================================================================================
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, 1999
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM
__________ TO __________
Commission File Number 1-13578
DOWNEY FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0633413
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3501 JAMBOREE ROAD, NEWPORT BEACH, CA 92660
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (949) 854-0300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
PACIFIC EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
At March 31, 1999, 28,146,342 shares of the Registrant's Common Stock,
$0.01 par value were outstanding.
================================================================================
<PAGE>
DOWNEY FINANCIAL CORP.
MARCH 31, 1999 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.......................................................... 28
Item 5 Other Information............................................ 28
Item 6 Exhibits and Reports on Form 8-K............................. 28
i
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
<CAPTION>
March 31, December 31, March 31,
(Dollars in Thousands, Except Per Share Data) 1999 1998 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Cash ......................................................................... $ 50,664 $ 58,510 $ 46,571
Federal funds ................................................................ 39,204 33,751 25,505
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents ................................................ 89,868 92,261 72,076
U.S. Treasury securities and agency obligations available for sale,
at fair value ............................................................ 115,317 116,061 125,005
Municipal securities being held to maturity, at amortized cost (estimated
market value of $6,745 at March 31, 1999 and December 31, 1998, and $6,865
at March 31, 1998) ....................................................... 6,764 6,764 6,885
Mortgage loans purchased under resale agreements ............................. -- -- 10,000
Loans held for sale, at the lower of cost or market .......................... 309,933 447,382 174,379
Mortgage-backed securities available for sale, at fair value ................. 28,957 32,146 45,983
Loans receivable held for investment ......................................... 5,763,657 5,308,837 5,179,832
Investments in real estate and joint ventures ................................ 52,155 49,447 41,123
Real estate acquired in settlement of loans .................................. 4,686 4,475 10,414
Premises and equipment ....................................................... 103,795 103,979 101,343
Federal Home Loan Bank stock, at cost ........................................ 50,105 49,430 47,353
Other assets ................................................................. 68,855 59,637 57,520
- ---------------------------------------------------------------------------------------------------------------------
$6,594,092 $6,270,419 $5,871,913
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ..................................................................... $5,205,282 $5,039,733 $5,108,822
Federal Home Loan Bank advances .............................................. 842,677 695,012 209,854
Commercial paper ............................................................. -- -- 44,517
Other borrowings ............................................................. 8,638 8,708 12,712
Accounts payable and accrued liabilities ..................................... 41,901 40,989 37,948
Deferred income taxes ........................................................ 5,188 5,411 11,974
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities ........................................................ 6,103,686 5,789,853 5,425,827
- ---------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock, par value of $0.01 per share; authorized 50,000,000 shares;
outstanding 28,146,342 shares at March 31, 1999, 28,131,776 shares
at December 31, 1998, and 26,755,938 shares at March 31, 1998 ............ 281 281 268
Additional paid-in capital ................................................... 92,357 92,166 45,954
Accumulated other comprehensive income - unrealized gains on securities
available for sale ....................................................... 305 753 426
Retained earnings ............................................................ 397,463 387,366 399,438
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity ............................................... 490,406 480,566 446,086
- ---------------------------------------------------------------------------------------------------------------------
$6,594,092 $6,270,419 $5,871,913
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
<CAPTION>
Three Months Ended
March 31,
---------------------
(Dollars in Thousands, Except Per Share Data) 1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Loans receivable ...................................................... $110,731 $105,345
U.S. Treasury securities and agency obligations ....................... 1,617 1,829
Mortgage-backed securities ............................................ 464 808
Other investments ..................................................... 1,082 1,741
- ------------------------------------------------------------------------------------------------------
Total interest income ............................................... 113,894 109,723
- ------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits .............................................................. 55,489 61,538
Borrowings ............................................................ 9,449 5,559
- ------------------------------------------------------------------------------------------------------
Total interest expense .............................................. 64,938 67,097
- ------------------------------------------------------------------------------------------------------
NET INTEREST INCOME ................................................... 48,956 42,626
PROVISION FOR LOAN LOSSES ............................................. 2,381 272
- ------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses ................. 46,575 42,354
- ------------------------------------------------------------------------------------------------------
OTHER INCOME, NET:
Loan and deposit related fees ......................................... 4,448 3,169
Real estate and joint ventures held for investment, net:
Reduction of (provision for) losses on real estate and joint ventures (53) 2,722
Operations, net ..................................................... 1,218 6,793
Secondary marketing activities:
Loan servicing fees ................................................. 574 150
Net gains on sales of loans and mortgage-backed securities .......... 3,987 872
Net gains on sales of investment securities ........................... 97 68
Other ................................................................. 1,071 1,152
- ------------------------------------------------------------------------------------------------------
Total other income, net ............................................. 11,342 14,926
- ------------------------------------------------------------------------------------------------------
OPERATING EXPENSE:
Salaries and related costs ............................................ 20,811 14,636
Premises and equipment costs .......................................... 4,735 3,882
Advertising expense ................................................... 2,199 1,583
Professional fees ..................................................... 540 1,386
SAIF insurance premiums and regulatory assessments .................... 989 950
Other general and administrative expense .............................. 6,975 3,773
- ------------------------------------------------------------------------------------------------------
Total general and administrative expense ............................ 36,249 26,210
- ------------------------------------------------------------------------------------------------------
Net operation of real estate acquired in settlement of loans .......... 90 255
Amortization of excess of cost over fair value of net assets acquired . 118 132
- ------------------------------------------------------------------------------------------------------
Total operating expense ............................................. 36,457 26,597
- ------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES ................................................. 21,460 30,683
Income taxes ............................................................... 9,112 13,118
- ------------------------------------------------------------------------------------------------------
NET INCOME ............................................................ $ 12,348 $ 17,565
======================================================================================================
PER SHARE INFORMATION:
BASIC ...................................................................... $ 0.44 $ 0.63
======================================================================================================
DILUTED .................................................................... $ 0.44 $ 0.62
======================================================================================================
CASH DIVIDENDS PAID ........................................................ $ 0.080 $ 0.076
======================================================================================================
Weighted average diluted shares outstanding ................................ 28,170,268 28,168,022
======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
<CAPTION>
Three Months Ended
March 31,
---------------------
(In Thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET INCOME ........................................................................... $ 12,348 $ 17,565
- --------------------------------------------------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES:
Unrealized gains (losses) on securities available for sale:
U.S. Treasury securities and agency obligations available for sale, at fair value (418) 524
Less reclassification of realized gains, net of losses included in income ....... (56) (39)
Mortgage-backed securities available for sale, at fair value .................... 26 (169)
- --------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) ................................................. (448) 316
- --------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME ................................................................. $ 11,900 $ 17,881
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<CAPTION>
Three Months Ended
March 31,
-----------------------
(In Thousands) 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................................ $ 12,348 $ 17,565
Adjustments to reconcile net income to net cash used for operating activities:
Depreciation and amortization ................................................... 1,871 2,025
Provision for (recovery of) losses on loans, real estate acquired in settlement
of loans, investments in real estate and joint ventures and other assets ...... 2,507 (2,383)
Net gains on sales of loans and mortgage-backed securities, investment
securities, real estate and other assets ...................................... (4,371) (7,324)
Interest capitalized on loans (negative amortization) ........................... (6,015) (4,806)
Federal Home Loan Bank stock dividends .......................................... (675) (651)
Loans originated for sale ......................................................... (646,786) (257,669)
Proceeds from sales of loans originated for sale .................................. 172,370 80,492
Other, net ........................................................................ (2,301) (3,361)
- ----------------------------------------------------------------------------------------------------------------
Net cash used for operating activities ............................................... (471,052) (176,112)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from:
Sales of U.S. Treasury securities and agency obligations available for sale ..... 50,014 60,068
Sales of mortgage-backed securities available for sale .......................... 600,219 39,277
Sales of wholly owned real estate and real estate acquired in settlement of loans 909 1,517
Purchase of:
U.S. Treasury securities and agency obligations available for sale .............. (50,000) (27,617)
Securities under resale agreements .............................................. -- (10,000)
Loans receivable held for investment ............................................ (302) (2,729)
Loans receivable originated held for investment (net of refinances of
$51,506 and $23,242 at March 31, 1999 and 1998, respectively) ................... (855,169) (259,937)
Principal payments on loans receivable held for investment and mortgage-backed
securities available for sale ................................................... 386,525 356,149
Net change in undisbursed loan funds .............................................. 30,670 12,530
Proceeds from (investments in) real estate held for investment .................... (2,999) 5,012
Other, net ........................................................................ (2,292) (1,051)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities ............................................ 157,575 173,219
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
<CAPTION>
Three Months Ended
March 31,
------------------------
(In Thousands) 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits .................................................. $ 165,549 $ 238,844
Net decrease in securities sold under agreements to repurchase ............ -- (34,803)
Proceeds from Federal Home Loan Bank advances ............................. 1,126,800 25,000
Repayments of Federal Home Loan Bank advances ............................. (979,135) (167,604)
Net decrease in other borrowings .......................................... (70) (39,245)
Proceeds from exercise of stock options ................................... 191 --
Cash dividends ............................................................ (2,251) (2,141)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities .................................... 311,084 20,051
- ---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ......................... (2,393) 17,158
Cash and cash equivalents at beginning of year ............................... 92,261 54,918
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................... $ 89,868 $ 72,076
=========================================================================================================
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the period for:
Interest ................................................................ $ 65,304 $ 67,178
Income taxes ............................................................ (16) 8,155
Supplemental disclosure of non-cash investing:
Loans transferred from (to) held for investment to (from) held for sale ... (7,095) 604
Loans exchanged for mortgage-backed securities ............................ 600,379 39,211
Real estate acquired in settlement of loans ............................... 2,428 5,431
Loans to facilitate the sale of real estate acquired in settlement of loans 1,463 3,045
=========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE (1) - BASIS OF FINANCIAL STATEMENT 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, 1999, December 31, 1998, and
March 31, 1998, and the results of operations, comprehensive income and changes
in cash flows for the three months ended March 31, 1999, and 1998. 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 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, comprehensive income
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, 1998, 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, 1998, 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) - 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 (3) - DERIVATIVES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. If certain conditions are met, a derivative may be specifically
designated as (a) a hedge of the exposure to changes in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction, or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available for sale security, or a
foreign-currency-denominated forecasted transaction.
Under SFAS 133, an entity that elects to apply hedge accounting is required
to establish at the inception of the hedge the method it will use for assessing
the effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. Those methods must be
consistent with the entity's approach to managing risk.
This statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. It is not anticipated that the financial impact
of this statement will have a material impact on Downey.
As part of its secondary marketing activities, Downey utilizes forward sale
and purchase contracts to hedge the value of loans originated for sale against
adverse changes in interest rates. At March 31, 1999, such sales and purchase
contracts amounted to approximately $509 million and $54 million, respectively.
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
6
<PAGE>
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 (4) - 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 that applicable federal tax authorities related to the
transaction clearly support Downey's positions and intends to vigorously defend
those positions. Management also believes that adequate tax reserves have been
established regarding the transaction.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Certain statements under this caption may 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 1999 totaled $12.3 million or $0.44 per
share on a diluted basis. This compares to net income in the first quarter of
1998 of $17.6 million or $0.62 per share on a diluted basis.
The decline in net income between first quarters primarily reflects two
factors. First, year-ago net income benefited from the settlement of certain
loan and real estate investment obligations of a former joint venture partner
("settlement"). That settlement added $2.9 million to net income. The pre-tax
amount of the settlement was $5.1 million of which $1.4 million represented the
recovery of a prior loan charge-off thereby reducing provision for loan loses;
$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. Also, negatively impacting the quarter-to-quarter
comparison was a decline in the remaining net income attributable to real estate
investment activities of $3.1 million due to there being no sales of real estate
assets in the current period compared to several sales a year ago which resulted
in pre-tax gains of $5.4 million.
Excluding those two factors, net income would have increased by $0.8
million, up 6.8% from a year ago. This adjusted increase was generated by
Downey's banking operations and reflects several factors. Net interest income
increased $6.3 million or 14.9% due to increases in both average earning assets
and the effective interest spread. In addition, the quarter-to-quarter
improvement reflected increases of $3.1 million in net gains on the sale of
loans, $1.3 million in loan and deposit related fees, and $0.4 million in loan
servicing fees. These positive factors were partially offset by a $9.7 million
increase in adjusted general and administrative expense and a $0.7 million
increase in the adjusted provision for loan losses. The increase in general and
administrative expense was due to significantly higher lending volumes, branch
expansion and increased expense related to Year 2000 compliance efforts.
For the first quarter of 1999, the return on average assets was 0.78% and
the return on average equity was 10.20%.
At March 31, 1999, assets totaled $6.6 billion, up $722 million or 12.3%
from a year ago. Single family loan originations totaled a record $1.424 billion
in the first quarter of 1999, more than triple the $453 million originated in
the first quarter of 1998. Of the current quarter total, $647 million
represented originations of loans for sale and $189 million represented
originations for portfolio of subprime credits as part of Downey's strategy to
enhance the portfolio's net yield. In addition to single family loans, $131
million of other loans were originated in the quarter including $60 million of
construction and land loans and $50 million of automobile loans.
Asset growth was primarily funded with borrowings, which increased $584
million between first quarters. That increase primarily occurred during the
fourth quarter of 1998 when Downey took advantage of the low interest rate
environment and borrowed $480 million of long-term Federal Home Loan Bank
("FHLB") advances. In addition to higher borrowings, asset growth was also
funded by an increase of $96 million or 1.9% in deposits. At quarter-end,
deposits totaled $5.2 billion. During the quarter, five new in-store branches
were opened and one traditional branch was closed, bringing total branches at
quarter end to 95 of which 33 are in-store. A year ago, branches totaled 89.
Non-performing assets increased $3 million during the quarter to $30
million or 0.46% of total assets.
At March 31, 1999, Downey Savings and Loan Association, F.A. (the "Bank")
had core and tangible capital ratios of 6.63% and a risk-based capital ratio of
12.49%. 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 $49.0 million in the first quarter of 1999, up
$6.3 million or 14.9% from the same period last year. The improvement between
first quarters reflected increases in both average earning assets and the
effective interest rate spread. Average earning assets increased by $440 million
or 7.8% between first quarters to $6.1 billion. The effective interest rate
spread of 3.23% in the current quarter was up from both the year-ago quarter
level of 3.04% and from the fourth quarter 1998 level of 3.14%.
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 were 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 indicated.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------------------
March 31, 1999 December 31, 1998 March 31, 1998
------------------------------------------------------------------------------------------
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 .............................. $5,818,860 $110,731 7.61% $5,480,840 $107,065 7.81% $5,313,496 $105,345 7.93%
Mortgage-backed securities ......... 30,599 464 6.07 35,794 580 6.48 47,970 808 6.74
Investment securities .............. 205,844 2,699 5.32 307,643 4,257 5.49 253,926 3,570 5.70
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ..... 6,055,303 113,894 7.52 5,824,277 111,902 7.69 5,615,392 109,723 7.82
Non-interest-earning assets ............ 273,867 262,408 248,698
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets ....................... $6,329,170 $6,086,685 $5,864,090
==================================================================================================================================
Interest-bearing liabilities:
Deposits ........................... $5,062,152 $ 55,489 4.45% $5,077,632 $ 59,557 4.65% $5,005,049 $ 61,538 4.99%
Borrowings ......................... 715,572 9,449 5.36 466,624 6,601 5.61 351,068 5,559 6.42
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 5,777,724 64,938 4.56 5,544,256 66,158 4.73 5,356,117 67,097 5.08
Non-interest-bearing liabilities ....... 67,338 67,999 72,328
Stockholders' equity ................... 484,108 474,430 435,645
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity .............. $6,329,170 $6,086,685 $5,864,090
==================================================================================================================================
Net interest income/interest rate spread $ 48,956 2.96% $ 45,744 2.96% $ 42,626 2.74%
Excess of interest-earning assets over
interest-bearing liabilities ....... $ 277,579 $ 280,021 $ 259,275
Effective interest rate spread ......... 3.23 3.14 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 assets and interest-bearing liabilities,
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 indicated.
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------
March 31, 1999 versus March 31, 1998
Changes Due To
----------------------------------------
Rate/
(In Thousands) Volume Rate Volume Net
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans ...................... $ 10,019 $(4,231) $(402) $ 5,386
Mortgage-backed securities . (292) (81) 29 (344)
Investment securities ...... (676) (241) 46 (871)
- ---------------------------------------------------------------------------
Change in interest income 9,051 (4,553) (327) 4,171
- ---------------------------------------------------------------------------
Interest expense:
Deposits ................... 702 (6,675) (76) (6,049)
Borrowings ................. 5,392 (1,707) 205 3,890
- ---------------------------------------------------------------------------
Change in interest expense 6,094 (8,382) 129 (2,159)
- ---------------------------------------------------------------------------
Change in net interest income .. $ 2,957 $ 3,829 $(456) $ 6,330
===========================================================================
</TABLE>
PROVISION FOR LOAN LOSSES
Provision for loan losses was $2.4 million in the current quarter compared
to $0.3 million in the first quarter of 1998. The increase reflects higher loan
growth during the current quarter, as well as the year-ago quarter included 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 "Financial Condition - Asset Quality - Valuation Allowances" on page 23.
OTHER INCOME
Total other income was $11.3 million in the first quarter of 1999, down
$3.6 million or 24.0% from the year-ago quarter. The decrease between first
quarters was primarily in income from real estate and joint ventures held for
investment that declined by $8.4 million. Included within that category in the
year-ago first quarter was $5.4 million of gains from the sale of joint venture
investments compared to none in the current quarter, as well as $2.6 million
from the previously mentioned settlement which was reflected as a reduction to
the provision for losses. Partially offsetting the decline in income from real
estate and joint ventures held for investment were increases of $3.1 million in
net gains on sales of loans, $1.3 million in loan and deposit related fees and
$0.4 million in loan servicing fees. The other category was essentially
unchanged between first quarters even though the year-ago quarter included $0.8
million from the previously mentioned settlement.
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 year-ago quarter are included in equity in
net income from joint ventures.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1999 1998 1998 1998 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations, net:
Rental operations, net of expenses ................. $ 981 $ 688 $ 894 $1,260 $ 881
Equity in net income from joint ventures ........... 47 256 2,605 1,116 5,226
Interest from joint venture advances ............... 190 182 380 336 686
- ---------------------------------------------------------------------------------------------------------------------
Total operations, net ............................ 1,218 1,126 3,879 2,712 6,793
Net gains on sales of wholly owned real estate ........ -- 2,487 -- 70 --
Reduction of (provision for) losses on real estate and
joint ventures ..................................... (53) 214 139 2,221 2,722
- ---------------------------------------------------------------------------------------------------------------------
Income from real estate and joint venture operations $1,165 $3,827 $4,018 $5,003 $9,515
=====================================================================================================================
</TABLE>
10
<PAGE>
OPERATING EXPENSE
Operating expense totaled $36.5 million in the current quarter, compared to
$26.6 million in the first quarter of 1998. The increase was due to higher
general and administrative costs which increased $10.0 million or 38.3%, as the
costs associated with the net operation of real estate acquired in settlement of
loans declined by $0.2 million. Included within general and administrative
expense in the year-ago quarter was a $0.3 million reduction to professional
fees due to the previously mentioned settlement. The increase in general and
administrative expense reflected higher lending volumes, branch expansion and
expenses related to Year 2000 compliance. Year 2000 related costs totaled $0.5
million in the current quarter, up from $0.2 million a year ago.
PROVISION FOR INCOME TAXES
Income taxes for the first quarter totaled $9.1 million, resulting in an
effective tax rate of 42.5%, compared to $13.1 million and 42.8% for the like
quarter of a year ago. For further information regarding income taxes see,
"Notes To Consolidated Financial Statements - Note (4) - Income Taxes" on page
7.
BUSINESS SEGMENT REPORTING
The previous sections of the Results of Operations discussed the
consolidated results of Downey. The purpose of this section is to present data
on the results of operations of Downey's two business segments - banking and
real estate investment.
The following table presents net income by business segment for the period
indicated, followed by a discussion of the results of operations of each
segment.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1999 1998 1998 1998 (1) 1998 (2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Banking .............. $12,029 $10,791 $10,870 $12,405 $12,670
Real estate investment 319 1,861 1,898 2,583 4,895
- --------------------------------------------------------------------------------
Total net income .. $12,348 $12,652 $12,768 $14,988 $17,565
================================================================================
<FN>
(1) The net income impact of a settlement with a former joint venture partner
totaled $1.8 million, of which $0.5 million was in banking and $1.3
million was in real estate investment.
(2) The net income impact of a settlement with a former joint venture partner
totaled $2.9 million, of which $1.4 million was in banking and $1.5
million was in real estate investment.
</FN>
</TABLE>
11
<PAGE>
Banking
Net income from banking operations for the first quarter of 1999 totaled
$12.0 million, down from $12.7 million in the first quarter of 1998. Year-ago
net income benefited by $1.4 million from the previously mentioned settlement.
The pre-tax amount was $2.5 million of which $1.4 million represented the
recovery of a prior loan charge-off thereby reducing provision for loan losses;
$0.8 million was recorded in other income; and $0.3 million was recorded as a
reduction to professional fees within operating expense. Excluding from a year
ago the settlement benefit, net income from banking would have increased by $0.8
million or 6.8%.
The increase in adjusted net income reflected several factors. Net interest
income increased $6.1 million or 14.3% due to increases in both average earning
assets and the effective interest rate spread. Also contributing to the increase
between first quarters was an adjusted $5.5 million increase in other income.
The increase in adjusted other income reflected increases in net gains on sales
of loans, loan and deposit related fees and loan servicing fees. The favorable
impact of these items was partially offset by adjusted increases of $9.8 million
in operating expense and $0.8 million in provision for loan losses. The increase
in adjusted operating expense reflected significantly higher lending volumes,
branch expansion and expenses related towards resolving Year 2000 compliance
issues. The table below sets forth banking operational results and selected
financial data for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1999 1998 1998 1998 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income ............. $ 48,948 $ 45,953 $ 42,889 $ 43,318 $ 42,807
Provision for loan losses ....... 2,381 1,180 985 1,520 233
Other income .................... 10,110 6,881 5,561 6,864 5,311
Operating expense ............... 35,839 33,057 28,270 27,077 25,550
Net intercompany income (expense) 82 (18) (48) 80 (121)
- --------------------------------------------------------------------------------------------------------
Income before income taxes ...... 20,920 18,579 19,147 21,665 22,214
Income taxes .................... 8,891 7,788 8,277 9,260 9,544
- --------------------------------------------------------------------------------------------------------
Net income ................... $ 12,029 $ 10,791 $ 10,870 $ 12,405 $ 12,670
========================================================================================================
AT PERIOD END:
Assets:
Loans ........................ $6,102,547 $5,788,365 $5,387,843 $5,328,291 $5,400,194
Other ........................ 473,310 463,960 500,294 481,463 449,917
- --------------------------------------------------------------------------------------------------------
Total assets ............... 6,575,857 6,252,325 5,888,137 5,809,754 5,850,111
- --------------------------------------------------------------------------------------------------------
Equity .......................... $ 490,406 $ 480,566 $ 470,815 $ 458,962 $ 446,086
========================================================================================================
</TABLE>
12
<PAGE>
Real Estate Investment
Net income from real estate investment operations totaled $0.3 million in
the first quarter of 1999, down from $4.9 million in the year-ago quarter.
Year-ago net income benefited by $1.5 million from the previously mentioned
settlement. The pre-tax amount was $2.6 million which was reflected as a
reduction of loss on real estate and joint ventures in the other income
category. Excluding the settlement, net income would have declined by $3.1
million. The adjusted decline primarily reflected lower gains from the sale of
real estate assets. In the year-ago first quarter, gains totaled $5.4 million
from sales associated with residential and shopping center joint venture
projects. Those gains appear in the other income category. There were no sales
in the first quarter of 1999. The table below sets forth real estate investment
operational results and selected financial data for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1999 1998 1998 1998 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net interest income (expense) .......... $ 8 $ (209) $ (102) $ (128) $ (181)
Provision for (reduction of) loan losses -- -- -- (58) 39
Other income ........................... 1,232 3,925 4,111 5,085 9,615
Operating expense ...................... 618 777 679 203 1,047
Net intercompany income (expense) ...... (82) 18 48 (80) 121
- --------------------------------------------------------------------------------------------------------
Income before income taxes ............. 540 2,957 3,378 4,732 8,469
Income taxes ........................... 221 1,096 1,480 2,149 3,574
- --------------------------------------------------------------------------------------------------------
Net income .......................... $ 319 $ 1,861 $ 1,898 $ 2,583 $ 4,895
========================================================================================================
AT PERIOD END:
Assets:
Real estate held for investment ..... $52,155 $49,447 $47,918 $41,880 $41,123
Other ............................... 7,564 9,841 13,790 17,892 15,496
- --------------------------------------------------------------------------------------------------------
Total assets ...................... 59,719 59,288 61,708 59,772 56,619
- --------------------------------------------------------------------------------------------------------
Equity ................................. $41,484 $41,194 $39,266 $37,424 $34,817
========================================================================================================
</TABLE>
Investment in real estate and joint ventures amounted to $52 million at
March 31, 1999, compared to $49 million at December 31, 1998, and $41 million at
March 31, 1998.
For information on valuation allowances associated with real estate and
joint venture loans, see "Financial Condition - Asset Quality - Valuation
Allowances" on page 23.
13
<PAGE>
FINANCIAL CONDITION
LOANS AND MORTGAGE-BACKED SECURITIES
Total loans and mortgage-backed securities, including those held for sale,
increased $314 million during the first quarter to a total of $6.1 billion or
92.5% of assets at March 31, 1999. The increase primarily occurred in the single
family loan portfolio which increased $429 million or 9.2% during the quarter.
Of that increase, $182 million represented fixed rate loans, while subprime
loans increased $168 million. In addition, the adjustable rate portfolio
increased by $79 million, the first increase in over a year. The single family
loan portfolio increase was partially offset by a $137 million decline in loans
held for sale.
The following table sets forth loans originated (including purchases) for
investment and for sale.
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1999 1998 1998 1998 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans originated for investment:
Residential, one-to-four units:
Adjustable .......................... $ 568,891 $ 436,960 $ 383,483 $309,468 $190,490
Fixed ............................... 208,504 181,717 6,921 6,824 4,791
Other ................................. 131,045 111,484 102,319 88,013 93,672
- --------------------------------------------------------------------------------------------------------
Total loans originated for investment 908,440 730,161 492,723 404,305 288,953
Loans originated for sale (1) ............ 646,786 740,837 571,146 592,931 257,669
- --------------------------------------------------------------------------------------------------------
Total loans originated ................ $1,555,226 $1,470,998 $1,063,869 $997,236 $546,622
========================================================================================================
<FN>
(1) One-to-four unit residential loans, primarily fixed.
</FN>
</TABLE>
Originations of one-to-four unit residential loans totaled $1.424 billion
in the first quarter of 1999, of which $777 million were for portfolio and $647
million were for sale. This was 5% higher than the $1.360 billion originated in
the fourth quarter of 1998, and more than double the $453 million originated in
the year-ago quarter. Of the current quarter total, $189 million represented
originations of subprime credits as part of Downey's strategy to enhance the
portfolio's net yield. During the current quarter, 76% of Downey's residential
one-to-four unit originations represented refinancings of existing loans
(existing Downey loans were 4%). This is down slightly from 77% (existing Downey
loans were 3%) during the 1998 fourth quarter, but up from 70% (existing Downey
loans were 5%) in the year-ago first quarter. In addition to single family
loans, $131 million of other loans were originated in the quarter including $60
million of construction and land loans and $50 million of automobile loans.
During the current quarter, loan originations for investment consisted
primarily of adjustable rate mortgages ("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 allowed, expressed as a percentage of
principal plus the amount added relative to the original loan amount. That limit
has been 110%, but was increased to 125% in 1998. At March 31, 1999, $3.2
billion of the ARMs in Downey's loan portfolio were subject to negative
amortization, of which $53 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 $777 million for the first
quarter of 1999, compared to $559 million for the previous quarter and $119
million for the first quarter of 1998. All were secured by residential
one-to-four unit property and at March 31, 1999, loans held for sale totaled
$310 million.
14
<PAGE>
At March 31, 1999, Downey had commitments to fund loans amounting to $807
million, of which $419 million were fixed rate one-to-four unit residential
loans being originated for sale in the secondary market, loans in process of
$123 million, undrawn lines of credit of $77 million, purchase loans of $53
million and letters of credit of $1 million. Downey believes its current sources
of funds will enable it to meet these obligations while exceeding all regulatory
liquidity requirements.
15
<PAGE>
The following table sets forth the origination, purchase and sale activity
relating to loans and mortgage-backed securities during the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1999 1998 1998 1998 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT PORTFOLIO:
Loans originated:
Loans secured by real estate:
Residential:
One-to-four units:
Adjustable ...................................... $ 382,562 $ 303,291 $ 283,468 $ 229,106 $ 127,871
Adjustable - subprime ........................... 186,329 133,409 100,015 78,845 60,017
- --------------------------------------------------------------------------------------------------------------------------
Total adjustable .............................. 568,891 436,700 383,483 307,951 187,888
Fixed ........................................... 205,758 179,786 5,351 3,980 3,319
Fixed - subprime ................................ 2,444 1,684 1,535 1,329 1,472
Five or more units:
Adjustable ...................................... -- -- -- -- 875
Fixed ........................................... -- -- 13,229 -- --
- --------------------------------------------------------------------------------------------------------------------------
Total residential ............................. 777,093 618,170 403,598 313,260 193,554
Commercial real estate ............................. 6,398 6,149 -- -- 4,214
Construction ....................................... 30,587 45,339 17,266 19,023 29,906
Land ............................................... 29,081 9,983 23,640 6,883 7,851
Non-mortgage:
Commercial ......................................... 2,925 700 645 4,421 610
Automobile ......................................... 50,294 43,330 40,158 46,153 45,552
Other consumer ..................................... 11,760 5,983 7,016 10,738 4,537
- --------------------------------------------------------------------------------------------------------------------------
Total loans originated ............................ 908,138 729,654 492,323 400,478 286,224
Real estate loans purchased (1) ......................... 302 507 400 3,827 2,729
- --------------------------------------------------------------------------------------------------------------------------
Total loans originated and purchased ................. 908,440 730,161 492,723 404,305 288,953
Loan repayments ......................................... (434,796) (489,912) (490,358) (498,516) (376,371)
Other net changes (2) ................................... (18,824) (8,211) 553 (11,740) (14,747)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for investment . 454,820 232,038 2,918 (105,951) (102,165)
- --------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO:
Residential, one-to-four units:
Originated whole loans ............................... 646,786 740,837 571,146 592,931 257,669
Loans transferred from (to) the investment portfolio . (7,095) (3,822) -- 162 604
Originated whole loans sold .......................... (176,139) (266,812) (354,371) (429,434) (79,686)
Loans exchanged for mortgage-backed securities ....... (600,379) (291,940) (153,175) (124,505) (39,211)
Other net changes .................................... (622) (3,794) (2,851) (1,369) (97)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for sale ..... (137,449) 174,469 60,749 37,785 139,279
- --------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, net:
Received in exchange for loans ....................... 600,379 291,940 153,175 124,505 39,211
Sold ................................................. (600,379) (293,222) (153,175) (124,505) (39,211)
Repayments ........................................... (3,235) (4,143) (4,242) (3,724) (3,020)
Other net changes .................................... 46 (560) 127 (13) (296)
- --------------------------------------------------------------------------------------------------------------------------
Net decrease in mortgage-backed securities available
for sale ........................................ (3,189) (5,985) (4,115) (3,737) (3,316)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans and mortgage-backed
securities held for sale and available for sale . (140,638) 168,484 56,634 34,048 135,963
- --------------------------------------------------------------------------------------------------------------------------
Total net increase (decrease) in loans and
mortgage-backed securities ...................... $ 314,182 $ 400,522 $ 59,552 $ (71,903) $ 33,798
==========================================================================================================================
<FN>
(1) Primarily one-to-four unit residential loans. Included in the three months
ended September 30, 1998, June 30, 1998, and March 31, 1998 were $0.4
million, $0.2 million and $0.1 million, respectively, of five or more unit
residential loans. Included also in the three months ended June 30, 1998
were $0.6 million of commercial real estate loans.
(2) Primarily includes borrowings against and repayments of lines of credit and
construction loans, changes in loss allowances, loans transferred to real
estate acquired in settlement of loans or from (to) the held for sale
portfolio, and interest capitalized on loans (negative amortization).
</FN>
</TABLE>
16
<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) 1999 1998 1998 1998 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT PORTFOLIO:
Loans secured by real estate:
Residential:
One-to-four units:
Adjustable ............................. $3,800,552 $3,721,728 $3,791,187 $3,892,221 $4,027,520
Adjustable - subprime .................. 745,843 580,232 461,646 372,608 303,058
Fixed .................................. 507,357 325,454 153,408 155,741 161,518
Fixed - subprime ....................... 10,932 8,719 7,516 5,993 4,672
- ------------------------------------------------------------------------------------------------------------------------------
Total one-to-four units ............. 5,064,684 4,636,133 4,413,757 4,426,563 4,496,768
Five or more units:
Adjustable ............................. 18,516 18,617 18,707 18,802 30,129
Fixed .................................. 7,904 21,412 22,436 8,934 8,748
Commercial real estate:
Adjustable ............................... 39,641 39,360 44,215 47,045 73,013
Fixed .................................... 111,606 101,430 112,687 114,379 118,476
Construction ................................ 147,246 127,761 92,779 95,664 89,989
Land ........................................ 74,959 44,859 39,222 29,857 32,510
Non-mortgage:
Commercial .................................. 28,182 28,293 27,710 27,298 25,478
Automobile .................................. 363,168 357,988 355,955 356,504 350,316
Other consumer .............................. 40,607 41,894 44,026 44,530 45,529
- ------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment .......... 5,896,513 5,417,747 5,171,494 5,169,576 5,270,956
Increase (decrease) for:
Undisbursed loan funds ...................... (133,785) (108,414) (88,213) (85,367) (78,888)
Net deferred costs and premiums ............. 33,515 31,021 24,962 21,408 19,581
Allowance for estimated loss ................ (32,586) (31,517) (31,444) (31,736) (31,817)
- ------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment, net ..... 5,763,657 5,308,837 5,076,799 5,073,881 5,179,832
- ------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO, NET:
Loans held for sale (all one-to-four units):
Adjustable .................................. -- 7,975 9,480 13,692 10,019
Fixed ....................................... 309,933 439,407 263,433 198,472 164,360
- ------------------------------------------------------------------------------------------------------------------------------
Total loans held for sale ................ 309,933 447,382 272,913 212,164 174,379
Mortgage-backed securities available for sale:
Adjustable .................................. 9,887 10,996 12,795 14,575 16,135
Fixed ....................................... 19,070 21,150 25,336 27,671 29,848
- ------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities available
for sale ............................... 28,957 32,146 38,131 42,246 45,983
- ------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities
held for sale and available for sale ... 338,890 479,528 311,044 254,410 220,362
- ------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities $6,102,547 $5,788,365 $5,387,843 $5,328,291 $5,400,194
==============================================================================================================================
</TABLE>
Loans held for sale are carried at the lower of cost or market. At March
31, 1999, 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, 1999, reflect an unrealized gain of $0.2 million. The current
quarter-end unrealized gain, less the associated tax effect of $0.1 million, is
reflected within a separate component of other comprehensive income until
realized.
17
<PAGE>
DEPOSITS
At March 31, 1999, deposits totaled $5.2 billion, up $96 million or 1.9%
from the year-ago quarter end, and up $166 million or 3.3% from year-end 1998.
Compared to the year-ago period, transaction accounts (i.e., checking, regular
passbook and money market) increased $306 million or 30.4%, while certificates
of deposits decreased $210 million or 5.1%. The following table sets forth
information concerning Downey's deposits and average rates paid at the dates
indicated.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998 September 30, 1998 June 30, 1998 March 31, 1998
---------------------------------------------------------------------------------------------------
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 ... 2.34% $1,313,707 2.30% $1,238,062 2.18% $1,080,734 2.17% $1,021,428 2.10% $1,007,323
Certificates of deposit:
Less than 3.00% ..... 2.60 23,324 2.62 25,126 2.63 26,686 2.63 27,290 2.63 29,543
3.00-3.49 ........... 3.01 323 3.01 593 3.03 449 3.02 677 3.01 581
3.50-3.99 ........... 3.91 47,813 3.88 51,474 3.91 40,115 -- -- -- --
4.00-4.49 ........... 4.39 604,692 4.39 428,316 4.16 14,754 4.13 59,708 4.20 60,410
4.50-4.99 ........... 4.80 1,004,947 4.80 668,204 4.88 468,922 4.90 208,774 4.89 134,194
5.00-5.99 ........... 5.41 2,015,702 5.53 2,421,333 5.57 3,162,420 5.60 3,072,092 5.63 2,947,539
6.00-6.99 ........... 6.06 192,320 6.06 204,065 6.06 382,502 6.05 778,300 6.06 925,762
7.00 and greater .... 7.24 2,454 7.24 2,560 7.25 2,798 7.24 3,107 7.21 3,470
- ----------------------------------------------------------------------------------------------------------------------------
Total certificates
of deposit ...... 5.09 3,891,575 5.26 3,801,671 5.50 4,098,646 5.61 4,149,948 5.66 4,101,499
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits .... 4.40% $5,205,282 4.53% $5,039,733 4.81% $5,179,380 4.93% $5,171,376 4.96% $5,108,822
============================================================================================================================
</TABLE>
BORROWINGS
During the 1999 first quarter, borrowings increased $148 million to $851
million, primarily reflecting increases in FHLB advances. This followed an
increase of $494 million during the fourth quarter of 1998 when Downey took
advantage of obtaining long-term advances from the FHLB at attractive borrowing
rates. 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) 1999 1998 1998 1998 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FHLB advances .................................. $842,677 $695,012 $197,935 $123,347 $209,854
Other borrowings:
Commercial paper ........................... -- -- -- 19,982 44,517
Other borrowings ........................... 8,638 8,708 12,166 12,256 12,712
- ----------------------------------------------------------------------------------------------------------------
Total borrowings ......................... $851,315 $703,720 $210,101 $155,585 $267,083
- ----------------------------------------------------------------------------------------------------------------
Weighted average rate on borrowings during
the period ................................. 5.36% 5.61% 5.91% 6.60% 6.42%
Total borrowings as a percentage of total assets 12.91 11.22 3.55 2.67 4.55
================================================================================================================
</TABLE>
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
interest rates. Downey's market risk arises primarily from interest rate risk in
its lending and deposit taking activities. This interest rate risk occurs to the
degree that interest-bearing liabilities reprice or mature more rapidly or on a
different basis than interest-earning assets. Since Downey's earnings depend
primarily on its net interest income, which is the difference between the
interest and dividends earned on interest-earning assets and the interest paid
on interest-bearing liabilities, a principal objective of Downey is to actively
monitor and manage the effects of adverse changes in interest rates on net
interest income while maintaining asset quality. There has been no significant
change in market risk since December 31, 1998.
18
<PAGE>
The following table sets forth the repricing frequency of Downey's major
asset and liability categories as of March 31, 1999, as well as certain
information regarding the repricing and maturity differences between
interest-earning assets and interest-bearing liabilities ("GAP") in future
periods. The repricing frequencies have been determined by reference to
projected maturities, based upon contractual maturities as adjusted for
scheduled repayments and "repricing mechanisms" (provisions for changes in the
interest and dividend rates of assets and liabilities). Prepayment rates are
assumed on substantially all of Downey's loan portfolio based upon its
historical loan prepayment experience and anticipated future prepayments.
Repricing mechanisms on certain of Downey's assets are subject to limitations,
such as caps on the amount that interest rates and payments on Downey's loans
may adjust, and accordingly, such assets do not normally respond as completely
or rapidly as Downey's liabilities to changes in market interest rates. The
interest rate sensitivity of Downey's assets and liabilities illustrated in the
table would vary substantially if different assumptions were used or if actual
experience differed from the assumptions set forth.
<TABLE>
<CAPTION>
March 31, 1999
---------------------------------------------------------------------------
Within 7 - 12 2 - 5 6 - 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) $ 111,157 $ 10,064 $ 90,169 $ -- $ -- $ 211,390
Loans and mortgage-backed securities:
Mortgage-backed securities .........(2) 15,047 4,638 8,542 684 46 28,957
Loans secured by real estate:
Residential:
Adjustable .....................(2) 4,462,219 106,564 9,648 -- -- 4,578,431
Fixed ..........................(2) 372,615 52,856 243,085 106,924 61,709 837,189
Commercial real estate ...........(2) 44,942 7,486 88,244 5,771 1,896 148,339
Construction .....................(2) 52,916 -- -- -- -- 52,916
Land .............................(2) 41,073 34 293 448 224 42,072
Non-mortgage:
Commercial .......................(2) 17,053 -- -- -- -- 17,053
Consumer .........................(2) 120,240 75,286 202,064 -- -- 397,590
- --------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed
securities ........................ 5,126,105 246,864 551,876 113,827 63,875 6,102,547
- --------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ...... $5,237,262 $ 256,928 $642,045 $113,827 $ 63,875 $6,313,937
==========================================================================================================================
Deposits and borrowings:
Interest-bearing deposits:
Fixed maturity deposits ............(1) $2,328,096 $ 1,274,626 $288,853 $ -- $ -- $3,891,575
Transaction accounts ...............(3) 1,152,738 -- -- -- -- 1,152,738
Non-interest-bearing transaction
accounts ............................. 160,969 -- -- -- -- 160,969
- --------------------------------------------------------------------------------------------------------------------------
Total deposits ........................ 3,641,803 1,274,626 288,853 -- -- 5,205,282
- --------------------------------------------------------------------------------------------------------------------------
Borrowings ............................. 301,471 17,744 101,100 431,000 -- 851,315
- --------------------------------------------------------------------------------------------------------------------------
Total deposits and borrowings ......... $3,943,274 $ 1,292,370 $389,953 $ 431,000 $ -- $6,056,597
==========================================================================================================================
Excess (shortfall) of interest-earning
assets over interest-bearing liabilities.. $1,293,988 $(1,035,442) $252,092 $(317,173) $ 63,875 $ 257,340
Cumulative gap ............................. 1,293,988 258,546 510,638 193,465 257,340
Cumulative gap - as a % of total assets:
March 31, 1999 ......................... 19.62% 3.92% 7.74% 2.93% 3.90%
December 31, 1998 ...................... 23.84 7.48 9.07 3.40 4.00
March 31, 1998 ......................... 25.50 2.57 2.70 3.65 4.07
==========================================================================================================================
<FN>
(1) Based upon contractual maturity and repricing date.
(2) Based upon contractual maturity, repricing date and projected repayment and
prepayments of principal. (3) Subject to immediate repricing.
</FN>
</TABLE>
Downey's six-month gap at March 31, 1999, was a positive 19.62% (i.e., more
interest-earning assets reprice within six months than interest-bearing
liabilities). This compares to a positive six-month gap of 23.84% at December
31, 1998,
19
<PAGE>
and 25.50% at March 31, 1998. Downey's strategy of emphasizing the origination
of adjustable rate mortgages continues to be pursued. For the twelve months
ended March 31, 1999, Downey originated and purchased for investment $2.0
billion of adjustable rate loans and mortgage-backed securities which
represented approximately 80% of all loans and mortgage-backed securities
originated and purchased for investment during the period.
At March 31, 1999, 97% of Downey's interest-earning assets mature, reprice
or are estimated to prepay within five years, down slightly from 98% at both
December 31, 1998 and March 31, 1998. At March 31, 1999, loans and
mortgage-backed securities with adjustable interest rates represented 79% of
Downey's loans and mortgage-backed securities portfolios. During the first
quarter of 1998, Downey continued to offer residential fixed rate loan products
to its customers primarily for sale in the secondary market. Downey prices and
originates such fixed rate mortgage loans for sale into the secondary market in
order to increase opportunities for originating ARMs and generate fee and
servicing income. Downey does originate fixed rate loans for portfolio to
facilitate the sale of real estate acquired in settlement of loans and which
meet certain yield and other approved guidelines.
At March 31, 1999, $5.3 billion or 86% 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
$5.0 billion or 92% and $5.1 billion or 92%, at December 31, 1998, and March 31,
1998, 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,
1999 1998 1998 1998 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted average yield:
Loans and mortgage-backed securities 7.59% 7.72% 7.82% 7.91% 7.94%
FHLB stock ......................... 5.29 5.44 5.86 5.88 5.89
Investment securities .............. 5.61 5.40 5.77 5.81 5.83
- ------------------------------------------------------------------------------------------------------
Earning assets yield ............. 7.52 7.65 7.73 7.82 7.86
- ------------------------------------------------------------------------------------------------------
Weighted average cost:
Deposits ........................... 4.40 4.53 4.81 4.93 4.96
Borrowings:
FHLB advances .................... 5.30 5.47 5.85 6.18 6.17
Other borrowings ................. 8.70 8.69 8.36 6.56 6.19
- ------------------------------------------------------------------------------------------------------
Combined borrowings ................ 5.33 5.51 6.00 6.26 6.17
- ------------------------------------------------------------------------------------------------------
Combined funds ..................... 4.53 4.66 4.86 4.97 5.02
- ------------------------------------------------------------------------------------------------------
Interest rate spread .................. 2.99% 2.99% 2.87% 2.85% 2.84%
======================================================================================================
</TABLE>
The period end weighted average yield on the loan and mortgage-backed
securities portfolios at March 31, 1999, was 7.59%, down from 7.72% and 7.94% at
December 31, 1998 and March 31, 1998, respectively. At March 31, 1999, the
single family ARM portfolio, including mortgage-backed securities, totaled $4.6
billion with a weighted average rate of 7.35%, compared to $4.3 billion with a
weighted average rate of 7.53% at December 31, 1998, and $4.4 billion with a
weighted average rate of 7.65% at March 31, 1998.
ASSET QUALITY
Non-Performing Assets
Non-performing assets increased during the quarter by $3 million to $30
million at March 31, 1999 or 0.46% of total assets. The increase primarily
occurred in single family subprime credits, which totaled 0.58% of such loans .
Non-performing assets at quarter end include non-accrual loans aggregating $1
million which were not contractually past due, but were deemed non-accrual due
to management's assessment of the borrower's ability to pay.
20
<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) 1999 1998 1998 1998 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential, one-to-four units .................. $16,579 $15,571 $15,397 $19,047 $17,736
Residential, one-to-four units - subprime ....... 4,379 1,975 2,479 1,107 832
Other ........................................... 4,127 4,829 20,677 20,259 20,060
- --------------------------------------------------------------------------------------------------------------------
Total non-accrual loans ....................... 25,085 22,375 38,553 40,413 38,628
Real estate acquired in settlement of loans ......... 4,686 4,475 5,423 7,576 10,414
Repossessed automobiles ............................. 319 569 611 764 688
- --------------------------------------------------------------------------------------------------------------------
Gross non-performing assets ..................... $30,090 $27,419 $44,587 $48,753 $49,730
====================================================================================================================
Allowance for loan losses (1):
Amount .......................................... $32,586 $31,517 $31,444 $31,736 $31,817
As a percentage of non-performing loans ......... 129.90% 140.86% 81.56% 78.53% 82.37%
Non-performing assets as a percentage of total assets 0.46 0.44 0.75 0.84 0.85
====================================================================================================================
<FN>
(1) Allowance for loan losses does not include the allowance for real estate
and real estate acquired in settlement of loans.
</FN>
</TABLE>
At March 31, 1999, the recorded investment in loans for which impairment
has been recognized totaled $13 million. The total allowance for possible losses
related to such loans was $1 million. During the first quarter of 1999, total
interest recognized on the impaired loan portfolio was $0.5 million.
Delinquent Loans
During the 1999 first quarter, total delinquencies decreased by $2 million
or 4.9%. The decrease occurred primarily in the one-to-four units residential
and automobile categories, which both declined by $2 million. Those declines
were partially offset by an increase in the one-to-four units - subprime
category of $3 million, with total subprime delinquencies equaling 0.64% of
related loans. As a percentage of total loans outstanding, total delinquencies
were 0.58% at the end of the 1999 first quarter, compared to 0.65% at year-end
1998 and 0.78% a year ago.
21
<PAGE>
The following table indicates the amounts of Downey's past due loans at the
dates indicated.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
----------------------------------------- -----------------------------------------
30-59 60-89 90+ 30-59 60-89 90+
(Dollars in Thousands) Days Days Days (1) Total Days Days Days (1) Total
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units .............. $ 8,463 $4,700 $13,180 $26,343 $ 9,841 $6,014 $12,832 $28,687
One-to-four units - subprime ... 1,177 2,281 1,385 4,843 244 784 947 1,975
Five or more units ............. -- -- -- -- -- -- 155 155
Commercial real estate ........... -- -- -- -- -- -- -- --
Construction ..................... -- -- -- -- -- -- -- --
Land ............................. -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total real estate loans ........ 9,640 6,981 14,565 31,186 10,085 6,798 13,934 30,817
Non-mortgage:
Commercial ....................... -- -- -- -- -- -- -- --
Automobile ....................... 3,248 383 1,000 4,631 4,650 888 1,048 6,586
Other consumer ................... 144 76 226 446 334 45 344 723
- ------------------------------------------------------------------------------------------------------------------------------
Total loans .................... $13,032 $7,440 $15,791 $36,263 $15,069 $7,731 $15,326 $38,126
==============================================================================================================================
Delinquencies as a percentage of total
loans ............................ 0.21% 0.12% 0.25% 0.58% 0.26% 0.13% 0.26% 0.65%
==============================================================================================================================
September 30, 1998 June 30, 1998
----------------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units .............. $10,601 $4,302 $12,408 $27,311 $12,500 $5,271 $14,497 $32,268
One-to-four units - subprime ... 741 1,334 505 2,580 535 -- 762 1,297
Five or more units ............. 155 -- -- 155 -- -- -- --
Commercial real estate ........... -- -- -- -- -- -- -- --
Construction ..................... -- -- -- -- -- -- -- --
Land ............................. -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total real estate loans ........ 11,497 5,636 12,913 30,046 13,035 5,271 15,259 33,565
Non-mortgage:
Commercial ....................... -- -- -- -- -- -- -- --
Automobile ....................... 5,330 1,105 990 7,425 4,795 860 819 6,474
Other consumer ................... 119 143 496 758 222 208 227 657
- ------------------------------------------------------------------------------------------------------------------------------
Total loans .................... $16,946 $6,884 $14,399 $38,229 $18,052 $6,339 $16,305 $40,696
==============================================================================================================================
Delinquencies as a percentage of total
loans ............................ 0.31% 0.13% 0.26% 0.70% 0.34% 0.12% 0.30% 0.76%
==============================================================================================================================
March 31, 1998
-----------------------------------------
<S> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units .............. $14,532 $6,096 $14,487 $35,115
One-to-four units - subprime ... 287 359 186 832
Five or more units ............. 222 -- -- 222
Commercial real estate ........... 241 -- -- 241
Construction ..................... -- -- -- --
Land ............................. -- -- -- --
- ----------------------------------------------------------------------------------
Total real estate loans ........ 15,282 6,455 14,673 36,410
Non-mortgage:
Commercial ....................... -- -- -- --
Automobile ....................... 4,005 946 716 5,667
Other consumer ................... 73 57 457 587
- ----------------------------------------------------------------------------------
Total loans .................... $19,360 $7,458 $15,846 $42,664
==================================================================================
Delinquencies as a percentage of total
loans ............................ 0.35% 0.14% 0.29% 0.78%
==================================================================================
<FN>
(1) All 90 day or greater delinquencies are on non-accrual status and reported
as part of non-performing assets.
</FN>
</TABLE>
22
<PAGE>
Valuation Allowances
Allowances for losses on all assets were $41 million, $40 million and $51
million, at March 31, 1999, December 31, 1998, and March 31, 1998, respectively.
The total allowance for possible loan losses was $33 million at March 31,
1999, compared to $32 million at both December 31, 1998, and at March 31, 1998.
Included in the current quarter-end total allowance was $32 million of general
loan valuation allowances, of which $3 million represents an unallocated
portion. These general loan valuation allowances may be included as a component
of risk-based capital, up to a maximum of 1.25% of risk-weighted assets. Net
charge-offs totaled $1.3 million in the 1999 first quarter, compared to $0.5
million in the year-ago quarter. The year-ago quarter included a $1.4 million
recovery from the previously mentioned settlement. Adjusting the year-ago
results to exclude that recovery, net charge-offs would have been down $0.6
million between first quarters. Included in the current quarter net charge-offs
were $0.1 million associated with one-to-four unit residential loans and $1.2
million associated with automobile loans.
The following table is a summary of the activity of Downey's allowance for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 1999 1998 1998 1998 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $31,517 $31,444 $31,736 $31,817 $32,092
Provision .................... 2,381 1,180 985 1,462 272
Charge-offs .................. (1,520) (1,574) (1,540) (1,877) (2,381)
Recoveries (1) ............... 208 467 263 334 1,834
- -------------------------------------------------------------------------------------------
Balance at end of period ..... $32,586 $31,517 $31,444 $31,736 $31,817
- -------------------------------------------------------------------------------------------
<FN>
(1) The first quarter of 1998 includes a $1.4 million recovery of a prior
commercial real estate loan charge-off due to the previously mentioned
settlement.
</FN>
</TABLE>
23
<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, 1999 December 31, 1998 September 30, 1998
------------------------------------------------------------------------------------------------
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 ........... $15,735 $5,064,684 0.31% $14,299 $4,636,133 0.31% $13,603 $4,413,757 0.31%
Five or more units .......... 299 26,420 1.13 401 40,029 1.00 409 41,143 0.99
Commercial real estate ........ 2,729 151,247 1.80 2,632 140,790 1.87 3,656 156,902 2.33
Construction .................. 1,732 147,246 1.18 1,508 127,761 1.18 1,087 92,779 1.17
Land .......................... 944 74,959 1.26 568 44,859 1.27 498 39,222 1.27
Non-Mortgage:
Commercial .................... 202 28,182 0.72 218 28,293 0.77 204 27,710 0.74
Automobile .................... 7,566 363,168 2.08 8,344 357,988 2.33 8,349 355,955 2.35
Other consumer ................ 579 40,607 1.43 747 41,894 1.78 838 44,026 1.90
Not specifically allocated ....... 2,800 -- -- 2,800 -- -- 2,800 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment $32,586 $5,896,513 0.55% $31,517 $5,417,747 0.58% $31,444 $5,171,494 0.61%
====================================================================================================================================
June 30, 1998 March 31, 1998
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential:
One-to-four units ........... $14,143 $4,426,563 0.32% $13,960 $4,496,768 0.31%
Five or more units .......... 309 27,736 1.11 399 38,877 1.03
Commercial real estate ........ 3,766 161,424 2.33 4,118 191,489 2.15
Construction .................. 1,137 95,664 1.19 1,072 89,989 1.19
Land .......................... 382 29,857 1.28 415 32,510 1.28
Non-Mortgage:
Commercial .................... 199 27,298 0.73 192 25,478 0.75
Automobile .................... 8,272 356,504 2.32 8,105 350,316 2.31
Other consumer ................ 728 44,530 1.63 756 45,529 1.66
Not specifically allocated ....... 2,800 -- -- 2,800 -- --
- --------------------------------------------------------------------------------------------------
Total loans held for investment $31,736 $5,169,576 0.61% $31,817 $5,270,956 0.60%
==================================================================================================
</TABLE>
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) 1999 1998 1998 1998 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $7,717 $8,151 $ 9,558 $18,140 $21,244
Provision (reduction) ........ 53 (214) (139) (2,221) (2,722)
Charge-offs .................. -- (220) (1,268) (6,361) (382)
Recoveries ................... -- -- -- -- --
- ----------------------------------------------------------------------------------------------
Balance at end of period ..... $7,770 $7,717 $ 8,151 $ 9,558 $18,140
==============================================================================================
</TABLE>
24
<PAGE>
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) 1999 1998 1998 1998 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $533 $582 $ 671 $ 898 $ 839
Provision (reduction) ........ 26 (14) 160 5 304
Charge-offs .................. (12) (35) (249) (232) (245)
Recoveries ................... -- -- -- -- --
- --------------------------------------------------------------------------------------------
Balance at end of period ..... $547 $533 $ 582 $ 671 $ 898
============================================================================================
</TABLE>
CAPITAL RESOURCES AND LIQUIDITY
The primary sources of funds generated in the first quarter of 1999 were
principal repayments (including prepayments, but excluding Downey refinances) on
loans and mortgage-backed securities held for investment and available for sale
of $387 million and net increases in deposits and borrowings of $166 million and
$148 million, respectively. In addition, loans held for sale declined by $137
million.
These funds were used primarily to originate loans held for investment of
$855 million (net of Downey refinances of $52 million).
At March 31, 1999 and December 31, 1998, the Bank's ratio of regulatory
liquidity was 4.0%, compared to 4.6% at March 31, 1998.
Stockholders' equity totaled $490 million at March 31, 1999, compared to
$481 million at December 31, 1998, and $446 million at March 31, 1998.
REGULATORY CAPITAL
The following table is a reconciliation of the Bank's stockholder's equity
to federal regulatory capital as of March 31, 1999. The core and tangible
capital ratios were 6.63% and the risk-based capital ratio was 12.49%. The
Bank's capital ratios exceed the "well capitalized" standards of 5% for core 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 ................................ $480,040 $480,040 $480,040
Adjustments:
Deductions:
Investment in subsidiary, primarily real estate . (42,477) (42,477) (42,477)
Goodwill ........................................ (4,425) (4,425) (4,425)
Non-permitted mortgage servicing rights ......... (1,571) (1,571) (1,571)
Additions:
Unrealized gains on securities available for sale (305) (305) (305)
General loss allowance - Investment in DSL ...... 1,451 1,451 1,451
Loan general valuation allowances (1) ........... -- -- 32,164
- ---------------------------------------------------------------------------------------------------------------------------
Regulatory capital .................................. 432,713 6.63% 432,713 6.63% 464,877 12.49%
Well capitalized requirement ........................ 97,898 1.50 (2) 326,327 5.00 372,277 10.00 (3)
- ---------------------------------------------------------------------------------------------------------------------------
Excess .............................................. $334,815 5.13% $106,386 1.63% $ 92,600 2.49%
===========================================================================================================================
<FN>
(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 11.62%.
</FN>
</TABLE>
25
<PAGE>
YEAR 2000
Risks of the Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using
two digits rather than four digits to represent the calendar year (e.g., "99"
for "1999"). Software so developed, and not corrected, could produce inaccurate
or unpredictable results or system failures commencing January 1, 2000, when
dates present a lower two digit year number than dates in the prior century.
Such occurrences may have a material adverse effect on Downey's financial
condition, results of operation, business or business prospects, as Downey, like
most financial organizations, is significantly subject to the potential impact
of the Year 2000 issue due to the nature of financial information. Potential
impacts to Downey may arise from software, computer hardware, and other
equipment both within Downey's direct control and outside Downey's ownership,
yet with which Downey electronically or operationally interfaces. Financial
institution regulators have intensively focused upon Year 2000 exposures,
issuing guidance concerning the responsibilities of management and the board of
directors. Year 2000 testing and certification is being addressed as a key
safety and soundness issue in conjunction with regulatory exams and the OTS has
authority to bring enforcement actions against any institution under its
supervision which it believes is not properly addressing Year 2000 compliance
issues.
State of Readiness
Downey has established a four-phase process to address the Year 2000 issue.
In addition, Downey's Board of Directors oversees the Year 2000 compliance
project's progress through monthly status reports and quarterly reviews with the
Year 2000 project manager.
As part of the first phase, which is now completed, Downey inventoried all
of its data systems to determine which are most critical to support customer
transaction processing and provide customer services. This inventory not only
included in-house systems, but those provided by third party vendors as well.
Systems were prioritized as being mission critical, high risk, moderate risk or
low risk, from which modification plans were developed which place priority
emphasis on those systems requiring change and classified mission critical or
high risk. Third party vendors were contacted during this phase to determine
their process and timeline in correcting any Year 2000 compliance issues. In
addition, commercial loan borrowers of Downey were also contacted to determine
the extent of their preparations for Year 2000 and any potential impact Year
2000 may have on their businesses and ability to repay loan obligations to
Downey. Commercial lending does not represent a significant portion of Downey's
loan portfolio (i.e., approximately 0.3%); therefore, Downey believes the Year
2000 preparedness of its commercial loan borrowers does not pose a significant
risk.
Phase two of the process consists of making appropriate Year 2000
programming changes to Downey's in-house systems, while phase three consists of
acceptance testing and sign-off of both Downey's in-house and vendor provided
systems. The fourth and final phase of the Year 2000 compliance project includes
installation of the system modifications into Downey's daily operation. The
fourth phase is scheduled to occur once a system has been successfully tested
and determined to be Year 2000 compliant.
By the end of 1998, programming was completed and acceptance testing was
substantially completed for Downey's in-house mainframe system. At the end of
the first quarter 1999, Downey completed acceptance testing and installation of
the in-house mainframe system, which performs all significant loan, deposit, and
general ledger accounting processes.
For Downey developed PC-based systems classified mission critical, all
programming changes and acceptance testing have been completed. Completion of
programming and acceptance testing of all other Downey developed PC-based
systems is expected to be completed by the end of second quarter 1999, as is the
installation of Year 2000 modifications.
The timing of Year 2000 acceptance testing and installation of all third
party vendor changes is dependent upon when such systems become available to
Downey. Downey has in place a process to monitor third party vendor progress in
making required Year 2000 corrections and, when completed, requires third party
vendors to represent that their systems are Year 2000 compliant. Although such
vendor representations are requested, Downey does not intend to rely solely upon
them. Rather, Downey intends to test such vendor programs or review testing
conducted by others for Year 2000 compliance.
26
<PAGE>
In addition to the computer systems utilized by Downey, Downey has also
inventoried other essential services that may be impacted by Year 2000 issues
such as telecommunications and utilities. Downey is monitoring such essential
service providers to determine their progress and how they are addressing Year
2000 issues. To date, no information exists to suggest such essential services
will not be Year 2000 compliant.
Costs to Address the Year 2000 Issue
Currently Downey estimates that Year 2000 project costs will approximate
$6.5 million. This cost is in addition to existing personnel who are working on
the Year 2000 compliance project and includes estimates for hardware and
software renovation or replacement, as well as additions to existing staff who
will be specifically devoted to the project. Approximately 50% of the Year 2000
compliance project cost represents costs to migrate to a new personal computer
environment and to replace certain older automated teller machines, both of
which Downey might otherwise have implemented or replaced during the period
notwithstanding the Year 2000 issue. As such, that portion of Year 2000 costs
will be amortized over the useful life of the equipment. Of the estimated total
expense, approximately $2.4 million has been incurred to-date, $0.1 million in
1997, $1.8 million in 1998 and $0.5 million during the first three months of
1999. The table below summarizes by year the estimated amount and anticipated
timing of the planned Year 2000 expense.
<TABLE>
<CAPTION>
(In Millions) 1997 1998 1999 2000 Thereafter Total
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Estimated Year 2000 expense $0.1 $1.8 $2.8 $1.0 $0.8 $6.5
==============================================================================
</TABLE>
As Downey progresses in addressing the Year 2000 compliance project and
additional information becomes available, estimates of costs could change. At
this time, no significant data system projects have been delayed as a result of
Downey's Year 2000 compliance effort.
Contingency Plans
Downey believes its Year 2000 compliance project should enable it to be
successful in modifying its computer systems to be Year 2000 compliant. As
previously stated, acceptance testing and installation with respect to Downey's
in-house mainframe system which performs all significant loan, deposit and
general ledger accounting processes was completed by the end of first quarter
1999. In addition to Year 2000 compliance system modification plans, Downey has
also developed contingency plans for all other systems classified as mission
critical and high risk. These contingency plans provide timetables to pursue
various alternatives based upon the failure of a system to be adequately
modified or sufficiently tested and validated to ensure Year 2000 compliance.
However, there can be no assurance that either the compliance process or
contingency plans will avoid partial or total system interruptions or the costs
necessary to update hardware and software would not have a material adverse
effect upon Downey's financial condition, results of operation, business or
business prospects.
27
<PAGE>
PART II - OTHER INFORMATION
Item 5 - Other Information
(A) See attached press release dated April 30, 1999 anouncing a new director.
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits.
99.1 Press release dated April 30, 1999 announcing new director.
(B) There were no reports on Form 8-K for the three months ended March 31, 1999.
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, 1999 /s/ DANIEL D. ROSENTHAL
-----------------------------------------------------
Daniel D. Rosenthal
President and Chief Executive Officer
Date: May 4, 1999 /s/ THOMAS E. PRINCE
-----------------------------------------------------
Thomas E. Prince
Executive Vice President and Chief Financial Officer
28
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 11,357
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 39,204
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 144,274
<INVESTMENTS-CARRYING> 6,764
<INVESTMENTS-MARKET> 6,745
<LOANS> 6,073,590
<ALLOWANCE> 32,586
<TOTAL-ASSETS> 6,594,092
<DEPOSITS> 5,205,282
<SHORT-TERM> 319,215
<LIABILITIES-OTHER> 47,089
<LONG-TERM> 532,100
0
0
<COMMON> 281
<OTHER-SE> 490,125
<TOTAL-LIABILITIES-AND-EQUITY> 6,594,092
<INTEREST-LOAN> 110,731
<INTEREST-INVEST> 3,163
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 113,894
<INTEREST-DEPOSIT> 55,489
<INTEREST-EXPENSE> 9,449
<INTEREST-INCOME-NET> 48,956
<LOAN-LOSSES> 2,381
<SECURITIES-GAINS> 97
<EXPENSE-OTHER> 36,457
<INCOME-PRETAX> 21,460
<INCOME-PRE-EXTRAORDINARY> 12,348
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,348
<EPS-PRIMARY> .44
<EPS-DILUTED> .44
<YIELD-ACTUAL> 7.52
<LOANS-NON> 25,085
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 269
<ALLOWANCE-OPEN> 31,517
<CHARGE-OFFS> 1,520
<RECOVERIES> 208
<ALLOWANCE-CLOSE> 32,586
<ALLOWANCE-DOMESTIC> 32,586
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,800
</TABLE>
For Further Information Contact
Thomas E. Prince
Chief Financial Officer
(949) 509-4440
DOWNEY FINANCIAL CORP. ANNOUNCES NEW DIRECTOR
Newport Beach, California - April 30, 1999. Maurice L. McAlister, Chairman
of the Board of Downey Financial Corp. (NYSE/PSE: DSL), announced today that
Michael Abrahams has been elected a director of the boards of both Downey
Financial Corp. and Downey Savings and Loan Association, F.A., increasing both
Board's memberships to eight directors.
Commenting on Mr. Abrahams' appointment, Mr. McAlister stated: "Michael
Abrahams brings a wealth of professional and financial experience that will be
of value to the Company. Michael Abrahams' professional experience in investment
banking, as a senior financial analyst and experience in government will
strengthen and assist the Board of Directors in evaluating future opportunities
for the Company."
Most recently, Michael Abrahams worked as a senior research analyst for
Sutro & Co. from 1996 to 1999 and prior thereto was a Senior Vice President with
Oppenheimer & Co., Inc. from 1991 to 1996. Michael Abrahams was a Vice President
with Bateman Eichler, Hill Richards from 1988 to 1991 and was with Johnston,
Lemon & Co. in Washington, DC from 1986 to 1988 as a securities analyst. Michael
Abrahams worked as policy analyst in the Executive Office of the President,
Office of Management and Budget, Washington, DC from 1981 to 1986. While working
there, Mr. Abrahams provided the White House and senior members of the Reagan
Administration with analyses and proposals to implement the President's
deregulatory mandate, with a primary focus on the deregulation of the banking
and thrift industries. Michael Abrahams was an Assistant Professor of Economics
at the Iowa State University from 1980 to 1981. Mr. Abrahams obtained his Ph.D.
in economics from the University of California, Berkeley in 1980 and graduated
from the University of California, Santa Barbara in 1973 with a degree in
economics and political science.
Downey Financial Corp., headquartered in Newport Beach, California, has
assets of $6.6 billion and is the parent company of Downey Savings and Loan
Association, F.A., which has 97 branches throughout California.
