================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
For the quarterly period ended SEPTEMBER 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
__________ TO __________
Commission File Number 1-13578
DOWNEY FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0633413
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3501 JAMBOREE ROAD, NEWPORT BEACH, CA 92660
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (714) 854-0300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
PACIFIC EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
At September 30, 1997, 26,753,970 shares of the Registrant's Common Stock,
$0.01 par value were outstanding.
================================================================================
<PAGE>
i
DOWNEY FINANCIAL CORP.
SEPTEMBER 30, 1997 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I
<TABLE>
<S> <C>
FINANCIAL INFORMATION..................................................... 1
Consolidated Balance Sheets........................................... 1
Consolidated Statements of Operations................................. 2
Consolidated Statements of Cash Flows................................. 3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................ 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................... 6
PART II
OTHER INFORMATION..................................................... 25
Item 6 Exhibits and Reports on Form 8-K............................ 25
</TABLE>
i
<PAGE>
25
PART I - FINANCIAL INFORMATION
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31, September 30,
(Dollars in Thousands, Except Per Share Data) 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash .................................................................... $ 73,020 $ 67,221 $ 39,658
Federal funds ........................................................... 39,040 6,038 13,025
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents ........................................... 112,060 73,259 52,683
U.S. Treasury and agency obligations and other investment securities
available for sale, at fair value ................................... 143,436 141,999 130,603
Municipal securities being held to maturity, at amortized cost (estimated
market value of $6,975 at September 30, 1997, and December 31, 1996,
and $7,075 at September 30, 1996) ................................... 6,996 6,997 7,097
Loans held for sale, at the lower of cost or market ..................... 25,968 12,865 6,749
Mortgage-backed securities available for sale, at fair value ............ 51,931 61,267 63,878
Loans receivable held for investment .................................... 5,257,870 4,655,714 4,445,717
Investments in real estate and joint ventures ........................... 40,865 46,498 44,585
Real estate acquired in settlement of loans ............................. 13,072 16,078 16,332
Premises and equipment .................................................. 98,248 96,643 95,736
Federal Home Loan Bank stock, at cost ................................... 43,384 41,447 40,800
Other assets ............................................................ 60,138 45,390 50,157
- ---------------------------------------------------------------------------------------------------------------------
$ 5,853,968 $ 5,198,157 $ 4,954,337
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Savings deposits ........................................................ $ 4,406,474 $ 3,859,122 $ 3,614,561
Checking deposits ....................................................... 376,320 313,980 300,830
- ---------------------------------------------------------------------------------------------------------------------
Total deposits ...................................................... 4,782,794 4,173,102 3,915,391
Federal Home Loan Bank advances ......................................... 467,637 386,883 397,147
Commercial paper ........................................................ 118,635 198,113 186,544
Other borrowings ........................................................ 12,760 10,349 10,443
Accounts payable and accrued liabilities ................................ 45,226 28,357 54,995
Deferred income taxes ................................................... 9,256 9,782 6,173
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities ................................................... 5,436,308 4,806,586 4,570,693
- ---------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock, par value of $0.01 per share; authorized 50,000,000
shares; outstanding 26,753,970 shares at September 30, 1997,
25,459,079 shares at December 31, 1996, and 16,972,905 shares at
September 30, 1996 .................................................. 268 255 170
Additional paid-in capital .............................................. 45,926 22,607 22,696
Unrealized losses on securities available for sale ...................... (652) (1,559) (2,780)
Retained earnings ....................................................... 372,118 370,268 363,558
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity .......................................... 417,660 391,571 383,644
- ---------------------------------------------------------------------------------------------------------------------
$ 5,853,968 $ 5,198,157 $ 4,954,337
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------
(Dollars in Thousands, Except Per Share Data) 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable ........................................... $ 105,150 $ 83,994 $ 298,214 $ 240,856
U.S. Treasury and agency securities ........................ 2,023 1,910 6,110 5,744
Mortgage-backed securities ................................. 884 1,102 2,795 3,265
Other investments .......................................... 1,044 944 2,842 3,573
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income .................................... 109,101 87,950 309,961 253,438
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits ................................................... 59,476 45,452 166,982 135,762
Borrowings ................................................. 12,071 7,463 30,024 18,639
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense ................................... 71,547 52,915 197,006 154,401
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income ........................................ 37,554 35,035 112,955 99,037
Provision for loan losses .................................. 1,578 4,092 5,606 7,463
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses ...... 35,976 30,943 107,349 91,574
- ----------------------------------------------------------------------------------------------------------------------------
OTHER INCOME, NET:
Loan and deposit related fees .............................. 2,924 1,917 7,842 5,265
Real estate and joint ventures held for investment, net:
Net gains on sales of wholly owned real estate ........... 1,505 38 1,810 10
Reduction of loss on real estate and joint ventures ...... 317 849 3,081 2,701
Operations, net .......................................... 973 1,179 6,265 2,486
Secondary marketing activities:
Loan servicing fees ...................................... 303 406 1,054 1,058
Net gains on sales of loans and mortgage-backed securities 1,559 280 2,222 1,211
Net gains on sales of investment securities ................ -- -- -- 4,473
Other ...................................................... 437 503 2,088 1,792
- ----------------------------------------------------------------------------------------------------------------------------
Total other income, net .................................. 8,018 5,172 24,362 18,996
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE:
Salaries and related costs ................................. 13,005 11,606 41,043 33,416
Premises and equipment costs ............................... 3,944 3,366 11,245 9,208
Advertising expense ........................................ 1,873 1,060 5,554 2,268
Professional fees .......................................... 1,528 849 3,529 2,341
SAIF insurance premiums and regulatory assessments ......... 865 2,380 2,520 7,069
Other general and administrative expense ................... 3,666 2,971 10,612 8,499
- ----------------------------------------------------------------------------------------------------------------------------
Total general and administrative expense ................. 24,881 22,232 74,503 62,801
- ----------------------------------------------------------------------------------------------------------------------------
SAIF Special Assessment .................................... -- 24,644 -- 24,644
Net operation of real estate acquired in settlement of loans 463 455 2,031 1,689
Amortization of excess of cost over fair value of net assets
acquired ................................................... 133 133 399 399
- ----------------------------------------------------------------------------------------------------------------------------
Total operating expense .................................. 25,477 47,464 76,933 89,533
- ----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES ............................. 18,517 (11,349) 54,778 21,037
Income taxes (benefit) ........................................ 7,960 (4,879) 23,581 9,079
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) .......................................... $ 10,557 $ (6,470) $ 31,197 $ 11,958
============================================================================================================================
PER SHARE INFORMATION:
NET INCOME (LOSS) ............................................. $ 0.39 $ (0.24) $ 1.16 $ 0.45
============================================================================================================================
CASH DIVIDENDS PAID ........................................... $ 0.080 $ 0.076 $ 0.236 $ 0.228
============================================================================================================================
Weighted average shares outstanding ........................... 26,796,232 26,762,359 26,793,142 26,752,607
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
(In Thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................................................... $ 31,197 $ 11,958
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization .................................................... 7,045 6,259
Provision for losses on loans, real estate acquired in settlement of loans,
investments in real estate and joint ventures and other assets ................. 3,845 5,808
Net gains on sales of loans and mortgage-backed securities, investment securities,
real estate and other assets ................................................... (8,174) (6,088)
Interest capitalized on loans (negative amortization) ............................ (10,207) (7,313)
Federal Home Loan Bank dividends ................................................. (1,937) (1,654)
Loans originated for sale .......................................................... (209,842) (122,972)
Proceeds from sales of loans originated for sale ................................... 137,097 119,816
Other, net ......................................................................... (1,059) 23,732
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities .................................. (52,035) 29,546
- --------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Sales of loans held for investment ............................................... 291,660 --
Sales of investment securities available for sale ................................ -- 189,541
Sales of mortgage-backed securities available for sale ........................... 60,038 16,900
Sales of wholly owned real estate and real estate acquired in settlement of loans 12,874 4,241
Purchase of:
U.S. Treasury and agency obligations and other investment securities ............. -- (160,455)
Mortgage-backed securities available for sale .................................... -- (30,073)
Loans receivable held for investment ............................................. (30,261) --
Loans receivable originated held for investment (net of refinances of $48,252 and
$64,768 at September 30, 1997 and 1996, respectively) ............................ (1,635,729) (899,346)
Principal payments on loans receivable held for investment and mortgage-backed
securities available for sale .................................................... 770,533 553,196
Net change in undisbursed loan funds ............................................... 15,759 14,172
Net change in investments in real estate held for investment ....................... 6,069 (2,490)
Other, net ......................................................................... (7,173) (5,354)
- --------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities ................................................ (516,230) (319,668)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
(In Thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits ........................................................... $ 609,692 $ 125,170
Net decrease in securities sold under agreements to repurchase ..................... -- (16,099)
Proceeds from Federal Home Loan Bank advances ...................................... 760,100 785,200
Repayments of Federal Home Loan Bank advances ...................................... (679,346) (608,768)
Net decrease in other borrowings ................................................... (77,067) (2,417)
Cash dividends ..................................................................... (6,313) (6,111)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities ............................................. 607,066 276,975
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents .................................. 38,801 (13,147)
Cash and cash equivalents at beginning of year ........................................ 73,259 65,830
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period ............................................ $ 112,060 $ 52,683
====================================================================================================================
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest ......................................................................... $ 195,667 $ 154,774
Income taxes ..................................................................... 14,831 19,535
Supplemental disclosure of non-cash investing:
Loans exchanged for mortgage-backed securities ..................................... 60,956 11,915
Real estate acquired in settlement of loans ........................................ 18,766 20,284
Loans to facilitate the sale of real estate acquired in settlement of loans ........ 15,321 18,817
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE (1) - BASIS OF PRESENTATION
In the opinion of Downey Financial Corp. and subsidiaries ("Downey"), the
accompanying consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary for a fair presentation
of Downey's financial condition as of September 30, 1997, December 31, 1996 and
September 30, 1996, and the results of operations for the three months and nine
months ended September 30, 1997 and 1996, and changes in cash flows for the nine
months ended September 30, 1997 and 1996. Certain prior period amounts have been
reclassified to conform to the current period presentation.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial operations and are in compliance with the instructions for Form 10-Q
and therefore do not include all information and footnotes necessary for a fair
presentation of financial position, results of operations and cash flows. The
following information under the heading Management's Discussion and Analysis of
the Financial Condition and Results of Operations is written with the
presumption that the interim consolidated financial statements will be read in
conjunction with Downey's Annual Report on Form 10-K for the year ended December
31, 1996, which contains among other things, a description of the business, the
latest audited consolidated financial statements and notes thereto, together
with Management's Discussion and Analysis of the Financial Position and Results
of Operations as of December 31, 1996, and for the year then ended. Therefore,
only material changes in financial condition and results of operations are
discussed in the remainder of Part I.
4
<PAGE>
NOTE (2) - TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES
Downey adopted, effective January 1, 1997, Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS 125").
SFAS 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Those
standards are based on consistent application of a financial-components approach
that focuses on control. Under that approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it controls and
the liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. SFAS 125
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings.
SFAS 125 requires that liabilities and derivatives incurred or obtained by
transferors as part of a transfer of financial assets be initially measured at
fair value, if practicable. It also requires that servicing assets and other
retained interests in the transferred assets be measured by allocating the
previous carrying amount between the assets sold, if any, and retained
interests, if any, based on their relative fair values at the date of the
transfer.
SFAS 125 includes specific provisions to deal with servicing assets or
liabilities. These provisions retain the impairment and amortization approaches
that are contained in Statement of Financial Accounting Standards No. 122,
"Accounting for Mortgage Servicing Rights, an Amendment to FASB No. 65" but
eliminates the distinction between normal and excess servicing.
The adoption of SFAS 125 did not have a material financial impact on
Downey.
NOTE (3) - NET INCOME PER SHARE
Net income per share is based upon the weighted average number of
outstanding shares and stock options deemed to be common stock equivalents to
the extent they are dilutive. Prior period outstanding shares and stock options
have been adjusted for stock dividends and stock splits.
NOTE (4) - DERIVATIVES
As part of its secondary marketing activities, Downey utilizes forward sale
contracts to hedge the value of loans originated for sale against adverse
changes in interest rates. At September 30, 1997, such contracts amounted to
approximately $24 million. These contracts have a high correlation to the price
movement of the loans being hedged. There is no recognition of unrealized gains
and losses on these contracts in the balance sheet or statement of income. When
the related loans are sold, the deferred gains or losses from these contracts
are recognized in the statement of income as a component of net gains or losses
on sales of loans and mortgage-backed securities.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements under this caption constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995 which
involve risks and uncertainties. Downey's actual results may differ
significantly from the results discussed in such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
economic conditions, competition in the geographic and business areas in which
Downey conducts its operations, fluctuations in interest rates, credit quality
and government regulation.
OVERVIEW
Net income for the third quarter of 1997 totaled $10.6 million or $0.39 per
share. This compares to a net loss in the year-ago third quarter of $6.5 million
or $0.24 per share. The loss in the year-ago third quarter was due solely to a
one-time assessment to recapitalize the Savings Association Insurance Fund
("SAIF"). Downey's share of that assessment was $14.0 million or $0.52 per share
on an after-tax basis. Excluding the impact of that assessment from the year-ago
quarter, net income for the current quarter would have been 39.5% higher.
For the first nine months of 1997, net income totaled $31.2 million or
$1.16 per share, up 20.0% from the adjusted year-ago results excluding the
impact of the previously mentioned one-time SAIF assessment. Including that
assessment, net income for the first nine months of 1996 was $12.0 million or
$0.45 per share.
The increase in net income between third quarters, excluding the one-time
SAIF assessment, reflected an increase in net interest income, a decrease in
provision for loan losses and an increase in other income. Net interest income
increased $2.5 million or 7.2% due to a 25.4% increase in average earning assets
as the effective interest spread declined between quarters. Provision for loan
losses declined $2.5 million, while total other income increased $2.8 million
reflecting increases in net gains on sales of loans, loan and deposit related
fees and income from real estate held for investment. Those positive factors
were partially offset, however, by a $2.6 million increase in general and
administrative costs due, in part, to branch expansion, particularly into
supermarket banking, higher advertising expenditures, and growth in auto
lending.
For the third quarter of 1997, the return on average assets was 0.71% and
the return on average equity was 10.28%, bringing the returns for the first nine
months of 1997 to 0.74% and 10.31%, respectively.
At September 30, 1997, assets totaled $5.9 billion, up 18.2% from a year
ago, but virtually unchanged from the end of the second quarter of 1997. The
lack of asset growth during the current quarter was intentional and primarily
reflected the sale of $290.5 million of single family adjustable rate mortgages
from the loan portfolio. Single family loan originations were $464.0 million in
the third quarter of 1997 compared to $392.5 million in the third quarter of
1996 and $714.9 million in the second quarter of 1997. Of the current quarter
total, $79.5 million represented originations for portfolio of subprime credits
("A-," "B" and "C") as part of Downey's strategy to enhance the portfolio's net
yield. In addition to single family loans, $120.2 million of other loans were
originated in the quarter including $70.8 million of automobile loans.
Non-performing assets declined $0.2 million during the quarter to $55.7
million or 0.95% of total assets.
Based on regulatory rules in effect at September 30, 1997, Downey Savings
and Loan Association, F.A. (the "Bank"), had core and tangible capital ratios of
6.40% and a risk-based capital ratio of 12.30%. These capital levels are well
above the "well capitalized" standards of 5% and 10%, respectively, as defined
by regulation.
6
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income totaled $37.6 million in the third quarter of 1997, up
$2.5 million or 7.2% from the same period last year. The improvement between
third quarters reflects an increase of 25.4% in average earning assets to $5.7
billion, as the effective interest spread declined from 3.06% in the year-ago
third quarter to 2.62% in the current quarter. The decline in the effective
interest spread primarily reflected an increase in funding costs as the growth
in earning assets was primarily funded with higher cost certificates of deposit
and borrowings. For the first nine months of 1997, net interest income totaled
$113.0 million, up $13.9 million or 14.1% from the same period a year ago.
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and resultant
yields, the interest expense on average interest-bearing liabilities and the
resultant costs, expressed both in dollars and rates. The table also sets forth
the net interest income, the interest rate spread and the effective interest
rate spread. The effective interest rate spread, which reflects the relative
level of interest-earning assets to interest-bearing liabilities, equals (i) the
difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities, (ii) divided by average
interest-earning assets for the period. The table also sets forth the net
earning balance (the difference between the average balance of interest-earning
assets and the average balance of interest-bearing liabilities) for the periods
indicated. Non-accrual loans are included in the average interest-earning assets
balance. Interest from non-accrual loans is included in interest income only to
the extent that payments are received and to the extent that Downey believes it
will recover the remaining principal balance of the loan. Average balances for
the quarter are computed using the average of each month's daily average balance
during the period.
7
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------
September 30,1997 September 30,1996
--------------------------------------------------------------------------
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 ...................................... $5,471,077 $ 105,150 7.69% $4,310,663 $ 83,994 7.79%
Mortgage-backed securities ................. 53,663 884 6.59 67,432 1,102 6.54
Investment securities ...................... 210,748 3,067 5.77 196,236 2,854 5.79
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ............ 5,735,488 109,101 7.61 4,574,331 87,950 7.69
Non-interest-earning assets .................... 243,519 235,881
- ----------------------------------------------------------------------------------------------------------------------------
Total assets ............................. $5,979,007 $4,810,212
============================================================================================================================
Interest-bearing liabilities:
Deposits ................................... $4,715,233 $ 59,476 5.00% $3,866,111 $ 45,452 4.68%
Borrowings ................................. 788,919 12,071 6.07 502,795 7,463 5.90
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities ....... 5,504,152 71,547 5.16 4,368,906 52,915 4.82
Non-interest-bearing liabilities ............... 63,883 50,054
Stockholders' equity ........................... 410,972 391,252
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $5,979,007 $4,810,212
============================================================================================================================
Net interest income/interest rate spread ....... $ 37,554 2.45% $ 35,035 2.87%
Excess of interest-earning assets over interest-
bearing liabilities ........................ $ 231,336 $ 205,425
Effective interest rate spread ................. 2.62% 3.06%
============================================================================================================================
Nine Months Ended
--------------------------------------------------------------------------
September 30,1997 September 30,1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans ...................................... $5,129,838 $ 298,214 7.75% $4,173,001 $ 240,856 7.70%
Mortgage-backed securities ................. 56,548 2,795 6.59 65,565 3,265 6.64
Investment securities ...................... 205,763 8,952 5.82 221,296 9,317 5.62
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ............ 5,392,149 309,961 7.66 4,459,862 253,438 7.58
Non-interest-earning assets .................... 249,617 236,769
- ----------------------------------------------------------------------------------------------------------------------------
Total assets ............................. $5,641,766 $4,696,631
============================================================================================================================
Interest-bearing liabilities:
Deposits ................................... $4,511,764 $ 166,982 4.95% $3,843,457 $ 135,762 4.72%
Borrowings ................................. 664,488 30,024 6.04 417,949 18,639 5.96
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities ....... 5,176,252 197,006 5.09 4,261,406 154,401 4.84
Non-interest-bearing liabilities ............... 61,893 46,943
Stockholders' equity ........................... 403,621 388,282
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $5,641,766 $4,696,631
============================================================================================================================
Net interest income/interest rate spread ....... $ 112,955 2.57% $ 99,037 2.74%
Excess of interest-earning assets over interest-
bearing liabilities ........................ $ 215,897 $ 198,456
Effective interest rate spread ................. 2.79% 2.96%
============================================================================================================================
</TABLE>
Changes in Downey's net interest income are a function of both changes
in rates and changes in volumes of interest-earning assets and interest-bearing
liabilities. The following table sets forth information regarding changes in
interest income and expense for Downey for the periods indicated. For each
category of interest-earning asset and interest-
8
<PAGE>
<PAGE>
bearing liability, information is provided on changes attributable to: (i)
changes in volume (changes in volume multiplied by comparative period rate);
(ii) changes in rate (changes in rate multiplied by comparative period volume);
and (iii) change in rate-volume (change in rate multiplied by change in volume).
Interest-earning asset and interest-bearing liability balances used in the
calculations represent quarterly average balances computed using the average of
each month's daily average balance during the period.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------------------------------------------------------------------
September 30, 1997 versus September 30, 1996 September 30, 1997 versus September 30, 1996
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 .................... $ 22,611 $ (1,146) $ (309) $ 21,156 $ 55,226 $ 1,734 $ 398 $ 57,358
Mortgage-backed securities (225) 9 (2) (218) (449) (24) 3 (470)
Investment securities .... 219 (6) -- 213 (670) 327 (22) (365)
- -----------------------------------------------------------------------------------------------------------------------------
Change in interest
income .............. 22,605 (1,143) (311) 21,151 54,107 2,037 379 56,523
- -----------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits ................. 10,100 3,218 706 14,024 23,491 6,585 1,144 31,220
Borrowings ............... 4,390 217 1 4,608 10,868 307 210 11,385
- -----------------------------------------------------------------------------------------------------------------------------
Change in interest
expense .............. 14,490 3,435 707 18,632 34,359 6,892 1,354 42,605
- -----------------------------------------------------------------------------------------------------------------------------
Change in net interest income $ 8,115 $ (4,578) $ (1,018) $ 2,519 $ 19,748 $ (4,855) $ (975) $ 13,918
=============================================================================================================================
</TABLE>
PROVISION FOR LOAN LOSSES
Provision for loan losses was $1.6 million in the current quarter compared
to $4.1 million in the year-ago quarter. For the first nine months of 1997,
provision for loan losses totaled $5.6 million, compared to $7.5 million in the
year-ago period. For information regarding the allowance for loan losses, see
"Asset Quality - Valuation Allowances" on page 21.
OTHER INCOME
Total other income was $8.0 million in the third quarter of 1997, up $2.8
million from the year-ago quarter. The increase primarily occurred in net gains
on sales of loans and mortgage-backed securities, up $1.3 million; loan and
deposit related fees, up $1.0 million; and income from real estate held for
investment, up $0.7 million. Included within the current quarter net gains on
sales of loans and mortgage-backed securities was a gain of $1.1 million
associated with the sale of $290.5 million of adjustable rate mortgage loans
originally included within loans held for investment. For the first nine months
of 1997, total other income was $24.4 million, up $5.4 million from a year ago.
The following table presents a breakdown of the key components comprising
income from real estate and joint venture operations.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 1997 1997 1997 1996 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations, net:
Rental operations, net of expenses ................. $ 124 $ 474 $ 851 $ 558 $ 721
Equity in net income (loss) from joint ventures .... 467 (238) 3,066 1,050 (30)
Interest from joint ventures ....................... 382 361 778 449 488
- -------------------------------------------------------------------------------------------------------------------
Total operations, net ............................ 973 597 4,695 2,057 1,179
Net gains on sales of wholly owned real estate ........ 1,505 305 -- 382 38
Recovery for losses on real estate and joint ventures . 317 487 2,277 605 849
- -------------------------------------------------------------------------------------------------------------------
Income from real estate and joint venture operations $ 2,795 $ 1,389 $ 6,972 $ 3,044 $ 2,066
===================================================================================================================
</TABLE>
9
<PAGE>
OPERATING EXPENSE
Operating expense totaled $25.5 million in the third quarter, down $22.0
million from the third quarter of 1996, which included the $24.6 million
one-time SAIF assessment. Excluding that assessment, operating expenses would
have increased $2.7 million or 11.6%. Higher general and administrative costs
were primarily responsible for the increase. General and administrative expense
increased $2.6 million or 11.9% and reflected branch expansion, particularly
into supermarket banking, higher advertising expenditures and growth in auto
lending. The $0.8 million increase in advertising expenditures reflects, in
large part, the cost of a television advertising campaign to increase public
awareness of the Bank, and specifically the Bank's subprime residential lending
product, a key component to Downey's strategy of increasing the loan portfolio
yield. For the first nine months of 1997, operating expenses totaled $76.9
million compared to $89.5 million in the same period of 1996.
PROVISION FOR INCOME TAXES
Income taxes for the third quarter totaled $8.0 million, resulting in an
effective tax rate of 43.0%, compared to an income tax benefit of $4.9 million
for the like quarter of a year ago. The year-ago tax benefit was due to the
pre-tax loss attributable to the one-time SAIF assessment. For the first nine
months of 1997, the effective tax rate was 43.0% compared to 43.2% in the same
period of 1996.
10
<PAGE>
FINANCIAL CONDITION
LOANS AND MORTGAGE-BACKED SECURITIES
Total loans and mortgage-backed securities, including those held for sale,
decreased $104.2 million during the third quarter to a total of $5.3 billion, or
91.1% of assets, at September 30, 1997. This decrease primarily reflected a
decline of $115.7 million in the residential one-to-four unit loan portfolio
held for investment due to the sale of $290.5 million of adjustable rate
mortgages tied to the Federal Home Loan Bank ("FHLB") Eleventh District Cost of
Funds Index ("COFI"). The sale was completed as part of a strategy to increase
the loan portfolio yield by changing the loan mix and to manage the Bank's
regulatory capital position. In addition to the decline in the residential
one-to-four unit loan portfolio held for investment, the combined multi-family
and commercial real estate portfolios declined $20.6 million. These decreases
were partially offset by increases of $37.6 million in automobile loans and
$11.7 million in the construction loan portfolio.
The following table sets forth originations of loans held for investment
and loans originated for sale.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 1997 1997 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans originated for investment:
Residential - one-to-four ARMs (1) ..... $383,204 $611,371 $388,707 $363,995 $359,816
Residential - one-to-four fixed (2) .... 6,049 8,408 3,904 5,134 7,859
Other (3) .............................. 120,204 110,455 97,261 72,006 86,223
- ----------------------------------------------------------------------------------------------------------
Total loans originated for investment 509,457 730,234 489,872 441,135 453,898
Loans originated for sale (primarily
residential - fixed) ................... 74,721 95,092 40,029 36,969 24,826
- ----------------------------------------------------------------------------------------------------------
Total loans originated ................. $584,178 $825,326 $529,901 $478,104 $478,724
==========================================================================================================
</TABLE>
(1) For the three months ended September 30, 1997, June 30, 1997, March 31,
1997, and December 31, 1996, $6.7 million, $17.3 million, $4.9 million, and
$0.2 million, respectively, of loans purchased through correspondent
lending relationships are included.
(2) Primarily represents loans to facilitate the sale of real estate acquired
in settlement of loans and loans that meet certain yield and other approved
guidelines.
(3) For the three months ended September 30, 1997, and June 30, 1997, $0.4
million, and $1.0 million, respectively, of loans purchased through
correspondent lending relationships are included.
Originations of one-to-four unit residential loans totaled $464.0 million
in the third quarter of 1997, of which $389.3 million were for portfolio and
$74.7 million were for sale. This was 35.1% below the $714.9 million originated
in the second quarter of 1997, but 18.2% higher than the $392.5 million
originated in the year-ago quarter. Of the current quarter total, $79.5 million
represented originations of subprime credits ("A-," "B" and "C") as part of
Downey's strategy to enhance the portfolio's net yield. During the current
quarter, 49% of Downey's residential one-to-four unit originations represented
refinancings of existing loans (existing Downey loans were 3%). This is up from
39% (existing Downey loans were 3%) during the previous quarter and from 36%
(existing Downey loans were 5%) in the year-ago third quarter. In addition to
single family loans, $120.2 million of other loans were originated in the
quarter including $70.8 million of automobile loans, $26.2 million of
construction loans and $13.3 million of land loans.
During the current quarter, loan originations for investment consisted
primarily of ARMs tied to COFI, an index which lags the movement in market
interest rates. This experience is similar to that of recent quarters.
Increasingly, the majority of ARM originations reprice monthly; however, Downey
also originates ARM loans which reprice semi-annually and annually. With respect
to ARMs that primarily adjust monthly, there is a lifetime interest rate cap,
but no other specified limit on periodic interest rate adjustments. Instead,
monthly adjustment ARMs have a periodic cap on changes in the required monthly
payments, which adjust annually. Monthly adjustment ARMs allow for negative
amortization (the addition to loan principal of accrued interest that exceeds
the required loan payment). There is a limit on the amount of negative
amortization, such that the principal plus the added amount cannot exceed 110%
of the original loan amount. At September 30, 1997, $2.4 billion of the ARMs in
Downey's loan portfolio were subject to negative amortization of which $23.8
million represented the amount of negative amortization included in the loan
balance.
11
<PAGE>
Downey also continues to originate residential fixed interest rate mortgage
loans to meet consumer demand, but intends to sell the majority of all such
loans. Sales of loans and mortgage-backed securities originated by Downey were
$362.1 million for the third quarter of 1997 of which $290.5 million represented
the previously mentioned sale of COFI ARMs from loans held for investment,
compared to $87.2 million in the previous quarter and $25.1 million for the
third quarter of 1996. All were secured by residential one-to-four unit
property.
At September 30, 1997, Downey had commitments to fund loans amounting to
$206.6 million, undrawn lines of credit of $69.0 million, loans in process of
$59.4 million and letters of credit of $0.1 million. Downey believes its current
sources of funds will enable it to meet these obligations while exceeding all
regulatory liquidity requirements.
12
<PAGE>
The following table sets forth the origination, purchase and sale activity
relating to loans and mortgage-backed securities.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 1997 1997 1997 1996 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT PORTFOLIO:
Loans originated:
Loans secured by real estate:
Residential:
One-to-four units:
Adjustable ........................................ $ 297,963 $ 563,119 $ 363,704 $ 350,282 $ 349,325
Adjustable - subprime ............................. 78,531 30,943 20,105 13,490 10,491
- -----------------------------------------------------------------------------------------------------------------------------
Total adjustable ................................ 376,494 594,062 383,809 363,772 359,816
Fixed ............................................. 5,054 7,467 3,879 5,134 7,652
Fixed - subprime .................................. 995 941 25 -- 207
Five or more units:
Adjustable ........................................ -- 4,600 -- -- 6,375
Fixed ............................................. -- -- -- -- 105
- -----------------------------------------------------------------------------------------------------------------------------
Total residential ............................... 382,543 607,070 387,713 368,906 374,155
Commercial real estate ............................... -- 4,145 -- 1,491 --
Construction ......................................... 26,200 11,121 25,851 15,873 14,065
Land ................................................. 13,310 6,985 -- -- --
Non-mortgage:
Commercial ........................................... 1,628 2,445 3,828 3,590 5,309
Consumer:
Automobile ......................................... 70,757 73,389 62,909 46,714 56,863
Other consumer ..................................... 7,951 6,784 4,673 4,338 3,506
- -----------------------------------------------------------------------------------------------------------------------------
Total loans originated ............................ 502,389 711,939 484,974 440,912 453,898
Real estate loans purchased (1) ......................... 7,068 18,295 4,898 223 --
- -----------------------------------------------------------------------------------------------------------------------------
Total loans originated and purchased ................... 509,457 730,234 489,872 441,135 453,898
Loan repayments ......................................... (302,116) (271,387) (235,834) (227,061) (183,629)
Other net changes (2), (3) .............................. (312,185) 3,367 (9,252) (4,077) (5,834)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for investment ... (104,844) 462,214 244,786 209,997 264,435
- -----------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO:
Residential, one-to-four units:
Originated whole loans ................................. 74,721 95,092 40,029 36,969 24,826
Loans transferred (to) from the investment portfolio (3) 290,606 (338) 446 156 170
Originated whole loans sold (3) ........................ (345,198) (59,696) (21,555) (16,461) (20,077)
Loans exchanged for mortgage-backed securities ......... (16,854) (27,476) (16,626) (14,537) (5,035)
Other net changes ...................................... 6 (44) (10) (11) (5)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for sale ....... 3,281 7,538 2,284 6,116 (121)
- -----------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, net:
Received in exchange for loans ......................... 16,854 27,476 16,626 14,537 5,035
Purchased .............................................. -- -- -- -- 4,705
Sold ................................................... (16,854) (27,476) (16,626) (14,537) (9,660)
Repayments ............................................. (2,823) (3,124) (3,501) (3,349) (3,794)
Other net changes ...................................... 147 468 (503) 738 89
- -----------------------------------------------------------------------------------------------------------------------------
Net decrease in mortgage-backed securities available
for sale ........................................... (2,676) (2,656) (4,004) (2,611) (3,625)
- -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans and mortgage-backed
securities held for sale and available for sale .... 605 4,882 (1,720) 3,505 (3,746)
- -----------------------------------------------------------------------------------------------------------------------------
Total net increase (decrease) in loans and mortgage-
backed securities .................................. $(104,239) $ 467,096 $ 243,066 $ 213,502 $ 260,689
=============================================================================================================================
</TABLE>
(1) Primarily one-to-four unit residential loans. Included in the three months
ended September 30, 1997, and June 30,1997, were $0.4 million and $1.0
million, respectfully, of five or more unit residential loans.
(2) Primarily includes borrowings against and repayments of lines of credit and
construction loans, changes in loss allowances, loans transferred to real
estate acquired in settlement of loans or to the held for sale portfolio
and interest capitalized on loans (negative amortization).
(3) For the three months ended September 30, 1997, includes $290.5 million of
residential one-to-four unit ARMs transferred from the held for investment
portfolio and subsequently sold servicing released.
13
<PAGE>
The following table sets forth the composition of Downey's loan and
mortgage-backed securities portfolios.
<TABLE>
<CAPTION>
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 1997 1997 1997 1996 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT PORTFOLIO:
Loans secured by real estate:
Residential:
One-to-four units:
Adjustable ...................................... $ 4,260,831 $ 4,451,684 $ 4,051,862 $ 3,840,862 $ 3,665,218
Adjustable - subprime ........................... 158,987 82,873 52,678 32,715 19,450
Fixed ........................................... 169,978 171,981 170,833 172,328 172,930
Fixed - subprime ................................ 2,500 1,507 567 543 544
- ------------------------------------------------------------------------------------------------------------------------------------
Total one-to-four units ...................... 4,592,296 4,708,045 4,275,940 4,046,448 3,858,142
Five or more units:
Adjustable ...................................... 41,636 47,341 42,901 43,050 54,737
Fixed ........................................... 9,260 14,333 13,338 13,857 14,116
Commercial real estate:
Adjustable ........................................ 115,923 126,686 127,245 158,656 161,690
Fixed ............................................. 95,941 94,993 101,162 101,953 101,121
Construction ....................................... 60,459 48,765 78,559 66,651 62,651
Land ............................................... 26,270 24,847 18,629 21,177 23,260
Non-mortgage:
Commercial ......................................... 23,741 25,718 25,450 22,136 19,169
Consumer:
Automobile ........................................ 325,216 287,611 242,403 202,186 174,628
Other consumer .................................... 47,067 46,244 46,892 47,281 46,755
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment ................. 5,337,809 5,424,583 4,972,519 4,723,395 4,516,269
Increase (decrease) for:
Undisbursed loan funds ............................. (65,783) (48,487) (55,447) (49,250) (50,052)
Deferral of fees and discounts, net of costs ....... 16,762 17,806 14,111 11,663 9,778
Allowance for estimated loss ....................... (30,918) (31,188) (30,683) (30,094) (30,278)
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment, net .............. 5,257,870 5,362,714 4,900,500 4,655,714 4,445,717
- ------------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO, NET:
Loans held for sale (all one-to-four units):
Adjustable ......................................... 4,614 1,942 1,800 1,145 2,109
Fixed .............................................. 21,354 20,745 13,349 11,720 4,640
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans held for sale ......................... 25,968 22,687 15,149 12,865 6,749
Mortgage-backed securities available for sale:
Adjustable ......................................... 18,716 19,799 21,367 23,620 24,967
Fixed .............................................. 33,215 34,808 35,896 37,647 38,911
- ------------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities available for sale 51,931 54,607 57,263 61,267 63,878
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities held
for sale and available for sale ................. 77,899 77,294 72,412 74,132 70,627
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities ........ $ 5,335,769 $ 5,440,008 $ 4,972,912 $ 4,729,846 $ 4,516,344
====================================================================================================================================
</TABLE>
Loans held for sale are carried at the lower of cost or market. At
September 30, 1997, no valuation allowance was required as the market value
exceeded book value on an aggregate basis.
Mortgage-backed securities available for sale are carried at fair value
and, at September 30, 1997, reflect an unrealized gain of $0.4 million. The
current quarter-end unrealized gain, less the associated tax effect of $0.2
million, is reflected within a separate component of stockholders' equity until
realized.
14
<PAGE>
INVESTMENTS IN REAL ESTATE AND JOINT VENTURES
Downey's investment in real estate and joint ventures amounted to $40.9
million at September 30, 1997, compared to $46.5 million at December 31, 1996,
and $44.6 million at September 30, 1996.
The following table is a summary of the activity of Downey's allowance for
real estate held for investment for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 1997 1997 1997 1996 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period . $ 21,670 $ 23,849 $ 30,071 $ 31,316 $ 32,185
Provision ...................... (317) (487) (2,277) (605) (849)
Charge-offs .................... -- (1,692) (3,945) (680) (54)
Recoveries ..................... -- -- -- 40 34
- -------------------------------------------------------------------------------------------------
Balance at end of period ....... $ 21,353 $ 21,670 $ 23,849 $ 30,071 $ 31,316
=================================================================================================
</TABLE>
In addition to losses charged against the allowance for loan losses, Downey
has recorded losses on real estate acquired in settlement of loans by direct
write-off to net operations of real estate acquired in settlement of loans and
against an allowance for losses specifically established for such assets. The
following table is a summary of the activity of Downey's allowance for real
estate acquired in settlement of loans for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 1997 1997 1997 1996 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 1,182 $ 1,334 $ 1,078 $ 1,132 $ 971
Provision .................... 235 299 597 622 278
Charge-offs .................. (334) (451) (341) (676) (117)
Recoveries ................... -- -- -- -- --
- -------------------------------------------------------------------------------------------------
Balance at end of period ..... $ 1,083 $ 1,182 $ 1,334 $ 1,078 $ 1,132
=================================================================================================
</TABLE>
DEPOSITS
At September 30, 1997, deposits totaled $4.8 billion, up 22.2% from a year
ago and $609.7 million above year-end 1996. Deposits in supermarket branches
increased $44.8 million during the quarter to $275.0 million and accounted for
approximately 32% of the total deposit increase from a year ago. During the
quarter, one new traditional branch was opened. The following table sets forth
information concerning Downey's deposits and average rates paid at the dates
indicated.
15
<PAGE>
<TABLE>
<CAPTION>
September 30, 1997 June 30, 1997 March 31, 1997 December 31, 1996 September 30, 1996
-------------------- ------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
(Dollars in Thousands) Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Regular passbook ....... 3.11% $ 446,721 2.97% $ 427,395 2.94% $ 419,627 2.90% $ 416,868 2.89% $ 414,793
Money market accounts .. 2.91 92,606 2.55 92,867 2.55 98,517 2.52 100,750 2.52 101,999
Checking accounts ...... 0.71 376,320 0.73 339,803 0.72 348,884 0.74 313,980 0.73 300,830
Certificates of deposit:
Less than 3.00% ..... 2.66 32,279 2.67 32,592 2.65 33,667 2.65 39,061 2.70 43,870
3.00-3.49 ........... 3.04 623 3.02 337 3.03 301 3.03 723 3.07 1,085
3.50-3.99 ........... 3.99 24 3.99 24 3.88 54 3.99 79 3.97 102
4.00-4.49 ........... 4.38 55,701 4.39 56,667 4.39 58,045 4.39 63,577 4.30 73,695
4.50-4.99 ........... 4.87 44,012 4.90 78,430 4.88 131,700 4.87 186,576 4.85 347,265
5.00-5.99 ........... 5.61 2,740,673 5.64 2,847,321 5.61 2,833,931 5.54 2,489,852 5.49 2,302,221
6.00-6.99 ........... 6.07 989,209 6.08 751,054 6.13 560,129 6.17 536,307 6.30 295,178
7.00 and greater .... 7.21 4,626 7.21 4,622 7.14 9,582 7.15 25,329 7.12 34,353
- ------------------------------------------------------------------------------------------------------------------------------------
Total certificates
of deposit ........ 5.68 3,867,147 5.67 3,771,047 5.62 3,627,409 5.56 3,341,504 5.44 3,097,769
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits ...... 5.00% $4,782,794 5.00% $4,631,112 4.92% $4,494,437 4.86% $4,173,102 4.74% $3,915,391
====================================================================================================================================
</TABLE>
BORROWINGS
During the 1997 third quarter, borrowings decreased $198.6 million to
$599.0 million, reflecting decreases in FHLB advances and commercial paper. The
following table sets forth information concerning Downey's FHLB advances and
other borrowings at the dates indicated.
<TABLE>
<CAPTION>
September 30, June 30, March 31, December 31, September 30,
(Dollars in Thousands) 1997 1997 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FHLB advances .................................. $467,637 $550,736 $330,479 $386,883 $397,147
Other borrowings:
Commercial paper ............................ 118,635 236,809 196,125 198,113 186,544
Real estate notes ........................... 12,760 10,063 10,188 10,349 10,443
- -------------------------------------------------------------------------------------------------------------------
Total borrowings ............................ $599,032 $797,608 $536,792 $595,345 $594,134
- -------------------------------------------------------------------------------------------------------------------
Weighted average rate on borrowings during
the period .................................. 6.07% 6.04% 5.97% 6.01% 5.90%
Total borrowings as a percentage of total assets 10.23 13.55 9.79 11.45 11.99
===================================================================================================================
</TABLE>
ASSET/LIABILITY MANAGEMENT
The following table sets forth the repricing frequency of Downey's major
asset and liability categories as of September 30, 1997, as well as certain
information regarding the repricing and maturity differences between
interest-earning assets and interest-bearing liabilities ("gap") in future
periods. The repricing frequencies have been determined by reference to
projected maturities, based upon contractual maturities as adjusted for
scheduled repayments and "repricing mechanisms" (provisions for changes in the
interest and dividend rates of assets and liabilities). Prepayment rates are
assumed on substantially all of Downey's loan portfolio based upon its
historical loan prepayment experience and anticipated future prepayments.
Repricing mechanisms on certain of Downey's assets are subject to limitations,
such as caps on the amount that interest rates and payments on Downey's loans
may adjust, and accordingly, such assets do not normally respond as completely
or rapidly as Downey's liabilities to changes in market interest rates. The
interest rate sensitivity of Downey's assets and liabilities illustrated in the
table would vary substantially if different assumptions were used or if actual
experience differed from the assumptions set forth.
16
<PAGE>
<TABLE>
<CAPTION>
September,1997
----------------------------------------------------------------------------
Within 7 - 12 1 - 5 5 - 10 Over Total
(Dollars in Thousands) 6 Months Months Years Years 10 Years Balance
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities and Federal Home
Loan Bank stock ........................ (1) $ 109,308 $ -- $123,548 $ -- $ -- $ 232,856
Loans and mortgage-backed securities:
Mortgage-backed securities ............. 23,306 4,373 19,135 3,425 1,692 51,931
Loans secured by real estate:
Residential:
Adjustable .......................... (2) 4,351,921 97,436 14,136 -- -- 4,463,493
Fixed ............................... (2) 42,862 16,881 80,437 38,298 24,491 202,969
Commercial real estate ................ (2) 130,301 6,317 43,933 23,712 3,563 207,826
Construction .......................... (2) 15,484 -- -- -- -- 15,484
Land .................................. (2) 9,742 40 350 532 379 11,043
Non-mortgage:
Commercial ............................ (2) 17,218 -- -- -- -- 17,218
Consumer .............................. (2) 112,520 58,872 194,413 -- -- 365,805
- --------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities 4,703,354 183,919 352,404 65,967 30,125 5,335,769
- --------------------------------------------------------------------------------------------------------------------------------
Total .................................. $4,812,662 $ 183,919 $475,952 $ 65,967 $ 30,125 $5,568,625
================================================================================================================================
Deposits and borrowings:
Interest bearing deposits:
Fixed maturity deposits ................ (1) $2,289,380 $ 1,211,738 $366,029 $ -- $ -- $3,867,147
Money market accounts .................. (3) 92,606 -- -- -- -- 92,606
Checking accounts ...................... (3) 258,046 -- -- -- -- 258,046
Regular passbook ....................... (3) 446,721 -- -- -- -- 446,721
Non-interest bearing deposits ............ (3) 118,274 -- -- -- -- 118,274
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits ......................... 3,205,027 1,211,738 366,029 -- -- 4,782,794
- --------------------------------------------------------------------------------------------------------------------------------
Borrowings ............................... 445,686 87,930 62,616 2,800 -- 599,032
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits and borrowings .......... $3,650,713 $ 1,299,668 $428,645 $ 2,800 $ -- $5,381,826
================================================================================================================================
Excess (short fall) of interest-earning
assets over interest-bearing liabilities . $1,161,949 $(1,115,749) $ 47,307 $ 63,167 $ 30,125 $ 186,799
Cumulative gap .............................. 1,161,949 46,200 93,507 156,674 186,799
Cumulative gap - as a % of total assets:
September 30, 1997 ....................... 19.85% 0.79% 1.60% 2.68% 3.19%
December 31, 1996 ........................ 16.71 2.68 0.50 1.47 3.04
September 30, 1996 ....................... 17.06 3.43 2.26 3.47 4.00
================================================================================================================================
</TABLE>
(1) Based upon contractual maturity and repricing date.
(2) Based upon contractual maturity, repricing date and projected repayments
and prepayments of principal. (3) Based upon contractual maturity or
repricing date.
The six-month gap at September 30, 1997, was a positive 19.85% (i.e., more
interest-earning assets reprice within six months than interest-bearing
liabilities). This compares to a positive six-month gap of 19.07% at June 30,
1997, 16.71% at December 31, 1996, and 17.06% at September 30, 1996. Downey's
strategy of emphasizing the origination of adjustable rate mortgages continues
to be pursued. For the twelve months ended September 30, 1997, Downey originated
and purchased for investment $2.1 billion of adjustable rate loans and
mortgage-backed securities which represented approximately 97% of all loans and
mortgage-backed securities originated and purchased for investment during the
period.
At September 30, 1997, 98% of Downey's interest-earning assets mature,
reprice or are estimated to prepay within five years, up slightly from 97% at
December 31, 1996, and unchanged from September 30, 1996. At September 30, 1997,
loans and mortgage-backed securities with adjustable interest rates represented
88% of Downey's loans and mortgage-backed securities portfolios. During the
third quarter of 1997, Downey continued to offer residential fixed rate
17
<PAGE>
loan products to its customers primarily for sale in the secondary market.
Downey prices and originates such fixed rate mortgage loans for sale into the
secondary market in order to increase opportunities for originating ARMs and
generate fee and servicing income. Downey does originate fixed rate loans for
portfolio to facilitate the sale of real estate acquired in settlement of loans
and which meet certain yield and other approved guidelines.
At September 30, 1997, $5.1 billion or 94% of the total loan portfolio
(including mortgage-backed securities) consisted of adjustable rate loans,
construction loans and loans with a due date of five years or less, compared to
$5.2 billion or 94%, at June 30, 1997, $4.5 billion or 94% at December 31, 1996,
and $4.3 billion or 94% at September 30, 1996.
The following table sets forth on a consolidated basis the interest rate
spread on Downey's interest-earning assets and interest-bearing liabilities as
of the dates indicated.
<TABLE>
<CAPTION>
September 30, June 30, March 31, December 31, September 30,
1997 1997 1997 1996 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted average yield:
Loan and mortgage-backed securities 7.80% 7.61% 7.74% 7.77% 7.71%
Investment securities ............. 5.75 5.67 5.71 6.11 6.11
- -------------------------------------------------------------------------------------------------------
Earning assets yield .............. 7.72 7.55 7.66 7.71 7.64
- -------------------------------------------------------------------------------------------------------
Weighted average cost:
Deposits .......................... 5.00 5.00 4.92 4.86 4.74
Borrowings:
FHLB advances ................... 6.04 5.98 5.83 5.80 5.76
Other borrowings ................ 5.78 5.60 5.53 5.60 5.61
- -------------------------------------------------------------------------------------------------------
Combined borrowings ............... 5.98 5.87 5.72 5.73 5.71
- -------------------------------------------------------------------------------------------------------
Combined funds .................... 5.11 5.13 5.01 4.97 4.86
- -------------------------------------------------------------------------------------------------------
Interest rate spread ................. 2.61% 2.42% 2.65% 2.74% 2.78%
=======================================================================================================
</TABLE>
The weighted average yield on the loan and mortgage-backed securities
portfolios at September 30, 1997, increased to 7.80%, compared to 7.61% at June
30, 1997, 7.77% at December 31, 1996, and 7.71% at September 30, 1996. At
September 30, 1997, the one-to-four unit residential ARM portfolio, including
mortgage-backed securities, totaled $4.5 billion with a weighted average rate of
7.41%, compared to $3.9 billion with a weighted average rate of 7.38% at
December 31, 1996, and $3.7 billion with a weighted average rate of 7.37% at
September 30, 1996.
ASSET QUALITY
Non-Performing Assets
Non-performing assets declined during the quarter by $0.2 million to $55.7
million at September 30, 1997, or 0.95% of total assets. All of Downey's
non-performing assets at September 30, 1997, were located in California with the
exception of one property acquired in settlement of a loan located in Arizona.
Non-performing assets at quarter end include non-accrual loans aggregating $18.0
million which were not contractually past due, but were deemed non-accrual due
to management's assessment of the borrower's ability to pay.
18
<PAGE>
The following table summarizes the non-performing assets of Downey at
the dates indicated.
<TABLE>
<CAPTION>
September 30, June 30, March 31, December 31, September 30,
(Dollars in Thousands) 1997 1997 1997 1996 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
One-to-four unit residential ..................... $21,776 $20,893 $23,739 $22,885 $26,613
Other ............................................ 20,383 20,369 19,733 22,136 24,097
- --------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans ......................... 42,159 41,262 43,472 45,021 50,710
Real estate acquired in settlement of loans, net .... 13,072 14,357 17,202 16,078 16,332
Repossessed automobiles ............................. 477 317 270 928 433
- --------------------------------------------------------------------------------------------------------------------------
Gross non-performing assets ...................... $55,708 $55,936 $60,944 $62,027 $67,475
==========================================================================================================================
==========================================================================================================================
Allowance for loan losses (1):
Amount .......................................... $30,918 $31,188 $30,683 $30,094 $30,278
As a percentage of non-performing loans ......... 73.34% 75.59% 70.58% 66.84% 59.71%
Non-performing assets as a percentage of total assets 0.95 0.95 1.11 1.19 1.36
==========================================================================================================================
</TABLE>
(1) Allowance for loan losses does not include the allowance for real estate
and real estate acquired in settlement of loans.
At September 30, 1997, the recorded investment in loans for which
impairment has been recognized totaled $13.9 million (all of which were on
non-accrual status). The total allowance for possible losses related to such
loans was $1.3 million. During the third quarter of 1997, total interest
recognized on the impaired loan portfolio, on a cash basis, was $0.5 million.
Delinquent Loans
During the 1997 third quarter, total delinquencies increased $5.5 million
or 13.7%. The increase primarily occurred in the residential one-to-four unit
category which increased $3.8 million and in the automobile loan category which
increased $1.1 million. As a percentage of loans outstanding, delinquencies at
the end of the 1997 third quarter were 0.85%, below the year-end 1996 level of
0.90% and year-ago level of 1.07%.
19
<PAGE>
The following table sets forth the amounts of Downey's past due loans at
the dates indicated.
<TABLE>
<CAPTION>
September 30, 1997 June 30, 1997
---------------------------------------- ----------------------------------------
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 ..................... $14,950 $ 5,965 $17,465 $38,380 $10,636 $ 5,402 $18,583 $34,621
Five or more units .................... 223 135 -- 358 -- -- -- --
Commercial real estate .................. -- -- 279 279 -- -- 279 279
Construction ............................ -- -- -- -- -- --
Land .................................... -- -- -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Total real estate loans ............. 15,173 6,100 17,744 39,017 10,636 5,402 18,862 34,900
Non-mortgage:
Commercial .............................. -- -- -- -- -- -- -- --
Consumer:
Automobile ............................ 3,903 1,312 672 5,887 3,574 647 555 4,776
Other consumer ........................ 355 173 58 586 165 66 87 318
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans ......................... $19,431 $ 7,585 $18,474 $45,490 $14,375 $ 6,115 $19,504 $39,994
===================================================================================================================================
Delinquencies as a percentage of total loans 0.36% 0.14% 0.35% 0.85% 0.27% 0.11% 0.36% 0.74%
===================================================================================================================================
March 31, 1997 December 31, 1996
---------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units ..................... $15,221 $ 5,095 $20,320 $40,636 $14,717 $ 5,502 $18,549 $38,768
Five or more units .................... -- -- -- -- -- -- -- --
Commercial real estate .................. -- -- 279 279 -- -- -- --
Construction ............................ -- -- -- -- -- -- -- --
Land .................................... -- -- -- -- -- -- 566 566
- -----------------------------------------------------------------------------------------------------------------------------------
Total real estate loans ............. 15,221 5,095 20,599 40,915 14,717 5,502 19,115 39,334
Non-mortgage:
Commercial .............................. -- -- -- -- -- -- -- --
Consumer:
Automobile ............................ 2,419 278 324 3,021 2,080 328 274 2,682
Other consumer ........................ 69 34 86 189 158 15 181 354
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans ......................... $17,709 $ 5,407 $21,009 $44,125 $16,955 $ 5,845 $19,570 $42,370
===================================================================================================================================
Delinquencies as a percentage of total loans 0.36% 0.11% 0.42% 0.89% 0.36% 0.12% 0.41% 0.90%
===================================================================================================================================
September 30, 1996
----------------------------------------
<S> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units ..................... $15,294 $ 5,579 $21,569 $42,442
Five or more units .................... -- -- -- --
Commercial real estate .................. 1,767 -- 1,926 3,693
Construction ............................ -- -- -- --
Land .................................... -- -- -- --
- ---------------------------------------------------------------------------------------
Total real estate loans ............. 17,061 5,579 23,495 46,135
Non-mortgage:
Commercial .............................. -- -- -- --
Consumer:
Automobile ............................ 1,037 177 224 1,438
Other consumer ........................ 258 88 266 612
- ---------------------------------------------------------------------------------------
Total loans ......................... $18,356 $ 5,844 $23,985 $48,185
=======================================================================================
Delinquencies as a percentage of total loans 0.41% 0.13% 0.53% 1.07%
=======================================================================================
</TABLE>
(1) All 90 day or greater delinquencies are on non-accrual status and reported
as part of non-performing assets.
20
<PAGE>
Valuation Allowances
Allowances for losses on all assets (including loans) were $53.9 million,
$54.7 million, $61.8 million and $63.2 million, at September 30, 1997, June 30,
1997, December 31, 1996, and September 30, 1996, respectively. For information
on valuation allowances associated with investments in real estate and joint
ventures, see "Investments in Real Estate and Joint Ventures" on page 15.
The allowance for possible loan losses was $30.9 million at September 30,
1997, compared to $31.2 million at June 30, 1997, $30.1 million at December 31,
1996, and $30.3 million at September 30, 1996. Included in the current
quarter-end total allowance was $30.5 million of general loan valuation
allowances, of which $2.8 million represents an unallocated portion. These
general loan valuation allowances may be included as a component of risk-based
capital, up to a maximum of 1.25% of risk-weighted assets. Net charge-offs
totaled $1.8 million in the 1997 third quarter, up from $1.6 million in the
year-ago quarter. Included in the current quarter net charge-offs were $0.6
million associated with one-to-four unit residential properties and $1.2 million
associated with automobile loans.
The following table is a summary of the activity of Downey's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 1997 1997 1997 1996 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 31,188 $ 30,683 $ 30,094 $ 30,278 $ 27,754
Provision .................... 1,578 1,873 2,155 1,674 4,092
Charge-offs .................. (2,001) (1,643) (1,783) (2,181) (1,657)
Recoveries ................... 153 275 217 323 89
- --------------------------------------------------------------------------------------------------
Balance at end of period ..... $ 30,918 $ 31,188 $ 30,683 $ 30,094 $ 30,278
==================================================================================================
</TABLE>
21
<PAGE>
The following table indicates the allocation of the total valuation
allowance for loan losses to the various categories of loans for the dates
indicated.
<TABLE>
<CAPTION>
September 30, 1997 June 30, 1997 March 31, 1997
--------------------------------- -------------------------------- --------------------------------
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 ...... $14,426 $4,592,296 0.31% $15,033 $4,708,045 0.32% $13,674 $4,275,940 0.32%
Five or more units ..... 417 50,896 0.82 521 61,674 0.84 509 56,239 0.91
Commercial real estate ... 4,592 211,864 2.17 4,704 221,679 2.12 6,421 228,407 2.81
Construction ............. 718 60,459 1.19 576 48,765 1.18 925 78,559 1.18
Land ..................... 349 26,270 1.33 332 24,847 1.34 254 18,629 1.36
Non-mortgage:
Commercial ............... 164 23,741 0.69 269 25,718 1.05 255 25,450 1.00
Consumer:
Automobile ............. 6,746 325,216 2.07 6,247 287,611 2.17 5,132 242,403 2.12
Other consumer ......... 706 47,067 1.50 706 46,244 1.53 713 46,892 1.52
Not specifically allocated .. 2,800 -- -- 2,800 -- -- 2,800 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans held for
investment ........... $30,918 $5,337,809 0.58% $31,188 $5,424,583 0.57% $30,683 $4,972,519 0.62%
====================================================================================================================================
December 31, 1996 September 30, 1996
--------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units ...... $13,241 $4,046,448 0.33%$ 12,679 $3,858,142 0.33%
Five or more units ..... 517 56,907 0.91 583 68,853 0.85
Commercial real estate 6,956 260,609 2.67 8,307 262,811 3.16
Construction ............. 773 66,651 1.16 727 62,651 1.16
Land ..................... 466 21,177 2.20 495 23,260 2.13
Non-mortgage:
Commercial ............... 236 22,136 1.07 208 19,169 1.09
Consumer:
Automobile ............. 4,303 202,186 2.13 3,681 174,628 2.11
Other consumer ......... 802 47,281 1.70 798 46,755 1.71
Not specifically allocated .. 2,800 -- -- 2,800 -- --
- -------------------------------------------------------------------------------------------------
Total loans held for
investment ........... $30,094 $4,723,395 0.64% $30,278 $4,516,269 0.67%
=================================================================================================
</TABLE>
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of funds generated in the third quarter of 1997 were
principal repayments (including prepayments, but excluding Downey refinances) on
loans and mortgage-backed securities of $296.3 million, proceeds from the
previously mentioned sale of COFI ARMs from the investment portfolio of $291.7
million and net increases in deposits of $151.7 million.
These funds were used primarily to originate loans held for investment of
$488.8 million (net of Downey refinances of $8.7 million) and for repayment of
various borrowings of $198.6 million.
At September 30, 1997, the Bank's ratio of regulatory liquidity was 5.04%,
compared to 5.26% at December 31, 1996, and 5.12% at September 30, 1996. The
ratio remains above the regulatory minimum of 5%.
Stockholders' equity totaled $417.7 million at September 30, 1997, compared
to $391.6 million at December 31, 1996, and $383.6 million at September 30,
1996.
22
<PAGE>
REGULATORY CAPITAL
The following table is a reconciliation of the Bank's stockholder's equity
to federal regulatory capital as of September 30, 1997. The core and tangible
capital ratios were 6.40% and the risk-based capital ratio was 12.30%. 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.
<TABLE>
<CAPTION>
Tangible Capital Core Capital Risk-Based Capital
------------------- -------------------- -------------------
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Stockholder's equity .......................... $ 408,643 $ 408,643 $ 408,643
Adjustments:
Deductions:
Investment in subsidiary, primarily real .. (34,428) (34,428) (34,428)
estate
Goodwill .................................. (5,186) (5,186) (5,186)
Core deposit premium ...................... (286) (286) (286)
Non-permitted mortgage servicing rights ... (181) (181) (181)
Additions:
Unrealized loss on securities available for 652 652 652
sale
General loss allowance - Investment in DSL 1,637 1,637 1,637
Loan general valuation allowances (1) ..... -- -- 30,503
- -------------------------------------------------------------------------------------------------------------------
Regulatory capital ............................ 370,851 6.40% 370,851 6.40% 401,354 12.30%
Well capitalized requirement .................. 86,920 1.50 (2) 289,734 5.00 326,323 10.00 (3)
- -------------------------------------------------------------------------------------------------------------------
Excess ........................................ $ 283,931 4.90% $ 81,117 1.40% $ 75,031 2.30%
===================================================================================================================
</TABLE>
(1) Limited to 1.25% of risk-weighted assets.
(2) Represents the minimum requirement for tangible capital, as no "well
capitalized" requirement has been established for this category.
(3) A third requirement is Tier 1 capital to risk-weighted assets of 6%, which
the Bank meets and exceeds with a ratio of 11.36%.
CURRENT ACCOUNTING ISSUES
The Financial Accounting Standards Board ("FASB") issued Statement of
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128") and "Disclosure
of Information about Capital Structure" ("SFAS 129") in February 1997, and
issued "Reporting Comprehensive Income" ("SFAS 130") and "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") in September
1997.
SFAS 128 - Earnings Per Share
SFAS 128 simplifies the standards for computing and presenting earnings per
share ("EPS") as previously prescribed by Accounting Principles Board Opinion
No. 15, "Earnings per Share." SFAS 128 replaces primary EPS with basic EPS and
fully diluted EPS with diluted EPS. Basic EPS excludes dilution and is computed
by dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted from
issuance of common stock that then shared in earnings. SFAS 128 also requires
dual presentation of basic and diluted EPS on the face of the income statement
and a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997, and earlier application is not permitted. If Downey had
adopted SFAS 128 as of January 1, 1997, proforma basic EPS and proforma diluted
EPS would have been $1.17 and $1.16, respectively for the nine months ending
September 30, 1997.
SFAS 129 - Disclosure of Information about Capital Structure
SFAS 129 consolidates existing reporting standards for disclosing
information about an entity's capital structure. SFAS 129 also supersedes
specific requirements found in previously issued accounting statements. SFAS 129
must be adopted for financial statements for periods ending after December 15,
1997.
23
<PAGE>
SFAS 130 - Reporting Comprehensive Income
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS 130 does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
SFAS 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
SFAS 131 - Disclosures about Segments of an Enterprise and Related Information
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS 131 supersedes FASB Statement No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. It amends FASB
Statement No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove
the special disclosure requirements for previously unconsolidated subsidiaries.
SFAS 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
SFAS 131 requires that a public business enterprise report a measure of
segment profit or loss, certain specific revenue and expense items, and segment
assets. It requires reconciliations of total segment revenues, total segment
profit or loss, total segment assets, and other amounts disclosed for segments
to corresponding amounts in the enterprise's general-purpose financial
statements. It requires that all public business enterprises report information
about the revenues derived from the enterprise's products or services (or groups
of similar products and services), about the countries in which the enterprise
earns revenues and holds assets, and about major customers regardless of whether
that information is used in making operating decisions. However, SFAS 131 does
not require an enterprise to report information that is not prepared for
internal use if reporting it would be impracticable.
SFAS 131 also requires that a public business enterprise report descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used in the
enterprise's general-purpose financial statements, and changes in the
measurement of segment amounts from period to period.
SFAS 131 is effective for financial statements for periods beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. This Statement need not be applied to
interim financial statements in the initial year of its application, but
comparative information for interim periods in the initial year of application
is to be reported in financial statements for interim periods in the second year
of application.
24
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(A) None.
(B) There were no reports on Form 8-K filed for the nine months ended September
30, 1997.
SIGNATURES: Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
DOWNEY FINANCIAL CORP.
Date: November 5, 1997
/S/ Thomas E Prince
-------------------------------------------------
Executive Vice President/ Chief Financial Officer
Date: November 5, 1997
/S/ Donald E. Royer
-------------------------------------------------
Executive Vice President / General Counsel
25
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 32,614
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 39,040
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 195,367
<INVESTMENTS-CARRYING> 6,996
<INVESTMENTS-MARKET> 6,975
<LOANS> 5,283,838
<ALLOWANCE> 30,918
<TOTAL-ASSETS> 5,853,968
<DEPOSITS> 4,782,794
<SHORT-TERM> 533,616
<LIABILITIES-OTHER> 54,482
<LONG-TERM> 65,416
0
0
<COMMON> 268
<OTHER-SE> 417,392
<TOTAL-LIABILITIES-AND-EQUITY> 5,853,968
<INTEREST-LOAN> 298,214
<INTEREST-INVEST> 11,747
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 309,961
<INTEREST-DEPOSIT> 166,982
<INTEREST-EXPENSE> 30,024
<INTEREST-INCOME-NET> 112,955
<LOAN-LOSSES> 5,606
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 76,933
<INCOME-PRETAX> 54,778
<INCOME-PRE-EXTRAORDINARY> 31,197
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,197
<EPS-PRIMARY> 1.16
<EPS-DILUTED> 1.16
<YIELD-ACTUAL> 7.66
<LOANS-NON> 42,159
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,310
<ALLOWANCE-OPEN> 30,094
<CHARGE-OFFS> 5,427
<RECOVERIES> 645
<ALLOWANCE-CLOSE> 30,918
<ALLOWANCE-DOMESTIC> 30,918
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,800
</TABLE>
