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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 JUNE 30, 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 June 30, 2001, 28,211,048 shares of the Registrant's Common Stock, $0.01
par value were outstanding.
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DOWNEY FINANCIAL CORP.
JUNE 30, 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.............................. 11
PART II
OTHER INFORMATION............................................................ 35
Item 6 Exhibits and Reports on Form 8-K....................... 35
i
PART I - FINANCIAL INFORMATION
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31, June 30,
(Dollars in Thousands, Except Per Share Data) 2001 2000 2000
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ASSETS
Cash .......................................................................... $ 110,932 $ 108,202 $ 85,681
Federal funds ................................................................. 35,600 19,601 9,600
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Cash and cash equivalents ................................................. 146,532 127,803 95,281
U.S. Treasury securities, agency obligations and other investment securities
available for sale, at fair value ......................................... 262,835 305,615 196,441
Municipal securities held to maturity, at amortized cost (estimated market
value of $6,534 at June 30, 2001 and December 31, 2000 and
$6,709 at June 30, 2000) .................................................. 6,550 6,550 6,727
Mortgage loans purchased under resale agreements .............................. 40,000 -- --
Loans held for sale, at lower of cost or market ............................... 376,560 251,572 220,619
Mortgage-backed securities available for sale, at fair value .................. 5,234 10,203 17,302
Loans receivable held for investment .......................................... 9,599,419 9,822,578 9,549,740
Investments in real estate and joint ventures ................................. 19,950 17,641 39,256
Real estate acquired in settlement of loans ................................... 8,366 9,942 5,657
Premises and equipment ........................................................ 104,591 104,178 105,766
Federal Home Loan Bank stock, at cost ......................................... 110,036 106,356 119,764
Mortgage servicing rights, net ................................................ 42,142 40,731 40,912
Other assets .................................................................. 99,701 90,694 79,125
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$10,821,916 $10,893,863 $10,476,590
=============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ...................................................................... $ 9,040,064 $ 8,082,689 $ 7,289,509
Federal Home Loan Bank advances ............................................... 892,670 1,978,348 2,411,808
Other borrowings .............................................................. 94 224 285
Accounts payable and accrued liabilities ...................................... 55,642 54,236 47,804
Deferred income taxes ......................................................... 32,727 33,730 29,688
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Total liabilities ......................................................... 10,021,197 10,149,227 9,779,094
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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 June 30, 2001, 28,205,741 shares
at December 31, 2000 and 28,170,388 shares at June 30, 2000 ............... 282 282 282
Additional paid-in capital .................................................... 93,374 93,239 92,760
Accumulated other comprehensive income (loss) ................................. 2,394 687 (1,717)
Retained earnings ............................................................. 584,669 530,428 486,171
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Total stockholders' equity ................................................ 680,719 624,636 577,496
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$10,821,916 $10,893,863 $10,476,590
=============================================================================================================================
See accompanying notes to consolidated financial statements.
1
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------------
(Dollars in Thousands, Except Per Share Data) 2001 2000 2001 2000
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INTEREST INCOME
Loans receivable .................................................... $ 203,820 $ 186,648 $ 416,582 $ 359,118
U.S. Treasury securities and agency obligations ..................... 4,122 3,138 8,532 6,052
Mortgage-backed securities .......................................... 87 300 215 652
Other investments ................................................... 3,206 2,614 5,872 4,393
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Total interest income ............................................ 211,235 192,700 431,201 370,215
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INTEREST EXPENSE
Deposits ............................................................ 114,386 90,219 229,187 171,452
Borrowings .......................................................... 17,562 35,875 43,524 66,353
Capital securities .................................................. 3,041 3,041 6,082 6,082
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Total interest expense ........................................... 134,989 129,135 278,793 243,887
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NET INTEREST INCOME ................................................. 76,246 63,565 152,408 126,328
PROVISION FOR LOAN LOSSES ........................................... 431 942 483 1,733
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Net interest income after provision for loan losses .............. 75,815 62,623 151,925 124,595
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OTHER INCOME, NET
Loan and deposit related fees ....................................... 14,136 7,007 24,366 12,830
Real estate and joint ventures held for investment, net:
Operations, net .................................................. 725 2,213 1,756 3,837
Net gains on sales of wholly owned real estate ................... -- -- 2 1,421
Provision for losses on real estate and joint ventures ........... (33) (1,473) (66) (1,430)
Secondary marketing activities:
Loan servicing fees .............................................. (2,898) 313 (11,083) 564
Net gains on sales of loans and mortgage-backed securities ....... 8,962 723 11,087 2,516
Net gains on sale of mortgage servicing rights ................... 671 -- 671 --
Net gains (losses) on sales of investment securities ................ 114 (89) 239 (89)
Gain on sale of subsidiary .......................................... -- -- -- 9,762
Other ............................................................... 606 773 1,262 1,533
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Total other income, net .......................................... 22,283 9,467 28,234 30,944
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OPERATING EXPENSE
Salaries and related costs .......................................... 24,646 19,974 47,917 41,499
Premises and equipment costs ........................................ 6,042 5,803 12,085 11,438
Advertising expense ................................................. 1,127 812 2,303 2,685
Professional fees ................................................... 1,604 688 2,181 1,508
SAIF insurance premiums and regulatory assessments .................. 741 627 1,473 1,247
Other general and administrative expense ............................ 5,973 4,817 11,312 9,705
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Total general and administrative expense ......................... 40,133 32,721 77,271 68,082
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Net operation of real estate acquired in settlement of loans ........ (106) 87 (108) 334
Amortization of excess of cost over fair value of net assets acquired 114 116 228 233
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Total operating expense .......................................... 40,141 32,924 77,391 68,649
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INCOME BEFORE INCOME TAXES .......................................... 57,957 39,166 102,768 86,890
Income taxes ........................................................ 24,502 16,684 43,485 36,972
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Net income before cumulative effect of change in accounting principle 33,455 22,482 59,283 49,918
Cumulative effect of change in accounting principle, net of taxes ... -- -- 36 --
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NET INCOME ....................................................... $ 33,455 $ 22,482 $ 59,319 $ 49,918
====================================================================================================================================
PER SHARE INFORMATION
Basic before cumulative effect of change in accounting principle .... $ 1.18 $ 0.80 $ 2.10 $ 1.77
BASIC AFTER CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ..... 1.18 0.80 2.10 1.77
====================================================================================================================================
Diluted before cumulative effect of change in accounting principle .. $ 1.18 $ 0.80 $ 2.09 $ 1.77
DILUTED AFTER CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ... 1.18 0.80 2.09 1.77
====================================================================================================================================
CASH DIVIDENDS DECLARED AND PAID .................................... $ 0.09 $ 0.09 $ 0.18 $ 0.18
====================================================================================================================================
Weighted average diluted shares outstanding ......................... 28,271,014 28,204,302 28,273,099 28,189,100
====================================================================================================================================
See accompanying notes to consolidated financial statements.
2
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------
(In Thousands) 2001 2000 2001 2000
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NET INCOME ................................................................ $ 33,455 $ 22,482 $ 59,319 $ 49,918
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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 ......................... (152) 244 541 (180)
Mortgage-backed securities available for sale, at fair value .......... 22 26 55 (29)
Less reclassification of realized (gains) losses included in net income (66) 51 (138) 60
Unrealized gains (losses) on cash flow hedges:
Net derivative instruments ............................................ 2,045 -- 1,110 --
Cumulative effect of change in accounting principle ................... -- -- (388) --
Less reclassification of realized (gains) losses included in net income (637) -- 527 --
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Total other comprehensive income (loss), net of income taxes (benefits) ... 1,212 321 1,707 (149)
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COMPREHENSIVE INCOME ...................................................... $ 34,667 $ 22,803 $ 61,026 $ 49,769
=============================================================================================================================
See accompanying notes to consolidated financial statements.
3
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Six Months Ended
June 30,
------------------------------
(In Thousands) 2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................................................... $ 59,319 $ 49,918
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 ......................................................... 24,004 14,454
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 ....... 11,576 3,394
Net gains on sales of loans and mortgage-backed securities, mortgage servicing rights,
investment securities, real estate and other assets ................................. (13,538) (5,754)
Gain on sale of subsidiary ............................................................ -- (9,762)
Interest capitalized on loans (negative amortization) ................................. (34,601) (34,272)
Federal Home Loan Bank stock dividends ................................................ (3,680) (3,414)
Loans originated for sale ................................................................ (2,093,678) (910,899)
Proceeds from sales of loans held for sale, including those sold
via mortgage-backed securities ........................................................ 1,955,407 793,303
Other, net ............................................................................... (9,933) (20,116)
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Net cash used for operating activities ................................................... (105,160) (123,148)
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of:
Subsidiary, net ....................................................................... -- 379,234
U.S. Treasury securities, agency obligations and other investment securities
available for sale .................................................................. 18,653 9,911
Wholly owned real estate and real estate acquired in settlement of loans .............. 2,565 5,659
Proceeds from maturities of U.S. Treasury securities, agency obligations
and other investment securities available for sale .................................... 284,090 --
Purchase of:
U.S. Treasury securities, agency obligations and other investment securities
available for sale .................................................................. (258,114) (35,025)
Mortgage loans under resale agreements ................................................ (40,000) --
Loans receivable held for investment .................................................. (88,259) (16,036)
Federal Home Loan Bank stock .......................................................... -- (13,958)
Originations of loans receivable held for investment (net of refinances of $377,262 at
June 30, 2001 and $62,778 at June 30, 2000) ........................................... (1,068,383) (2,008,704)
Principal payments on loans receivable held for investment and mortgage-backed
securities available for sale ......................................................... 1,428,465 814,807
Net change in undisbursed loan funds ..................................................... (12,279) (47,643)
Proceeds from (investments in) real estate held for investment ........................... (3,332) 1,790
Other, net ............................................................................... (6,141) (4,123)
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Net cash provided by (used for) investing activities ..................................... 257,265 (914,088)
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See accompanying notes to consolidated financial statements.
4
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Six Months Ended
June 30,
-----------------------------
(In Thousands) 2001 2000
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ..................................................... $ 957,375 $ 726,748
Proceeds from Federal Home Loan Bank advances ................................ 1,043,200 3,746,508
Repayments of Federal Home Loan Bank advances ................................ (2,128,878) (3,457,107)
Net decrease in other borrowings ............................................. (130) (88)
Proceeds from exercise of stock options ...................................... 135 376
Cash dividends ............................................................... (5,078) (5,067)
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Net cash provided by (used for) financing activities ......................... (133,376) 1,011,370
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Net increase (decrease) in cash and cash equivalents ......................... 18,729 (25,866)
Cash and cash equivalents at beginning of period ............................. 127,803 121,147
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CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................... $ 146,532 $ 95,281
==============================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................................................ $ 284,408 $ 242,385
Income taxes ............................................................ 40,956 33,525
Supplemental disclosure of non-cash investing:
Loans transferred to held for investment from held for sale ............... 3,179 26,426
Loans exchanged for mortgage-backed securities ............................ 1,534,584 516,343
Real estate acquired in settlement of loans ............................... 9,302 7,260
Loans to facilitate the sale of real estate acquired in settlement of loans 5,202 3,713
==============================================================================================================
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 June 30, 2001, December 31,
2000 and June 30, 2000, the results of operations and comprehensive income for
the three months and six months ended June 30, 2001 and 2000, and changes in
cash flows for the six months ended June 30, 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 for the periods indicated.
Three Months Ended June 30,
------------------------------------------------------
2001 2000
------------------------------------------------------
Net Per Share Net Per Share
(Dollars in Thousands, Except Per Share Data) Income Amount Income Amount
---------------------------------------------------------------------------------------------------------
Basic earnings per share .......... $33,455 $1.18 $22,482 $0.80
Effect of dilutive stock options .. -- -- -- --
---------------------------------------------------------------------------------------------------------
Diluted earnings per share .... $33,455 $1.18 $22,482 $0.80
=========================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic ............................. 28,211,048 28,160,371
Dilutive stock options ............ 59,966 43,931
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Diluted ....................... 28,271,014 28,204,302
=========================================================================================================
6
Six Months Ended June 30,
----------------------------------------------------
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 ................................. $59,283 $2.10 $49,918 $1.77
Effect of dilutive stock options ......................... -- -- -- --
-----------------------------------------------------------------------------------------------------------------
Diluted earnings per share ........................... $59,283 $2.10 $49,918 $1.77
=================================================================================================================
AFTER CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Basic earnings per share ................................. $59,319 $2.09 $49,918 $1.77
Effect of dilutive stock options ......................... -- -- -- --
-----------------------------------------------------------------------------------------------------------------
Diluted earnings per share ........................... $59,319 $2.09 $49,918 $1.77
=================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic .................................................... 28,210,364 28,154,390
Dilutive stock options ................................... 62,735 34,710
-----------------------------------------------------------------------------------------------------------------
Diluted .............................................. 28,273,099 28,189,100
=================================================================================================================
NOTE (3) - BUSINESS SEGMENT REPORTING
The following table presents by major business segments the operating
results for the periods indicated and selected financial data.
Real Estate
(In Thousands) Banking Investment Elimination Totals
--------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, 2001
Net interest income ....................... $ 76,236 $ 10 $ -- $ 76,246
Provision for loan losses ................. 431 -- -- 431
Other income .............................. 21,211 1,072 -- 22,283
Operating expense ......................... 38,863 1,278 -- 40,141
Net intercompany income (expense) ......... 84 (84) -- --
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Income (loss) before income taxes (benefit) 58,237 (280) -- 57,957
Income taxes (benefit) .................... 24,618 (116) -- 24,502
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Net income (loss) .................... $ 33,619 $ (164) $ -- $ 33,455
========================================================================================================
AT JUNE 30, 2001
Assets:
Loans and mortgage-backed securities . $ 9,981,213 $ -- $ -- $ 9,981,213
Real estate held for investment ...... -- 19,950 -- 19,950
Other ................................ 837,387 1,673 (18,307) 820,753
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Total assets ....................... 10,818,600 21,623 (18,307) 10,821,916
--------------------------------------------------------------------------------------------------------
Equity .................................... $ 680,719 $ 18,307 $ (18,307) $ 680,719
========================================================================================================
THREE MONTHS ENDED JUNE 30, 2000
Net interest income ....................... $ 63,501 $ 64 $ -- $ 63,565
Provision for loan losses ................. 942 -- -- 942
Other income .............................. 8,640 827 -- 9,467
Operating expense ......................... 32,558 366 -- 32,924
Net intercompany income (expense) ......... 107 (107) -- --
--------------------------------------------------------------------------------------------------------
Income before income taxes ................ 38,748 418 -- 39,166
Income taxes .............................. 16,511 173 -- 16,684
--------------------------------------------------------------------------------------------------------
Net income ........................... $ 22,237 $ 245 $ -- $ 22,482
========================================================================================================
AT JUNE 30, 2000
Assets:
Loans and mortgage-backed securities . $ 9,787,661 $ -- $ -- $ 9,787,661
Real estate held for investment ...... -- 39,256 -- 39,256
Other ................................ 683,771 7,655 (41,753) 649,673
--------------------------------------------------------------------------------------------------------
Total assets ....................... 10,471,432 46,911 (41,753) 10,476,590
--------------------------------------------------------------------------------------------------------
Equity .................................... $ 577,496 $ 41,753 $ (41,753) $ 577,496
========================================================================================================
7
Real Estate
(In Thousands) Banking Investment Elimination Totals
---------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2001
Net interest income ..................... $152,370 $ 38 $ -- $152,408
Provision for loan losses ............... 483 -- -- 483
Other income ............................ 25,894 2,340 -- 28,234
Operating expense ....................... 75,853 1,538 -- 77,391
Net intercompany income (expense) ....... 181 (181) -- --
---------------------------------------------------------------------------------------------
Income before income taxes .............. 102,109 659 -- 102,768
Income taxes ............................ 43,217 268 -- 43,485
---------------------------------------------------------------------------------------------
Net income before cumulative effect of
change in accounting principle ..... 58,892 391 -- 59,283
Cumulative effect of change in accounting
principle, net of income taxes ..... 36 -- -- 36
---------------------------------------------------------------------------------------------
Net income ......................... $ 58,928 $ 391 $ -- $ 59,319
=============================================================================================
SIX MONTHS ENDED JUNE 30, 2000
Net interest income ..................... $126,216 $ 112 $ -- $126,328
Provision for loan losses ............... 1,733 -- -- 1,733
Other income:
Gain on sale of subsidiary ......... 9,762 -- -- 9,762
All other .......................... 17,225 3,957 -- 21,182
Operating expense ....................... 68,042 607 -- 68,649
Net intercompany income (expense) ....... 215 (215) -- --
---------------------------------------------------------------------------------------------
Income before income taxes .............. 83,643 3,247 -- 86,890
Income taxes ............................ 35,639 1,333 -- 36,972
---------------------------------------------------------------------------------------------
Net income ......................... $ 48,004 $ 1,914 $ -- $ 49,918
=============================================================================================
NOTE (4) - MORTGAGE SERVICING RIGHTS
The following table is a summary of the activity in our mortgage servicing
rights and related allowance for the periods indicated and other related
financial data.
Three Months Ended
-------------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(Dollars in Thousands) 2001 2001 2000 2000 2000
------------------------------------------------------------------------------------------------------------------------------------
Gross balance at beginning of period ............. $ 49,323 $ 46,214 $ 45,834 $ 41,126 $ 37,177
Additions ........................................ 13,403 5,394 2,548 6,267 5,541
Amortization ..................................... (2,299) (2,063) (1,803) (1,559) (1,363)
Sale of servicing ................................ (2,328) -- -- -- --
Impairment write-down ............................ (2,251) (222) (365) -- (229)
------------------------------------------------------------------------------------------------------------------------------------
Gross balance at end of period ................ 55,848 49,323 46,214 45,834 41,126
------------------------------------------------------------------------------------------------------------------------------------
Allowance balance at beginning of period ......... 13,606 5,483 820 214 229
Provision for impairment ......................... 2,351 8,345 5,028 606 214
Impairment write-down ............................ (2,251) (222) (365) -- (229)
------------------------------------------------------------------------------------------------------------------------------------
Allowance balance at end of period ............ 13,706 13,606 5,483 820 214
------------------------------------------------------------------------------------------------------------------------------------
Total mortgage servicing rights, net .......... $ 42,142 $ 35,717 $ 40,731 $ 45,014 $ 40,912
====================================================================================================================================
Estimated fair value (1) ......................... $ 42,142 $ 35,752 $ 41,826 $ 45,895 $ 48,110
====================================================================================================================================
AT PERIOD END
Mortgage loans serviced for others:
Total ......................................... $ 5,056,120 $ 4,296,883 $ 3,964,462 $ 4,020,931 $ 3,549,043
With capitalized mortgage servicing rights (2):
Amount ...................................... 4,456,822 3,999,380 3,779,562 3,686,763 3,288,766
Weighted average interest rate .............. 7.29% 7.50% 7.56% 7.51% 7.41%
====================================================================================================================================
Custodial escrow balances ........................ $ 9,924 $ 5,281 $ 8,207 $ 11,378 $ 6,762
====================================================================================================================================
(1) The estimated fair value may exceed book value for certain asset strata.
(2) Excludes loans sold or securitized prior to 1996 without capitalized
mortgage servicing rights.
8
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
on 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 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 June 30, 2001, we had rate lock commitments estimated to sell as
part of our secondary marketing activities of $264 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 June 30, 2001, forward sale contracts amounted to $698 million,
of which $358 million were designated as cash flow hedges, and forward purchase
contracts totaled $45 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.
9
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.
Note (8) - CURRENT ACCOUNTING ISSUES
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142").
SFAS 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. The use of the
pooling-of-interests method will be prohibited. It is not anticipated that the
financial impact of this statement will have a material effect on Downey.
SFAS 142 applies to all acquired intangible assets whether acquired
singularly, as part of a group, or in a business combination. The Statement
supersedes APB Opinion No. 17, "Intangible Assets," and will carry forward
provisions in Opinion 17 related to internally developed intangible assets. The
Statement changes the accounting for goodwill from an amortization method to an
impairment-only approach. Goodwill should no longer be amortized, but instead
tested for impairment at least annually at the reporting unit level. The
accounting provisions are effective for fiscal years beginning after December
31, 2001. For the first six months of 2001, the amortization of excess of cost
over fair value of net assets acquired was $0.2 million and as of June 30, 2001,
goodwill amounted to $3.4 million. It is not anticipated that the financial
impact of this statement will have a material effect on Downey.
10
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 second quarter of 2001 totaled a record $33.4
million or $1.18 per share on a diluted basis, up 48.8% from the $22.5 million
or $0.80 per share in the second quarter of 2000.
The increase in our net income between second quarters was due to higher
net income from our banking operations, which increased $11.4 million or 51.2%
to $33.6 million reflecting the following:
o net interest income increased $12.7 million or 20.1% due to increases
in both average earning assets and the effective interest rate spread;
o other income increased $12.6 million, more than double the year-ago
level, due to higher net gains from sales of loans and mortgage-backed
securities, and loan and deposit related fees; and
o provision for loan losses declined by $0.5 million.
Those favorable items were partially offset by a $6.3 million increase in
operating expense due to higher costs associated with an increased number of
branch locations and higher loan origination activity, and a $2.4 million
addition to the valuation allowance for mortgage servicing rights due to the
continued drop in interest rates which reduced the value associated with
custodial deposits.
For the first six months of 2001, our net income totaled $59.3 million or
$2.09 per share on a diluted basis. This represents an increase of 33.9% over
the $44.3 million or $1.57 per share in the year-ago period, excluding the $5.6
million or $0.20 per share after-tax gain from the sale of our indirect
automobile finance subsidiary. Including the gain, our net income for the first
six months of 2000 totaled $49.9 million or $1.77 per share on a diluted basis.
The increase between six month periods primarily reflected higher net income
from our banking operations.
For the second quarter of 2001, our return on average assets was 1.22% and
our return on average equity was 20.15%. For the first six months of 2001, our
return on average assets was 1.08% and our return on average equity was 18.26%.
At June 30, 2001, our assets totaled $10.8 billion, up $345 million or 3.3%
from a year ago, but down $209 million or 1.9% from March 31, 2001. Our single
family loan originations totaled a record $2.122 billion in the second quarter
of 2001, up 52.7% from the $1.390 billion we originated in the second quarter of
2000 and 47.6% above the $1.438 billion we originated in the first quarter of
2001. Of the current quarter total, $826 million represented originations of
loans for portfolio, of which $110 million represented subprime credits. In
addition to single family loans, we originated $43 million of other loans in the
quarter.
Between second quarters, we funded our asset growth with a $1.8 billion or
24.0% increase in deposits. At quarter-end, our deposits totaled $9.0 billion.
During the quarter, one new traditional branch and seven new in-store branches
were opened, bringing our total branches at quarter end to 129, of which 63 are
in-store. A year ago, branches totaled 104, of which 40 were in-store.
Our non-performing assets increased only $1 million during the quarter to
$60 million or 0.55% of total assets.
At June 30, 2001, our primary subsidiary, Downey Savings and Loan
Association, F.A. (the "Bank"), had core and tangible capital ratios of 6.95%
and a risk-based capital ratio of 13.84%. 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.
11
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 second quarter of
2001, up $12.7 million or 19.9% from the same period last year. The improvement
between second quarters reflected increases in both average earning assets and
the effective interest rate spread. Our average earning assets increased by $633
million or 6.4% between second quarters to $10.6 billion. Our effective interest
rate spread of 2.89% in the current quarter was up from the year-ago quarter
level of 2.56%. This improvement reflected an increase in our earning asset
yield between second quarters, while our cost of funds declined. This is
indicative of what typically happens when interest rates decline, as there is an
administrative lag in the repricing of our loans which are primarily priced to
the Federal Home Loan Bank ("FHLB") Eleventh District Cost of Funds Index
("COFI"). Our current quarter effective interest rate spread was up 2 basis
points from the first quarter 2001 level, as our earning asset yield fell more
consistent with our cost of funds on a linked-quarter basis. For the first six
months of 2001, net interest income totaled $152.4 million, up $26.1 million or
20.6% from a year ago.
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.
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 using the average
of each month's daily average balance during the periods indicated.
12
Three Months Ended June 30,
---------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans ......................... $10,057,634 $203,820 8.11% $ 9,581,579 $186,648 7.79%
Mortgage-backed securities .... 5,651 87 6.16 17,963 300 6.68
Investment securities ......... 501,169 7,328 5.86 331,885 5,752 6.97
----------------------------------------------------------------------------------------------------------
Total interest-earning assets 10,564,454 211,235 8.00 9,931,427 192,700 7.76
Non-interest-earning assets ....... 362,519 349,115
----------------------------------------------------------------------------------------------------------
Total assets .................. $10,926,973 $10,280,542
==========================================================================================================
Transaction accounts:
Non-interest-bearing checking . $ 296,370 $ -- -- % $ 200,540 $ -- -- %
Interest-bearing checking (1) . 408,931 499 0.49 384,499 922 0.96
Money market .................. 89,960 629 2.80 89,028 629 2.84
Regular passbook .............. 875,580 7,515 3.44 806,793 7,053 3.52
----------------------------------------------------------------------------------------------------------
Total transaction accounts .. 1,670,841 8,643 2.07 1,480,860 8,604 2.34
Certificates of deposit ........... 7,102,427 105,743 5.97 5,651,092 81,615 5.81
----------------------------------------------------------------------------------------------------------
Total deposits ................ 8,773,268 114,386 5.23 7,131,952 90,219 5.09
Borrowings ........................ 1,241,535 17,562 5.67 2,361,491 35,875 6.11
Capital securities ................ 120,000 3,041 10.14 120,000 3,041 10.14
----------------------------------------------------------------------------------------------------------
Total deposits, borrowings and
capital securities ........... 10,134,803 134,989 5.34 9,613,443 129,135 5.40
Other liabilities ................. 128,086 100,853
Stockholders' equity .............. 664,084 566,246
----------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity ......... $10,926,973 $10,280,542
==========================================================================================================
Net interest income/interest rate
spread ........................... $ 76,246 2.66% $ 63,565 2.36%
Excess of interest-earning assets
over deposits, borrowings and
capital securities ............... $ 429,651 317,984
Effective interest rate spread .... 2.89 2.56
==========================================================================================================
Six Months Ended June 30,
---------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
----------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans ......................... $10,119,289 $416,582 8.23% $ 9,263,800 $359,118 7.75%
Mortgage-backed securities .... 6,706 215 6.41 19,420 652 6.71
Investment securities ......... 466,097 14,404 6.23 322,682 10,445 6.51
----------------------------------------------------------------------------------------------------------
Total interest-earning assets 10,592,092 431,201 8.14 9,605,902 370,215 7.71
Non-interest-earning assets ....... 358,203 342,854
----------------------------------------------------------------------------------------------------------
Total assets .................. $10,950,295 $ 9,948,756
==========================================================================================================
Transaction accounts:
Non-interest-bearing checking . $ 271,308 $ -- -- % $ 195,866 $ -- -- %
Interest-bearing checking (1) . 402,707 1,132 0.57 377,607 1,859 0.99
Money market .................. 89,610 1,254 2.82 90,662 1,280 2.84
Regular passbook .............. 821,264 13,943 3.42 813,646 14,426 3.57
----------------------------------------------------------------------------------------------------------
Total transaction accounts .. 1,584,889 16,329 2.08 1,477,781 17,565 2.39
Certificates of deposit ........... 6,988,021 212,858 6.14 5,463,277 153,887 5.66
----------------------------------------------------------------------------------------------------------
Total deposits ................ 8,572,910 229,187 5.39 6,941,058 171,452 4.97
Borrowings ........................ 1,478,807 43,524 5.94 2,235,113 66,353 5.97
Capital securities ................ 120,000 6,082 10.14 120,000 6,082 10.14
----------------------------------------------------------------------------------------------------------
Total deposits, borrowings and
capital securities ........... 10,171,717 278,793 5.53 9,296,171 243,887 5.28
Other liabilities ................. 128,837 97,915
Stockholders' equity .............. 649,741 554,670
----------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity ......... $10,950,295 $ 9,948,756
==========================================================================================================
Net interest income/interest rate
spread ........................... $152,408 2.61% $126,328 2.43%
Excess of interest-earning assets
over deposits, borrowings and
capital securities ............... $ 420,375 $ 309,731
Effective interest rate spread .... 2.88 2.63
==========================================================================================================
(1) Includes amounts swept into money market deposit accounts.
13
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 June 30, Six Months Ended June 30,
2001 Versus 2000 2001 Versus 2000
Changes Due To Changes Due To
--------------------------------------------------------------------------------------------
Rate/ Rate/
(In Thousands) Volume Rate Volume Net Volume Rate Volume Net
------------------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans ........................... $ 9,273 $ 7,525 $ 374 $ 17,172 $ 33,164 $ 22,246 $ 2,054 $ 57,464
Mortgage-backed securities ...... (206) (23) 16 (213) (427) (29) 19 (437)
Investment securities ........... 2,982 (931) (475) 1,576 4,595 (440) (196) 3,959
------------------------------------------------------------------------------------------------------------------------------------
Change in interest income ..... 12,049 6,571 (85) 18,535 37,332 21,777 1,877 60,986
------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Transaction accounts:
Interest-bearing checking (1) . 58 (452) (29) (423) 124 (798) (53) (727)
Money market .................. -- -- -- -- (17) (9) -- (26)
Regular passbook .............. 638 (162) (14) 462 148 (626) (5) (483)
------------------------------------------------------------------------------------------------------------------------------------
Total transaction accounts .. 696 (614) (43) 39 255 (1,433) (58) (1,236)
Certificates of deposit ......... 21,193 2,337 598 24,128 42,522 12,860 3,589 58,971
------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 21,889 1,723 555 24,167 42,777 11,427 3,531 57,735
Borrowings ...................... (16,912) (2,386) 985 (18,313) (22,594) (73) (162) (22,829)
Capital securities .............. -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Change in interest expense .... 4,977 (663) 1,540 5,854 20,183 11,354 3,369 34,906
------------------------------------------------------------------------------------------------------------------------------------
Change in net interest income ....... $ 7,072 $ 7,234 $ (1,625) $ 12,681 $ 17,149 $ 10,423 $ (1,492) $ 26,080
====================================================================================================================================
(1) Includes amounts swept into money market deposit accounts.
PROVISION FOR LOAN LOSSES
Provision for loan losses was $0.4 million in the current quarter, down
from $0.9 million in the second quarter of 2000. For the first six months of
2001, provision for loan losses was $0.5 million, compared to $1.7 million in
the year-ago period. 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 30.
OTHER INCOME
Our total other income was $22.3 million in the second quarter of 2001, up
$12.8 million from a year ago primarily due to:
o an $8.2 million increase in net gains from sales of loans and
mortgage-backed securities; and
o a $7.1 million increase in loan and deposit related fees.
Those increases were partially offset by a $2.4 million addition to the
valuation allowance for mortgage servicing rights that appears within the
category of loan servicing fees. For the first six months of 2001, total other
income was $28.2 million, down $2.7 million from a year ago, of which $9.8
million was attributable to the year-ago pre-tax gain from the sale of our
indirect automobile finance subsidiary. Below is a further discussion of the
major other income categories.
14
Loan and Deposit Related Fees
Loan and deposit related fees totaled $14.1 million in the second quarter
of 2001, up $7.1 million from a year ago. Our loan related fees accounted for
$5.7 million of the increase between second quarters, of which $4.9 million
represented higher loan prepayment fees. Our deposit related fees increased by
$1.4 million or 44.5%, primarily due to higher fees from our checking accounts.
For the six months of 2001, loan and deposit related fees totaled $24.4 million,
up $11.5 million from the same period of 2000.
The following table presents a breakdown of loan and deposit related fees
for the periods indicated.
Three Months Ended
-------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2001 2001 2000 2000 2000
-------------------------------------------------------------------------------------------------
Loan related fees:
Prepayment fees ................... $ 7,455 $ 4,525 $ 3,899 $ 3,043 $ 2,604
Other fees ........................ 2,251 1,779 1,513 1,329 1,338
Deposit related fees:
Automated teller machine fees ..... 1,650 1,533 1,618 1,566 1,362
Other fees ........................ 2,780 2,393 2,270 2,021 1,703
-------------------------------------------------------------------------------------------------
Total loan and deposit related fees $14,136 $10,230 $ 9,300 $ 7,959 $ 7,007
=================================================================================================
Real Estate and Joint Ventures Held for Investment
Income from our real estate and joint ventures held for investment in the
second quarter of 2001 was virtually unchanged from $0.7 million a year ago. Our
net gains on sales of joint ventures declined by $1.1 million and income from
real estate operations declined by $0.4 million due to fewer properties being
owned. These decreases were offset by a $1.4 million decline in the provision
for losses on real estate and joint ventures. For the first six months of 2001,
income from real estate and joint ventures held for investment totaled $1.7
million, down $2.1 million from the same period of 2000.
The table below sets forth the key components comprising our income from
real estate and joint venture operations for the periods indicated.
Three Months Ended
--------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2001 2001 2000 2000 2000
-----------------------------------------------------------------------------------------------------------------------
Operations, net:
Rental operations, net of expenses ................ $ 452 $ 508 $ 309 $ 422 $ 866
Equity in net income from joint ventures .......... 121 391 169 1,531 1,147
Interest from joint venture advances .............. 152 132 200 215 200
-----------------------------------------------------------------------------------------------------------------------
Total operations, net ........................... 725 1,031 678 2,168 2,213
Net gains on sales of wholly owned real estate ....... -- 2 303 1,257 --
(Provision for) reduction of losses on real estate and
joint ventures .................................... (33) (33) (36) 600 (1,473)
-----------------------------------------------------------------------------------------------------------------------
Income from real estate and joint ventures held for
investment, net ................................. $ 692 $ 1,000 $ 945 $ 4,025 $ 740
=======================================================================================================================
Secondary Marketing Activities
Sales of loans and mortgage-backed securities we originated increased to
$1.364 billion in the second quarter of 2001 from $467 million a year ago. Net
gains associated with these sales totaled $9.0 million in the second quarter of
2001, up from $0.7 million a year ago. The net gains included capitalized
mortgage servicing rights of $13.4 million in the second quarter of 2001,
compared to $5.5 million a year ago. For the first six months of 2001, net gains
on sales of loans and mortgage-backed securities totaled $11.1 million, up from
$2.5 million from the same period of 2000.
A loss of $2.9 million was recorded in loan servicing fees from our
portfolio of loans serviced for others during the second quarter of 2001,
compared to income of $0.3 million a year ago. The loss in the 2001 second
quarter reflects a $2.4 million provision to the valuation allowance for
mortgage servicing rights due to the continued drop in interest rates which
reduced the value associated with custodial deposits. At June 30, 2001, we
serviced $5.1 billion of loans for others,
15
compared to $4.0 billion at December 31, 2000 and $3.5 billion at June 30, 2000.
For the first six months of 2001, a loss of $11.1 million was recorded in loan
servicing fees, compared to income of $0.6 million from the same period of 2000.
The following table presents a breakdown of the components of our loan
servicing fees for the periods indicated.
Three Months Ended
-------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2001 2001 2000 2000 2000
------------------------------------------------------------------------------------------------------
Income from servicing operations $ 1,752 $ 2,223 $ 2,718 $ 2,086 $ 1,890
Amortization of MSRs ........... (2,299) (2,063) (1,803) (1,559) (1,363)
Provision for impairment ....... (2,351) (8,345) (5,028) (606) (214)
------------------------------------------------------------------------------------------------------
Total loan servicing fees .... $(2,898) $(8,185) $(4,113) $ (79) $ 313
======================================================================================================
For further information regarding mortgage servicing rights, see Notes To
Consolidated Financial Statements--Note (4)--Mortgage Servicing Rights on page
8.
OPERATING EXPENSE
Operating expense totaled $40.1 million in the current quarter, up $7.2
million from the second quarter of 2000. The increase was primarily due to a
$7.4 million or 22.7% increase in general and administrative expense. That
increase was primarily due to higher costs associated with an increased number
of branch locations and higher loan origination activity. For the first six
months of 2001, operating expenses totaled $77.4 million, up $8.7 million from
the same period of 2000.
The following table presents a breakdown of our operating expense for the
periods indicated.
Three Months Ended
----------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2001 2001 2000 2000 2000
-----------------------------------------------------------------------------------------------------------------
Salaries and related costs ................... $ 24,646 $ 23,271 $ 21,743 $ 19,280 $ 19,974
Premises and equipment costs ................. 6,042 6,043 5,945 5,837 5,803
Advertising expense .......................... 1,127 1,176 1,121 980 812
Professional fees ............................ 1,604 577 1,274 537 688
SAIF insurance premiums and regulatory
assessments ............................... 741 732 696 683 627
Other general and administrative expense ..... 5,973 5,339 5,188 4,823 4,817
-----------------------------------------------------------------------------------------------------------------
Total general and administrative expense . 40,133 37,138 35,967 32,140 32,721
Net operation of real estate acquired in
settlement of loans ....................... (106) (2) 263 221 87
Amortization of excess of cost over fair value
of net assets acquired ................... 114 114 114 115 116
-----------------------------------------------------------------------------------------------------------------
Total operating expense .................. $ 40,141 $ 37,250 $ 36,344 $ 32,476 $ 32,924
=================================================================================================================
PROVISION FOR INCOME TAXES
Income taxes for the current quarter totaled $24.5 million, resulting in an
effective tax rate of 42.3%, compared to $16.7 million and 42.6% for the like
quarter of a year ago. For the first six months of 2001, our effective tax rate
was 42.3%, compared to 42.6% for the same period of 2000. For further
information regarding income taxes, see Notes to Consolidated Financial
Statements--Note (6) - Income Taxes on page 9.
16
BUSINESS SEGMENT REPORTING
The previous sections of the Results of Operations discussed our
consolidated results. The purpose of this section is to present data and
discussion 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.
Three Months Ended
---------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2001 2001 2000 2000 2000
------------------------------------------------------------------------------------------------------
Banking net income ..................... $ 33,619 $ 25,309 $ 22,738 $ 24,080 $ 22,237
Real estate investment net income (loss) (164) 555 257 2,258 245
------------------------------------------------------------------------------------------------------
Total net income .................... $ 33,455 $ 25,864 $ 22,995 $ 26,338 $ 22,482
======================================================================================================
Six Months Ended June 30,
--------------------------
2001 2000
------------------------------------------------------------------------------------------------------
Banking net income .............. $ 58,928 $ 48,004
Real estate investment net income 391 1,914
------------------------------------------------------------------------------------------------------
Total net income ............. $ 59,319 $ 49,918
======================================================================================================
Banking
Net income from our banking operations for the second quarter of 2001
totaled $33.6 million, up 51.2% from $22.2 million in the second quarter of
2000.
The increase between second quarters primarily reflected higher net
interest income and other income. Net interest income increased $12.7 million or
20.1% due to an increase in both our average earning assets and our effective
interest rate spread. Other income increased $12.6 million, more than double the
year-ago level, due to higher net gains from sales of loans and mortgage-backed
securities, and loan and deposit related fees. Also favorably impacting our
banking net income was a $0.5 million decline in provision for loan losses.
These favorable items were partially offset by an unfavorable change in loan
servicing fees and an increase in operating expense. Loan servicing included a
$2.4 million addition to the valuation allowance for mortgage servicing rights,
while operating expense increased $6.3 million due to higher costs associated
with the increased number of branch locations and higher loan origination
activity.
17
The following table sets forth our banking operational results for the
periods indicated and selected financial data.
Three Months Ended
-----------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2001 2001 2000 2000 2000
--------------------------------------------------------------------------------------------------------------------
Net interest income ..................... $ 76,236 $ 76,134 $ 68,879 $ 67,137 $ 63,501
Provision for loan losses ............... 431 52 511 1,007 942
Other income ............................ 21,211 4,683 6,466 7,953 8,640
Operating expense ....................... 38,863 36,990 35,738 32,216 32,558
Net intercompany income ................. 84 97 99 83 107
--------------------------------------------------------------------------------------------------------------------
Income before income taxes .............. 58,237 43,872 39,195 41,950 38,748
Income taxes ............................ 24,618 18,599 16,457 17,870 16,511
--------------------------------------------------------------------------------------------------------------------
Net income before cumulative effect of
change in accounting principle ....... 33,619 25,273 22,738 24,080 22,237
Cumulative effect of change in accounting
principle, net of income taxes ....... -- 36 -- -- --
--------------------------------------------------------------------------------------------------------------------
Net income ......................... $ 33,619 $ 25,309 $ 22,738 $ 24,080 $ 22,237
====================================================================================================================
AT PERIOD END
Assets:
Loans and mortgage-backed securities . $ 9,981,213 $10,272,222 $10,084,353 $ 9,646,741 $ 9,787,661
Other ................................ 837,387 755,324 806,201 715,933 683,771
--------------------------------------------------------------------------------------------------------------------
Total assets ....................... 10,818,600 11,027,546 10,890,554 10,362,674 10,471,432
--------------------------------------------------------------------------------------------------------------------
Equity .................................. $ 680,719 $ 648,592 $ 624,636 $ 602,624 $ 577,496
====================================================================================================================
For the first six months of 2001, our net income from banking totaled $58.9
million, up $10.9 million from the same period a year ago. The sale of our
indirect automobile finance subsidiary benefited our year-ago six-month period
net income by $5.6 million. Excluding that gain, net income from our banking
operations would have increased by $16.5 million or 39.0% from a year ago.
The following table sets forth our banking operational results for the
periods indicated.
Six Months Ended June 30,
-------------------------
(In Thousands) 2001 2000
--------------------------------------------------------------------------------------------------
Net interest income .................................................... $152,370 $126,216
Provision for loan losses .............................................. 483 1,733
Other income:
Gain on sale of subsidiary .......................................... -- 9,762
All other ........................................................... 25,894 17,225
Operating expense ...................................................... 75,853 68,042
Net intercompany income ................................................ 181 215
--------------------------------------------------------------------------------------------------
Income before income taxes ............................................. 102,109 83,643
Income taxes ........................................................... 43,217 35,639
--------------------------------------------------------------------------------------------------
Net income before cumulative effect of change in accounting principle .. 58,892 48,004
Cumulative effect of change in accounting principle, net of income taxes 36 --
--------------------------------------------------------------------------------------------------
Net income (1) ...................................................... $ 58,928 $ 48,004
==================================================================================================
(1) Included in the previous year was a $5.6 million after-tax gain related to
the sale of subsidiary.
18
Real Estate Investment
Our real estate investment operations recorded a loss of $0.2 million in
the second quarter of 2001, compared to net income of $0.2 million in the
year-ago quarter. The decline was primarily attributed to higher operating
expenses due to litigation matters associated with certain joint venture
partners.
The following table sets forth real estate investment operational results
for the periods indicated and selected financial data.
Three Months Ended
----------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2001 2001 2000 2000 2000
----------------------------------------------------------------------------------------------------------------
Net interest income ........................... $ 10 $ 28 $ 58 $ 73 $ 64
Other income .................................. 1,072 1,268 1,079 4,112 827
Operating expense ............................. 1,278 260 606 260 366
Net intercompany expense ...................... 84 97 99 83 107
----------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (benefit) ... (280) 939 432 3,842 418
Income taxes (benefit) ........................ (116) 384 175 1,584 173
----------------------------------------------------------------------------------------------------------------
Net income (loss) .......................... $ (164) $ 555 $ 257 $ 2,258 $ 245
================================================================================================================
AT PERIOD END:
Assets:
Investment in real estate and joint ventures $ 19,950 $ 18,690 $ 17,641 $ 15,851 $ 39,256
Other ...................................... 1,673 3,337 3,584 6,347 7,655
----------------------------------------------------------------------------------------------------------------
Total assets ............................. 21,623 22,027 21,225 22,198 46,911
----------------------------------------------------------------------------------------------------------------
Equity ........................................ $ 18,307 $ 18,471 $ 17,916 $ 17,659 $ 41,753
================================================================================================================
Our investment in real estate and joint ventures amounted to $20 million at
June 30, 2001, compared to $18 million at December 31, 2000 and $39 million at
June 30, 2000.
For the first six months of 2001, our net income from real estate
investment operations totaled $0.4 million, down from $1.9 million from the same
period a year ago.
The following table sets forth our real estate investment operational
results for the periods indicated.
Six Months Ended June 30,
-------------------------
(In Thousands) 2001 2000
------------------------------------------------------
Net interest income ...... $ 38 $ 112
Other income ............. 2,340 3,957
Operating expense ........ 1,538 607
Net intercompany expense . 181 215
------------------------------------------------------
Income before income taxes 659 3,247
Income taxes ............. 268 1,333
------------------------------------------------------
Net income ............ $ 391 $1,914
======================================================
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 30.
19
FINANCIAL CONDITION
LOANS AND MORTGAGE-BACKED SECURITIES
Total loans and mortgage-backed securities, including those we hold for
sale, decreased $291 million during the second quarter to a total of $10.0
billion or 92.2% of assets at June 30, 2001. The decrease represents a lower
level of single family loans held for investment, which declined $210 million
during the quarter as prepayments exceeded originations. Given the low interest
rate environment and borrower preference for fixed rate loans, our annualized
prepayment speed in the current quarter was a record 44%, compared to 18% a year
ago.
The following table sets forth loans originated, including purchases, for
investment and for sale during the periods indicated.
Three Months Ended
---------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2001 2001 2000 2000 2000
-------------------------------------------------------------------------------------------------------------------
Loans originated for investment:
Residential one-to-four units:
Adjustable .......................... $ 814,696 $ 636,988 $ 887,064 $ 382,828 $ 842,899
Fixed ............................... 10,849 4,117 2,713 3,896 4,192
Other .................................. 43,492 28,964 57,901 82,343 40,554
-------------------------------------------------------------------------------------------------------------------
Total loans originated for investment 869,037 670,069 947,678 469,067 887,645
Loans originated for sale (1) ............. 1,296,877 796,801 335,726 482,595 542,983
-------------------------------------------------------------------------------------------------------------------
Total loans originated ................. $2,165,914 $1,466,870 $1,283,404 $ 951,662 $1,430,628
===================================================================================================================
(1) Residential one-to-four unit loans, primarily fixed.
Originations of residential one-to-four unit loans totaled a record $2.122
billion in the second quarter of 2001, of which $826 million were for portfolio
and $1.297 billion were for sale. This was 47.6% above the $1.438 billion we
originated in the first quarter of 2001 and 52.7% above the $1.390 billion we
originated in the year-ago second quarter. Of the current quarter originations
for portfolio, $110 million represented originations of subprime credits as part
of our continuing strategy to enhance the portfolio's net yield. During the
current quarter, 72% of our residential one-to-four unit originations
represented refinancing transactions. This is similar to the previous quarter
level but up from 34% in the year-ago second quarter. In addition to single
family loans, we originated $43 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.
20
At June 30, 2001, $7.0 billion of the adjustable rate mortgages in our loan
portfolio were subject to negative amortization of which $183 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 $1.364 billion of loans in the second quarter of 2001, compared
to $597 million in the previous quarter and $467 million in the second quarter
of 2000. All were secured by residential one-to-four unit property, and at June
30, 2001, loans held for sale totaled $377 million.
At June 30, 2001, our unfunded loan application pipeline totaled $1.522
billion. Within that pipeline, we had commitments to borrowers for short-term
interest rate locks of $647 million, of which $320 million were related to
residential one-to-four unit loans being originated for sale in the secondary
market. Furthermore, we had commitments on undrawn lines of credit of $82
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.
21
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
--------------------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2001 2001 2000 2000 2000
------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
Loans originated:
Loans secured by real estate:
Residential one-to-four units:
Adjustable ...................................... $ 620,539 $ 501,945 $ 675,943 $ 339,983 $ 781,444
Adjustable - subprime ........................... 106,148 135,043 210,915 41,982 61,455
------------------------------------------------------------------------------------------------------------------------------------
Total adjustable .............................. 726,687 636,988 886,858 381,965 842,899
Fixed ........................................... 7,455 4,117 2,312 3,629 716
Fixed - subprime ................................ 3,394 -- -- -- --
Residential five or more units:
Adjustable ...................................... -- -- -- -- --
Fixed ........................................... 125 -- 163 515 --
------------------------------------------------------------------------------------------------------------------------------------
Total residential ............................. 737,661 641,105 889,333 386,109 843,615
Commercial real estate ........................... -- -- -- 22,500 --
Construction ..................................... 23,154 18,888 30,767 35,493 15,658
Land ............................................. 6,219 -- 9,785 1,025 155
Non-mortgage:
Commercial ....................................... 4,970 165 7,029 4,850 6,060
Automobile ....................................... 1,502 2,091 4,442 6,135 6,744
Other consumer ................................... 7,522 7,570 5,715 10,770 11,937
------------------------------------------------------------------------------------------------------------------------------------
Total loans originated .......................... 781,028 669,819 947,071 466,882 884,169
Real estate loans purchased:
One-to-four units .................................. 88,009 -- 401 631 3,476
One-to-four units - subprime ....................... -- -- 206 499 --
Other (1) .......................................... -- 250 -- 1,055 --
------------------------------------------------------------------------------------------------------------------------------------
Total real estate loans purchased ................ 88,009 250 607 2,185 3,476
------------------------------------------------------------------------------------------------------------------------------------
Total loans originated and purchased ............ 869,037 670,069 947,678 469,067 887,645
Loan repayments ....................................... (1,095,547) (705,116) (621,199) (485,831) (496,561)
Other net changes (2) ................................. 5,813 32,585 28,565 (65,442) 54,562
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for investment (220,697) (2,462) 355,044 (82,206) 445,646
------------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO
Residential, one-to-four units:
Originated whole loans ............................. 1,296,270 796,216 333,985 469,101 518,457
Originated whole loans - subprime .................. -- -- 794 13,494 24,526
Loans purchased .................................... 607 585 947 -- --
Loans transferred from (to) the investment portfolio (787) (2,392) (1,745) 83,164 (11,475)
Originated whole loans sold ........................ (292,552) (134,352) (75,205) (330,306) (165,031)
Loans exchanged for mortgage-backed securities ..... (1,071,840) (462,744) (167,637) (286,339) (302,362)
Other net changes .................................. (649) (3,179) (6,343) (2,957) (1,213)
SFAS 133 capitalized basis adjustment (3) .......... (753) 558 -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for sale ... (69,704) 194,692 84,796 (53,843) 62,902
------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, net:
Received in exchange for loans ..................... 1,071,840 462,744 167,637 286,339 302,362
Sold ............................................... (1,071,840) (462,744) (167,637) (289,542) (302,362)
Repayments ......................................... (647) (4,417) (2,459) (1,759) (1,559)
Other net changes .................................. 39 56 231 91 43
------------------------------------------------------------------------------------------------------------------------------------
Net decrease in mortgage-backed securities
available for sale .............................. (608) (4,361) (2,228) (4,871) (1,516)
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for sale and
mortgage-backed securities available for sale ... (70,312) 190,331 82,568 (58,714) 61,386
------------------------------------------------------------------------------------------------------------------------------------
Total net increase (decrease) in loans and
mortgage-backed securities ...................... $ (291,009) $ 187,869 $ 437,612 $ (140,920) $ 507,032
====================================================================================================================================
(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 real
estate acquired in settlement of loans or from (to) the held for sale
portfolio, and interest capitalized on loans (negative amortization).
(3) Reflects the change in value from date of interest rate lock commitment to
date of origination.
22
The following table sets forth the composition of our loan and
mortgage-backed securities portfolios at the dates indicated.
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2001 2001 2000 2000 2000
------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
Loans secured by real estate:
Residential one-to-four units:
Adjustable .................................. $ 7,097,270 $ 7,215,128 $ 7,200,400 $ 6,922,891 $ 6,956,084
Adjustable - subprime ....................... 1,683,302 1,748,715 1,726,526 1,634,342 1,676,546
Fixed ....................................... 408,757 437,197 454,838 470,384 486,323
Fixed - subprime ............................ 18,256 16,941 17,388 18,120 18,806
------------------------------------------------------------------------------------------------------------------------------------
Total residential one-to-four units ..... 9,207,585 9,417,981 9,399,152 9,045,737 9,137,759
Residential five or more units:
Adjustable .................................. 13,359 13,462 14,203 14,284 14,917
Fixed ....................................... 5,464 5,453 5,257 5,444 4,983
Commercial real estate:
Adjustable .................................. 47,236 47,583 37,374 36,590 36,838
Fixed ....................................... 110,513 114,586 127,230 127,715 110,914
Construction .................................. 99,261 96,564 118,165 120,179 121,602
Land .......................................... 21,283 21,230 26,880 26,294 37,222
Non-mortgage:
Commercial .................................... 21,648 21,312 21,721 23,454 24,511
Automobile .................................... 32,594 36,590 39,614 40,303 38,935
Other consumer ................................ 56,096 58,610 60,653 60,362 56,627
------------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment ............. 9,615,039 9,833,371 9,850,249 9,500,362 9,584,308
Increase (decrease) for:
Undisbursed loan funds ........................ (59,940) (59,206) (72,328) (72,393) (77,563)
Net deferred costs and premiums ............... 78,621 80,010 79,109 73,579 76,232
Allowance for losses .......................... (34,301) (34,059) (34,452) (34,014) (33,237)
------------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment, net ........ 9,599,419 9,820,116 9,822,578 9,467,534 9,549,740
------------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO, NET
Loans held for sale:
Residential one-to-four units ................. 376,755 445,706 251,014 163,726 209,248
Residential one-to-four units - subprime ...... -- -- 558 3,050 11,371
SFAS 133 capitalized basis adjustment (1) ..... (195) 558 -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Total loans held for sale ................... 376,560 446,264 251,572 166,776 220,619
Mortgage-backed securities available for sale:
Adjustable .................................... 5,234 5,835 6,050 6,240 6,783
Fixed ......................................... -- 7 4,153 6,191 10,519
------------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities available
for sale ................................ 5,234 5,842 10,203 12,431 17,302
------------------------------------------------------------------------------------------------------------------------------------
Total loans held for sale and mortgage-backed
securities available for sale ........... 381,794 452,106 261,775 179,207 237,921
------------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities .. $ 9,981,213 $ 10,272,222 $ 10,084,353 $ 9,646,741 $ 9,787,661
====================================================================================================================================
(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 June 30, 2001,
no valuation allowance was required as the market value exceeded book value on
an aggregate basis.
At June 30, 2001, our residential one-to-four units subprime portfolio
consisted of approximately 75% "A-" credit, 21% "B" credit and 4% "C" credit
loans. At June 30, 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 June 30, 2001, reflected an unrealized loss of $30,000. The current
quarter-end unrealized loss, less the associated tax effect is reflected within
a separate component of other comprehensive income (loss) until realized.
23
DEPOSITS
At June 30, 2001, our deposits totaled $9.0 billion, up $1.8 billion or
24.0% from the year-ago quarter end and up $957 million or 11.8% from year-end
2000. Compared to the year-ago period, our certificates of deposit increased
$1.4 billion or 24.2% and our transaction accounts--i.e., checking, regular
passbook and money market--increased $339 million or 23.1%. Within transaction
accounts, our regular passbook accounts increased $183 million or 22.7% and our
total checking accounts (non-interest and interest bearing) increased $151
million or 26.2%.
The following table sets forth information concerning our deposits and
weighted average rates paid at the dates indicated.
June 30, 2001 March 31, 2001 December 31, 2000 September 30, 2000 June 30, 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 ............ -- % $ 328,338 -- % $ 335,404 -- % $ 244,311 -- % $ 225,442 -- % $ 200,823
Interest-bearing
checking (1) ........ 0.42 401,126 0.42 416,636 0.78 395,640 0.78 381,596 0.76 377,212
Money market .......... 2.79 89,949 2.87 91,733 2.88 89,408 2.87 88,505 2.88 85,339
Regular passbook ...... 3.44 986,488 3.38 807,503 3.41 754,127 3.42 776,527 3.43 803,841
------------------------------------------------------------------------------------------------------------------------------------
Total transaction
accounts .......... 2.11 1,805,901 1.92 1,651,276 2.12 1,483,486 2.18 1,472,070 2.24 1,467,215
Certificates of deposit:
Less than 3.00% ....... 2.48 27,473 2.14 7,620 2.41 6,357 2.41 7,188 2.48 7,708
3.00-3.49 ............. 3.36 8,342 3.45 26 3.45 25 3.45 26 3.41 1
3.50-3.99 ............. 3.83 82,191 3.81 20,748 3.97 384 3.82 1 3.82 1
4.00-4.49 ............. 4.29 387,442 4.38 7,279 4.19 26,916 4.23 33,660 4.29 41,648
4.50-4.99 ............. 4.74 691,800 4.72 293,442 4.82 80,844 4.83 162,903 4.81 263,352
5.00-5.99 ............. 5.50 2,791,697 5.62 2,288,745 5.71 1,901,166 5.69 2,106,639 5.66 3,011,284
6.00-6.99 ............. 6.59 3,233,032 6.64 4,424,756 6.63 4,558,730 6.58 3,889,166 6.49 2,493,154
7.00 and greater ...... 7.03 12,186 7.03 14,383 7.02 24,781 7.02 20,129 7.02 5,146
------------------------------------------------------------------------------------------------------------------------------------
Total certificates of
deposit ........... 5.82 7,234,163 6.21 7,056,999 6.33 6,599,203 6.22 6,219,712 5.96 5,822,294
------------------------------------------------------------------------------------------------------------------------------------
Total deposits..... 5.08% $9,040,064 5.40% $8,708,275 5.56% $8,082,689 5.44% $7,691,782 5.22% $7,289,509
====================================================================================================================================
(1) Includes amounts swept into money market deposit accounts.
BORROWINGS
During the 2001 second quarter, our borrowings decreased $564 million to
$893 million, due to a decrease in FHLB advances. This followed a decrease of
$521 million during the first quarter of 2001.
The following table sets forth information concerning our FHLB advances and
other borrowings at the dates indicated.
June 30, March 31, December 31, September 30, June 30,
(Dollars in Thousands) 2001 2001 2000 2000 2000
-------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances ................ $ 892,670 $1,457,046 $1,978,348 $1,860,255 $2,411,808
Other borrowings ............................... 94 145 224 248 285
-------------------------------------------------------------------------------------------------------------------------
Total borrowings ............................ $ 892,764 $1,457,191 $1,978,572 $1,860,503 $2,412,093
=========================================================================================================================
Weighted average rate on borrowings during
the period ................................. 5.67% 6.14% 6.34% 6.39% 6.11%
Total borrowings as a percentage of total assets 8.25 13.21 18.16 17.95 23.02
=========================================================================================================================
24
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 second 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.
25
The following table sets forth the repricing frequency of our major asset
and liability categories as of June 30, 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.
June 30, 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) $ 288,273 $ 36,283 $130,396 $ 69 $ -- $ 455,021
Loans and mortgage-backed securities: . (2)
Loans secured by real estate:
Residential:
Adjustable ...................... 8,315,833 238,787 291,575 -- -- 8,846,195
Fixed ........................... 414,476 32,435 178,564 106,903 76,458 808,836
Commercial real estate ............ 49,632 17,198 81,151 3,609 1,660 153,250
Construction ...................... 50,691 -- -- -- -- 50,691
Land .............................. 13,557 9 67 799 -- 14,432
Non-mortgage loans:
Commercial ........................ 14,721 -- -- -- -- 14,721
Consumer .......................... 62,980 6,446 18,428 -- -- 87,854
Mortgage-backed securities .......... 5,234 -- -- -- -- 5,234
-------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed
securities .......................... 8,927,124 294,875 569,785 111,311 78,118 9,981,213
-------------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ....... $9,215,397 $ 331,158 $700,181 $ 111,380 $ 78,118 $10,436,234
===============================================================================================================================
Transaction accounts:
Non-interest-bearing checking ......... $ 328,338 -- -- -- -- 328,338
Interest-bearing checking ............. (3) 401,126 -- -- -- -- 401,126
Money market .......................... (4) 89,949 -- -- -- -- 89,949
Regular passbook ...................... (4) 986,488 -- -- -- -- 986,488
-------------------------------------------------------------------------------------------------------------------------------
Total transaction accounts .......... 1,805,901 -- -- -- -- 1,805,901
Certificates of deposit .................. (1) 5,242,261 1,853,536 138,366 -- -- 7,234,163
-------------------------------------------------------------------------------------------------------------------------------
Total deposits ........................ 7,048,162 1,853,536 138,366 -- -- 9,040,064
Borrowings ............................... 215,549 74,258 172,957 430,000 -- 892,764
Capital securities ....................... -- -- -- -- 120,000 120,000
-------------------------------------------------------------------------------------------------------------------------------
Total deposits, borrowings and
capital securities .................. $7,263,711 $ 1,927,794 $311,323 $ 430,000 $120,000 $10,052,828
===============================================================================================================================
Excess (shortfall) of interest-earning
assets over deposits, borrowings and
capital securities ................... $1,951,686 $(1,596,636) $388,858 $(318,620) $(41,882) $ 383,406
Cumulative gap ........................... 1,951,686 355,050 743,908 425,288 383,406
Cumulative gap - as a % of total assets:
June 30, 2001 ......................... 18.03% 3.28% 6.87% 3.93% 3.54%
December 31, 2000 ..................... 28.66 7.13 5.94 3.13 3.13
June 30, 2000 ......................... 32.57 14.05 5.23 2.41 2.85
==============================================================================================================================
(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.
26
Our six-month gap at June 30, 2001 was a positive 18.03%. This means that
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 32.57% at June 30, 2000. We continue to pursue
our strategy of emphasizing the origination of adjustable rate mortgages. For
the twelve months ended June 30, 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 June 30, 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 June 30, 2000. At June 30, 2001, loans held for investment
and mortgage-backed securities with adjustable interest rates represented 90% of
those portfolios. During the second 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 to originate adjustable rate
mortgages and to generate fees 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 June 30, 2001, $9.2 billion or 92% 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 $9.1 billion or 93% at June 30,
2000.
The following table sets forth the interest rate spread between our
interest-earning assets and interest-bearing liabilities at the dates indicated.
June 30, March 31, December 31, September 30, June 30,
2001 2001 2000 2000 2000
--------------------------------------------------------------------------------------------------------------
Weighted average yield:
Loans and mortgage-backed securities 8.24% 8.56% 8.45% 8.40% 8.03%
Federal Home Loan Bank stock ....... 6.00 5.51 5.52 5.52 5.52
Investment securities .............. 5.54 6.00 6.45 6.42 6.35
--------------------------------------------------------------------------------------------------------------
Interest-earning assets yield .... 8.12 8.46 8.36 8.32 7.97
--------------------------------------------------------------------------------------------------------------
Weighted average cost:
Deposits ........................... 5.08 5.40 5.56 5.44 5.22
Borrowings:
Federal Home Loan Bank advances .. 5.36 5.94 6.26 6.37 6.31
Other borrowings ................. 7.88 7.88 8.12 7.88 7.88
--------------------------------------------------------------------------------------------------------------
Total borrowings .............. 5.36 5.94 6.26 6.37 6.31
Capital securities ................. 10.00 10.00 10.00 10.00 10.00
--------------------------------------------------------------------------------------------------------------
Combined funds cost .............. 5.16 5.53 5.75 5.68 5.55
--------------------------------------------------------------------------------------------------------------
Interest rate spread .......... 2.96% 2.93% 2.61% 2.64% 2.42%
==============================================================================================================
The period-end weighted average yield on our loan portfolio decreased to
8.24% at June 30, 2001, down from 8.45% at December 31, 2000 , but up from 8.03%
at June 30, 2000. At June 30, 2001, our adjustable rate mortgage portfolio of
single family residential loans, including mortgage-backed securitites, totaled
$8.8 billion with a weighted average rate of 8.27%, compared to $9.0 billion
with a weighted average rate of 8.47% at December 31, 2000 and $8.7 billlion
with a weighted average rate of 8.00% at June 30, 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 only $1
million to $60 million or 0.55% of total assets. This increase was primarily due
to a rise in residential non-performers of $2 million, which included a $2
million decline in residential subprime 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.
27
The following table summarizes our non-performing assets at the dates
indicated.
June 30, March 31, December 31, September 30, June 30,
(Dollars in Thousands) 2001 2001 2000 2000 2000
--------------------------------------------------------------------------------------------------------------------------
Non-accrual loans:
Residential one-to-four units ................... $22,494 $16,965 $20,746 $17,976 $18,692
Residential one-to-four units - subprime ........ 25,737 26,353 22,296 20,389 19,725
Other ........................................... 3,054 3,367 1,708 1,867 1,537
--------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans ........................ 51,285 46,685 44,750 40,232 39,954
Troubled debt restructure - below market rate (1) ... 204 205 206 209 210
Real estate acquired in settlement of loans ......... 8,366 11,634 9,942 9,161 5,657
Repossessed automobiles ............................. 37 15 76 -- --
--------------------------------------------------------------------------------------------------------------------------
Total non-performing assets ..................... $59,892 $58,539 $54,974 $49,602 $45,821
==========================================================================================================================
Allowance for loan losses:
Amount .......................................... $34,301 $34,059 $34,452 $34,014 $33,237
As a percentage of non-performing loans ......... 66.62% 72.64% 76.63% 84.11% 82.75%
Non-performing assets as a percentage of total assets 0.55 0.53 0.50 0.48 0.44
==========================================================================================================================
(1) Represents a single residential one-to-four unit loan.
Delinquent Loans
During the 2001 second quarter, our delinquencies as a percentage of total
loans outstanding increased from 0.73% to 0.81% and were above the 0.51% of a
year ago. The increase primarily occurred in both of our residential one-to-four
unit categories.
28
The following table indicates the amounts of our past due loans at the
dates indicated.
June 30, 2001 March 31, 2001
-----------------------------------------------------------------------------------
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 .............. $15,190 $ 7,262 $17,291 $39,743 $14,166 $ 6,961 $15,490 $36,617
One-to-four units - subprime ... 11,402 6,513 20,772 38,687 11,223 6,651 17,860 35,734
Five or more units ............. -- -- 248 248 -- -- 508 508
Commercial real estate ........... -- -- -- -- -- -- -- --
Construction ..................... -- -- -- -- -- -- -- --
Land ............................. -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------
Total real estate loans ........ 26,592 13,775 38,311 78,678 25,389 13,612 33,858 72,859
Non-mortgage:
Commercial ....................... -- -- 1,290 1,290 -- 1,290 -- 1,290
Automobile ....................... 112 63 32 207 230 55 74 359
Other consumer ................... 287 28 185 500 189 31 190 410
------------------------------------------------------------------------------------------------------------------------------
Total loans .................... $26,991 $13,866 $39,818 $80,675 $25,808 $14,988 $34,122 $74,918
==============================================================================================================================
Delinquencies as a percentage of total
loans ............................ 0.27% 0.14% 0.40% 0.81% 0.25% 0.15% 0.33% 0.73%
==============================================================================================================================
December 31, 2000 September 30, 2000
------------------------------------------------------------------------------------
Loans secured by real estate:
Residential:
One-to-four units .............. $12,400 $ 8,611 $15,246 $36,257 $14,970 $3,037 $16,176 $34,183
One-to-four units - subprime ... 7,300 7,658 14,427 29,385 7,701 5,422 11,911 25,034
Five or more units ............. -- -- -- -- -- -- -- --
Commercial real estate ........... -- -- -- -- -- -- -- --
Construction ..................... -- -- -- -- -- -- -- --
Land ............................. -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------
Total real estate loans ........ 19,700 16,269 29,673 65,642 22,671 8,459 28,087 59,217
Non-mortgage:
Commercial ....................... -- -- -- -- -- -- -- --
Automobile ....................... 393 26 151 570 356 50 116 522
Other consumer ................... 98 29 246 373 200 86 433 719
------------------------------------------------------------------------------------------------------------------------------
Total loans .................... $20,191 $16,324 $30,070 $66,585 $23,227 $8,595 $28,636 $60,458
==============================================================================================================================
Delinquencies as a percentage of total
loans ............................ 0.20% 0.16% 0.30% 0.66% 0.24% 0.09% 0.30% 0.63%
==============================================================================================================================
June 30, 2000
---------------------------------------
Loans secured by real estate:
Residential:
One-to-four units .............. $ 7,519 $4,970 $14,805 $27,294
One-to-four units - subprime ... 6,270 4,590 11,054 21,914
Five or more units ............. -- -- -- --
Commercial real estate ........... -- -- -- --
Construction ..................... -- -- -- --
Land ............................. -- -- -- --
---------------------------------------------------------------------------------
Total real estate loans ........ 13,789 9,560 25,859 49,208
Non-mortgage:
Commercial ....................... -- -- -- --
Automobile ....................... 158 -- 6 164
Other consumer ................... 372 30 208 610
---------------------------------------------------------------------------------
Total loans .................... $14,319 $9,590 $26,073 $49,982
=================================================================================
Delinquencies as a percentage of total
loans ............................ 0.15% 0.10% 0.26% 0.51%
=================================================================================
(1) All 90 day or greater delinquencies are on non-accrual status and reported
as part of non-performing assets.
29
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 June 30, 2001, $38
million at December 31, 2000 and $37 million at June 30, 2000.
Our provision for loan losses was $0.4 million in the current quarter and
exceeded our net loan charge-offs by $0.2 million resulting in an increase in
the allowance for loan losses to $34.3 million at June 30, 2001. The current
quarter allowance increase reflected an increase of $0.4 million in allocated
allowances to $5.1 million due to an increase in bankruptcies. General valuation
allowances declined by $0.2 million to $26.4 million due to declines in various
categories of our loan portfolio. There was no change in the unallocated
allowance of $2.8 million. Since year-end 2000, our allowance for loan losses
declined by $0.2 million, as general valuation allowances declined by $0.6
million, partially offset by a $0.4 million increase in allocated allowances.
The following table is a summary of the activity of our allowance for loan
losses during the periods indicated.
Three Months Ended
-----------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2001 2001 2000 2000 2000
-----------------------------------------------------------------------------------------------------
Balance at beginning of period $ 34,059 $ 34,452 $ 34,014 $ 33,237 $ 32,529
Provision .................... 431 52 511 1,007 942
Charge-offs .................. (326) (508) (346) (234) (237)
Recoveries ................... 137 63 273 4 3
-----------------------------------------------------------------------------------------------------
Balance at end of period ..... $ 34,301 $ 34,059 $ 34,452 $ 34,014 $ 33,237
=====================================================================================================
30
The following table presents by category of loan gross charge-offs, gross
recoveries and net charge-offs during the periods indicated.
Three Months Ended
-------------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(Dollars in Thousands) 2001 2001 2000 2000 2000
--------------------------------------------------------------------------------------------------------------------
GROSS LOAN CHARGE-OFFS
Loans secured by real estate:
Residential:
One-to-four units ............................ $ 115 $ 268 $ 69 $ 153 $ 114
One-to-four units - subprime ................. 92 136 136 21 57
Five or more units ........................... -- -- -- -- --
Commercial real estate .......................... -- -- -- -- --
Construction .................................... -- -- -- -- --
Land ............................................ -- -- -- -- --
Non-mortgage:
Commercial ...................................... -- -- -- -- --
Automobile ...................................... 72 48 98 -- 17
Other consumer .................................. 47 56 43 60 49
--------------------------------------------------------------------------------------------------------------------
Total gross loan charge-offs ................. 326 508 346 234 237
--------------------------------------------------------------------------------------------------------------------
GROSS LOAN RECOVERIES
Loans secured by real estate:
Residential:
One-to-four units ............................ 121 59 19 -- --
One-to-four units - subprime ................. 5 -- -- -- --
Five or more units ........................... -- -- -- -- --
Commercial real estate .......................... 1 -- 250 -- --
Construction .................................... -- -- -- -- --
Land ............................................ -- -- -- -- --
Non-mortgage:
Commercial ...................................... -- -- -- -- --
Automobile ...................................... 4 -- -- -- --
Other consumer .................................. 6 4 4 4 3
--------------------------------------------------------------------------------------------------------------------
Total gross loan recoveries .................. 137 63 273 4 3
--------------------------------------------------------------------------------------------------------------------
NET LOAN CHARGE-OFFS
Loans secured by real estate:
Residential:
One-to-four units ............................ (6) 209 50 153 114
One-to-four units - subprime ................. 87 136 136 21 57
Five or more units ........................... -- -- -- -- --
Commercial real estate .......................... (1) -- (250) -- --
Construction .................................... -- -- -- -- --
Land ............................................ -- -- -- -- --
Non-mortgage:
Commercial ...................................... -- -- -- -- --
Automobile ...................................... 68 48 98 -- 17
Other consumer .................................. 41 52 39 56 46
--------------------------------------------------------------------------------------------------------------------
Total net loan charge-offs ................... $ 189 $ 445 $ 73 $ 230 $ 234
====================================================================================================================
Net loan charge-offs as a percentage of average loans 0.01% 0.02% -- % 0.01% 0.01%
====================================================================================================================
31
The following table indicates our allocation of the allowance for loan
losses to the various categories of loans at the dates indicated.
June 30, 2001 March 31, 2001 December 31, 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 ....... $15,139 $7,506,027 0.20% $14,613 $7,652,325 0.19% $15,254 $7,655,238 0.20%
One-to-four units -
subprime .............. 10,826 1,701,558 0.64 11,057 1,765,656 0.63 10,157 1,743,914 0.58
Five or more units ...... 141 18,823 0.75 142 18,915 0.75 146 19,460 0.75
Commercial real estate .... 2,703 157,749 1.71 2,709 162,169 1.67 2,935 164,604 1.78
Construction .............. 1,171 99,261 1.18 1,142 96,564 1.18 1,390 118,165 1.18
Land ...................... 263 21,283 1.24 261 21,230 1.23 332 26,880 1.24
Non-mortgage:
Commercial ................ 422 21,648 1.95 424 21,312 1.99 442 21,721 2.03
Automobile ................ 175 32,594 0.54 234 36,590 0.64 269 39,614 0.68
Other consumer ............ 661 56,096 1.18 677 58,610 1.16 727 60,653 1.20
Not specifically allocated ... 2,800 -- -- 2,800 -- -- 2,800 -- --
------------------------------------------------------------------------------------------------------------------------------
Total loans held for
investment .............. $34,301 $9,615,039 0.36% $34,059 $9,833,371 0.35% $34,452 $9,850,249 0.35%
==============================================================================================================================
September 30, 2000 June 30, 2000
------------------------------------------------------------
Loans secured by real estate:
Residential:
One-to-four units ...... $15,143 $7,393,275 0.20% $14,622 $7,442,407 0.20%
One-to-four units -
subprime ............. 9,946 1,652,462 0.60 9,862 1,695,352 0.58
Five or more units ..... 148 19,728 0.75 175 19,900 0.88
Commercial real estate ... 2,930 164,305 1.78 2,690 147,752 1.82
Construction ............. 1,412 120,179 1.17 1,433 121,602 1.18
Land ..................... 325 26,294 1.24 463 37,222 1.24
Non-mortgage:
Commercial ............... 287 23,454 1.22 283 24,511 1.15
Automobile ............... 234 40,303 0.58 203 38,935 0.52
Other consumer ........... 789 60,362 1.31 706 56,627 1.25
Not specifically allocated .. 2,800 -- -- 2,800 -- --
-------------------------------------------------------------------------------------------
Total loans held for
investment ............. $34,014 $9,500,362 0.36% $33,237 $9,584,308 0.35%
===========================================================================================
At June 30, 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 second quarter of 2001, total interest
recognized on the impaired loan portfolio was $0.4 million, increasing the
year-to-date total to $0.9 million.
The following table is a summary of the activity in our allowance for loan
losses associated with impaired loans during 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
--------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2001 2001 2000 2000 2000
----------------------------------------------------------------------------------------
Balance at beginning of period $ 798 $ 800 $ 791 $ 792 $ 795
Provision (reduction) ........ (16) (2) 9 (1) (3)
Charge-offs .................. -- -- -- -- --
Recoveries ................... -- -- -- -- --
----------------------------------------------------------------------------------------
Balance at end of period ..... $ 782 $ 798 $ 800 $ 791 $ 792
========================================================================================
32
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
-----------------------------------------------------------
June 30, March 31, December 31, September 30, June 30,
(In Thousands) 2001 2001 2000 2000 2000
--------------------------------------------------------------------------------------------
Balance at beginning of period $3,030 $2,997 $2,961 $3,561 $2,088
Provision (reduction) ........ 33 33 36 (600) 1,473
Charge-offs .................. -- -- -- -- --
Recoveries ................... -- -- -- -- --
--------------------------------------------------------------------------------------------
Balance at end of period ..... $3,063 $3,030 $2,997 $2,961 $3,561
============================================================================================
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 second quarter of 2001 were
from:
o principal repayments--including prepayments, but excluding refinances
of our existing loans--on loans and mortgage-backed securities of $865
million; and
o a net increase in deposits of $332 million.
We used these funds for the following purposes:
o to originate and purchase loans held for investment of $634 million;
and
o to paydown our borrowings by $564 million.
At June 30, 2001, the Bank's ratio of regulatory liquidity was 5.4%,
compared to 4.3% at December 31, 2000 and 4.1% at June 30, 2000.
Downey currently has liquid assets, including due from Bank--interest
bearing balances, of $20 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 $681 million at June 30, 2001, up from $625
million at December 31, 2000 and $577 million at June 30, 2000.
33
REGULATORY CAPITAL COMPLIANCE
Our core and tangible capital ratios were 6.95% and our risk-based capital
ratio was 13.84%. 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.
The following table is a reconciliation of the Bank's stockholder's equity
to federal regulatory capital as of June 30, 2001.
Tangible Capital Core Capital Risk-Based Capital
---------------------- ---------------------- ---------------------
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------------------------------------------
Stockholder's equity ......................... $776,487 $776,487 $776,487
Adjustments:
Deductions:
Investment in subsidiary, primarily real
estate ................................. (17,687) (17,687) (17,687)
Goodwill ................................. (3,379) (3,379) (3,379)
Non-permitted mortgage servicing rights .. (4,214) (4,214) (4,214)
Additions:
Unrealized gains on securities available
for sale ............................... (2,394) (2,394) (2,394)
General loss allowance - investment in DSL
Service Company ........................ 549 549 549
Allowance for loan losses,
net of specific allowances (1) ......... -- -- 34,029
-------------------------------------------------------------------------------------------------------------------------
Regulatory capital ........................... 749,362 6.95% 749,362 6.95% 783,391 13.84%
Well capitalized requirement ................. 161,785 1.50 (2) 539,284 5.00 566,195 10.00 (3)
-------------------------------------------------------------------------------------------------------------------------
Excess ....................................... $587,577 5.45% $210,078 1.95% $217,196 3.84%
=========================================================================================================================
(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 13.24%.
34
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
(B) Form 8-K filed April 16, 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: August 1, 2001 /s/ Daniel D. Rosenthal
----------------------------------------------------
Daniel D. Rosenthal
President and Chief Executive Officer
Date: August 1, 2001 /s/ Thomas E. Prince
----------------------------------------------------
Thomas E. Prince
Executive Vice President and Chief Financial Officer
28