================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
For the quarterly period ended September 30, 1996
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 Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
At September 30, 1996, 16,972,905 shares of the Registrant's Common Stock,
$0.01 par value were outstanding.
================================================================================
<PAGE>
DOWNEY FINANCIAL CORP.
SEPTEMBER 30, 1996 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I
<TABLE>
<S> <C>
FINANCIAL INFORMATION ............................................ 1
Consolidated Balance Sheets .................................. 1
Consolidated Statements of Operations ........................ 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 ............................................ 24
Item 6 Exhibit24and Reports on Form 8-K ................... 24
</TABLE>
i
<PAGE>
PART I - FINANCIAL INFORMATION
DOWNEY FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Dollars in Thousands, Except Per Share Data) September 30, December 31, September 30,
====================================================================================================================================
1996 1995 1995
<S> <C> <C> <C>
ASSETS
Cash ................................................................................... $ 39,658 $ 58,581 $ 50,366
Federal funds .......................................................................... 13,025 7,249 21
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents .......................................................... 52,683 65,830 50,387
U.S. Treasury and agency obligations and other investment securities
available for sale, at fair value .................................................. 130,603 164,880 --
U.S. Treasury and agency obligations and other investment securities
being held to maturity, at amortized cost (estimated market value of $7,075
at September 30, 1996, $7,170 at December 31, 1995 and
$167,828 at September 30, 1995) .................................................... 7,097 7,194 164,860
Mortgage loans purchased under resale agreements ....................................... -- -- 10,000
Loans held for sale, at the lower of cost or market .................................... 6,749 13,059 6,368
Mortgage-backed securities available for sale, at fair value ........................... 63,878 52,076 19,168
Mortgage-backed securities held to maturity, at amortized cost
(estimated market value of $36,678 at September 30, 1995) .......................... -- -- 35,250
Loans receivable held for investment ................................................... 4,445,717 4,104,339 4,140,777
Investments in real estate and joint ventures .......................................... 44,585 42,320 53,183
Real estate acquired in settlement of loans ............................................ 16,332 18,854 25,325
Premises and equipment ................................................................. 95,736 92,977 92,401
Federal Home Loan Bank stock, at cost .................................................. 40,800 39,146 38,632
Other assets ........................................................................... 50,157 55,592 48,422
- ------------------------------------------------------------------------------------------------------------------------------------
$ 4,954,337 $ 4,656,267 $ 4,684,773
====================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits ....................................................................... $ 3,614,561 $ 3,493,207 $ 3,515,481
Checking deposits ...................................................................... 300,830 297,014 291,593
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits ..................................................................... 3,915,391 3,790,221 3,807,074
Mortgage-backed securities sold under agreements to repurchase ......................... -- 16,099 38,400
Federal Home Loan Bank advances ........................................................ 397,147 220,715 212,995
Commercial paper ....................................................................... 186,544 196,602 196,917
Other borrowings ....................................................................... 10,443 2,802 10,779
Accounts payable and accrued liabilities ............................................... 54,995 37,032 36,009
Deferred income taxes .................................................................. 6,173 8,724 8,744
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities .................................................................. 4,570,693 4,272,195 4,310,918
- ------------------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock, par value of $0.01 per share; authorized 50,000,000
shares; 16,972,905 shares issued and outstanding ................................... 170 170 170
Additional paid-in capital ............................................................. 22,696 22,696 22,696
Unrealized gain (loss) on securities available for sale ................................ (2,780) 3,495 (337)
Retained earnings ...................................................................... 363,558 357,711 351,326
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity ......................................................... 383,644 384,072 373,855
- ------------------------------------------------------------------------------------------------------------------------------------
$ 4,954,337 $ 4,656,267 $ 4,684,773
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
DOWNEY FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------------------------------
(Dollars in Thousands, Except Per Share Data) 1996 1995 1996 1995
===================================================================================================================================
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable .................................................... $ 83,994 $ 78,036 $ 240,856 $ 222,061
U.S. Treasury and agency securities ................................. 1,910 2,716 5,744 7,987
Mortgage-backed securities .......................................... 1,102 970 3,265 3,398
Other investments ................................................... 944 694 3,573 2,254
Yield maintenance on covered assets, net ............................ -- 174 -- 536
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest income ........................................... 87,950 82,590 253,438 236,236
- -----------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits ............................................................ 45,452 47,415 135,762 134,358
Borrowings .......................................................... 7,463 7,472 18,639 26,529
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest expense .......................................... 52,915 54,887 154,401 160,887
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME ................................................. 35,035 27,703 99,037 75,349
PROVISION FOR LOAN LOSSES ........................................... 4,092 1,805 7,463 7,697
- -----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses ............. 30,943 25,898 91,574 67,652
- -----------------------------------------------------------------------------------------------------------------------------------
Other income, net:
Loan and deposit related fees ....................................... 1,917 1,455 5,265 4,014
Real estate and joint ventures held for investment, net:
Net gains (losses) on sales of wholly owned real estate ........... 38 (2) 10 2,206
Reduction of loss on real estate and joint ventures ............... 849 50 2,701 1,812
Operations, net ................................................... 1,179 713 2,486 2,751
Secondary marketing activities:
Loan servicing fees ............................................... 406 357 1,058 1,085
Net gains on sales of loans and mortgage-backed securities ........ 280 60 1,211 154
Net gains (losses) on sales of investment securities ................ -- -- 4,473 (15)
Reduction of loss on investment in lease residual ................... -- -- -- 207
Other ............................................................... 503 444 1,792 1,373
- -----------------------------------------------------------------------------------------------------------------------------------
Total other income, net ......................................... 5,172 3,077 18,996 13,587
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE:
Salaries and related costs .......................................... 11,606 9,513 33,416 29,401
Premises and equipment costs ........................................ 3,366 2,876 9,208 8,575
SAIF insurance premiums and regulatory assessments .................. 2,380 2,524 7,069 6,702
Professional fees ................................................... 849 845 2,341 2,441
Other general and administrative expense ............................ 4,031 2,661 10,767 8,091
- -----------------------------------------------------------------------------------------------------------------------------------
Total general and administrative expense .......................... 22,232 18,419 62,801 55,210
- -----------------------------------------------------------------------------------------------------------------------------------
SAIF Special Assessment ............................................. 24,644 -- 24,644 --
Net operation of real estate acquired in settlement of loans ........ 455 1,068 1,689 3,463
Amortization of excess of cost over fair value of net assets acquired 133 133 399 398
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating expense ......................................... 47,464 19,620 89,533 59,071
- -----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES ...................................... (11,349) 9,355 21,037 22,168
Income taxes (benefit) ................................................. (4,879) 3,980 9,079 9,400
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) ................................................... $ (6,470) $ 5,375 $ 11,958 $ 12,768
===================================================================================================================================
PER SHARE INFORMATION:
Net income (loss) ...................................................... $ (0.39) $ 0.31 $ 0.70 $ 0.75
===================================================================================================================================
DIVIDENDS PAID ......................................................... $ 0.120 $ 0.114 $ 0.360 $ 0.343
===================================================================================================================================
Weighted average shares outstanding .................................... 16,972,905 16,972,905 16,972,905 16,972,905
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
DOWNEY FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
(In Thousands) 1996 1995
================================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................................ $ 11,958 $ 12,768
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ................................................... 6,259 6,098
Provision for losses on loans, leases, real estate acquired in settlement
of loans and investments in real estate and joint ventures .................... 5,808 7,750
Net gains on sales of loans, investment securities, real estate and other assets (6,088) (2,409)
Interest capitalized on loans (negative amortization) ........................... (7,313) (4,078)
Federal Home Loan Bank dividends ................................................ (1,654) (1,294)
Net change in loans receivable - held for sale .................................... (3,119) (5,816)
Other, net ........................................................................ 23,695 (17,456)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities .................................. 29,546 (4,437)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Maturities of U.S. Treasury and agency obligations .............................. -- 15,000
Sales of investment securities available for sale ............................... 189,541 --
Sales of mortgage-backed securities available for sale .......................... 16,900 21,372
Sales of wholly owned real estate and real estate acquired in settlement of loans 4,241 24,791
Purchase of:
U.S. Treasury and agency obligations and other investment securities ............ (160,455) (25,000)
Mortgage-backed securities available for sale ................................... (30,073) --
Loans receivable held for investment ........................................... -- (44,194)
Mortgage loans under resale agreement ........................................... -- (10,000)
Loans receivable originated - held for investment (net of refinances of
$64,768 and $32,034 at September 30, 1996 and 1995, respectively) ............... (899,346) (340,503)
Principal payments on loans receivable held for investment and mortgage-backed
securities held to maturity and available for sale .............................. 553,196 331,716
Net change in undisbursed loan funds .............................................. 14,172 288
Investments in real estate and joint ventures held for investment ................. (2,490) (721)
Other, net ........................................................................ (5,354) (6,947)
- ----------------------------------------------------------------------------------------------------------------
Net cash used by investing activities ................................................ (319,668) (34,198)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits .......................................................... 125,170 249,676
Net decrease in securities sold under agreements to repurchase .................... (16,099) --
Proceeds from Federal Home Loan Bank advances ..................................... 785,200 743,000
Repayments of Federal Home Loan Bank advances ..................................... (608,768) (941,805)
Net decrease in other borrowings .................................................. (2,417) (16,880)
Cash dividends .................................................................... (6,111) (5,820)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities ............................................ 276,975 28,171
- ----------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents ............................................ (13,147) (10,464)
Cash and cash equivalents at beginning of year ....................................... 65,830 60,851
- ----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................................... $ 52,683 $ 50,387
================================================================================================================
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest .................................................................... $ 154,774 $ 162,852
Income taxes ................................................................ 19,535 6,635
Supplemental disclosure of non-cash investing:
Loans exchanged for mortgage-backed securities .............................. 11,915 --
Real estate acquired in settlement of loans ................................. 20,284 26,703
Loans to facilitate the sale of real estate acquired in settlement of loans . 18,817 6,811
================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
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 September 30, 1996, December 31, 1995 and
September 30, 1995, and the results of operations for the three months and nine
months ended September 30, 1996 and 1995, and changes in cash flows for the nine
months ended September 30, 1996 and 1995. 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, 1995, 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, 1995, and for the year then ended. Therefore,
only material changes in financial condition and results of operations are
discussed in the remainder of Part I.
NOTE (2) - MORTGAGE SERVICING RIGHTS
Downey adopted, effective January 1, 1996, Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights, an
Amendment to FASB No. 65," ("SFAS 122"). In accordance with SFAS 122, Downey
capitalizes mortgage servicing rights ("MSRs") acquired through either the
purchase or origination of mortgage loans for sale or securitization with
servicing rights retained. The total cost of the mortgage loans designated for
sale is allocated to the MSRs and the mortgage loans without the MSRs based on
their relative fair values. The MSRs are included in other assets and as a
component of gain on sale of loans. The MSRs are amortized over the projected
servicing period and such amortization is reflected as a component of loan
servicing fees.
The MSRs are periodically reviewed for impairment based on their fair
value. The fair value of the MSRs, for the purposes of impairment, is measured
using a discounted cash flow analysis based on Downey's estimated servicing
costs, market prepayment rates and market-adjusted discount rates. Impairment is
measured on a disaggregated basis based on predominant risk characteristics of
the underlying mortgage loans. The risk characteristics used by Downey for the
purposes of capitalization and impairment evaluation include loan type, interest
rate tranches, loan term and collateral type. Impairment losses are recognized
through a valuation allowance, with any associated provision recorded as a
component of loan servicing fees.
NOTE (3) - NET INCOME (LOSS) PER SHARE
Net income (loss) per share of common stock is based upon the weighted
average number of shares of common stock outstanding during the period
(16,972,905 in 1996 and 1995). No effect has been given to options outstanding
under Downey's stock option plans as there was no material dilutive effect.
NOTE (4) - SAIF RECAPITALIZATION AND ASSOCIATED LEGISLATION
Legislation was signed into law on September 30, 1996, to recapitalize the
Savings Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
Corporation ("FDIC"). To effect the recapitalization, all SAIF-insured
institutions such as Downey Savings and Loan Association, F.A. are required to
pay a one-time special assessment equal to 0.657% of deposits based upon deposit
levels at March 31, 1995. For Downey, this one-time assessment is equal to $24.6
million or, on an after-tax basis, $14.0 million or $0.83 per share. The charge
for this assessment was reflected in Downey's third quarter 1996 results and
will be paid to the FDIC on November 27, 1996.
The legislation provides that effective January 1, 1997, SAIF members will
have the same risk-based deposit insurance assessment schedule as members of the
Bank Insurance Fund ("BIF"). The FDIC has proposed an assessment schedule based
upon the capital position and supervisory evaluation of institutions of 0 to
0.27% of deposits, which is
4
<PAGE>
below the current assessment schedule for SAIF-insured institutions of 0.23% to
0.31%. In addition to FDIC assessments, prior legislation provided the Financing
Corporation ("FICO") and the Resolution Funding Corporation with assessment
authority to fund their operations and to make required interest payments on
their respective obligations. These assessments were only paid by SAIF-insured
institutions and could not exceed and were subtracted from the amounts SAIF
members paid to the FDIC for the funding of SAIF. With the recently enacted
legislation, both BIF and SAIF members will now share in the cost of the FICO
obligations. From 1997 through 1999, partial sharing will occur with pro-rata
sharing to commence by January 1, 2000, or when the last savings association
ceases to exist. The proposed January 1, 1997, FICO assessments are 0.064% for
SAIF-insured institutions and 0.013% for BIF-insured institutions. Based upon
the proposed deposit and FICO bond assessments, Downey expects that its deposit
insurance expense will decline by approximately 70% in 1997. Based upon current
deposit levels, Downey's on-going annual after-tax savings will approximate $3.7
million or $0.22 per share.
Other components of the recently enacted legislation provide that (i)
banking regulators are authorized to prevent SAIF-insured institutions from
"facilitating or encouraging" customers to shift their deposits to BIF-insured
affiliates for the purpose of evading the SAIF premium; (ii) the BIF and SAIF
insurance funds will merge to form the Deposit Insurance Fund on January 1,
1999, if there are no savings associations (not including state-chartered
savings banks) in existence on that date; and (iii) the Treasury Department is
directed to report to Congress by March 31, 1997, with recommendations on a
common charter for banks and savings institutions. In addition, the legislation
provides certain regulatory relief with respect to lender liability and certain
other matters.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Net income for the third quarter of 1996 totaled $7.6 million or $0.44 per
share before an after-tax charge of $14.0 million or $0.83 per share for a
one-time charge for a government-mandated industry-wide assessment to all
institutions who are insured by the Federal Deposit Insurance Corporation as
part of its Savings Association Insurance Fund ("SAIF"). Including this charge,
Downey recorded a net loss of $6.5 million, or $0.39 per share. With the payment
of this assessment, SAIF will be recapitalized and future deposit insurance
premiums will be reduced by approximately 70%. Excluding the one-time
assessment, third quarter net income would have been 40.8% higher than the $5.4
million or $0.31 per share earned in the third quarter of last year. For further
information regarding the one-time SAIF assessment and the associated
legislation, see "Note 4 of Notes to Financial Statements" on page 4.
For the first nine months of 1996, net income amounted to $12.0 million or
$0.70 per share, compared to $12.8 million or $0.75 per share earned in the same
period of 1995. Excluding the one-time SAIF assessment, net income would have
been $26.0 million or $1.53 per share, more than double the year-ago period.
Net income, excluding the one-time SAIF assessment, increased between third
quarters due to increases in net interest income and other income, and a
decrease in the cost associated with the net operation of real estate acquired
in settlement of loans. Net interest income increased $7.3 million or 26.5% due
to a higher effective interest spread, while other income increased $2.1 million
or 68.1% as all major categories were higher, especially income from real estate
held for investment. The cost associated with the net operation of real estate
acquired in settlement of loans declined by $0.6 million. Those positive factors
were partially offset by increases of $2.3 million in provision for loan losses
and $3.8 million in general and administrative expense. The increase in general
and administrative expense primarily reflected expansion into new business
activities.
Due to the one-time SAIF assessment, the returns on average assets and
equity were negative in the third quarter of 1996. Excluding the impact of that
one-time assessment, the third quarter return on average assets would have been
0.63% and the return on average equity would have been 7.74%, with the returns
for the first nine months of 1996 at 0.74% and 8.93%, respectively.
At September 30, 1996, assets totaled $5.0 billion, up $270 million or 5.8%
from a year ago. Single family loan originations totaled $392.5 million in the
third quarter of 1996, up from $108.1 million in the third quarter of 1995 and
$265.7 million in the second quarter of 1996. In addition to single family
loans, $86.2 million of other loans were originated in the quarter including
$56.9 million of automobile loans and $14.1 million of construction loans.
Non-performing assets increased $4.6 million during the quarter to $67.5
million or 1.36% of total assets. The current quarter increase was primarily
associated with one shopping center loan being placed on non-accrual status.
Downey Financial Corp.'s primary subsidiary, Downey Savings and Loan
Association, F.A. (the "Bank"), had core and tangible capital ratios of 6.77%
and a risk-based capital ratio of 12.93%. These capital levels are well above
the "well capitalized" standards of 5% and 10%, respectively, as defined by the
regulators.
6
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income totaled $35.0 million in the third quarter of 1996, up
$7.3 million or 26.5% from the same period last year. The improvement between
third quarters reflected a higher effective interest spread and a 3.0% increase
in average earning assets to $4.6 billion. The effective interest spread was
3.06% in the current quarter, up from 2.49% in the year-ago third quarter and
3.02% in the 1996 second quarter. The increase in the effective interest spread
reflected several factors including a growing proportion of higher yielding
automobile loans and a decline in rates on funding sources. For the first nine
months of 1996, net interest income totaled $99.0 million, up $23.7 million or
31.4% 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, and the interest expense on average interest-bearing liabilities and the
resultant 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
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended
----------------------------------------------------------------------------
September 30, 1996 September 30, 1995
----------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars In Thousands) Balance Interest Rate Balance Interest Rate
========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans ................................ $4,310,663 $ 83,994 7.79% $4,173,565 $ 78,210 7.50%
Mortgage-backed securities ........... 67,432 1,102 6.54 55,990 970 6.93
Investment securities ................ 196,236 2,854 5.79 212,141 3,410 6.38
- ------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ..... 4,574,331 87,950 7.69 4,441,696 82,590 7.44
Non-interest-earning assets ............. 235,881 266,584
- ------------------------------------------------------------------------------------------------------------------------
Total assets ...................... $4,810,212 $4,708,280
========================================================================================================================
Interest-bearing liabilities:
Deposits ............................. $3,866,111 $ 45,452 4.68% $3,802,413 $ 47,415 4.95%
Borrowings ........................... 502,795 7,463 5.90 469,768 7,472 6.31
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4,368,906 52,915 4.82 4,272,181 54,887 5.10
Non-interest-bearing liabilities ........ 50,054 64,347
Stockholders' equity .................... 391,252 371,752
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity ......................... $4,810,212 $4,708,280
========================================================================================================================
Net interest income/interest rate spread $ 35,035 2.87% $ 27,703 2.34%
Excess of interest-earning assets over
interest-bearing liabilities ......... $ 205,425 $ 169,515
Effective interest rate spread .......... 3.06% 2.49%
========================================================================================================================
<CAPTION>
For the Nine Months Ended
----------------------------------------------------------------------------
September 30, 1996 September 30, 1995
----------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans ................................ $4,173,001 $ 240,856 7.70% $4,191,035 $ 222,597 7.08%
Mortgage-backed securities ........... 65,565 3,265 6.64 67,234 3,398 6.74
Investment securities ................ 221,296 9,317 5.62 214,991 10,241 6.37
- ------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ..... 4,459,862 253,438 7.58 4,473,260 236,236 7.04
Non-interest-earning assets ............. 236,769 263,072
- ------------------------------------------------------------------------------------------------------------------------
Total assets ...................... $4,696,631 $4,736,332
========================================================================================================================
Interest-bearing liabilities:
Deposits ............................. $3,843,457 $ 135,762 4.72% $3,750,430 $ 134,358 4.79%
Borrowings ........................... 417,949 18,639 5.96 550,906 26,529 6.44
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4,261,406 154,401 4.84 4,301,336 160,887 4.99
Non-interest-bearing liabilities ........ 46,943 66,213
Stockholders' equity .................... 388,282 368,783
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity ......................... $4,696,631 $4,736,332
========================================================================================================================
Net interest income/interest rate spread $ 99,037 2.74% $ 75,349 2.05%
Excess of interest-earning assets over
interest-bearing liabilities ......... $ 198,456 $ 171,924
Effective interest rate spread .......... 2.96% 2.25%
========================================================================================================================
</TABLE>
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
8
<PAGE>
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.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------------------- ----------------------------------------------
September 30, 1996 versus September 30, 1995 September 30, 1996 versus September 30, 1995
Changes Due To Changes Due To
---------------------------------------------- ----------------------------------------------
Rate/ Rate/
(In Thousands) Volume Rate Volume Net Volume Rate Volume Net
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans .................... $ 2,569 $ 3,113 $ 102 $ 5,784 $ (958) $ 19,300 $ (83) $ 18,259
Mortgage-backed securities 198 (55) (11) 132 (84) (50) 1 (133)
Investment securities .... (265) (315) 24 (556) 310 (1,199) (35) (924)
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income .. 2,502 2,743 115 5,360 (732) 18,051 (117) 17,202
- ----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits ................. 662 (2,582) (43) (1,963) 3,460 (2,006) (50) 1,404
Borrowings ............... 438 (626) 179 (9) (6,375) (1,985) 470 (7,890)
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense . 1,100 (3,208) 136 (1,972) (2,915) (3,991) 420 (6,486)
- ----------------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 1,402 $ 5,951 $ (21) $ 7,332 $ 2,183 $ 22,042 $ (537) $ 23,688
==============================================================================================================================
</TABLE>
PROVISION FOR LOAN LOSSES
Provision for loan losses was $4.1 million in the current quarter, up from
$1.8 million in the year-ago quarter. For the first nine months of 1996,
provision for loan losses totaled $7.5 million compared to $7.7 million in the
year-ago period. For information regarding the allowance for loan losses, see
"Asset Quality - Valuation Allowances" on page 20.
OTHER INCOME
Total other income was $5.2 million in the third quarter of 1996, up $2.1
million from the year-ago quarter. The increase was spread throughout all major
categories of other income, with the largest increases occurring in income from
real estate held for investment, up $1.3 million, loan and deposit related fees,
up $0.5 million, and net gains on sales of loans and mortgage-backed securities,
up $0.2 million. For the first nine months of 1996, total other income was $19.0
million, up $5.4 million from the year-ago period.
The following table presents a breakdown of the key components comprising
income from real estate and joint venture operations.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 1996 1996 1996 1995 1995
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
Operations, net:
Rental operations, net of expenses ................. $ 721 $ 285 $ 853 $ 867 $ 1,033
Equity in net income (loss) and interest from joint
venture advances ................................. 458 243 (74) 119 (320)
- -----------------------------------------------------------------------------------------------------------------------
Total operations, net ............................ 1,179 528 779 986 713
Net gains (losses) on sales of wholly owned real estate 38 (9) (19) 2,333 (2)
Recovery for losses on real estate and joint ventures . 849 382 1,470 1,104 50
- -----------------------------------------------------------------------------------------------------------------------
Income from real estate and joint venture operations $ 2,066 $ 901 $ 2,230 $ 4,423 $ 761
=======================================================================================================================
</TABLE>
9
<PAGE>
OPERATING EXPENSE
Operating expense totaled $47.5 million in the third quarter of which $24.6
million represented the previously mentioned one-time SAIF assessment. Excluding
that assessment, operating expense would have totaled $22.8 million, up $3.2
million from a year ago. The increase was explained by higher general and
administrative costs, as the costs associated with the net operation of real
estate acquired in settlement of loans declined by $0.6 million. The $3.8
million increase in general and administrative costs was primarily associated
with expansion into supermarket banking, auto finance and commercial banking as
well as increased single family lending volumes. For the first nine months of
1996, operating expenses totaled $89.5 million, compared to $59.1 million in the
same period of 1995.
PROVISION FOR INCOME TAXES
An income tax benefit of $4.9 million was recorded in the third quarter due
to the pre-tax loss attributable to the one-time SAIF assessment. This compares
to income taxes of $4.0 million for the like quarter of a year ago. For the
first nine months of 1996, the effective tax rate was 43.1% compared to 42.4% in
the same period of 1995.
10
<PAGE>
FINANCIAL CONDITION
LOANS AND MORTGAGE-BACKED SECURITIES
Total loans and mortgage-backed securities, including those held for sale,
increased $260.7 million during the third quarter to a total of $4.5 billion, or
91.2% of assets, at September 30, 1996. This increase primarily reflected
increases of $214.4 million in the residential one-to-four unit loan portfolio
held for investment and $39.8 million in automobile loans.
The following table sets forth originations of loans held for investment
and loans originated for sale.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 1996 1996 1996 1995 1995
============================================================================================================
<S> <C> <C> <C> <C> <C>
Loans originated for investment:
Residential - one-to-four ARMs ........ $359,816 $222,270 $113,984 $109,080 $ 73,830
Residential - one-to-four fixed (1) ... 7,859 12,794 7,831 4,861 4,357
Other ................................. 86,223 112,294 59,860 57,516 35,039
- ------------------------------------------------------------------------------------------------------------
Total loans originated for investment 453,898 347,358 181,675 171,457 113,226
Loans originated for sale (primarily
residential - fixed) .................. 24,826 30,644 67,502 48,027 29,881
- ------------------------------------------------------------------------------------------------------------
Total loans originated ................ $478,724 $378,002 $249,177 $219,484 $143,107
============================================================================================================
</TABLE>
(1) Primarily represents loans to facilitate the sale of real estate acquired
in settlement of loans and loans that meet certain yield and other
approved guidelines.
Originations of one-to-four unit residential loans totaled $392.5 million
in the third quarter of 1996, of which $367.7 million were for portfolio and
$24.8 million were for sale. This was 48% higher than the $265.7 million
originated in the second quarter of 1996, and more than triple the $108.1
million originated in the year-ago quarter. During the current quarter, 36% of
Downey's residential one-to-four unit originations represented refinancings of
existing loans (existing Downey loans were 5%). This is down from both 40%
(existing Downey loans were 8%) during the previous quarter and 46% (existing
Downey loans were 15%) in the year-ago third quarter. In addition to single
family loans, $86.2 million of other loans were originated in the quarter
including $56.9 million of automobile loans and $14.1 million of construction
loans.
During the current quarter, loan originations for investment consisted
primarily of adjustable rate mortages ("ARMs") tied to the Federal Home Loan
Bank ("FHLB") Eleventh District Cost of Funds Index ("COFI"), an index which
lags the movement in market interest rates. This experience is similar to that
of recent quarters. 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 September 30, 1996,
$1.6 billion of the ARMs in Downey's loan portfolio were subject to negative
amortization of which $12.6 million, or less than 1%, represented the amount of
negative amortization added to the unpaid 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 originated. Sales of loans and mortgage-backed securities originated by
Downey were $25.1 million for the third quarter of 1996, compared to $43.6
million in the previous quarter and $28.6 million for the third quarter of 1995.
All were secured by residential one-to-four unit property.
At September 30, 1996, Downey had commitments to fund loans amounting to
$139.8 million, undrawn lines of credit of $71.6 million, loans in process of
$43.7 million and no letters of credit. Downey believes its current sources of
funds will enable it to meet these obligations while exceeding all regulatory
liquidity requirements.
11
<PAGE>
The following table sets forth the origination, purchase and sale activity
relating to loans and mortgage-backed securities Downey held for investment and
held for sale.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------
September 30, June 30, March 31, December 31, September30,
(In Thousands) 1996 1996 1996 1995 1995
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
INVESTMENT PORTFOLIO:
Loans originated:
Loans secured by real estate:
Residential:
One-to-four units:
Adjustable .............................................. $ 359,816 $ 222,270 $ 94,120 $ 97,234 $ 73,830
Adjustable - fixed for first three or five years ........ -- -- 19,864 11,846 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjustable ...................................... 359,816 222,270 113,984 109,080 73,830
Fixed ................................................... 7,859 12,794 7,831 4,861 4,357
Five or more units:
Adjustable .............................................. 6,375 4,641 6,393 -- --
Fixed ................................................... 105 -- 2,148 270 149
- ------------------------------------------------------------------------------------------------------------------------------------
Total residential ..................................... 374,155 239,705 130,356 114,211 78,336
Commercial real estate ..................................... -- -- 57 5,509 457
Construction ............................................... 14,065 27,630 14,110 15,078 8,053
Land ....................................................... -- 10,468 -- 12,906 --
Non-mortgage:
Commercial - secured ....................................... 5,309 1,536 -- -- --
Commercial - unsecured ..................................... -- -- 1,400 1,000 --
Automobile ................................................. 56,863 63,968 33,421 19,275 22,873
Other consumer ............................................. 3,506 4,051 2,331 3,478 3,507
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans originated ................................ 453,898 347,358 181,675 171,457 113,226
Loan repayments ................................................ (183,629) (205,617) (216,406) (183,292) (164,139)
Other net changes (1) .......................................... (5,834) (26,539) (3,528) (24,603) (13,195)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for investment ....... 264,435 115,202 (38,259) (36,438) (64,108)
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities held to maturity, net:
Repayments ................................................. -- -- -- (1,695) (1,317)
Mortgage-backed securities transferred to available for sale -- -- -- (33,555) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net decrease in mortgage-backed securities, net .......... -- -- -- (35,250) (1,317)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans and mortgage-backed
securities held for investment ......................... 264,435 115,202 (38,259) (71,688) (65,425)
- ------------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO:
Residential, one-to-four units:
Originated whole loans ..................................... 24,826 30,644 67,502 48,027 29,881
Loans transferred from the investment portfolio ............ 170 250 1,215 -- --
Originated whole loans sold ................................ (20,077) (36,708) (62,180) (41,329) (28,554)
Loans exchanged for mortgage-backed securities ............. (5,035) (6,880) -- -- --
Other net changes .......................................... (5) 31 (63) (7) (2)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for sale ........... (121) (12,663) 6,474 6,691 1,325
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, net:
Purchased .................................................. 4,705 -- 25,368 -- --
Loans exchanged for mortgage-backed securities ............. 5,035 6,880 -- -- --
Transfer from mortgage-backed securities held to maturity .. -- -- -- 33,555 --
Sold ....................................................... (9,660) (6,880) -- -- --
Repayments ................................................. (3,794) (4,176) (4,342) (2,086) (1,159)
Other net changes .......................................... 89 (714) (709) 1,439 121
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in mortgage-backed securities
available for sale ..................................... (3,625) (4,890) 20,317 32,908 (1,038)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans and mortgage-backed
securities held for sale and available for sale ........ (3,746) (17,553) 26,791 39,599 287
- ------------------------------------------------------------------------------------------------------------------------------------
Total net increase (decrease) in loans and
mortgage-backed securities ............................... $ 260,689 $ 97,649 $ (11,468) $ (32,089) $ (65,138)
====================================================================================================================================
</TABLE>
(1) Primarily includes borrowings against and repayments of construction loans
and lines of credit, changes in loss allowances, loans transferred to real
estate acquired in settlement of loans or to the held for sale portfolio,
and interest capitalized on loans (negative amortization).
12
<PAGE>
The following table sets forth the composition of Downey's loan and
mortgage-backed securities portfolios held for investment, and held for sale by
type of loan at the dates indicated.
<TABLE>
<CAPTION>
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 1996 1996 1996 1995 1995
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
INVESTMENT PORTFOLIO:
Loans secured by real estate:
Residential:
One-to-four units:
Adjustable ........................................ $3,684,668 $3,470,064 $3,413,503 $3,486,774 $3,536,084
Fixed ............................................. 173,474 173,651 169,057 169,738 174,943
- ------------------------------------------------------------------------------------------------------------------------------------
Total one-to-four units ......................... 3,858,142 3,643,715 3,582,560 3,656,512 3,711,027
Five or more units:
Adjustable ........................................ 54,737 48,518 50,245 44,438 46,757
Fixed ............................................. 14,116 14,130 14,897 12,883 14,680
Commercial real estate:
Adjustable ........................................ 161,690 162,809 163,737 170,498 169,821
Fixed ............................................. 101,121 101,996 103,021 100,085 104,133
Construction ........................................... 62,651 56,341 37,066 28,593 16,215
Land ................................................... 23,260 26,840 18,782 21,867 9,285
Non-mortgage:
Commercial:
Secured ............................................. 7,093 1,786 250 250 250
Unsecured ........................................... 12,076 11,469 13,896 12,614 12,117
Consumer:
Automobile .......................................... 174,628 134,829 82,093 56,127 41,690
Other consumer ...................................... 46,755 47,543 48,405 50,945 51,771
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment ................... 4,516,269 4,249,976 4,114,952 4,154,812 4,177,746
Less:
Undisbursed loan funds ................................. (50,052) (48,681) (28,865) (29,942) (16,704)
Unearned fees and discounts ............................ 9,778 7,741 7,389 7,412 7,610
Allowance for estimated loss ........................... (30,278) (27,754) (27,396) (27,943) (27,875)
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment, net .............. 4,445,717 4,181,282 4,066,080 4,104,339 4,140,777
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities held to maturity, net:
Adjustable ............................................. -- -- -- -- 17,872
Fixed .................................................. -- -- -- -- 17,378
- ------------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities held to maturity, net -- -- -- -- 35,250
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities held
for investment .................................... 4,445,717 4,181,282 4,066,080 4,104,339 4,176,027
- ------------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO, NET:
Loans held for sale (all one-to-four units):
Adjustable ............................................. 2,109 3,243 1,028 238 --
Fixed .................................................. 4,640 3,627 18,505 12,821 6,368
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans held for sale ........................... 6,749 6,870 19,533 13,059 6,368
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities available for sale:
Adjustable ............................................. 24,967 27,247 30,579 34,355 19,168
Fixed .................................................. 38,911 40,256 41,814 17,721 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities available for sale.. 63,878 67,503 72,393 52,076 19,168
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities
held for sale and available for sale ......... 70,627 74,373 91,926 65,135 25,536
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities ...... $ 4,516,344 $ 4,255,655 $ 4,158,006 $ 4,169,474 $ 4,201,563
====================================================================================================================================
</TABLE>
13
<PAGE>
Loans held for sale are carried at the lower of cost or market. At
September 30, 1996, 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 September 30, 1996, reflect an unrealized loss of $0.4 million. The
current quarter-end unrealized loss, less the associated tax effect of $0.2
million, is reflected as a separate component of stockholders' equity until
realized.
INVESTMENTS IN REAL ESTATE AND JOINT VENTURES
Downey's investment in real estate and joint ventures amounted to $44.6
million at September 30, 1996, compared to $42.3 million at December 31, 1995,
and $53.2 million at September 30, 1995.
The following table is a summary of the activity of Downey's allowance for
real estate held for investment for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 1996 1996 1996 1995 1995
====================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 32,185 $ 32,868 $ 34,338 $ 35,442 $ 35,492
Provision .................... (849) (382) (1,470) (1,104) (50)
Charge-offs .................. (54) (301) -- -- --
Recoveries ................... 34 -- -- -- --
- ---------------------------------------------------------------------------------------------------
Balance at end of period ..... $ 31,316 $ 32,185 $ 32,868 $ 34,338 $ 35,442
===================================================================================================
</TABLE>
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.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 1996 1996 1996 1995 1995
=================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 971 $ 1,224 $ 1,217 $ 1,031 $ 804
Provision .................... 278 4 754 426 771
Charge-offs .................. (117) (257) (747) (240) (544)
Recoveries ................... -- -- -- -- --
- ----------------------------------------------------------------------------------------------
Balance at end of period ..... $ 1,132 $ 971 $ 1,224 $ 1,217 $ 1,031
==============================================================================================
</TABLE>
DEPOSITS
At September 30, 1996, deposits totaled $3.9 billion, up 2.8% from a year
ago. Branch generated deposits increased $263 million or 7.2%, while all
remaining Wall Street generated deposits matured and were not renewed. The
increase between third quarters was in regular passbook and certificates of
deposit, and to a lesser extent, checking accounts. The increase in these
accounts, however, was tempered by a decline in the level of money market
accounts. The following table sets forth information concerning Downey's
deposits and average rates paid at the dates indicated.
14
<PAGE>
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996 March 31, 1996 December 31, 1995 September 30, 1995
------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
(Dollars in Average Average Average Average Average
Thousands) Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Regular passbook .. 2.89% $ 414,793 2.76% $ 411,573 2.65% $ 399,198 2.59% $ 387,986 2.48% $ 375,474
Money market ...... 2.52 101,999 2.39 105,649 2.30 113,103 2.30 119,891 2.30 120,781
accounts
Checking accounts . 0.73 300,830 0.74 299,057 0.72 316,109 0.76 297,014 0.81 291,593
Certificates of
deposit:
Less than 3.00% 2.70 43,870 2.71 48,088 2.77 50,460 2.82 57,786 2.83 66,454
3.00-3.49 ...... 3.07 1,085 3.06 695 3.16 974 3.21 1,392 3.28 2,446
3.50-3.99 ...... 3.97 102 3.95 1,360 3.81 4,081 3.75 7,781 3.85 14,530
4.00-4.49 ...... 4.30 73,695 4.21 77,341 4.21 84,523 4.18 99,758 4.19 137,620
4.50-4.99 ...... 4.85 347,265 4.85 437,075 4.86 319,664 4.88 262,065 4.81 236,352
5.00-5.99 ...... 5.49 2,302,221 5.47 2,191,299 5.48 2,052,359 5.52 1,863,474 5.57 1,489,966
6.00-6.99 ...... 6.30 295,178 6.39 235,150 6.46 480,486 6.46 596,803 6.37 957,526
7.00-7.99 ...... 7.12 34,305 7.18 47,151 7.18 69,465 7.27 94,768 7.28 107,321
8.00-8.99 ...... 8.50 48 8.22 107 8.18 236 8.31 1,245 8.22 6,759
9.00 and greater -- -- -- -- -- -- 9.35 258 9.35 252
- ------------------------------------------------------------------------------------------------------------------------------------
Total certificates
of deposit ... 5.44 3,097,769 5.40 3,038,266 5.53 3,062,248 5.61 2,985,330 5.70 3,019,226
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits . 4.74% $3,915,391 4.68% $3,854,545 4.75% $3,890,658 4.81% $3,790,221 4.90% $3,807,074
====================================================================================================================================
</TABLE>
BORROWINGS
During the 1996 third quarter, borrowings increased $166.0 million to
$594.1 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.
<TABLE>
<CAPTION>
At Periods Ended
-----------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(Dollars in Thousands) 1996 1996 1996 1995 1995
==================================================================================================================
<S> <C> <C> <C> <C> <C>
FHLB advances .................................. $397,147 $239,307 $181,137 $220,715 $212,995
Other borrowings:
Reverse repurchase agreements ............... -- -- -- 16,099 38,400
Commercial paper ............................ 186,544 178,243 148,358 196,602 196,917
Industrial revenue bonds .................... -- -- -- -- 6,420
Real estate notes ........................... 10,443 10,560 2,721 2,802 4,359
- ------------------------------------------------------------------------------------------------------------------
Total borrowings ............................ $594,134 $428,110 $332,216 $436,218 $459,091
==================================================================================================================
Weighted average rate on borrowings during
the period .................................. 5.90% 6.06% 5.92% 6.16% 6.31%
Total borrowings as a percentage of total assets 11.99 9.08 7.14 9.37 9.80
==================================================================================================================
</TABLE>
ASSET/LIABILITY MANAGEMENT
The following table sets forth the repricing frequency of Downey's major
asset and liability categories as of September 30, 1996, 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
15
<PAGE>
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.
<TABLE>
<CAPTION>
Analysis of Repricing Mechanisms
Based Upon Estimates and Assumptions
At September 30, 1996
------------------------------------------------------------------------------------------
Rate Total Percent Within 1 1 - 3 3 - 5 5 - 10 Over
(Dollars in Thousands) % Balance of Total Year Years Years Years 10
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities and
Federal Home Loan Bank stock ......... (1) 6.11% $ 191,525 4.07% $ 60,922 $ -- $130,603 $ -- $ --
Loans and mortgage-backed securities:
Mortgage-backed securities ......... 7.00 63,878 1.36 34,920 14,208 8,525 3,815 2,410
Real estate - mortgage:
Residential:
ARM ............................ (2) 7.37 3,732,585 79.29 3,701,555 31,030 -- -- --
Fixed .......................... (2) 8.86 193,964 4.12 43,427 51,004 33,621 41,959 23,953
Commercial ....................... (2) 8.65 261,876 5.56 186,185 30,120 17,900 27,671 --
Construction ..................... (2) 9.53 28,331 0.60 28,331 -- -- -- --
Consumer ........................... (2) 11.13 217,246 4.61 102,321 74,863 40,062 -- --
Commercial ......................... (2) 11.00 18,464 0.39 18,464 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed
securities ....................... 7.71 4,516,344 95.93 4,115,203 201,225 100,108 73,445 26,363
- ------------------------------------------------------------------------------------------------------------------------------------
Total .............................. 7.64% $4,707,869 100.00 $4,176,125 $ 201,225 $230,711 $ 73,445 $ 26,363
====================================================================================================================================
Deposits and borrowings:
Interest bearing deposits:
Fixed maturity deposits ............ (3) 5.44 $3,097,769 68.69% $2,711,687 $ 357,160 $ 28,555 $ 367 $ --
Money market accounts .............. (4) 2.52 101,999 2.26 101,999 -- -- -- --
Checking accounts .................. (4) 1.00 220,991 4.90 220,991 -- -- -- --
Passbook accounts .................. (4) 2.89 414,780 9.20 414,780 -- -- -- --
Non-interest bearing deposits ...... 0.00 79,852 1.77 79,852 -- -- -- --
Total deposits ..................... 4.74 3,915,391 86.82 3,529,309 357,160 28,555 367 --
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowings .......................... 5.71 594,134 13.18 476,684 87,488 16,719 13,243 --
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits and borrowings ...... 4.86% $4,509,525 100.00% $4,005,993 $ 444,648 $ 45,274 $ 13,610 $ --
====================================================================================================================================
Excess (short fall) of interest-earning assets
over interest-bearing liabilities ... $ 198,344 $ 170,132 $(243,423) $185,437 $ 59,835 $ 26,363
Cumulative gap ......................... 170,132 (73,291) 112,146 171,981 198,344
Cumulative gap - as a % of total assets:
September 30, 1996 .................. 3.43% (1.48)% 2.26% 3.47% 4.00%
December 31, 1995 ................... 4.96 0.13 2.58 3.16 3.47
September 30, 1995 .................. 3.89 1.17 3.25 3.97 4.34
====================================================================================================================================
</TABLE>
(1) Based upon contractual maturity.
(2) Based upon contractual maturity, repricing date, and projected repayments
and prepayments of principal.
(3) Based upon contractual maturity or repricing date.
(4) Subject to immediate repricing.
The one year gap at September 30, 1996, was a positive 3.43% (i.e., more
interest-earning assets reprice within one year than interest-bearing
liabilities). This compares to a positive one year gap of 2.39% at June 30,
1996, 4.96% at December 31, 1995 and 3.89% at September 30, 1995. Downey's
strategy of emphasizing the origination of adjustable rate mortgages continues
to be pursued. For the twelve months ended September 30, 1996, Downey originated
and purchased for
16
<PAGE>
investment $940 million of adjustable rate loans and mortgage-backed securities
which represented approximately 81% of all loans and mortgage-backed securities
originated and purchased for investment during the period.
At September 30, 1996, 98% of Downey's interest-earning assets mature,
reprice or are estimated to prepay within five years, unchanged from June 30,
1996, but down slightly from 99% at both December 31, 1995 and September 30,
1995. At September 30, 1996, loans and mortgage-backed securities with
adjustable interest rates represented 89% of Downey's loans and mortgage-backed
securities portfolios. During the third quarter of 1996, Downey continued to
offer residential fixed-rate loan products to its customers primarily for sale
in the secondary market. Downey prices and originates such fixed-rate mortgage
loans for sale into the secondary market in order to increase opportunities for
originating ARMs and generate fee and servicing income. 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 September 30, 1996, $4.3 billion or 94% of the total loan portfolio
(including mortgage-backed securities) consisted of adjustable rate loans and
loans with a due date of five years or less, compared to $4.0 billion or 93%,
$4.0 billion or 95%, $4.0 billion or 96%, at June 30, 1996, December 31, 1995,
and September 30, 1995, 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.
<TABLE>
<CAPTION>
September 30, June 30, March 31, December 31, September 30,
1996 1996 1996 1995 1995
=================================================================================================================
<S> <C> <C> <C> <C> <C>
Weighted average yield:
Loan and mortgage-backed securities portfolio 7.71% 7.76% 7.70% 7.67% 7.56%
Investment securities ....................... 6.11 5.77 5.79 6.29 6.30
- -----------------------------------------------------------------------------------------------------------------
Earning assets yield ........................ 7.64 7.67 7.60 7.60 7.50
- -----------------------------------------------------------------------------------------------------------------
Weighted average cost:
Savings deposits ............................ 4.74 4.68 4.75 4.81 4.90
Borrowings:
FHLB advances ............................ 5.76 5.77 6.01 6.07 6.15
Other borrowings ......................... 5.61 5.53 5.49 5.62 5.82
- -----------------------------------------------------------------------------------------------------------------
Combined borrowings ......................... 5.71 5.67 5.77 5.84 5.97
- -----------------------------------------------------------------------------------------------------------------
Combined funds .............................. 4.86 4.77 4.83 4.92 5.01
- -----------------------------------------------------------------------------------------------------------------
Interest rate spread ........................... 2.78% 2.90% 2.77% 2.68% 2.49%
=================================================================================================================
</TABLE>
The weighted average yield on the loan and mortgage-backed securities
portfolios decreased during the third quarter from 7.76% at June 30, 1996 to
7.71% at September 30, 1996, but was higher than 7.67% at December 31, 1995, and
7.56% at September 30, 1995. At September 30, 1996, the single family ARM
portfolio, including mortgage-backed securities, totaled $3.7 billion with a
weighted average rate of 7.37%, compared to $3.5 billion with a weighted average
rate of 7.46% at June 30, 1996, $3.5 billion with a weighted average rate of
7.51% at December 31, 1995, and $3.6 billion with a weighted average rate of
7.38% at September 30, 1995.
ASSET QUALITY
Non-Performing Assets
Non-performing assets increased during the quarter by $4.6 million to $67.5
million at September 30, 1996, or 1.36% of total assets. The current quarter
increase was primarily associated with one shopping center loan being placed on
non-accrual status. All of Downey's non-performing assets at September 30, 1996,
were located in California, with the exception of one property acquired in
settlement of a loan located in Arizona.
17
<PAGE>
The following table summarizes the non-performing assets of Downey at the
dates indicated.
<TABLE>
<CAPTION>
September 30, June 30, March 31, December 31, September 30,
(Dollars in Thousands) 1996 1996 1996 1995 1995
====================================================================================================================
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
One-to-four unit residential ..................... $26,613 $26,034 $24,551 $25,587 $26,429
Other ............................................ 24,097 21,146 50,259 52,754 55,684
- --------------------------------------------------------------------------------------------------------------------
Total non-accrual loans ....................... 50,710 47,180 74,810 78,341 82,113
Real estate acquired in settlement of loans, net (1) 16,332 15,452 19,454 18,854 15,876
Repossessed automobiles ............................. 433 232 239 -- --
- --------------------------------------------------------------------------------------------------------------------
Gross non-performing assets ......................... $67,475 $62,864 $94,503 $97,195 $97,989
====================================================================================================================
Allowance for loan losses (2) ....................... $30,278 $27,754 $27,396 $27,943 $27,924
Non-performing assets as a percentage of total assets 1.36% 1.33% 2.03% 2.09% 2.09%
====================================================================================================================
</TABLE>
(1) Excludes real estate acquired in settlement of loans covered under the
Butterfield Assistance Agreement at September 30, 1995.
(2) Allowance for loan losses does not include the allowance for real estate
and real estate acquired in settlement of loans. Included, however, are
valuation allowances of $49,000 at September 30, 1995, relating to a
mortgage-backed security in the held to maturity portfolio.
At September 30, 1996, the recorded investment in loans for which
impairment has been recognized totaled $48.5 million, all but $28.0 million of
which were on non-accrual status. The total allowance for possible losses
related to such loans was $5.8 million. During the third quarter of 1996, total
interest recognized on the impaired loan portfolio was $1.4 million.
Delinquent Loans
During the 1996 third quarter, total delinquencies increased $1.3 million
or 2.7%. However, as a percent of loans, delinquencies declined from 1.10% at
June 30, 1996 to 1.07% at September 30, 1996. The dollar increase during the
quarter occurred primarily in the commercial real estate loan category. Overall,
the 30-59 days category increased $3.2 million, partially offset by decreases in
the 60-89 and 90+ day categories of $2.3 million and $0.3 million, respectively.
18
<PAGE>
The following table sets forth the amounts of Downey's past due loans at
the dates indicated.
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
---------------------------------------- ----------------------------------------
30-59 60-89 90+ 30-59 60-89 90+
(Dollars in Thousands) Days Days Days (1) Total Days Days Days (1) Total
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units .................... $15,294 $ 5,579 $21,569 $42,442 $14,076 $ 7,544 $21,122 $42,742
Five or more units ................... -- -- -- -- -- -- -- --
Commercial .............................. 1,767 -- 1,926 3,693 -- -- 2,056 2,056
Construction ............................ -- -- -- -- -- -- -- --
Land .................................... -- -- -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total real estate loans .............. 17,061 5,579 23,495 46,135 14,076 7,544 23,178 44,798
Non-mortgage:
Commercial ........................... -- -- -- -- -- -- 115 115
Consumer:
Automobile ......................... 1,037 177 224 1,438 945 147 134 1,226
Other consumer ..................... 258 88 266 612 160 403 215 778
- --------------------------------------------------------------------------------------------------------------------------------
Total loans ........................ $18,356 $ 5,844 $23,985 $48,185 $15,181 $ 8,094 $23,642 $46,917
================================================================================================================================
Delinquencies as a percentage of total
loans ............................. 0.41% 0.13% 0.53% 1.07% 0.36% 0.19% 0.56% 1.10%
================================================================================================================================
<CAPTION>
March 31, 1996 December 31, 1995
---------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units .................... $15,767 $ 8,093 $20,038 $43,898 $14,047 $ 6,645 $22,303 $42,995
Five or more units ................... 107 -- -- 107 89 -- 447 536
Commercial .............................. -- -- 2,056 2,056 -- -- 30,675 30,675
Construction ............................ -- -- -- -- -- -- -- --
Land .................................... -- -- -- -- -- -- 6,516 6,516
- --------------------------------------------------------------------------------------------------------------------------------
Total real estate loans .............. 15,874 8,093 22,094 46,061 14,136 6,645 59,941 80,722
Non-mortgage:
Commercial ........................... -- -- 115 115 -- -- 115 115
Consumer:
Automobile ......................... 355 226 190 771 667 249 540 1,456
Other consumer ..................... 90 123 195 408 257 410 170 837
- --------------------------------------------------------------------------------------------------------------------------------
Total loans ........................ $16,319 $ 8,442 $22,594 $47,355 $15,060 $ 7,304 $60,766 $83,130
================================================================================================================================
Delinquencies as a percentage of total
loans ............................. 0.39% 0.20% 0.54% 1.14% 0.36% 0.18% 1.46% 1.99%
================================================================================================================================
<CAPTION>
September 30, 1995
----------------------------------------
Loans secured by real estate:
<S> <C> <C> <C> <C>
Residential:
One-to-four units .................... $14,562 $ 7,004 $22,084 $43,650
Five or more units ................... 2,400 -- -- 2,400
Commercial .............................. 1,946 -- 29,592 31,538
Construction ............................ -- -- -- --
Land .................................... 6,516 -- -- 6,516
- -------------------------------------------------------------------------------------
Total real estate loans .............. 25,424 7,004 51,676 84,104
Non-mortgage:
Commercial ........................... 115 -- -- 115
Consumer:
Automobile ......................... 900 105 22 1,027
Other consumer ..................... 355 63 258 676
- -------------------------------------------------------------------------------------
Total loans ........................ $26,794 $ 7,172 $51,956 $85,922
=====================================================================================
Delinquencies as a percentage of total
loans ............................. 0.64% 0.17% 1.24% 2.05%
=====================================================================================
</TABLE>
(1) All 90 day or greater delinquencies are on non-accrual status and
reported as part of non-performing assets.
19
<PAGE>
Valuation Allowances
Allowances for losses on all assets (including loans) were $63.2 million,
$61.4 million, $64.1 million, and $65.0 million, at September 30, 1996, June 30,
1996, December 31, 1995, and September 30, 1995, 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 14.
The total allowance for possible loan losses was $30.3 million at September
30, 1996, compared to $27.8 million at June 30, 1996, and $27.9 million at both
December 31, 1995 and September 30, 1995. Included in the current quarter-end
total allowance of $30.3 million was $27.5 million of general loan valuation
allowances, of which $2.8 million represents an unallocated portion. These
general loan valuation allowances may be included as a component of risk-based
capital, up to a maximum of 1.25% of risk-weighted assets. Net charge-offs
totaled $1.6 million in the 1996 third quarter, compared to $2.9 million in the
year-ago quarter. Included in the current quarter net charge-offs were $0.9
million associated with one-to-four unit residential properties and $0.5 million
associated with automobile loans.
The changes in the total valuation allowance for loan losses, including
mortgage-backed securities held to maturity, are as follows:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 1996 1996 1996 1995 1995
===============================================================================================
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $27,754 $27,396 $27,943 $27,924 $29,028
Provision .................... 4,092 2,200 1,171 1,596 1,805
Charge-offs .................. (1,657) (2,059) (1,763) (1,580) (3,003)
Recoveries ................... 89 217 45 3 94
- -----------------------------------------------------------------------------------------------
Balance at end of period (1) . $30,278 $27,754 $27,396 $27,943 $27,924
===============================================================================================
</TABLE>
(1) Includes valuation allowances of $49,000 at September 30, 1995, relating to
a mortgage-backed security in the held to maturity portfolio which was
charged-off in December 1995.
20
<PAGE>
The following table indicates the allocation of the total valuation
allowance for loan losses, including mortgage-backed securities held to
maturity, to the various categories of loans, for the dates indicated.
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996 March 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
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units ........ $12,679 $3,858,142 0.33% $12,212 $3,643,715 0.34% $12,079 $3,582,560 0.34%
Five or more units ....... 583 68,853 0.85 542 62,648 0.87 836 65,142 1.28
Commercial ................. 8,307 262,811 3.16 6,864 264,805 2.59 7,577 266,758 2.84
Construction ............... 727 62,651 1.16 654 56,341 1.16 433 37,066 1.17
Land ....................... 495 23,260 2.13 785 26,840 2.92 776 18,782 4.13
Commercial non-mortgage:
Secured .................. 71 7,093 1.00 18 1,786 1.00 3 250 1.00
Unsecured ................ 137 12,076 1.13 245 11,469 2.14 269 13,896 1.94
Consumer and other:
Automobile ............... 3,681 174,628 2.11 2,762 134,829 2.05 1,695 82,093 2.06
Other consumer ........... 798 46,755 1.71 872 47,543 1.83 928 48,405 1.92
Mortgage-backed securities held
to maturity ................ -- -- -- -- -- -- -- -- --
Not specifically allocated .... 2,800 -- -- 2,800 -- -- 2,800 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans held for
investment and
mortgage-backed
securities held to
maturity $30,278 $4,516,269 0.67% $27,754 $4,249,976 0.65% $27,396 $4,114,952 0.67%
====================================================================================================================================
<CAPTION>
December 31, 1995 September 30, 1995
------------------------------ ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units ........ $12,254 $3,656,512 0.34% $12,925 $3,711,027 0.35%
Five or more units ....... 895 57,321 1.56 963 61,437 1.57
Commercial ................. 8,456 270,583 3.13 7,806 273,954 2.85
Construction ............... 335 28,593 1.17 193 16,215 1.19
Land ....................... 973 21,867 4.45 814 9,285 8.77
Commercial non-mortgage:
Secured .................. 3 250 1.00 3 250 1.00
Unsecured ................ 256 12,614 2.03 573 12,117 4.73
Consumer and other:
Automobile ............... 849 56,127 1.51 636 41,690 1.53
Other consumer ........... 1,122 50,945 2.20 1,162 51,771 2.24
Mortgage-backed securities held
to maturity (1) ............ -- -- -- 49 35,250 0.14
Not specifically allocated .... 2,800 -- -- 2,800 -- --
- --------------------------------------------------------------------------------------------------
Total loans held for
investment and
mortgage-backed
securities held to
maturity $27,943 $4,154,812 0.67% $27,924 $4,212,996 0.66%
==================================================================================================
</TABLE>
(1) At June 30, 1994, the Bank established a general valuation allowance
related to a mortgage-backed security in its held to maturity portfolio,
against which a charge-off was recorded during the 1995 fourth quarter,
thereby eliminating the allowance.
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of funds generated in the third quarter of 1996 were
principal repayments (including prepayments, but excluding Downey refinances) on
loans and mortgage-backed securities of $166.8 million, and net increases in
FHLB advances of $157.8 million and in deposits of $60.8 million.
These funds were used primarily to originate loans held for investment of
$428.1 million (net of Downey refinances of $20.6 million) and purchase
mortgage-backed securities of $4.7 million.
21
<PAGE>
Loan repayments continued to represent a major source of funds, totaling
$183.6 million in the 1996 third quarter. This level was below the $205.6
million in the previous quarter, but above the $164.1 million in the 1995 third
quarter.
At September 30, 1996, the Bank's ratio of regulatory liquidity was 5.12%,
compared to 5.03% at December 31, 1995, and 5.06% at September 30, 1995. The
ratio remains above the regulatory minimum of 5%.
Stockholders' equity totaled $383.6 million at September 30, 1996, compared
to $384.1 million at December 31, 1995, and $373.9 million at September 30,
1995.
REGULATORY CAPITAL
The following table is a reconciliation of the Bank's stockholder's equity
to federal regulatory capital as of September 30, 1996. The core and tangible
capital ratios were 6.77% and the risk-based capital ratio was 12.93%. 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.
In a real estate joint venture relationship involving four shopping centers
with aggregate assets of $42.2 million, DSL Service Company, a wholly owned
subsidiary of the Bank, and its joint venture partners agreed in July 1996 to
sell the real estate assets prior to year-end 1996 or legal ownership will
revert solely to DSL Service Company. These shopping center assets are currently
joint ventures for legal purposes; however, DSL Service Company could acquire
operating control and management of these shopping centers if the sale does not
take place. In such an event, Downey would begin to report these assets as
wholly owned for financial reporting purposes. Two of the shopping centers are
currently financed, in part, by secured notes from the Bank in the amount of
$29.8 million and $1.2 million, respectively. These secured notes would become
part of the Bank's investment in DSL Service Company and would be deducted from
capital when calculating regulatory capital ratios until such time as the notes
are repaid. Based on September 30, 1996 data, such a deduction from capital
would reduce the Bank's tangible and core capital ratios to 6.18% from 6.77% and
the risk-based capital ratio to 11.95% from 12.93%, in all cases still above the
"well capitalized" standards.
<TABLE>
<CAPTION>
Tangible Capital Core Capital Risk-Based Capital
------------------- ------------------- ---------------------
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
=====================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Stockholder's Equity .............................. $ 374,962 $ 374,962 $ 374,962
Adjustments:
Deductions:
Investment in subsidiary primarily real estate . (42,406) (42,406) (42,406)
Non-supervisory goodwill ....................... (5,717) (5,717) (5,717)
Core deposit premium ........................... (590) (590) (590)
Non-permitted mortgage servicing rights ........ (107) (107) (107)
Additions:
Unrealized loss on securities available for sale 2,780 2,780 2,780
General loss allowance - Investment in DSL ..... 2,327 2,327 2,327
Loan and lease general valuation allowances (1) -- -- 27,485
- ---------------------------------------------------------------------------------------------------------------------
Regulatory capital ................................ 331,249 6.77% 331,249 6.77% 358,734 12.93%
Well capitalized requirement ...................... 73,393 1.50 (2) 244,645 5.00 277,411 10.00 (3)
- ---------------------------------------------------------------------------------------------------------------------
Excess ............................................ $ 257,856 5.27%$ 86,604 1.77% $ 81,323 2.93%
=====================================================================================================================
</TABLE>
(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 11.94%.
RECENT DEVELOPMENTS
Sale of Annuities
Effective the end of third quarter 1996, Downey ceased selling annuity
insurance products to customers. After offering the program for a year, it was
determined that there was not sufficient customer interest to continue the
program.
22
<PAGE>
Current Accounting Issues
In June, 1996, the Financial Accounting Standards Board issued Statement of
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 included specific provisions to deal with servicing assets or
liabilities. These provisions retain the impairment and amortization approaches
that are contained in Statement No. 122 but eliminates the distinction between
normal and excess servicing.
SFAS 125 will be effective for transactions occurring after December 31,
1996. It is not anticipated that the financial impact of this statement will
have a material effect on Downey.
Stock Split Effected in the Form of a Dividend
To enhance the marketability of Downey's stock by expanding the
availability of shares in the public market and pricing the stock at a level
more attractive to investors, the Board of Directors announced on October 29,
1996, a three-for-two split of Downey's common stock to be effected in the form
of a stock dividend. One additional common share will be issued on December 12,
1996, for every two shares held by shareholders of record on November 15, 1996.
23
<PAGE>
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 nine months ended September
30, 1996.
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: October 31, 1996 /s/ STEPHEN W. PROUGH
-------------------------------------------------
Stephen W. Prough
President and Chief Executive Officer
Date: October 31, 1996 /s/ THOMAS E. PRINCE
-------------------------------------------------
Thomas E. Prince
Executive Vice President/ Chief Financial Officer
24
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 13,150
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 13,025
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 194,481
<INVESTMENTS-CARRYING> 7,097
<INVESTMENTS-MARKET> 7,075
<LOANS> 4,452,466
<ALLOWANCE> 30,278
<TOTAL-ASSETS> 4,954,337
<DEPOSITS> 3,915,391
<SHORT-TERM> 476,684
<LIABILITIES-OTHER> 61,168
<LONG-TERM> 117,450
0
0
<COMMON> 170
<OTHER-SE> 383,474
<TOTAL-LIABILITIES-AND-EQUITY> 4,954,337
<INTEREST-LOAN> 240,856
<INTEREST-INVEST> 12,582
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 253,438
<INTEREST-DEPOSIT> 135,762
<INTEREST-EXPENSE> 18,639
<INTEREST-INCOME-NET> 99,037
<LOAN-LOSSES> 7,463
<SECURITIES-GAINS> 4,473
<EXPENSE-OTHER> 89,533
<INCOME-PRETAX> 21,037
<INCOME-PRE-EXTRAORDINARY> 11,958
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,958
<EPS-PRIMARY> 0.70
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.58
<LOANS-NON> 50,710
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,505
<ALLOWANCE-OPEN> 27,943
<CHARGE-OFFS> 5,479
<RECOVERIES> 351
<ALLOWANCE-CLOSE> 30,278
<ALLOWANCE-DOMESTIC> 30,278
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,800
</TABLE>
