================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
For the quarterly period ended June 30, 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 June 30, 1997, 26,733,496 shares of the Registrant's Common Stock, $0.01
par value were outstanding.
================================================================================
DOWNEY FINANCIAL CORP.
JUNE 30, 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..................................................... 25
Item 6 Exhibits and Reports on Form 8-K............................ 25
i
PART I - FINANCIAL INFORMATION
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31, June 30,
(Dollars in Thousands, Except Per Share Data) 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Cash .................................................................... $ 55,229 $ 67,221 $ 48,313
Federal funds ........................................................... 248 6,038 28,756
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents ........................................... 55,477 73,259 77,069
U.S. Treasury and agency obligations and other investment securities
available for sale, at fair value ................................... 141,861 141,999 130,297
Municipal securities being held to maturity, at amortized cost (estimated
market value of $6,975 at June 30, 1997 and December 31, 1996, and
$7,075 at June 30, 1996) ............................................ 6,997 6,997 7,098
Loans held for sale, at the lower of cost or market ..................... 22,687 12,865 6,870
Mortgage-backed securities available for sale, at fair value ............ 54,607 61,267 67,503
Loans receivable held for investment .................................... 5,362,714 4,655,714 4,181,282
Investments in real estate and joint ventures ........................... 36,145 46,498 44,664
Real estate acquired in settlement of loans ............................. 14,357 16,078 15,452
Premises and equipment .................................................. 97,501 96,643 94,952
Federal Home Loan Bank stock, at cost ................................... 42,734 41,447 40,197
Other assets ............................................................ 50,590 45,390 46,910
- ---------------------------------------------------------------------------------------------------------------------
$ 5,885,670 $ 5,198,157 $ 4,712,294
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits ........................................................ $ 4,291,309 $ 3,859,122 $ 3,555,488
Checking deposits ....................................................... 339,803 313,980 299,057
- ---------------------------------------------------------------------------------------------------------------------
Total deposits ...................................................... 4,631,112 4,173,102 3,854,545
Federal Home Loan Bank advances ......................................... 550,736 386,883 239,307
Commercial paper ........................................................ 236,809 198,113 178,243
Other borrowings ........................................................ 10,063 10,349 10,560
Accounts payable and accrued liabilities ................................ 38,744 28,357 33,608
Deferred income taxes ................................................... 10,241 9,782 4,112
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities ................................................... 5,477,705 4,806,586 4,320,375
- ---------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock, par value of $0.01 per share; authorized 50,000,000 shares;
outstanding 26,733,496 shares at June 30, 1997, 25,459,079 shares at
December 31, 1996 and 16,972,905 shares at June 30, 1996 ............ 267 255 170
Additional paid-in capital .............................................. 22,612 22,607 22,696
Unrealized losses on securities available for sale ...................... (1,648) (1,559) (3,012)
Retained earnings ....................................................... 386,734 370,268 372,065
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity .......................................... 407,965 391,571 391,919
- ---------------------------------------------------------------------------------------------------------------------
$ 5,885,670 $ 5,198,157 $ 4,712,294
=====================================================================================================================
See accompanying notes to consolidated financial statements.
1
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------
(Dollars in Thousands, Except Per Share Data) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans receivable ........................................... $ 99,373 $ 79,022 $ 193,064 $ 156,862
U.S. Treasury and agency securities ........................ 2,053 1,913 4,087 3,834
Mortgage-backed securities ................................. 927 1,130 1,911 2,163
Other investments .......................................... 923 1,084 1,798 2,629
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income .................................. 103,276 83,149 200,860 165,488
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits ................................................... 56,102 44,820 107,506 90,310
Borrowings ................................................. 9,891 5,214 17,953 11,176
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense ................................. 65,993 50,034 125,459 101,486
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME ........................................ 37,283 33,115 75,401 64,002
PROVISION FOR LOAN LOSSES .................................. 1,873 2,200 4,028 3,371
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses .... 35,410 30,915 71,373 60,631
- ----------------------------------------------------------------------------------------------------------------------------
OTHER INCOME, NET:
Loan and deposit related fees .............................. 2,629 1,731 4,918 3,348
Real estate and joint ventures held for investment, net:
Net gains (losses) on sales of wholly owned real estate .. 305 (9) 305 (28)
Reduction of loss on real estate and joint ventures ...... 487 382 2,764 1,852
Operations, net .......................................... 597 528 5,292 1,307
Secondary marketing activities:
Loan servicing fees ...................................... 345 390 751 652
Net gains on sales of loans and mortgage-backed securities 330 376 663 931
Net gains on sales of investment securities ................ -- -- -- 4,473
Other ...................................................... 660 604 1,651 1,289
- ----------------------------------------------------------------------------------------------------------------------------
Total other income, net ................................ 5,353 4,002 16,344 13,824
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE:
Salaries and related costs ................................. 13,641 11,108 28,038 21,810
Premises and equipment costs ............................... 3,777 2,988 7,301 5,842
Advertising expense ........................................ 2,423 654 3,681 1,208
Professional fees .......................................... 1,192 784 2,001 1,492
SAIF insurance premiums and regulatory assessments ......... 849 2,332 1,655 4,689
Other general and administrative expense ................... 3,623 2,920 6,946 5,528
- ----------------------------------------------------------------------------------------------------------------------------
Total general and administrative expense ................. 25,505 20,786 49,622 40,569
- ----------------------------------------------------------------------------------------------------------------------------
Net operation of real estate acquired in settlement of loans 641 187 1,568 1,234
Amortization of excess of cost over fair value of net assets
acquired 134 134 266 266
- ----------------------------------------------------------------------------------------------------------------------------
Total operating expense ................................ 26,280 21,107 51,456 42,069
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES .................................... 14,483 13,810 36,261 32,386
Income taxes .................................................. 6,173 5,946 15,621 13,958
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME ................................................. $ 8,310 $ 7,864 $ 20,640 $ 18,428
============================================================================================================================
PER SHARE INFORMATION:
NET INCOME .................................................... $ 0.31 $ 0.30 $ 0.77 $ 0.69
============================================================================================================================
CASH DIVIDENDS PAID ........................................... $ 0.080 $ 0.076 $ 0.156 $ 0.152
============================================================================================================================
Weighted average shares outstanding ........................... 26,781,938 26,746,232 26,791,598 26,747,731
============================================================================================================================
See accompanying notes to consolidated financial statements.
2
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
--------------------------
(In Thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................................... $ 20,640 $ 18,428
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................... 4,680 3,780
Provision for losses on loans, real estate acquired in settlement of loans,
investments in real estate and joint ventures and other assets ................. 2,298 2,279
Net gains on sales of loans and mortgage-backed securities, investment securities,
real estate and other assets ................................................... (4,488) (5,709)
Interest capitalized on loans (negative amortization) ............................ (6,453) (5,204)
Federal Home Loan Bank dividends ................................................. (1,287) (1,051)
Net change in loans receivable - held for sale ..................................... (52,617) 1,319
Other, net ......................................................................... 437 5,746
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities .................................. (36,790) 19,588
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Sales of investment securities - available for sale ............................. -- 189,541
Sales of mortgage-backed securities - available for sale ........................ 43,566 7,266
Sales of wholly owned real estate and real estate acquired in settlement of loans 8,224 3,058
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 .......................................... (23,193) --
Loans receivable originated - held for investment (net of refinances of $39,573 and
$44,168 at June 30, 1997 and 1996, respectively) ................................. (1,146,918) (471,202)
Principal payments on loans receivable - held for investment and mortgage-backed
securities - available for sale .................................................. 474,273 390,848
Net change in undisbursed loan funds ............................................... (714) 15,353
Net change in investments in real estate held for investment ....................... 11,980 (2,717)
Other, net ......................................................................... (4,308) (6,815)
- --------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities ................................................ (637,090) (60,491)
- --------------------------------------------------------------------------------------------------------------------
3
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Six Months Ended
June 30,
--------------------------
(In Thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ........................................................... $ 458,010 $ 64,324
Net decrease in securities sold under agreements to repurchase ..................... -- (16,099)
Proceeds from Federal Home Loan Bank advances ...................................... 662,500 400,000
Repayments of Federal Home Loan Bank advances ...................................... (498,647) (381,408)
Net increase (decrease) in other borrowings ........................................ 38,410 (10,601)
Cash dividends ..................................................................... (4,175) (4,074)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities ............................................. 656,098 52,142
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents .................................. (17,782) 11,239
Cash and cash equivalents at beginning of year ........................................ 73,259 65,830
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................................ $ 55,477 $ 77,069
====================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ......................................................................... $ 124,238 $ 102,755
Income taxes ..................................................................... 6,240 14,025
Supplemental disclosure of non-cash investing:
Loans exchanged for mortgage-backed securities ..................................... 44,102 6,880
Real estate acquired in settlement of loans ........................................ 13,498 13,312
Loans to facilitate the sale of real estate acquired in settlement of loans ........ 10,422 13,663
====================================================================================================================
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 June 30, 1997, December 31, 1996 and June
30, 1996, and the results of operations for the three months and six months
ended June 30, 1997 and 1996, and changes in cash flows for the six months ended
June 30, 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) - 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 (3) - 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. Prior period outstanding shares and stock options
have been adjusted for stock dividends and stock splits.
NOTE (4) - DERIVATIVES
As part of its secondary marketing activities, Downey utilizes forward sale
contracts to hedge the value of loans originated for sale against adverse
changes in interest rates. At June 30, 1997, such contracts amounted to
approximately $25 million. These contracts have a high correlation to the price
movement of the loans being hedged. There is no recognition of unrealized gains
and 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.
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 second quarter of 1997 totaled $8.3 million, or $0.31
per share, up 5.7% from the $7.9 million, or $0.30 per share, earned in the
second quarter of 1996. For the six months ended June 30, 1997, net income
amounted to $20.6 million, or $0.77 per share, up 12.0% from the $18.4 million,
or $0.69 per share, earned in the same period of last year.
The increase in net income between second quarters reflected an increase in
net interest income, a decrease in provision for loan losses and an increase in
other income. Net interest income increased $4.2 million or 12.6% due to a 23.4%
increase in average earning assets as the effective interest spread declined
between quarters. Provision for loan losses declined $0.3 million, while total
other income increased $1.4 million primarily reflecting increases in loan and
deposit related fees and income from real estate held for investment. Those
positive factors were partially offset, however, by a $4.7 million increase in
general and administrative costs and a $0.5 million increase in costs associated
with the net operation of real estate acquired in settlement of loans. The
increase in general and administrative expense was due, in part, to branch
expansion, particularly into supermarket banking, higher advertising
expenditures, and growth in auto lending.
For the second quarter of 1997, the return on average assets was 0.59% and
the return on average equity was 8.24%, bringing the returns for the first six
months of 1997 to 0.75% and 10.32%, respectively.
At June 30, 1997, assets totaled $5.9 billion, up 24.9% from a year ago.
Single family loan originations were a record $714.9 million in the second
quarter of 1997 compared to $265.7 million in the second quarter of 1996 and
$432.6 million in the first quarter of 1997. Of the current quarter total, $31.9
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, $110.4 million of other loans were originated
in the quarter including $73.4 million of automobile loans.
Non-performing assets declined $5.0 million during the quarter to $55.9
million or 0.95% of total assets. Virtually all of the decline was in single
family real estate-related assets.
Based on regulatory rules in effect at June 30, 1997, Downey Savings and
Loan Association, F.A. (the "Bank"), had core and tangible capital ratios of
6.24% and a risk-based capital ratio of 12.05%. 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 $37.3 million in the second quarter of 1997, up
$4.2 million or 12.6% from the same period last year. The improvement between
second quarters reflects an increase of 23.4% in average earning assets, as the
effective interest spread declined from 3.02% in the year-ago second quarter to
2.75% in the current quarter. Between second quarters, the yield on earning
assets increased 5 basis points, while the cost of funding those earning assets
increased 32 basis points. The more rapid increase in funding costs occurred as
the growth in earning assets was primarily funded with higher cost certificates
of deposit and borrowings. To a lesser extent, the effective interest spread was
also negatively impacted in the current quarter by a higher proportion of single
family adjustable rate mortgages in their initial incentive rate period. For the
first six months of 1997, net interest income totaled $75.4 million, up $11.4
million or 17.8% from the same period a year ago.
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.
7
Three Months Ended
------------------------------------------------------------------------------
June 30,1997 June 30,1996
------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars In Thousands) Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans .................................. $5,156,085 $99,373 7.71% $4,108,440 $79,022 7.69%
Mortgage-backed securities ............. 56,005 927 6.62 70,007 1,130 6.46
Investment securities .................. 205,381 2,976 5.81 211,434 2,997 5.70
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ....... 5,417,471 103,276 7.63 4,389,881 83,149 7.58
Non-interest-earning assets ............... 249,052 232,926
- -----------------------------------------------------------------------------------------------------------------------------
Total assets ........................ $5,666,523 $4,622,807
- -----------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits ............................... $4,544,260 $56,102 4.95% $3,846,691 $44,820 4.69%
Borrowings ............................. 657,242 9,891 6.04 346,273 5,214 6.06
- -----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities .. 5,201,502 65,993 5.09 4,192,964 50,034 4.80
Non-interest-bearing liabilities .......... 61,635 41,466
Stockholders' equity ...................... 403,386 388,377
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $5,666,523 $4,622,807
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income/interest rate spread .. $37,283 2.54% $33,115 2.78%
Excess of interest-earning assets over
interest-bearing liabilities ........... $ 215,969 $ 196,917
Effective interest rate spread ............ 2.75% 3.02%
- -----------------------------------------------------------------------------------------------------------------------------
Six Months Ended
---------------------------------------------------------------------------
June 30,1997 June 30,1996
---------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans .................................. $4,959,219 $193,064 7.79% $4,104,170 $156,862 7.64%
Mortgage-backed securities ............. 57,991 1,911 6.59 64,631 2,163 6.69
Investment securities .................. 203,270 5,885 5.84 233,827 6,463 5.56
- --------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ....... 5,220,480 200,860 7.70 4,402,628 165,488 7.52
Non-interest-earning assets ............... 252,665 237,213
- --------------------------------------------------------------------------------------------------------------------------
Total assets ........................ $5,473,145 $4,639,841
- --------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits ............................... $4,410,029 $107,506 4.92% $3,832,129 $ 90,310 4.74%
Borrowings ............................. 602,273 17,953 6.01 375,527 11,176 5.98
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities .. 5,012,302 125,459 5.05 4,207,656 101,486 4.85
Non-interest-bearing liabilities .......... 60,897 45,388
Stockholders' equity ...................... 399,946 386,797
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity ............................ $5,473,145 $4,639,841
- --------------------------------------------------------------------------------------------------------------------------
Net interest income/interest rate spread .. $75,401 2.65% $ 64,002 2.67%
Excess of interest-earning assets over
interest-bearing liabilities ........... $ 208,178 $ 194,972
Effective interest rate spread ............ 2.89% 2.91%
==========================================================================================================================
8
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) change in rate-volume
(change in rate multiplied by change 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.
Three Months Ended Six Months Ended
--------------------------------------------------------------------------------------------
June 30, 1997 versus June 30, 1996 June 30, 1997 versus June 30, 1996
Changes Due To Changes Due To
--------------------------------------------------------------------------------------------
Rate/ Rate/
(In Thousands) Volume Rate Volume Net Volume Rate Volume Net
- ----------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans .................... $ 20,150 $ 160 $ 41 $ 20,351 $ 32,680 $ 2,915 $ 607 $ 36,202
Mortgage-backed securities (226) 29 (6) (203) (222) (33) 3 (252)
Investment securities .... (60) 41 (2) (21) (871) 336 (43) (578)
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income . 19,864 230 33 20,127 31,587 3,218 567 35,372
- ----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits ................. 8,240 2,575 467 11,282 13,387 3,310 499 17,196
Borrowings ............... 4,626 (7) 58 4,677 6,696 87 (6) 6,777
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense 12,866 2,568 525 15,959 20,083 3,397 493 23,973
- ----------------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 6,998 $ (2,338) $ (492) $ 4,168 $ 11,504 $ (179) $ 74 $ 11,399
============================================================================================================================
PROVISION FOR LOAN LOSSES
Provision for loan losses was $1.9 million in the current quarter compared
to $2.2 million in the year-ago quarter. For the first six months of 1997,
provision for loan losses totaled $4.0 million, compared to $3.4 million in the
year-ago period. For information regarding the allowance for loan losses, see
"Asset Quality - Valuation Allowances" on page 21.
OTHER INCOME
Total other income was $5.4 million in the second quarter of 1997, up $1.4
million from the year-ago quarter as most major categories increased. The
increase primarily occurred in loan and deposit related fees, up $0.9 million,
and income from real estate held for investment, up $0.5 million. For the first
six months of 1997, total other income was $16.3 million, up $2.5 million from a
year ago.
9
The following table presents a breakdown of the key components comprising
income from real estate and joint venture operations.
Three Months Ended
------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1997 1997 1996 1996 1996
- ---------------------------------------------------------------------------------------------------------------------
Operations, net:
Rental operations, net of expenses ................. $ 474 $ 851 $ 558 $ 721 $ 285
Equity in net income (loss) from joint ventures .... (238) 3,066 1,050 (30) (256)
Interest from joint ventures ....................... 361 778 449 488 499
- ---------------------------------------------------------------------------------------------------------------------
Total operations, net ............................ 597 4,695 2,057 1,179 528
Net gains (losses) on sales of wholly owned real estate 305 -- 382 38 (9)
Recovery for losses on real estate and joint ventures . 487 2,277 605 849 382
- ---------------------------------------------------------------------------------------------------------------------
Income from real estate and joint venture operations $ 1,389 $ 6,972 $ 3,044 $ 2,066 $ 901
=====================================================================================================================
OPERATING EXPENSE
Operating expense totaled $26.3 million in the second quarter, up $5.2
million or 24.5% from the second quarter of 1996. General and administrative
costs increased $4.7 million or 22.7%, while the costs associated with the net
operation of real estate acquired in settlement of loans increased by $0.5
million. The increase in general and administrative expense primarily reflected
branch expansion, particularly into supermarket banking, higher advertising
expenditures, and growth in auto lending. The $1.8 million increase in
advertising expenditures reflects, in large part, the initial cost of a
television advertising campaign to increase public awareness of the Bank, and
specifically the Bank's subprime residential lending product, a key component to
Downey's strategy of increasing the loan portfolio yield. For the first six
months of 1997, operating expenses totaled $51.5 million compared to $42.1
million in the same period of 1996.
PROVISION FOR INCOME TAXES
Income taxes for the second quarter totaled $6.2 million, resulting in an
effective tax rate of 42.6%, compared to $5.9 million and 43.1% for the like
quarter of a year ago. For the first six months of 1997, the effective tax rate
was 43.1%, unchanged from the same period of 1996.
10
FINANCIAL CONDITION
LOANS AND MORTGAGE-BACKED SECURITIES
Total loans and mortgage-backed securities, including those held for sale,
increased $467.1 million during the second quarter to a total of $5.4 billion,
or 92.4% of assets, at June 30, 1997. This increase primarily reflected
increases of $432.1 million in the residential one-to-four unit loan portfolio
held for investment and $45.2 million in automobile loans. These increases were
partially offset by a decline of $29.8 million in the construction loan
portfolio.
The following table sets forth originations of loans held for investment
and loans originated for sale.
Three Months Ended
-------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1997 1997 1996 1996 1996
- ----------------------------------------------------------------------------------------------------------
Loans originated for investment:
Residential - one-to-four ARMs (1) .... $611,371 $388,707 $363,995 $359,816 $222,270
Residential - one-to-four fixed (2) ... 8,408 3,904 5,134 7,859 12,794
Other (3) ............................. 110,455 97,261 72,006 86,223 112,294
- ----------------------------------------------------------------------------------------------------------
Total loans originated for investment 730,234 489,872 441,135 453,898 347,358
Loans originated for sale (primarily
residential - fixed) .................. 95,092 40,029 36,969 24,826 30,644
- ----------------------------------------------------------------------------------------------------------
Total loans originated ................ $825,326 $529,901 $478,104 $478,724 $378,002
==========================================================================================================
(1) For the three months ended June 30, 1997, March 31, 1997 and December 31,
1996, $17.3 million, $4.9 million and $0.2 million, respectively, of 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.
(3) For the three months ended June 30, 1997, $1.0 million of loans purchased
through correspondent lending relationships are included.
Originations of one-to-four unit residential loans totaled a record $714.9
million in the second quarter of 1997, of which $619.8 million were for
portfolio and $95.1 million were for sale. This was 65% higher than the $432.6
million originated in the first quarter of 1997, and more than double the $265.7
million originated in the year-ago quarter. Of the current quarter total, $31.9
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, 39% of Downey's residential one-to-four unit originations represented
refinancings of existing loans (existing Downey loans were 3%). This is down
from 49% (existing Downey loans were 3%) during the previous quarter, and down
from 40% (existing Downey loans were 8%) in the year-ago second quarter. In
addition to single family loans, $110.4 million of other loans were originated
in the quarter including $73.4 million of automobile loans and $11.1 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 June 30, 1997, $2.5 billion of the ARMs in Downey's loan portfolio
were subject to negative amortization of which $21.2 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 and mortgage-backed securities originated by Downey were
$87.2 million for the second quarter of 1997, compared to $38.2 million in the
previous quarter and $43.6 million for the second quarter of 1996. All were
secured by residential one-to-four unit property.
11
At June 30, 1997, Downey had commitments to fund loans amounting to $235.2
million, undrawn lines of credit of $72.2 million, loans in process of $39.5
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.
12
The following table sets forth the origination, purchase and sale activity
relating to loans and mortgage-backed securities.
Three Months Ended
-------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1997 1997 1996 1996 1996
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO:
Loans originated:
Loans secured by real estate:
Residential:
One-to-four units:
Adjustable ...................................... $ 563,119 $ 363,704 $ 350,282 $ 349,325 $ 215,553
Adjustable - subprime ........................... 30,943 20,105 13,490 10,491 6,717
- ------------------------------------------------------------------------------------------------------------------------
Total adjustable .............................. 594,062 383,809 363,772 359,816 222,270
Fixed ........................................... 7,467 3,879 5,134 7,652 12,456
Fixed - subprime ................................ 941 25 -- 207 338
Five or more units:
Adjustable ...................................... 4,600 -- -- 6,375 4,641
Fixed ........................................... -- -- -- 105 --
- ------------------------------------------------------------------------------------------------------------------------
Total residential ............................. 607,070 387,713 368,906 374,155 239,705
Commercial real estate ............................. 4,145 -- 1,491 -- --
Construction ....................................... 11,121 25,851 15,873 14,065 27,630
Land ............................................... 6,985 -- -- -- 10,468
Non-mortgage:
Commercial:
Secured .......................................... 1,891 3,828 2,540 5,309 1,536
Unsecured ........................................ 554 -- 1,050 -- --
Consumer:
Automobile ....................................... 73,389 62,909 46,714 56,863 63,968
Other consumer ................................... 6,784 4,673 4,338 3,506 4,051
- ------------------------------------------------------------------------------------------------------------------------
Total loans originated ........................ 711,939 484,974 440,912 453,898 347,358
Real estate loans purchased (1) ........................ 18,295 4,898 223 -- --
- ------------------------------------------------------------------------------------------------------------------------
Total loans originated and purchased ............. 730,234 489,872 441,135 453,898 347,358
Loan repayments ........................................ (271,387) (235,834) (227,061) (183,629) (205,617)
Other net changes (2) .................................. 3,367 (9,252) (4,077) (5,834) (26,539)
- ------------------------------------------------------------------------------------------------------------------------
Net increase in loans held for investment .......... 462,214 244,786 209,997 264,435 115,202
- ------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO:
Residential, one-to-four units:
Originated whole loans .............................. 95,092 40,029 36,969 24,826 30,644
Loans transferred (to) from the investment portfolio (338) 446 156 170 250
Originated whole loans sold ......................... (59,696) (21,555) (16,461) (20,077) (36,708)
Loans exchanged for mortgage-backed securities ...... (27,476) (16,626) (14,537) (5,035) (6,880)
Other net changes ................................... (44) (10) (11) (5) 31
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for sale ..... 7,538 2,284 6,116 (121) (12,663)
- ------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, net:
Received in exchange for loans ...................... 27,476 16,626 14,537 5,035 6,880
Purchased ........................................... -- -- -- 4,705 --
Sold ................................................ (27,476) (16,626) (14,537) (9,660) (6,880)
Repayments .......................................... (3,124) (3,501) (3,349) (3,794) (4,176)
Other net changes ................................... 468 (503) 738 89 (714)
- ------------------------------------------------------------------------------------------------------------------------
Net decrease in mortgage-backed securities available
for sale ......................................... (2,656) (4,004) (2,611) (3,625) (4,890)
- ------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans and mortgage-backed
securities held for sale and available for sale .. 4,882 (1,720) 3,505 (3,746) (17,553)
- ------------------------------------------------------------------------------------------------------------------------
Total net increase in loans and mortgage-backed
securities ....................................... $ 467,096 $ 243,066 $ 213,502 $ 260,689 $ 97,649
========================================================================================================================
(1) Primarily one-to-four unit residential loans except for $986,000
representing five or more residential units for the three months ending
June 30, 1997.
(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).
13
The following table sets forth the composition of Downey's loan and
mortgage-backed securities portfolios.
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1997 1997 1996 1996 1996
- --------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO:
Loans secured by real estate:
Residential:
One-to-four units:
Adjustable ............................... $ 4,451,684 $ 4,051,862 $ 3,840,862 $ 3,665,218 $ 3,461,022
Adjustable - subprime .................... 82,873 52,678 32,715 19,450 9,042
Fixed .................................... 171,981 170,833 172,328 172,930 173,313
Fixed - subprime ......................... 1,507 567 543 544 338
- --------------------------------------------------------------------------------------------------------------------------------
Total one-to-four units ................ 4,708,045 4,275,940 4,046,448 3,858,142 3,643,715
Five or more units:
Adjustable ............................... 47,341 42,901 43,050 54,737 48,518
Fixed .................................... 14,333 13,338 13,857 14,116 14,130
Commercial real estate:
Adjustable ............................... 126,686 127,245 158,656 161,690 162,809
Fixed .................................... 94,993 101,162 101,953 101,121 101,996
Construction ................................... 48,765 78,559 66,651 62,651 56,341
Land ........................................... 24,847 18,629 21,177 23,260 26,840
Non-mortgage:
Commercial:
Secured ..................................... 12,177 13,413 9,610 7,093 1,786
Unsecured ................................... 13,541 12,037 12,526 12,076 11,469
Consumer:
Automobile .................................. 287,611 242,403 202,186 174,628 134,829
Other consumer .............................. 46,244 46,892 47,281 46,755 47,543
- --------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment .......... 5,424,583 4,972,519 4,723,395 4,516,269 4,249,976
Increase (decrease) for:
Undisbursed loan funds ......................... (48,487) (55,447) (49,250) (50,052) (48,681)
Deferral of fees and discounts, net of costs ... 17,806 14,111 11,663 9,778 7,741
Allowance for loan losses ...................... (31,188) (30,683) (30,094) (30,278) (27,754)
- --------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment, net ..... 5,362,714 4,900,500 4,655,714 4,445,717 4,181,282
- --------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO, NET:
Loans held for sale (all one-to-four units):
Adjustable ..................................... 1,942 1,800 1,145 2,109 3,243
Fixed .......................................... 20,745 13,349 11,720 4,640 3,627
- --------------------------------------------------------------------------------------------------------------------------------
Total loans held for sale ................... 22,687 15,149 12,865 6,749 6,870
Mortgage-backed securities available for sale:
Adjustable ..................................... 19,799 21,367 23,620 24,967 27,247
Fixed .......................................... 34,808 35,896 37,647 38,911 40,256
- --------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities available
for sale .................................. 54,607 57,263 61,267 63,878 67,503
- --------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities
held for sale and available for sale . 77,294 72,412 74,132 70,627 74,373
- --------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities $ 5,440,008 $ 4,972,912 $ 4,729,846 $ 4,516,344 $ 4,255,655
================================================================================================================================
Loans held for sale are carried at the lower of cost or market. At June 30,
1997, no valuation allowance was required as the market value exceeded book
value on an aggregate basis.
Mortgage-backed securities available for sale are carried at fair value
and, at June 30, 1997, reflect an unrealized gain of $0.3 million. The current
quarter-end unrealized gain, less the associated tax effect of $0.1 million, is
reflected within a separate component of stockholders' equity until realized.
14
INVESTMENTS IN REAL ESTATE AND JOINT VENTURES
Downey's investment in real estate and joint ventures amounted to $36.1
million at June 30, 1997, compared to $46.5 million at December 31, 1996, and
$44.7 million at June 30, 1996.
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
--------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1997 1997 1996 1996 1996
- -----------------------------------------------------------------------------------------------
Balance at beginning of period $ 23,849 $ 30,071 $ 31,316 $ 32,185 $ 32,868
Provision .................... (487) (2,277) (605) (849) (382)
Charge-offs .................. (1,692) (3,945) (680) (54) (301)
Recoveries ................... -- -- 40 34 --
- -----------------------------------------------------------------------------------------------
Balance at end of period ..... $ 21,670 $ 23,849 $ 30,071 $ 31,316 $ 32,185
===============================================================================================
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
-------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1997 1997 1996 1996 1996
- ----------------------------------------------------------------------------------------------
Balance at beginning of period $ 1,334 $ 1,078 $ 1,132 $ 971 $ 1,224
Provision .................... 299 597 622 278 4
Charge-offs .................. (451) (341) (676) (117) (257)
Recoveries ................... -- -- -- -- --
- ----------------------------------------------------------------------------------------------
Balance at end of period ..... $ 1,182 $ 1,334 $ 1,078 $ 1,132 $ 971
==============================================================================================
DEPOSITS
At June 30, 1997, deposits totaled $4.6 billion, up 20.1% from a year ago
and $458.0 million above year-end 1996. Deposits in supermarket branches
increased $57.2 million during the quarter to $230.2 million and accounted for
approximately 30% of the total deposit increase from a year ago. The following
table sets forth information concerning Downey's deposits and average rates paid
at the dates indicated.
15
June 30, 1997 March 31, 1997 December 31, 1996 September 30, 1996 June 30, 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 ....... 2.97% $ 427,395 2.94% $ 419,627 2.90% $ 416,868 2.89% $ 414,793 2.76% $ 411,573
Money market accounts .. 2.55 92,867 2.55 98,517 2.52 100,750 2.52 101,999 2.39 105,649
Checking accounts ...... 0.73 339,803 0.72 348,884 0.74 313,980 0.73 300,830 0.74 299,057
Certificates of deposit:
Less than 3.00% ..... 2.67 32,592 2.65 33,667 2.65 39,061 2.70 43,870 2.71 48,088
3.00-3.49 ........... 3.02 337 3.03 301 3.03 723 3.07 1,085 3.06 695
3.50-3.99 ........... 3.99 24 3.88 54 3.99 79 3.97 102 3.95 1,360
4.00-4.49 ........... 4.39 56,667 4.39 58,045 4.39 63,577 4.30 73,695 4.21 77,341
4.50-4.99 ........... 4.90 78,430 4.88 131,700 4.87 186,576 4.85 347,265 4.85 437,075
5.00-5.99 ........... 5.64 2,847,321 5.61 2,833,931 5.54 2,489,852 5.49 2,302,221 5.47 2,191,299
6.00-6.99 ........... 6.08 751,054 6.13 560,129 6.17 536,307 6.30 295,178 6.39 235,150
7.00 and greater .... 7.21 4,622 7.14 9,582 7.15 25,329 7.12 34,353 7.18 47,258
- ------------------------------------------------------------------------------------------------------------------------------------
Total crtificates
of deposit ........ 5.67 3,771,047 5.62 3,627,409 5.56 3,341,504 5.44 3,097,769 5.40 3,038,266
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits ...... 5.00% $4,631,112 4.92% $4,494,437 4.86% $4,173,102 4.74% $3,915,391 4.68% $3,854,545
====================================================================================================================================
BORROWINGS
During the 1997 second quarter, borrowings increased $260.8 million to
$797.6 million, reflecting increases in FHLB advances and commercial paper. The
following table sets forth information concerning Downey's FHLB advances and
other borrowings at the dates indicated.
June 30, March 31, December 31, September 30, June 30,
(Dollars in Thousands) 1997 1997 1996 1996 1996
- ------------------------------------------------------------------------------------------------------------------
FHLB advances .................................. $550,736 $330,479 $386,883 $397,147 $239,307
Other borrowings:
Commercial paper ............................ 236,809 196,125 198,113 186,544 178,243
Real estate notes ........................... 10,063 10,188 10,349 10,443 10,560
- ------------------------------------------------------------------------------------------------------------------
Total borrowings ............................ $797,608 $536,792 $595,345 $594,134 $428,110
- ------------------------------------------------------------------------------------------------------------------
Weighted average rate on borrowings during
the period .................................. 6.04% 5.97% 6.01% 5.90% 6.06%
Total borrowings as a percentage of total assets 13.55 9.79 11.45 11.99 9.08
==================================================================================================================
ASSET/LIABILITY MANAGEMENT
The following table sets forth the repricing frequency of Downey's major
asset and liability categories as of June 30, 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.
16
June 30,1997
--------------------------------------------------------------------------
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) $ 69,826 $ - $122,014 $ - $ - $ 191,840
Loans and mortgage-backed securities:
Mortgage-backed securities ............. 24,305 4,297 20,287 3,693 2,025 54,607
Loans secured by real estate:
Residential:
Adjustable .......................... (2) 4,464,898 106,600 10,127 - - 4,581,625
Fixed ............................... (2) 41,335 15,904 79,678 40,390 31,115 208,422
Commercial real estate ................ (2) 138,072 8,889 43,319 23,937 3,371 217,588
Construction .......................... (2) 17,973 - - - - 17,973
Land .................................. (2) 14,939 10 82 116 267 15,414
Non-mortgage:
Commercial ............................ (2) 16,554 - - - - 16,554
Consumer .............................. (2) 97,510 51,389 178,926 - - 327,825
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities 4,815,586 187,089 332,419 68,136 36,778 5,440,008
- ----------------------------------------------------------------------------------------------------------------------------------
Total .................................. $4,885,412 $ 187,089 $454,433 $ 68,136 $ 36,778 $5,631,848
==================================================================================================================================
Deposits and borrowings:
Interest bearing deposits:
Fixed maturity deposits ................ (1) $2,372,609 $ 1,001,956 $396,482 $ - $ - $3,771,047
Money market accounts .................. (3) 92,867 - - - - 92,867
Checking accounts ...................... (3) 242,894 - - - - 242,894
Passbook accounts ...................... (3) 427,395 - - - - 427,395
Non-interest bearing deposits ............ 96,909 - - - - 96,909
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits ........................ 3,232,674 1,001,956 396,482 - - 4,631,112
- ----------------------------------------------------------------------------------------------------------------------------------
Borrowings ............................... 530,325 192,596 71,887 2,800 - 797,608
- ----------------------------------------------------------------------------------------------------------------------------------
Total deposits and borrowings .......... $3,762,999 $ 1,194,552 $468,369 $ 2,800 $ - $5,428,720
==================================================================================================================================
Excess (shortfall) of interest-earning
assets over interest-bearing liabilities . $1,122,413 $(1,007,463) $(13,936) $ 65,336 $ 36,778 $ 203,128
Cumulative gap ................................ 1,122,413 114,950 101,014 166,350 203,128
Cumulative gap - as a % of total assets:
June 30, 1997 ............................ 19.07% 1.95% 1.72% 2.83% 3.45%
December 31, 1996 ........................ 16.71 2.68 0.50 1.47 3.04
June 30, 1996 ............................ 7.55 2.39 2.03 3.36 3.81
==================================================================================================================================
(1) Based upon contractual maturity and repricing date.
(2) Based upon contractual maturity, repricing date, and projected repayments
and prepayments of principal.
(3) Based upon contractual maturity or repricing date.
The six-month gap at June 30, 1997, was a positive 19.07% (i.e., more
interest-earning assets reprice within one year than interest-bearing
liabilities). This compares to a positive six-month gap of 16.85% at March 31,
1997, 16.71% at December 31, 1996 and 7.55% at June 30, 1996. Downey's strategy
of emphasizing the origination of adjustable rate mortgages continues to be
pursued. For the twelve months ended June 30, 1997, Downey originated and
purchased for investment $2.0 billion of adjustable rate loans and
mortgage-backed securities which represented approximately 97% of all loans and
mortgage-backed securities originated and purchased for investment during the
period.
At June 30, 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, and unchanged from June 30, 1996. At June 30, 1997, loans and
mortgage-backed securities with adjustable interest rates represented 89% of
Downey's loans and mortgage-backed securities portfolios. During the second
quarter of 1997, Downey continued to offer residential fixed rate loan products
to its
17
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. 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 June 30, 1997, $5.2 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
$4.7 billion or 94%, $4.5 billion or 94%, $4.0 billion or 93%, at March 31,
1997, December 31, 1996, and June 30, 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.
June 30, March 31, December 31, September 30, June 30,
1997 1997 1996 1996 1996
- ------------------------------------------------------------------------------------------------------------------
Weighted average yield:
Loan and mortgage-backed securities portfolio 7.61% 7.74% 7.77% 7.71% 7.76%
Investment securities ....................... 5.67 5.71 6.11 6.11 5.77
- ----------------------------------------------------------------------------------------------------------------
Earning assets yield ........................ 7.55 7.66 7.71 7.64 7.67
- ----------------------------------------------------------------------------------------------------------------
Weighted average cost:
Deposits .................................... 5.00 4.92 4.86 4.74 4.68
Borrowings:
FHLB advances ............................. 5.98 5.83 5.80 5.76 5.77
Other borrowings .......................... 5.60 5.53 5.60 5.61 5.53
- ----------------------------------------------------------------------------------------------------------------
Combined borrowings ......................... 5.87 5.72 5.73 5.71 5.67
- ----------------------------------------------------------------------------------------------------------------
Combined funds .............................. 5.13 5.01 4.97 4.86 4.77
- ----------------------------------------------------------------------------------------------------------------
Interest rate spread ........................... 2.42% 2.65% 2.74% 2.78% 2.90%
================================================================================================================
The weighted average yield on the loan and mortgage-backed securities
portfolios at June 30, 1997, decreased to 7.61%, compared to 7.74% at March 31,
1997, 7.77% at December 31, 1996, and 7.76% at June 30, 1996. At June 30, 1997,
the one-to-four unit residential ARM portfolio, including mortgage-backed
securities, totaled $4.6 billion with a weighted average rate of 7.22%, compared
to $3.9 billion with a weighted average rate of 7.38% at December 31, 1996, and
$3.5 billion with a weighted average rate of 7.46% at June 30, 1996.
ASSET QUALITY
Non-Performing Assets
Non-performing assets decreased during the quarter by $5.0 million to $55.9
million at June 30, 1997, or 0.95% of total assets. Virtually all of the decline
was related to one-to-four unit residential assets. All of Downey's
non-performing assets at June 30, 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 $18.2
million which were not contractually past due, but were deemed non-accrual due
to management's assessment of the borrower's ability to pay.
18
The following table summarizes the non-performing assets of Downey at the
dates indicated.
June 30, March 31, December 31, September 30, June 30,
(Dollars in Thousands) 1997 1997 1996 1996 1996
- ----------------------------------------------------------------------------------------------------------------------
Non-accrual loans:
One-to-four unit residential .................... $20,893 $23,739 $22,885 $26,613 $26,034
Other ........................................... 20,369 19,733 22,136 24,097 21,146
- ----------------------------------------------------------------------------------------------------------------------
Total non-accrual loans ........................ 41,262 43,472 45,021 50,710 47,180
Real estate acquired in settlement of loans, net .... 14,357 17,202 16,078 16,332 15,452
Repossessed automobiles ............................. 317 270 928 433 232
- ----------------------------------------------------------------------------------------------------------------------
Gross non-performing assets ......................... $55,936 $60,944 $62,027 $67,475 $62,864
======================================================================================================================
======================================================================================================================
Allowance for loan losses (1):
Amount ......................................... $31,188 $30,683 $30,094 $30,278 $27,754
As a percentage of non-performing loans ........ 75.59% 70.58% 66.84% 59.71% 58.83%
Non-performing assets as a percentage of total assets 0.95 1.11 1.19 1.36 1.33
======================================================================================================================
(1) Allowance for loan losses does not include the allowance for real estate
and real estate acquired in settlement of loans.
At June 30, 1997, the recorded investment in loans for which impairment has
been recognized totaled $14.0 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 second quarter of 1997, total interest recognized on the impaired
loan portfolio, on a cash basis, was $0.5 million.
Delinquent Loans
During the 1997 second quarter, total delinquencies decreased $4.0 million
or 9.0%. All of the decrease occurred in the residential one-to-four units
category which declined $6.0 million. That decline was partially offset by
increases in automobile loans of $1.8 million, commercial real estate loans of
$0.2 million and other consumer loans of $0.1 million.
19
The following table sets forth the amounts of Downey's past due loans at
the dates indicated.
June 30, 1997 March 31, 1997
---------------------------------------- ----------------------------------------
30-59 60-89 90+ 30-59 60-89 90+
(Dollars in Thousands) Days Days Days (1) Total Days Days Days (1) Total
- --------------------------------------------------------------------------------------------------------------------------------
Loans secured by real estate:
Residential:
One-to-four units .................. $10,636 $ 5,402 $18,583 $34,621 $15,221 $ 5,095 $20,320 $40,636
Five or more units ................. -- -- -- -- -- -- -- --
Commercial real estate ............... -- -- 457 457 -- -- 279 279
Construction ......................... -- -- -- -- -- -- -- --
Land ................................. -- -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total real estate loans .......... 10,636 5,402 19,040 35,078 15,221 5,095 20,599 40,915
Non-mortgage:
Commercial ........................... -- -- -- -- -- -- -- --
Consumer:
Automobile ......................... 3,574 647 555 4,776 2,419 278 324 3,021
Other consumer ..................... 165 66 87 318 69 34 86 189
- --------------------------------------------------------------------------------------------------------------------------------
Total loans ...................... $14,375 $ 6,115 $19,682 $40,172 $17,709 $ 5,407 $21,009 $44,125
================================================================================================================================
Delinquencies as a percentage of total
loans .............................. 0.27% 0.11% 0.36% 0.74% 0.36% 0.11% 0.42% 0.89%
================================================================================================================================
December 31, 1996 September 30, 1996
---------------------------------------- ----------------------------------------
Loans secured by real estate:
Residential:
One-to-four units .................. $14,717 $ 5,502 $18,549 $38,768 $15,294 $ 5,579 $21,569 $42,442
Five or more units ................. -- -- -- -- -- -- -- --
Commercial real estate ............... -- -- -- -- 1,767 -- 1,926 3,693
Construction ......................... -- -- -- -- -- -- -- --
Land ................................. -- -- 566 566 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total real estate loans ............ 14,717 5,502 19,115 39,334 17,061 5,579 23,495 46,135
Non-mortgage:
Commercial ........................... -- -- -- -- -- -- -- --
Consumer:
Automobile ......................... 2,080 328 274 2,682 1,037 177 224 1,438
Other consumer ..................... 158 15 181 354 258 88 266 612
- --------------------------------------------------------------------------------------------------------------------------------
Total loans ...................... $16,955 $ 5,845 $19,570 $42,370 $18,356 $ 5,844 $23,985 $48,185
================================================================================================================================
Delinquencies as a percentage of total
loans .............................. 0.36% 0.12% 0.41% 0.90% 0.41% 0.13% 0.53% 1.07%
================================================================================================================================
June 30, 1996
----------------------------------------
Loans secured by real estate:
Residential:
One-to-four units .................. $14,076 $ 7,544 $21,122 $42,742
Five or more units ................. -- -- -- --
Commercial real estate ............... -- -- 2,056 2,056
Construction ......................... -- -- -- --
Land ................................. -- -- -- --
- ------------------------------------------------------------------------------------
Total real estate loans ............ 14,076 7,544 23,178 44,798
Non-mortgage:
Commercial ........................... -- -- 115 115
Consumer:
Automobile ......................... 945 147 134 1,226
Other consumer ..................... 160 403 215 778
- ------------------------------------------------------------------------------------
Total loans ...................... $15,181 $ 8,094 $23,642 $46,917
====================================================================================
Delinquencies as a percentage of total
loans .............................. 0.36% 0.19% 0.56% 1.10%
====================================================================================
(1) All 90 day or greater delinquencies are on non-accrual status and reported
as part of non-performing assets.
20
Valuation Allowances
Allowances for losses on all assets (including loans) were $54.7 million,
$56.5 million, $61.8 million, and $61.4 million, at June 30, 1997, March 31,
1997, December 31, 1996, and June 30, 1996, respectively. For information on
valuation allowances associated with investments in real estate and joint
ventures, see "Investments in Real Estate and Joint Ventures" on page 15.
The allowance for possible loan losses was $31.2 million at June 30, 1997,
compared to $30.7 million at March 31, 1997, $30.1 million at December 31, 1996,
and $27.8 million at June 30, 1996. Included in the current quarter-end total
allowance was $30.9 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 $1.4 million in the
1997 second quarter, down from $1.8 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 $0.7 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
---------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1997 1997 1996 1996 1996
- ------------------------------------------------------------------------------------------------
Balance at beginning of period $ 30,683 $ 30,094 $ 30,278 $ 27,754 $ 27,396
Provision .................... 1,873 2,155 1,674 4,092 2,200
Charge-offs .................. (1,643) (1,783) (2,181) (1,657) (2,059)
Recoveries ................... 275 217 323 89 217
- ------------------------------------------------------------------------------------------------
Balance at end of period ..... $ 31,188 $ 30,683 $ 30,094 $ 30,278 $ 27,754
================================================================================================
21
The following table indicates the allocation of the total valuation
allowance for loan losses to the various categories of loans for the dates
indicated.
June 30, 1997 March 31, 1997 December 31, 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 ... $ 15,033 $4,708,045 0.32%$ 13,674 $4,275,940 0.32%$ 13,241 $4,046,448 0.33%
Five or more units .. 521 61,674 0.84 509 56,239 0.91 517 56,907 0.91
Commercial real estate 4,704 221,679 2.12 6,421 228,407 2.81 6,956 260,609 2.67
Construction .......... 576 48,765 1.18 925 78,559 1.18 773 66,651 1.16
Land .................. 332 24,847 1.34 254 18,629 1.36 466 21,177 2.20
Non-mortgage:
Commercial:
Secured ............. 122 12,177 1.00 134 13,413 1.00 96 9,610 1.00
Unsecured ........... 147 13,541 1.09 121 12,037 1.00 140 12,526 1.12
Consumer:
Automobile .......... 6,247 287,611 2.17 5,132 242,403 2.12 4,303 202,186 2.13
Other consumer ...... 706 46,244 1.53 713 46,892 1.52 802 47,281 1.70
Not specifically allocated 2,800 -- -- 2,800 -- -- 2,800 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans held for
investment ........ $ 31,188 $5,424,583 0.57% $30,683 $4,972,519 0.62%$ 30,094 $4,723,395 0.64%
==================================================================================================================================
September 30, 1996 June 30, 1996
---------------------------------- ---------------------------------
Loans secured by real estate:
Residential:
One-to-four units ... $ 12,679 $3,858,142 0.33% $12,212 $3,643,715 0.34%
Five or more units .. 583 68,853 0.85 542 62,648 0.87
Commercial real estate 8,307 262,811 3.16 6,864 264,805 2.59
Construction .......... 727 62,651 1.16 654 56,341 1.16
Land .................. 495 23,260 2.13 785 26,840 2.92
Non-mortgage:
Commercial:
Secured ............. 71 7,093 1.00 18 1,786 1.00
Unsecured ........... 137 12,076 1.13 245 11,469 2.14
Consumer:
Automobile .......... 3,681 174,628 2.11 2,762 134,829 2.05
Other consumer ...... 798 46,755 1.71 872 47,543 1.83
Not specifically allocated 2,800 -- -- 2,800 -- --
- ------------------------------------------------------------------------------------------------
Total loans held for
investment ........ $ 30,278 $4,516,269 0.67%$ 27,754 $4,249,976 0.65%
================================================================================================
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of funds generated in the second quarter of 1997 were
principal repayments (including prepayments, but excluding Downey refinances) on
loans and mortgage-backed securities of $250.2 million and net increases in FHLB
advances of $220.3 million, in deposits of $136.7 million and in other
borrowings of $40.6 million.
These funds were used primarily to originate loans held for investment of
$680.6 million (net of Downey refinances of $24.4 million).
At June 30, 1997, the Bank's ratio of regulatory liquidity was 5.05%,
compared to 5.26% at December 31, 1996, and 5.07% at June 30, 1996. The ratio
remains above the regulatory minimum of 5%.
Stockholders' equity totaled $408.0 million at June 30, 1997, compared to
$391.6 million at December 31, 1996, and $391.9 million at June 30, 1996.
22
REGULATORY CAPITAL
The following table is a reconciliation of the Bank's stockholder's equity
to federal regulatory capital as of June 30, 1997. The core and tangible capital
ratios were 6.24% and the risk-based capital ratio was 12.05%. 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 ............................... $ 399,308 $ 399,308 $ 399,308
Adjustments:
Deductions:
Investment in subsidiary, primarily real estate (33,289) (33,289) (33,289)
Goodwill ....................................... (5,319) (5,319) (5,319)
Core deposit premium ........................... (357) (357) (357)
Non-permitted mortgage servicing rights ........ (174) (174) (174)
Additions:
Unrealized loss on securities available for sale 1,648 1,648 1,648
General loss allowance - Investment in DSL ..... 1,833 1,833 1,833
Loan general valuation allowances (1) .......... -- -- 30,863
- -------------------------------------------------------------------------------------------------------------------
Regulatory capital ................................. 363,650 6.24% 363,650 6.24% 394,513 12.05%
Well capitalized requirement ....................... 87,481 1.50 (2) 291,603 5.00 327,301 10.00 (3)
- -------------------------------------------------------------------------------------------------------------------
Excess ............................................. $ 276,169 4.74% $ 72,047 1.24% $ 67,212 2.05%
===================================================================================================================
(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 11.11%.
CURRENT ACCOUNTING ISSUES
The Financial Accounting Standards Board ("FASB") issued Statement of
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") and "Disclosure
of Information about Capital Structure" ("SFAS 129") in February 1997, and
issued "Reporting Comprehensive Income" ("SFAS 130") and "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") in June 1997.
SFAS 128 - Earnings Per Share
SFAS 128 simplifies the standards for computing and presenting earnings per
share ("EPS") as previously prescribed by Accounting Principles Board Opinion
No. 15, "Earnings per Share." SFAS 128 replaces primary EPS with basic EPS and
fully diluted EPS with diluted EPS. Basic EPS excludes dilution and is computed
by dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS 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. SFAS 128 also requires
dual presentation of basic and diluted EPS on the face of the income statement
and a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997, and earlier application is not permitted. If Downey had
adopted SFAS 128 as of January 1, 1997, proforma basic EPS and proforma diluted
EPS would have been $0.77 for the six months ending June 30, 1997.
SFAS 129 - Disclosure of Information about Capital Structure
SFAS 129 consolidates existing reporting standards for disclosing
information about an entity's capital structure. SFAS 129 also supersedes
specific requirements found in previously issued accounting statements. SFAS 129
must be adopted for financial statements for periods ending after December 15,
1997.
23
SFAS 130 - Reporting Comprehensive Income
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS 130 does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
SFAS 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
SFAS 131 - Disclosures about Segments of an Enterprise and Related Information
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 supersedes FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
SFAS 131 requires that a public business enterprise report a measure of
segment profit or loss, certain specific revenue and expense items, and segment
assets. It requires reconciliations of total segment revenues, total segment
profit or loss, total segment assets, and other amounts disclosed for segments
to corresponding amounts in the enterprise's general-purpose financial
statements. It requires that all public business enterprises report information
about the revenues derived from the enterprise's products or services (or groups
of similar products and services), about the countries in which the enterprise
earns revenues and holds assets, and about major customers regardless of whether
that information is used in making operating decisions. However, SFAS 131 does
not require an enterprise to report information that is not prepared for
internal use if reporting it would be impracticable.
SFAS 131 also requires that a public business enterprise report descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used in the
enterprise's general-purpose financial statements, and changes in the
measurement of segment amounts from period to period.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. This Statement need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application.
24
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(A) None.
(B) There were no reports on Form 8-K filed for the six months ended June 30,
1997.
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: July 31, 1997 /s/ JAMES W. LOKEY
-------------------------------------------------
James W. Lokey
President and Chief Executive Officer
Date: July 31, 1997 /S/ THOMAS E. PRINCE
-------------------------------------------------
Thomas E. Prince
Executive Vice President/ Chief Financial Officer
25