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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
For the quarterly period ended March 31, 1997
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 (714) 854-0300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock, $0.01 Par Value New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
At March 31, 1997, 25,460,954 shares of the Registrant's Common Stock,
$0.01 par value were outstanding.
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DOWNEY FINANCIAL CORP.
MARCH 31, 1997 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 Cash Flows................................. 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................... 6
PART II
OTHER INFORMATION..................................................... 23
Item 6 Exhibits and Reports on Form 8-K............................ 23
i
PART I - FINANCIAL INFORMATION
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31, March 31,
(Dollars in Thousands, Except Per Share Data) 1997 1996 1996
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ASSETS
Cash ............................................................................ $ 78,068 $ 67,221 $ 54,070
Federal funds ................................................................... 19,558 6,038 16,888
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents ................................................... 97,626 73,259 70,958
U.S. Treasury and agency obligations and other investment securities
available for sale, at fair value ........................................... 140,055 141,999 132,005
Municipal securities being held to maturity, at amortized cost (estimated
market value of $6,975 at March 31, 1997 and December 31, 1996, and
$7,075 at March 31, 1996) ................................................... 6,997 6,997 7,098
Mortgage loans purchased under resale agreements ................................ 20,000 -- 40,000
Loans held for sale, at the lower of cost or market ............................. 15,149 12,865 19,533
Mortgage-backed securities available for sale, at fair value .................... 57,263 61,267 72,393
Loans receivable held for investment ............................................ 4,900,500 4,655,714 4,066,080
Investments in real estate and joint ventures ................................... 41,041 46,498 42,903
Real estate acquired in settlement of loans ..................................... 17,202 16,078 19,454
Premises and equipment .......................................................... 97,217 96,643 95,075
Federal Home Loan Bank stock, at cost ........................................... 42,116 41,447 39,653
Other assets .................................................................... 49,307 45,390 47,432
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$ 5,484,473 $ 5,198,157 $ 4,652,584
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits ................................................................ $ 4,145,553 $ 3,859,122 $ 3,574,549
Checking deposits ............................................................... 348,884 313,980 316,109
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Total deposits .............................................................. 4,494,437 4,173,102 3,890,658
Federal Home Loan Bank advances ................................................. 330,479 386,883 181,137
Commercial paper ................................................................ 196,125 198,113 148,358
Other borrowings ................................................................ 10,188 10,349 2,721
Accounts payable and accrued liabilities ........................................ 43,825 28,357 38,250
Deferred income taxes ........................................................... 8,916 9,782 3,990
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Total liabilities ........................................................... 5,083,970 4,806,586 4,265,114
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STOCKHOLDERS' EQUITY:
Common stock, par value of $0.01 per share; authorized 50,000,000 shares,
outstanding 25,460,954 shares at March 31, 1997 and 25,459,079
shares at December 31, 1996 and 16,972,905 at March 31, 1996 ................ 255 255 170
Additional paid-in capital ...................................................... 22,634 22,607 22,696
Unrealized losses on securities available for sale .............................. (2,947) (1,559) (1,634)
Retained earnings ............................................................... 380,561 370,268 366,238
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Total stockholders' equity .................................................. 400,503 391,571 387,470
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$ 5,484,473 $ 5,198,157 $ 4,652,584
===================================================================================================================================
See accompanying notes to consolidated financial statements.
1
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended
March 31,
---------------------------------
(Dollars in Thousands, Except Per Share Data) 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans receivable ........................................................ $ 93,691 $ 77,840
U.S. Treasury and agency securities ..................................... 2,034 1,921
Mortgage-backed securities .............................................. 984 1,033
Other investments ....................................................... 875 1,545
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Total interest income ............................................... 97,584 82,339
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INTEREST EXPENSE:
Deposits ................................................................ 51,404 45,490
Borrowings .............................................................. 8,062 5,962
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Total interest expense .............................................. 59,466 51,452
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NET INTEREST INCOME ..................................................... 38,118 30,887
PROVISION FOR LOAN LOSSES ............................................... 2,155 1,171
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Net interest income after provision for loan losses ................. 35,963 29,716
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OTHER INCOME, NET:
Loan and deposit related fees ........................................... 2,289 1,617
Real estate and joint ventures held for investment, net:
Net losses on sales of wholly owned real estate ....................... -- (19)
Reduction of loss on real estate and joint ventures ................... 2,277 1,470
Operations, net ....................................................... 4,695 779
Secondary marketing activities:
Loan servicing fees ................................................... 406 262
Net gains on sales of loans and mortgage-backed securities ............ 333 555
Net gains on sales of investment securities ............................. -- 4,473
Other ................................................................... 991 685
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Total other income, net ............................................. 10,991 9,822
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OPERATING EXPENSE:
Salaries and related costs .............................................. 14,397 10,702
Premises and equipment costs ............................................ 3,524 2,854
Advertising expense ..................................................... 1,258 561
Professional fees ....................................................... 809 708
SAIF insurance premiums and regulatory assessments ...................... 806 2,357
Other general and administrative expense ................................ 3,323 2,601
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Total general and administrative expense .............................. 24,117 19,783
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Net operation of real estate acquired in settlement of loans ............ 927 1,047
Amortization of excess of cost over fair value of net assets acquired ... 132 132
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Total operating expense ............................................. 25,176 20,962
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INCOME BEFORE INCOME TAXES ................................................. 21,778 18,576
Income taxes ............................................................... 9,448 8,012
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NET INCOME .............................................................. $ 12,330 $ 10,564
======================================================================================================================
PER SHARE INFORMATION:
NET INCOME ................................................................. $ 0.46 $ 0.39
======================================================================================================================
CASH DIVIDENDS PAID ........................................................ $ 0.076 $ 0.076
======================================================================================================================
Weighted average shares outstanding ........................................ 26,801,833 26,749,672
======================================================================================================================
See accompanying notes to consolidated financial statements.
2
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
--------------------------
(In Thousands) 1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................ $ 12,330 $ 10,564
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ....................................................... 2,349 1,789
Provision for losses on loans, leases, real estate acquired in settlement of loans,
investments in real estate and joint ventures and other assets .................... 569 455
Net gains on sales of loans and mortgage-backed securities, investment securities,
real estate and other assets ...................................................... (3,771) (5,067)
Interest capitalized on loans (negative amortization) ............................... (2,997) (3,251)
Federal Home Loan Bank dividends .................................................... (669) (507)
Net change in loans receivable - held for sale ........................................ (18,087) (5,919)
Other, net ............................................................................ 6,306 9,188
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Net cash provided by (used for) operating activities ..................................... (3,970) 7,252
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Sales of investment securities - available for sale ................................ -- 189,541
Sales of mortgage-backed securities - available for sale ........................... 16,582 --
Sales of wholly owned real estate and real estate acquired in settlement of loans ... 4,427 6,254
Purchase of:
U.S. Treasury and agency obligations and other investment securities ................ -- (160,455)
Mortgage-backed securities - available for sale .................................... -- (25,368)
Loans receivable - held for investment ............................................. (4,898) --
Securities under resale agreements .................................................. (20,000) (40,000)
Loans receivable originated - held for investment (net of refinances of $15,176 and
$21,895 at March 31, 1997 and 1996, respectively) ................................... (466,272) (159,780)
Principal payments on loans receivable held for investment and mortgage-backed
securities - available for sale ..................................................... 224,090 200,651
Net change in undisbursed loan funds .................................................. 5,521 (3,195)
Investments in real estate held for investment ........................................ 10,865 (198)
Other, net ............................................................................ (2,723) (3,972)
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Net cash provided by (used for) investing activities ..................................... (232,408) 3,478
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Three Months Ended
March 31,
---------------------------
(In Thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------ ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits .............................................................. $ 321,335 $ 100,437
Proceeds from Federal Home Loan Bank advances ......................................... 180,300 25,000
Repayments of Federal Home Loan Bank advances ......................................... (236,704) (64,578)
Net decrease in other borrowings ...................................................... (2,149) (64,424)
Cash dividends ........................................................................ (2,037) (2,037)
- ------------------------------------------------------------------------------------------------------------ ----------------
Net cash provided by (used for) financing activities ..................................... 260,745 (5,602)
- ------------------------------------------------------------------------------------------------------------ ----------------
Net increase in cash and cash equivalents ................................................ 24,367 5,128
Cash and cash equivalents at beginning of year ........................................... 73,259 65,830
- ------------------------------------------------------------------------------------------------------------ ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................................... $ 97,626 $ 70,958
=============================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid (received) during the period for:
Interest ............................................................................ $ 57,282 $ 53,070
Income taxes ........................................................................ (7,109) (27)
Supplemental disclosure of non-cash investing:
Loans exchanged for mortgage-backed securities ...................................... 16,626 --
Real estate acquired in settlement of loans ......................................... 6,316 8,426
Loans to facilitate the sale of real estate acquired in settlement of loans ......... 3,526 4,336
=============================================================================================================================
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE (1) - BASIS OF PRESENTATION
In the opinion of Downey Financial Corp. and subsidiaries ("Downey"), the
accompanying consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary for a fair presentation
of Downey's financial condition as of March 31, 1997, December 31, 1996 and
March 31, 1996, and the results of operations and changes in cash flows for the
three months ended March 31, 1997 and 1996. 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 ("GAAP") 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 position, results of operations and cash flows. The
following information under the heading Management's Discussion and Analysis of
the Financial Condition and Results of Operations is written with the
presumption that the interim consolidated financial statements will be read in
conjunction with Downey's Annual Report on Form 10-K for the year ended December
31, 1996, 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 the Financial Position and Results
of Operations as of December 31, 1996, 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.
4
NOTE (2) - STOCK DIVIDEND
The Board of Directors announced on April 23, 1997, the declaration of a 5%
stock dividend and a quarterly cash dividend of $0.08 per share. The cash
dividend is payable on both existing shares outstanding as well as those to be
issued as a result of the stock dividend, thereby effectively providing
shareholders with a 5% cash dividend increase.
Both the stock and cash dividend are payable on May 22, 1997, to
stockholders of record on May 8, 1997. In lieu of fractional shares,
stockholders will receive cash based on the record date closing price, adjusted
to reflect the shares outstanding after the 5% stock dividend. Upon completion
of the stock dividend, there will be approximately 26.7 million shares of common
stock outstanding.
In accordance with generally accepted accounting principles, per share
computations are based on the number of shares outstanding adjusted for the
stock dividend.
NOTE (3) - TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES
Downey adopted, effective January 1, 1997, Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
SFAS 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Those
standards are based on consistent application of a financial-components approach
that focuses on control. Under that approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. SFAS 125
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings.
SFAS 125 requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at
fair value, if practicable. It also requires that servicing assets and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of the
transfer.
SFAS 125 includes specific provisions to deal with servicing assets or
liabilities. These provisions retain the impairment and amortization approaches
that are contained in Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights, an Amendment to FASB No. 65" but
eliminates the distinction between normal and excess servicing.
The adoption of SFAS 125 did not have a material financial impact on
Downey.
NOTE (4) - NET INCOME PER SHARE
Net income per share is based upon the weighted average number of
outstanding shares and stock options deemed to be common stock equivalents to
the extent they are dilutive.
5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements under this caption constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995 which
involve risks and uncertainties. Downey's actual results may differ
significantly from the results discussed in such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
economic conditions, competition in the geographic and business areas in which
Downey conducts its operations, fluctuations in interest rates, credit quality
and government regulation.
OVERVIEW
Net income for the first quarter of 1997 totaled $12.3 million, or $0.46
per share, up 16.7% from the $10.6 million, or $0.39 per share earned in the
first quarter of 1996.
The increase in net income between first quarters is impacted by special
items in each period. The current quarter included the favorable impact of prior
period interest income on a non-accrual loan repaid during the quarter and a
gain from the sale of four joint venture shopping centers, partially reduced by
the expense associated with the departure of the former chief executive officer.
The net after-tax impact of those items was a benefit of $2.8 million, whereas
the year-ago first quarter included an after-tax gain of $2.6 million from the
sale of securities. Excluding those special items, net income would have been
$9.5 million in the first quarter of 1997, up $1.4 million or 18.1% from the
adjusted year-ago level.
Excluding the above-mentioned special items, the increase in net income
between first quarters primarily reflected an increase of $6.2 million in net
interest income. The increase in net interest income was attributable to higher
earning asset levels and an improvement in the effective interest spread.
Partially offsetting the increase in net interest income were increases of $1.0
million in provision for loan losses and $2.9 million in general and
administrative expense (excluding the previously mentioned expense associated
with the departure of the former chief executive officer). The increase in
general and administrative expense primarily reflected branch expansion,
particularly into supermarket banking, and growth in auto lending.
For the first quarter of 1997, the return on average assets was 0.93% and
the return on average equity was 12.44%. Excluding the previously mentioned
special items, the returns would have been 0.72% and 9.54%, respectively.
At March 31, 1997, assets totaled $5.5 billion, up $832 million or 17.9%
from a year ago. Single family loan originations totaled $432.6 million in the
first quarter of 1997 compared to $189.3 million in the first quarter of 1996.
Of the current quarter total, $20.1 million represented originations for
portfolio of subprime credits ("A-," "B" and "C") as part of Downey's strategy
to enhance the portfolio's net yield. In addition to single family loans, $97.3
million of other loans were originated in the quarter including $62.9 million of
automobile loans and $25.9 million of construction loans.
Non-performing assets declined $1.1 million during the quarter to $60.9
million or 1.11% of total assets.
Based on rules in effect at March 31, 1997, Downey Savings and Loan
Association, F.A. (the "Bank") had core and tangible capital ratios of 6.54% and
a risk-based capital ratio of 12.58%. These capital levels are well above the
"well capitalized" standards of 5% and 10%, respectively, as defined by
regulation.
6
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income totaled $38.1 million in the first quarter of 1997, up
$7.2 million or 23.4% from the same period last year. The improvement between
first quarters reflects an increase of 13.8% in average earning assets and a
higher effective interest spread. The effective interest spread increased from
2.80% in the year-ago first quarter to 3.04% in the current quarter.
Approximately 8 basis points or about one-third of the increase in the effective
interest spread reflects the receipt of approximately $1.0 million of prior
period interest on a non-accrual loan repaid during the quarter. On an adjusted
basis, the effective interest spread was 2.96% in the first quarter, similar to
the fourth quarter 1996 level.
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and resultant
yields, the interest expense on average interest-bearing liabilities and the
resultant costs, expressed both in dollars and rates. The table also sets forth
the net interest income, the interest rate spread and the effective interest
spread. The effective interest spread, which reflects the relative level of
interest-earning assets to interest-bearing liabilities, equals (i) the
difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities, (ii) divided by average
interest-earning assets for the period. The table also sets forth the net
earning balance (the difference between the average balance of interest-earning
assets and the average balance of interest-bearing liabilities) for the periods
indicated. Non-accrual loans are included in the average interest-earning assets
balance. Interest from non-accrual loans is included in interest income only to
the extent that payments are received and to the extent that Downey believes it
will recover the remaining principal balance of the loan. Average balances for
the quarter are computed using the average of each month's daily average balance
during the period.
Three Months Ended
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March 31, 1997 December 31, 1996 March 31, 1996
---------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(Dollars In Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans ......................... $4,762,353 $93,691 7.87% $4,557,540 $88,890 7.80% $4,099,899 $77,840 7.59%
Mortgage-backed securities .... 59,976 984 6.56 63,131 1,052 6.67 59,255 1,033 6.97
Investment securities ......... 201,159 2,909 5.86 197,566 2,980 6.00 256,220 3,466 5.44
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 5,023,488 97,584 7.77 4,818,237 92,922 7.71 4,415,374 82,339 7.46
Non-interest-earning assets ...... 256,277 248,245 241,501
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets ................ $5,279,765 $5,066,482 $4,656,875
==================================================================================================================================
Interest-bearing liabilities:
Deposits ...................... $4,275,799 $51,404 4.88% $4,041,572 $48,640 4.79% $3,817,568 $45,490 4.79%
Borrowings .................... 547,302 8,062 5.97 577,386 8,724 6.01 404,780 5,962 5.92
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing ...... 4,823,101 59,466 5.00 4,618,958 57,364 4.94 4,222,348 51,452 4.90
liabilities
Non-interest-bearing liabilities . 60,158 59,622 49,310
Stockholders' equity ............. 396,506 387,902 385,217
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity ...... $5,279,765 $5,066,482 $4,656,875
==================================================================================================================================
Net interest income/interest rate
spread $38,118 2.77% $35,558 2.77% $30,887 2.56%
Excess of interest-earning assets
over interest-bearing
liabilities .................... 200,387 199,279 193,026
Effective interest rate spread ... 3.04% 2.95% 2.80%
==================================================================================================================================
Changes in Downey's 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
interest income and expense for Downey for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to: (i) changes in volume (changes in volume
multiplied by comparative period rate); (ii) changes in rate (changes in rate
multiplied by comparative period volume); and (iii) 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.
7
Three Months Ended
--------------------------------------------
March 31,1997 versus March 31,1996
Changes Due To
--------------------------------------------
Rate/
(In Thousands) Volume Rate Volume Net
- ----------------------------------------------------------------------------
Interest income:
Loans .................... $ 12,578 $ 2,818 $ 455 $ 15,851
Mortgage-backed securities 13 (61) (1) (49)
Investment securities .... (778) 282 (61) (557)
- ----------------------------------------------------------------------------
Total interest income .. 11,813 3,039 393 15,245
- ----------------------------------------------------------------------------
Interest expense:
Deposits ................. 5,090 736 88 5,914
Borrowings ............... 2,081 81 (62) 2,100
- ----------------------------------------------------------------------------
Total interest expense . 7,171 817 26 8,014
- ----------------------------------------------------------------------------
Change in net interest income $ 4,642 $ 2,222 $ 367 $ 7,231
============================================================================
PROVISION FOR LOAN LOSSES
Provision for loan losses was $2.2 million in the current quarter compared
to $1.2 million in the year-ago quarter. The increase primarily reflects growth
in single family residential and automobile loans. For information regarding the
allowance for loan losses, see "Asset Quality - Valuation Allowances" on page
20.
OTHER INCOME
Total other income was $11.0 million in the first quarter of 1997, up $1.2
million or 11.9% from the year-ago quarter. Favorably impacting other income
were increases in most major categories the more significant of which were $4.7
million in income from real estate held for investment and $0.7 million in loan
and deposit related fees. The increase in income from real estate held for
investment includes a $5.5 million gain from the all cash sale of four
California shopping centers from one joint venture partnership relationship.
Those increases more than offset the $4.5 million decline in net gains on sales
of investment securities, as the year-ago quarter included gains from the sale
of U.S. Treasury securities carried in an available for sale portfolio.
The following table presents a breakdown of the key components comprising
income from real estate and joint venture operations. The above mentioned gain
from the sale of four joint venture shopping centers appears in two categories.
Equity in net income (loss) from joint ventures contains $3.9 million of the
gain, while $1.6 million is reported in the recovery for losses on real estate
and joint ventures category.
Three Months Ended
------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1997 1996 1996 1996 1996
- ---------------------------------------------------------------------------------------------------------------------
Operations, net:
Rental operations, net of expenses .................. $ 851 $ 558 $ 721 $ 285 $ 853
Equity in net income (loss) from joint ventures ..... 3,066 1,050 (30) (256) (709)
Interest from joint ventures ........................ 778 449 488 499 635
- --------------------------------------------------------------------------------------------------------------------
Total operations, net ............................. 4,695 2,057 1,179 528 779
Net gains (losses) on sales of wholly-owned real estate -- 382 38 (9) (19)
Recovery for losses on real estate and joint ventures .. 2,277 605 849 382 1,470
- --------------------------------------------------------------------------------------------------------------------
Income from real estate and joint venture operations $ 6,972 $ 3,044 $ 2,066 $ 901 $ 2,230
====================================================================================================================
8
OPERATING EXPENSE
Operating expense totaled $25.2 million in the first quarter, up $4.2
million or 20.1% from the first quarter of 1996. The increase was explained by
higher general and administrative costs, as the costs associated with the net
operation of real estate acquired in settlement of loans declined by $0.1
million. Included in general and administrative costs was $1.4 million
associated with the departure of the former chief executive officer. Excluding
that amount, general and administrative costs would have increased by $2.9
million or 14.8%. That increase primarily reflected branch expansion,
particularly into supermarket banking, and growth in auto lending.
PROVISION FOR INCOME TAXES
Income taxes for the first quarter totaled $9.4 million, resulting in an
effective tax rate of 43.4%, compared to $8.0 million and 43.1% for the like
quarter of a year ago.
9
FINANCIAL CONDITION
LOANS AND MORTGAGE-BACKED SECURITIES
Total loans and mortgage-backed securities, including those held for sale,
increased $243.1 million during the first quarter to a total of $5.0 billion, or
90.7% of assets, at March 31, 1997. This increase primarily reflected increases
of $229.5 million in the residential one-to-four unit loan portfolio held for
investment and $40.2 million in automobile loans. Those increases were partially
offset by a decline of $32.2 million in the commercial real estate loan
portfolio.
The following table sets forth originations of loans held for investment
and loans originated for sale.
Three Months Ended
------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1997 1996 1996 1996 1996
- ---------------------------------------------------------------------------------------------------------
Loans originated for investment:
Residential - one-to-four ARMs (1) .... $388,707 $363,995 $359,816 $222,270 $113,984
Residential - one-to-four fixed (2) ... 3,904 5,134 7,859 12,794 7,831
Other ................................. 97,261 72,006 86,223 112,294 59,860
- ---------------------------------------------------------------------------------------------------------
Total loans originated for investment 489,872 441,135 453,898 347,358 181,675
Loans originated for sale (primarily
residential - fixed) .................. 40,029 36,969 24,826 30,644 67,502
- ---------------------------------------------------------------------------------------------------------
Total loans originated ................ $529,901 $478,104 $478,724 $378,002 $249,177
=========================================================================================================
(1) For the three months ended March 31, 1997 and December 31, 1996, $4.9
million and $0.2 million, respectively, in loans purchased through
correspondent lending relationships are included.
(2) Primarily represents loans to facilitate the sale of real estate acquired
in settlement of loans and loans that meet certain yield and other approved
guidelines.
Originations of one-to-four unit residential loans totaled $432.6 million
in the first quarter of 1997, of which $392.6 million were for portfolio and
$40.0 million were for sale. This was 6.5% higher than the $406.1 million
originated in the fourth quarter of 1996, and more than double the $189.3
million originated in the year-ago quarter. Of the current quarter total, $20.1
million represented originations of subprime credits ("A-," "B" and "C") as part
of Downey's strategy to enhance the portfolio's net yield. During the current
quarter, 49% of Downey's residential one-to-four unit originations represented
refinancings of existing loans (existing Downey loans were 3%). This is up from
45% (existing Downey loans were 6%) during the 1996 fourth quarter, but down
from 59% (existing Downey loans were 12%) in the year-ago first quarter. In
addition to single family loans, $97.3 million of other loans were originated in
the quarter including $62.9 million of automobile loans and $25.9 million of
construction loans.
During the current quarter, loan originations for investment consisted
primarily of ARMs tied to the Federal Home Loan Bank ("FHLB") Eleventh District
Cost of Funds Index, an index which lags the movement in market interest rates.
This experience is similar to that of recent quarters. Increasingly, the
majority of ARM originations reprice monthly; however, Downey also originates
ARM loans which reprice semi-annually and annually. With respect to ARMs that
primarily adjust monthly, there is a lifetime interest rate cap, but no other
specified limit on periodic interest rate adjustments. Instead, monthly
adjustment ARMs have a periodic cap on changes in the required monthly payments,
which adjust annually. Monthly adjustment ARMs allow for negative amortization
(the addition to loan principal of accrued interest that exceeds the required
loan payment). There is a limit on the amount of negative amortization, such
that the principal plus the added amount cannot exceed 110% of the original loan
amount. At March 31, 1997, $2.1 billion of the ARMs in Downey's loan portfolio
were subject to negative amortization of which $17.7 million represented the
amount of negative amortization included in the loan balance.
Downey also continues to originate residential fixed interest rate mortgage
loans to meet consumer demand, but intends to sell the majority of all such
loans. Sales of loans originated by Downey were $38.2 million for the first
quarter of 1997, compared to $31.0 million in the previous quarter and $62.2
million for the first quarter of 1996. All were secured by residential
one-to-four unit property.
10
At March 31, 1997, Downey had commitments to fund loans amounting to $283.8
million, undrawn lines of credit of $72.8 million, loans in process of $46.1
million and no letters of credit. Downey believes its current sources of funds
will enable it to meet these obligations while exceeding all regulatory
liquidity requirements.
11
The following table sets forth the origination, purchase and sale activity
relating to loans and mortgage-backed securities Downey held for investment and
held for sale.
Three Months Ended
----------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1997 1996 1996 1996 1996
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO:
Loans originated:
Loans secured by real estate:
Residential:
One-to-four units:
Adjustable ..................................... $ 363,704 $ 350,282 $ 349,325 $ 215,553 $ 91,788
Adjustable - subprime .......................... 20,105 13,490 10,491 6,717 2,332
Adjustable - fixed for first three or five years -- -- -- -- 19,864
- ------------------------------------------------------------------------------------------------------------------------
Total adjustable .............................. 383,809 363,772 359,816 222,270 113,984
Fixed .......................................... 3,879 5,134 7,652 12,456 7,831
Fixed - subprime ............................... 25 -- 207 338 --
Five or more units:
Adjustable ..................................... -- -- 6,375 4,641 6,393
Fixed .......................................... -- -- 105 -- 2,148
- ------------------------------------------------------------------------------------------------------------------------
Total residential ............................. 387,713 368,906 374,155 239,705 130,356
Commercial real estate ............................. -- 1,491 -- -- 57
Construction ....................................... 25,851 15,873 14,065 27,630 14,110
Land ............................................... -- -- -- 10,468 --
Non-mortgage:
Commercial:
Secured .......................................... 3,828 2,540 5,309 1,536 --
Unsecured ........................................ -- 1,050 -- -- 1,400
Consumer:
Automobile ....................................... 62,909 46,714 56,863 63,968 33,421
Other consumer ................................... 4,673 4,338 3,506 4,051 2,331
- ------------------------------------------------------------------------------------------------------------------------
Total loans originated ........................ 484,974 440,912 453,898 347,358 181,675
Real estate loans purchased (1) ........................ 4,898 223 -- -- --
- ------------------------------------------------------------------------------------------------------------------------
Total loans originated and purchased ............. 489,872 441,135 453,898 347,358 181,675
Loan repayments ........................................ (235,765) (227,061) (183,629) (205,617) (216,406)
Other net changes (2) .................................. (9,321) (4,077) (5,834) (26,539) (3,528)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for investment 244,786 209,997 264,435 115,202 (38,259)
- ------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO:
Residential, one-to-four units:
Originated whole loans .............................. 40,029 36,969 24,826 30,644 67,502
Loans transferred from the investment portfolio ..... 446 156 170 250 1,215
Originated whole loans sold ......................... (21,555) (16,461) (20,077) (36,708) (62,180)
Loans exchanged for mortgage-backed securities ...... (16,626) (14,537) (5,035) (6,880) --
Other net changes ................................... (10) (11) (5) 31 (63)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for sale ..... 2,284 6,116 (121) (12,663) 6,474
- ------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, net:
Received in exchange for loans ...................... 16,626 14,537 5,035 6,880 --
Purchased ........................................... -- -- 4,705 -- 25,368
Sold ................................................ (16,626) (14,537) (9,660) (6,880) --
Repayments .......................................... (3,501) (3,349) (3,794) (4,176) (4,342)
Other net changes ................................... (503) 738 89 (714) (709)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in mortgage-backed
securities available for sale .................... (4,004) (2,611) (3,625) (4,890) 20,317
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans and mortgage-backed
securities held for sale and available for sale (1,720) 3,505 (3,746) (17,553) 26,791
- ------------------------------------------------------------------------------------------------------------------------
Total net increase (decrease) in loans and mortgage-
backed securities ................................ $ 243,066 $ 213,502 $ 260,689 $ 97,649 $ (11,468)
========================================================================================================================
(1) Primarily one-to-four unit residential loans.
(2) Primarily includes borrowings against and repayments of lines of credit and
construction loans, changes in loss allowances, loans transferred to real
estate acquired in settlement of loans or to the held for sale portfolio,
and interest capitalized on loans (negative amortization).
12
The following table sets forth the composition of Downey's loan and
mortgage-backed securities portfolios held for investment, and held for sale by
type of loan at the dates indicated.
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1997 1996 1996 1996 1996
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO:
Loans secured by real estate:
Residential:
One-to-four units:
Adjustable ................................. $ 4,051,862 $ 3,840,862 $ 3,665,218 $ 3,461,022 $ 3,411,171
Adjustable - subprime ...................... 52,678 32,715 19,450 9,042 2,332
Fixed ...................................... 170,833 172,328 172,930 173,313 169,057
Fixed - subprime ........................... 567 543 544 338 --
- ----------------------------------------------------------------------------------------------------------------------------------
Total one-to-four units .................. 4,275,940 4,046,448 3,858,142 3,643,715 3,582,560
Five or more units:
Adjustable ................................. 42,901 43,050 54,737 48,518 50,245
Fixed ...................................... 13,338 13,857 14,116 14,130 14,897
Commercial real estate:
Adjustable ................................. 127,245 158,656 161,690 162,809 163,737
Fixed ...................................... 101,162 101,953 101,121 101,996 103,021
Construction ..................................... 78,559 66,651 62,651 56,341 37,066
Land ............................................. 18,629 21,177 23,260 26,840 18,782
Non-mortgage:
Commercial:
Secured ....................................... 13,413 9,610 7,093 1,786 250
Unsecured ..................................... 12,037 12,526 12,076 11,469 13,896
Consumer:
Automobile .................................... 242,403 202,186 174,628 134,829 82,093
Other consumer ................................ 46,892 47,281 46,755 47,543 48,405
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment ............ 4,972,519 4,723,395 4,516,269 4,249,976 4,114,952
Increase (decrease) for:
Undisbursed loan funds ........................... (55,447) (49,250) (50,052) (48,681) (28,865)
Deferral of fees and discounts, net of costs ..... 14,111 11,663 9,778 7,741 7,389
Allowance for estimated loss ..................... (30,683) (30,094) (30,278) (27,754) (27,396)
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment, net ....... 4,900,500 4,655,714 4,445,717 4,181,282 4,066,080
- ----------------------------------------------------------------------------------------------------------------------------------
SALE AND TRADING PORTFOLIOS, NET:
Loans held for sale (all one-to-four units):
Adjustable ....................................... 1,800 1,145 2,109 3,243 1,028
Fixed ............................................ 13,349 11,720 4,640 3,627 18,505
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans held for sale ..................... 15,149 12,865 6,749 6,870 19,533
Mortgage-backed securities available for sale:
Adjustable ....................................... 21,367 23,620 24,967 27,247 30,579
Fixed ............................................ 35,896 37,647 38,911 40,256 41,814
- ----------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities available
for sale ................................... 57,263 61,267 63,878 67,503 72,393
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities
held for sale and available for sale.. 72,412 74,132 70,627 74,373 91,926
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed
securities ............................ $ 4,972,912 $ 4,729,846 $ 4,516,344 $ 4,255,655 $ 4,158,006
==================================================================================================================================
Loans held for sale are carried at the lower of cost or market. At March
31, 1997, no valuation allowance was required as the market value exceeded book
value on an aggregate basis.
13
Mortgage-backed securities available for sale are carried at fair value
and, at March 31, 1997, reflect an unrealized loss of $0.2 million. The current
quarter-end unrealized loss, less the associated tax effect of $0.1 million, is
reflected as a separate component of stockholders' equity until realized.
INVESTMENTS IN REAL ESTATE AND JOINT VENTURES
Downey's investment in real estate and joint ventures amounted to $41.0
million at March 31, 1997, compared to $46.5 million at December 31, 1996, and
$42.9 million at March 31, 1996. The current quarter decline primarily reflects
the sale of four California shopping centers from one joint venture partnership
relationship.
The following table is a summary of the activity of Downey's allowance for
real estate held for investment for the periods indicated.
Three Months Ended
---------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1997 1996 1996 1996 1996
- ---------------------------------------------------------------------------------------------------
Balance at beginning of period .... $ 30,071 $ 31,316 $ 32,185 $ 32,868 $ 34,338
Provision ......................... (2,277) (605) (849) (382) (1,470)
Charge-offs ....................... (3,945) (680) (54) (301) --
Recoveries ........................ -- 40 34 -- --
- --------------------------------------------------------------------------------------------------
Balance at end of period .......... $ 23,849 $ 30,071 $ 31,316 $ 32,185 $ 32,868
==================================================================================================
In addition to losses charged against the allowance for loan losses, Downey
has 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 such assets. The
following table is a summary of the activity of Downey's allowance for real
estate acquired in settlement of loans for the periods indicated.
Three Months Ended
--------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1997 1996 1996 1996 1996
- ---------------------------------------------------------------------------------------------------
Balance at beginning of period .... $ 1,078 $ 1,132 $ 971 $ 1,224 $ 1,217
Provision ......................... 597 622 278 4 754
Charge-offs ....................... (341) (676) (117) (257) (747)
Recoveries ........................ -- -- -- -- --
- --------------------------------------------------------------------------------------------------
Balance at end of period .......... $ 1,334 $ 1,078 $ 1,132 $ 971 $ 1,224
==================================================================================================
DEPOSITS
At March 31, 1997, deposits totaled $4.5 billion, up $603.8 million or
15.5% from the year-ago quarter end, and up $321.3 million or 7.7% from year-end
1996. All categories except money market accounts increased between first
quarters, with the majority of the increase occurring in certificates of
deposit. At quarter end, deposits totaling $173.0 million were associated with
24 supermarket branches opened since mid-June 1996. The following table sets
forth information concerning Downey's deposits and average rates paid at the
dates indicated.
14
March 31, 1997 December 31, 1996 September 30, 1996 June 30, 1996 March 31, 1996
---------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
(Dollars in Thousands) Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Regular passbook ...... 2.94% $ 419,627 2.90% $ 416,868 2.89% $ 414,793 2.76% $ 411,573 2.65% $ 399,198
Money market
accounts ............ 2.55 98,517 2.52 100,750 2.52 101,999 2.39 105,649 2.30 113,103
Checking accounts ..... 0.72 348,884 0.74 313,980 0.73 300,830 0.74 299,057 0.72 316,109
Certificates of
deposit:
Less than 3.00% ... 2.65 33,667 2.65 39,061 2.70 43,870 2.71 48,088 2.77 50,460
3.00-3.49 ......... 3.03 301 3.03 723 3.07 1,085 3.06 695 3.16 974
3.50-3.99 ......... 3.88 54 3.99 79 3.97 102 3.95 1,360 3.81 4,081
4.00-4.49 ......... 4.39 58,045 4.39 63,577 4.30 73,695 4.21 77,341 4.21 84,523
4.50-4.99 ......... 4.88 131,700 4.87 186,576 4.85 347,265 4.85 437,075 4.86 319,664
5.00-5.99 ......... 5.61 2,833,931 5.54 2,489,852 5.49 2,302,221 5.47 2,191,299 5.48 2,052,359
6.00-6.99 ......... 6.13 560,129 6.17 536,307 6.30 295,178 6.39 235,150 6.46 480,486
7.00 and greater .. 7.14 9,582 7.15 25,329 7.12 34,353 7.18 47,258 7.18 69,701
- ------------------------------------------------------------------------------------------------------------------------------------
Totalcertificates
of deposit ........ 5.62 3,627,409 5.56 3,341,504 5.44 3,097,769 5.40 3,038,266 5.53 3,062,248
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits ...... 4.92% $4,494,437 4.86% $4,173,102 4.74% $3,915,391 4.68% $3,854,545 4.75% $3,890,658
====================================================================================================================================
BORROWINGS
During the 1997 first quarter, borrowings declined $58.6 million to $536.8
million, reflecting declines in all categories, the more significant of which
was $56.4 million in FHLB advances. The following table sets forth information
concerning Downey's FHLB advances and other borrowings at the dates indicated.
March 31, December 31, September 30, June 30, March 31,
(Dollars in Thousands) 1997 1996 1996 1996 1996
- -----------------------------------------------------------------------------------------------------------------
FHLB advances .................................. $330,479 $386,883 $397,147 $239,307 $181,137
Other borrowings:
Commercial paper ............................ 196,125 198,113 186,544 178,243 148,358
Real estate notes ........................... 10,188 10,349 10,443 10,560 2,721
- ----------------------------------------------------------------------------------------------------------------
Total borrowings ............................ $536,792 $595,345 $594,134 $428,110 $332,216
================================================================================================================
Weighted average rate on borrowings during the
period ...................................... 5.97% 6.01% 5.90% 6.06% 5.92%
Total borrowings as a percentage of total assets 9.79 11.45 11.99 9.08 7.14
================================================================================================================
ASSET/LIABILITY MANAGEMENT
The following table sets forth the repricing frequency of Downey's major
asset and liability categories as of March 31, 1997, as well as certain
information regarding the repricing and maturity differences between
interest-earning assets and interest-bearing liabilities ("gap") in future
periods. The repricing frequencies have been determined 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). Prepayment rates are
assumed on substantially all of Downey's loan portfolio based upon its
historical loan prepayment experience and anticipated future prepayments.
Repricing mechanisms on certain of Downey's assets are subject to limitations,
such as caps on the amount that interest rates and payments on Downey's loans
may adjust, and accordingly, such assets do not normally respond as completely
or rapidly as Downey's liabilities to changes in market interest rates. The
interest rate sensitivity of Downey's assets and liabilities illustrated in the
table would vary substantially if different assumptions were used or if actual
experience differed from the assumptions set forth.
15
March 31, 1997
-------------------------------------------------------------------
Within 7 - 12 1 - 5 5 - 10 Over Total
(Dollars in Thousands) 6 Months Months Years Years 10 Years Balance
- --------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Investment securities and Federal Home Loan
Bank stock .............................. (1) $ 98,668 $ - $130,058 $ -- $ -- $ 228,726
Loans and mortgage-backed securities:
Mortgage-backed securities .............. (2) 27,274 4,023 20,388 3,516 2,062 57,263
Real estate - mortgage:
Residential:
ARM .................................. (2) 3,660,704 482,773 1,676 -- -- 4,145,153
Fixed ................................ (2) 33,541 15,663 83,176 41,131 24,335 197,846
Commercial ............................. (2) 152,170 11,614 44,630 18,726 -- 227,140
Construction ........................... (2) 36,260 -- -- -- -- 36,260
Consumer ................................ (2) 84,034 36,769 163,305 -- -- 284,108
Commercial .............................. (2) 25,142 -- -- -- -- 25,142
- --------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities 4,019,125 550,842 313,175 63,373 26,397 4,972,912
- --------------------------------------------------------------------------------------------------------------------------
Total ................................... $4,117,793 $ 550,842 $443,233 $ 63,373 $ 26,397 $5,201,638
==========================================================================================================================
Deposits and borrowings:
Interest bearing deposits:
Fixed maturity deposits ................. (3) $1,967,582 $1,208,100 $451,335 $ 392 $ -- $3,627,409
Money market accounts ................... (4) 98,517 -- -- -- -- 98,517
Checking accounts ....................... (4) 247,877 -- -- -- -- 247,877
Passbook accounts ....................... (4) 419,627 -- -- -- -- 419,627
Non-interest bearing deposits ............. 101,007 -- -- -- -- 101,007
- --------------------------------------------------------------------------------------------------------------------------
Total deposits ......................... 2,834,610 1,208,100 451,335 392 -- 4,494,437
- --------------------------------------------------------------------------------------------------------------------------
Borrowings ................................ 359,168 113,345 51,291 12,988 -- 536,792
- --------------------------------------------------------------------------------------------------------------------------
Total deposits and borrowings ........... $3,193,778 $1,321,445 $502,626 $ 13,380 $ -- $5,031,229
==========================================================================================================================
Excess (shortfall) of interest-earning assets
over interest-bearing liabilities ......... $ 924,015 $ (770,603) $(59,393) $ 49,993 $ 26,397 $ 170,409
Cumulative gap .............................. 924,015 153,412 94,019 $144,012 $170,409
Cumulative gap - as a % of total assets:
March 31, 1997 ......................... 16.85% 2.80% 1.71% 2.63% 3.11%
December 31, 1996 ...................... 16.71 2.68 0.50 1.47 3.04
March 31, 1996 ......................... 9.45 2.99 2.67 3.33 3.67
==========================================================================================================================
(1) Based upon contractual maturity and repricing date.
(2) Based upon contractual maturity, repricing date and projected repayment and
prepayments of principal.
(3) Based upon contractual maturity or repricing date.
(4) Subject to immediate repricing.
The six-month gap at March 31, 1997, was a positive 16.85% (i.e., more
interest earning assets reprice within six months than interest-bearing
liabilities). This compares to a positive six-month gap of 16.71% at December
31, 1996, and 9.45% at March 31, 1996. Downey's strategy of emphasizing the
origination of adjustable rate mortgages continues to be pursued. For the twelve
months ended March 31, 1997, Downey originated and purchased for investment $1.7
billion of adjustable rate loans and mortgage-backed securities which
represented approximately 96% of all loans and mortgage-backed securities
originated and purchased for investment during the period.
At March 31, 1997, 98% of Downey's interest-earning assets mature, reprice
or are estimated to prepay within five years, up slightly from 97% at December
31, 1996, but down slightly from 99% at March 31, 1996. At March 31, 1997, loans
and mortgage-backed securities with adjustable interest rates represented 89% of
Downey's loans and mortgage-backed securities portfolios. During the first
quarter of 1997, Downey continued to offer residential fixed rate loan products
to its customers primarily for sale in the secondary market. Downey prices and
originates such fixed rate mortgage loans for sale into the secondary market in
order to increase opportunities for originating ARMs and generate fee and
servicing income.
16
Downey does originate fixed rate loans for portfolio to facilitate the sale of
real estate acquired in settlement of loans and which meet certain yield and
other approved guidelines.
At March 31, 1997, $4.7 billion or 94% of the 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
$4.5 billion or 94% and $3.9 billion or 93%, at December 31, 1996, and March 31,
1996, respectively.
The following table sets forth on a consolidated basis the interest rate
spread on Downey's interest-earning assets and interest-bearing liabilities as
of the dates indicated.
March 31, December 31, September 30, June 30, March 31,
1997 1996 1996 1996 1996
- ---------------------------------------------------------------------------------------------------------------
Weighted average yield:
Loan and mortgage-backed securities portfolio 7.74% 7.77% 7.71% 7.76% 7.70%
Investment securities ....................... 5.71 6.11 6.11 5.77 5.79
- ------------------------------------------------------------------------------------------------------------
Earning assets yield ........................ 7.66 7.71 7.64 7.67 7.60
- ------------------------------------------------------------------------------------------------------------
Weighted average cost:
Savings deposits ............................ 4.92 4.86 4.74 4.68 4.75
Borrowings:
FHLB advances ............................. 5.83 5.80 5.76 5.77 6.01
Other borrowings .......................... 5.53 5.60 5.61 5.53 5.49
- ------------------------------------------------------------------------------------------------------------
Combined borrowings ......................... 5.72 5.73 5.71 5.67 5.77
- ------------------------------------------------------------------------------------------------------------
Combined funds .............................. 5.01 4.97 4.86 4.77 4.83
- ------------------------------------------------------------------------------------------------------------
Interest rate spread ........................... 2.65% 2.74% 2.78% 2.90% 2.77%
============================================================================================================
The weighted average yield on the loan and mortgage-backed securities
portfolios at March 31, 1997, decreased to 7.74%, compared to 7.77% at December
31, 1996, and 7.70% at March 31, 1996. At March 31, 1997, the single family ARM
portfolio, including mortgage-backed securities, totaled $4.1 billion with a
weighted average rate of 7.33%, compared to $3.3 billion with a weighted average
rate of 7.38% at December 31, 1996, and $3.4 billion with a weighted average
rate of 7.53% at March 31, 1996.
ASSET QUALITY
Non-Performing Assets
Non-performing assets decreased during the quarter by $1.1 million to $60.9
million at March 31, 1997, or 1.11% of assets. All of Downey's non-performing
assets at March 31, 1997, were located in California with the exception of one
property acquired in settlement of a loan located in Arizona. Non-performing
assets at quarter end include non-accrual loans aggregating $18.4 million which
were not contractually past due, but were deemed non-accrual due to management's
assessment of the borrower's ability to pay.
17
The following table summarizes the non-performing assets of Downey at the
dates indicated.
March 31, December 31, September 30, June 30, March 31,
(Dollars in Thousands) 1997 1996 1996 1996 1996
- ------------------------------------------------------------------------------------------------------------------
Non-accrual loans:
One-to-four unit residential .................... $23,739 $22,885 $26,613 $26,034 $24,551
Other ........................................... 19,733 22,136 24,097 21,146 50,259
- -----------------------------------------------------------------------------------------------------------------
Total non-accrual loans ........................ 43,472 45,021 50,710 47,180 74,810
Real estate acquired in settlement of loans, net .... 17,202 16,078 16,332 15,452 19,454
Repossessed automobiles ............................. 270 928 433 232 239
- -----------------------------------------------------------------------------------------------------------------
Gross non-performing assets ......................... $60,944 $62,027 $67,475 $62,864 $94,503
=================================================================================================================
Allowance for loan losses (1):
Amount ......................................... $30,683 $30,094 $30,278 $27,754 $27,396
As a percentage of non-performing loans ........ 70.58% 66.84% 59.71% 58.83% 36.62%
Non-performing assets as a percentage of total assets 1.11 1.19 1.36 1.33 2.03
=================================================================================================================
(1) Allowance for loan losses does not include the allowance for real estate
and real estate acquired in settlement of loans.
At March 31, 1997, the recorded investment in loans for which impairment
has been recognized totaled $14.1 million (all of which were on non-accrual
status). The total allowance for possible losses related to such loans was $1.5
million. During the first quarter of 1997, total interest recognized on the
impaired loan portfolio, on a cash basis, was $0.6 million.
Delinquent Loans
During the 1997 first quarter, total delinquencies increased $1.8
million or 4.1%. However, as a percent of loans, delinquencies declined from
0.90% at December 31, 1996 to 0.89% at March 31, 1997. The dollar increase
during the quarter occurred primarily in the residential one-to-four units
category. Overall, the 30-59 days and 90+ days categories increased $0.8 million
and $1.4 million, respectively, partially offset by a decrease in the 60-89 days
category of $0.4 million.
18
The following table indicates the amounts of Downey's past due loans.
March 31, 1997 December 31, 1996
--------------------------------------- ---------------------------------------
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 .................... $15,221 $ 5,095 $20,320 $40,636 $14,717 $ 5,502 $18,549 $38,768
Five or more units ................... -- -- -- -- -- -- -- --
Commercial .............................. -- -- 279 279 -- -- -- --
Construction ............................ -- -- -- -- -- -- -- --
Land .................................... -- -- -- -- -- -- 566 566
- -------------------------------------------------------------------------------------------------------------------------------
Total real estate loans .............. 15,221 5,095 20,599 40,915 14,717 5,502 19,115 39,334
Non-mortgage:
Commercial ........................... -- -- -- -- -- -- -- --
Consumer:
Automobile ......................... 2,419 278 324 3,021 2,080 328 274 2,682
Other consumer ..................... 69 34 86 189 158 15 181 354
- -------------------------------------------------------------------------------------------------------------------------------
Total loans ........................ $17,709 $ 5,407 $21,009 $44,125 $16,955 $ 5,845 $19,570 $42,370
================================================================================================================================
Delinquencies as a percentage of total
loans 0.36% 0.11% 0.42% 0.89% 0.36% 0.12% 0.41% 0.90%
================================================================================================================================
September 30, 1996 June 30, 1996
---------------------------------------- ----------------------------------------
Loans secured by real estate:
Residential:
One-to-four units .................... $15,294 $ 5,579 $21,569 $42,442 $14,076 $ 7,544 $21,122 $42,742
Five or more units ................... -- -- -- -- -- -- -- --
Commercial .............................. 1,767 -- 1,926 3,693 -- -- 2,056 2,056
Construction ............................ -- -- -- -- -- -- -- --
Land .................................... -- -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total real estate loans .............. 17,061 5,579 23,495 46,135 14,076 7,544 23,178 44,798
Non-mortgage:
Commercial ........................... -- -- -- -- -- -- 115 115
Consumer:
Automobile ......................... 1,037 177 224 1,438 945 147 134 1,226
Other consumer ..................... 258 88 266 612 160 403 215 778
- --------------------------------------------------------------------------------------------------------------------------------
Total loans ........................ $18,356 $ 5,844 $23,985 $48,185 $15,181 $ 8,094 $23,642 $46,917
================================================================================================================================
Delinquencies as a percentage of total
loans 0.41% 0.13% 0.53% 1.07% 0.36% 0.19% 0.56% 1.10%
================================================================================================================================
March 31, 1996
----------------------------------------
Loans secured by real estate:
Residential:
One-to-four units .................... $15,767 $ 8,093 $20,038 $43,898
Five or more units ................... 107 -- -- 107
Commercial .............................. -- -- 2,056 2,056
Construction ............................ -- -- -- --
Land .................................... -- -- -- --
- ------------------------------------------------------------------------------------
Total real estate loans .............. 15,874 8,093 22,094 46,061
Non-mortgage:
Commercial ........................... -- -- 115 115
Consumer:
Automobile ......................... 355 226 190 771
Other consumer ..................... 90 123 195 408
- ------------------------------------------------------------------------------------
Total loans ........................ $16,319 $ 8,442 $22,594 $47,355
====================================================================================
Delinquencies as a percentage of total
loans 0.39% 0.20% 0.54% 1.14%
====================================================================================
(1) All 90 day or greater delinquencies are on non-accrual status and reported
as part of non-performing assets.
19
Valuation Allowances
Allowances for losses on all assets (including loans) were $56.5 million,
$61.8 million, and $62.1 million, at March 31, 1997, December 31, 1996, and
March 31, 1996, respectively. For information on valuation allowances associated
with real estate and joint venture loans, see "Investments in Real Estate and
Joint Ventures" on page 14.
The total allowance for possible loan losses was $30.7 million at March 31,
1997, compared to $30.1 million at December 31, 1996, and $27.4 million at March
31, 1996. Included in the current quarter-end total allowance was $30.3 million
of general loan valuation allowances, of which $2.8 million represents an
unallocated portion. These general loan valuation allowances may be included as
a component of risk-based capital, up to a maximum of 1.25% of risk-weighted
assets. Net charge-offs totaled $1.6 million in the 1997 first quarter, compared
to $1.7 million in the year-ago quarter. Included in the current quarter net
charge-offs were $0.6 million associated with one-to-four unit residential
properties and $0.9 million associated with automobile loans.
The following table is a summary of the activity of Downey's allowance for
loan losses for the periods indicated.
Three Months Ended
------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1997 1996 1996 1996 1996
- ---------------------------------------------------------------------------------------------
Balance at beginning of period $ 30,094 $ 30,278 $ 27,754 $ 27,396 $ 27,943
Provision .................... 2,155 1,674 4,092 2,200 1,171
Charge-offs .................. (1,783) (2,181) (1,657) (2,059) (1,763)
Recoveries ................... 217 323 89 217 45
- ---------------------------------------------------------------------------------------------
Balance at end of period ..... $ 30,683 $ 30,094 $ 30,278 $ 27,754 $ 27,396
=============================================================================================
20
The following table indicates the allocation of the total valuation
allowance for loan losses to the various categories of loans for the dates
indicated.
March 31, 1997 December 31, 1996 September 30, 1996
------------------------------ -------------------------------- ---------------------------------
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 ... $13,674 $4,275,940 0.32% $13,241 $4,046,448 0.33% $12,679 $3,858,142 0.33%
Five or more units .. 509 56,239 0.91 517 56,907 0.91 583 68,853 0.85
Commercial ............ 6,421 228,407 2.81 6,956 260,609 2.67 8,307 262,811 3.16
Construction .......... 925 78,559 1.18 773 66,651 1.16 727 62,651 1.16
Land .................. 254 18,629 1.36 466 21,177 2.20 495 23,260 2.13
Commercial non-mortgage:
Secured ............. 134 13,413 1.00 96 9,610 1.00 71 7,093 1.00
Unsecured ........... 121 12,037 1.00 140 12,526 1.12 137 12,076 1.13
Consumer:
Automobile .......... 5,132 242,403 2.12 4,303 202,186 2.13 3,681 174,628 2.11
Other consumer ...... 713 46,892 1.52 802 47,281 1.70 798 46,755 1.71
Not specifically allocated 2,800 -- -- 2,800 -- -- 2,800 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans held for
investment ........ $30,683 $4,972,519 0.62% $30,094 $4,723,395 0.64% $30,278 $4,516,269 0.67%
=================================================================================================================================
June 30, 1996 March 31, 1996
------------------------------ --------------------------------
Loans secured by real estate:
Residential:
One-to-four units ... $12,212 $3,643,715 0.34% $12,079 $3,582,560 0.34%
Five or more units .. 542 62,648 0.87 836 65,142 1.28
Commercial ............ 6,864 264,805 2.59 7,577 266,758 2.84
Construction .......... 654 56,341 1.16 433 37,066 1.17
Land .................. 785 26,840 2.92 776 18,782 4.13
Commercial non-mortgage:
Secured ............. 18 1,786 1.00 3 250 1.00
Unsecured ........... 245 11,469 2.14 269 13,896 1.94
Consumer:
Automobile .......... 2,762 134,829 2.05 1,695 82,093 2.06
Other consumer ...... 872 47,543 1.83 928 48,405 1.92
Not specifically allocated 2,800 -- -- 2,800 -- --
- ----------------------------------------------------------------------------------------------
Total loans held for
investment ........ $27,754 $4,249,976 0.65% $27,396 $4,114,952 0.67%
==============================================================================================
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of funds generated in the first quarter of 1997 were a
net increase in deposits of $321.3 million and principal repayments (including
prepayments, but excluding Downey refinances) on loans and mortgage-backed
securities held for investment and available for sale of $224.1 million.
These funds were used primarily to originate loans held for investment of
$466.3 million (net of Downey refinances of $15.2 million) and repay FHLB
advances and other borrowings which declined by $58.6 million in the aggregate.
At March 31, 1997, the Bank's ratio of regulatory liquidity was 5.46%,
compared to 5.26% at December 31, 1996, and 5.20% at March 31, 1996. The ratio
remains above the regulatory minimum of 5%.
Stockholders' equity totaled $400.5 million at March 31, 1997, compared to
$391.6 million at December 31, 1996, and $387.5 million at March 31, 1996.
21
REGULATORY CAPITAL
The following table is a reconciliation of the Bank's stockholder's equity
to federal regulatory capital as of March 31, 1997. The core and tangible
capital ratios were 6.54% and the risk-based capital ratio was 12.58%. The
Bank's capital ratios exceed the "well capitalized" standards of 5% for core and
tangible and 10% for risk-based, as defined by regulation.
Tangible Capital Core Capital Risk-Based Capital
---------------- --------------- ------------------
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------
Stockholder's Equity ................................. $391,825 $391,825 $391,825
Adjustments:
Deductions:
Investment in subsidiary, primarily real estate . (35,954) (35,954) (35,954)
Goodwill ........................................ (5,451) (5,451) (5,451)
Core deposit premium ............................ (436) (436) (436)
Non-permitted mortgage servicing rights ......... (139) (139) (139)
Additions:
Unrealized loss on securities available for sale 2,947 2,947 2,947
General loss allowance - Investment in DSL ...... 1,841 1,841 1,841
Loan and lease general valuation allowances (1) . -- -- 30,310
- ---------------------------------------------------------------------------------------------------------------------
Regulatory capital ................................... 354,633 6.54% 354,633 6.54% 384,943 12.58%
Well capitalized requirement ......................... 81,399 1.50 (2) 271,329 5.00 306,010 10.00 (3)
- ---------------------------------------------------------------------------------------------------------------------
Excess $273,234 5.04% $ 83,304 1.54% $ 78,933 2.58%
=====================================================================================================================
(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%, which
the Bank meets and exceeds with a ratio of 11.59%.
22
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(A) None.
(B) The Registrant filed with the Commission a Current Report on Form 8-K,
dated February 7, 1997, with respect to senior management transition.
SIGNATURES: Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
DOWNEY FINANCIAL CORP.
Date: May 1, 1997 /s/ JAMES W. LOKEY
-------------------------------------------------
James W. Lokey
President and Chief Executive Officer
Date: May 1, 1997 /s/ THOMAS E. PRINCE
-------------------------------------------------
Thomas E. Prince
Executive Vice President/ Chief Financial Officer
23