts, our total checking accounts (non-interest and interest
bearing) increased $72 million or 13.5%. That increase, however, was partially
offset by declines in regular passbook and money market accounts, as depositors
transferred funds into higher-yielding certificates of deposit.
The following table sets forth information concerning our deposits and
average rates paid at the dates indicated.
September 30, 2000 June 30, 2000 March 31, 2000 December 31, 1999 September 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:
Non-interest-bearing
checking ............ - % $ 225,442 - % $ 200,823 - % $ 215,512 - % $ 182,165 - % $ 194,018
Interest-bearing
checking (1) ........ 0.78 381,596 0.76 377,212 1.00 385,343 1.00 383,973 1.00 341,045
Money market .......... 2.87 88,505 2.88 85,339 2.88 90,217 2.91 95,947 2.92 96,223
Regular passbook ...... 3.42 776,527 3.43 803,841 3.60 833,648 3.62 827,854 3.42 813,229
- --------------------------------------------------------------------------------------------------------------------------------
Total transaction
accounts ........... 2.18 1,472,070 2.24 1,467,215 2.39 1,524,720 2.46 1,489,939 2.36 1,444,515
Certificates of deposit:
Less than 3.00% ....... 2.41 7,188 2.48 7,708 2.50 7,946 2.47 8,717 2.49 11,084
3.00-3.49 ............. 3.45 26 3.41 1 3.41 1 3.02 16 3.02 15
3.50-3.99 ............. 3.82 1 3.82 1 3.92 324 3.92 3,786 3.94 2,236
4.00-4.49 ............. 4.23 33,660 4.29 41,648 4.30 80,555 4.32 210,127 4.37 436,442
4.50-4.99 ............. 4.83 162,903 4.81 263,352 4.81 601,590 4.78 939,858 4.78 1,189,830
5.00-5.99 ............. 5.69 2,106,639 5.66 3,011,284 5.61 3,440,320 5.56 3,623,632 5.53 3,138,246
6.00-6.99 ............. 6.58 3,889,166 6.49 2,493,154 6.27 1,305,922 6.07 284,984 6.17 86,490
7.00 and greater ...... 7.02 20,129 7.02 5,146 - - 7.32 1,702 7.24 2,454
- --------------------------------------------------------------------------------------------------------------------------------
Total certificates of
deposit ............ 6.22 6,219,712 5.96 5,822,294 5.66 5,436,658 5.39 5,072,822 5.25 4,866,797
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits ..... 5.44% $7,691,782 5.22% $7,289,509 4.95% $6,961,378 4.72% $6,562,761 4.59% $6,311,312
================================================================================================================================
<FN>
(1) Includes amounts swept into money market deposit accounts.
</FN>
BORROWINGS
During the 2000 third quarter, our borrowings decreased $552 million to
$1.9 billion, due to a decrease in FHLB advances. This followed an increase of
$163 million during the second quarter of 2000.
The following table sets forth information concerning our FHLB advances and
other borrowings at the dates indicated.
September 30, June 30, March 31, December 31, September 30,
(Dollars in Thousands) 2000 2000 2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances .......... $1,860,255 $2,411,808 $2,248,964 $2,122,407 $1,477,207
Other borrowings ......................... 248 285 329 373 8,501
- ----------------------------------------------------------------------------------------------------------------------------
Total borrowings ...................... $1,860,503 $2,412,093 $2,249,293 $2,122,780 $1,485,708
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average rate on borrowings during
the period ............................ 6.39% 6.11% 5.81% 5.66% 5.35%
Total borrowings as a percentage of total
assets ................................ 17.95 23.02 22.59 22.56 17.48
============================================================================================================================
21
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 third 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 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 September 30, 2000, as well as other information
regarding the repricing and maturity differences between interest-earning assets
and total deposits, borrowings and capital securities 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.
September 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) $ 160,073 $ 3,029 $ 193,314 $ 69 $ - $ 356,485
Loans and mortgage-backed securities:
Loans secured by real estate:
Residential:
Adjustable ......................(2) 8,221,118 282,287 127,755 - - 8,631,160
Fixed ...........................(2) 181,076 25,811 162,599 126,825 151,119 647,430
Commercial real estate ............(2) 45,705 11,488 99,683 2,692 1,749 161,317
Construction ......................(2) 59,257 - - - - 59,257
Land ..............................(2) 19,814 9 69 815 - 20,707
Non-mortgage loans:
Commercial ........................(2) 14,844 - - - - 14,844
Consumer ..........................(2) 68,712 7,871 23,012 - - 99,595
Mortgage-backed securities ..........(2) 12,431 - - - - 12,431
- ----------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed
securities .......................... 8,622,957 327,466 413,118 130,332 152,868 9,646,741
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ....... $8,783,030 $ 330,495 $ 606,432 $ 130,401 $152,868 $10,003,226
============================================================================================================================
Transaction accounts:
Non-interest-bearing checking ........ $ 225,442 $ - $ - $ - $ - $ 225,442
Interest-bearing checking (4) ........(3) 381,596 - - - - 381,596
Money market .........................(3) 88,505 - - - - 88,505
Regular passbook .....................(3) 776,527 - - - - 776,527
- ----------------------------------------------------------------------------------------------------------------------------
Total transaction accounts .......... 1,472,070 - - - - 1,472,070
Certificates of deposit .................(1) 2,638,753 2,874,176 706,783 - - 6,219,712
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits ....................... 4,110,823 2,874,176 706,783 - - 7,691,782
Borrowings .............................. 1,362,106 8,437 58,960 431,000 - 1,860,503
Capital securities ...................... - - - - 120,000 120,000
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits, borrowings and capital
securities .......................... $5,472,929 $ 2,882,613 $ 765,743 $ 431,000 $120,000 $ 9,672,285
============================================================================================================================
Excess (shortfall) of interest-earning
assets over deposits, borrowings and
capital securities .................... $3,310,101 $(2,552,118) $(159,311) $(300,599) $ 32,868 $ 330,941
Cumulative gap .......................... 3,310,101 757,983 598,672 298,073 330,941
Cumulative gap - as a % of total assets:
September 30, 2000 ................... 31.93% 7.31% 5.77% 2.88% 3.19%
December 31, 1999 .................... 21.29 10.20 4.97 1.92 2.35
September 30, 1999 ................... 24.94 9.15 5.43 2.09 2.70
============================================================================================================================
<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.
(4) Includes amounts swept into money market deposit accounts.
</FN>
23
Our six-month gap at September 30, 2000 was a positive 31.93%. This means
that more interest-earning assets reprice within six months than total deposits,
borrowings and capital securities. This compares to a positive six-month gap of
21.29% at December 31, 1999 and 24.94% at September 30, 1999. We continue to
pursue our strategy of emphasizing the origination of adjustable rate mortgages.
For the twelve months ended September 30, 2000, we originated and purchased for
investment $3.7 billion of adjustable rate loans which represented approximately
96% of all loans we originated and purchased for investment during the period.
At September 30, 2000, 97% of our interest-earning assets mature, reprice
or are estimated to prepay within five years, unchanged from 97% at December 31,
1999 but up slightly from 96% at September 30, 1999. At September 30, 2000,
loans held for investment and mortgage-backed securities with adjustable
interest rates represented 91% of those portfolios. During the third 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 September 30, 2000, $9.0 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 $7.1 billion or 89% at September
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.
September 30, June 30, March 31, December 31, September 30,
2000 2000 2000 1999 1999
- ------------------------------------------------------------------------------------------------------------------------
Weighted average yield:
Loans and mortgage-backed securities 8.40% 8.03% 7.70% 7.67% 7.33%
Federal Home Loan Bank stock ....... 5.52 5.52 5.69 5.60 5.24
Investment securities .............. 6.42 6.35 6.12 6.12 5.85
- ------------------------------------------------------------------------------------------------------------------------
Earning assets yield ............. 8.32 7.97 7.64 7.62 7.28
- ------------------------------------------------------------------------------------------------------------------------
Weighted average cost:
Deposits ........................... 5.44 5.22 4.95 4.72 4.59
Borrowings:
Federal Home Loan Bank advances .. 6.37 6.31 5.95 5.77 5.45
Other borrowings ................. 7.88 7.88 7.88 7.88 8.68
- ------------------------------------------------------------------------------------------------------------------------
Total borrowings .............. 6.37 6.31 5.95 5.99 5.46
Capital securities ................. 10.00 10.00 10.00 10.00 10.00
- ------------------------------------------------------------------------------------------------------------------------
Combined funds cost .............. 5.68 5.55 5.25 5.05 4.84
- ------------------------------------------------------------------------------------------------------------------------
Interest rate spread .......... 2.64% 2.42% 2.39% 2.57% 2.44%
========================================================================================================================
The period-end weighted average yield on our loan portfolio increased to
8.40% at September 30, 2000, up from 7.67% at December 31, 1999 and 7.33% at
September 30, 1999. At September 30, 2000, our adjustable rate mortgage
portfolio of single family residential loans, including mortgage-backed
securitites, totaled $8.6 billion with a weighted average rate of 8.38% compared
to $7.3 billion with a weighted average rate of 7.52% at December 31, 1999 and
$6.4 billlion with a weighted average rate of 7.10% at September 30, 1999.
24
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 $4 million to
$50 million or 0.48% of total assets. The increase was primarily due to a rise
in residential non-performers of which $2 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.
The following table summarizes our non-performing assets at the dates
indicated.
September 30, June 30, March 31, December 31, September 30,
(Dollars in Thousands) 2000 2000 2000 1999 1999
- -----------------------------------------------------------------------------------------------------------------------------
Non-accrual loans:
Residential one-to-four units .............. $17,976 $18,692 $15,546 $15,590 $16,318
Residential one-to-four units - subprime ... 20,389 19,725 15,426 13,914 9,719
Other ...................................... 1,867 1,537 1,479 3,477 3,563
- -----------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans .................. 40,232 39,954 32,451 32,981 29,600
Trouble debt restructure - below market rate (1) 209 210 210 - -
Real estate acquired in settlement of loans .... 9,161 5,657 7,115 5,899 5,213
Repossessed automobiles ........................ - - - 314 335
- -----------------------------------------------------------------------------------------------------------------------------
Total non-performing assets ................ $49,602 $45,821 $39,776 $39,194 $35,148
=============================================================================================================================
Allowance for loan losses (2):
Amount ..................................... $34,014 $33,237 $32,529 $38,342 $35,962
As a percentage of non-performing loans .... 84.11% 82.75% 99.60% 116.25% 121.49%
Non-performing assets as a percentage of total
assets ..................................... 0.48 0.44 0.40 0.42 0.41
=============================================================================================================================
<FN>
(1) Represents a 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>
Delinquent Loans
During the 2000 third quarter, our delinquencies as a percentage of total
loans outstanding increased from 0.51% to 0.63% and were slightly above the
0.58% at year-end 1999. The increase primarily occurred in loans delinquent
30-59 days within our residential one-to-four units category and our residential
one-to-four units subprime category.
25
The following table indicates the amounts of our past due loans at the
dates indicated.
September 30, 2000 June 30, 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 ............... $14,970 $3,037 $16,176 $34,183 $ 7,519 $4,970 $14,805 $27,294
One-to-four units - subprime .... 7,701 5,422 11,911 25,034 6,270 4,590 11,054 21,914
Five or more units .............. - - - - - - - -
Commercial real estate ............ - - - - - - - -
Construction ...................... - - - - - - - -
Land .............................. - - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------
Total real estate loans ......... 22,671 8,459 28,087 59,217 13,789 9,560 25,859 49,208
Non-mortgage:
Commercial ........................ - - - - - - - -
Automobile ........................ 356 50 116 522 158 - 6 164
Other consumer .................... 200 86 433 719 372 30 208 610
- -----------------------------------------------------------------------------------------------------------------------------
Total loans ..................... $23,227 $8,595 $28,636 $60,458 $14,319 $9,590 $26,073 $49,982
=============================================================================================================================
Delinquencies as a percentage of total
loans ............................... 0.24% 0.09% 0.30% 0.63% 0.15% 0.10% 0.26% 0.51%
=============================================================================================================================
March 31, 2000 December 31, 1999
-----------------------------------------------------------------------------------
Loans secured by real estate:
Residential:
One-to-four units ............... $10,388 $4,389 $12,974 $27,751 $ 8,630 $3,889 $12,793 $25,312
One-to-four units - subprime .... 11,037 3,127 7,092 21,256 7,867 3,069 7,935 18,871
Five or more units .............. - - - - - - - -
Commercial real estate ............ - - - - - - - -
Construction ...................... - - - - - - - -
Land .............................. - - - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------
Total real estate loans ......... 21,425 7,516 20,066 49,007 16,497 6,958 20,728 44,183
Non-mortgage:
Commercial ........................ - - - - - - - -
Automobile ........................ 150 33 14 197 4,758 674 717 6,149
Other consumer .................... 356 44 137 537 679 42 114 835
- -----------------------------------------------------------------------------------------------------------------------------
Total loans ..................... $21,931 $7,593 $20,217 $49,741 $21,934 $7,674 $21,559 $51,167
=============================================================================================================================
Delinquencies as a percentage of total
loans ............................... 0.23% 0.08% 0.22% 0.53% 0.25% 0.09% 0.24% 0.58%
=============================================================================================================================
September 30, 1999
-----------------------------------------
Loans secured by real estate:
Residential:
One-to-four units ............... $11,306 $3,441 $12,804 $27,551
One-to-four units - subprime .... 3,669 3,278 3,697 10,644
Five or more units .............. - - - -
Commercial real estate ............ - - - -
Construction ...................... - - - -
Land .............................. - - - -
- -----------------------------------------------------------------------------------
Total real estate loans ......... 14,975 6,719 16,501 38,195
Non-mortgage:
Commercial ........................ - - - -
Automobile ........................ 4,548 367 571 5,486
Other consumer .................... 161 33 175 369
- -----------------------------------------------------------------------------------
Total loans ..................... $19,684 $7,119 $17,247 $44,050
===================================================================================
Delinquencies as a percentage of total
loans ............................... 0.25% 0.09% 0.21% 0.55%
===================================================================================
<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 maintain valuation allowances for losses on loans and real estate to
provide for losses inherent in those portfolios. The adequacy of the allowance
is evaluated quarterly by management to maintain the allowance at levels
sufficient to provide for inherent losses. We adhere to an internal asset review
system and loss allowance methodology designed to provide for timely recognition
of problem assets and an adequate allowance to cover asset losses. The amount of
the allowance is based upon the summation of general valuation allowances,
allocated allowances and an unallocated allowance. General valuation allowances
relate to assets with no well-defined deficiency or weakness and takes into
consideration loss that is imbedded within the portfolio but has not yet been
realized. Allocated allowances relate to assets with well-defined deficiencies
or weaknesses. Included in these allowances are those amounts associated with
assets where it is probable that the value of the asset has been impaired and
the loss can be reasonably estimated. If we determine the net fair value of the
asset exceeds our carrying value, a specific allowance is recorded for the
amount of that difference. The unallocated allowance is more subjective and is
reviewed quarterly to take into consideration estimation errors and economic
trends that are not necessarily captured in determining the general valuation
and allocated allowances.
Allowances for losses on all assets were $37 million at September 30, 2000,
$41 million at December 31, 1999 and $39 million at September 30, 1999.
Our provision for loan losses was $1.0 million in the current quarter and
exceeded net loan charge-offs by $0.8 million resulting in an increase in the
allowance for loan losses to $34.0 million at September 30, 2000. The current
quarter allowance increase reflected an increase of $0.7 million in general
valuation allowances to $26.9 million due to changes in the residential loan and
commercial real estate loan portfolios, while allocated allowances increased
$0.1 million to $4.3 million due primarily to an increase in loans classified
loss. There was no change in the unallocated allowance of $2.8 million. Since
year-end 1999, our allowance for loan losses declined by $4.3 million. General
valuation allowances declined by $5.5 million associated with the sale of the
indirect auto finance subsidiary which more than offset an increase related to
changes in residential loans. Allocated allowances declined by $0.6 million of
which $0.3 million was associated with the subsidiary sale with the remainder
associated with a decline in loans classified substandard.
The following table is a summary of the activity of our allowance for loan
losses during the periods indicated.
Three Months Ended
----------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2000 2000 2000 1999 1999
- ---------------------------------------------------------------------------------------------------------------
Balance at beginning of period $33,237 $32,529 $38,342 $35,962 $34,345
Provision .................... 1,007 942 791 3,253 2,838
Charge-offs .................. (234) (237) (932) (1,312) (1,423)
Recoveries ................... 4 3 139 439 202
Transfers (1) ................ - - (5,811) - -
- ---------------------------------------------------------------------------------------------------------------
Balance at end of period ..... $34,014 $33,237 $32,529 $38,342 $35,962
===============================================================================================================
<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.
September 30, 2000 June 30, 2000 March 31, 2000
----------------------------------------------------------------------------------------------
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 ...... $15,143 $7,393,275 0.20% $14,622 $7,442,407 0.20% $14,120 $6,961,984 0.20%
One-to-four units -
subprime ............. 9,946 1,652,462 0.60 9,862 1,695,352 0.58 9,036 1,699,956 0.53
Five or more units ..... 148 19,728 0.75 175 19,900 0.88 178 20,292 0.88
Commercial real estate ... 2,930 164,305 1.78 2,690 147,752 1.82 2,634 148,920 1.77
Construction ............. 1,412 120,179 1.17 1,433 121,602 1.18 1,747 147,910 1.18
Land ..................... 325 26,294 1.24 463 37,222 1.24 899 72,139 1.25
Non-mortgage:
Commercial ............... 287 23,454 1.22 283 24,511 1.15 293 26,922 1.09
Automobile (1) ........... 234 40,303 0.58 203 38,935 0.52 184 35,469 0.52
Other consumer ........... 789 60,362 1.31 706 56,627 1.25 638 52,447 1.22
Not specifically allocated .. 2,800 - - 2,800 - - 2,800 - -
- -----------------------------------------------------------------------------------------------------------------------------
Total loans held for
investment ............. $34,014 $9,500,362 0.36% $33,237 $9,584,308 0.35% $32,529 $9,166,039 0.35%
=============================================================================================================================
December 31, 1999 September 30, 1999
--------------------------------------------------------------
Loans secured by real estate:
Residential:
One-to-four units ...... $12,913 $6,155,399 0.21% $12,556 $5,517,234 0.23%
One-to-four units -
subprime ............. 9,876 1,639,401 0.60 6,940 1,372,798 0.51
Five or more units ..... 184 21,055 0.87 276 23,544 1.17
Commercial real estate ... 2,439 148,327 1.64 2,463 148,912 1.65
Construction ............. 2,075 176,487 1.18 2,242 190,441 1.18
Land ..................... 843 67,631 1.25 764 61,263 1.25
Non-mortgage:
Commercial ............... 334 26,667 1.25 227 27,605 0.82
Automobile ............... 6,259 399,789 1.57 7,099 391,975 1.81
Other consumer ........... 619 49,344 1.25 595 44,764 1.33
Not specifically allocated .. 2,800 - - 2,800 - -
- ---------------------------------------------------------------------------------------------
Total loans held for
investment ............. $38,342 $8,684,100 0.44% $35,962 $7,778,536 0.46%
=============================================================================================
<FN>
(1) The decline between March 31, 2000 and December 31, 1999 primarily reflects
the sale of subsidiary.
</FN>
At September 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 third quarter of 2000, total
interest recognized on the impaired loan portfolio was $0.5 million, increasing
the year-to-date total to $1.5 million.
A summary of the activity in the allowance for loan losses associated with
impaired loans is shown below for the periods indicated. We have recorded
reductions due to loan principal payments.
Three Months Ended
--------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2000 2000 2000 1999 1999
- ------------------------------------------------------------------------------------------------------------------
Balance at beginning of period .. $792 $795 $797 $798 $801
Reduction of impaired loan losses (1) (3) (2) (1) (3)
Charge-offs ..................... - - - - -
Recoveries ...................... - - - - -
- ------------------------------------------------------------------------------------------------------------------
Balance at end of period ........ $791 $792 $795 $797 $798
==================================================================================================================
28
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
----------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2000 2000 2000 1999 1999
- ---------------------------------------------------------------------------------------------------------------
Balance at beginning of period $3,561 $2,088 $2,131 $2,435 $ 7,389
Provision (reduction) ........ (600) 1,473 (43) (292) (3,162)
Charge-offs .................. - - - (12) (1,792)
Recoveries ................... - - - - -
- ---------------------------------------------------------------------------------------------------------------
Balance at end of period ..... $2,961 $3,561 $2,088 $2,131 $ 2,435
===============================================================================================================
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
----------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2000 2000 2000 1999 1999
- ----------------------------------------------------------------------------------------------------------------
Balance at beginning of period $ - $ - $ - $ - $ 509
Provision (reduction) ........ 107 154 74 56 (136)
Charge-offs .................. (107) (154) (74) (56) (373)
- ----------------------------------------------------------------------------------------------------------------
Balance at end of period ..... $ - $ - $ - $ - $ -
================================================================================================================
CAPITAL RESOURCES AND LIQUIDITY
Our primary sources of funds generated in the third quarter of 2000 were
from:
o principal repayments--including prepayments, but excluding refinances
of our existing loans--on loans and mortgage-backed securities of $461
million;
o a net increase in deposits of $402 million; and
o a net decrease in loans held for sale of $54 million.
We used these funds to paydown our borrowings by $552 million and to
originate loans held for investment of $439 million.
At September 30, 2000, the Bank's ratio of regulatory liquidity was 4.9%,
compared to 4.2% at December 31, 1999 and 4.1% at September 30, 1999.
Stockholders' equity totaled $603 million at September 30, 2000, up from
$532 million at December 31, 1999 and $516 million at September 30, 1999.
Downey currently has liquid assets, including due from Bank--interest
bearing balances, of $17 million and can obtain further funds by means of
dividends from subsidiaries, subject to certain limitations, or issuance of
further debt or equity.
29
REGULATORY CAPITAL COMPLIANCE
The following table is a reconciliation of the Bank's stockholder's equity
to federal regulatory capital as of September 30, 2000. During the quarter, the
net investment in our real estate subsidiary was reduced by $26 million due to
sales of certain real estate investments thereby increasing regulatory capital
by that amount in addition to retained earnings. Our core and tangible capital
ratios were 6.56% and our risk-based capital ratio was 13.11%. 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 ......................... $702,078 $702,078 $702,078
Adjustments:
Deductions:
Investment in subsidiary, primarily real
estate ................................ (16,939) (16,939) (16,939)
Goodwill ................................. (3,721) (3,721) (3,721)
Non-permitted mortgage servicing rights .. (4,501) (4,501) (4,501)
Additions:
Unrealized losses on securities available
for sale .............................. 805 805 805
General loss allowance - investment in DSL
Service Company ....................... 447 447 447
General loan valuation allowances (1) .... - - 33,725
- -------------------------------------------------------------------------------------------------------------------------
Regulatory capital ........................... 678,169 6.56% 678,169 6.56% 711,894 13.11%
Well capitalized requirement ................. 155,002 1.50 (2) 516,675 5.00 543,076 10.00 (3)
- -------------------------------------------------------------------------------------------------------------------------
Excess ....................................... $523,167 5.06% $161,494 1.56% $168,818 3.11%
=========================================================================================================================
<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 12.49%.
</FN>
CURRENT ACCOUNTING ISSUES
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities - a
replacement of FASB Statement No. 125," which revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures. Although it replaces FASB Statement
No. 125, it carries over most of Statement 125's provisions without
reconsideration.
The accounting provisions are effective for fiscal years beginning after
March 15, 2001. The reclassification and disclosure provisions are effective for
fiscal years beginning after December 15, 2000. It is not anticipated that the
financial impact of this statement will have a material effect on Downey.
30
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
27 Financial Data Schedule.
(B) There were no reports on Form 8-K filed for the three months ended
September 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: November 1, 2000 /s/ Daniel D. Rosenthal
----------------------------------------------------
Daniel D. Rosenthal
President and Chief Executive Officer
Date: November 1, 2000 /s/ Thomas E. Prince
----------------------------------------------------
Thomas E. Prince
Executive Vice President and Chief Financial Officer
31