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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, 2001
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, 2001, 28,211,048 shares of the Registrant's Common Stock,
$0.01 par value were outstanding.
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DOWNEY FINANCIAL CORP.
MARCH 31, 2001 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............................ 10
PART II
OTHER INFORMATION.......................................................... 34
Item 6 Exhibits and Reports on Form 8-K..................... 34
i
PART I - FINANCIAL INFORMATION
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31, March 31,
(Dollars in Thousands, Except Per Share Data) 2001 2000 2000
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ASSETS
Cash .......................................................................... $ 114,316 $ 108,202 $ 84,459
Federal funds ................................................................. 7,601 19,601 20,200
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Cash and cash equivalents ................................................. 121,917 127,803 104,659
U.S. Treasury securities, agency obligations and other investment securities
available for sale, at fair value ......................................... 255,891 305,615 191,085
Municipal securities held to maturity, at amortized cost (estimated
market value of $6,534 at March 31, 2001 and December 31, 2000, and $6,709
at March 31, 2000) ........................................................ 6,550 6,550 6,727
Loans held for sale, at lower of cost or market ............................... 446,264 251,572 157,717
Mortgage-backed securities available for sale, at fair value .................. 5,842 10,203 18,818
Loans receivable held for investment .......................................... 9,820,116 9,822,578 9,104,094
Investments in real estate and joint ventures ................................. 18,690 17,641 40,571
Real estate acquired in settlement of loans ................................... 11,634 9,942 7,115
Premises and equipment ........................................................ 104,138 104,178 106,526
Federal Home Loan Bank stock, at cost ......................................... 108,223 106,356 107,637
Mortgage servicing rights, net ................................................ 35,717 40,731 36,948
Other assets .................................................................. 96,120 90,694 77,112
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$11,031,102 $10,893,863 $ 9,959,009
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ...................................................................... $ 8,708,275 $ 8,082,689 $ 6,961,378
Federal Home Loan Bank advances ............................................... 1,457,046 1,978,348 2,248,964
Other borrowings .............................................................. 145 224 329
Accounts payable and accrued liabilities ...................................... 64,138 54,236 45,327
Deferred income taxes ......................................................... 32,906 33,730 26,160
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Total liabilities ......................................................... 10,262,510 10,149,227 9,282,158
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Company obligated mandatorily redeemable capital securities of subsidiary trust
holding solely junior subordinated debentures of the Company
("Capital Securities") .................................................... 120,000 120,000 120,000
STOCKHOLDERS' EQUITY
Preferred stock, par value of $0.01 per share; authorized 5,000,000 shares;
outstanding none .......................................................... -- -- --
Common stock, par value of $0.01 per share; authorized 50,000,000 shares;
outstanding 28,211,048 shares at March 31, 2001, 28,205,741 shares
at December 31, 2000 and 28,148,409 shares at March 31, 2000 .............. 282 282 281
Additional paid-in capital .................................................... 93,374 93,239 92,385
Accumulated other comprehensive income (loss) ................................. 1,182 687 (2,038)
Retained earnings ............................................................. 553,754 530,428 466,223
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Total stockholders' equity ................................................ 648,592 624,636 556,851
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$11,031,102 $10,893,863 $ 9,959,009
=============================================================================================================================
See accompanying notes to consolidated financial statements.
1
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended
March 31,
------------------------------
(Dollars in Thousands, Except Per Share Data) 2001 2000
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INTEREST INCOME:
Loans receivable ...................................................... $ 212,762 $ 172,470
U.S. Treasury securities and agency obligations ....................... 4,410 2,914
Mortgage-backed securities ............................................ 128 352
Other investments ..................................................... 2,666 1,779
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Total interest income ............................................... 219,966 177,515
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INTEREST EXPENSE:
Deposits .............................................................. 114,801 81,233
Borrowings ............................................................ 25,962 30,478
Capital securities .................................................... 3,041 3,041
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Total interest expense .............................................. 143,804 114,752
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NET INTEREST INCOME ................................................... 76,162 62,763
PROVISION FOR LOAN LOSSES .................................................. 52 791
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Net interest income after provision for loan losses ................... 76,110 61,972
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OTHER INCOME, NET:
Loan and deposit related fees ......................................... 10,230 5,823
Real estate and joint ventures held for investment, net:
Operations, net ..................................................... 1,031 1,624
Net gains on sales of wholly owned real estate ...................... 2 1,421
(Provision for) reduction of losses on real estate and joint ventures (33) 43
Secondary marketing activities:
Loan servicing fees ................................................. (8,185) 251
Net gains on sales of loans and mortgage-backed securities .......... 2,125 1,793
Net gains on sales of investment securities ........................... 125 --
Gain on sale of subsidiary ............................................ -- 9,762
Other ................................................................. 656 760
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Total other income, net ............................................. 5,951 21,477
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OPERATING EXPENSE:
Salaries and related costs ............................................ 23,271 21,525
Premises and equipment costs .......................................... 6,043 5,635
Advertising expense ................................................... 1,176 1,873
Professional fees ..................................................... 577 820
SAIF insurance premiums and regulatory assessments .................... 732 620
Other general and administrative expense .............................. 5,339 4,888
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Total general and administrative expense ............................ 37,138 35,361
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Net operation of real estate acquired in settlement of loans .......... (2) 247
Amortization of excess of cost over fair value of net assets acquired . 114 117
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Total operating expense ............................................. 37,250 35,725
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INCOME BEFORE INCOME TAXES ................................................. 44,811 47,724
Income taxes ............................................................... 18,983 20,288
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Net income before cumulative effect of change in accounting principle ...... 25,828 27,436
Cumulative effect of change in accounting principle, net of income taxes ... 36 --
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NET INCOME ............................................................ $ 25,864 $ 27,436
=============================================================================================================
PER SHARE INFORMATION:
Basic before cumulative effect of change in accounting principle ...... $ 0.92 $ 0.97
BASIC AFTER CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ....... 0.92 0.97
=============================================================================================================
Diluted before cumulative effect of change in accounting principle .... $ 0.91 $ 0.97
DILUTED AFTER CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ..... 0.91 0.97
=============================================================================================================
CASH DIVIDENDS DECLARED AND PAID ...................................... $ 0.09 $ 0.09
=============================================================================================================
Weighted average diluted shares outstanding ........................... 28,275,184 28,173,883
=============================================================================================================
See accompanying notes to consolidated financial statements.
2
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months Ended
March 31,
----------------------------
(In Thousands) 2001 2000
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NET INCOME .................................................................. $25,864 $27,436
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OTHER COMPREHENSIVE INCOME (LOSS), NET OF INCOME TAXES (BENEFITS):
Unrealized gains (losses) on securities available for sale:
U.S. Treasury securities, agency obligations and other investment
securities available for sale, at fair value ........................ 693 (424)
Mortgage-backed securities available for sale, at fair value .......... 33 (55)
Less reclassification of realized (gains) losses included in net income (72) 9
Unrealized gains (losses) on cash flow hedges:
Net derivative instruments ............................................ (935) --
Cumulative effect of a change in accounting principle ................. (388) --
Less reclassification of realized losses included in net income ....... 1,164 --
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Total other comprehensive income (loss), net of income taxes (benefits) .. 495 (470)
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COMPREHENSIVE INCOME ........................................................ $26,359 $26,966
===========================================================================================================
See accompanying notes to consolidated financial statements.
3
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended
March 31,
-------------------------------
(In Thousands) 2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................................... $ 25,864 $ 27,436
Adjustments to reconcile net income to net cash used for operating activities:
Cumulative effect of change in accounting principle, net of income taxes ........... (36) --
Depreciation and amortization ...................................................... 9,947 6,595
Provision for losses on loans, real estate acquired in settlement
of loans, investments in real estate and joint ventures, mortgage servicing rights
and other assets ................................................................. 8,593 823
Net gains on sales of loans and mortgage-backed securities, investment
securities, real estate and other assets ......................................... (3,116) (3,553)
Gain on sale of subsidiary ......................................................... -- (9,762)
Interest capitalized on loans (negative amortization) .............................. (21,886) (15,884)
Federal Home Loan Bank stock dividends ............................................. (1,867) (1,215)
Loans originated for sale ............................................................ (796,801) (367,916)
Proceeds from sales of loans held for sale, including those sold
via mortgage-backed securities ..................................................... 595,743 330,156
Increase in other, net ............................................................... (2,783) (12,548)
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Net cash used for operating activities .................................................. (186,342) (45,868)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of:
Subsidiary, net .................................................................... -- 373,442
U.S. Treasury securities, agency obligations and other investment
securities available for sale .................................................... 10,017 --
Wholly owned real estate and real estate acquired in settlement of loans ........... 2,528 3,232
Proceeds from maturities of U.S. Treasury securities, agency obligations
and other investment securities available for sale ................................. 202,765 --
Purchase of:
U.S. Treasury securities, agency obligations and other investment
securities available for sale .................................................... (160,945) (20,000)
Loans receivable held for investment ............................................... (250) (12,560)
Federal Home Loan Bank stock ....................................................... -- (4,030)
Loans receivable originated held for investment (net of refinances of
$146,113 at March 31, 2001 and $33,564 at March 31, 2000) .......................... (522,091) (1,155,505)
Principal payments on loans receivable held for investment and mortgage-backed
securities available for sale ...................................................... 563,420 345,901
Net change in undisbursed loan funds ................................................. (12,250) (23,047)
Investments in real estate held for investment ....................................... (1,668) 1,271
Other, net ........................................................................... (2,872) (1,921)
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Net cash provided by (used for) investing activities .................................... 78,654 (493,217)
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See accompanying notes to consolidated financial statements.
4
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Three Months Ended
March 31,
-------------------------------
(In Thousands) 2001 2000
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits ............................................................. $ 625,586 $ 398,617
Proceeds from Federal Home Loan Bank advances ........................................ 498,500 2,004,500
Repayments of Federal Home Loan Bank advances ........................................ (1,019,802) (1,877,943)
Net decrease in other borrowings ..................................................... (79) (44)
Proceeds from exercise of stock options .............................................. 135 --
Cash dividends ....................................................................... (2,538) (2,533)
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Net cash provided by financing activities ............................................... 101,802 522,597
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Net decrease in cash and cash equivalents ............................................... (5,886) (16,488)
Cash and cash equivalents at beginning of period ........................................ 127,803 121,147
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CASH AND CASH EQUIVALENTS AT END OF PERIOD .............................................. $ 121,917 $ 104,659
===========================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ........................................................................... $ 145,806 $ 113,604
Income taxes ....................................................................... 1,516 12,684
Supplemental disclosure of non-cash investing:
Loans transferred from held for sale to held for investment .......................... 2,392 14,951
Loans exchanged for mortgage-backed securities ....................................... 462,744 213,981
Real estate acquired in settlement of loans .......................................... 5,353 4,692
Loans to facilitate the sale of real estate acquired in settlement of loans .......... 1,615 1,957
===========================================================================================================================
See accompanying notes to consolidated financial statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE (1) - BASIS OF FINANCIAL STATEMENT PRESENTATION
In the opinion of Downey Financial Corp. and subsidiaries ("Downey," "we,"
"us" and "our"), 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, 2001, December 31,
2000 and March 31, 2000 and the results of operations, comprehensive income, and
changes in cash flows for the three months ended March 31, 2001 and 2000.
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 accounting principles generally accepted in the United States of
America 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 condition, 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, 2000, which contains
among other things, a description of the business, the latest audited
consolidated financial statements and notes thereto, together with Management's
Discussion and Analysis of Financial Condition and Results of Operations as of
December 31, 2000 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.
The following table presents a reconciliation of the components used to
derive basic and diluted earnings per share both before and after the cumulative
effect of change in accounting principle for the periods indicated.
Three Months Ended March 31,
-----------------------------------------------
2001 2000
-----------------------------------------------
Net Per Share Net Per Share
(Dollars in Thousands, Except Per Share Data) Income Amount Income Amount
---------------------------------------------------------------------------------------------------------------------
BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
Basic earnings per share ............................... $25,828 $0.92 $27,436 $0.97
Effect of dilutive stock options ....................... -- 0.01 -- --
---------------------------------------------------------------------------------------------------------------------
Diluted earnings per share ............................. $25,828 $0.91 $27,436 $0.97
=====================================================================================================================
AFTER CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
Basic earnings per share ............................... $25,864 $0.92 $27,436 $0.97
Effect of dilutive stock options ....................... -- 0.01 -- --
---------------------------------------------------------------------------------------------------------------------
Diluted earnings per share ............................. $25,864 $0.91 $27,436 $0.97
=====================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic .................................................. 28,209,678 28,148,409
Dilutive stock options ................................. 65,506 25,474
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Diluted ................................................ 28,275,184 28,173,883
=====================================================================================================================
6
NOTE (3) - BUSINESS SEGMENT REPORTING
The following table presents the operating results and selected financial
data by major business segments for the periods indicated.
Real Estate
(In Thousands) Banking Investment Elimination Totals
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THREE MONTHS ENDED MARCH 31, 2001:
Net interest income ..................... $ 76,134 $ 28 $ -- $ 76,162
Provision for loan losses ............... 52 -- -- 52
Other income ............................ 4,683 1,268 -- 5,951
Operating expense ....................... 36,990 260 -- 37,250
Net intercompany income (expense) ....... 97 (97) -- --
-----------------------------------------------------------------------------------------------------
Income before income taxes .............. 43,872 939 -- 44,811
Income taxes ............................ 18,599 384 -- 18,983
-----------------------------------------------------------------------------------------------------
Net income before cumulative effect of
change in accounting principle ..... 25,273 555 -- 25,828
Cumulative effect of change in accounting
principle, net of income taxes ..... 36 -- -- 36
-----------------------------------------------------------------------------------------------------
Net income ......................... $ 25,309 $ 555 $ -- $ 25,864
=====================================================================================================
AT MARCH 31, 2001:
Assets
Loans and mortgage-backed securities $10,272,222 $ -- $ -- $10,272,222
Real estate held for investment .... -- 18,690 -- 18,690
Other .............................. 755,324 3,337 (18,471) 740,190
-----------------------------------------------------------------------------------------------------
Total assets ..................... 11,027,546 22,027 (18,471) 11,031,102
-----------------------------------------------------------------------------------------------------
Equity .................................. $ 648,592 $ 18,471 $ (18,471) $ 648,592
=====================================================================================================
THREE MONTHS ENDED MARCH 31, 2000:
Net interest income ..................... $ 62,715 $ 48 $ -- $ 62,763
Provision for loan losses ............... 791 -- -- 791
Other income:
Gain on sale of subsidiary ......... 9,762 -- -- 9,762
All other .......................... 8,585 3,130 -- 11,715
Operating expense ....................... 35,484 241 -- 35,725
Net intercompany income (expense) ....... 108 (108) -- --
-----------------------------------------------------------------------------------------------------
Income before income taxes .............. 44,895 2,829 -- 47,724
Income taxes ............................ 19,128 1,160 -- 20,288
-----------------------------------------------------------------------------------------------------
Net income ......................... $ 25,767 $ 1,669 $ -- $ 27,436
=====================================================================================================
AT MARCH 31, 2000:
Assets
Loans and mortgage-backed securities $ 9,280,629 $ -- $ -- $ 9,280,629
Real estate held for investment .... -- 40,571 -- 40,571
Other .............................. 672,124 7,193 (41,508) 637,809
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Total assets ..................... 9,952,753 47,764 (41,508) 9,959,009
-----------------------------------------------------------------------------------------------------
Equity .................................. $ 556,851 $ 41,508 $ (41,508) $ 556,851
=====================================================================================================
7
NOTE (4) - MORTGAGE SERVICING RIGHTS
The following table sets forth information concerning mortgage servicing
right activity, allowance and estimated fair value as well as mortgage loans
serviced for others at the dates indicated.
Three Months Ended
------------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(Dollars in Thousands) 2001 2000 2000 2000 2000
--------------------------------------------------------------------------------------------------------------------------
Gross balance at beginning of period ........... $ 46,214 $ 45,834 $ 41,126 $ 37,177 $ 34,266
Additions ...................................... 5,394 2,548 6,267 5,541 4,154
Amortization ................................... (2,063) (1,803) (1,559) (1,363) (1,243)
Impairment write-down .......................... (222) (365) -- (229) --
--------------------------------------------------------------------------------------------------------------------------
Gross balance at end of period ............ 49,323 46,214 45,834 41,126 37,177
--------------------------------------------------------------------------------------------------------------------------
Allowance balance at beginning of period ....... 5,483 820 214 229 3
Provision for impairment ....................... 8,345 5,028 606 214 226
Impairment write-down .......................... (222) (365) -- (229) --
--------------------------------------------------------------------------------------------------------------------------
Allowance balance at end of period ........ 13,606 5,483 820 214 229
--------------------------------------------------------------------------------------------------------------------------
Mortgage servicing rights, net ............ $ 35,717 $ 40,731 $ 45,014 $ 40,912 $ 36,948
==========================================================================================================================
Estimated fair value (1) ....................... $ 35,752 $ 41,826 $ 45,895 $ 48,110 $ 41,146
==========================================================================================================================
Mortgage loans serviced for others:
Total ..................................... $4,296,883 $3,964,462 $4,020,931 $3,549,043 $3,171,829
With capitalized mortgage servicing rights:
Amount .................................. 3,999,380 3,779,562 3,686,763 3,288,766 2,951,103
Weighted average interest rate .......... 7.50% 7.56% 7.51% 7.41% 7.31%
==========================================================================================================================
Custodial escrow balances ...................... $ 5,281 $ 8,207 $ 11,378 $ 6,762 $ 3,364
==========================================================================================================================
(1) The estimated fair value exceeded book value for certain asset stratum.
Excludes loans sold or securitized prior to 1996 without capitalized
mortgage servicing rights.
NOTE (5) - ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
On January 1, 2001, we adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, ("SFAS 133"). SFAS 133 required the recognition of all derivative
financial instruments at fair value and reported as either assets or liabilities
in the balance sheet. The accounting for gains and losses associated with
changes in the fair value of derivatives are reported in current earnings or
other comprehensive income, net of tax, depending on whether they qualify for
hedge accounting and whether the hedge is highly effective in achieving
offsetting changes in the fair value or cash flows of the asset or liability
hedged. Under the provisions of SFAS 133, the method used for assessing the
effectiveness of a hedging derivative, as well as the measurement approach for
determining the ineffective aspects of the hedge, must have been established at
the inception of the hedge. Those methods must also be consistent with the
entity's approach to managing risk. Although we continue to hedge as previously
done, SFAS 133, as applied to our risk management strategies, may increase or
decrease reported net income and stockholders' equity, depending on levels of
interest rates and other variables affecting the fair values of derivative
instruments and hedged items, but will have no effect on actual cash flows or
the overall economics of the transactions.
With the implementation of SFAS 133, we recorded after-tax transition
amounts associated with establishing the fair values of the derivative
instruments and hedged items on the balance sheet as an increase of $36,000 to
net income and a reduction of $388,000 in other comprehensive income. All of the
other comprehensive income transition amount was reclassified into earnings
during the first quarter of 2001.
Derivatives
We offer short-term interest rate lock commitments to help us attract
potential home loan borrowers. The rate locks guarantee a specified interest
rate for a loan if our underwriting standards are met, but do not obligate the
potential borrower. The rate lock commitments we ultimately expect to sell in
the secondary market are treated as derivatives. Consequently, as derivatives,
the expected rate lock commitments do not qualify for hedge accounting.
Associated fair
8
value adjustments are recorded in the balance sheet in either other assets or
accounts payable and accrued liabilities, with an offset to current earnings
under net gains on sales of loans and mortgage-backed securities. At March 31,
2001, we had rate lock commitments estimated to sell as part of our secondary
marketing activities of $337 million. At origination, the fair value of our rate
lock derivatives are capitalized into the basis of our loans held for sale and,
from that point until sale, qualify for hedge accounting under SFAS 133.
Hedging Activities
As part of our secondary marketing activities, we typically utilize
short-term forward sale and purchase contracts to offset the impact of changes
in market interest rates on the value of rate lock derivatives and loans
originated for sale. Contracts associated with originated loans are accounted
for as cash flow hedges. These contracts have a high correlation to the price
movement of both the rate lock derivatives and the loans being hedged. Changes
in forward sale contract values not assigned to originated loans and the
ineffectiveness of hedge transactions are recorded in net gains on sales of
loans and mortgage-backed securities. The changes in values on forward sale
contracts assigned as cash flow hedges to originated loans are recorded in other
comprehensive income, net of tax, as long as cash flow hedge requirements are
met. The amounts recorded in accumulated other comprehensive income will be
recognized in the income statement when the hedged forecasted transactions
settle. We estimate that all of the related unrealized losses in accumulated
other comprehensive income will be reclassified into earnings within the next
three months. At March 31, 2001, forward sale contracts amounted to $780
million, of which $400 million were designated as cash flow hedges, and forward
purchase contracts totaled $8 million.
NOTE (6) - INCOME TAXES
Downey and its wholly owned subsidiaries file a consolidated federal income
tax return and various state income and franchise tax returns on a calendar year
basis. The Internal Revenue Service and state taxing authorities have examined
Downey's tax returns for all tax years through 1995 and are currently reviewing
returns filed for the 1996 tax year. Adjustments proposed by the Internal
Revenue Service have been protested by Downey and are currently moving through
the government appeals process. Downey believes it has established appropriate
liabilities for any resultant deficiencies. Tax years subsequent to 1996 remain
open to review by federal and state tax authorities.
NOTE (7) - SALE OF SUBSIDIARY
On February 29, 2000, Downey Savings and Loan Association, F.A. sold its
indirect automobile finance subsidiary, Downey Auto Finance Corp., to Auto One
Acceptance Corp., a subsidiary of California Federal Bank and recognized a
pre-tax gain from the sale of $9.8 million. As of December 31, 1999, Downey Auto
Finance Corp. had loans totaling $366 million and total assets of $373 million.
9
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. Our 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 we conduct
our operations, fluctuations in interest rates, credit quality and government
regulation.
OVERVIEW
Our net income for the first quarter of 2001 totaled $25.9 million or $0.91
per share on a diluted basis, compared to $27.4 million or $0.97 per share in
the same period a year ago. Included in our year-ago results was a $5.6 million
or $0.20 per share after-tax gain from the sale of our indirect automobile
finance subsidiary. If the year-ago gain is excluded, our net income in the
current quarter would have increased by $4.1 million or 18.5%. On January 1,
2001, we adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended,
("SFAS 133") and, as a result, recorded an immaterial cumulative effect of
change in accounting principle.
The increase in our adjusted net income between first quarters was due to
higher net income from our banking operations, as net income from our real
estate investment activities declined from $1.7 million in the first quarter of
2000 to $0.6 million in the current quarter. On an adjusted basis, net income
from our banking operations increased $5.2 million or 25.6% to $25.3 million
reflecting the following:
o net interest income increased $13.4 million or 21.4% due to increases
in both average earning assets and the effective interest rate spread;
and
o provision for loan losses declined by $0.7 million.
Those favorable items were partially offset by an increase of $1.5 million in
operating expenses associated with an increased number of branch locations and
higher loan origination activity. In addition, other income declined by $3.9
million, as higher loan and deposit related fees, and net gains on sales of
loans and mortgage-backed securities were unable to offset an $8.3 million
addition to the valuation allowance for mortgage servicing rights due to the
continued drop in fixed rate mortgage interest rates during the quarter and the
expectation of higher loan prepayments in future periods.
For the first quarter of 2001, our return on average assets was 0.94% and
our return on average equity was 16.28%.
At March 31, 2001, our assets totaled $11.0 billion, up $1.1 billion or
10.8% from a year ago. Our single family loan originations totaled $1.438
billion in the first quarter of 2001, down 4.1% from the $1.499 billion
originated in the first quarter of 2000. Of the current quarter total, $641
million represented originations of loans for portfolio, of which $135 million
represented subprime credits. In addition to single family loans, we originated
$29 million of other loans in the quarter.
Between first quarters, we funded our asset growth with a $1.7 billion or
25.1% increase in deposits. At quarter-end, our deposits totaled $8.7 billion.
During the quarter, seven new in-store branches were opened, bringing our total
branches at quarter end to 121, of which 56 are in-store. A year ago, branches
totaled 104, of which 40 were in-store.
Our non-performing assets increased $4 million during the quarter to $59
million or 0.53% of total assets. This increase was due to a rise in residential
subprime non-performers of $6 million and a $1 million commercial loan placed on
non-accrual. Those increases were partially offset by a $4 million decline in
residential non-performers.
At March 31, 2001, our primary subsidiary, Downey Savings and Loan
Association, F.A. (the "Bank") had core and tangible capital ratios of 6.55% and
a risk-based capital ratio of 13.09%. These capital levels were substantially
above the "well capitalized" standards defined by regulation of 5% for core and
tangible capital and 10% for risk-based capital.
10
RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income is the difference between the interest and dividends
earned on loans, mortgage-backed securities and investment securities
("interest-earning assets") and the interest paid on deposits, borrowings and
capital securities ("interest-bearing liabilities"). The spread between the
yield on interest-earning assets and the cost of interest-bearing liabilities
and the relative dollar amounts of these assets and liabilities principally
affects net interest income.
Our net interest income totaled $76.2 million in the first quarter of 2001,
up $13.4 million or 21.3% from the same period last year. The improvement
between first quarters reflected increases in both average earning assets and
the effective interest rate spread. Our average earning assets increased by $1.3
billion or 14.4% between first quarters to $10.6 billion. Our effective interest
rate spread of 2.87% in the current quarter was up from 2.71% in both the
year-ago quarter and fourth quarter of 2000. Although market interest rates
declined during the current quarter, the yield on our adjustable rate mortgage
loans continued to rise due to the administrative lag in the Federal Home Loan
Bank ("FHLB") Eleventh District Cost of Funds Index ("COFI"), the index to which
the majority of our loans are priced. Therefore, our earning asset yield
increased more rapidly than our cost of funds.
The following table presents for the periods indicated the total dollar
amount of:
o interest income from average interest-earning assets and the resultant
yields; and
o interest expense on average interest-bearing liabilities and the
resultant costs, expressed as rates.
The table also sets forth our net interest income, interest rate spread and
effective interest rate spread. The effective interest rate spread reflects the
relative level of interest-earning assets to interest-bearing liabilities and
equals:
o the difference between interest income on interest-earning assets and
interest expense on interest-bearing liabilities, divided by
o average interest-earning assets for the period.
11
The table also sets forth our net interest-earning balance--the difference
between the average balance of interest-earning assets and the average balance
of total deposits, borrowings and capital securities--for the periods indicated.
We included non-accrual loans in the average interest-earning assets balance. We
included interest from non-accrual loans in interest income only to the extent
we received payments and to the extent we believe we will recover the remaining
principal balance of the loans. We computed average balances for the quarter
using the average of each month's daily average balance during the periods
indicated.
Three Months Ended
--------------------------------------------------------------------------------------------------
March 31, 2001 December 31, 2000 March 31, 2000
--------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans ......................... $10,180,942 $212 762 8.36% $ 9,803,336 $203,336 8.30% $8,946,021 $172,470 7.71%
Mortgage-backed securities .... 7,761 128 6.60 11,282 184 6.52 20,877 352 6.74
Investment securities ......... 431,023 7,076 6.66 378,359 6,255 6.58 313,481 4,693 6.02
------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 10,619,726 219,966 8.29 10,192,977 209,775 8.23 9,280,379 177,515 7.65
Non-interest-earning assets ..... 353,887 341,736 336,592
------------------------------------------------------------------------------------------------------------------------------------
Total assets .................. $10,973,613 $10,534,713 $9,616,971
====================================================================================================================================
Transaction accounts:
Non-interest-bearing checking . $ 246,246 $ -- -- % $ 228,353 $ -- -- % $ 191,192 $ -- -- %
Interest-bearing checking (1) . 396,484 633 0.65 386,301 778 0.80 370,715 937 1.02
Money market .................. 89,259 626 2.84 88,956 636 2.84 92,295 651 2.84
Regular passbook .............. 766,948 6,427 3.40 764,511 6,570 3.42 820,498 7,373 3.61
------------------------------------------------------------------------------------------------------------------------------------
Total transaction accounts .. 1,498,937 7,686 2.08 1,468,121 7,984 2.16 1,474,700 8,961 2.44
Certificates of deposit ......... 6,873,614 107,115 6.32 6,394,378 100,910 6.28 5,275,462 72,272 5.51
------------------------------------------------------------------------------------------------------------------------------------
Total deposits ................ 8,372,551 114,801 5.56 7,862,499 108,894 5.51 6,750,162 81,233 4.84
Borrowings ...................... 1,716,077 25,962 6.14 1,814,189 28,903 6.34 2,108,736 30,478 5.81
Capital securities .............. 120,000 3,041 10.14 120,000 3,041 10.14 120,000 3,041 10.14
------------------------------------------------------------------------------------------------------------------------------------
Total deposits, borrowings and
capital securities ........... 10,208,628 143,804 5.71 9,796,688 140,838 5.72 8,978,898 114,752 5.14
Other liabilities ............... 129,588 124,765 94,980
Stockholders' equity ............ 635,397 613,260 543,093
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity ......... $10,973,613 $10,534,713 $9,616,971
====================================================================================================================================
Net interest income/interest rate
spread ......................... $ 76,162 2.58% $ 68,937 2.51% $ 62,763 2.51%
Excess of interest-earning assets
over deposits, borrowings and
capital securities ............. $ 411,098 $ 396,289 $ 301,481
Effective interest rate spread .. 2.87 2.71 2.71
====================================================================================================================================
(1) Includes amounts swept into money market deposit accounts.
12
Changes in our net interest income are a function of both changes in rates
and changes in volumes of interest-earning assets and interest-bearing
liabilities. The following table sets forth information regarding changes in our
interest income and expense for the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, we have provided
information on changes attributable to:
o changes in volume--changes in volume multiplied by comparative period
rate;
o changes in rate--changes in rate multiplied by comparative period
volume; and
o 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.
Three Months Ended
---------------------------------------------
March 31, 2001 Versus March 31, 2000
Changes Due To
---------------------------------------------
Rate/
(In Thousands) Volume Rate Volume Net
-------------------------------------------------------------------------------------
Interest income:
Loans ........................... $ 23,808 $ 14,485 $ 1,999 $ 40,292
Mortgage-backed securities ...... (221) (8) 5 (224)
Investment securities ........... 1,714 486 183 2,383
-------------------------------------------------------------------------------------
Change in interest income ..... 25,301 14,963 2,187 42,451
-------------------------------------------------------------------------------------
Interest expense:
Transaction accounts:
Interest-bearing checking (1) . 66 (347) (23) (304)
Money market .................. (27) 2 -- (25)
Regular passbook .............. (519) (456) 29 (946)
-------------------------------------------------------------------------------------
Total transaction accounts .. (480) (801) 6 (1,275)
Certificates of deposit ......... 21,277 10,412 3,154 34,843
-------------------------------------------------------------------------------------
Total interest-bearing deposits 20,797 9,611 3,160 33,568
Borrowings ...................... (5,875) 1,696 (337) (4,516)
Capital securities .............. -- -- -- --
-------------------------------------------------------------------------------------
Change in interest expense .... 14,922 11,307 2,823 29,052
-------------------------------------------------------------------------------------
Change in net interest income ....... $ 10,379 $ 3,656 $ (636) $ 13,399
=====================================================================================
(1) Includes amounts swept into money market deposit accounts.
PROVISION FOR LOAN LOSSES
Provision for loan losses was $0.1 million in the current quarter, down
from $0.8 million in the first quarter of 2000. For information regarding our
allowance for loan losses, see Financial Condition--Problem Loans and Real
Estate--Allowance for Losses on Loans and Real Estate on page 29.
OTHER INCOME
Our total other income was $6.0 million in the first quarter of 2001, down
$15.5 million from a year ago. Included in the year-ago amount was a $9.8
million gain from the sale of our indirect auto finance subsidiary. Excluding
that gain, other income in the current quarter would have declined by $5.8
million primarily due to:
o an $8.2 million loss in loan servicing fees compared to income of $0.3
million; and
o a $2.1 million decline in income from real estate held for investment
activities.
Those declines were partially offset by an increase of $4.4 million in our loan
and deposit related fees and $0.3 million in net gains on sales of loans and
mortgage-backed securities. Below is a further discussion of the major other
income categories.
13
Loan and Deposit Related Fees
Loan and deposit related fees totaled $10.2 million in the first quarter of
2001, up $4.4 million from a year ago. Our loan related fees accounted for $3.3
million of the increase between first quarters, of which $2.9 million
represented higher loan prepayment fees. Our deposit related fees increased by
$1.1 million or 38.9%, of which $0.3 million were fees from automated teller
machines.
The following table presents a breakdown of loan and deposit related fees
during the periods indicated.
Three Months Ended
---------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2001 2000 2000 2000 2000
--------------------------------------------------------------------------------------------------
Loan related fees:
Prepayment fees ................... $ 4,525 $ 3,899 $ 3,043 $ 2,604 $ 1,649
Other fees ........................ 1,779 1,513 1,329 1,338 1,347
Deposit related fees:
Automated teller machine fees ..... 1,533 1,618 1,566 1,362 1,246
Other fees ........................ 2,393 2,270 2,021 1,703 1,581
--------------------------------------------------------------------------------------------------
Total loan and deposit related fees $10,230 $ 9,300 $ 7,959 $ 7,007 $ 5,823
==================================================================================================
Real Estate and Joint Ventures Held for Investment
Income from our real estate and joint ventures held for investment totaled
$1.0 million in the first quarter of 2001, down from $3.1 million a year ago.
Our income from real estate held for investment decreased by $2.1 million, due
primarily to lower net gains on sales that totaled $0.4 million in the current
quarter, compared to $1.7 million in the year-ago quarter. In addition, our net
rental income declined by $0.5 million due to fewer properties being owned.
The table below sets forth the key components comprising our income from
real estate and joint venture operations during the periods indicated.
Three Months Ended
----------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2001 2000 2000 2000 2000
-------------------------------------------------------------------------------------------------------------------
Operations, net:
Rental operations, net of expenses ................ $ 508 $ 309 $ 422 $ 866 $ 975
Equity in net income from joint ventures .......... 391 169 1,531 1,147 377
Interest from joint venture advances .............. 132 200 215 200 272
-------------------------------------------------------------------------------------------------------------------
Total operations, net ........................... 1,031 678 2,168 2,213 1,624
Net gains on sales of wholly owned real estate ....... 2 303 1,257 -- 1,421
Reduction of (provision for) losses on real estate and
joint ventures .................................... (33) (36) 600 (1,473) 43
-------------------------------------------------------------------------------------------------------------------
Income from real estate and joint ventures held for
investment ...................................... $ 1,000 $ 945 $ 4,025 $ 740 $ 3,088
===================================================================================================================
Secondary Marketing Activities
Sales of loans and mortgage-backed securities we originated increased in
the first quarter of 2001 to $597 million from $331 million a year ago. Net
gains associated with these sales totaled $2.1 million in the first quarter of
2001, up from $1.8 million a year ago. The net gains included capitalized
mortgage servicing rights of $5.4 million in the first quarter of 2001, compared
to $4.2 million a year ago..
A loss of $8.2 million was recorded in loan servicing fees from our
portfolio of loans serviced for others during the first quarter of 2001,
compared to income of $0.3 million a year ago. The loss in the 2001 first
quarter reflects an increase of $8.3 million in the valuation allowance for
mortgage servicing rights due to lower interest rates and expectation of higher
loan prepayments in future periods. At March 31, 2001, we serviced $4.3 billion
of loans for others compared to $4.0 billion at December 31, 2000 and $3.2
billion at March 31, 2000.
14
The following table presents a breakdown of the components of our loan
servicing fees. For further information regarding mortgage servicing rights, see
Notes To Consolidated Financial Statements--Note (4)--Mortgage Servicing Rights
on page 8.
Three Months Ended
-------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2001 2000 2000 2000 2000
------------------------------------------------------------------------------------------
Income from servicing operations $ 2,223 $ 2,718 $ 2,086 $ 1,890 $ 1,720
Amortization of MSRs ........... (2,063) (1,803) (1,559) (1,363) (1,243)
Provision for impairment ....... (8,345) (5,028) (606) (214) (226)
------------------------------------------------------------------------------------------
Loan servicing fees ............ $(8,185) $(4,113) $ (79) $ 313 $ 251
==========================================================================================
OPERATING EXPENSE
Operating expense totaled $37.3 million in the current quarter, up $1.5
million from the first quarter of 2000. The increase was due to a $1.8 million
or 5.0% increase in general and administrative expense. That increase was
primarily due to higher costs associated with the increased number of branch
locations and higher loan origination activity.
The following table presents a breakdown of our operating expense for the
periods indicated.
Three Months Ended
----------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2001 2000 2000 2000 2000
----------------------------------------------------------------------------------------------------------
Salaries and related costs ................... $ 23,271 $ 21,743 $ 19,280 $ 19,974 $ 21,525
Premises and equipment costs ................. 6,043 5,945 5,837 5,803 5,635
Advertising expense .......................... 1,176 1,121 980 812 1,873
Professional fees ............................ 577 1,274 537 688 820
SAIF insurance premiums and regulatory
assessments ............................... 732 696 683 627 620
Other general and administrative expense ..... 5,339 5,188 4,823 4,817 4,888
----------------------------------------------------------------------------------------------------------
Total general and administrative expense . 37,138 35,967 32,140 32,721 35,361
Net operation of real estate acquired in
settlement of loans ....................... (2) 263 221 87 247
Amortization of excess of cost over fair value
of net assets acquired ................... 114 114 115 116 117
----------------------------------------------------------------------------------------------------------
Total operating expense .................. $ 37,250 $ 36,344 $ 32,476 $ 32,924 $ 35,725
==========================================================================================================
PROVISION FOR INCOME TAXES
Income taxes for the first quarter, including the taxes on the cumulative
effect of change in accounting principle, totaled $19.0 million, resulting in an
effective tax rate of 42.4%, compared to $20.3 million and 42.5% for the like
quarter of a year ago. For further information regarding income taxes, see Notes
To Consolidated Financial Statements--Note (6) --Income Taxes on page 9.
15
BUSINESS SEGMENT REPORTING
The previous sections of the Results of Operations discussed our
consolidated results. The purpose of this section is to present data on the
results of operations of our two business segments--banking and real estate
investment. For further information regarding business segments, see Notes To
Consolidated Financial Statements--Note (3) --Business Segment Reporting on page
7.
The following table presents by business segment our net income for the
periods indicated, followed by a discussion of the results of operations of each
segment.
Three Months Ended
--------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2001 2000 2000 2000 2000
-------------------------------------------------------------------------------------------
Banking net income .............. $25,309 $22,738 $24,080 $22,237 $25,767
Real estate investment net income 555 257 2,258 245 1,669
-------------------------------------------------------------------------------------------
Total net income ............. $25,864 $22,995 $26,338 $22,482 $27,436
===========================================================================================
Banking
Net income from our banking operations for the first quarter of 2001
totaled $25.3 million, down from $25.8 million in the first quarter of 2000. The
sale of our indirect automobile finance subsidiary benefited our first quarter
2000 net income by $5.6 million. Excluding that gain, net income from our
banking operations would have increased by $5.2 million or 25.6% from a year
ago.
The adjusted increase between first quarters primarily reflected higher net
interest income. Net interest income increased $13.4 million or 21.4% due to an
increase in both our average earning assets and our effective interest rate
spread. Also favorably impacting our banking net income was a $0.7 million
decline in provision for loan losses. These favorable items were partially
offset by an increase of $1.5 million in operating expense and a decline of $3.9
million in all other income. The increase in operating expense was due to higher
general and administrative costs associated with the increased number of branch
locations and higher loan origination activity. The decline in all other income
was primarily due to an $8.3 million addition to the valuation allowance for
mortgage servicing rights, partially offset by increases in loan and deposit
related fees and net gains on sales of loans and mortgage-backed securities.
16
The table below sets forth our banking operational results and selected
financial data for the periods indicated.
Three Months Ended
-------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2001 2000 2000 2000 2000
---------------------------------------------------------------------------------------------------------------
Net interest income ..................... $ 76,134 $ 68,879 $ 67,137 $ 63,501 $ 62,715
Provision for loan losses ............... 52 511 1,007 942 791
Other income:
Gain on sale of subsidiary ........... -- -- -- -- 9,762
All other ............................ 4,683 6,466 7,953 8,640 8,585
Operating expense ....................... 36,990 35,738 32,216 32,558 35,484
Net intercompany income ................. 97 99 83 107 108
---------------------------------------------------------------------------------------------------------------
Income before income taxes .............. 43,872 39,195 41,950 38,748 44,895
Income taxes ............................ 18,599 16,457 17,870 16,511 19,128
---------------------------------------------------------------------------------------------------------------
Net income before cumulative effect of
change in accounting principle ....... 25,273 22,738 24,080 22,237 25,767
Cumulative effect of change in accounting
principle, net of income taxes ....... 36 -- -- -- --
---------------------------------------------------------------------------------------------------------------
Net income (1) ..................... $ 25,309 $ 22,738 $ 24,080 $ 22,237 $ 25,767
===============================================================================================================
AT PERIOD END:
Assets:
Loans and mortgage-backed securities . $10,272,222 $10,084,353 $ 9,646,741 $ 9,787,661 $ 9,280,629
Other ................................ 755,324 806,201 715,933 683,771 672,124
---------------------------------------------------------------------------------------------------------------
Total assets ....................... 11,027,546 10,890,554 10,362,674 10,471,432 9,952,753
---------------------------------------------------------------------------------------------------------------
Equity .................................. $ 648,592 $ 624,636 $ 602,624 $ 577,496 $ 556,851
===============================================================================================================
(1) Included in the quarter ending March 31, 2000 was a $5.6 million after-tax
gain related to the sale of subsidiary.
17
Real Estate Investment
Net income from our real estate investment operations totaled $0.6 million
in the first quarter of 2001, down $1.1 million from the year-ago quarter. The
decline was primarily attributed to lower net gains on sales that totaled $0.4
million in the current quarter, compared to $1.7 million in the year-ago
quarter. Also contributing to the decline in income from real estate held for
investment was a lower level of net rental income due to fewer properties being
owned.
The table below sets forth real estate investment operational results and
selected financial data for the periods indicated.
Three Months Ended
--------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2001 2000 2000 2000 2000
---------------------------------------------------------------------------------------------------------
Net interest income ........................... $ 28 $ 58 $ 73 $ 64 $ 48
Other income .................................. 1,268 1,079 4,112 827 3,130
Operating expense ............................. 260 606 260 366 241
Net intercompany expense ...................... 97 99 83 107 108
---------------------------------------------------------------------------------------------------------
Income before income taxes .................... 939 432 3,842 418 2,829
Income taxes .................................. 384 175 1,584 173 1,160
---------------------------------------------------------------------------------------------------------
Net income ................................. $ 555 $ 257 $ 2,258 $ 245 $ 1,669
=========================================================================================================
AT PERIOD END:
Assets:
Investment in real estate and joint ventures $18,690 $17,641 $15,851 $39,256 $40,571
Other ...................................... 3,337 3,584 6,347 7,655 7,193
---------------------------------------------------------------------------------------------------------
Total assets ............................. 22,027 21,225 22,198 46,911 47,764
---------------------------------------------------------------------------------------------------------
Equity ........................................ $18,471 $17,916 $17,659 $41,753 $41,508
=========================================================================================================
Our investment in real estate and joint ventures amounted to $19 million at
March 31, 2001, compared to $18 million at December 31, 2000 and $41 million at
March 31, 2000.
For information on valuation allowances associated with real estate and
joint venture loans, see Financial Condition--Problem Loans and Real
Estate--Allowances for Losses on Loans and Real Estate on page 29.
18
FINANCIAL CONDITION
LOANS AND MORTGAGE-BACKED SECURITIES
Total loans and mortgage-backed securities, including those we hold for
sale, increased $188 million during the first quarter to a total of $10.3
billion or 93.1% of assets at March 31, 2001. The increase represents a higher
level of single family loans held for sale which increased $195 million during
the quarter.
The following table sets forth loans originated, including purchases, for
investment and for sale during the periods indicated.
Three Months Ended
---------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2001 2000 2000 2000 2000
------------------------------------------------------------------------------------------------------------
Loans originated for investment:
Residential, one-to-four units:
Adjustable .......................... $ 636,988 $ 887,064 $ 382,828 $ 842,899 $1,126,995
Fixed ............................... 4,117 2,713 3,896 4,192 3,860
Other ................................. 28,964 57,901 82,343 40,554 72,731
------------------------------------------------------------------------------------------------------------
Total loans originated for investment 670,069 947,678 469,067 887,645 1,203,586
Loans originated for sale (1) ............ 796,801 335,726 482,595 542,983 367,916
------------------------------------------------------------------------------------------------------------
Total loans originated ................ $1,466,870 $1,283,404 $ 951,662 $1,430,628 $1,571,502
============================================================================================================
(1) One-to-four unit residential loans, primarily fixed.
Originations of one-to-four unit residential loans totaled $1.438 billion
in the first quarter of 2001, of which $641 million were for portfolio and $797
million were for sale. This was 17.3% above the $1.226 billion originated in the
fourth quarter of 2000, but 4.1% lower than the $1.499 billion we originated in
the year-ago first quarter. Of the current quarter originations for portfolio,
$135 million represented originations of subprime credits as part of our
continuing strategy to enhance the portfolio's net yield. During the current
quarter, 71% of our residential one-to-four unit originations represented
refinancing transactions. This is up from 52% in the previous quarter and 45% in
the year-ago first quarter. In addition to single family loans, we originated
$29 million of other loans in the current quarter.
During the current quarter, loan originations for investment consisted
primarily of adjustable rate mortgages tied to COFI, an index which lags the
movement in market interest rates. This experience is similar to that of recent
quarters.
Our adjustable rate mortgages generally:
o begin with an incentive interest rate, which is an interest rate below
the current market rate, that adjusts to the applicable index plus a
defined spread, subject to periodic and lifetime caps, after one,
three, six or twelve months;
o provide that the maximum interest rate we can charge borrowers cannot
exceed the incentive rate by more than six to nine percentage points,
depending on the type of loan and the initial rate offered; and
o limit interest rate adjustments to 1% per adjustment period for those
that adjust semi-annually and 2% per adjustment period for those that
adjust annually.
Most of our adjustable rate mortgages adjust monthly instead of
semi-annually. These monthly adjustable rate mortgages:
o have a lifetime interest rate cap, but no specified periodic interest
rate adjustment cap;
o have a periodic cap on changes in required monthly payments, which
adjust annually; and
o allow for negative amortization, which is the addition to loan
principal of accrued interest that exceeds the required monthly loan
payments.
Regarding negative amortization, if a loan incurs significant negative
amortization, then there is an increased risk that the market value of the
underlying collateral on the loan would be insufficient to satisfy fully the
outstanding principal and interest. We currently impose a limit on the amount of
negative amortization, so that the principal plus the added amount cannot exceed
110% of the original loan amount.
19
At March 31, 2001, $7.1 billion of the adjustable rate mortgages in our
loan portfolio were subject to negative amortization of which $170 million
represented the amount of negative amortization included in the loan balance.
We also continue to originate residential fixed interest rate mortgage
loans to meet consumer demand, but we intend to sell the majority of these
loans. We sold $597 million of loans in the first quarter of 2001, compared to
$243 million in the previous quarter and $331 million in the first quarter of
2000. All were secured by residential one-to-four unit property, and at March
31, 2001, loans held for sale totaled $446 million.
At March 31, 2001, we had commitments to fund loans amounting to $1.465
billion, of which $1.023 billion were one-to-four unit residential loans being
originated for sale in the secondary market, as well as undrawn lines of credit
of $83 million and loans in process of $53 million. We believe our current
sources of funds will enable us to meet these obligations while exceeding all
regulatory liquidity requirements.
20
The following table sets forth the origination, purchase and sale activity
relating to our loans and mortgage-backed securities during the periods
indicated.
Three Months Ended
------------------------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2001 2000 2000 2000 2000
------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO:
Loans originated:
Loans secured by real estate:
Residential one-to-four units:
Adjustable ........................................ $ 501,945 $ 675,943 $ 339,983 $ 781,444 $ 1,034,226
Adjustable - subprime ............................. 135,043 210,915 41,982 61,455 81,559
------------------------------------------------------------------------------------------------------------------------------------
Total adjustable ................................ 636,988 886,858 381,965 842,899 1,115,785
Fixed ............................................. 4,117 2,312 3,629 716 2,510
Fixed - subprime .................................. -- -- -- -- --
Residential five or more units:
Adjustable ........................................ -- -- -- -- --
Fixed ............................................. -- 163 515 -- --
------------------------------------------------------------------------------------------------------------------------------------
Total residential ............................... 641,105 889,333 386,109 843,615 1,118,295
Commercial real estate ............................. -- -- 22,500 -- 1,220
Construction ....................................... 18,888 30,767 35,493 15,658 16,412
Land ............................................... -- 9,785 1,025 155 5,565
Non-mortgage:
Commercial ......................................... 165 7,029 4,850 6,060 565
Automobile ......................................... 2,091 4,442 6,135 6,744 39,255
Other consumer ..................................... 7,570 5,715 10,770 11,937 9,714
------------------------------------------------------------------------------------------------------------------------------------
Total loans originated ............................ 669,819 947,071 466,882 884,169 1,191,026
Real estate loans purchased:
One-to-four units .................................... -- 401 631 3,476 4,670
One-to-four units - subprime ......................... -- 206 499 -- 7,890
Other (1) ............................................ 250 -- 1,055 -- --
------------------------------------------------------------------------------------------------------------------------------------
Total real estate loans purchased .................. 250 607 2,185 3,476 12,560
------------------------------------------------------------------------------------------------------------------------------------
Total loans originated and purchased ........... 670,069 947,678 469,067 887,645 1,203,586
Loan repayments ......................................... (705,116) (621,199) (485,831) (496,561) (378,211)
Other net changes (2) ................................... 32,585 28,565 (65,442) 54,562 (309,620)
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for investment . (2,462) 355,044 (82,206) 445,646 515,755
------------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO:
Residential, one-to-four units:
Originated whole loans ............................... 796,216 333,985 469,101 518,457 319,556
Originated whole loans - subprime .................... -- 794 13,494 24,526 48,360
Loans purchased ...................................... 585 947 -- -- --
Loans transferred from (to) the investment portfolio . (2,392) (1,745) 83,164 (11,475) (14,951)
Originated whole loans sold .......................... (134,352) (75,205) (330,306) (165,031) (116,970)
Loans exchanged for mortgage-backed securities ....... (462,744) (167,637) (286,339) (302,362) (213,981)
Other net changes .................................... (3,179) (6,343) (2,957) (1,213) (302)
SFAS 133 capitalized basis adjustment (3) ............ 558 -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for sale ..... 194,692 84,796 (53,843) 62,902 21,712
------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, net:
Received in exchange for loans ....................... 462,744 167,637 286,339 302,362 213,981
Sold ................................................. (462,744) (167,637) (289,542) (302,362) (215,547)
Repayments ........................................... (4,417) (2,459) (1,759) (1,559) (1,254)
Other net changes .................................... 56 231 91 43 (81)
------------------------------------------------------------------------------------------------------------------------------------
Net decrease in mortgage-backed securities available
for sale .......................................... (4,361) (2,228) (4,871) (1,516) (2,901)
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for sale and
mortgage-backed securities available for sale ..... 190,331 82,568 (58,714) 61,386 18,811
------------------------------------------------------------------------------------------------------------------------------------
Total net increase (decrease) in loans and
mortgage-backed securities ......................... $ 187,869 $ 437,612 $ (140,920) $ 507,032 $ 534,566
====================================================================================================================================
(1) Includes two five or more unit residential loans for the three months ended
March 31, 2001 and one construction loan for the three months ended
September 30, 2000.
(2) Primarily includes borrowings against and repayments of lines of credit and
construction loans, changes in loss allowances, loans transferred to or
from real estate acquired in settlement of loans or from (to) the held for
sale portfolio, and interest capitalized on loans (negative amortization).
Also included for the three months ended March 31, 2000, was $367 million
of net automobile loans sold as part of the sale of subsidiary.
(3) Reflects the change in value from date of interest rate lock commitment to
date of origination.
21
The following table sets forth the composition of our loan and
mortgage-backed securities portfolios at the dates indicated.
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2001 2000 2000 2000 2000
------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO:
Loans secured by real estate:
Residential one-to-four units:
Adjustable .................................. $ 7,215,128 $ 7,200,400 $ 6,922,891 $ 6,956,084 $ 6,461,852
Adjustable - subprime ....................... 1,748,715 1,726,526 1,634,342 1,676,546 1,680,205
Fixed ....................................... 437,197 454,838 470,384 486,323 500,132
Fixed - subprime ............................ 16,941 17,388 18,120 18,806 19,751
------------------------------------------------------------------------------------------------------------------------------------
Total one-to-four units ................... 9,417,981 9,399,152 9,045,737 9,137,759 8,661,940
Residential five or more units:
Adjustable .................................. 13,462 14,203 14,284 14,917 15,254
Fixed ....................................... 5,453 5,257 5,444 4,983 5,038
Commercial real estate:
Adjustable .................................. 47,583 37,374 36,590 36,838 37,148
Fixed ....................................... 114,586 127,230 127,715 110,914 111,772
Construction ................................... 96,564 118,165 120,179 121,602 147,910
Land ........................................... 21,230 26,880 26,294 37,222 72,139
Non-mortgage:
Commercial ..................................... 21,312 21,721 23,454 24,511 26,922
Automobile ..................................... 36,590 39,614 40,303 38,935 35,469
Other consumer ................................. 58,610 60,653 60,362 56,627 52,447
------------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment ............. 9,833,371 9,850,249 9,500,362 9,584,308 9,166,039
Increase (decrease) for:
Undisbursed loan funds ......................... (59,206) (72,328) (72,393) (77,563) (103,203)
Net deferred costs and premiums ................ 80,010 79,109 73,579 76,232 73,787
Allowance for losses ........................... (34,059) (34,452) (34,014) (33,237) (32,529)
------------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment, net ........ 9,820,116 9,822,578 9,467,534 9,549,740 9,104,094
------------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO, NET:
Loans held for sale:
One-to-four units .............................. 445,706 251,014 163,726 209,248 131,896
One-to-four units - subprime ................... -- 558 3,050 11,371 25,821
SFAS 133 capitalized basis adjustment (1) ...... 558 -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Total loans held for sale ................... 446,264 251,572 166,776 220,619 157,717
Mortgage-backed securities available for sale:
Adjustable ..................................... 5,835 6,050 6,240 6,783 7,451
Fixed .......................................... 7 4,153 6,191 10,519 11,367
------------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities available .. 5,842 10,203 12,431 17,302 18,818
for sale
------------------------------------------------------------------------------------------------------------------------------------
Total loans held for sale and mortgage-backed
securities available for sale ............. 452,106 261,775 179,207 237,921 176,535
------------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities .. $ 10,272,222 $ 10,084,353 $ 9,646,741 $ 9,787,661 $ 9,280,629
====================================================================================================================================
(1) Reflects the change in value from date of interest rate lock commitment to
date of origination.
We carry loans for sale at the lower of cost or market. At March 31, 2001,
no valuation allowance was required as the market value exceeded book value on
an aggregate basis.
At March 31, 2001, our residential one-to-four units subprime portfolio
consisted of approximately 73% A-, 22% B and 5% C loans. At March 31, 2001, the
average loan-to-value ratio at origination for these loans was approximately
75%.
We carry mortgage-backed securities available for sale at fair value which,
at March 31, 2001, reflected an unrealized loss of $9,000. The current
quarter-end unrealized loss, less the associated tax effect is reflected within
a separate component of other comprehensive income (loss) until realized.
22
DEPOSITS
At March 31, 2001, deposits totaled $8.7 billion, up $1.7 billion or 25.1%
from a year-ago and up $626 million or 7.7% from year-end 2000. Compared to the
year-ago period, our certificates of deposit increased $1.6 billion or 29.8% and
our transaction accounts--i.e., checking, regular passbook and money
market--increased $127 million or 8.3%. Within transaction accounts, our total
checking accounts (non-interest and interest bearing) increased $151 million or
25.2%. That increase, however, was partially offset by declines in regular
passbook accounts.
The following table sets forth information concerning our deposits and
average rates paid at the dates indicated.
March 31, 2001 December 31, 2000 September 30, 2000 June 30, 2000 March 31, 2000
--------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
(Dollars in Thousands) Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount
------------------------------------------------------------------------------------------------------------------------------
Transaction accounts:
Non-interest-bearing
checking ............ - % $ 335,404 - % $ 244,311 - % $ 225,442 - % $ 200,823 - % $ 215,512
Interest-bearing
checking (1) ........ 0.42 416,636 0.78 395,640 0.78 381,596 0.76 377,212 1.00 385,343
Money market ......... 2.87 91,733 2.88 89,408 2.87 88,505 2.88 85,339 2.88 90,217
Regular passbook ..... 3.38 807,503 3.41 754,127 3.42 776,527 3.43 803,841 3.60 833,648
------------------------------------------------------------------------------------------------------------------------------
Total transaction
accounts .......... 1.92 1,651,276 2.12 1,483,486 2.18 1,472,070 2.24 1,467,215 2.39 1,524,720
Certificates of deposit:
Less than 3.00% ....... 2.14 7,620 2.41 6,357 2.41 7,188 2.48 7,708 2.50 7,946
3.00-3.49 ............. 3.45 26 3.45 25 3.45 26 3.41 1 3.41 1
3.50-3.99 ............. 3.81 20,748 3.97 384 3.82 1 3.82 1 3.92 324
4.00-4.49 ............. 4.38 7,279 4.19 26,916 4.23 33,660 4.29 41,648 4.30 80,555
4.50-4.99 ............. 4.72 293,442 4.82 80,844 4.83 162,903 4.81 263,352 4.81 601,590
5.00-5.99 ............. 5.62 2,288,745 5.71 1,901,166 5.69 2,106,639 5.66 3,011,284 5.61 3,440,320
6.00-6.99 ............. 6.64 4,424,756 6.63 4,558,730 6.58 3,889,166 6.49 2,493,154 6.27 1,305,922
7.00 and greater ...... 7.03 14,383 7.02 24,781 7.02 20,129 7.02 5,146 --
------------------------------------------------------------------------------------------------------------------------------
Total certificates of
deposit ........... 6.21 7,056,999 6.33 6,599,203 6.22 6,219,712 5.96 5,822,294 5.66 5,436,658
------------------------------------------------------------------------------------------------------------------------------
Total deposits ...... 5.40% $8,708,275 5.56% $8,082,689 5.44% $7,691,782 5.22% $7,289,509 4.95% $6,961,378
==============================================================================================================================
(1) Includes amounts swept into money market deposit accounts.
BORROWINGS
During the 2001 first quarter, our borrowings decreased $521 million to
$1.5 billion, due to a decrease in FHLB advances. This followed an increase of
$118 million during the fourth quarter of 2000.
The following table sets forth information concerning our FHLB advances and
other borrowings at the dates indicated.
March 31, December 31, September 30, June 30, March 31,
(Dollars in Thousands) 2001 2000 2000 2000 2000
----------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances ................ $1,457,046 $1,978,348 $1,860,255 $2,411,808 $2,248,964
Other borrowings ............................... 145 224 248 285 329
----------------------------------------------------------------------------------------------------------------------
Total borrowings ............................ $1,457,191 $1,978,572 $1,860,503 $2,412,093 $2,249,293
----------------------------------------------------------------------------------------------------------------------
Weighted average rate on borrowings during
the period ................................. 6.14% 6.34% 6.39% 6.11% 5.81%
Total borrowings as a percentage of total assets 13.21 18.16 17.95 23.02 22.59
======================================================================================================================
23
CAPITAL SECURITIES
On July 23, 1999, we issued $120 million in capital securities, of which
$108 million was invested as additional common stock in the Bank. The capital
securities pay quarterly cumulative cash distributions at an annual rate of
10.00% of the liquidation value of $25 per share. Interest expense including the
amortization of deferred issuance costs on our capital securities was $3.0
million for the first quarter of 2001.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
interest rates. Our market risk arises primarily from interest rate risk in our
lending and deposit taking activities. This interest rate risk occurs to the
degree that our interest-bearing liabilities reprice or mature on a different
basis--generally more rapidly--than our interest-earning assets. Since our
earnings depend primarily on our 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, one of our principal objectives
is to actively monitor and manage the effects of adverse changes in interest
rates on net interest income while maintaining asset quality. Our primary
strategy to manage interest rate risk is to emphasize the origination of
adjustable rate mortgages or loans with relatively short maturities. Interest
rates on adjustable rate mortgages are primarily tied to COFI. There has been no
significant change in our market risk since December 31, 2000.
24
The following table sets forth the repricing frequency of our major asset
and liability categories as of March 31, 2001, as well as other information
regarding the repricing and maturity differences between our interest-earning
assets and total deposits, borrowings and capital securities in future periods.
We refer to these differences as "gap." We have determined the repricing
frequencies 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. We assume prepayment rates on substantially all of our loan
portfolio based upon our historical loan prepayment experience and anticipated
future prepayments. Repricing mechanisms on a number of our assets are subject
to limitations, such as caps on the amount that interest rates and payments on
our loans may adjust, and accordingly, these assets do not normally respond to
changes in market interest rates as completely or rapidly as our liabilities.
The interest rate sensitivity of our assets and liabilities illustrated in the
following table would vary substantially if we used different assumptions or if
actual experience differed from the assumptions shown.
March 31, 2001
-------------------------------------------------------------------------------------
Within 7 - 12 2 - 5 6 - 10 Over Total
(Dollars in Thousands) 6 Months Months Years Years 10 Years Balance
------------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Investment securities and FHLB stock ..(1) $ 208,079 $ 73,365 $ 96,752 $ 69 $ -- $ 378,265
Loans and mortgage-backed securities:
Loans secured by real estate:
Residential:
Adjustable .......................(2) 8,656,954 250,128 120,231 -- -- 9,027,313
Fixed ............................(2) 487,982 33,960 188,889 114,453 82,910 908,194
Commercial real estate .............(2) 50,779 16,775 86,029 4,113 1,693 159,389
Construction .......................(2) 46,289 -- -- -- -- 46,289
Land ...............................(2) 15,728 9 67 800 -- 16,604
Non-mortgage loans:
Commercial .........................(2) 14,329 -- -- -- -- 14,329
Consumer ...........................(2) 66,225 7,147 20,890 -- -- 94,262
Mortgage-backed securities ...........(2) 5,842 -- -- -- -- 5,842
------------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed
securities ........................... 9,344,128 308,019 416,106 119,366 84,603 10,272,222
------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ........ $ 9,552,207 $ 381,384 $ 512,858 $ 119,435 $ 84,603 $10,650,487
====================================================================================================================================
Transaction accounts:
Non-interest-bearing checking: ........ $ 335,404 $ -- $ -- $ -- $ -- $ 335,404
Interest-bearing checking .............(3) 416,636 -- -- -- -- 416,636
Money market ..........................(4) 91,733 -- -- -- -- 91,733
Regular passbook ......................(4) 807,503 -- -- -- -- 807,503
------------------------------------------------------------------------------------------------------------------------------------
Total transaction accounts ........... 1,651,276 -- -- -- -- 1,651,276
Certificates of deposit ...................(1) 4,755,955 2,113,677 187,367 -- -- 7,056,999
------------------------------------------------------------------------------------------------------------------------------------
Total deposits ........................ 6,407,231 2,113,677 187,367 -- -- 8,708,275
Borrowings ................................ 967,389 5,066 54,736 430,000 -- 1,457,191
Capital securities ........................ -- -- -- -- 120,000 120,000
------------------------------------------------------------------------------------------------------------------------------------
Total deposits, borrowings and
capital securities ................. $ 7,374,620 $ 2,118,743 $ 242,103 $ 430,000 $ 120,000 $10,285,466
====================================================================================================================================
Excess (shortfall) of interest-earning
assets over deposits, borrowings and
capital securities .................... $2,177,587 $(1,737,359) $ 270,755 $ (310,565) $ (35,397) $ 365,021
Cumulative gap ............................ 2,177,587 440,228 710,983 400,418 365,021
Cumulative gap-- as a % of total assets:
March 31, 2001 ........................ 19.74% 3.99% 6.45% 3.63% 3.31%
December 31, 2000 ..................... 28.66 7.13 5.94 3.13 3.13
March 31, 2000 ........................ 24.69 14.35 5.20 2.28 2.77
===================================================================================================================================
(1) Based upon contractual maturity and repricing date.
(2) Based upon contractual maturity, repricing date and projected repayment and
prepayments of principal.
(3) Includes amounts swept into money market deposit accounts and subject to
immediate repricing.
(4) Subject to immediate repricing.
25
Our six-month gap at March 31, 2001 was a positive 19.74%. This means more
interest-earning assets reprice within six months than total deposits,
borrowings and capital securities. This compares to a positive six-month gap of
28.66% at December 31, 2000 and 24.69% at March 31, 2000. We continue to pursue
our strategy of emphasizing the origination of adjustable rate mortgages. For
the twelve months ended March 31, 2001, we originated and purchased for
investment $2.9 billion of adjustable rate loans which represented approximately
98% of all loans we originated and purchased for investment during the period.
At March 31, 2001, 98% of our interest-earning assets mature, reprice or
are estimated to prepay within five years, unchanged from December 31, 2000, but
up slightly from 97% at March 31, 2000. At March 31, 2001, loans held for
investment and mortgage-backed securities with adjustable interest rates
represented 90% of those portfolios. During the first quarter of 2001, we
continued to offer residential fixed rate loan products to our customers
primarily for sale in the secondary market. We price and originate fixed rate
mortgage loans for sale into the secondary market to increase opportunities for
originating adjustable rate mortgages and generating fee and servicing income.
We also originate fixed rate loans for portfolio to facilitate the sale of real
estate acquired in settlement of loans and which meet specific yield and other
approved guidelines.
At March 31, 2001, $9.4 billion or 91% of our 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
$9.4 billion or 93% at December 31, 2000 and $8.7 billion or 93% at March 31,
2000.
The following table sets forth the interest rate spread between our
interest-earning assets and interest-bearing liabilities at the dates indicated.
March 31, December 31, September 30, June 30, March 31,
2001 2000 2000 2000 2000
-------------------------------------------------------------------------------------------------
Weighted average yield:
Loans and mortgage-backed securities 8.56% 8.45% 8.40% 8.03% 7.70%
Federal Home Loan Bank stock ....... 5.51 5.52 5.52 5.52 5.69
Investment securities .............. 6.00 6.45 6.42 6.35 6.12
-------------------------------------------------------------------------------------------------
Earning assets yield ............. 8.46 8.36 8.32 7.97 7.64
-------------------------------------------------------------------------------------------------
Weighted average cost:
Deposits ........................... 5.40 5.56 5.44 5.22 4.95
Borrowings:
Federal Home Loan Bank advances .. 5.94 6.26 6.37 6.31 5.95
Other borrowings ................. 7.88 8.12 7.88 7.88 7.88
-------------------------------------------------------------------------------------------------
Total borrowings ............. 5.94 6.26 6.37 6.31 5.95
Capital securities ................. 10.00 10.00 10.00 10.00 10.00
-------------------------------------------------------------------------------------------------
Combined funds cost .............. 5.53 5.75 5.68 5.55 5.25
-------------------------------------------------------------------------------------------------
Interest rate spread ......... 2.93% 2.61% 2.64% 2.42% 2.39%
=================================================================================================
The period-end weighted average yield on our loan portfolio increased to
8.56% at March 31, 2001, up from 8.45% at December 31, 2000 and 7.70% at March
31, 2000. At March 31, 2001, our adjustable rate mortgage portfolio of single
family residential loans, including mortgage-backed securities, totaled $9.0
billion with a weighted average rate of 8.65%, compared to $9.0 billion with a
weighted average rate of 8.47% at December 31, 2000 and $8.2 billion with a
weighted average rate of 7.63% at March 31, 2000.
PROBLEM LOANS AND REAL ESTATE
Non-Performing Assets
Non-performing assets consist of loans on which we have ceased the accrual
of interest, which we refer to as non-accrual loans, loans restructured at a
below market rate, real estate acquired in settlement of loans and repossessed
automobiles. Non-performing assets increased during the quarter by $4 million to
$59 million or 0.53% of total assets. This increase was due to a rise in
residential subprime non-performers of $6 million and a $1 million commercial
loan placed on non-accrual, partially offset by a $4 million decline in
residential non-performers. Non-performing assets at quarter end include
non-accrual loans aggregating $2 million which were not contractually past due,
but were deemed non-accrual due to management's assessment of the borrower's
ability to pay.
26
The following table summarizes our non-performing assets at the dates
indicated.
March 31, December 31, September 30, June 30, March 31,
(Dollars in Thousands) 2001 2000 2000 2000 2000
---------------------------------------------------------------------------------------------------------------
Non-accrual loans:
Residential one-to-four units ................... $16,965 $20,746 $17,976 $18,692 $15,546
Residential one-to-four units - subprime ........ 26,353 22,296 20,389 19,725 15,426
Other ........................................... 3,367 1,708 1,867 1,537 1,479
---------------------------------------------------------------------------------------------------------------
Total non-accrual loans ....................... 46,685 44,750 40,232 39,954 32,451
Troubled debt restructure - below market rate (1) ... 205 206 209 210 210
Real estate acquired in settlement of loans ......... 11,634 9,942 9,161 5,657 7,115
Repossessed automobiles ............................. 15 76 -- -- --
---------------------------------------------------------------------------------------------------------------
Total non-performing assets ..................... $58,539 $54,974 $49,602 $45,821 $39,776
===============================================================================================================
Allowance for loan losses:
Amount .......................................... $34,059 $34,452 $34,014 $33,237 $32,529
As a percentage of non-performing loans ......... 72.64% 76.63% 84.11% 82.75% 99.60%
Non-performing assets as a percentage of total assets 0.53 0.50 0.48 0.44 0.40
===============================================================================================================
(1) Represents a single one-to-four unit residential loan.
Delinquent Loans
During the 2001 first quarter, our delinquencies as a percentage of total
loans outstanding increased from 0.66% to 0.73%, and were above the 0.53% of a
year ago. The increase primarily occurred within our residential one-to-four
units subprime category and non-mortgage commercial category.
27
The following table indicates the amounts of our past due loans at the
dates indicated.
March 31, 2001 December 31, 2000
-------------------------------------------------------------------------------------
30-59 60-89 90+ 30-59 60-89 90+
(Dollars in Thousands) Days Days Days (1) Total Days Days Days (1) Total
------------------------------------------------------------------------------------------------------------------------------
Loans secured by real estate:
Residential:
One-to-four units .............. $14,166 $ 6,961 $15,490 $36,617 $12,400 $ 8,611 $15,246 $36,257
One-to-four units - subprime ... 11,223 6,651 17,860 35,734 7,300 7,658 14,427 29,385
Five or more units ............. -- -- 508 508 -- -- -- --
Commercial real estate ........... -- -- -- -- -- -- -- --
Construction ..................... -- -- -- -- -- -- -- --
Land ............................. -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------
Total real estate loans ........ 25,389 13,612 33,858 72,859 19,700 16,269 29,673 65,642
Non-mortgage:
Commercial ....................... -- 1,290 -- 1,290 -- -- -- --
Automobile ....................... 230 55 74 359 393 26 151 570
Other consumer ................... 189 31 190 410 98 29 246 373
------------------------------------------------------------------------------------------------------------------------------
Total loans .................... $25,808 $14,988 $34,122 $74,918 $20,191 $16,324 $30,070 $66,585
==============================================================================================================================
Delinquencies as a percentage of total
loans ............................ 0.25% 0.15% 0.33% 0.73% 0.20% 0.16% 0.30% 0.66%
==============================================================================================================================
September 30, 2000 June 30, 2000
-------------------------------------------------------------------------------------
Loans secured by real estate:
Residential:
One-to-four units .............. $14,970 $ 3,037 $16,176 $34,183 $ 7,519 $ 4,970 $14,805 $27,294
One-to-four units - subprime ... 7,701 5,422 11,911 25,034 6,270 4,590 11,054 21,914
Five or more units ............. -- -- -- -- -- -- -- --
Commercial real estate ........... -- -- -- -- -- -- -- --
Construction ..................... -- -- -- -- -- -- -- --
Land ............................. -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------
Total real estate loans ........ 22,671 8,459 28,087 59,217 13,789 9,560 25,859 49,208
Non-mortgage:
Commercial ....................... -- -- -- -- -- -- -- --
Automobile ....................... 356 50 116 522 158 -- 6 164
Other consumer ................... 200 86 433 719 372 30 208 610
------------------------------------------------------------------------------------------------------------------------------
Total loans .................... $23,227 $ 8,595 $28,636 $60,458 $14,319 $ 9,590 $26,073 $49,982
==============================================================================================================================
Delinquencies as a percentage of total
loans ............................ 0.24% 0.09% 0.30% 0.63% 0.15% 0.10% 0.26% 0.51%
==============================================================================================================================
March 31, 2000
-----------------------------------------
Loans secured by real estate:
Residential:
One-to-four units .............. $10,388 $ 4,389 $12,974 $27,751
One-to-four units - subprime ... 11,037 3,127 7,092 21,256
Five or more units ............. -- -- -- --
Commercial real estate ........... -- -- -- --
Construction ..................... -- -- -- --
Land ............................. -- -- -- --
----------------------------------------------------------------------------------
Total real estate loans ........ 21,425 7,516 20,066 49,007
Non-mortgage:
Commercial ....................... -- -- -- --
Automobile ....................... 150 33 14 197
Other consumer ................... 356 44 137 537
----------------------------------------------------------------------------------
Total loans .................... $21,931 $ 7,593 $20,217 $49,741
==================================================================================
Delinquencies as a percentage of total
loans ............................ 0.23% 0.08% 0.22% 0.53%
==================================================================================
(1) All 90 day or greater delinquencies are on non-accrual status and reported
as part of non-performing assets.
28
Allowance for Losses on Loans and Real Estate
We maintain valuation allowances for losses on loans and real estate to
provide for losses inherent in those portfolios. The adequacy of the allowance
is evaluated quarterly by management to maintain the allowance at levels
sufficient to provide for inherent losses. We adhere to an internal asset review
system and loss allowance methodology designed to provide for timely recognition
of problem assets and an adequate allowance to cover asset losses. The amount of
the allowance is based upon the summation of general valuation allowances,
allocated allowances and an unallocated allowance. General valuation allowances
relate to assets with no well-defined deficiency or weakness and takes into
consideration loss that is imbedded within the portfolio but has not yet been
realized. Allocated allowances relate to assets with well-defined deficiencies
or weaknesses. Included in these allowances are those amounts associated with
assets where it is probable that the value of the asset has been impaired and
the loss can be reasonably estimated. If we determine the net fair value of the
asset exceeds our carrying value, a specific allowance is recorded for the
amount of that difference. The unallocated allowance is more subjective and is
reviewed quarterly to take into consideration estimation errors and economic
trends that are not necessarily captured in determining the general valuation
and allocated allowances.
Allowances for losses on all assets were $37 million at March 31, 2001, $38
million at December 31, 2000 and $35 million at March 31, 2000.
Our provision for loan losses was $0.1 million in the current quarter and
was below our net loan charge-offs by $0.4 million resulting in a decrease in
the allowance for loan losses to $34.1 million at March 31, 2001. The current
quarter allowance decrease reflected a decrease of $0.5 million in general
valuation allowances to $26.5 million due to declines in various categories of
our loan portfolio, while allocated allowances remained virtually unchanged at
$4.7 million. There was no change in the unallocated allowance of $2.8 million.
The following table is a summary of the activity in our allowance for loan
losses during the periods indicated.
Three Months Ended
----------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2001 2000 2000 2000 2000
-------------------------------------------------------------------------------------------
Balance at beginning of period $ 34,452 $ 34,014 $ 33,237 $ 32,529 $ 38,342
Provision .................... 52 511 1,007 942 791
Charge-offs .................. (508) (346) (234) (237) (932)
Recoveries ................... 63 273 4 3 139
Transfers (1) ................ -- -- -- -- (5,811)
-------------------------------------------------------------------------------------------
Balance at end of period ..... $ 34,059 $ 34,452 $ 34,014 $ 33,237 $ 32,529
===========================================================================================
(1) Reduction was due to the sale of subsidiary.
29
The following table presents gross charge-offs, gross recoveries and net
charge-offs by category of loan during the periods indicated.
Three Months Ended
---------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(Dollars in Thousands) 2001 2000 2000 2000 2000
----------------------------------------------------------------------------------------------------------------
Gross loan charge-offs:
Loans secured by real estate:
Residential:
One-to-four units ........................... $ 268 $ 69 $ 153 $ 114 $ 16
One-to-four units - subprime ................ 136 136 21 57 169
Five or more units .......................... -- -- -- -- --
Commercial real estate ........................ -- -- -- -- --
Construction .................................. -- -- -- -- --
Land .......................................... -- -- -- -- --
Non-mortgage:
Commercial .................................... -- -- -- -- --
Automobile .................................... 48 98 -- 17 717
Other consumer ................................ 56 43 60 49 30
----------------------------------------------------------------------------------------------------------------
Total gross loan charge-offs ................ 508 346 234 237 932
----------------------------------------------------------------------------------------------------------------
Gross loan recoveries:
Loans secured by real estate:
Residential:
One-to-four units ........................... 59 19 -- -- --
One-to-four units - subprime ................ -- -- -- -- --
Five or more units .......................... -- -- -- -- --
Commercial real estate ........................ -- 250 -- -- --
Construction .................................. -- -- -- -- --
Land .......................................... -- -- -- -- --
Non-mortgage:
Commercial .................................... -- -- -- -- --
Automobile .................................... -- -- -- -- 136
Other consumer ................................ 4 4 4 3 3
----------------------------------------------------------------------------------------------------------------
Total gross loan recoveries ................. 63 273 4 3 139
----------------------------------------------------------------------------------------------------------------
Net loan charge-offs:
Loans secured by real estate:
Residential:
One-to-four units ........................... 209 50 153 114 16
One-to-four units - subprime ................ 136 136 21 57 169
Five or more units .......................... -- -- -- -- --
Commercial real estate ........................ -- (250) -- -- --
Construction .................................. -- -- -- -- --
Land .......................................... -- -- -- -- --
Non-mortgage:
Commercial .................................... -- -- -- -- --
Automobile .................................... 48 98 -- 17 581
Other consumer ................................ 52 39 56 46 27
----------------------------------------------------------------------------------------------------------------
Total net loan charge-offs .................. $ 445 $ 73 $ 230 $ 234 $ 793
================================================================================================================
Net loan charge-offs as a percentage of average loans 0.02% -% 0.01% 0.01% 0.04%
================================================================================================================
30
The following table indicates our allocation of the allowance for loan
losses to the various categories of loans at the dates indicated.
March 31, 2001 December 31, 2000 September 30, 2000
------------------------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------------------------------------------------
Loans secured by real estate:
Residential:
One-to-four units ...... $14,613 $7,652,325 0.19% $15,254 $7,655,238 0.20% $15,143 $7,393,275 0.20%
One-to-four units -
subprime ............. 11,057 1,765,656 0.63 10,157 1,743,914 0.58 9,946 1,652,462 0.60
Five or more units ..... 142 18,915 0.75 146 19,460 0.75 148 19,728 0.75
Commercial real estate ... 2,709 162,169 1.67 2,935 164,604 1.78 2,930 164,305 1.78
Construction ............. 1,142 96,564 1.18 1,390 118,165 1.18 1,412 120,179 1.17
Land ..................... 261 21,230 1.23 332 26,880 1.24 325 26,294 1.24
Non-mortgage:
Commercial ............... 424 21,312 1.99 442 21,721 2.03 287 23,454 1.22
Automobile ............... 234 36,590 0.64 269 39,614 0.68 234 40,303 0.58
Other consumer ........... 677 58,610 1.16 727 60,653 1.20 789 60,362 1.31
Not specifically allocated .. 2,800 -- -- 2,800 -- -- 2,800 -- --
-------------------------------------------------------------------------------------------------------------------------------
Total loans held for
investment ............. $34,059 $9,833,371 0.35% $34,452 $9,850,249 0.35% $34,014 $9,500,362 0.36%
===============================================================================================================================
June 30, 2000 March 31, 2000
-------------------------------------------------------------
Loans secured by real estate:
Residential:
One-to-four units ...... $14,622 $7,442,407 0.20% $14,120 $6,961,984 0.20%
One-to-four units -
subprime ............. 9,862 1,695,352 0.58 9,036 1,699,956 0.53
Five or more units ..... 175 19,900 0.88 178 20,292 0.88
Commercial real estate ... 2,690 147,752 1.82 2,634 148,920 1.77
Construction ............. 1,433 121,602 1.18 1,747 147,910 1.18
Land ..................... 463 37,222 1.24 899 72,139 1.25
Non-mortgage:
Commercial ............... 283 24,511 1.15 293 26,922 1.09
Automobile ............... 203 38,935 0.52 184 35,469 0.52
Other consumer ........... 706 56,627 1.25 638 52,447 1.22
Not specifically allocated .. 2,800 -- -- 2,800 -- --
---------------------------------------------------------------------------------------------
Total loans held for
investment ............. $33,237 $9,584,308 0.35% $32,529 $9,166,039 0.35%
=============================================================================================
At March 31, 2001, the recorded investment in loans for which we recognized
impairment totaled $14 million. The total allowance for losses related to these
loans was $1 million. During the first quarter of 2001, total interest
recognized on the impaired loan portfolio was $0.5 million.
A summary of the activity in the allowance for loan losses associated with
impaired loans is shown below for the periods indicated. We have recorded
provisions and reductions to the allowance associated with changes in the net
book value of loans classified as impaired.
Three Months Ended
---------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2001 2000 2000 2000 2000
-----------------------------------------------------------------------------------------
Balance at beginning of period $ 800 $ 791 $ 792 $ 795 $ 797
Provision (reduction) ........ (2) 9 (1) (3) (2)
Charge-offs .................. -- -- -- -- --
Recoveries ................... -- -- -- -- --
-----------------------------------------------------------------------------------------
Balance at end of period ..... $ 798 $ 800 $ 791 $ 792 $ 795
=========================================================================================
31
The following table is a summary of the activity in our allowance for real
estate and joint ventures held for investment during the periods indicated.
Three Months Ended
---------------------------------------------------------
March 31, December 31, September 30, June 30, March 31,
(In Thousands) 2001 2000 2000 2000 2000
-----------------------------------------------------------------------------------------
Balance at beginning of period $ 2,997 $ 2,961 $ 3,561 $ 2,088 $ 2,131
Provision (reduction) ........ 33 36 (600) 1,473 (43)
Charge-offs .................. -- -- -- -- --
Recoveries ................... -- -- -- -- --
-----------------------------------------------------------------------------------------
Balance at end of period ..... $ 3,030 $ 2,997 $ 2,961 $ 3,561 $ 2,088
=========================================================================================
CAPITAL RESOURCES AND LIQUIDITY
Our sources of funds include deposits, advances from the FHLB and other
borrowings; proceeds from the sale of real estate, loans and mortgage-backed
securities; payments of loans and mortgage-backed securities and payments for
and sales of loan servicing; and income from other investments. Interest rates,
real estate sales activity and general economic conditions significantly affect
repayments on loans and mortgage-backed securities and deposit inflows and
outflows.
Our primary sources of funds generated in the first quarter of 2001 were
from:
o a net increase in deposits of $626 million;
o principal repayments--including prepayments, but excluding refinances
of our existing loans--on loans and mortgage-backed securities of $563
million; and
o maturities of U.S. Treasury securities, agency obligations and other
investment securities available for sale of $203 million.
We used these funds for the following purposes:
o to originate loans held for investment of $522 million;
o to paydown our borrowings by $521 million;
o to increase our loans held for sale a net $195 million; and
o to purchase U.S. Treasury securities, agency obligations and other
investment securities available for sale of $161 million.
At March 31, 2001, the Bank's ratio of regulatory liquidity was 4.6%,
compared to 4.3% at December 31, 2000 and 4.0% at March 31, 2000.
Downey currently has liquid assets, including due from
Bank--interest-bearing balances, of $18 million and can obtain further funds by
means of dividends from subsidiaries, subject to certain limitations, or
issuance of further debt or equity.
Stockholders' equity totaled $649 million at March 31, 2001, up from $625
million at December 31, 2000 and $557 million at March 31, 2000.
32
REGULATORY CAPITAL
The following table is a reconciliation of the Bank's stockholder's equity
to federal regulatory capital as of March 31, 2001. Our core and tangible
capital ratios were 6.55% and the risk-based capital ratio was 13.09%. The
Bank's capital ratios exceed the "well capitalized" standards of 5.00% for core
capital and 10.00% for risk-based capital, as defined by regulation.
Tangible Capital Core Capital Risk-Based Capital
---------------- ---------------- ---------------------
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
----------------------------------------------------------------------------------------------------------------
Stockholder's equity ....................... $745,486 $745,486 $745,486
Adjustments:
Deductions:
Investment in subsidiary, primarily real
estate ............................... (17,818) (17,818) (17,818)
Goodwill ............................... (3,493) (3,493) (3,493)
Non-permitted mortgage servicing rights (3,572) (3,572) (3,572)
Additions:
Unrealized gains on securities available
for sale ............................. (1,182) (1,182) (1,182)
General loss allowance - investment in
DSL Service Company .................... 516 516 516
Allowance for loan losses,
net of specific allowances (1) ....... -- -- 33,760
----------------------------------------------------------------------------------------------------------------
Regulatory capital ......................... 719,937 6.55% 719,937 6.55% 753,697 13.09%
Well capitalized requirement ............... 164,944 1.50 (2) 549,812 5.00 575,605 10.00 (3)
----------------------------------------------------------------------------------------------------------------
Excess ..................................... $554,993 5.05% $170,125 1.55% $178,092 3.09%
================================================================================================================
(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 6.00%,
which the Bank met and exceeded with a ratio of 12.51%.
33
PART II -- OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits.
(B) Form 8-K filed January 18, 2001.
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 2, 2001 /s/ DANIEL D. ROSENTHAL
----------------------------------------------------
Daniel D. Rosenthal
President and Chief Executive Officer
Date: May 2, 2001 /s/ THOMAS E. PRINCE
----------------------------------------------------
Thomas E. Prince
Executive Vice President and Chief Financial Officer
34