================================================================================
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 March 31, 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 (714) 854-0300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, $0.01 Par Value New York Stock Exchange
Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
At March 31, 1998, 26,755,938 shares of the Registrant's Common Stock,
$0.01 par value were outstanding.
================================================================================
<PAGE>
DOWNEY FINANCIAL CORP.
MARCH 31, 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..................................................... 25
Item 6 Exhibits and Reports on Form 8-K............................ 25
i
<PAGE>
PART I - FINANCIAL INFORMATION
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31, March 31,
(Dollars in Thousands, Except Per Share Data) 1998 1997 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash ...................................................................... $ 46,571 $ 48,823 $ 78,068
Federal funds ............................................................. 25,505 6,095 19,558
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents ............................................. 72,076 54,918 97,626
U.S. Treasury and agency obligations and other investment securities
available for sale, at fair value ..................................... 125,005 159,398 140,055
Municipal securities being held to maturity, at amortized cost (estimated
market value of $6,865 at March 31, 1998, and December 31, 1997, and
$6,975 at March 31, 1997) ............................................. 6,885 6,885 6,997
Mortgage loans purchased under resale agreements .......................... 10,000 -- 20,000
Loans held for sale, at the lower of cost or market ....................... 174,379 35,100 15,149
Mortgage-backed securities available for sale, at fair value .............. 45,983 49,299 57,263
Loans receivable held for investment ...................................... 5,179,832 5,281,997 4,900,500
Investments in real estate and joint ventures ............................. 41,123 41,356 41,041
Real estate acquired in settlement of loans ............................... 10,414 9,626 17,202
Premises and equipment .................................................... 101,343 101,901 97,217
Federal Home Loan Bank stock, at cost ..................................... 47,353 44,085 42,116
Other assets .............................................................. 57,520 51,260 49,307
- ---------------------------------------------------------------------------------------------------------------------
$ 5,871,913 $ 5,835,825 $ 5,484,473
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits .................................................................. $ 5,108,822 $ 4,869,978 $ 4,494,437
Government securities sold under agreements to repurchase ................. -- 34,803 --
Federal Home Loan Bank advances ........................................... 209,854 352,458 330,479
Commercial paper .......................................................... 44,517 83,811 196,125
Other borrowings .......................................................... 12,712 12,663 10,188
Accounts payable and accrued liabilities .................................. 37,948 40,579 43,825
Deferred income taxes ..................................................... 11,974 11,187 8,916
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities ..................................................... 5,425,827 5,405,479 5,083,970
- ---------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock, par value of $0.01 per share; authorized 50,000,000
ahares; outstanding 26,755,938 shares at March 31, 1998, and December
31, 1997, and 25,460,954 at March 31, 1997 ............................ 268 268 255
Additional paid-in capital ................................................ 45,954 45,954 22,634
Unrealized gains (losses) on securities available for sale ................ 426 110 (2,947)
Retained earnings ......................................................... 399,438 384,014 380,561
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity ............................................ 446,086 430,346 400,503
- ---------------------------------------------------------------------------------------------------------------------
$ 5,871,913 $ 5,835,825 $ 5,484,473
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
(Dollars in Thousands, Except Per Share Data) 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Loans receivable .................................................... $ 105,345 $ 93,691
U.S. Treasury and agency securities ................................. 1,829 2,034
Mortgage-backed securities .......................................... 808 984
Other investments ................................................... 1,741 875
- ----------------------------------------------------------------------------------------------------
Total interest income ........................................... 109,723 97,584
- ----------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits ............................................................ 61,538 51,404
Borrowings .......................................................... 5,559 8,062
- ----------------------------------------------------------------------------------------------------
Total interest expense .......................................... 67,097 59,466
- ----------------------------------------------------------------------------------------------------
NET INTEREST INCOME ................................................. 42,626 38,118
PROVISION FOR LOAN LOSSES ........................................... 272 2,155
- ----------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses ............. 42,354 35,963
- ----------------------------------------------------------------------------------------------------
OTHER INCOME, NET:
Loan and deposit related fees ....................................... 3,169 2,289
Real estate and joint ventures held for investment, net:
Reduction of loss on real estate and joint ventures ............... 2,722 2,277
Operations, net ................................................... 6,793 4,695
Secondary marketing activities:
Loan servicing fees ............................................... 150 406
Net gains on sales of loans and mortgage-backed securities ........ 872 333
Net gains on sales of investment securities ......................... 68 --
Other ............................................................... 1,152 991
- ----------------------------------------------------------------------------------------------------
Total other income, net ......................................... 14,926 10,991
- ----------------------------------------------------------------------------------------------------
OPERATING EXPENSE:
Salaries and related costs .......................................... 14,636 14,397
Premises and equipment costs ........................................ 3,882 3,524
Advertising expense ................................................. 1,583 1,258
Professional fees ................................................... 1,386 809
SAIF insurance premiums and regulatory assessments .................. 744 806
Other general and administrative expense ............................ 3,979 3,323
- ----------------------------------------------------------------------------------------------------
Total general and administrative expense .......................... 26,210 24,117
- ----------------------------------------------------------------------------------------------------
Net operation of real estate acquired in settlement of loans ........ 255 927
Amortization of excess of cost over fair value of net assets acquired 132 132
- ----------------------------------------------------------------------------------------------------
Total operating expense ......................................... 26,597 25,176
- ----------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES ............................................. 30,683 21,778
Income taxes ........................................................... 13,118 9,448
- ----------------------------------------------------------------------------------------------------
NET INCOME .......................................................... $ 17,565 $ 12,330
====================================================================================================
PER SHARE INFORMATION:
BASIC .................................................................. $ 0.63 $ 0.44
====================================================================================================
DILUTED ................................................................ $ 0.62 $ 0.44
====================================================================================================
CASH DIVIDENDS PAID .................................................... $ 0.076 $ 0.073
====================================================================================================
Weighted average shares outstanding .................................... 28,168,022 28,141,925
====================================================================================================
</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
March 31,
--------------------
(Dollars In Thousands) 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME ..................................................................... $ 17,565 $ 12,330
- -------------------------------------------------------------------------------------------------------
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 ....................................... 485 1,604
Mortgage-backed securities available for sale, at fair value .............. (169) (2,992)
- -------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) ........................................... 316 (1,388)
- -------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME ........................................................... $ 17,881 $ 10,942
=======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
(In Thousands) 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................................... $ 17,565 $ 12,330
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ...................................................... 2,025 2,349
Provision (recovery) for losses on loans, leases, real estate acquired in settlement
of loans, investments in real estate and joint ventures and other assets ......... (2,383) 569
Net gains on sales of loans and mortgage-backed securities, investment
securities, real estate and other assets ......................................... (7,324) (3,771)
Interest capitalized on loans (negative amortization) .............................. (4,806) (2,997)
Federal Home Loan Bank dividends ................................................... (651) (669)
Loans originated for sale ............................................................ (257,669) (40,029)
Proceeds from sales of loans originated for sale ..................................... 80,492 21,932
Other, net ........................................................................... (3,361) 6,247
- ------------------------------------------------------------------------------------------------------------------
Net cash used for operating activities .................................................. (176,112) (4,039)
- ------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Sales of investment securities available for sale .................................. 60,068 --
Sales of mortgage-backed securities available for sale ............................. 39,277 16,582
Sales of wholly owned real estate and real estate acquired in settlement of loans .. 1,517 4,427
Purchase of:
U.S. Treasury and agency obligations and other investment securities ............... (27,617) --
Securities under resale agreements ................................................. (10,000) (20,000)
Loans receivable held for investment ............................................... (2,729) (4,898)
Loans receivable originated held for investment (net of refinances of
$23,242 and $15,176 at March 31, 1998 and 1997, respectively) ...................... (259,937) (466,272)
Principal payments on loans receivable held for investment and mortgage-backed
securities available for sale ...................................................... 356,149 224,159
Net change in undisbursed loan funds ................................................. 12,530 5,521
Investments in real estate held for investment ....................................... 5,012 10,865
Other, net ........................................................................... (1,051) (2,723)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) investing activities .................................... 173,219 (232,339)
==================================================================================================================
</TABLE>
4
<PAGE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
(In Thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits .................................................... $ 238,844 $ 321,335
Net decrease in securities sold under agreements to repurchase .............. (34,803) --
Proceeds from Federal Home Loan Bank advances ............................... 25,000 180,300
Repayments of Federal Home Loan Bank advances ............................... (167,604) (236,704)
Net decrease in other borrowings ............................................ (39,245) (2,149)
Cash dividends .............................................................. (2,141) (2,037)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities ...................................... 20,051 260,745
- ---------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents ...................................... 17,158 24,367
Cash and cash equivalents at beginning of year ................................. 54,918 73,259
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 72,076 $ 97,626
- ---------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information: Cash paid (received) during
the period for:
Interest .................................................................. $ 67,178 $ 57,282
Income taxes .............................................................. 8,155 (7,109)
Supplemental disclosure of non-cash investing:
Loans exchanged for mortgage-backed securities .............................. 39,211 16,626
Real estate acquired in settlement of loans ................................. 5,431 6,316
Loans to facilitate the sale of real estate acquired in settlement of loans . 3,045 3,526
=========================================================================================================
</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 March 31, 1998, December 31, 1997 and
March 31, 1997, and the results of operations and changes in cash flows for the
three months ended March 31, 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 Position 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) - Stock Dividend
The Board of Directors announced on April 22, 1998, the declaration of a 5%
stock dividend and a quarterly cash dividend of $0.08 per share. The cash
dividend is payable on both existing shares outstanding as well as those to be
issued as a result of the stock dividend, thereby effectively providing
shareholders with a 5% cash dividend increase.
Both the stock and cash dividend are payable on May 22, 1998, to
stockholders of record on May 7, 1998. In lieu of fractional shares,
stockholders will receive cash based on the record date closing price, adjusted
to reflect the shares outstanding after the 5% stock dividend. Upon completion
of the stock dividend, there will be approximately 28.1 million shares of common
stock outstanding.
In accordance with generally accepted accounting principles, per share
computations are based on the number of shares outstanding adjusted for the
stock dividend. Below are the adjusted per share net income and cash dividends
paid for each quarter of 1997 and first quarter 1998.
Net Income Per Share Cash
-------------------- Dividends
Basic Diluted Paid
- ------------------------------------------------------------------------
1997:
First quarter .................... $ 0.44 $ 0.44 $ 0.073
Second quarter ................... 0.30 0.30 0.075
Third quarter .................... 0.37 0.37 0.076
Fourth quarter ................... 0.50 0.50 0.076
- -----------------------------------------------------------------------
Total ........................ $ 1.61 $ 1.61 $ 0.300
=======================================================================
1998:
First quarter .................... $ 0.63 $ 0.62 $ 0.076
=======================================================================
Note (3) - 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
6
<PAGE>
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.
Note (4) - 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 issuance of
common stock that then shared in earnings.
Note (5) - Derivatives
As part of its secondary marketing activities, Downey utilizes forward sale
contracts to hedge the value of loans originated for sale against adverse
changes in interest rates. At March 31, 1998, such contracts amounted to
approximately $221 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 (6) - 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 first quarter of 1998 totaled $17.6 million, or $0.62
per share on a diluted basis, up 42.5% from the $12.3 million, or $0.44 per
share earned in the first quarter of 1997.
First quarter 1998 net income benefited from the settlement of certain loan
and real estate investment obligations of a joint venture partner
("settlement"). The pre-tax amount totaled $5.1 million of which $1.4 million
represented the recovery of a prior loan charge-off thereby reducing provision
for loan losses; $2.6 million was recorded as a reduction of loss on real estate
and joint ventures; $0.8 million was recorded in miscellaneous other income; and
$0.3 million was recorded as a reduction to professional fees within general and
administrative expense. Excluding the settlement, net income would have been
$14.6 million, up $2.3 million or 18.7% from a year ago.
The increase in net income between first quarters, excluding the previously
mentioned settlement, reflected several factors. Net interest income increased
$4.5 million or 11. 8% due to a like percentage increase in average earning
assets, while adjusted total other income increased $0.5 million primarily
reflecting increases in loan and deposit related fees as well as net gains on
sales of loans. Also contributing to the improvement in net income were
reductions of $0.5 million in adjusted provision for loan losses and $0.7
million in costs associated with the net operation of real estate acquired in
settlement of loans. Those positive factors were partially offset by a $2.4
million increase in general and administrative costs.
For the first quarter of 1998, the return on average assets was 1.20% and
the return on average equity was 16.13%. Excluding the previously mentioned
settlement, the returns on average assets and average equity would have been
1.00% and 13.44%, respectively.
At March 31, 1998, assets totaled $5.9 billion, up $387.4 million or 7.1%
from a year ago. Single family loan originations totaled $453.0 million in the
first quarter of 1998 compared to $432.6 million in the first quarter of 1997.
Of the current quarter total, $257.7 million represented originations of loans
for sale and $62.6 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, $93.7 million of
other loans were originated in the quarter including $45.6 million of automobile
loans and $37.8 million of construction and land loans.
Non-performing assets declined $2.4 million during the quarter to $49.7
million or 0.85% of total assets.
Deposits totaled $5.1 billion at March 31, 1998, up $614.4 million or 13.7%
from a year-ago. Since deposit growth exceeded the growth in assets, borrowings
were reduced by $269.7 million and totaled $267.1 million at the end of the
current quarter. During the quarter, three new traditional branches were opened,
bringing total branches to 89 of which 26 are in-store. A year ago, branches
totaled 82.
At March 31, 1998, Downey Savings and Loan Association, F.A. (the "Bank")
had core and tangible capital ratios of 6.83% and a risk-based capital ratio of
12.92%. These capital levels are well above the "well capitalized" standards of
5% and 10%, respectively, as defined by regulation.
8
<PAGE>
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income totaled $42.6 million in the first quarter of 1998, up
$4.5 million or 11.8% from the same period last year. The improvement between
first quarters reflects an increase of 11.8% in average earning assets. The
effective interest spread of 3.04% in the current quarter was unchanged from the
year-ago quarter, but up from the fourth quarter 1997 level of 2.94%.
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and resultant
yields, the interest expense on average interest-bearing liabilities and the
resultant costs, expressed both in dollars and rates. The table also sets forth
the net interest income, the interest rate spread and the effective interest
rate spread. The effective interest rate spread, which reflects the relative
level of interest-earning assets to interest-bearing liabilities, equals (i) the
difference between interest income on interest-earning assets and interest
expense on interest-bearing liabilities, (ii) divided by average
interest-earning assets for the period. The table also sets forth the net
earning balance (the difference between the average balance of interest-earning
assets and the average balance of interest-bearing liabilities) for the periods
indicated. Non-accrual loans are included in the average interest-earning assets
balance. Interest from non-accrual loans is included in interest income only to
the extent that payments are received and to the extent that Downey believes it
will recover the remaining principal balance of the loan. Average balances for
the quarter are computed using the average of each month's daily average balance
during the period.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------------------
March 31, 1998 December 31, 1997 March 31, 1997
------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(Dollars In Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans .......................... $5,313,496 $105,345 7.93% $5,309,555 $105,867 7.98% $4,762,353 $93,691 7.87%
Mortgage-backed securities ..... 47,970 808 6.74 50,534 838 6.63 59,976 984 6.56
Investment securities .......... 253,926 3,570 5.70 251,801 3,752 5.91 201,159 2,909 5.86
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 5,615,392 109,723 7.82 5,611,890 110,457 7.87 5,023,488 97,584 7.77
Non-interest-earning assets ....... 248,698 238,288 256,277
- -------------------------------------------------------------------------------------------------------------------------------
Total assets ................ $5,864,090 $5,850,178 $5,279,765
===============================================================================================================================
Interest-bearing liabilities:
Deposits ....................... $5,005,049 $ 61,538 4.99% $4,817,987 $ 60,539 4.99% $4,275,799 $51,404 4.88%
Borrowings ..................... 351,068 5,559 6.42 561,179 8,715 6.16 547,302 8,062 5.97
- -------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities .............. 5,356,117 67,097 5.08 5,379,166 69,254 5.11 4,823,101 59,466 5.00
Non-interest-bearing liabilities .. 72,328 47,985 60,158
Stockholders' equity .............. 435,645 423,027 396,506
- -------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity ..... $5,864,090 $5,850,178 $5,279,765
===============================================================================================================================
Net interest income/interest rate
spread ......................... $ 42,626 2.74% $ 41,203 2.76% $38,118 2.77%
Excess of interest-earning assets
overinterest-bearing liabilities $ 259,275 $ 232,724 $ 200,387
Effective interest rate spread .... 3.04% 2.94% 3.04%
===============================================================================================================================
</TABLE>
Changes in Downey's net interest income are a function of both changes in
rates and changes in volumes of interest-earning assets and interest-bearing
liabilities. The table on the following page 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) changes in
rate-volume (changes in rate multiplied by changes in volume). Interest-earning
asset and interest-bearing liability balances used in the calculations represent
quarterly average balances computed using the average of each month's daily
average balance during the period.
9
<PAGE>
Three Months Ended
--------------------------------------------
March 31, 1998 versus March 31, 1997
Changes Due To
--------------------------------------------
Rate/
(In Thousands) Volume Rate Volume Net
- -------------------------------------------------------------------------------
Interest income:
Loans ....................... $ 10,843 $ 727 $ 84 $ 11,654
Mortgage-backed securities .. (197) 26 (5) (176)
Investment securities ....... 763 (81) (21) 661
- -------------------------------------------------------------------------------
Change in interest income 11,409 672 58 12,139
- -------------------------------------------------------------------------------
Interest expense:
Deposits .................... 8,767 1,168 199 10,134
Borrowings .................. (2,896) 641 (248) (2,503)
- -------------------------------------------------------------------------------
Change in interest expense 5,871 1,809 (49) 7,631
- -------------------------------------------------------------------------------
Change in net interest income .. $ 5,538 $ (1,137) $ 107 $ 4,508
===============================================================================
PROVISION FOR LOAN LOSSES
Provision for loan losses was $0.3 million in the current quarter compared
to $2.2 million in the year-ago quarter. The decrease primarily reflects a $1.4
million 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 22.
OTHER INCOME
Total other income was $14.9 million in the first quarter of 1998, up $3.9
million or 35.8% from the year-ago quarter. The increase between first quarters
was due largely to the previously mentioned settlement. Income from real estate
held for investment included $2.6 million of settlement proceeds as a reduction
to the provision for losses, while the miscellaneous other income category
contained $0.8 million. Also favorably impacting total other income were
increases of $0.9 million in loan and deposit related fees and $0.5 million in
net gains on sales of loans. Excluding the settlement, income from real estate
held for investment would have declined between first quarters by $0.1 million
due primarily to a similar reduction in gains from the sale of joint venture
properties. Such gains totaled $5.4 million in the current quarter, compared to
$5.5 million in the year-ago period.
The following table presents a breakdown of the key components comprising
income from real estate and joint venture operations. The above mentioned $5.4
million joint venture gains in the current quarter are included in equity in net
income (loss) from joint ventures, while the year-ago joint venture gains of
$5.5 million appear in two categories. Equity in net income (loss) from joint
ventures contains $3.9 million of the gain, while $1.6 million is reported in
the recovery for losses on real estate and joint ventures category.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1998 1997 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations, net:
Rental operations, net of expenses ................. $ 881 $ 868 $ 124 $ 474 $ 851
Equity in net income (loss) from joint ventures .... 5,226 636 467 (238) 3,066
Interest from joint venture advances ............... 686 359 382 361 778
- --------------------------------------------------------------------------------------------------------------------
Total operations, net ............................ 6,793 1,863 973 597 4,695
Net gains on sales of wholly owned real estate ........ -- 1,094 1,505 305 --
Recovery for losses on real estate and joint ventures . 2,722 109 317 487 2,277
- --------------------------------------------------------------------------------------------------------------------
Income from real estate and joint venture operations $ 9,515 $ 3,066 $ 2,795 $ 1,389 $ 6,972
====================================================================================================================
</TABLE>
10
<PAGE>
OPERATING EXPENSE
Operating expense totaled $26.6 million in the current quarter, up $1.4
million or 5.6% from the first quarter of 1997. The increase was due to higher
general and administrative costs which increased $2.1 million or 8.7%, as the
costs associated with the net operation of real estate acquired in settlement of
loans declined by $0.7 million. Included within general and administrative
expense in the current quarter was a $0.3 million reduction to professional fees
due to the previously mentioned settlement, while the year-ago first quarter
included $1.4 million of expense associated with the departure of the former
chief executive. Excluding those amounts, general and administrative expense
would have increased by $3.8 million or 16.7% between first quarters. The
increase in general and administrative expense reflected branch expansion and
growth in lending activities.
PROVISION FOR INCOME TAXES
Income taxes for the first quarter totaled $13.1 million, resulting in an
effective tax rate of 42.8%, compared to $9.4 million and 43.4% for the like
quarter of a year ago. For further information regarding income taxes see "Note
(6) - Income Taxes" on page 7.
11
<PAGE>
FINANCIAL CONDITION
LOANS AND MORTGAGE-BACKED SECURITIES
Total loans and mortgage-backed securities, including those held for sale,
increased $33.8 million during the first quarter to a total of $5.4 billion, or
92.0% of assets, at March 31, 1998. The relatively small change 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, the portfolio of residential one-to-four unit loans held for sale
increased by $139.3 million as fixed rate loans are originated for sale into the
secondary market, while the portfolio of residential one-to-four unit loans held
for investment declined by $110.8 million due to the higher ARM prepayment
speeds.
The following table sets forth originations of loans held for investment
and loans originated for sale.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1998 1997 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans originated for investment:
Residential - one-to-four ARMs (1) .... $190,490 $254,028 $383,204 $611,371 $388,707
Residential - one-to-four fixed (2) ... 4,791 6,705 6,049 8,408 3,904
Other (3) ............................. 93,672 85,527 120,204 110,455 97,261
- ---------------------------------------------------------------------------------------------------------
Total loans originated for investment 288,953 346,260 509,457 730,234 489,872
Loans originated for sale (primarily
residential - fixed) .................. 257,669 79,429 74,721 95,092 40,029
- ---------------------------------------------------------------------------------------------------------
Total loans originated ................ $546,622 $425,689 $584,178 $825,326 $529,901
=========================================================================================================
</TABLE>
(1) For the three months ended March 31, 1998, December 31, 1997, September 30,
1997, June 30, 1997 and March 31, 1997, $2.6 million, $5.6 million, $6.7
million, $17.3 million and $4.9 million, respectively, of loans purchased
through correspondent lending relationships are included.
(2) Primarily represents loans to facilitate the sale of real estate acquired
in settlement of loans and loans that meet certain yield and other approved
guidelines.
(3) For the three months ended March 31, 1998, September 30, 1997, and June 30,
1997, $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 $453.0 million
in the first quarter of 1998, of which $195.3 million were for portfolio and
$257.7 million were for sale. This was 33% higher than the $340.2 million
originated in the fourth quarter of 1997, and 5% higher than the $432.6 million
originated in the year-ago quarter. Of the current quarter total, $62.6 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, 70% of Downey's residential one-to-four unit originations represented
refinancings of existing loans (existing Downey loans were 5%). This is up from
51% (existing Downey loans were 2%) during the 1997 fourth quarter, and up from
49% (existing Downey loans were 3%) in the year-ago first quarter. In addition
to single family loans, $93.7 million of other loans were originated in the
quarter including $45.6 million of automobile loans and $37.8 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 March 31, 1998, $2.6 billion of the
12
<PAGE>
ARMs in Downey's loan portfolio were subject to negative amortization of which
$32.4 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 $118.9 million for the first
quarter of 1998, compared to $70.1 million in the previous quarter and $38.2
million for the first quarter of 1997. All were secured by residential
one-to-four unit property and at March 31, 1998, loans held for sale totaled
$174.4 million.
At March 31, 1998, Downey had commitments to fund loans amounting to $468.8
million, of which $283.1 million were fixed rate one-to-four unit residential
loans being originated for sale in the secondary market, undrawn lines of credit
of $68.3 million, loans in process of $70.5 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.
13
<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
----------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1998 1997 1997 1997 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment Portfolio:
Loans originated:
Loans secured by real estate:
Residential:
One-to-four units:
Adjustable .................................... $ 127,871 $ 159,656 $ 297,963 $ 563,119 $ 363,704
Adjustable - subprime ......................... 60,017 88,820 78,531 30,943 20,105
- --------------------------------------------------------------------------------------------------------------------------
Total adjustable ............................. 187,888 248,476 376,494 594,062 383,809
Fixed ......................................... 3,319 5,865 5,054 7,467 3,879
Fixed - subprime .............................. 1,472 825 995 941 25
Five or more units - adjustable ................. 875 -- -- 4,600 --
- --------------------------------------------------------------------------------------------------------------------------
Total residential ............................ 193,554 255,166 382,543 607,070 387,713
Commercial real estate ............................ 4,214 3,685 -- 4,145 --
Construction ...................................... 29,906 16,842 26,200 11,121 25,851
Land .............................................. 7,851 -- 13,310 6,985 --
Non-mortgage:
Commercial ........................................ 610 6,435 1,628 2,445 3,828
Automobile ........................................ 45,552 51,985 70,757 73,389 62,909
Other consumer .................................... 4,537 6,580 7,951 6,784 4,673
- --------------------------------------------------------------------------------------------------------------------------
Total loans originated ........................ 286,224 340,693 502,389 711,939 484,974
Real estate loans purchased (1) ....................... 2,729 5,567 7,068 18,295 4,898
- --------------------------------------------------------------------------------------------------------------------------
Total loans originated and purchased ............... 288,953 346,260 509,457 730,234 489,872
Loan repayments ....................................... (376,371) (321,020) (302,116) (271,387) (235,834)
Other net changes (2), (3) ............................ (14,747) (1,113) (312,185) 3,367 (9,252)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for investment (102,165) 24,127 (104,844) 462,214 244,786
- --------------------------------------------------------------------------------------------------------------------------
Sale Portfolio:
Residential, one-to-four units:
Originated whole loans ............................. 257,669 79,429 74,721 95,092 40,029
Loans transferred (to) from the investment portfolio 604 (156) 290,606 (338) 446
Originated whole loans sold (3) .................... (79,686) (41,540) (345,198) (59,696) (21,555)
Loans exchanged for mortgage-backed securities ..... (39,211) (28,566) (16,854) (27,476) (16,626)
Other net changes .................................. (97) (35) 6 (44) (10)
- --------------------------------------------------------------------------------------------------------------------------
Net increase in loans held for sale ............... 139,279 9,132 3,281 7,538 2,284
- --------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, net:
Received in exchange for loans ..................... 39,211 28,566 16,854 27,476 16,626
Sold ............................................... (39,211) (28,566) (16,854) (27,476) (16,626)
Repayments ......................................... (3,020) (3,112) (2,823) (3,124) (3,501)
Other net changes .................................. (296) 480 147 468 (503)
- --------------------------------------------------------------------------------------------------------------------------
Net decrease in mortgage-backed securities ........ (3,316) (2,632) (2,676) (2,656) (4,004)
available for sale
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans and
mortgage-backed securities held for
sale and available for sale .................... 135,963 6,500 605 4,882 (1,720)
- --------------------------------------------------------------------------------------------------------------------------
Total net increase (decrease) in loans and
mortgage-backed Securities ..................... $ 33,798 $ 30,627 $(104,239) $ 467,096 $ 243,066
==========================================================================================================================
</TABLE>
(1) Primarily one-to-four unit residential loans. Included in the three months
ended March 31, 1998, September 30, 1997, and June 30, 1997, were $0.1
million, $0.4 million and $1.0 million, respectively, of five or more unit
residential loans.
(2) Primarily includes borrowings against and repayments of lines of credit and
construction loans, changes in loss allowances, loans transferred to real
estate acquired in settlement of loans or to the held for sale portfolio,
and interest capitalized on loans (negative amortization).
(3) 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.
14
<PAGE>
The following table sets forth the composition of Downey's loan and
mortgage-backed securities portfolios at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1998 1997 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment Portfolio:
Loans secured by real estate:
Residential:
One-to-four units:
Adjustable ................................. $ 4,027,520 $ 4,190,160 $ 4,260,831 $ 4,451,684 $ 4,051,862
Adjustable - subprime ...................... 303,058 245,749 158,987 82,873 52,678
Fixed ...................................... 161,518 168,315 169,978 171,981 170,833
Fixed - subprime ........................... 4,672 3,321 2,500 1,507 567
- ---------------------------------------------------------------------------------------------------------------------------------
Total one-to-four units ................. 4,496,768 4,607,545 4,592,296 4,708,045 4,275,940
Five or more units:
Adjustable ................................. 30,129 29,246 41,636 47,341 42,901
Fixed ...................................... 8,748 9,032 9,260 14,333 13,338
Commercial real estate:
Adjustable .................................... 73,013 87,604 115,923 126,686 127,245
Fixed ......................................... 118,476 114,821 95,941 94,993 101,162
Construction .................................... 89,989 70,865 60,459 48,765 78,559
Land ............................................ 32,510 25,687 26,270 24,847 18,629
Non-mortgage:
Commercial ...................................... 25,478 26,024 23,741 25,718 25,450
Automobile ...................................... 350,316 342,326 325,216 287,611 242,403
Other consumer .................................. 45,529 47,735 47,067 46,244 46,892
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment ............... 5,270,956 5,360,885 5,337,809 5,424,583 4,972,519
Increase (decrease) for:
Undisbursed loan funds .......................... (78,888) (64,884) (65,783) (48,487) (55,447)
Deferral of fees and discounts, net of costs .... 19,581 18,088 16,762 17,806 14,111
Allowance for estimated loss .................... (31,817) (32,092) (30,918) (31,188) (30,683)
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment, net .......... 5,179,832 5,281,997 5,257,870 5,362,714 4,900,500
- ---------------------------------------------------------------------------------------------------------------------------------
Sale Portfolio, Net:
Loans held for sale (all one-to-four units):
Adjustable ...................................... 10,019 1,617 4,614 1,942 1,800
Fixed ........................................... 164,360 33,483 21,354 20,745 13,349
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans held for sale ..................... 174,379 35,100 25,968 22,687 15,149
Mortgage-backed securities available for sale:
Adjustable ...................................... 16,135 17,751 18,716 19,799 21,367
Fixed ........................................... 29,848 31,548 33,215 34,808 35,896
- ---------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities available
for sale ................................... 45,983 49,299 51,931 54,607 57,263
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities held
for sale and available for sale ............ 220,362 84,399 77,899 77,294 72,412
- ---------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities .... $ 5,400,194 $ 5,366,396 $ 5,335,769 $ 5,440,008 $ 4,972,912
=================================================================================================================================
</TABLE>
Loans held for sale are carried at the lower of cost or market. At March
31, 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 March 31, 1998, reflect an unrealized gain of $0.6 million. The current
quarter-end unrealized gain, less the associated tax effect of $0.3 million, is
reflected as a separate component of stockholders' equity until realized.
15
<PAGE>
INVESTMENTS IN REAL ESTATE AND JOINT VENTURES
Downey's investment in real estate and joint ventures amounted to $41.1
million at March 31, 1998, substantially unchanged from year-end 1997 and March
31, 1997.
The following table is a summary of the activity of Downey's allowance for
real estate held for investment for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1998 1997 1997 1997 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 21,244 $ 21,353 $ 21,670 $ 23,849 $ 30,071
Provision .................... (2,722) (109) (317) (487) (2,277)
Charge-offs .................. (382) -- -- (1,692) (3,945)
Recoveries ................... -- -- -- -- --
- ---------------------------------------------------------------------------------------------
Balance at end of period ..... $ 18,140 $ 21,244 $ 21,353 $ 21,670 $ 23,849
=============================================================================================
</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
---------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1998 1997 1997 1997 1997
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 839 $ 1,083 $ 1,182 $ 1,334 $ 1,078
Provision .................... 304 (24) 235 299 597
Charge-offs .................. (245) (220) (334) (451) (341)
Recoveries ................... -- -- -- -- --
- ----------------------------------------------------------------------------------------------
Balance at end of period ..... $ 898 $ 839 $ 1,083 $ 1,182 $ 1,334
==============================================================================================
</TABLE>
16
<PAGE>
DEPOSITS
At March 31, 1998, deposits totaled $5.1 billion, up $614.4 million or
13.7% from the year-ago quarter end, and up $238.8 million or 4.9% from year-end
1997. Compared to the year-ago period, transaction accounts (i.e., checking,
regular passbook and money market) increased $140.3 million or 16.2%, while
certificates of deposits increased $474.1 million or 13.1%. The following table
sets forth information concerning Downey's deposits and average rates paid at
the dates indicated.
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997 September 30, 1997 June 30, 1997 March 31, 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 ... 2.10% $1,007,323 2.15% $ 935,869 2.10% $ 915,647 3.04% $ 860,065 2.00% $ 867,028
Certificates of deposit:
Less than 3.00% ..... 2.63 29,543 2.64 30,623 2.66 32,279 2.67 32,592 2.65 33,667
3.00-3.49 ........... 3.01 581 3.02 766 3.04 623 3.02 337 3.03 301
3.50-3.99 ........... -- -- -- -- 3.99 24 3.99 24 3.88 54
4.00-4.49 ........... 4.20 60,410 4.31 60,095 4.38 55,701 4.39 56,667 4.39 58,045
4.50-4.99 ........... 4.89 134,194 4.87 40,356 4.87 44,012 4.90 78,430 4.88 131,700
5.00-5.99 ........... 5.63 2,947,539 5.63 2,896,291 5.61 2,740,673 5.64 2,847,321 5.61 2,833,931
6.00-6.99 ........... 6.06 925,762 6.06 901,920 6.07 989,209 6.08 751,054 6.13 560,129
7.00 and greater .... 7.21 3,470 7.22 4,058 7.21 4,626 7.21 4,622 7.14 9,582
- ------------------------------------------------------------------------------------------------------------------------------------
Total certificates
of deposit 5.66 4,101,499 5.68 3,934,109 5.68 3,867,147 5.67 3,771,047 5.62 3,627,409
- ------------------------------------------------------------------------------------------------------------------------------------
Total deposits 4.96% $5,108,822 5.00% $4,869,978 5.00% $4,782,794 5.00% $4,631,112 4.92% $4,494,437
====================================================================================================================================
</TABLE>
BORROWINGS
During the 1998 first quarter, borrowings decreased $216.7 million to
$267.1 million, reflecting decreases in FHLB advances, commercial paper and
reverse repurchase agreements. The following table sets forth information
concerning Downey's FHLB advances and other borrowings at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31, September 30, June 30, March 31,
(Dollars in Thousands) 1998 1997 1997 1997 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FHLB advances ................................... $209,854 $352,458 $467,637 $550,736 $330,479
Reverse repurchase agreements ................... -- 34,803 -- -- --
Commercial paper ................................ 44,517 83,811 118,635 236,809 196,125
Other borrowings ................................ 12,712 12,663 12,760 10,063 10,188
- -------------------------------------------------------------------------------------------------------------------
Total borrowings ............................. $267,083 $483,735 $599,032 $797,608 $536,792
===================================================================================================================
Weighted average rate on borrowings during
the period ................................... 6.42% 6.16% 6.07% 6.04% 5.97%
Total borrowings as a percentage of total assets 4.55 8.29 10.23 13.55 9.79
===================================================================================================================
</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.
The following table sets forth the repricing frequency of Downey's major
asset and liability categories as of March 31, 1998, as well as certain
information regarding the repricing and maturity differences between
interest-earning
17
<PAGE>
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>
March 31, 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) $ 99,752 $ -- $114,996 $ -- $ -- $ 214,748
Loans and mortgage-backed securities:
Mortgage-backed securities ............. (2) 20,838 4,490 16,490 2,941 1,224 45,983
Loans secured by real estate:
Residential:
Adjustable ......................... (2) 4,257,416 105,572 7,859 -- -- 4,370,847
Fixed .............................. (2) 187,563 18,429 81,103 33,118 19,047 339,260
Commercial real estate ............... (2) 76,323 8,402 77,269 21,784 4,202 187,980
Construction ......................... (2) 36,854 -- -- -- -- 36,854
Land ................................. (2) 12,778 41 358 546 319 14,042
Non-mortgage:
Commercial ........................... (2) 16,984 -- -- -- -- 16,984
Consumer ............................. (2) 107,386 63,157 217,701 -- -- 388,244
- --------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities 4,716,142 200,091 400,780 58,389 24,792 5,400,194
- --------------------------------------------------------------------------------------------------------------------------
Total .................................. $4,815,894 200,091 $515,776 $ 58,389 $ 24,792 $5,614,942
==========================================================================================================================
Deposits and borrowings:
Interest bearing deposits:
Fixed maturity deposits ................ (1) $ 2,154,362 $ 1,520,829 $426,308 $ -- $ -- $4,101,499
- --------------------------------------------------------------------------------------------------------------------------
Transaction accounts ................... (3) 873,478 -- -- -- -- 873,478
Non-interest bearing transaction
accounts ............................... 133,845 -- -- -- -- 133,845
- --------------------------------------------------------------------------------------------------------------------------
Total deposits ......................... 3,161,685 1,520,829 426,308 -- -- 5,108,822
- --------------------------------------------------------------------------------------------------------------------------
Borrowings ............................... 156,748 25,858 81,677 2,800 -- 267,083
- --------------------------------------------------------------------------------------------------------------------------
Total deposits and borrowings .......... $3,318,433 $ 1,546,687 $507,985 $ 2,800 $ -- $5,375,905
==========================================================================================================================
Excess (shortfall) of interest-earning
assets over interest-bearing liabilities . $1,497,461 $(1,346,596) 7,791 $ 55,589 $ 24,792 $ 239,037
Cumulative gap .............................. 1,497,461 150,865 158,656 214,245 239,037
Cumulative gap - as a % of total assets:
March 31, 1998 ........................... 25.50% 2.57% 2.70% 3.65% 4.07%
December 31, 1997 ........................ 24.82 1.35 2.71 3.54 3.93
March 31, 1997 ........................... 16.85 2.80 1.71 2.63 3.11
==========================================================================================================================
</TABLE>
(1) Based upon contractual maturity and repricing date.
(2) Based upon contractual maturity, repricing date and projected repayment and
prepayments of principal.
(3) Based upon contractual maturity or repricing date.
The six-month gap at March 31, 1998, was a positive 25.50% (i.e., more
interest-earning assets reprice within six months than interest-bearing
liabilities). This compares to a positive six-month gap of 24.82% at December
31, 1997, and 16.85% at March 31, 1997. Downey's strategy of emphasizing the
origination of adjustable rate mortgages continues to be
18
<PAGE>
pursued. For the twelve months ended March 31, 1998, Downey originated and
purchased for investment $1.8 billion of adjustable rate loans and
mortgage-backed securities which represented approximately 95% of all loans and
mortgage-backed securities originated and purchased for investment during the
period.
At March 31, 1998, 98% of Downey's interest-earning assets mature, reprice
or are estimated to prepay within five years, down slightly from 99% at December
31, 1997, but unchanged from 98% at March 31, 1997. At March 31, 1998, loans and
mortgage-backed securities with adjustable interest rates represented 89% of
Downey's loans and mortgage-backed securities portfolios. During the first
quarter of 1997, 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 March 31, 1998, $5.1 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, compared to
$5.1 billion or 94% and $4.7 billion or 94%, at December 31, 1997, and March 31,
1997, respectively.
The following table sets forth on a consolidated basis the interest rate
spread on Downey's interest-earning assets and interest-bearing liabilities as
of the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31, September 30, June 30, March 31,
1998 1997 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted average yield:
Loan and mortgage-backed securities 7.94% 7.95% 7.80% 7.61% 7.74%
Investment securities ............. 5.84 5.79 5.75 5.67 5.71
- -------------------------------------------------------------------------------------------------------
Earning assets yield .............. 7.86 7.87 7.72 7.55 7.66
- -------------------------------------------------------------------------------------------------------
Weighted average cost:
Deposits .......................... 4.96 5.00 5.00 5.00 4.92
Borrowings:
FHLB advances ................... 6.17 6.11 6.04 5.98 5.83
Other borrowings ................ 6.19 6.15 5.78 5.60 5.53
- -------------------------------------------------------------------------------------------------------
Combined borrowings ............... 6.17 6.12 5.98 5.87 5.72
- -------------------------------------------------------------------------------------------------------
Combined funds .................... 5.02 5.11 5.11 5.13 5.01
- -------------------------------------------------------------------------------------------------------
Interest rate spread ................. 2.84% 2.76% 2.61% 2.42% 2.65%
=======================================================================================================
</TABLE>
The weighted average yield on the loan and mortgage-backed securities
portfolios at March 31, 1998, was 7.94%, virtually unchanged from 7.95% at
December 31, 1997, but up from 7.74% at March 31, 1997. At March 31, 1998, the
single family ARM portfolio, including mortgage-backed securities, totaled $4.4
billion with a weighted average rate of 7.65%, compared to $4.5 billion with a
weighted average rate of 7.58% at December 31, 1997, and $4.1 billion with a
weighted average rate of 7.33% at March 31, 1997.
ASSET QUALITY
Non-Performing Assets
Non-performing assets decreased during the quarter by $2.4 million to $49.7
million at March 31, 1998, or 0.85% of total assets. Non-performing assets at
quarter end include non-accrual loans aggregating $17.4 million which were not
contractually past due, but were deemed non-accrual due to management's
assessment of the borrower's ability to pay.
19
<PAGE>
The following table summarizes the non-performing assets of Downey at the
dates indicated.
<TABLE>
<CAPTION>
March 31, December 31, September 30, June 30, March 31,
(Dollars in Thousands) 1998 1997 1997 1997 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
One-to-four unit residential $17,736 $20,816 $21,602 $20,893 $23,739
One-to-four unit residential - subprime 832 -- 174 -- --
Other 20,060 20,883 20,383 20,369 19,733
- --------------------------------------------------------------------------------------------------------------------
Total non-accrual loans 38,628 41,699 42,159 41,262 43,472
Real estate acquired in settlement of loans, net 10,414 9,626 13,072 14,357 17,202
Repossessed automobiles 688 795 477 317 270
- --------------------------------------------------------------------------------------------------------------------
Gross non-performing assets $49,730 $52,120 $55,708 $55,936 $60,944
====================================================================================================================
====================================================================================================================
Allowance for loan losses (1):
Amount $31,817 $32,092 $30,918 $31,188 $30,683
As a percentage of non-performing loans 82.37% 76.96% 73.34% 75.59% 70.58%
Non-performing assets as a percentage of total assets 0.85 0.89 0.95 0.95 1.11
====================================================================================================================
</TABLE>
(1) Allowance for loan losses does not include the allowance for real estate
and real estate acquired in settlement of loans.
At March 31, 1998, the recorded investment in loans for which impairment
has been recognized totaled $13.7 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 first quarter of 1998, total interest recognized on the
impaired loan portfolio, on a cash basis, was $0.5 million.
Delinquent Loans
During the 1998 first quarter, total delinquencies were essentially
unchanged as increases in the 30-59 days and 60-89 days categories were offset
by a decrease in the 90+ days category. As a percentage of loans outstanding,
delinquencies at the end of the 1998 first quarter were 0.79%, unchanged from
year-end 1997 and below the year-ago level of 0.89%.
20
<PAGE>
The following table indicates the amounts of Downey's past due loans.
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
--------------------------------------- -------------------------------------------
30-59 60-89 90+ 30-59 60-89 90+
(Dollars in Thousands) Days Days Days (1) Total Days Days Days (1) Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units ...................... $14,532 $ 6,096 $14,487 $35,115 $12,099 $ 4,101 $18,579 $34,779
One-to-four units - subprime ........... 287 359 186 832 185 -- -- 185
Five or more units ..................... 222 -- -- 222 -- 222 -- 222
Commercial real estate ................... 241 -- -- 241 -- -- 279 279
Construction ............................. -- -- -- -- -- -- -- --
Land ..................................... -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total real estate loans ................ 15,282 6,455 14,673 36,410 12,284 4,323 18,858 35,465
Non-mortgage:
Commercial ............................... -- -- -- -- -- -- -- --
Automobile ............................... 4,005 946 716 5,667 4,167 981 961 6,109
Other consumer ........................... 73 57 457 587 218 54 533 805
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans .......................... $19,360 $ 7,458 $15,846 $42,664 $16,669 $ 5,358 $20,352 $42,379
====================================================================================================================================
Delinquencies as a percentage of total loans 0.36% 0.14% 0.29% 0.79% 0.31% 0.10% 0.38% 0.79%
====================================================================================================================================
September 30, 1997 June 30, 1997
--------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units ...................... $14,950 $ 5,851 $17,405 $38,206 $10,427 $ 5,402 $18,583 $34,412
One-to-four units - subprime ........... -- 114 60 174 209 -- -- 209
Five or more units ..................... 223 135 -- 358 -- -- -- --
Commercial real estate ................... -- -- 279 279 -- -- 279 279
Construction ............................. -- -- -- -- -- -- -- --
Land ..................................... -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total real estate loans ................ 15,173 6,100 17,744 39,017 10,636 5,402 18,862 34,900
Non-mortgage:
Commercial ............................... -- -- -- -- -- -- -- --
Automobile ............................... 3,903 1,312 672 5,887 3,574 647 555 4,776
Other consumer ........................... 355 173 58 586 165 66 87 318
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans .......................... $19,431 $ 7,585 $18,474 $45,490 $14,375 $ 6,115 $19,504 $39,994
====================================================================================================================================
Delinquencies as a percentage of total loans 0.36% 0.14% 0.35% 0.85% 0.27% 0.11% 0.36% 0.74%
====================================================================================================================================
March 31, 1997
---------------------------------------
<S> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units ...................... $15,221 $ 5,095 $20,320 $40,636
One-to-four units - subprime ........... -- -- -- --
Five or more units ..................... -- -- -- --
Commercial real estate ................... -- -- 279 279
Construction ............................. -- -- -- --
Land ..................................... -- -- -- --
- ----------------------------------------------------------------------------------------
Total real estate loans ................ 15,221 5,095 20,599 40,915
Non-mortgage:
Commercial ............................... -- -- -- --
Automobile ............................... 2,419 278 324 3,021
Other consumer ........................... 69 34 86 189
- ----------------------------------------------------------------------------------------
Total loans .......................... $17,709 $ 5,407 $21,009 $44,125
========================================================================================
Delinquencies as a percentage of total loans 0.36% 0.11% 0.42% 0.89%
========================================================================================
</TABLE>
(1) All 90 day or greater delinquencies are on non-accrual status and reported
as part of non-performing assets.
21
<PAGE>
Valuation Allowances
Allowances for losses on all assets (including loans) were $51.2 million,
$54.8 million and $56.5 million, at March 31, 1998, December 31, 1997, and March
31, 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 16.
The total allowance for possible loan losses was $31.8 million at March 31,
1998, compared to $32.1 million at December 31, 1997, and $30.7 million at March
31, 1997. 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 $0.5 million in the 1998 first quarter, compared
to $1.6 million in the year-ago quarter. Included in the current quarter net
charge-offs were $0.5 million associated with one-to-four unit residential loans
and $1.4 million associated with automobile loans. Those amounts were partially
offset by a $1.4 million recovery of a prior commercial real estate loan
charge-off due to the previously mentioned settlement.
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
-----------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1998 1997 1997 1997 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $32,092 $30,918 $31,188 $30,683 $30,094
Provision .................... 272 3,034 1,578 1,873 2,155
Charge-offs .................. (2,381) (2,346) (2,001) (1,643) (1,783)
Recoveries ................... 1,834 486 153 275 217
- --------------------------------------------------------------------------------------------------
Balance at end of period ..... $31,817 $32,092 $30,918 $31,188 $30,683
==================================================================================================
</TABLE>
22
<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>
March 31, 1998 December 31, 1997 September 30, 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 ...... $ 13,960 $4,496,768 0.31% $14,652 $4,607,545 0.32% $14,426 $4,592,296 0.31%
Five or more units ..... 399 38,877 1.03 314 38,278 0.82 417 50,896 0.82
Commercial real estate ... 4,118 191,489 2.15 4,112 202,425 2.03 4,592 211,864 2.17
Construction ............. 1,072 89,989 1.19 847 70,865 1.20 718 60,459 1.19
Land ..................... 415 32,510 1.28 331 25,687 1.29 349 26,270 1.33
Non-Mortgage:
Commercial ............... 192 25,478 0.75 196 26,024 0.75 164 23,741 0.69
Automobile ............... 8,105 350,316 2.31 8,016 342,326 2.34 6,746 325,216 2.07
Other consumer ........... 756 45,529 1.66 824 47,735 1.73 706 47,067 1.50
Not specifically allocated .. 2,800 -- -- 2,800 -- -- 2,800 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans held for
investment ............ $ 31,817 $5,270,956 0.60% $32,092 $5,360,885 0.60% $30,918 $5,337,809 0.58%
====================================================================================================================================
June 30, 1997 March 31, 1997
---------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units ...... $ 15,033 $4,708,045 0.32% $13,674 $4,275,940 0.32%
Five or more units ..... 521 61,674 0.84 509 56,239 0.91
Commercial real estate ... 4,704 221,679 2.12 6,421 228,407 2.81
Construction ............. 576 48,765 1.18 925 78,559 1.18
Land ..................... 332 24,847 1.34 254 18,629 1.36
Non-mortgage:
Commercial ............... 269 25,718 1.05 255 25,450 1.00
Automobile ............... 6,247 287,611 2.17 5,132 242,403 2.12
Other consumer ........... 706 46,244 1.53 713 46,892 1.52
Not specifically allocated .. 2,800 -- -- 2,800 -- --
- ---------------------------------------------------------------------------------------------------
Total loans held for
investment ............ $ 31,188 $5,424,583 0.57% $30,683 $4,972,519 0.62%
===================================================================================================
</TABLE>
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of funds generated in the first 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 $356.1 million and a net increase in deposits of $238.8 million.
These funds were used primarily to originate loans held for investment of
$259.9 million (net of Downey refinances of $23.2 million), fund the net
increase of $139.3 million of loans held for sale and repay FHLB advances and
other borrowings which declined by $216.7 million in the aggregate.
The minimum liquidity ratio set by the regulators was reduced in the fourth
quarter of 1997 from 5% to 4%. At March 31, 1998, the Bank's ratio of regulatory
liquidity was 4.6%, compared to 4.8% at December 31, 1997, and 5.5% at March 31,
1997.
Stockholders' equity totaled $446.1 million at March 31, 1998, compared to
$430.3 million at December 31, 1997, and $400.5 million at March 31, 1997.
23
<PAGE>
REGULATORY CAPITAL
The following table is a reconciliation of the Bank's stockholder's equity
to federal regulatory capital as of March 31, 1998. The core and tangible
capital ratios were 6.83% and the risk-based capital ratio was 12.92%. 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 ............................... $436,903 $436,903 $436,903
Adjustments:
Deductions:
Investment in subsidiary, primarily real estate (36,306) (36,306) (36,306)
Goodwill ....................................... (4,920) (4,920) (4,920)
Core deposit premium ........................... (143) (143) (143)
Non-permitted mortgage servicing rights ........ (223) (223) (223)
Additions:
Unrealized gain on securities available for sale (426) (426) (426)
General loss allowance - Investment in DSL ..... 1,671 1,671 1,671
Loan general valuation allowances (1) -- -- 31,554
- -------------------------------------------------------------------------------------------------------------------
Regulatory capital ................................. 396,556 6.83% 396,556 6.83% 428,110 12.92%
Well capitalized requirement ....................... 87,117 1.50 (2) 290,391 5.00 331,465 10.00 (3)
- -------------------------------------------------------------------------------------------------------------------
Excess ............................................. $309,439 5.33% $106,165 1.83% $ 96,645 2.92%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Limited to 1.25% of risk-weighted assets.
(2) Represents the minimum requirement for tangible capital, as no "well
capitalized" requirement has been established for this category.
(3) A third requirement is Tier 1 capital to risk-weighted assets of 6%, which
the Bank meets and exceeds with a ratio of 11.96%.
24
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(A) None.
(B) There were no reports on Form 8-K for the three months ended March 31,
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: May 4, 1998 /s/ JAMES W. LOKEY
-------------------------------------------------
James W. Lokey
President and Chief Executive Officer
Date: May 4, 1998 /s/ THOMAS E. PRINCE
-------------------------------------------------
Thomas E. Prince
Executive Vice President/ Chief Financial Officer
25
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 10,888 22,907
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 25,505 19,558
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 170,988 217,318
<INVESTMENTS-CARRYING> 6,885 6,997
<INVESTMENTS-MARKET> 6,865 6,975
<LOANS> 5,354,211 4,915,649
<ALLOWANCE> 31,817 30,683
<TOTAL-ASSETS> 5,871,913 5,484,473
<DEPOSITS> 5,108,822 4,494,437
<SHORT-TERM> 182,606 472,513
<LIABILITIES-OTHER> 49,922 52,741
<LONG-TERM> 84,477 64,279
0 0
0 0
<COMMON> 268 255
<OTHER-SE> 445,818 400,248
<TOTAL-LIABILITIES-AND-EQUITY> 5,871,913 5,484,473
<INTEREST-LOAN> 105,345 93,681
<INTEREST-INVEST> 4,378 3,893
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 109,723 98,584
<INTEREST-DEPOSIT> 61,538 51,404
<INTEREST-EXPENSE> 5,559 8,062
<INTEREST-INCOME-NET> 42,646 38,118
<LOAN-LOSSES> 272 2,155
<SECURITIES-GAINS> 68 0
<EXPENSE-OTHER> 26,597 25,176
<INCOME-PRETAX> 30,683 21,778
<INCOME-PRE-EXTRAORDINARY> 17,565 12,330
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 17,565 12,330
<EPS-PRIMARY> 0.63 0.44
<EPS-DILUTED> 0.62 0.44
<YIELD-ACTUAL> 7.82 7.77
<LOANS-NON> 38,628 43,472
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 234 233
<ALLOWANCE-OPEN> 32,092 30,094
<CHARGE-OFFS> 2,381 1,783
<RECOVERIES> 1,834 217
<ALLOWANCE-CLOSE> 31,817 30,683
<ALLOWANCE-DOMESTIC> 31,817 30,683
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 2,800 2,800
</TABLE>
