<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
For the quarterly period ended JUNE 30, 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 June 30, 1996, 16,972,905 shares of the Registrants Common Stock, $0.01
par value were outstanding.
================================================================================
<PAGE>
DOWNEY FINANCIAL CORP.
JUNE 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 Income................................. 2
Consolidated Statements of Cash Flows............................. 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......................... 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................... 5
PART II
OTHER INFORMATION................................................. 24
Item 6 Exhibits and Reports on Form 8-K........................ 24
</TABLE>
i
<PAGE>
PART I - FINANCIAL INFORMATION
DOWNEY FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31, June 30,
(Dollars in Thousands, Except Per Share Data) 1996 1995 1995
===================================================================================================================================
<S> <C> <C> <C>
ASSETS
Cash $ 48,313 $ 58,581 $ 41,572
Federal funds 28,756 7,249 20,424
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 77,069 65,830 61,996
U.S. Treasury and agency obligations and other investment securities
available for sale, at fair value 130,297 164,880 -
U.S. Treasury and agency obligations and other investment securities
being held to maturity, at amortized cost (estimated market value
of $7,075 at June 30, 1996, $7,170 at December 31, 1995 and
$168,189 at June 30, 1995) 7,098 7,194 164,967
Loans held for sale, at the lower of cost or market 6,870 13,059 5,043
Mortgage-backed securities available for sale, at fair value 67,503 52,076 20,206
Mortgage-backed securities held to maturity, at amortized cost
(estimated market value of $37,329 at June 30, 1995) - - 36,567
Loans receivable held for investment 4,181,282 4,104,339 4,204,885
Investments in real estate and joint ventures 44,664 42,320 53,979
Real estate acquired in settlement of loans 15,452 18,854 26,763
Premises and equipment 94,952 92,977 92,216
Federal Home Loan Bank stock, at cost 40,197 39,146 38,182
Other assets 46,910 55,592 40,647
- -----------------------------------------------------------------------------------------------------------------------------------
$4,712,294 $4,656,267 $4,745,451
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits $3,555,488 $3,493,207 $3,490,167
Checking deposits 299,057 297,014 273,139
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits 3,854,545 3,790,221 3,763,306
Mortgage-backed securities sold under agreements to repurchase - 16,099 30,768
Federal Home Loan Bank advances 239,307 220,715 319,800
Commercial paper 178,243 196,602 197,091
Other borrowings 10,560 2,802 11,120
Accounts payable and accrued liabilities 33,608 37,032 41,433
Deferred income taxes 4,112 8,724 11,588
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 4,320,375 4,272,195 4,375,106
- -----------------------------------------------------------------------------------------------------------------------------------
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 (3,012) 3,495 (412)
Retained earnings 372,065 357,711 347,891
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 391,919 384,072 370,345
- -----------------------------------------------------------------------------------------------------------------------------------
$4,712,294 $4,656,267 $4,745,451
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
DOWNEY FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------
(Dollars in Thousands, Except Per Share Data) 1996 1995 1996 1995
====================================================================================================================================
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $ 79,022 $ 75,355 $ 156,862 $ 144,025
U.S. Treasury and agency securities 1,913 2,675 3,834 5,271
Mortgage-backed securities 1,130 1,082 2,163 2,428
Other investments 1,084 568 2,629 1,560
Yield maintenance on covered assets, net - 185 - 362
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income 83,149 79,865 165,488 153,646
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 44,820 46,118 90,310 86,943
Borrowings 5,214 8,401 11,176 19,057
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 50,034 54,519 101,486 106,000
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 33,115 25,346 64,002 47,646
PROVISION FOR LOAN LOSSES 2,200 2,336 3,371 5,892
- ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 30,915 23,010 60,631 41,754
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INCOME, NET:
Loan and deposit related fees 1,731 1,304 3,348 2,559
Real estate and joint ventures held for investment, net:
Net gains (losses) on sales of wholly owned real estate (9) (4) (28) 2,208
Reduction of loss on real estate and joint ventures 382 1,378 1,852 1,762
Operations, net 528 866 1,307 2,038
Secondary marketing activities:
Loan servicing fees 390 360 652 728
Net gains on sales of loans and mortgage-backed securities 376 62 931 94
Net gains (losses) on sales of investment securities - (15) 4,473 (15)
Reduction of loss on investment in lease residual - - - 207
Commissions earned on insurance and related products 195 46 460 46
Other 409 382 829 883
- ------------------------------------------------------------------------------------------------------------------------------------
Total other income, net 4,002 4,379 13,824 10,510
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE:
Salaries and related costs 11,108 9,976 21,810 19,888
Premises and equipment costs 2,988 2,859 5,842 5,699
SAIF insurance premiums and regulatory assessments 2,332 2,089 4,689 4,178
Professional fees 784 968 1,492 1,596
Other general and administrative expense 3,574 2,744 6,736 5,430
- ------------------------------------------------------------------------------------------------------------------------------------
Total general and administrative expense 20,786 18,636 40,569 36,791
- ------------------------------------------------------------------------------------------------------------------------------------
Net operation of real estate acquired in settlement of loans 187 1,353 1,234 2,395
Amortization of excess of cost over fair value of net assets acquired 134 132 266 265
- ------------------------------------------------------------------------------------------------------------------------------------
Total operating expense 21,107 20,121 42,069 39,451
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 13,810 7,268 32,386 12,813
Income taxes 5,946 3,085 13,958 5,420
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 7,864 $ 4,183 $ 18,428 $ 7,393
====================================================================================================================================
PER SHARE INFORMATION:
NET INCOME $ 0.47 $ 0.25 $ 1.09 $ 0.44
====================================================================================================================================
DIVIDENDS PAID $ 0.120 $ 0.114 $ 0.240 $ 0.229
====================================================================================================================================
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>
Six Months Ended
June 30,
---------------------------
(In Thousands) 1996 1995
===========================================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,428 $ 7,393
Adjustments to reconcile net cash provided by operating activities:
Depreciation and amortization 3,780 3,913
Provision for losses on loans, leases, real estate acquired in settlement
of loans and investments in real estate and joint ventures 2,279 5,280
Net gains on sales of loans, investment securities, real estate and other assets (5,709) (2,179)
Interest capitalized on loans (negative amortization) (5,204) (2,107)
Federal Home Loan Bank dividends (1,051) (844)
Net change in loans receivable - held for sale 1,319 (4,612)
Other, net 5,746 (4,264)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,588 2,580
- ---------------------------------------------------------------------------------------------------------------------------
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 7,266 21,334
Sales of wholly-owned real estate and real estate acquired in settlement of loans 3,058 8,838
Purchase of:
U.S. Treasury and agency obligations and other investment securities (160,455) (25,000)
Mortgage-backed securities available for sale (25,368) -
Loans receivable held for investment - (44,194)
Loans receivable originated - held for investment (net of refinances of $44,168 and $15,428
at June 30, 1996 and 1995, respectively) (471,202) (237,072)
Principal payments on loans receivable held for investment and mortgage-backed securities
held to maturity and available for sale 390,848 181,919
Net change in undisbursed loan funds 15,353 (4,301)
Investments in real estate and joint ventures held for investment (2,717) (163)
Other, net (6,815) (3,828)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (60,491) (87,467)
- ---------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 64,324 205,908
Net decrease in securities sold under agreements to repurchase (16,099) -
Proceeds from Federal Home Loan Bank advances 400,000 1,006,000
Repayments of Federal Home Loan Bank advances (381,408) (1,098,000)
Net decrease in other borrowings (10,601) (23,997)
Cash dividends (4,074) (3,879)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 52,142 86,032
- ---------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 11,239 1,145
Cash and cash equivalents at beginning of year 65,830 60,851
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 77,069 $ 61,996
===========================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 102,755 $ 105,721
Income taxes 14,025 3,875
Supplemental disclosure of non-cash investing:
Loans exchanged for mortgage-backed securities 6,880 -
Real estate acquired in settlement of loans 13,312 12,198
Loans to facilitate the sale of real estate acquired in settlement of loans 13,663 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 June 30, 1996, December 31, 1995 and June
30, 1995, and the results of operations for the three months and six months
ended June 30, 1996 and 1995, and changes in cash flows for the six months ended
June 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 Downeys 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 PER SHARE
Net income 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 Downeys stock option plans as there was no material dilutive effect.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Net income for the second quarter of 1996 totaled $7.8 million, or
$0.47 per share, up 88.0% from the $4.2 million, or $0.25 per share, earned in
the second quarter of 1995. For the six months ended June 30, 1996, net income
amounted to $18.4 million, or $1.09 per share, more than double the $7.4
million, or $0.44 per share, earned in the same period of last year.
The increase in net income between second quarters reflected an
increase in net interest income and declines in the cost associated with the net
operation of real estate acquired in settlement of loans and provision for loan
losses. Net interest income increased $7.8 million or 30.7% due to a higher
effective interest spread. The cost associated with the net operation of real
estate acquired in settlement of loans declined by $1.2 million, and provision
for loan losses declined by $0.1 million. These positive factors were partially
offset by a $0.4 million decline in other income due to lower income from real
estate held for investment, and a $2.2 million or 11.5% increase in general
administrative expense due, in part, to expansion into new business activities.
For the second quarter of 1996, the return on average assets was 0.68%
and the return on average equity was 8.10%, bringing the returns for the first
six months of 1996 to 0.79% and 9.53%, respectively.
At June 30, 1996, assets totaled $4.7 billion, up slightly from a year
ago. Single family loan originations totaled $265.7 million in the second
quarter of 1996, of which $235.1 million were for portfolio and $30.6 million
were for sale. This compares to $87.4 million in the second quarter of 1995 and
$189.3 million in the first quarter of 1996. In addition to single family loans,
$112.3 million of other loans were originated in the quarter including $64.0
million of automobile loans and $27.6 million of construction loans.
Non-performing assets declined $31.6 million during the quarter to
$62.9 million or 1.33% of total assets. The decline in the current quarter was
spread throughout most categories but primarily reflected the return to accrual
status of one large commercial real estate loan secured by a Northern California
shopping center which had been placed on non-accrual status during the first
quarter of 1995 when the borrower declared bankruptcy. Downey and the borrower
agreed to a restructure of the loan which was approved by the bankruptcy court
in January 1996 and the borrower has since performed according to the terms of
the restructure.
Based on regulatory rules in effect at June 30, 1996, Downey Savings
and Loan Association, F.A. ("the Bank"), had core and tangible capital ratios of
7.56% and a risk-based capital ratio of 14.39%. These capital levels are well
above the "well capitalized" standards of 5% and 10%, respectively, as defined
by the regulators. When calculated on a fully phased-in basis where the full
amount of Downey's nonincludable investment in real estate is deducted from
capital, the core and tangible capital ratios were 7.20% and the risk-based
capital ratio was 13.82%, also exceeding the "well capitalized" standards. The
fully phased-in rules became effective July 1, 1996.
5
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income was $33.1 million in the second quarter of 1996,
up $7.8 million or 30.7% from the same period last year. The increase between
second quarters reflected a higher effective interest spread as earning assets
averaged $4.4 billion in the current quarter, down 2.2% from a year ago. The
effective interest spread was 3.02% in the current quarter, up from 2.26% in the
year-ago second quarter and 2.80% in the 1996 first quarter. The increase in the
effective interest spread reflected several factors including a growing
proportion of higher yielding automobile loans, a lower proportion of adjustable
rate mortgages ("ARMs") in their initial low incentive period, and a more rapid
downward repricing of funding sources than earning assets due to the declining
interest rate environment which began in 1995 and continued into the first
quarter of 1996. In addition, approximately 4 basis points of the increase in
effective interest spread reflected the return of one large commercial real
estate loan to accrual status during the quarter (see "Asset Quality - Non-
Performing Assets" on page 16). For the first six months of 1996, net interest
income totaled $64.0 million, up $16.4 million or 34.3% 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.
6
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
----------------------------------------------------------------------------
June 30, 1996 June 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 $4,108,440 $ 79,022 7.69% $4,214,630 $ 75,540 7.17%
Mortgage-backed securities 70,007 1,130 6.46 63,791 1,082 6.78
Investment securities 211,434 2,997 5.70 209,998 3,243 6.19
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 4,389,881 83,149 7.58 4,488,419 79,865 7.12
Non-interest-earning assets 232,926 260,478
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $4,622,807 $4,748,897
===================================================================================================================================
Interest-bearing liabilities:
Deposits $3,846,691 $ 44,820 4.69% $3,788,921 $ 46,118 4.88%
Borrowings 346,273 5,214 6.06 521,850 8,401 6.46
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4,192,964 50,034 4.80 4,310,771 54,519 5.07
Non-interest-bearing liabilities 41,466 69,674
Stockholders' equity 388,377 368,452
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $4,622,807 $4,748,897
===================================================================================================================================
Net interest income/interest rate spread $ 33,115 2.78% $ 25,346 2.05%
Excess of interest-earning assets over
interest-bearing liabilities $ 196,917 $ 177,648
Effective interest rate spread 3.02% 2.26%
==================================================================================================================================
<CAPTION>
FOR THE SIX MONTHS ENDED
----------------------------------------------------------------------------
June 30, 1996 June 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 $4,104,170 $156,862 7.64% $4,199,770 $144,387 6.88%
Mortgage-backed securities 64,631 2,163 6.69 72,856 2,428 6.67
Investment securities 233,827 6,463 5.56 216,416 6,831 6.37
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 4,402,628 165,488 7.52 4,489,042 153,646 6.85
Non-interest-earning assets 237,213 261,316
- -----------------------------------------------------------------------------------------------------------------------------------
Total assets $4,639,841 $4,750,358
===================================================================================================================================
Interest-bearing liabilities:
Deposits $3,832,129 $ 90,310 4.74% $3,724,438 $ 86,943 4.71%
Borrowings 375,527 11,176 5.98 591,475 19,057 6.50
- -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4,207,656 101,486 4.85 4,315,913 106,000 4.91
Non-interest-bearing liabilities 45,388 67,147
Stockholders' equity 386,797 367,298
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $4,639,841 $4,750,358
===================================================================================================================================
Net interest income/interest rate spread $ 64,002 2.67% $ 47,646 1.94%
Excess of interest-earning assets over
interest-bearing liabilities $ 194,972 $ 173,129
Effective interest rate spread 2.91% 2.12%
===================================================================================================================================
</TABLE>
7
<PAGE>
Changes in Downey's net interest income are a function of both changes
in rates and changes in volumes of interest-earning assets and interest-bearing
liabilities. The following table sets forth information regarding changes in
interest income and expense for Downey for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to: (i) changes in volume (changes in
volume multiplied by comparative period rate); (ii) changes in rate (changes in
rate multiplied by comparative period volume); and (iii) change in rate-volume
(change in rate multiplied by change in volume). Interest-earning asset and
interest-bearing liability balances used in the calculations represent quarterly
average balances computed using the average of each month's daily average
balance during the period.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------------------- --------------------------------------------
June 30, 1996 versus June 30, 1995 June 30, 1996 versus June 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 $(1,903) $ 5,524 $(139) $ 3,482 $(3,287) $16,129 $(367) $12,475
Mortgage-backed securities 105 (52) (5) 48 (274) 10 (1) (265)
Investment securities 23 (267) (2) (246) 524 (825) (67) (368)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest income (1,775) 5,205 (146) 3,284 (3,037) 15,314 (435) 11,842
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 776 (2,043) (31) (1,298) 2,716 633 18 3,367
Borrowings (2,743) (532) 88 (3,187) (6,541) (1,507) 167 (7,881)
- ------------------------------------------------------------------------------------------------------------------------------------
Total interst expense (1,967) (2,575) 57 (4,485) (3,825) (874) 185 (4,514)
- ------------------------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 192 $ 7,780 $(203) $ 7,769 $ 788 $16,188 $(620) $16,356
====================================================================================================================================
</TABLE>
PROVISION FOR LOAN LOSSES
Provision for loan losses was $2.2 million in the current quarter,
down from $2.3 million in the year-ago quarter. For the first six months of
1996, provision for loan losses totaled $3.4 million, compared to $5.9 million
in the year-ago period. For information regarding the allowance for loan
losses, see Asset Quality - Valuation Allowances on page 19.
OTHER INCOME
Total other income was $4.0 million in the second quarter of 1996,
down $0.4 million from the year-ago quarter. The decrease was primarily due to
a decline in income associated with real estate held for investment. That
category declined, in the aggregate, by $1.3 million between second quarters to
$0.9 million. The decline was primarily in provision for losses on real estate
held for investment as the year-ago second quarter included a reduction of $1.4
million compared to a reduction of only $0.4 million in the current quarter.
Partially offsetting the decline in income associated with real estate held for
investment were increases in loan and deposit fees of $0.4 million, net gains on
sales of loans and mortgage-backed securities of $0.3 million which primarily
represents the impact of Downey's adoption of SFAS 122 (see Note 2 of Notes to
Consolidated Financial Statements on page 4), and commissions earned on
insurance and related products of $0.1 million. For the first six months of
1996, total other income was $13.8 million, up $3.3 million from the year-ago
period.
8
<PAGE>
The following table presents a breakdown of the key components
comprising income from real estate and joint venture operations.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1996 1996 1995 1995 1995
============================================================================================================================
<S> <C> <C> <C> <C> <C>
Operations, net:
Rental operations, net of expenses $285 $ 853 $ 867 $1,033 $ 872
Equity in net income (loss) and interest from
joint venture advances 243 (74) 119 (320) (6)
- ----------------------------------------------------------------------------------------------------------------------------
Total operations, net 528 779 986 713 866
Net gains (losses) on sales of wholly-owned
real estate (9) (19) 2,333 (2) (4)
Recovery for losses on real estate and
joint ventures 382 1,470 1,104 50 1,378
- ----------------------------------------------------------------------------------------------------------------------------
Income from real estate and joint $901 $2,230 $4,423 $ 761 $2,240
venture operations
============================================================================================================================
</TABLE>
OPERATING EXPENSE
Operating expense totaled $21.1 million in the second quarter, up $1.0
million or 4.9% from the second quarter of 1995. 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 $1.2
million to $0.2 million. General and administrative expense totaled $20.8
million and was $2.2 million or 11.5% higher than the same period last year.
The increase in general and administrative expense reflects several factors
including higher costs associated with increased lending volumes, the expansion
this quarter into commercial banking and supermarket banking activities, and
increased deposit insurance premiums due to higher deposit levels. For the
first six months of 1996, operating expenses totaled $42.1 million, up $2.6
million or 6.6% from the same period of 1995.
PROVISION FOR INCOME TAXES
Income taxes for the second quarter totaled $5.9 million, resulting in
an effective tax rate of 43.1%, compared to $3.1 million and 42.4% for the like
quarter of a year ago. For the first six months of 1996, the effective tax rate
was 43.1% compared to 42.3% in the same period of 1995.
9
<PAGE>
FINANCIAL CONDITION
LOANS AND MORTGAGE-BACKED SECURITIES
Total loans and mortgage-backed securities, including those held for sale,
increased $97.6 million during the second quarter to a total of $4.3 billion, or
90.3% of assets, at June 30, 1996. This increase primarily reflected increases
of $61.2 million in the residential one-to-four unit loan portfolio held for
investment and $52.7 million in automobile loans. These increases were partially
offset by decreases in loans held for sale and mortgage-backed securities
available for sale.
The following table sets forth originations of loans held for investment
and loans originated for sale.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1996 1996 1995 1995 1995
======================================================================================================================
<S> <C> <C> <C> <C> <C>
Loans originated for investment:
Residential - one-to-four ARMs (1) $222,270 $113,984 $109,080 $ 73,830 $ 70,970
Residential - one-to-four fixed (2) 12,794 7,831 4,861 4,357 3,673
Other 112,294 59,860 57,516 35,039 29,892
- ----------------------------------------------------------------------------------------------------------------------
Total loans originated for investment 347,358 181,675 171,457 113,226 104,535
Loans originated for sale (primarily
residential - fixed) 30,644 67,502 48,027 29,881 12,745
- ----------------------------------------------------------------------------------------------------------------------
Total loans originated $378,002 $249,177 $219,484 $143,107 $117,280
======================================================================================================================
</TABLE>
(1) Includes for the three months ended June 30, 1995, $0.6 million in loans
purchased through correspondent lending relationships.
(2) Primarily represents loans to facilitate the sale of real estate acquired
in settlement of loans and loans that meet certain yield and other approved
guidelines.
Originations of one-to-four unit residential loans totaled $265.7 million
in the second quarter of 1996, of which $235.1 million were for portfolio and
$30.6 million were for sale. This was 40% higher than the $189.3 million
originated in the first quarter of 1996, and about triple the $87.4 million
originated in the year-ago quarter. During the current quarter, 40% of Downey's
residential one-to-four unit originations represented refinancings of existing
loans (existing Downey loans were 8%). This is down from 59% (existing Downey
loans were 12%) during the previous quarter, and up from 34% (existing Downey
loans were 7%) in the year-ago second quarter. In addition to single family
loans, $112.3 million of other loans were originated in the quarter including
$64.0 million of automobile loans and $27.6 million of construction loans.
During the current quarter, loan originations for investment consisted
primarily of ARMs tied to the Federal Home Loan Bank ("FHLB") Eleventh District
Cost of Funds Index ("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 June 30, 1996, $1.3 billion of the ARMs in
Downey's loan portfolio were subject to negative amortization of which $10.5
million 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 $43.6 million for the second quarter of 1996, compared to $62.2
million in the previous quarter and $8.5 million for the second quarter of 1995.
All were secured by residential one-to-four unit property.
10
<PAGE>
At June 30, 1996, Downey had commitments to fund loans amounting to $114.5
million, undrawn lines of credit of $68.8 million, loans in process of $47.6
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.
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
---------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1996 1996 1995 1995 1995
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
INVESTMENT PORTFOLIO:
Loans originated:
Loans secured by real estate:
Residential:
One-to-four units:
Adjustable $ 222,270 $ 94,120 $ 97,234 $ 73,830 $ 70,400
Adjustable - fixed for first three or five years - 19,864 11,846 - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjustable 222,270 113,984 109,080 73,830 70,400
Fixed 12,794 7,831 4,861 4,357 3,673
Five or more units:
Adjustable 4,641 6,393 - - -
Fixed - 2,148 270 149 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total residential 239,705 130,356 114,211 78,336 74,073
Commercial real estate - 57 5,509 457 -
Construction 27,630 14,110 15,078 8,053 5,800
Land 10,468 - 12,906 - -
Non-mortgage:
Commercial - secured 1,536 - - - -
Commercial - unsecured - 1,400 1,000 - 115
Automobile 63,968 33,421 19,275 22,873 19,405
Other consumer 4,051 2,331 3,478 3,507 4,572
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans originated 347,358 181,675 171,457 113,226 103,965
Real estate loans purchased (1) - - - - 570
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans originated and purchased 347,358 181,675 171,457 113,226 104,535
Loan repayments (208,294) (218,204) (184,714) (165,222) (101,186)
Other net changes (2) (23,862) (1,730) (23,181) (12,112) (11,716)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for investment 115,202 (38,259) (36,438) (64,108) (8,367)
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities held to maturity, net:
Repayments - - (1,695) (1,317) (1,424)
Mortgage-backed securities transferred to available
for sale - - (33,555) - -
- ------------------------------------------------------------------------------------------------------------------------------------
Net decrease in mortgage-backed securities, net - - (35,250) (1,317) (1,424)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans and mortgage-backed
securities held for investment 115,202 (38,259) (71,688) (65,425) (9,791)
- ------------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO:
Residential, one-to-four units:
Originated whole loans 30,644 67,502 48,027 29,881 12,745
Loans transferred from the investment portfolio 250 1,215 - - -
Originated whole loans sold (36,708) (62,180) (41,329) (28,554) (8,530)
Loans exchanged for mortgage-backed securities (6,880) - - - -
Other net changes 31 (63) (7) (2) -
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for sale (12,663) 6,474 6,691 1,325 4,215
- ------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, net:
Purchased - 25,368 - - -
Loans exchanged for mortgage-backed securities 6,880 - - - -
Transfer from mortgage-backed securities held to maturity - - 33,555 - -
Sold (6,880) - - - (21,372)
Repayments (4,176) (4,342) (2,086) (1,159) (1,123)
Other net changes (714) (709) 1,439 121 274
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in mortgage-backed securities
available for sale (4,890) 20,317 32,908 (1,038) (22,221)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans and mortgage-backed
securities held for sale and available for sale (17,553) 26,791 39,599 287 (18,006)
- ------------------------------------------------------------------------------------------------------------------------------------
Total net increase (decrease) in loans and mortgage-
backed securities $ 97,649 $ (11,468) $ (32,089) $ (65,138) $ (27,797)
====================================================================================================================================
</TABLE>
(1) Primarily one-to-four unit residential loans.
(2) 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).
11
<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>
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1996 1996 1995 1995 1995
===============================================================================================================================
<S> <C> <C> <C> <C> <C>
INVESTMENT PORTFOLIO:
Loans secured by real estate:
Residential:
One-to-four units:
Adjustable $3,470,064 $3,413,503 $3,486,774 $3,536,084 $3,601,504
Fixed 173,651 169,057 169,738 174,943 179,054
- -------------------------------------------------------------------------------------------------------------------------------
Total one-to-four units 3,643,715 3,582,560 3,656,512 3,711,027 3,780,558
Five or more units:
Adjustable 48,518 50,245 44,438 46,757 47,260
Fixed 14,130 14,897 12,883 14,680 14,751
Commercial real estate:
Adjustable 162,809 163,737 170,498 169,821 173,497
Fixed 101,996 103,021 100,085 104,133 112,797
Construction 56,341 37,066 28,593 16,215 12,047
Land 26,840 18,782 21,867 9,285 9,333
Non-mortgage:
Commercial:
Secured 1,786 250 250 250 250
Unsecured 11,469 13,896 12,614 12,117 12,239
Consumer:
Automobile 134,829 82,093 56,127 41,690 21,845
Other consumer 47,543 48,405 50,945 51,771 52,984
- -------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment 4,249,976 4,114,952 4,154,812 4,177,746 4,237,561
Less:
Undisbursed loan funds (48,681) (28,865) (29,942) (16,704) (11,252)
Unearned fees and discounts 7,741 7,389 7,412 7,610 7,555
Allowance for estimated loss (27,754) (27,396) (27,943) (27,875) (28,979)
- -------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment, net 4,181,282 4,066,080 4,104,339 4,140,777 4,204,885
- -------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities held to maturity, net:
Adjustable - - - 17,872 18,555
Fixed - - - 17,378 18,012
- -------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities held to
maturity, net - - - 35,250 36,567
- -------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities
held for investment 4,181,282 4,066,080 4,104,339 4,176,027 4,241,452
- -------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO, NET:
Loans held for sale (all one-to-four units):
Adjustable 3,243 1,028 238 - -
Fixed 3,627 18,505 12,821 6,368 5,043
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans held for sale 6,870 19,533 13,059 6,368 5,043
- -----------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities available for sale:
Adjustable 27,247 30,579 34,355 19,168 20,206
Fixed 40,256 41,814 17,721 - -
- -------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities available
for sale 67,503 72,393 52,076 19,168 20,206
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities
held for sale and available for sale 74,373 91,926 65,135 25,536 25,249
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgaged-backed securities $4,255,655 $4,158,006 $4,169,474 $4,201,563 $4,266,701
===================================================================================================================================
</TABLE>
12
<PAGE>
Loans held for sale are carried at the lower of cost or market. At June 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 June 30, 1996, reflect an unrealized loss of $0.5 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 $44.7
million at June 30, 1996, compared to $42.3 million at December 31, 1995, and
$54.0 million at June 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
-------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1996 1996 1995 1995 1995
================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $32,868 $34,338 $35,442 $35,492 $36,870
Provision (382) (1,470) (1,104) (50) (1,378)
Charge-offs (301) - - - -
Recoveries - - - - -
- ----------------------------------------------------------------------------------------------------------------
Balance at end of period $32,185 $32,868 $34,338 $35,442 $35,492
================================================================================================================
</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
-------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1996 1996 1995 1995 1995
================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,224 $1,217 $1,031 $ 804 $ 747
Provision 4 754 426 771 624
Charge-offs (257) (747) (240) (544) (567)
Recoveries - - - - -
- ----------------------------------------------------------------------------------------------------------------
Balance at end of period $ 971 $1,224 $1,217 $1,031 $ 804
================================================================================================================
</TABLE>
DEPOSITS
At June 30, 1996, deposits totaled $3.9 billion, up $91.2 million or 2.4%
from the year-ago quarter end, but down $36.1 million or 0.9% from the end of
the first quarter of 1996. The increase between second 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.
13
<PAGE>
<TABLE>
<CAPTION>
June 30, 1996 March 31, 1996 December 31, 1995 September 30, 1995 June 30, 1995
------------------ ------------------- -------------------- -------------------- ------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
(Dollars in Thousands) Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Regular passbook 2.76% $ 411,573 2.65% $ 399,198 2.59% $ 387,986 2.48% $ 375,474 2.41% $ 365,847
Money market accounts 2.39 105,649 2.30 113,103 2.30 119,891 2.30 120,781 2.30 126,638
Checking accounts 0.74 299,057 0.72 316,109 0.76 297,014 0.81 291,593 0.85 273,139
Certificates of deposit:
Less than 3.00% 2.71 48,088 2.77 50,460 2.82 57,786 2.83 66,454 2.82 56,195
3.00-3.49 3.06 695 3.16 974 3.21 1,392 3.28 2,446 3.23 21,060
3.50-3.99 3.95 1,360 3.81 4,081 3.75 7,781 3.85 14,530 3.84 82,110
4.00-4.49 4.21 77,341 4.21 84,523 4.18 99,758 4.19 137,620 4.25 174,281
4.50-4.99 4.85 437,075 4.86 319,664 4.88 262,065 4.81 236,352 4.75 217,719
5.00-5.99 5.47 2,191,299 5.48 2,052,359 5.52 1,863,474 5.57 1,489,966 5.56 1,106,762
6.00-6.99 6.39 235,150 6.46 480,486 6.46 596,803 6.37 957,526 6.35 1,209,652
7.00-7.99 7.18 47,151 7.18 69,465 7.27 94,768 7.28 107,321 7.30 119,203
8.00-8.99 8.22 107 8.18 236 8.31 1,245 8.22 6,759 8.23 10,303
9.00 and greater - - - - 9.35 258 9.35 252 9.36 397
- ------------------------------------------------------------------------------------------------------------------------------------
Total certificates of
deposit 5.40 3,038,266 5.53 3,062,248 5.61 2,985,330 5.70 3,019,226 5.71 2,997,682
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 4.68% $3,854,545 4.75% $3,890,658 4.81% $3,790,221 4.90% $3,807,074 4.92% $3,763,306
====================================================================================================================================
</TABLE>
BORROWINGS
During the 1996 second quarter, borrowings increased $95.9 million to
$428.1 million, reflecting increases in all categories. The following table sets
forth information concerning Downey's FHLB advances and other borrowings at the
dates indicated.
<TABLE>
<CAPTION>
At Periods Ended
---------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(Dollars in Thousands) 1996 1996 1995 1995 1995
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
FHLB advances $239,307 $181,137 $220,715 $212,995 $319,800
Other borrowings:
Reverse repurchase agreements - - 16,099 38,400 30,768
Commercial paper 178,243 148,358 196,602 196,917 197,091
Industrial revenue bonds - - - 6,420 6,421
Real estate notes 10,560 2,721 2,802 4,359 4,699
- ------------------------------------------------------------------------------------------------------------------------------------
Total borrowings $428,110 $332,216 $436,218 $459,091 $558,779
====================================================================================================================================
Weighted average rate on borrowings during
the period 6.06% 5.92% 6.16% 6.31% 6.46%
Total borrowings as a percentage of total assets 9.08% 7.14% 9.37% 9.80% 11.78%
====================================================================================================================================
</TABLE>
ASSET/LIABILITY MANAGEMENT
The following table sets forth the repricing frequency of Downey's major
asset and liability categories as of June 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 prepayments. Repricing
14
<PAGE>
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 JUNE 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 Years
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities and
Federal Home Loan Bank stock (1) 5.77% $ 206,348 4.62% $ 76,051 $ - $130,297 $ - $ -
Loans and mortgage-backed securities:
Mortgage-backed securities 7.04 67,503 1.52 37,220 14,316 9,243 4,006 2,718
Real estate - mortgage:
Residential:
ARM (2) 7.46 3,510,607 78.68 3,472,050 38,557 - - -
Fixed (2) 8.86 194,180 4.35 47,586 54,357 34,519 39,326 18,392
Commercial (2) 8.51 271,247 6.08 183,831 33,152 21,333 32,931 -
Construction (2) 9.47 21,071 0.47 21,071 - - - -
Consumer (2) 11.28 178,950 4.01 90,147 57,756 31,047 - -
Commercial (2) 11.00 12,097 0.27 12,097 - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed 7.76 4,255,655 95.38 3,864,002 198,138 96,142 76,263 21,110
securities
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 7.67% $4,462,003 100.00% $3,940,053 $ 198,138 $226,439 $ 76,263 $ 21,110
====================================================================================================================================
Deposits and borrowings:
Interest-bearing deposits:
Fixed maturity deposits (3) 5.40% $3,038,266 70.94% $2,660,646 $ 349,125 $ 28,227 $ 268 $ -
Money market accounts (4) 2.39 105,649 2.47 105,649 - - - -
Checking accounts (4) 1.00 219,886 5.13 219,886 - - - -
Passbook accounts (4) 2.76 411,557 9.61 411,557 - - - -
Non-interest bearing deposits 0.00 79,187 1.85 79,187 - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 4.68 3,854,545 90.00 3,476,925 349,125 28,227 268 -
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowings 5.67 428,110 10.00 350,575 59,395 4,780 13,360 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits and borrowings 4.77% $4,282,655 100.00% $3,827,500 $ 408,520 $ 33,007 $ 13,628 $ -
====================================================================================================================================
Excess (shortfall) of interest-earning
assets over interest-bearing liabilities $ 179,348 $ 112,553 $(210,382) $193,432 $ 62,635 $ 21,110
Cumulative gap 112,553 (97,829) 95,603 158,238 179,348
Cumulative gap - as a % of total assets:
June 30, 1996 2.39% (2.08)% 2.03% 3.36% 3.81%
December 31, 1995 4.96 0.13 2.58 3.16 3.47
June 30, 1995 4.98 0.06 2.41 3.23 3.54
====================================================================================================================================
</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 June 30, 1996, was a positive 2.39% (i.e., more
interest-earning assets reprice within one year than interest-bearing
liabilities). This compares to a positive one year gap of 2.99% at March 31,
1996, 4.96% at December 31, 1995 and 4.98% at June 30, 1995. Downey's strategy
of emphasizing the origination of adjustable rate mortgages continues to be
pursued. For the twelve months ended June 30, 1996, Downey originated and
purchased for investment
15
<PAGE>
$635 million of adjustable rate loans and mortgage-backed securities which
represented approximately 78% of all loans and mortgage-backed securities
originated and purchased for investment during the period.
At June 30, 1996, 98% of Downey's interest-earning assets mature, reprice
or are estimated to prepay within five years, down slightly from 99% at March
31, 1996, December 31, 1995 and June 30, 1995. At June 30, 1996, loans and
mortgage-backed securities with adjustable interest rates represented 89% of
Downey's loans and mortgage-backed securities portfolios. During the second
quarter of 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 June 30, 1996, $4.0 billion or 93% 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 $3.9 billion or 93%,
$4.0 billion or 95%, $4.1 billion or 95%, at March 31, 1996, December 31, 1995,
and June 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>
June 30, March 31, December 31, September 30, June 30,
1996 1996 1995 1995 1995
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Weighted average yield:
Loan and mortgage-backed securities portfolio 7.76% 7.70% 7.67% 7.56% 7.32%
Investment securities 5.77 5.79 6.29 6.30 6.15
- -----------------------------------------------------------------------------------------------------------------------------------
Earning assets yield 7.67 7.60 7.60 7.50 7.26
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted average cost:
Savings deposits 4.68 4.75 4.81 4.90 4.92
Borrowings:
FHLB advances 5.77 6.01 6.07 6.15 6.23
Other borrowings 5.53 5.49 5.62 5.82 6.06
- -----------------------------------------------------------------------------------------------------------------------------------
Combined borrowings 5.67 5.77 5.84 5.97 6.16
- -----------------------------------------------------------------------------------------------------------------------------------
Combined funds 4.77 4.83 4.92 5.01 5.08
- -----------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.90% 2.77% 2.68% 2.49% 2.18%
====================================================================================================================================
</TABLE>
The weighted average yield on the loan and mortgage-backed securities
portfolios at June 30, 1996, increased to 7.76%, compared to 7.70% at March 31,
1996, 7.67% at December 31, 1995, and 7.32% at June 30, 1995. At June 30, 1996,
the single family ARM portfolio, including mortgage-backed securities, totaled
$3.5 billion with a weighted average rate of 7.46%, compared to $3.4 billion
with a weighted average rate of 7.53% at March 31, 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 7.16% at June 30, 1995.
ASSET QUALITY
Non-Performing Assets
Non-performing assets decreased during the quarter by $31.6 million to
$62.9 million at June 30, 1996, or 1.33% of total assets. The decline in the
current quarter was spread throughout most categories but primarily reflected
the return to accrual status of one large commercial real estate loan secured by
a Northern California shopping center. This loan had been placed on non-accrual
status during the first quarter of 1995 when the borrower declared bankruptcy.
Downey and the borrower agreed to a restructure of the loan which was approved
by the bankruptcy court in January 1996 and the borrower has since performed
according to the terms of the restructure. The effective yield on this loan
bears a market rate of interest.
16
<PAGE>
All of Downey's non-performing assets at June 30, 1996, were located in
California, with the exception of one property acquired in settlement of a loan
located in Arizona.
The following table summarizes the non-performing assets of Downey at the
dates indicated.
<TABLE>
<CAPTION>
June 30, March 31, December 31, September 30, June 30,
(Dollars in Thousands) 1996 1996 1995 1995 1995
==================================================================================================================================
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
One-to-four unit residential $26,034 $24,551 $25,587 $26,429 $24,553
Other 21,146 50,259 52,754 55,684 53,315
- ----------------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans 47,180 74,810 78,341 82,113 77,868
Real estate acquired in settlement of loans,
net (1) 15,452 19,454 18,854 15,876 13,577
Repossessed automobiles 232 239 - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Gross non-performing assets $62,864 $94,503 $97,195 $97,989 $91,445
==================================================================================================================================
Allowance for loan losses (2) $27,754 $27,396 $27,943 $27,924 $29,028
Non-performing assets as a percentage of
total assets 1.33% 2.03% 2.09% 2.09% 1.93%
==================================================================================================================================
</TABLE>
(1) Excludes real estate acquired in settlement of loans covered under the
Butterfield Assistance Agreement at September 30, 1995 and June 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 both September 30, 1995 and June 30,
1995, relating to a mortgage-backed security in the held to maturity
portfolio.
At June 30, 1996, the recorded investment in loans for which impairment has
been recognized totaled $44.2 million, all of which were on non-accrual status
except for the previously mentioned commercial real estate loan which returned
to accrual status during the quarter. The total allowance for possible losses
related to such loans was $4.3 million. During the second quarter of 1996,
total interest recognized on the impaired loan portfolio was $0.7 million.
Delinquent Loans
During the 1996 second quarter, total delinquencies decreased $0.4 million or
0.9%. The decrease occurred in total residential loan categories of $1.3
million, partially offset by increases in automobile loans of $0.5 million and
other consumer loans of $0.4 million. Overall, the 90+ days category increased
$1.0 million, offset by decreases in the 30-59 and 60-89 day categories of $1.1
million and $0.3 million, respectively.
17
<PAGE>
<TABLE>
<CAPTION>
The following table sets forth the amounts of Downey's past due loans at the
dates indicated.
June 30, 1996 March 31, 1996
----------------------------------------- --------------------------------------
30-59 60-89 90+ 30-59 60-89 90+
(Dollars in Thousands) Days Days Days (1) Total Days Days Days(1) Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units $14,076 $ 7,544 $21,122 $42,742 $15,767 $ 8,093 $20,038 $43,898
Five or more units - - - - 107 - - 107
Commercial - - 2,056 2,056 - - 2,056 2,056
Construction - - - - - - - -
Land - - - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Total real estate loans 14,076 7,544 23,178 44,798 15,874 8,093 22,094 46,061
Non-mortgage:
Commercial - - 115 115 - - 115 115
Consumer:
Automobile 945 147 134 1,226 355 226 190 771
Other consumer 160 403 215 778 90 123 195 408
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans $15,181 $ 8,094 $23,642 $46,917 $16,319 $ 8,442 $22,594 $47,355
====================================================================================================================================
Delinquencies as a percentage of
total loans 0.36% 0.19% 0.56% 1.10% 0.39% 0.20% 0.54% 1.14%
====================================================================================================================================
<CAPTION>
December 31, 1995 September 30, 1995
-------------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units $14,047 $ 6,645 $22,303 $42,995 $14,562 $ 7,004 $22,084 $43,650
Five or more units 89 - 447 536 2,400 - - 2,400
Commercial - - 30,675 30,675 1,946 - 29,592 31,538
Construction - - - - - - - -
Land - - 6,516 6,516 6,516 - - 6,516
- ------------------------------------------------------------------------------------------------------------------------------------
Total real estate loans 14,136 6,645 59,941 80,722 25,424 7,004 51,676 84,104
Non-mortgage:
Commercial - - 115 115 115 - - 115
Consumer:
Automobile 667 249 540 1,456 900 105 22 1,027
Other consumer 257 410 170 837 355 63 258 676
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans $15,060 $ 7,304 $60,766 $83,130 $26,794 $ 7,172 $51,956 $85,922
====================================================================================================================================
Delinquencies as a percentage of
total loans 0.36% 0.18% 1.46% 1.99% 0.64% 0.17% 1.24% 2.05%
====================================================================================================================================
<CAPTION>
June 30, 1995
-------------------------------------------
<S> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units $13,105 $ 6,371 $19,907 $39,383
Five or more units 74 - 189 263
Commercial - 4,994 31,854 36,848
Construction - - - -
Land - - - -
- ---------------------------------------------------------------------------------------
Total real estate loans 13,179 11,365 51,950 76,494
Non-mortgage:
Commercial - - - -
Consumer:
Automobile 75 7 17 99
Other consumer 301 9 261 571
- ---------------------------------------------------------------------------------------
Total loans $13,555 $11,381 $52,228 $77,164
=======================================================================================
Delinquencies as a percentage of
total loans 0.32% 0.27% 1.22% 1.81%
- ---------------------------------------------------------------------------------------
</TABLE>
(1) All 90 day or greater delinquencies are on non-accrual status and reported
as part of non-performing assets.
18
<PAGE>
Valuation Allowances
Allowances for losses on all assets (including loans) were $61.4 million,
$62.1 million, $64.1 million, and $65.9 million, at June 30, 1996, March 31,
1996, December 31, 1995, and June 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 13.
The total allowance for possible loan losses was $27.8 million at June 30,
1996, compared to $27.4 million at March 31, 1996, $27.9 million at December 31,
1995, and $29.0 million at June 30, 1995. Included in the current quarter-end
total allowance of $27.8 million was $26.4 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 $1.8 million in the 1996 second quarter, compared to $2.2 million in the
year-ago quarter. Included in the current quarter net charge-offs were $1.6
million associated with one-to-four unit residential properties and $0.2 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
-------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1996 1996 1995 1995 1995
=================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $27,396 $27,943 $27,924 $29,028 $28,928
Provision 2,200 1,171 1,596 1,805 2,336
Charge-offs (2,059) (1,763) (1,580) (3,003) (2,298)
Recoveries 217 45 3 94 62
- -----------------------------------------------------------------------------------------------------------------
Balance at end of period (1) $27,754 $27,396 $27,943 $27,924 $29,028
=================================================================================================================
</TABLE>
(1) Includes valuation allowances of $49,000 at both September 30, 1995, and
June 30, 1995, relating to a mortgage-backed security in the held to
maturity portfolio which was charged-off in December 1995.
19
<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>
June 30, 1996 March 31, 1996 December 31, 1995
--------------------------------- ---------------------------------- -------------------------------
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 $12,212 $3,643,715 0.34% $12,079 $3,582,560 0.34% $12,254 $3,656,512 0.34%
Five or more units 542 62,648 0.87 836 65,142 1.28 895 57,321 1.56
Commercial 6,864 264,805 2.59 7,577 266,758 2.84 8,456 270,583 3.13
Construction 654 56,341 1.16 433 37,066 1.17 335 28,593 1.17
Land 785 26,840 2.92 776 18,782 4.13 973 21,867 4.45
Commercial non-mortgage:
Secured 18 1,786 1.00 3 250 1.00 3 250 1.00
Unsecured 245 11,469 2.14 269 13,896 1.94 256 12,614 2.03
Consumer and other
Automobile 2,762 134,829 2.05 1,695 82,093 2.06 849 56,127 1.51
Other consumer 872 47,543 1.83 928 48,405 1.92 1,122 50,945 2.20
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 $27,754 $4,249,976 0.65% $27,396 $4,114,952 0.67% $27,943 $4,154,812 0.67%
====================================================================================================================================
<CAPTION>
September 30, 1995 June 30, 1995
--------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units $12,925 $3,711,027 0.35% $12,175 $3,780,558 0.32%
Five or more units 963 61,437 1.57 930 62,011 1.50
Commercial 7,806 273,954 2.85 10,268 286,294 3.59
Construction 193 16,215 1.19 145 12,047 1.20
Land 814 9,285 8.77 817 9,333 8.75
Commercial non-mortgage:
Secured 3 250 1.00 3 250 1.00
Unsecured 573 12,117 4.73 460 12,239 3.76
Consumer and other
Automobile 636 41,690 1.53 280 21,845 1.28
Other consumer 1,162 51,771 2.24 1,101 52,984 2.08
Mortgage-backed securities
held to maturity (1) 49 35,250 0.14 49 36,567 0.13
Not specifically allocated 2,800 - - 2,800 - -
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans held for
investment and mortgage-
backed securities held to
maturity $27,924 $4,212,996 0.66% $29,028 $4,274,128 0.68%
=================================================================================================================================
</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 second quarter of 1996
were principal repayments (including prepayments, but excluding Downey
refinances) on loans and mortgage-backed securities of $190.2 million, and net
increases in FHLB advances of $58.2 million and in other borrowings of $53.8
million.
20
<PAGE>
These funds were used primarily to originate loans held for investment of
$308.8 million (net of Downey refinances of $22.3 million) and cover net deposit
withdrawals of $36.1 million.
Loan repayments continued to represent a major source of funds, totaling
$208.3 million in the 1996 second quarter. This level was below the $218.2
million in the previous quarter, but above the $101.2 million in the 1995 second
quarter.
At June 30, 1996, the Bank's ratio of regulatory liquidity was 5.07%,
compared to 5.03% at December 31, 1995, and 5.02% at June 30, 1995. The ratio
remains above the regulatory minimum of 5%.
Stockholders' equity totaled $391.9 million at June 30, 1996, compared to
$384.1 million at December 31, 1995, and $370.3 million at June 30, 1995.
REGULATORY CAPITAL
The following table is a reconciliation of the Banks stockholders equity to
federal regulatory capital as of June 30, 1996. The data is provided based on
regulations currently in effect (i.e., transitional basis) and on a fully
phased-in basis, where the full amount of the Banks investment in real estate as
defined by the Office of Thrift Supervision is deducted from capital. The
transitional June 30, 1996 core and tangible capital ratios were 7.56% and the
risk-based capital ratio was 14.39%. When calculated on a fully phased-in
basis, the core and tangible capital ratios were 7.20% and the risk-based
capital ratio was 13.82%. 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, on both a transitional and fully phased-in basis. The
fully phased-in rules became effective July 1, 1996.
In a real estate joint venture relationship involving four shopping centers
with aggregate assets of $45.0 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. Although these shopping center assets
currently remain as joint ventures for legal purposes, DSL Service Company has
acquired operating control and management. Downey will begin to report these
assets as wholly owned for financial reporting purposes beginning in the third
quarter of 1996. Two of the shopping centers are currently financed, in part,
by secured notes from the Bank in the amount of $29.9 million and $1.2 million,
respectively. These secured notes will now become part of the Bank's investment
in DSL Service Company and will be deducted from capital when calculating
regulatory capital ratios until such time as the notes are repaid. Based on
June 30, 1996 data, such a deduction from capital would reduce the Bank's fully
phased-in tangible and core capital ratios to 6.57% from 7.20% and the risk-
based capital ratio to 12.78% from 13.82%, in all cases still above the "well
capitalized" standards.
Aside from asset growth and the above mentioned real estate joint venture
agreement, the Bank's future regulatory capital ratios may be impacted by
pending legislation. Legislation has been introduced in Congress wherein a
special one-time assessment may be assessed to recapitalize SAIF. If enacted as
proposed, the Bank would pay a one-time premium which, on an after-tax basis,
would approximate $18 million. Based on the June 30, 1996, data adjusted for the
above mentioned real estate joint venture relationship, such a one-time charge
to capital would reduce the Bank's fully phased-in tangible and core capital
ratios to approximately 6.18% and the risk-based capital ratio to approximately
12.08%, levels still above the regulatory "well capitalized" standards.
21
<PAGE>
<TABLE>
<CAPTION>
Transitional
-------------------------------------------------------------------------------
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 $383,260 $383,260 $383,260
Adjustments:
Phased deduction:
Investment in subsidiary (60% transitional)
primarily real estate (28,679) (28,679) (28,679)
Non-supervisory goodwill (5,851) (5,851) (5,851)
Core deposit premium (669) (669) (669)
Non-permitted mortgage servicing rights (97) (97) (97)
Additions:
Unrealized loss on securities available for sale 3,012 3,012 3,012
General loss allowance - Investment in DSL 2,604 2,604 2,604
Loan and lease general valuation allowances (1) - - 26,374
- -----------------------------------------------------------------------------------------------------------------------------------
Regulatory capital 353,580 7.56% 353,580 7.56% 379,954 14.39%
Well capitalized requirement 70,109 1.50 (2) 233,697 5.00 264,027 10.00%
- ------------------------------------------------------------------------------------------------------------------------------------
Excess $283,471 6.06% $119,883 2.56% $115,927 4.39%
====================================================================================================================================
<CAPTION>
Fully Phased-In
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stockholder's Equity $383,260 $383,260 $383,260
Adjustments:
Phased deduction:
Investment in subsidiary primarily real estate (47,798) (47,798) (47,798)
Non-supervisory goodwill (5,851) (5,851) (5,851)
Core deposit premium (669) (669) (669)
Non-permitted mortgage servicing rights (97) (97) (97)
Additions:
Unrealized loss on securities available for sale 3,012 3,012 3,012
General loss allowance - Investment in DSL 2,604 2,604 2,604
Loan and lease general valuation allowances (1) - - 26,374
- -----------------------------------------------------------------------------------------------------------------------------------
Regulatory capital 334,461 7.20% 334,461 7.20% 360,835 13.82%
Well capitalized requirement 69,684 1.50 (2) 232,279 5.00 261,183 10.00% (3)
- ------------------------------------------------------------------------------------------------------------------------------------
Excess $264,777 5.70% $102,182 2.20% $ 99,652 3.82%
====================================================================================================================================
</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 13.39% and 12.81% on a
transitional and fully phased-in basis, respectively.
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.
22
<PAGE>
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.
23
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibit 27
(B) There were no reports on Form 8-K filed for the six months ended June
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: July 31, 1996 /s/ STEPHEN W. PROUGH
----------------------------------------
Stephen W. Prough
President and Chief Executive Officer
Date: July 31, 1996 /s/ THOMAS E. PRINCE
----------------------------------------
Thomas E. Prince
Executive Vice President/Chief
Financial Officer
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 16,352
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 28,756
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 197,800
<INVESTMENTS-CARRYING> 7,098
<INVESTMENTS-MARKET> 7,075
<LOANS> 4,188,152
<ALLOWANCE> 27,754
<TOTAL-ASSETS> 4,712,294
<DEPOSITS> 3,854,545
<SHORT-TERM> 350,575
<LIABILITIES-OTHER> 37,720
<LONG-TERM> 77,535
0
0
<COMMON> 170
<OTHER-SE> 391,749
<TOTAL-LIABILITIES-AND-EQUITY> 4,712,294
<INTEREST-LOAN> 156,862
<INTEREST-INVEST> 8,626
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 165,488
<INTEREST-DEPOSIT> 90,310
<INTEREST-EXPENSE> 11,176
<INTEREST-INCOME-NET> 64,002
<LOAN-LOSSES> 3,371
<SECURITIES-GAINS> 4,473
<EXPENSE-OTHER> 42,069
<INCOME-PRETAX> 32,386
<INCOME-PRE-EXTRAORDINARY> 18,428
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,428
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.52
<LOANS-NON> 47,180
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,670
<ALLOWANCE-OPEN> 27,943
<CHARGE-OFFS> 3,822
<RECOVERIES> 262
<ALLOWANCE-CLOSE> 27,754
<ALLOWANCE-DOMESTIC> 27,754
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,800
</TABLE>
