================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
For the quarterly period ended JUNE 30, 1998
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 (949) 854-0300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
PACIFIC EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
At June 30, 1998, 28,104,618 shares of the Registrant's Common Stock, $0.01
par value were outstanding.
================================================================================
<PAGE>
DOWNEY FINANCIAL CORP.
JUNE 30, 1998 QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION ...................................................... 1
Consolidated Balance Sheets ............................................ 1
Consolidated Statements of Income ...................................... 2
Consolidated Statements of Comprehensive Income ........................ 3
Consolidated Statements of Cash Flows .................................. 4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ................................. 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................................... 8
PART II
OTHER INFORMATION...................................................... 27
Item 6 Exhibits and Reports on Form 8-K............................. 27
i
<PAGE>
PART I - FINANCIAL INFORMATION
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31, June 30,
(Dollars in Thousands, Except Per Share Data) 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash .................................................................... $ 47,744 $ 48,823 $ 55,229
Federal funds ........................................................... 19,001 6,095 248
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents ........................................... 66,745 54,918 55,477
U.S. Treasury and agency obligations and other investment securities
available for sale, at fair value ................................... 125,019 159,398 141,861
Municipal securities being held to maturity, at amortized cost (estimated
market value of $6,865 at June 30, 1998, and December 31, 1997, and
$6,975 at June 30, 1997) ............................................ 6,885 6,885 6,997
Mortgage loans purchased under resale agreements ........................ 50,000 -- --
Loans held for sale, at the lower of cost or market ..................... 212,164 35,100 22,687
Mortgage-backed securities available for sale, at fair value ............ 42,246 49,299 54,607
Loans receivable held for investment .................................... 5,073,881 5,281,997 5,362,714
Investments in real estate and joint ventures ........................... 41,880 41,356 36,145
Real estate acquired in settlement of loans ............................. 7,576 9,626 14,357
Premises and equipment .................................................. 101,809 101,901 97,501
Federal Home Loan Bank stock, at cost ................................... 48,010 44,085 42,734
Other assets ............................................................ 55,887 51,260 50,590
- -------------------------------------------------------------------------------------------------------------------
$ 5,832,102 $ 5,835,825 $ 5,885,670
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ................................................................ $ 5,171,376 $ 4,869,978 $ 4,631,112
Government securities sold under agreements to repurchase ............... -- 34,803 --
Federal Home Loan Bank advances ......................................... 123,347 352,458 550,736
Commercial paper ........................................................ 19,982 83,811 236,809
Other borrowings ........................................................ 12,256 12,663 10,063
Accounts payable and accrued liabilities ................................ 39,567 40,579 38,744
Deferred income taxes ................................................... 6,612 11,187 10,241
- -------------------------------------------------------------------------------------------------------------------
Total liabilities ................................................... 5,373,140 5,405,479 5,477,705
- -------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock, par value of $0.01 per share; authorized 50,000,000
shares; outstanding 28,104,618 shares at June 30, 1998, 26,755,938
shares at December 31, 1997, and 26,733,496 shares at June 30, 1997 . 281 268 267
Additional paid-in capital .............................................. 91,814 45,954 22,612
Accumulated other comprehensive income (loss) - unrealized gains (losses)
on securities available for sale .................................... 420 110 (1,648)
Retained earnings ....................................................... 366,447 384,014 386,734
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity .......................................... 458,962 430,346 407,965
- -------------------------------------------------------------------------------------------------------------------
$ 5,832,102 $ 5,835,825 $ 5,885,670
===================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------
(Dollars in Thousands, Except Per Share Data) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable ........................................... $ 105,583 $ 99,373 $ 210,928 $ 193,064
U.S. Treasury and agency securities ........................ 1,846 2,053 3,675 4,087
Mortgage-backed securities ................................. 738 927 1,546 1,911
Other investments .......................................... 1,630 923 3,371 1,798
- ----------------------------------------------------------------------------------------------------------------------------
Total interest income .................................. 109,797 103,276 219,520 200,860
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits ................................................... 62,999 56,102 124,537 107,506
Borrowings ................................................. 3,608 9,891 9,167 17,953
- ----------------------------------------------------------------------------------------------------------------------------
Total interest expense ................................. 66,607 65,993 133,704 125,459
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME ........................................ 43,190 37,283 85,816 75,401
PROVISION FOR LOAN LOSSES .................................. 1,462 1,873 1,734 4,028
- ----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses .... 41,728 35,410 84,082 71,373
- ----------------------------------------------------------------------------------------------------------------------------
OTHER INCOME, NET:
Loan and deposit related fees .............................. 3,727 2,629 6,896 4,918
Real estate and joint ventures held for investment, net:
Net gains on sales of wholly owned real estate ........... 70 305 70 305
Reduction of losses on real estate and joint ventures .... 2,221 487 4,943 2,764
Operations, net .......................................... 2,712 597 9,505 5,292
Secondary marketing activities:
Loan servicing fees ...................................... 139 345 289 751
Net gains on sales of loans and mortgage-backed securities 2,414 330 3,286 663
Net gains on sales of investment securities ................ -- -- 68 --
Other ...................................................... 666 660 1,818 1,651
- ----------------------------------------------------------------------------------------------------------------------------
Total other income, net ................................ 11,949 5,353 26,875 16,344
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSE:
Salaries and related costs ................................. 15,609 13,641 30,245 28,038
Premises and equipment costs ............................... 3,908 3,777 7,790 7,301
Advertising expense ........................................ 1,552 2,423 3,135 3,681
Professional fees .......................................... (29) 1,192 1,357 2,001
SAIF insurance premiums and regulatory assessments ......... 955 849 1,905 1,655
Other general and administrative expense ................... 5,248 3,623 9,021 6,946
- ----------------------------------------------------------------------------------------------------------------------------
Total general and administrative expense ................. 27,243 25,505 53,453 49,622
- ----------------------------------------------------------------------------------------------------------------------------
Net operation of real estate acquired in settlement of loans (97) 641 158 1,568
Amortization of excess of cost over fair value of net assets
acquired ............................................... 134 134 266 266
- ----------------------------------------------------------------------------------------------------------------------------
Total operating expense ................................ 27,280 26,280 53,877 51,456
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES .................................... 26,397 14,483 57,080 36,261
Income taxes .................................................. 11,409 6,173 24,527 15,621
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME ................................................. $ 14,988 $ 8,310 $ 32,553 $ 20,640
============================================================================================================================
PER SHARE INFORMATION:
BASIC ......................................................... $ 0.53 $ 0.30 $ 1.16 $ 0.74
============================================================================================================================
DILUTED ....................................................... $ 0.53 $ 0.30 $ 1.15 $ 0.74
============================================================================================================================
CASH DIVIDENDS PAID ........................................... $ 0.080 $ 0.076 $ 0.156 $ 0.149
============================================================================================================================
Weighted average diluted shares outstanding ................... 28,179,643 28,070,171 28,173,832 28,070,004
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------
(Dollars in Thousands) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCOME ..................................................................... $ 14,988 $ 8,310 $ 32,553 $ 20,640
- -------------------------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
Unrealized gains (losses) on securities available for sale:
U.S. Treasury and agency obligations and other investment securities
available for sale, at fair value ....................................... (7) (1,673) 525 (69)
Less reclassification of realized gains included in income ................ -- -- (39) --
Mortgage-backed securities available for sale, at fair value .............. 1 2,972 (176) (20)
- -------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) ........................................... (6) 1,299 310 (89)
- -------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME ........................................................... $ 14,982 $ 9,609 $ 32,863 $ 20,551
===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
(In Thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................................... $ 32,553 $ 20,640
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization ...................................................... 3,986 4,680
Provision (recovery) for losses on loans, leases, real estate acquired in settlement
of loans, investments in real estate and joint ventures and other assets ......... (3,081) 2,298
Net gains on sales of loans and mortgage-backed securities, investment
securities, real estate and other assets ......................................... (13,125) (4,488)
Interest capitalized on loans (negative amortization) .............................. (9,371) (6,453)
Federal Home Loan Bank dividends ................................................... (1,308) (1,287)
Loans originated for sale ........................................................... (850,600) (135,121)
Proceeds from sales of loans originated for sale .................................... 513,434 82,450
Other, net .......................................................................... (285) 491
- ---------------------------------------------------------------------------------------------------------------------
Net cash used for operating activities ................................................. (327,797) (36,790)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Sales of investment securities available for sale .................................. 60,068 --
Sales of mortgage-backed securities available for sale ............................. 162,688 43,566
Sales of wholly owned real estate and real estate acquired in settlement of loans .. 3,236 8,224
Purchase of:
U.S. Treasury and agency obligations and other investment securities ............... (27,617) --
Securities under resale agreements ................................................. (50,000) --
Loans receivable held for investment ............................................... (6,556) (23,193)
Loans originated for investment (net of refinances of $23,725 and $39,573
at June 30, 1998 and 1997, respectively) ........................................... (653,936) (1,146,918)
Principal payments on loans receivable held for investment and mortgage-backed
securities available for sale ...................................................... 857,906 474,273
Net change in undisbursed loan funds ................................................ 22,564 (714)
Investments in real estate held for investment ...................................... 5,317 11,980
Other, net .......................................................................... (3,064) (4,308)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities ................................... 370,606 (637,090)
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
(In Thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits .................................................... $ 301,398 $ 458,010
Net decrease in securities sold under agreements to repurchase .............. (34,803) --
Proceeds from Federal Home Loan Bank advances ............................... 75,300 662,500
Repayments of Federal Home Loan Bank advances ............................... (304,411) (498,647)
Net increase (decrease) in other borrowings ................................. (64,236) 38,410
Proceeds from exercise of stock options ..................................... 158 --
Cash dividends .............................................................. (4,388) (4,175)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities ........................... (30,982) 656,098
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ........................... 11,827 (17,782)
Cash and cash equivalents at beginning of year ................................. 54,918 73,259
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 66,745 $ 55,477
- ---------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................................................... $ 133,464 $ 124,238
Income taxes ............................................................... 28,915 6,240
Supplemental disclosure of non-cash investing:
Loans exchanged for mortgage-backed securities .............................. 163,716 44,102
Real estate acquired in settlement of loans ................................. 9,497 13,498
Loans to facilitate the sale of real estate acquired in settlement of loans . 9,041 10,422
=========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE (1) - BASIS OF PRESENTATION
In the opinion of Downey Financial Corp. and subsidiaries ("Downey"), the
accompanying consolidated financial statements contain all adjustments
(consisting of only normal recurring accruals) necessary for a fair presentation
of Downey's financial condition as of June 30, 1998, December 31, 1997 and June
30, 1997, and the results of operations for the three months and six months
ended June 30, 1998 and 1997, and changes in cash flows for the six months ended
June 30, 1998 and 1997. 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
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, 1997,
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 Financial Condition and Results of
Operations as of December 31, 1997, and for the year then ended. Therefore, only
material changes in financial condition and results of operations are discussed
in the remainder of Part I.
NOTE (2) - SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In September 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131").
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 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. SFAS 131 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. To date, Downey is still examining the impact of SFAS 131 and has
not determined what operating segments will be reported.
NOTE (3) - NET INCOME PER SHARE
Net income per share is calculated on both a basic and diluted basis. Basic
net income per share excludes dilution and is computed by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted net income per share 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 the issuance of
common stock that then shared in earnings.
NOTE (4) - DERIVATIVES
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133").
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
6
<PAGE>
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (a) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment, (b)
a hedge of the exposure to variable cash flows of a forecasted transaction, or
(c) a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available for sale security, or a
foreign-currency-denominated forecasted transaction.
Under SFAS 133, an entity that elects to apply hedge accounting is required
to establish at the inception of the hedge the method it will use for assessing
the effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk.
This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999.
As part of its secondary marketing activities, Downey utilizes forward sale
contracts to hedge the value of loans originated for sale against adverse
changes in interest rates. At June 30, 1998, such contracts amounted to
approximately $217 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.
NOTE (5) - INCOME TAXES
During the first quarter of 1998, the Internal Revenue Service ("IRS")
completed its review of Downey's federal income tax returns for years 1990
through 1995. As a result of that review, the IRS proposed additions to tax of
approximately $20 million. Of that amount, Downey has paid approximately $5
million for items not disputed. The balance of the remaining tax additions
primarily relates to the sale and leaseback of computer equipment in 1990.
Management believes substantial legal authority exists for the positions taken
on the tax returns and intends to vigorously defend those positions, and that
adequate provisions have been provided for the potential exposure.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements under this caption constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995 which
involve risks and uncertainties. Downey's actual results may differ
significantly from the results discussed in such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
economic conditions, competition in the geographic and business areas in which
Downey conducts its operations, fluctuations in interest rates, credit quality
and government regulation.
OVERVIEW
Net income for the second quarter of 1998 totaled $15.0 million or $0.53
per share on a diluted basis, up 80.4% from the $8.3 million or $0.30 per share
earned in the second quarter of 1997. For the six months ended June 30, 1998,
net income amounted to $32.6 million, or $1.15 per share, up 57.7% from the
$20.6 million, or $0.74 per share, earned in the same period of last year.
As in the first quarter, second quarter net income benefited from the
settlement of certain loan and real estate investment obligations of a joint
venture partner ("settlement"). The second quarter pre-tax amount totaled $3.2
million of which $1.7 million was recorded as a reduction of loss on real estate
and joint ventures; $0.2 million was recorded in miscellaneous other income; and
$1.3 million was recorded as a partial recovery of legal fees within general and
administrative expense. Excluding the settlement, second quarter net income
would have been $13.2 million, up $4.9 million or 58.4% from a year ago.
For the first six months, the pre-tax amount associated with the settlement
was $8.3 million of which $1.4 million represented the recovery of a prior loan
charge-off thereby reducing provision for loan losses; $4.3 million was recorded
as a reduction of loss on real estate and joint ventures; $1.0 million was
recorded in miscellaneous other income; and $1.6 million was recorded as a
partial recovery of legal fees within general and administrative expense.
Excluding the settlement, net income for the first six months of 1998 would have
been $27.8 million, up $7.2 million or 34.7% from a year ago.
The increase in net income between second quarters, excluding the
previously mentioned settlement, reflected several factors. Net interest income
increased $5.9 million or 15.8% due to a higher effective interest rate spread
and a 3.4% increase in average earning assets. An increase of $4.7 million in
adjusted total other income and reductions of $0.7 million in costs associated
with the net operation of real estate acquired in settlement of loans and $0.4
million in provision for loan losses also contributed to the improvement of net
income. The increase in adjusted total other income reflected increases in
income from real estate held for investment, net gains on sales of loans, and
loan and deposit related fees. Those positive factors were partially offset by a
$3.0 million increase in adjusted general and administrative costs reflecting
higher lending volumes and branch expansion.
For the second quarter of 1998, the return on average assets was 1.02% and
the return on average equity was 13.29%, bringing the returns for the first six
months of 1998 to 1.11% and 14.68%, respectively. Excluding the previously
mentioned settlement, the returns on average assets and average equity would
have been 0.90% and 11.67%, respectively, in the second quarter and 0.95% and
12.54%, respectively, for the first six months.
Assets totaled $5.8 billion at June 30, 1998, down slightly from both a
year ago and year-end 1997. The low interest rate environment during the first
half of 1998 has generated increased prepayments of residential loans as
customers seek low, fixed rate mortgages. As a result, the portfolio of loans
held for investment declined, which decline was only partially offset by an
increase in investment securities and a temporary increase in loans held for
sale. Single family loan originations totaled a record $909.2 million in the
second quarter of 1998 compared to $714.9 in the second quarter of 1997. Of the
current quarter total, $592.9 million represented originations of loans for sale
and $80.9 million represented originations for portfolio of subprime credits
("A-," "B" and "C") as part of Downey's strategy to enhance the portfolio's net
yield. In addition to single family loans, $88.0 million of other loans were
originated in the quarter including $46.2 million of automobile loans and $25.9
million of construction and land loans.
Non-performing assets declined $1.0 million during the quarter to $48.8
million or 0.84% of total assets.
8
<PAGE>
Deposits totaled $5.2 billion at June 30, 1998, up 11.7% from a year ago
and $301.4 million above year-end 1997. Since the growth in deposits during the
first six months of 1998 were not needed to fund asset growth, borrowings were
reduced by $328.2 million and totaled $155.6 million at the end of the current
quarter. During the quarter, one new in-store branch was opened, bringing total
branches at quarter end to 90 of which 27 are in-store.
At June 30, 1998, Downey's primary subsidiary, Downey Savings and Loan
Association, F.A. (the "Bank"), had core and tangible capital ratios of 7.05%
and a risk-based capital ratio of 13.24%. These capital levels are well above
the "well capitalized" standards of 5% and 10%, respectively, as defined by
regulation.
9
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income totaled $43.2 million in the second quarter of 1998, up
$5.9 million or 15.8% from the same period last year. The improvement reflected
increases in both the effective interest rate spread and average earning assets.
The effective interest rate spread averaged 3.08% in the current quarter, up
from 2.75% in the year-ago quarter, while average interest-earning assets
increased 3.4% to $5.6 billion. For the first six months of 1998, net interest
income totaled $85.8 million, up $10.4 million or 13.8% from the same period a
year ago.
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and resultant
yields, the interest expense on average interest-bearing liabilities and the
resultant costs, expressed both in dollars and rates. The table also sets forth
the net interest income, the interest rate spread and the effective interest
spread. The effective interest spread, which reflects the relative level of
interest-earning assets to interest-bearing liabilities, equals (i) the
difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities, (ii) divided by average
interest-earning assets for the period. The table also sets forth the net
earning balance (the difference between the average balance of interest-earning
assets and the average balance of interest-bearing liabilities) for the periods
indicated. Non-accrual loans are included in the average interest-earning assets
balance. Interest from non-accrual loans is included in interest income only to
the extent that payments are received and to the extent that Downey believes it
will recover the remaining principal balance of the loan. Average balances are
computed using the average of each month's daily average balance during the
period indicated.
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------
June 30,1998 June 30,1997
---------------------------------------------------------------------------
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 ................................ $5,316,803 $ 105,583 7.94% $5,156,085 $ 99,373 7.71%
Mortgage-backed securities ........... 44,146 738 6.69 56,005 927 6.62
Investment securities ................ 242,071 3,476 5.76 205,381 2,976 5.81
- -----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ..... 5,603,020 109,797 7.84 5,417,471 103,276 7.63
Non-interest-earning assets ............. 256,211 249,052
- -----------------------------------------------------------------------------------------------------------------------
Total assets ...................... $5,859,231 $5,666,523
=======================================================================================================================
Interest-bearing liabilities:
Deposits ............................. $5,123,428 $ 62,999 4.93% $4,544,260 $ 56,102 4.95%
Borrowings ........................... 219,384 3,608 6.60 657,242 9,891 6.04
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 5,342,812 66,607 5.00 5,201,502 65,993 5.09
Non-interest-bearing liabilities ........ 65,275 61,635
Stockholders' equity .................... 451,144 403,386
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity ......................... $5,859,231 $5,666,523
=======================================================================================================================
Net interest income/interest rate spread $ 43,190 2.84% $ 37,283 2.54%
Excess of interest-earning assets over
interest-bearing liabilities ......... $ 260,208 $ 215,969
Effective interest rate spread .......... 3.08% 2.75%
=======================================================================================================================
Six Months Ended
---------------------------------------------------------------------------
June 30,1998 June 30,1997
---------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans ................................ $5,315,150 $ 210,928 7.94% $4,959,219 $ 193,064 7.79%
Mortgage-backed securities ........... 46,058 1,546 6.71 57,991 1,911 6.59
Investment securities ................ 247,999 7,046 5.73 203,270 5,885 5.84
- -----------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ..... 5,609,207 219,520 7.83 5,220,480 200,860 7.70
Non-interest-earning assets ............. 252,454 252,665
- -----------------------------------------------------------------------------------------------------------------------
Total assets ...................... $5,861,661 $5,473,145
=======================================================================================================================
Interest-bearing liabilities:
Deposits ............................. $5,064,239 $ 124,537 4.96% $4,410,029 $ 107,506 4.92%
Borrowings ........................... 285,226 9,167 6.48 602,273 17,953 6.01
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 5,349,465 133,704 5.04 5,012,302 125,459 5.05
Non-interest-bearing liabilities ........ 68,802 60,897
Stockholders' equity .................... 443,394 399,946
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity ........................ $5,861,661 $5,473,145
=======================================================================================================================
Net interest income/interest rate spread $ 85,816 2.79% $ 75,401 2.65%
Excess of interest-earning assets over
interest-bearing liabilities ......... $ 259,742 $ 208,178
Effective interest rate spread .......... 3.06% 2.89%
=======================================================================================================================
</TABLE>
11
<PAGE>
Changes in Downey's net interest income are a function of both changes in
rates and changes in volumes of interest-earning assets and interest-bearing
liabilities. The following table sets forth information regarding changes in
interest income and expense for Downey for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to: (i) changes in volume (changes in volume
multiplied by comparative period rate); (ii) changes in rate (changes in rate
multiplied by comparative period volume); and (iii) change in rate-volume
(change in rate multiplied by change in volume). Interest-earning asset and
interest-bearing liability balances used in the calculations represent average
balances computed using the average of each month's daily average balance during
the period indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------------------------------------------------------------------------
June 30, 1998 versus June 30, 1997 June 30, 1998 versus June 30, 1997
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 ....................... $ 3,098 $ 3,018 $ 94 $ 6,210 $ 13,857 $ 3,739 $ 268 $ 17,864
Mortgage-backed securities .. (196) 9 (2) (189) (394) 36 (7) (365)
Investment securities ....... 532 (27) (5) 500 1,295 (110) (24) 1,161
- -------------------------------------------------------------------------------------------------------------------------------
Change in interest income 3,434 3,000 87 6,521 14,758 3,665 237 18,660
- -------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits .................... 7,151 (225) (29) 6,897 15,948 943 140 17,031
Borrowings .................. (6,592) 1,150 (841) (6,283) (9,459) 1,558 (885) (8,786)
- -------------------------------------------------------------------------------------------------------------------------------
Change in interest expense 559 925 (870) 614 6,489 2,501 (745) 8,245
- -------------------------------------------------------------------------------------------------------------------------------
Change in net interest income .. $ 2,875 $ 2,075 $ 957 $ 5,907 $ 8,269 $ 1,164 $ 982 $ 10,415
===============================================================================================================================
</TABLE>
PROVISION FOR LOAN LOSSES
Provision for loan losses was $1.5 million in the current quarter compared
to $1.9 million in the year-ago quarter. For the first six months of 1998,
provision for loan losses totaled $1.7 million, compared to $4.0 million in the
year-ago period. Included in the six-month 1998 amount was a $1.4 million
reduction due to the recovery of a prior loan charge-off as a result of the
previously mentioned settlement. For information regarding the allowance for
loan losses, see "Asset Quality - Valuation Allowances" on page 24.
OTHER INCOME
Total other income was $11.9 million in the second quarter of 1998, up $6.6
million from the year-ago quarter. The previously mentioned settlement accounted
for $1.9 million of the increase between second quarters, of which $1.7 million
was included in income from real estate held for investment as a reduction to
the provision for losses and $0.2 million was included in the miscellaneous
other income category. Also favorably impacting total other income were
increases of $2.1 million in net gains on sales of loans and $1.1 million in
loan and deposit related fees. Excluding the settlement, income from real estate
held for investment increased between second quarters by $1.9 million primarily
due to a gain from the sale of a joint venture project. For the first six months
of 1998, total other income was $26.9 million, up $10.5 million from a year ago,
and included $5.3 million from the previously mentioned settlement.
12
<PAGE>
The following table presents a breakdown of the key components comprising
income from real estate and joint venture operations.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1998 1998 1997 1997 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations, net:
Rental operations, net of expenses ................. $ 1,260 $ 881 $ 868 $ 124 $ 474
Equity in net income (loss) from joint ventures .... 1,116 5,226 636 467 (238)
Interest from joint venture advances ............... 336 686 359 382 361
- -------------------------------------------------------------------------------------------------------------------
Total operations, net ............................ 2,712 6,793 1,863 973 597
Net gains on sales of wholly owned real estate ........ 70 -- 1,094 1,505 305
Reduction of losses on real estate and joint ventures . 2,221 2,722 109 317 487
- -------------------------------------------------------------------------------------------------------------------
Income from real estate and joint venture operations $ 5,003 $ 9,515 $ 3,066 $ 2,795 $ 1,389
===================================================================================================================
</TABLE>
OPERATING EXPENSE
Operating expense totaled $27.3 million in the current quarter, up $1.0
million or 3.8% from the second quarter of 1997. General and administrative
expense increased $1.7 million or 6.8%. Included within general and
administrative costs in the current quarter was a $1.3 million reduction to
legal fees due to the previously mentioned settlement. Excluding that amount,
general and administrative costs would have increased by $3.0 million or 11.9%
primarily reflecting higher lending volumes and branch expansion. The increase
in general and administrative costs was partially offset by a favorable change
in the operation of real estate acquired in settlement of loans. During the
current quarter, gains from the sale of single family homes acquired in
settlement of loans offset operating costs resulting in net income of $0.1
million compared to a net cost of $0.6 million in the year-ago quarter. For the
first six months of 1998, operating expenses totaled $53.9 million after a
reduction of $1.6 million to legal fees from the previously mentioned
settlement, compared to $51.5 million in the same period of 1997.
PROVISION FOR INCOME TAXES
Income taxes for the second quarter totaled $11.4 million, resulting in an
effective tax rate of 43.2%, compared to $6.2 million and 42.6% for the like
quarter of a year ago. For the first six months of 1998, the effective tax rate
was 43.0%, compared to 43.1% from the same period of 1997. For further
information regarding income taxes see "Note (5) - Income Taxes" on page 7.
13
<PAGE>
FINANCIAL CONDITION
LOANS AND MORTGAGE-BACKED SECURITIES
Total loans and mortgage-backed securities, including those held for
sale, decreased $71.9 million during the second quarter to a total of $5.3
billion, or 91.4% of assets, at June 30, 1998. This decrease during the quarter
was affected by the low level of interest rates which significantly increased
customer preference for fixed rate residential loans rather than adjustable rate
mortgages ("ARMs"). Reflecting these market dynamics, a greater proportion of
the residential one-to-four unit loan originations during the current quarter
were fixed rate rather than adjustable rate, and prepayment speeds experienced
in the existing ARM portfolio were higher than in recent quarters as more
customers refinanced their ARMs into fixed rate loans. As a result, during the
quarter, the portfolio of residential one-to four unit loans held for investment
declined by $70.2 million due to the higher ARM prepayment speeds, while the
portfolio of residential one-to-four unit loans held for sale increased by $37.8
million as fixed rate loans were originated for sale into the secondary market.
The following table sets forth originations of loans held for investment
and loans originated for sale.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1998 1998 1997 1997 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans originated for investment:
Residential - one-to-four ARMs (1) .... $309,468 $190,490 $254,028 $383,204 $611,371
Residential - one-to-four fixed (2) ... 6,824 4,791 6,705 6,049 8,408
Other (3) ............................. 88,013 93,672 85,527 120,204 110,455
- -------------------------------------------------------------------------------------------------------
Total loans originated for investment 404,305 288,953 346,260 509,457 730,234
Loans originated for sale (primarily
residential - fixed) .................. 592,931 257,669 79,429 74,721 95,092
- -------------------------------------------------------------------------------------------------------
Total loans originated ................ $997,236 $546,622 $425,689 $584,178 $825,326
=======================================================================================================
</TABLE>
(1) For the three months ended June 30, 1998, March 31, 1998, December 31,
1997, September 30, 1997 and June 30, 1997 $1.5 million, $2.6 million, $5.6
million, $6.7 million and $17.3 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. Included also in the three months ended June 30, 1998 were $1.5
million of purchased loans.
(3) For the three months ended June 30, 1998, March 31, 1998, September 30,
1997 and June 30, 1997, $0.2 million, $0.1 million, $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 a record $909.2
million in the second quarter of 1998, of which $316.3 million were for
portfolio and $592.9 million were for sale. This was double the $453.0 million
originated in the first quarter of 1998, and 27% higher than the $714.9 million
originated in the year-ago quarter. Of the current quarter total, $80.9 million
represented originations of subprime credits ("A-," "B" and "C") as part of
Downey's strategy to enhance the portfolio's net yield. During the current
quarter, 67% of Downey's residential one-to-four unit originations represented
refinancings of existing loans (existing Downey loans were 3%). This is down
from 70% (existing Downey loans were 5%) during the previous quarter, and up
from 39% (existing Downey loans were 3%) in the year-ago second quarter. In
addition to single family loans, $88.0 million of other loans were originated in
the quarter including $46.2 million of automobile loans and $25.9 million of
construction and land loans.
During the current quarter, loan originations for investment consisted
primarily of ARMs tied to the Federal Home Loan Bank ("FHLB") Eleventh District
Cost of Funds Index, an index which lags the movement in market interest rates.
This experience is similar to that of recent quarters. Increasingly, the
majority of ARM originations reprice monthly; however, Downey also originates
ARM loans which reprice semi-annually and annually. With respect to ARMs that
primarily adjust monthly, there is a lifetime interest rate cap, but no other
specified limit on periodic interest rate adjustments. Instead, monthly
adjustment ARMs have a periodic cap on changes in the required monthly payments,
which adjust annually. Monthly adjustment ARMs allow for negative amortization
(the addition to loan principal of accrued interest that exceeds the required
loan payment). There is a limit on the amount of negative amortization, such
that the principal plus the added amount cannot exceed 110% of the original loan
amount. At June 30, 1998, $2.7 billion of the
14
<PAGE>
ARMs in Downey's loan portfolio were subject to negative amortization of which
$37.0 million represented the amount of negative amortization included in the
loan balance.
Downey also continues to originate residential fixed interest rate mortgage
loans to meet consumer demand, but intends to sell the majority of all such
loans. Sales of loans originated by Downey were $553.9 million for the second
quarter of 1998, compared to $118.9 million in the previous quarter and $87.2
million for the second quarter of 1997. All were secured by residential
one-to-four unit property and at June 30, 1998, loans held for sale totaled
$212.2 million.
At June 30, 1998, Downey had commitments to fund loans amounting to $420.7
million, of which $228.1 were fixed rate one-to-four unit residential loans
being originated for sale in the secondary market, loans in process of $75.5
million, undrawn lines of credit of $73.4 million and letters of credit of $0.4
million. Downey believes its current sources of funds will enable it to meet
these obligations while exceeding all regulatory liquidity requirements.
15
<PAGE>
The following table sets forth the origination, purchase and sale activity
relating to loans and mortgage-backed securities for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1998 1998 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT PORTFOLIO:
Loans originated:
Loans secured by real estate:
Residential:
One-to-four units:
Adjustable .................................. $ 229,106 $ 127,871 $ 159,656 $ 297,963 $ 563,119
Adjustable - subprime ....................... 78,845 60,017 88,820 78,531 30,943
- ---------------------------------------------------------------------------------------------------------------------
Total adjustable .......................... 307,951 187,888 248,476 376,494 594,062
Fixed ....................................... 3,980 3,319 5,865 5,054 7,467
Fixed - subprime ............................ 1,329 1,472 825 995 941
Five or more units - adjustable ............... -- 875 -- -- 4,600
- ---------------------------------------------------------------------------------------------------------------------
Total residential ......................... 313,260 193,554 255,166 382,543 607,070
Commercial real estate .......................... -- 4,214 3,685 -- 4,145
Construction .................................... 19,023 29,906 16,842 26,200 11,121
Land ............................................ 6,883 7,851 -- 13,310 6,985
Non-mortgage:
Commercial ...................................... 4,421 610 6,435 1,628 2,445
Automobile ...................................... 46,153 45,552 51,985 70,757 73,389
Other consumer .................................. 10,738 4,537 6,580 7,951 6,784
- ---------------------------------------------------------------------------------------------------------------------
Total loans originated ...................... 400,478 286,224 340,693 502,389 711,939
Real estate loans purchased (1) ..................... 3,827 2,729 5,567 7,068 18,295
- ---------------------------------------------------------------------------------------------------------------------
Total loans originated and purchased ............. 404,305 288,953 346,260 509,457 730,234
Loan repayments ..................................... (498,516) (376,371) (321,020) (302,116) (271,387)
Other net changes (2), (3) .......................... (11,740) (14,747) (1,113) (312,185) 3,367
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for
investment .................................... (105,951) (102,165) 24,127 (104,844) 462,214
- ---------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO:
Residential, one-to-four units:
Originated whole loans ........................... 592,931 257,669 79,429 74,721 95,092
Loans transferred from (to) the investment
portfolio (3) ................................. 162 604 (156) 290,606 (338)
Originated whole loans sold (3) .................. (429,434) (79,686) (41,540) (345,198) (59,696)
Loans exchanged for mortgage-backed securities ... (124,505) (39,211) (28,566) (16,854) (27,476)
Other net changes ................................ (1,369) (97) (35) 6 (44)
- ---------------------------------------------------------------------------------------------------------------------
Net increase in loans held for sale ............. 37,785 139,279 9,132 3,281 7,538
- ---------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, net:
Received in exchange for loans ................... 124,505 39,211 28,566 16,854 27,476
Sold ............................................. (124,505) (39,211) (28,566) (16,854) (27,476)
Repayments ....................................... (3,724) (3,020) (3,112) (2,823) (3,124)
Other net changes ................................ (13) (296) 480 147 468
- ---------------------------------------------------------------------------------------------------------------------
Net decrease in mortgage-backed securities
available for sale ............................ (3,737) (3,316) (2,632) (2,676) (2,656)
- ---------------------------------------------------------------------------------------------------------------------
Net increase in loans and mortgage-backed
securities held for sale and available for sale 34,048 135,963 6,500 605 4,882
- ---------------------------------------------------------------------------------------------------------------------
Total net increase (decrease) in loans and
mortgage-backed securities .................... $ (71,903) $ 33,798 $ 30,627 $(104,239) $ 467,096
=====================================================================================================================
</TABLE>
(1) Primarily one-to-four unit residential loans. Included in the three months
ended June 30, 1998, March 31, 1998, September 30, 1997, and June 30, 1997
were $0.2 million, $0.1 million, $0.4 million and $1.0 million,
respectively, of five or more unit residential loans. Included also in the
three months ended June 30, 1998 were $0.6 million of commercial real
estate 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) Includes $290.5 million of one-to-four unit residential ARMs transferred
from the held for investment portfolio during the three months ended
September 30, 1997, and sold servicing released.
16
<PAGE>
The following table sets forth the composition of Downey's loan and
mortgage-backed securities portfolios at the dates indicated.
<TABLE>
<CAPTION>
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1998 1998 1997 1997 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT PORTFOLIO:
Loans secured by real estate:
Residential:
One-to-four units:
Adjustable ................................. $ 3,892,221 $ 4,027,520 $ 4,190,160 $ 4,260,831 $ 4,451,684
Adjustable - subprime ...................... 372,608 303,058 245,749 158,987 82,873
Fixed ...................................... 155,741 161,518 168,315 169,978 171,981
Fixed - subprime ........................... 5,993 4,672 3,321 2,500 1,507
- ----------------------------------------------------------------------------------------------------------------------------------
Total one-to-four units .................. 4,426,563 4,496,768 4,607,545 4,592,296 4,708,045
Five or more units:
Adjustable ................................. 18,802 30,129 29,246 41,636 47,341
Fixed ...................................... 8,934 8,748 9,032 9,260 14,333
Commercial real estate:
Adjustable .................................... 47,045 73,013 87,604 115,923 126,686
Fixed ......................................... 114,379 118,476 114,821 95,941 94,993
Construction ..................................... 95,664 89,989 70,865 60,459 48,765
Land ............................................. 29,857 32,510 25,687 26,270 24,847
Non-mortgage:
Commercial ....................................... 27,298 25,478 26,024 23,741 25,718
Automobile ....................................... 356,504 350,316 342,326 325,216 287,611
Other consumer ................................... 44,530 45,529 47,735 47,067 46,244
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment ............... 5,169,576 5,270,956 5,360,885 5,337,809 5,424,583
Increase (decrease) for:
Undisbursed loan funds ........................... (85,367) (78,888) (64,884) (65,783) (48,487)
Deferral of fees and discounts, net of costs ..... 21,408 19,581 18,088 16,762 17,806
Allowance for estimated loss ..................... (31,736) (31,817) (32,092) (30,918) (31,188)
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment, net .......... 5,073,881 5,179,832 5,281,997 5,257,870 5,362,714
- ----------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO, NET:
Loans held for sale (all one-to-four units):
Adjustable ....................................... 13,692 10,019 1,617 4,614 1,942
Fixed ............................................ 198,472 164,360 33,483 21,354 20,745
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans held for sale ..................... 212,164 174,379 35,100 25,968 22,687
Mortgage-backed securities available for sale:
Adjustable ....................................... 14,575 16,135 17,751 18,716 19,799
Fixed ............................................ 27,671 29,848 31,548 33,215 34,808
- ----------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities available
for sale ................................... 42,246 45,983 49,299 51,931 54,607
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities held
for sale and available for sale ............ 254,410 220,362 84,399 77,899 77,294
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities .... $ 5,328,291 $ 5,400,194 $ 5,366,396 $ 5,335,769 $ 5,440,008
==================================================================================================================================
</TABLE>
Loans held for sale are carried at the lower of cost or market. At June 30,
1998, no valuation allowance was required as the market value exceeded book
value on an aggregate basis.
Mortgage-backed securities available for sale are carried at fair value
and, at June 30, 1998, reflect an unrealized gain of $0.6 million. The current
quarter-end unrealized gain, less the associated tax effect of $0.2 million, is
reflected within a separate component of other comprehensive income (loss) until
realized.
17
<PAGE>
INVESTMENTS IN REAL ESTATE AND JOINT VENTURES
Downey's investment in real estate and joint ventures amounted to $41.9
million at June 30, 1998, compared to $41.4 million at December 31, 1997, and
$36.1 million at June 30, 1997.
The following table is a summary of the activity of Downey's allowance for
real estate held for investment for the periods indicated. Of the total
charge-offs recorded during the current quarter, $5.8 million represents that
portion of the joint venture assets not recovered by the previously mentioned
settlement, but for which allowances were provided in prior periods.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1998 1998 1997 1997 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 18,140 $ 21,244 $ 21,353 $ 21,670 $ 23,849
Provision .................... (2,221) (2,722) (109) (317) (487)
Charge-offs .................. (6,361) (382) -- -- (1,692)
Recoveries ................... -- -- -- -- --
- ---------------------------------------------------------------------------------------------
Balance at end of period ..... $ 9,558 $ 18,140 $ 21,244 $ 21,353 $ 21,670
=============================================================================================
</TABLE>
In addition to losses charged against the allowance for loan losses, Downey
has recorded losses on real estate acquired in settlement of loans by direct
write-off to net operations of real estate acquired in settlement of loans and
against an allowance for losses specifically established for such assets. The
following table is a summary of the activity of Downey's allowance for real
estate acquired in settlement of loans for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1998 1998 1997 1997 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 898 $ 839 $ 1,083 $ 1,182 $ 1,334
Provision .................... 5 304 (24) 235 299
Charge-offs .................. (232) (245) (220) (334) (451)
Recoveries ................... -- -- -- -- --
- ---------------------------------------------------------------------------------------------
Balance at end of period ..... $ 671 $ 898 $ 839 $ 1,083 $ 1,182
=============================================================================================
</TABLE>
18
<PAGE>
DEPOSITS
At June 30, 1998, deposits totaled $5.2 billion, up $540.3 million or 11.7%
from the year-ago quarter end, and up $301.4 million or 6.2% from year-end 1997.
Compared to the year-ago period, transaction accounts (i.e., checking, regular
passbook and money market) increased $161.4 million or 18.8%, while certificates
of deposits increased $378.9 million or 10.0%. The following table sets forth
information concerning Downey's deposits and average rates paid at the dates
indicated.
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998 December 31, 1997 September 30, 1997 June 30, 1997
------------------ ------------------ ------------------ ------------------- ------------------
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>
Transaction accounts ... 2.17% $1,021,428 2.10% $1,007,323 2.15% $ 935,869 2.10% $ 915,647 2.04% $ 860,065
Certificates of deposit:
Less than 3.00% ..... 2.63 27,290 2.63 29,543 2.64 30,623 2.66 32,279 2.67 32,592
3.00-3.49 ........... 3.02 677 3.01 581 3.02 766 3.04 623 3.02 337
3.50-3.99 ........... -- -- -- -- -- -- 3.99 24 3.99 24
4.00-4.49 ........... 4.13 59,708 4.20 60,410 4.31 60,095 4.38 55,701 4.39 56,667
4.50-4.99 ........... 4.90 208,774 4.89 134,194 4.87 40,356 4.87 44,012 4.90 78,430
5.00-5.99 ........... 5.60 3,072,092 5.63 2,947,539 5.63 2,896,291 5.61 2,740,673 5.64 2,847,321
6.00-6.99 ........... 6.05 778,300 6.06 925,762 6.06 901,920 6.07 989,209 6.08 751,054
7.00 and greater .... 7.24 3,107 7.21 3,470 7.22 4,058 7.21 4,626 7.21 4,622
- --------------------------------------------------------------------------------------------------------------------------------
Total certificates
of deposit ..... 5.61 4,149,948 5.66 4,101,499 5.68 3,934,109 5.68 3,867,147 5.67 3,771,047
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits .... 4.93% $5,171,376 4.96% $5,108,822 5.00% $4,869,978 5.00% $4,782,794 5.00% $4,631,112
================================================================================================================================
</TABLE>
BORROWINGS
During the 1998 second quarter, borrowings decreased $111.5 million to
$155.6 million, reflecting decreases in all categories. Since year-end 1997, the
decline has been $328.2 million. The following table sets forth information
concerning Downey's FHLB advances and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
June 30, March 31, December 31, September 30, June 30,
(Dollars in Thousands) 1998 1998 1997 1997 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FHLB advances .................................. $123,347 $209,854 $352,458 $467,637 $550,736
Reverse repurchase agreements .................. -- -- 34,803 -- --
Commercial paper ............................... 19,982 44,517 83,811 118,635 236,809
Other borrowings ............................... 12,256 12,712 12,663 12,760 10,063
- -------------------------------------------------------------------------------------------------------------
Total borrowings ............................ $155,585 $267,083 $483,735 $599,032 $797,608
- -------------------------------------------------------------------------------------------------------------
Weighted average rate on borrowings during
the period .................................. 6.60% 6.42% 6.16% 6.07% 6.04%
Total borrowings as a percentage of total assets 2.67 4.55 8.29 10.23 13.55
=============================================================================================================
</TABLE>
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
interest rates. Downey's market risk arises primarily from interest rate risk in
its lending and deposit taking activities. This interest rate risk occurs to the
degree that interest-bearing liabilities reprice or mature more rapidly or on a
different basis than interest-earning assets. Since Downey's earnings depend
primarily on its net interest income, which is the difference between the
interest and dividends earned on interest-earning assets and the interest paid
on interest-bearing liabilities, a principal objective of Downey is to actively
monitor and manage the effects of adverse changes in interest rates on net
interest income while maintaining asset quality. There has been no significant
change in market risk since December 31, 1997.
19
<PAGE>
The following table sets forth the repricing frequency of Downey's major
asset and liability categories as of June 30, 1998, 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.
<TABLE>
<CAPTION>
June 30, 1998
------------------------------------------------------------------
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 FHLB stock ..... (1) $ 133,900 $ -- $115,015 $ -- $ -- $ 248,915
Loans and mortgage-backed securities:
Mortgage-backed securities ............. (2) 19,481 4,641 15,025 2,353 746 42,246
Loans secured by real estate:
Residential:
Adjustable ......................... (2) 4,221,628 64,324 12,944 -- -- 4,298,896
Fixed .............................. (2) 221,707 18,602 79,774 31,291 17,775 369,149
Commercial real estate ............... (2) 52,443 10,243 86,512 6,347 2,695 158,240
Construction ......................... (2) 39,832 -- -- -- -- 39,832
Land ................................. (2) 7,876 42 363 555 289 9,125
Non-mortgage:
Commercial ........................... (2) 17,326 -- -- -- -- 17,326
Consumer ............................. (2) 115,055 63,825 214,597 -- -- 393,477
- --------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities 4,695,348 161,677 409,215 40,546 21,505 5,328,291
- --------------------------------------------------------------------------------------------------------------------
Total .................................. $ 4,829,248 $ 161,677 $524,230 $ 40,546 $ 21,505 $5,577,206
====================================================================================================================
Deposits and borrowings:
Interest bearing deposits:
Fixed maturity deposits ................ (1) $2,544,643 $ 1,239,148 $366,157 $ -- $ -- $4,149,948
Transaction accounts ................... (3) 896,501 -- -- -- -- 896,501
Non-interest bearing transaction accounts 124,927 -- -- -- -- 124,927
- --------------------------------------------------------------------------------------------------------------------
Total deposits ......................... 3,566,071 1,239,148 366,157 -- -- 5,171,376
- --------------------------------------------------------------------------------------------------------------------
Borrowings ............................... 60,572 23,575 70,438 1,000 -- 155,585
- --------------------------------------------------------------------------------------------------------------------
Total deposits and borrowings .......... $3,626,643 $ 1,262,723 $436,595 $ 1,000 $ -- $5,326,961
====================================================================================================================
Excess (shortfall) of interest-earning assets
over interest-bearing liabilities ........ $1,202,605 $(1,101,046) $ 87,635 $ 39,546 $ 21,505 $ 250,245
Cumulative gap .............................. 1,202,605 101,559 189,194 228,740 250,245
Cumulative gap - as a % of total assets:
June 30, 1998 ............................ 20.62% 1.74% 3.24% 3.92% 4.29%
December 31, 1997 ........................ 24.82 1.35 2.71 3.54 3.93
June 30, 1997 ............................ 19.07 1.95 1.72 2.83 3.45
====================================================================================================================
</TABLE>
(1) Based upon contractual maturity and repricing date.
(2) Based upon contractual maturity, repricing date, and projected repayments
and prepayments of principal.
(3) Subject to immediate repricing.
20
<PAGE>
The six-month gap at June 30, 1998, was a positive 20.62% (i.e., more
interest-earning assets reprice within six months than interest-bearing
liabilities). This compares to a positive six-month gap of 25.50% at March 31,
1998, 24.82% at December 31, 1997, and 19.07% at June 30, 1997. Downey's
strategy of emphasizing the origination of adjustable rate mortgages continues
to be pursued. For the twelve months ended June 30, 1998, Downey originated and
purchased for investment $1.5 billion of adjustable rate loans and
mortgage-backed securities which represented approximately 94% of all loans and
mortgage-backed securities originated and purchased for investment during the
period.
At June 30, 1998, 99% of Downey's interest-earning assets mature, reprice
or are estimated to prepay within five years, unchanged from year-end 1997, and
up from 98% at June 30, 1997. At June 30, 1998, loans and mortgage-backed
securities with adjustable interest rates represented 87% of such portfolios.
During the second quarter of 1998, Downey continued to offer residential fixed
rate loan products to its customers primarily for sale in the secondary market.
Downey prices and originates such fixed rate mortgage loans for sale into the
secondary market in order to increase opportunities for originating ARMs and
generate fee and servicing income. Downey does originate fixed rate loans for
portfolio to facilitate the sale of real estate acquired in settlement of loans
and which meet certain yield and other approved guidelines.
At June 30, 1998, $5.0 billion or 92% 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,
substantially unchanged from year-end 1997 and a year-ago.
The following table sets forth on a consolidated basis the interest rate
spread on Downey's interest-earning assets and interest-bearing liabilities as
of the dates indicated.
<TABLE>
<CAPTION>
June 30, March 31, December 31, September 30, June 30,
1998 1998 1997 1997 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted average yield:
Loan and mortgage-backed securities 7.91% 7.94% 7.95% 7.80% 7.61%
Investment securities ............. 5.84 5.84 5.79 5.75 5.67
- ----------------------------------------------------------------------------------------------------
Earning assets yield .............. 7.82 7.86 7.87 7.72 7.55
- ----------------------------------------------------------------------------------------------------
Weighted average cost:
Deposits .......................... 4.93 4.96 5.00 5.00 5.00
Borrowings:
FHLB advances ................... 6.18 6.17 6.11 6.04 5.98
Other borrowings ................ 6.56 6.19 6.15 5.78 5.60
- ----------------------------------------------------------------------------------------------------
Combined borrowings ............... 6.26 6.17 6.12 5.98 5.87
- ----------------------------------------------------------------------------------------------------
Combined funds .................... 4.97 5.02 5.11 5.11 5.13
- ----------------------------------------------------------------------------------------------------
Interest rate spread ................. 2.85% 2.84% 2.76% 2.61% 2.42%
====================================================================================================
</TABLE>
The weighted average yield on the loan and mortgage-backed securities
portfolios at June 30, 1998, decreased to 7.91%, compared to 7.94% at March 31,
1998, 7.95% at December 31, 1997, and 7.61% at June 30, 1997. At June 30, 1998,
the one-to-four unit residential ARM portfolio, including mortgage-backed
securities, totaled $4.3 billion with a weighted average rate of 7.63%, compared
to $4.5 billion with a weighted average rate of 7.58% at December 31, 1997, and
$4.6 billion with a weighted average rate of 7.22% at June 30, 1997.
ASSET QUALITY
Non-Performing Assets
Non-performing assets decreased during the quarter by $1.0 million to $48.8
million at June 30, 1998, or 0.84% of total assets. Non-performing assets at
quarter end include non-accrual loans aggregating $17.1 million which were not
contractually past due, but were deemed non-accrual due to management's
assessment of the borrower's ability to pay.
21
<PAGE>
The following table summarizes the non-performing assets of Downey at the
dates indicated.
<TABLE>
<CAPTION>
June 30, March 31, December 31, September 30, June 30,
(Dollars in Thousands) 1998 1998 1997 1997 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
One-to-four unit residential ..................... $19,047 $17,736 $20,816 $21,602 $20,893
One-to-four unit residential - subprime .......... 1,107 832 -- 174 --
Other ............................................ 20,259 20,060 20,883 20,383 20,369
- -------------------------------------------------------------------------------------------------------------------
Total non-accrual loans ........................ 40,413 38,628 41,699 42,159 41,262
Real estate acquired in settlement of loans, net .... 7,576 10,414 9,626 13,072 14,357
Repossessed automobiles ............................. 764 688 795 477 317
- -------------------------------------------------------------------------------------------------------------------
Gross non-performing assets ...................... $48,753 $49,730 $52,120 $55,708 $55,936
===================================================================================================================
===================================================================================================================
Allowance for loan losses (1):
Amount ........................................... $31,736 $31,817 $32,092 $30,918 $31,188
As a percentage of non-performing loans .......... 78.53% 82.37% 76.96% 73.34% 75.59%
Non-performing assets as a percentage of total assets 0.84 0.85 0.89 0.95 0.95
===================================================================================================================
</TABLE>
(1) Allowance for loan losses does not include the allowance for real estate
and real estate acquired in settlement of loans.
At June 30, 1998, the recorded investment in loans for which impairment has
been recognized totaled $13.6 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 second quarter of 1998, total interest recognized on the impaired
loan portfolio, on a cash basis, was $0.4 million. For the first six months of
1998, such income totaled $0.9 million.
Delinquent Loans
During the 1998 second quarter, total delinquencies declined $2.0 million
or 4.6%. The decrease occurred primarily in the residential one-to-four units
category which declined $2.4 million. That decline was partially offset by an
increase in automobile loans of $0.8 million. As a percentage of loans
outstanding, delinquencies were 0.76% at the end of the 1998 second quarter,
compared to 0.79% at year-end 1997 and 0.74% a year ago.
22
<PAGE>
The following table sets forth the amounts of Downey's past due loans at
the dates indicated.
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
------------------------------------- -------------------------------------
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 ........................ $12,500 $ 5,271 $14,497 $32,268 $14,532 $ 6,096 $14,487 $35,115
One-to-four units - subprime ............. 535 -- 762 1,297 287 359 186 832
Five or more units ....................... -- -- -- -- 222 -- -- 222
Commercial real estate ..................... -- -- -- -- 241 -- -- 241
Construction ............................... -- -- -- -- -- -- -- --
Land ....................................... -- -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total real estate loans .................. 13,035 5,271 15,259 33,565 15,282 6,455 14,673 36,410
Non-mortgage:
Commercial ................................. -- -- -- -- -- -- -- --
Automobile ................................. 4,795 860 819 6,474 4,005 946 716 5,667
Other consumer ............................. 222 208 227 657 73 57 457 587
- -------------------------------------------------------------------------------------------------------------------------------
Total loans ............................ $18,052 $ 6,339 $16,305 $40,696 $19,360 $ 7,458 $15,846 $42,664
===============================================================================================================================
Delinquencies as a percentage of total loans 0.34% 0.12% 0.31% 0.77% 0.36% 0.14% 0.29% 0.79%
===============================================================================================================================
December 31, 1997 September 30, 1997
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units ........................ $12,099 $ 4,101 $18,579 $34,779 $14,950 $ 5,851 $17,405 $38,206
One-to-four units - subprime ............. 185 -- -- 185 -- 114 60 174
Five or more units ....................... -- 222 -- 222 223 135 -- 358
Commercial real estate ..................... -- -- 279 279 -- -- 279 279
Construction ............................... -- -- -- -- -- -- -- --
Land ....................................... -- -- -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total real estate loans .................. 12,284 4,323 18,858 35,465 15,173 6,100 17,744 39,017
Non-mortgage:
Commercial ................................. -- -- -- -- -- -- -- --
Automobile ................................. 4,167 981 961 6,109 3,903 1,312 672 5,887
Other consumer ............................. 218 54 533 805 355 173 58 586
- -------------------------------------------------------------------------------------------------------------------------------
Total loans ............................ $16,669 $ 5,358 $20,352 $42,379 $19,431 $ 7,585 $18,474 $45,490
===============================================================================================================================
Delinquencies as a percentage of total loans 0.31% 0.10% 0.38% 0.79% 0.36% 0.14% 0.35% 0.85%
===============================================================================================================================
June 30, 1997
-------------------------------------
<S> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units ........................ $10,427 $ 5,402 $18,583 $34,412
One-to-four units - subprime ............. 209 -- -- 209
Five or more units ....................... -- -- -- --
Commercial real estate ..................... -- -- 279 279
Construction ............................... -- -- -- --
Land ....................................... -- -- -- --
- --------------------------------------------------------------------------------------
Total real estate loans .................. 10,636 5,402 18,862 34,900
Non-mortgage:
Commercial ................................. -- -- -- --
Automobile ................................. 3,574 647 555 4,776
Other consumer ............................. 165 66 87 318
- --------------------------------------------------------------------------------------
Total loans ............................ $14,375 $ 6,115 $19,504 $39,994
======================================================================================
Delinquencies as a percentage of total loans 0.27% 0.11% 0.36% 0.74%
======================================================================================
</TABLE>
(1) All 90 day or greater delinquencies are on non-accrual status and reported
as part of non-performing assets.
23
<PAGE>
Valuation Allowances
Allowances for losses on all assets (including loans) were $42.3 million,
$54.8 million and $54.7 million, at June 30, 1998, December 31, 1997, and June
30, 1997, respectively. For information on valuation allowances associated with
real estate and joint venture loans, see "Investments in Real Estate and Joint
Ventures" on page 18.
The total allowance for possible loan losses was $31.7 million at June 30,
1998, substantially unchanged from recent quarter ends. Included in the current
quarter-end total allowance was $31.5 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 $1.5 million in the 1998 second quarter, compared to $1.4 million in the
year-ago quarter. Included in the current quarter net charge-offs were $0.3
million associated with one-to-four unit residential loans 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
----------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 1998 1998 1997 1997 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 31,817 $ 32,092 $ 30,918 $ 31,188 $ 30,683
Provision .................... 1,462 272 3,034 1,578 1,873
Charge-offs .................. (1,877) (2,381) (2,346) (2,001) (1,643)
Recoveries ................... 334 1,834 (1) 486 153 275
- ---------------------------------------------------------------------------------------------
Balance at end of period ..... $ 31,736 $ 31,817 $ 32,092 $ 30,918 $ 31,188
=============================================================================================
</TABLE>
(1) Includes a $1.4 million recovery of a prior commercial real estate loan
charge-off due to the previously mentioned settlement.
24
<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>
June 30, 1998 March 31, 1998 December 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 ........... $14,143 $4,426,563 0.32% $13,960 $4,496,768 0.31% $14,652 $4,607,545 0.32%
Five or more units .......... 309 27,736 1.11 399 38,877 1.03 314 38,278 0.82
Commercial real estate ........ 3,766 161,424 2.33 4,118 191,489 2.15 4,112 202,425 2.03
Construction .................. 1,137 95,664 1.19 1,072 89,989 1.19 847 70,865 1.20
Land .......................... 382 29,857 1.28 415 32,510 1.28 331 25,687 1.29
Non-Mortgage:
Commercial .................... 199 27,298 0.73 192 25,478 0.75 196 26,024 0.75
Automobile .................... 8,272 356,504 2.32 8,105 350,316 2.31 8,016 342,326 2.34
Other consumer ................ 728 44,530 1.63 756 45,529 1.66 824 47,735 1.73
Not specifically allocated ....... 2,800 -- -- 2,800 -- -- 2,800 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment $31,736 $5,169,576 0.61% $31,817 $5,270,956 0.60% $32,092 $5,360,885 0.60%
==================================================================================================================================
September 30, 1997 June 30, 1997
------------------------------- -------------------------------
<S> <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%
Five or more units .......... 417 50,896 0.82 521 61,674 0.84
Commercial real estate ........ 4,592 211,864 2.17 4,704 221,679 2.12
Construction .................. 718 60,459 1.19 576 48,765 1.18
Land .......................... 349 26,270 1.33 332 24,847 1.34
Non-mortgage:
Commercial .................... 164 23,741 0.69 269 25,718 1.05
Automobile .................... 6,746 325,216 2.07 6,247 287,611 2.17
Other consumer ................ 706 47,067 1.50 706 46,244 1.53
Not specifically allocated ....... 2,800 -- -- 2,800 -- --
- ---------------------------------------------------------------------------------------------------
Total loans held for investment $30,918 $5,337,809 0.58% $31,188 $5,424,583 0.57%
===================================================================================================
</TABLE>
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of funds generated in the second quarter of 1998 were
principal repayments (including prepayments, but excluding Downey refinances) on
loans and mortgage-backed securities held for investment and available for sale
of $478.5 million and net increases in deposits of $62.6 million.
These funds were used primarily to originate loans held for investment of
$376.8 million (net of Downey refinances of $23.7 million), fund the net
increase of $37.8 million of loans held for sale and repay borrowings which
declined by $111.5 million.
The minimum liquidity ratio set by the regulators was reduced in the fourth
quarter of 1997 from 5% to 4%. At June 30, 1998, the Bank's ratio of regulatory
liquidity was 4.4%, compared to 4.8% at December 31, 1997, and 5.1% at June 30,
1997.
Stockholders' equity totaled $459.0 million at June 30, 1998, compared to
$430.3 million at December 31, 1997, and $408.0 million at June 30, 1997.
25
<PAGE>
REGULATORY CAPITAL
The following table is a reconciliation of the Bank's stockholder's equity
to federal regulatory capital as of June 30, 1998. The core and tangible capital
ratios were 7.05% and the risk-based capital ratio was 13.24%. 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 ............................... $449,545 $449,545 $449,545
Adjustments:
Deductions:
Investment in subsidiary, primarily real estate (38,766) (38,766) (38,766)
Goodwill ....................................... (4,788) (4,788) (4,788)
Core deposit premium ........................... (71) (71) (71)
Non-permitted mortgage servicing rights ........ (348) (348) (348)
Additions:
Unrealized gain on securities available for sale (420) (420) (420)
General loss allowance - Investment in DSL ..... 1,431 1,431 1,431
Loan general valuation allowances (1) .......... -- -- 31,456
- -------------------------------------------------------------------------------------------------------------------------
Regulatory capital ................................. 406,583 7.05% 406,583 7.05% 438,039 13.24%
Well capitalized requirement ....................... 86,478 1.50 (2) 288,259 5.00 330,800 10.00 (3)
- -------------------------------------------------------------------------------------------------------------------------
Excess ............................................. $320,105 5.55% $118,324 2.05% $107,239 3.24%
=========================================================================================================================
</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 12.29%.
26
<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 six months ended June 30,
1998.
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: August 7, 1998 /s/ James W. Lokey
-------------------------------------------------
James W. Lokey
President and Chief Executive Officer
Date: August 7, 1998 /s/ Thomas E. Prince
-------------------------------------------------
Thomas E. Prince
Executive Vice President/ Chief Financial Officer
27
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 9,875 23,762
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 69,001 248
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 167,265 196,468
<INVESTMENTS-CARRYING> 6,885 6,997
<INVESTMENTS-MARKET> 6,865 6,975
<LOANS> 5,286,045 5,385,401
<ALLOWANCE> 31,736 31,188
<TOTAL-ASSETS> 5,832,102 5,885,670
<DEPOSITS> 5,171,376 4,631,112
<SHORT-TERM> 84,147 722,921
<LIABILITIES-OTHER> 46,179 48,985
<LONG-TERM> 71,438 74,687
0 0
0 0
<COMMON> 281 267
<OTHER-SE> 458,681 407,698
<TOTAL-LIABILITIES-AND-EQUITY> 5,832,102 5,885,670
<INTEREST-LOAN> 210,928 193,064
<INTEREST-INVEST> 8,592 7,796
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 219,520 200,860
<INTEREST-DEPOSIT> 124,537 107,506
<INTEREST-EXPENSE> 9,167 17,953
<INTEREST-INCOME-NET> 85,816 75,401
<LOAN-LOSSES> 1,734 4,028
<SECURITIES-GAINS> 68 0
<EXPENSE-OTHER> 53,877 51,456
<INCOME-PRETAX> 57,080 36,261
<INCOME-PRE-EXTRAORDINARY> 32,553 20,640
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 32,553 20,640
<EPS-PRIMARY> 1.16 0.74
<EPS-DILUTED> 1.15 0.74
<YIELD-ACTUAL> 7.83 7.70
<LOANS-NON> 40,413 41,262
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 672 765
<ALLOWANCE-OPEN> 32,092 30,094
<CHARGE-OFFS> 4,258 3,426
<RECOVERIES> 2,168 492
<ALLOWANCE-CLOSE> 31,736 31,188
<ALLOWANCE-DOMESTIC> 31,736 31,188
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 2,800 2,800
</TABLE>
