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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 SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________
Commission File Number 1-13578
DOWNEY FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0633413
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3501 JAMBOREE ROAD, NEWPORT BEACH, CA 92660
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (949) 854-0300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
COMMON STOCK, $0.01 PAR VALUE NEW YORK STOCK EXCHANGE
PACIFIC EXCHANGE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
At September 30, 2001, 28,213,048 shares of the Registrant's Common Stock,
$0.01 par value were outstanding.
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DOWNEY FINANCIAL CORP.
SEPTEMBER 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
September 30, December 31, September 30,
(Dollars in Thousands, Except Per Share Data) 2001 2000 2000
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ASSETS
Cash .......................................................................... $ 103,000 $ 108,202 $ 106,132
Federal funds ................................................................. 2,401 19,601 11,102
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Cash and cash equivalents ................................................. 105,401 127,803 117,234
U.S. Treasury securities, agency obligations and other investment securities
available for sale, at fair value ......................................... 296,204 305,615 216,812
Municipal securities held to maturity, at amortized cost (estimated market
value of $6,533 at September 30, 2001, $6,534 at December 31, 2000 and
$6,709 at September 30, 2000) ............................................. 6,549 6,550 6,726
Loans held for sale, at lower of cost or market ............................... 373,489 251,572 166,776
Mortgage-backed securities available for sale, at fair value .................. 4,562 10,203 12,431
Loans receivable held for investment .......................................... 9,534,438 9,822,578 9,467,534
Investments in real estate and joint ventures ................................. 38,043 17,641 15,851
Real estate acquired in settlement of loans ................................... 11,870 9,942 9,161
Premises and equipment ........................................................ 106,488 104,178 104,405
Federal Home Loan Bank stock, at cost ......................................... 111,649 106,356 121,845
Mortgage servicing rights, net ................................................ 37,507 40,731 45,014
Other assets .................................................................. 90,094 90,694 83,424
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$10,716,294 $10,893,863 $10,367,213
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ...................................................................... $ 8,868,782 $ 8,082,689 $ 7,691,782
Federal Home Loan Bank advances ............................................... 927,398 1,978,348 1,860,255
Other borrowings .............................................................. 29 224 248
Accounts payable and accrued liabilities ...................................... 67,392 54,236 56,972
Deferred income taxes ......................................................... 34,218 33,730 35,332
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Total liabilities ......................................................... 9,897,819 10,149,227 9,644,589
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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 28,213,048 shares at September 30, 2001, 28,205,741 shares
at December 31, 2000 and 28,201,606 shares at September 30, 2000 .......... 282 282 282
Additional paid-in capital .................................................... 93,400 93,239 93,176
Accumulated other comprehensive income (loss) ................................. 897 687 (805)
Retained earnings ............................................................. 603,896 530,428 509,971
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Total stockholders' equity ................................................ 698,475 624,636 602,624
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$10,716,294 $10,893,863 $10,367,213
============================================================================================================================
See accompanying notes to consolidated financial statements.
1
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Income
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------
(Dollars in Thousands, Except Per Share Data) 2001 2000 2001 2000
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INTEREST INCOME
Loans receivable ....................................................... $ 187,867 $ 198,084 $ 604,449 $ 557,202
U.S. Treasury securities and agency obligations ........................ 3,727 3,379 12,259 9,431
Mortgage-backed securities ............................................. 62 224 277 876
Other investments ...................................................... 2,040 2,683 7,912 7,076
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Total interest income ............................................... 193,696 204,370 624,897 574,585
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INTEREST EXPENSE
Deposits ............................................................... 107,033 98,957 336,220 270,409
Borrowings ............................................................. 10,176 35,163 53,700 101,516
Capital securities ..................................................... 3,040 3,040 9,122 9,122
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Total interest expense .............................................. 120,249 137,160 399,042 381,047
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NET INTEREST INCOME .................................................... 73,447 67,210 225,855 193,538
PROVISION FOR LOAN LOSSES .............................................. 791 1,007 1,274 2,740
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Net interest income after provision for loan losses ................. 72,656 66,203 224,581 190,798
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OTHER INCOME, NET
Loan and deposit related fees .......................................... 13,274 7,959 37,640 20,789
Real estate and joint ventures held for investment, net:
Operations, net ..................................................... 372 2,168 2,128 6,005
Net gains on sales of wholly owned real estate ...................... -- 1,257 2 2,678
(Provision for) reduction of losses on real estate and joint ventures 374 600 308 (830)
Secondary marketing activities:
Loan servicing fees ................................................. (11,771) (79) (22,854) 485
Net gains (losses) on sales of loans and mortgage-backed securities . 4,234 (331) 15,321 2,185
Net gains on sales of mortgage servicing rights ..................... 87 -- 758 --
Net gains (losses) on sales of investment securities ................... 3 (19) 242 (108)
Gain on sale of subsidiary ............................................. -- -- -- 9,762
Other .................................................................. 497 510 1,759 2,043
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Total other income, net ............................................. 7,070 12,065 35,304 43,009
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OPERATING EXPENSE
Salaries and related costs ............................................. 24,943 19,280 72,860 60,779
Premises and equipment costs ........................................... 6,628 5,837 18,713 17,275
Advertising expense .................................................... 939 980 3,242 3,665
Professional fees ...................................................... 2,432 537 4,613 2,045
SAIF insurance premiums and regulatory assessments ..................... 786 683 2,259 1,930
Other general and administrative expense ............................... 5,981 4,823 17,293 14,528
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Total general and administrative expense ............................ 41,709 32,140 118,980 100,222
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Net operation of real estate acquired in settlement of loans ........... 110 221 2 555
Amortization of excess of cost over fair value of net assets acquired .. 116 115 344 348
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Total operating expense ............................................. 41,935 32,476 119,326 101,125
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INCOME BEFORE INCOME TAXES ............................................. 37,791 45,792 140,559 132,682
Income taxes ........................................................... 16,025 19,454 59,510 56,426
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Net income before cumulative effect of change in accounting principle .. 21,766 26,338 81,049 76,256
Cumulative effect of change in accounting principle, net of taxes ...... -- -- 36 --
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NET INCOME .......................................................... $ 21,766 $ 26,338 $ 81,085 $ 76,256
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PER SHARE INFORMATION
Basic before cumulative effect of change in accounting principle ....... $ 0.77 $ 0.94 $ 2.87 $ 2.71
BASIC AFTER CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ........ 0.77 0.94 2.87 2.71
====================================================================================================================================
Diluted before cumulative effect of change in accounting principle ..... $ 0.77 $ 0.93 $ 2.86 $ 2.70
DILUTED AFTER CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ...... 0.77 0.93 2.86 2.70
====================================================================================================================================
CASH DIVIDENDS DECLARED AND PAID ....................................... $ 0.09 $ 0.09 $ 0.27 $ 0.27
====================================================================================================================================
Weighted average diluted shares outstanding ............................ 28,278,485 28,247,953 28,274,894 28,208,718
====================================================================================================================================
See accompanying notes to consolidated financial statements.
2
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Three Months Ended Nine Months Ended
September 30, September 30,
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(In Thousands) 2001 2000 2001 2000
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NET INCOME ................................................................. $ 21,766 $ 26,338 $ 81,085 $ 76,256
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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 .......................... 973 850 1,513 670
Mortgage-backed securities available for sale, at fair value ........... 9 72 64 43
Less reclassification of realized (gains) losses included in net income (2) (10) (139) 50
Unrealized gains (losses) on cash flow hedges:
Net derivative instruments ............................................. (3,052) -- (1,942) --
Cumulative effect of change in accounting principle .................... -- -- (388) --
Less reclassification of realized losses included in net income ........ 575 -- 1,102 --
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Total other comprehensive income (loss), net of income taxes (benefits) .... (1,497) 912 210 763
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COMPREHENSIVE INCOME ....................................................... $ 20,269 $ 27,250 $ 81,295 $ 77,019
============================================================================================================================
See accompanying notes to consolidated financial statements.
3
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine Months Ended
September 30,
------------------------------
(In Thousands) 2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................................................... $ 81,085 $ 76,256
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 ......................................................... 37,402 22,933
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 ....... 21,376 3,909
Net gains on sales of loans and mortgage-backed securities, mortgage servicing rights,
investment securities, real estate and other assets ................................. (18,193) (8,354)
Gain on sale of subsidiary ............................................................ -- (9,762)
Interest capitalized on loans (negative amortization) ................................. (36,633) (51,925)
Federal Home Loan Bank stock dividends ................................................ (5,293) (5,495)
Loans originated for sale ................................................................ (3,210,267) (1,393,494)
Proceeds from sales of loans held for sale, including those sold
via mortgage-backed securities ........................................................ 3,071,593 1,408,079
Other, net ............................................................................... (3,005) (14,902)
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Net cash provided by (used for) operating activities ..................................... (61,971) 27,245
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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 .................................................................. 24,052 13,892
Wholly owned real estate and real estate acquired in settlement of loans .............. 8,426 35,842
Proceeds from maturities of U.S. Treasury securities, agency obligations
and other investment securities available for sale .................................... 340,715 --
Purchase of:
U.S. Treasury securities, agency obligations and other investment securities
available for sale .................................................................. (351,619) (58,025)
Loans receivable held for investment .................................................. (94,980) (18,221)
Federal Home Loan Bank stock .......................................................... -- (13,958)
Originations of loans receivable held for investment (net of refinances of $557,183 at
September 30, 2001 and $89,667 at September 30, 2000) ................................. (1,807,057) (2,447,826)
Principal payments on loans receivable held for investment and mortgage-backed
securities available for sale ......................................................... 2,218,148 1,275,508
Net change in undisbursed loan funds ..................................................... (8,946) (53,073)
Proceeds from (investments in) real estate held for investment ........................... (5,573) 1,155
Other, net ............................................................................... (11,089) (5,617)
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Net cash provided by (used for) investing activities ..................................... 312,077 (891,089)
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See accompanying notes to consolidated financial statements.
4
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Nine Months Ended
September 30,
-------------------------------
(In Thousands) 2001 2000
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CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ..................................................... $ 786,093 $ 1,129,021
Proceeds from Federal Home Loan Bank advances ................................ 2,040,850 4,793,708
Repayments of Federal Home Loan Bank advances ................................ (3,091,800) (5,055,860)
Net decrease in other borrowings ............................................. (195) (125)
Proceeds from exercise of stock options ...................................... 161 792
Cash dividends ............................................................... (7,617) (7,605)
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Net cash provided by (used for) financing activities ......................... (272,508) 859,931
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Net decrease in cash and cash equivalents .................................... (22,402) (3,913)
Cash and cash equivalents at beginning of period ............................. 127,803 121,147
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CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................... $ 105,401 $ 117,234
===============================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ................................................................ $ 404,885 $ 370,778
Income taxes ............................................................ 59,016 55,422
Supplemental disclosure of non-cash investing:
Loans transferred to held for investment from held for sale ............... 4,287 40,100
Loans transferred from held for investment to held for sale ............... -- 96,838
Loans transferred from held for investment to wholly owned real estate .... 15,688 --
Loans exchanged for mortgage-backed securities ............................ 2,525,816 802,682
Real estate acquired in settlement of loans ............................... 17,588 13,599
Loans to facilitate the sale of real estate acquired in settlement of loans 8,156 4,584
===============================================================================================================
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 September 30, 2001, December
31, 2000 and September 30, 2000, the results of operations and comprehensive
income for the three months and nine months ended September 30, 2001 and 2000,
and changes in cash flows for the nine months ended September 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 statements 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 September 30,
----------------------------------------------------
2001 2000
----------------------------------------------------
Net Per Share Net Per Share
(Dollars in Thousands, Except Per Share Data) Income Amount Income Amount
-------------------------------------------------------------------------------------------------------
Basic earnings per share .......... $21,766 $0.77 $26,338 $0.94
Effect of dilutive stock options .. -- -- -- 0.01
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Diluted earnings per share .... $21,766 $0.77 $26,338 $0.93
=======================================================================================================
Weighted average shares outstanding
Basic ............................. 28,212,575 28,195,739
Dilutive stock options ............ 65,910 52,214
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Diluted ....................... 28,278,485 28,247,953
=======================================================================================================
6
Nine Months Ended September 30,
---------------------------------------------------
2001 2000
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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 ................................. $81,049 $2.87 $76,256 $2.71
Effect of dilutive stock options ......................... -- 0.01 -- 0.01
----------------------------------------------------------------------------------------------------------------
Diluted earnings per share ........................... $81,049 $2.86 $76,256 $2.70
================================================================================================================
AFTER CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
Basic earnings per share ................................. $81,085 $2.87 $76,256 $2.71
Effect of dilutive stock options ......................... -- 0.01 -- 0.01
----------------------------------------------------------------------------------------------------------------
Diluted earnings per share ........................... $81,085 $2.86 $76,256 $2.70
================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic .................................................... 28,211,100 28,168,173
Dilutive stock options ................................... 63,794 40,545
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Diluted .............................................. 28,274,894 28,208,718
================================================================================================================
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 SEPTEMBER 30, 2001
Net interest income (loss) ................ $ 73,473 $ (26) $ -- $ 73,447
Provision for loan losses ................. 791 -- -- 791
Other income .............................. 5,987 1,083 -- 7,070
Operating expense ......................... 40,071 1,864 -- 41,935
Net intercompany income (expense) ......... 92 (92) -- --
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Income (loss) before income taxes (benefit) 38,690 (899) -- 37,791
Income taxes (benefit) .................... 16,389 (364) -- 16,025
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Net income (loss) .................... $ 22,301 $ (535) $ -- $ 21,766
=======================================================================================================
AT SEPTEMBER 30, 2001
Assets:
Loans and mortgage-backed securities . $ 9,912,489 $ -- $ -- $ 9,912,489
Real estate held for investment ...... -- 38,043 -- 38,043
Other ................................ 797,775 1,629 (33,642) 765,762
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Total assets ....................... 10,710,264 39,672 (33,642) 10,716,294
-------------------------------------------------------------------------------------------------------
Equity .................................... $ 698,475 $ 33,642 $ (33,642) $ 698,475
=======================================================================================================
THREE MONTHS ENDED SEPTEMBER 30, 2000
Net interest income ....................... $ 67,137 $ 73 $ -- $ 67,210
Provision for loan losses ................. 1,007 -- -- 1,007
Other income .............................. 7,953 4,112 -- 12,065
Operating expense ......................... 32,216 260 -- 32,476
Net intercompany income (expense) ......... 83 (83) -- --
-------------------------------------------------------------------------------------------------------
Income before income taxes ................ 41,950 3,842 -- 45,792
Income taxes .............................. 17,870 1,584 -- 19,454
-------------------------------------------------------------------------------------------------------
Net income ........................... $ 24,080 $ 2,258 $ -- $ 26,338
=======================================================================================================
AT SEPTEMBER 30, 2000
Assets:
Loans and mortgage-backed securities . $ 9,646,741 $ -- $ -- $ 9,646,741
Real estate held for investment ...... -- 15,851 -- 15,851
Other ................................ 715,933 6,347 (17,659) 704,621
-------------------------------------------------------------------------------------------------------
Total assets ....................... 10,362,674 22,198 (17,659) 10,367,213
-------------------------------------------------------------------------------------------------------
Equity .................................... $ 602,624 $ 17,659 $ (17,659) $ 602,624
=======================================================================================================
7
Real Estate
(In Thousands) Banking Investment Elimination Totals
-------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2001
Net interest income ......................... $225,843 $ 12 $ -- $225,855
Provision for loan losses ................... 1,274 -- -- 1,274
Other income ................................ 31,881 3,423 -- 35,304
Operating expense ........................... 115,924 3,402 -- 119,326
Net intercompany income (expense) ........... 273 (273) -- --
-------------------------------------------------------------------------------------------------
Income (loss) before income taxes (benefit) . 140,799 (240) -- 140,559
Income taxes (benefit) ...................... 59,606 (96) -- 59,510
-------------------------------------------------------------------------------------------------
Net income (loss) before cumulative effect of
change in accounting principle ......... 81,193 (144) -- 81,049
Cumulative effect of change in accounting
principle, net of income taxes ......... 36 -- -- 36
-------------------------------------------------------------------------------------------------
Net income (loss) ...................... $ 81,229 $ (144) $ -- $ 81,085
=================================================================================================
NINE MONTHS ENDED SEPTEMBER 30, 2000
Net interest income ......................... $193,353 $ 185 $ -- $193,538
Provision for loan losses ................... 2,740 -- -- 2,740
Other income:
Gain on sale of subsidiary ............. 9,762 -- -- 9,762
All other .............................. 25,178 8,069 -- 33,247
Operating expense ........................... 100,258 867 -- 101,125
Net intercompany income (expense) ........... 298 (298) -- --
-------------------------------------------------------------------------------------------------
Income before income taxes .................. 125,593 7,089 -- 132,682
Income taxes ................................ 53,509 2,917 -- 56,426
-------------------------------------------------------------------------------------------------
Net income ............................. $ 72,084 $ 4,172 $ -- $ 76,256
=================================================================================================
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
------------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(Dollars in Thousands) 2001 2001 2001 2000 2000
-----------------------------------------------------------------------------------------------------------------------------------
Gross balance at beginning of period ............. $ 55,848 $ 49,323 $ 46,214 $ 45,834 $ 41,126
Additions ........................................ 10,294 13,403 5,394 2,548 6,267
Amortization ..................................... (2,495) (2,299) (2,063) (1,803) (1,559)
Sale of servicing ................................ (582) (2,328) -- -- --
Impairment write-down ............................ (1,414) (2,251) (222) (365) --
-----------------------------------------------------------------------------------------------------------------------------------
Gross balance at end of period ................ 61,651 55,848 49,323 46,214 45,834
-----------------------------------------------------------------------------------------------------------------------------------
Allowance balance at beginning of period ......... 13,706 13,606 5,483 820 214
Provision for impairment ......................... 11,852 2,351 8,345 5,028 606
Impairment write-down ............................ (1,414) (2,251) (222) (365) --
-----------------------------------------------------------------------------------------------------------------------------------
Allowance balance at end of period ............ 24,144 13,706 13,606 5,483 820
-----------------------------------------------------------------------------------------------------------------------------------
Total mortgage servicing rights, net .......... $ 37,507 $ 42,142 $ 35,717 $ 40,731 $ 45,014
===================================================================================================================================
Estimated fair value (1) ......................... $ 37,507 $ 42,142 $ 35,752 $ 41,826 $ 45,895
===================================================================================================================================
AT PERIOD END
Mortgage loans serviced for others:
Total ......................................... $ 5,458,970 $ 5,056,120 $ 4,296,883 $ 3,964,462 $ 4,020,931
With capitalized mortgage servicing rights (2):
Amount ...................................... 5,078,088 4,456,822 3,999,380 3,779,562 3,686,763
Weighted average interest rate .............. 7.19% 7.29% 7.50% 7.56% 7.51%
===================================================================================================================================
Custodial escrow balances ........................ $ 15,415 $ 9,924 $ 5,281 $ 8,207 $ 11,378
===================================================================================================================================
(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 September 30, 2001, we had rate lock commitments estimated to
sell as part of our secondary marketing activities of $423 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 September 30, 2001, forward sale contracts amounted to $827
million, of which $369 million were designated as cash flow hedges, and forward
purchase contracts totaled $53 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 nine months of 2001, the amortization of excess of cost
over fair value of net assets acquired was $0.3 million and as of September 30,
2001, goodwill amounted to $3.3 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 third quarter of 2001 totaled $21.8 million or $0.77
per share on a diluted basis, down 17.4% from the $26.3 million or $0.93 per
share in the third quarter of 2000.
The decline in our net income between third quarters was primarily due to
the addition we made to our valuation allowance for mortgage servicing rights.
The addition was reflected within the category of loan servicing fees and was
necessary due to the continued drop in market interest rates that have increased
the expected rate of prepayments on loans we service for others, as well as a
decline in the value of associated custodial accounts. The pre-tax addition
during the third quarter was $11.9 million, compared to $0.6 million a year ago.
If that valuation allowance had not been necessary, our net income in the
current quarter would have been $28.6 million, up $1.9 million or 7.1% from the
adjusted year-ago level. This reflected an increase of $4.7 million in adjusted
net income from our banking operations, that more than offset a $2.8 million
decline in net income from real estate investment activities. Adjusted net
income from banking operations increased due to the following:
o a $9.3 million increase in other income due to higher loan and deposit
related fees as well as higher net gains from the sales of loans and
mortgage-backed securities;
o a $6.3 million or 9.4% increase in net interest income due to
increases in both average earning assets and our effective interest
rate spread; and
o a $0.2 million reduction in provision for loan losses.
These favorable items were partially offset by a $7.9 million increase in our
operating expense associated with an increased number of branch locations and
higher loan origination activity.
For the first nine months of 2001, our net income totaled $81.1 million or
$2.86 per share on a diluted basis. This is an increase of 14.8% over the $70.6
million or $2.50 per share for the first nine months of 2000, excluding the $5.6
million or $0.20 per share after-tax gain from the sale of our indirect
automobile finance subsidiary from the year-ago results. Including the gain, our
net income for the first nine months of 2000 totaled $76.3 million or $2.70 per
share on a diluted basis. The increase between nine-month periods primarily
reflected higher net income from our banking operations.
For the third quarter of 2001, our return on average assets was 0.82% and
our return on average equity was 12.63%. For the first nine months of 2001, our
return on average assets was 1.00% and our return on average equity was 16.31%.
At September 30, 2001, our assets totaled $10.7 billion, up $349 million or
3.4% from a year ago, but down $106 million from June 30, 2001. Our single
family loan originations totaled $1.988 billion in the third quarter of 2001, up
128.7% from the $869 million we originated in the third quarter of 2000 but 6.3%
below the record $2.122 billion we originated in the second quarter of 2001. Of
the current quarter total, $872 million represented originations of loans for
portfolio, of which $101 million represented subprime credits. In addition to
single family loans, we originated $57 million of other loans in the quarter.
Between third quarters, we funded our asset growth with a $1.2 billion or
15.3% increase in deposits. At quarter-end, our deposits totaled $8.9 billion.
During the quarter, one new traditional branch and four new in-store branches
were opened, bringing our total branches at quarter end to 134, with the total
equally divided between traditional and in-store locations. A year ago, branches
totaled 107, of which 43 were in-store.
Our non-performing assets increased $15 million during the quarter to $75
million or 0.70% of total assets. The increase was all in residential loans, of
which $7 million were subprime.
At September 30, 2001, our primary subsidiary, Downey Savings and Loan
Association, F.A. (the "Bank"), had core and tangible capital ratios of 7.04%
and a risk-based capital ratio of 14.11%. 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 $73.4 million in the third quarter of 2001,
up $6.2 million or 9.3% from the same period last year. The improvement between
third quarters reflected increases in both average earning assets and the
effective interest rate spread. Our average earning assets increased by $215
million or 2.1% between third quarters to $10.3 billion. Our effective interest
rate spread of 2.85% in the current quarter was up from the year-ago quarter
level of 2.66%. This improvement was due to our cost of funds declining more
rapidly than our yield on earning assets. 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, however, was down 4 basis points from the second
quarter 2001 level, as our earning asset yield fell slightly faster than with
our cost of funds on a linked-quarter basis. For the first nine months of 2001,
net interest income totaled $225.9 million, up $32.3 million or 16.7% 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 September 30,
------------------------------------------------------------------------
2001 2000
------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans ......................... $ 9,893,414 $187,867 7.60% $ 9,728,972 $198,084 8.14%
Mortgage-backed securities .... 4,951 62 5.01 13,715 224 6.53
Investment securities ......... 420,635 5,767 5.44 361,046 6,062 6.68
--------------------------------------------------------------------------------------------------------------
Total interest-earning assets 10,319,000 193,696 7.51 10,103,733 204,370 8.09
Non-interest-earning assets ....... 354,634 333,522
--------------------------------------------------------------------------------------------------------------
Total assets .................. $10,673,634 $10,437,255
==============================================================================================================
Transaction accounts:
Non-interest-bearing checking . $ 313,665 $ -- -- % $ 216,800 $ -- -- %
Interest-bearing checking (1) . 406,779 501 0.49 383,563 882 0.91
Money market .................. 93,388 648 2.75 87,702 628 2.85
Regular passbook .............. 1,184,206 9,426 3.16 793,046 6,845 3.43
--------------------------------------------------------------------------------------------------------------
Total transaction accounts .. 1,998,038 10,575 2.10 1,481,111 8,355 2.24
Certificates of deposit ........... 6,929,044 96,458 5.52 5,937,680 90,602 6.07
--------------------------------------------------------------------------------------------------------------
Total deposits ................ 8,927,082 107,033 4.76 7,418,791 98,957 5.31
Borrowings ........................ 805,879 10,176 5.01 2,189,570 35,163 6.39
Capital securities ................ 120,000 3,040 10.14 120,000 3,040 10.14
--------------------------------------------------------------------------------------------------------------
Total deposits, borrowings and
capital securities............ 9,852,961 120,249 4.84 9,728,361 137,160 5.61
Other liabilities ................. 131,469 119,577
Stockholders' equity .............. 689,204 589,317
--------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity ......... $10,673,634 $10,437,255
==============================================================================================================
Net interest income/interest rate
spread ........................... $ 73,447 2.67% $ 67,210 2.48%
Excess of interest-earning assets
over deposits, borrowings and
capital securities................ $ 466,039 $ 375,372
Effective interest rate spread .... 2.85 2.66
==============================================================================================================
Nine Months Ended September 30,
------------------------------------------------------------------------
2001 2000
------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
--------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans ......................... $10,043,997 $604,449 8.02% $ 9,418,857 $557,202 7.89%
Mortgage-backed securities .... 6,121 277 6.03 17,518 876 6.67
Investment securities ......... 450,942 20,171 5.98 335,471 16,507 6.57
--------------------------------------------------------------------------------------------------------------
Total interest-earning assets 10,501,060 624,897 7.93 9,771,846 574,585 7.84
Non-interest-earning assets ....... 357,013 339,743
--------------------------------------------------------------------------------------------------------------
Total assets .................. $10,858,073 $10,111,589
==============================================================================================================
Transaction accounts:
Non-interest-bearing checking . $ 285,427 $ -- -- % $ 202,844 $ -- -- %
Interest-bearing checking (1) . 404,065 1,633 0.54 379,592 2,741 0.96
Money market .................. 90,869 1,903 2.80 89,675 1,908 2.84
Regular passbook .............. 942,245 23,369 3.32 806,779 21,271 3.52
--------------------------------------------------------------------------------------------------------------
Total transaction accounts .. 1,722,606 26,905 2.09 1,478,890 25,920 2.34
Certificates of deposit ........... 6,968,361 309,315 5.93 5,621,411 244,489 5.81
--------------------------------------------------------------------------------------------------------------
Total deposits ................ 8,690,967 336,220 5.17 7,100,301 270,409 5.09
Borrowings ........................ 1,254,497 53,700 5.72 2,219,932 101,516 6.11
Capital securities ................ 120,000 9,122 10.14 120,000 9,122 10.14
--------------------------------------------------------------------------------------------------------------
Total deposits, borrowings and
capital securities ........... 10,065,464 399,042 5.30 9,440,233 381,047 5.39
Other liabilities ................. 129,714 105,137
Stockholders' equity .............. 662,895 566,219
--------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity ......... $10,858,073 $10,111,589
==============================================================================================================
Net interest income/interest rate
spread ........................... $225,855 2.63% $193,538 2.45%
Excess of interest-earning assets
over deposits, borrowings and
capital securities ............... $ 435,596 $ 331,613
Effective interest rate spread .... 2.87 2.64
==============================================================================================================
(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 September 30, Nine Months Ended September 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 ........................... $ 3,348 $(13,340) $ (225) $(10,217) $ 36,982 $ 9,626 $ 639 $ 47,247
Mortgage-backed securities ...... (143) (52) 33 (162) (570) (83) 54 (599)
Investment securities ........... 906 (1,031) (170) (295) 5,652 (1,479) (509) 3,664
------------------------------------------------------------------------------------------------------------------------------------
Change in interest income ..... 4,111 (14,423) (362) (10,674) 42,064 8,064 184 50,312
------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Transaction accounts:
Interest-bearing checking (1) . 53 (409) (25) (381) 177 (1,207) (78) (1,108)
Money market .................. 46 (25) (1) 20 42 (47) -- (5)
Regular passbook .............. 3,417 (560) (276) 2,581 3,536 (1,231) (207) 2,098
------------------------------------------------------------------------------------------------------------------------------------
Total transaction accounts .. 3,516 (994) (302) 2,220 3,755 (2,485) (285) 985
Certificates of deposit ......... 16,177 (8,845) (1,476) 5,856 58,326 5,244 1,256 64,826
------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 19,693 (9,839) (1,778) 8,076 62,081 2,759 971 65,811
Borrowings ...................... (22,138) (7,566) 4,717 (24,987) (44,231) (5,805) 2,220 (47,816)
Capital securities .............. -- -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Change in interest expense .... (2,445) (17,405) 2,939 (16,911) 17,850 (3,046) 3,191 17,995
------------------------------------------------------------------------------------------------------------------------------------
Change in net interest income ....... $ 6,556 $ 2,982 $(3,301) $ 6,237 $ 24,214 $ 11,110 $(3,007) $ 32,317
====================================================================================================================================
(1) Includes amounts swept into money market deposit accounts.
PROVISION FOR LOAN LOSSES
Provision for loan losses was $0.8 million in the current quarter, down
from $1.0 million in the third quarter of 2000. For the first nine months of
2001, provision for loan losses was $1.3 million, compared to $2.7 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 $7.1 million in the third quarter of 2001, down
$5.0 million from a year ago primarily due to:
o an $11.9 million addition to the valuation allowance for mortgage
servicing rights reflected within the category of loan servicing fees
due to the continued drop in market interest rates that have increased
the expected rate of prepayments on loans serviced for others, as well
as a decline in the value of associated custodial accounts; and
o a $3.3 million decrease in income from real estate held for investment
due to lower gains from sales and lower recapture of valuation
allowances.
Those decreases were partially offset by a $5.3 million increase in loans and
deposit related fees due to increases of $3.3 million in loan prepayment fees
and $1.0 million in deposit related fees, as well as an increase of $4.6 million
in net gains
14
from sales of loans and mortgage-backed securities. For the first nine months of
2001, total other income was $35.3 million, down $7.7 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.
Loan and Deposit Related Fees
Loan and deposit related fees totaled $13.3 million in the third quarter of
2001, up $5.3 million from a year ago. Our loan related fees accounted for $4.3
million of the increase between third quarters, of which $3.3 million
represented higher loan prepayment fees. Our deposit related fees increased by
$1.0 million or 29.2%, primarily due to higher fees from our checking accounts.
For the nine months of 2001, loan and deposit related fees totaled $37.6
million, up $16.9 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
------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2001 2001 2001 2000 2000
----------------------------------------------------------------------------------------------------------
Loan related fees:
Prepayment fees ................... $ 6,384 $ 7,455 $ 4,525 $ 3,899 $ 3,043
Other fees ........................ 2,257 2,251 1,779 1,513 1,329
Deposit related fees:
Automated teller machine fees ..... 1,671 1,650 1,533 1,618 1,566
Other fees ........................ 2,962 2,780 2,393 2,270 2,021
----------------------------------------------------------------------------------------------------------
Total loan and deposit related fees $13,274 $14,136 $10,230 $ 9,300 $ 7,959
==========================================================================================================
Real Estate and Joint Ventures Held for Investment
Income from our real estate and joint ventures held for investment totaled
$0.7 million in the third quarter of 2001, down from $4.0 million a year ago.
Our net gains on sales declined by $2.7 million between third quarters, while
the recapture of valuation allowances were lower by $0.2 million. For the first
nine months of 2001, income from real estate and joint ventures held for
investment totaled $2.4 million, down $5.4 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
------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2001 2001 2001 2000 2000
--------------------------------------------------------------------------------------------------------------------------
Operations, net:
Rental operations, net of expenses ................ $ 259 $ 452 $ 508 $ 309 $ 422
Equity in net income from joint ventures .......... 12 121 391 169 1,531
Interest from joint venture advances .............. 101 152 132 200 215
--------------------------------------------------------------------------------------------------------------------------
Total operations, net ........................... 372 725 1,031 678 2,168
Net gains on sales of wholly owned real estate ....... -- -- 2 303 1,257
(Provision for) reduction of losses on real estate and
joint ventures .................................... 374 (33) (33) (36) 600
--------------------------------------------------------------------------------------------------------------------------
Income from real estate and joint ventures held for
investment, net ................................. $ 746 $ 692 $ 1,000 $ 945 $ 4,025
==========================================================================================================================
Secondary Marketing Activities
Sales of loans and mortgage-backed securities we originated increased to
$1.120 billion in the third quarter of 2001 from $620 million a year ago. Net
gains associated with these sales totaled $4.2 million in the third quarter of
2001, up from a loss of $0.3 million a year ago. The year-ago loss was due to a
conversion to a new loan origination system that temporarily affected the hedge
position against our loans held for sale. The net gains included capitalized
mortgage servicing rights of $10.3 million in the third quarter of 2001,
compared to $6.3 million a year ago. For the first nine months of 2001, net
gains on sales of loans and mortgage-backed securities totaled $15.3 million, up
from $2.2 million from the same period of 2000.
15
A loss of $11.8 million was recorded in loan servicing fees from our
portfolio of loans serviced for others during the third quarter of 2001,
compared to a loss of $0.1 million a year ago. The loss in the 2001 third
quarter reflects an $11.9 million provision to the valuation allowance for
mortgage servicing rights due to the continued drop in interest rates that have
increased the expected rate of prepayments on loans serviced for others, as well
as a decline in the value of associated custodial accounts. At September 30,
2001, we serviced $5.5 billion of loans for others, compared to $4.0 billion at
both December 31, 2000 and September 30, 2000. For the first nine months of
2001, a loss of $22.9 million was recorded in loan servicing fees, compared to
income of $0.5 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
--------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2001 2001 2001 2000 2000
-------------------------------------------------------------------------------------------------------
Income from servicing operations $ 2,576 $ 1,752 $ 2,223 $ 2,718 $ 2,086
Amortization of MSRs ........... (2,495) (2,299) (2,063) (1,803) (1,559)
Provision for impairment ....... (11,852) (2,351) (8,345) (5,028) (606)
-------------------------------------------------------------------------------------------------------
Total loan servicing fees .... $(11,771) $ (2,898) $ (8,185) $ (4,113) $ (79)
=======================================================================================================
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 $41.9 million in the current quarter, up $9.5
million from the third quarter of 2000. The increase was primarily due to a $9.6
million or 29.8% 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 nine months of
2001, operating expenses totaled $119.3 million, up $18.2 million from the same
period of 2000.
The following table presents a breakdown of our operating expense for the
periods indicated.
Three Months Ended
------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2001 2001 2001 2000 2000
------------------------------------------------------------------------------------------------------------------
Salaries and related costs ................... $ 24,943 $ 24,646 $ 23,271 $ 21,743 $ 19,280
Premises and equipment costs ................. 6,628 6,042 6,043 5,945 5,837
Advertising expense .......................... 939 1,127 1,176 1,121 980
Professional fees ............................ 2,432 1,604 577 1,274 537
SAIF insurance premiums and regulatory
assessments ............................... 786 741 732 696 683
Other general and administrative expense ..... 5,981 5,973 5,339 5,188 4,823
------------------------------------------------------------------------------------------------------------------
Total general and administrative expense . 41,709 40,133 37,138 35,967 32,140
Net operation of real estate acquired in
settlement of loans ....................... 110 (106) (2) 263 221
Amortization of excess of cost over fair value
of net assets acquired ................... 116 114 114 114 115
------------------------------------------------------------------------------------------------------------------
Total operating expense .................. $ 41,935 $ 40,141 $ 37,250 $ 36,344 $ 32,476
==================================================================================================================
PROVISION FOR INCOME TAXES
Income taxes for the current quarter totaled $16.0 million, resulting in an
effective tax rate of 42.4%, compared to $19.5 million and 42.5% for the like
quarter of a year ago. For the first nine months of 2001, our effective tax rate
was 42.3%, compared to 42.5% 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
------------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2001 2001 2001 2000 2000
-----------------------------------------------------------------------------------------------------------------------
Banking net income ..................... $22,301 $33,619 $25,309 $22,738 $24,080
Real estate investment net income (loss) (535) (164) 555 257 2,258
-----------------------------------------------------------------------------------------------------------------------
Total net income .................... $21,766 $33,455 $25,864 $22,995 $26,338
=======================================================================================================================
Nine Months Ended September 30,
---------------------------------
2001 2000
-----------------------------------------------------------------------------------------------------------------------
Banking net income ..................... $81,229 $72,084
Real estate investment net income (loss) (144) 4,172
-----------------------------------------------------------------------------------------------------------------------
Total net income .................... $81,085 $76,256
=======================================================================================================================
Banking
Net income from our banking operations for the third quarter of 2001
totaled $22.3 million, down 7.4% from $24.1 million in the third quarter of
2000.
The decrease between third quarters primarily reflected the $11.9 million
addition to the valuation allowance for mortgage servicing rights reflected
within the category of loan servicing fees as a result of the continued drop in
market interest rates that have increased the expected rate of prepayments on
loans serviced for others, as well as a decline in the value of associated
custodial accounts. If that valuation allowance had not been necessary, net
income from our banking operations would have been $29.1 million, up $4.7
million or 19.2% from the adjusted year-ago level. The adjusted increase
primarily resulted from:
o a $6.3 million increase in net interest income due to increases in
both our average earning assets and effective interest rate spread;
o a $5.0 million increase in loan and deposit related fees;
o a $4.6 million increase in net gains on sales of loans and
mortgage-backed securities; and
o a $0.2 million reduction in provision for loan losses.
Partially offsetting these favorable items was a $7.9 million increase in
operating expense due to higher costs associated with an 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
---------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2001 2001 2001 2000 2000
-----------------------------------------------------------------------------------------------------------------------
Net interest income ..................... $ 73,473 $ 76,236 $ 76,134 $ 68,879 $ 67,137
Provision for loan losses ............... 791 431 52 511 1,007
Other income ............................ 5,987 21,211 4,683 6,466 7,953
Operating expense ....................... 40,071 38,863 36,990 35,738 32,216
Net intercompany income ................. 92 84 97 99 83
-----------------------------------------------------------------------------------------------------------------------
Income before income taxes .............. 38,690 58,237 43,872 39,195 41,950
Income taxes ............................ 16,389 24,618 18,599 16,457 17,870
-----------------------------------------------------------------------------------------------------------------------
Net income before cumulative effect of
change in accounting principle ....... 22,301 33,619 25,273 22,738 24,080
Cumulative effect of change in accounting
principle, net of income taxes ....... -- -- 36 -- --
-----------------------------------------------------------------------------------------------------------------------
Net income ......................... $ 22,301 $ 33,619 $ 25,309 $ 22,738 $ 24,080
=======================================================================================================================
AT PERIOD END
Assets:
Loans and mortgage-backed securities . $ 9,912,489 $ 9,981,213 $10,272,222 $10,084,353 $ 9,646,741
Other ................................ 797,775 837,387 755,324 806,201 715,933
-----------------------------------------------------------------------------------------------------------------------
Total assets ....................... 10,710,264 10,818,600 11,027,546 10,890,554 10,362,674
-----------------------------------------------------------------------------------------------------------------------
Equity .................................. $ 698,475 $ 680,719 $ 648,592 $ 624,636 $ 602,624
=======================================================================================================================
For the first nine months of 2001, our net income from banking totaled
$81.2 million, up $9.1 million from the same period a year ago. The sale of our
indirect automobile finance subsidiary benefited our year-ago nine-month period
net income by $5.6 million. Excluding that gain, net income from our banking
operations would have increased by $14.8 million or 22.2% from a year ago.
The following table sets forth our banking operational results for the
periods indicated.
Nine Months Ended September 30,
-------------------------------
(In Thousands) 2001 2000
----------------------------------------------------------------------------------------------------------
Net interest income .................................................... $225,843 $193,353
Provision for loan losses .............................................. 1,274 2,740
Other income:
Gain on sale of subsidiary .......................................... -- 9,762
All other ........................................................... 31,881 25,178
Operating expense ...................................................... 115,924 100,258
Net intercompany income ................................................ 273 298
----------------------------------------------------------------------------------------------------------
Income before income taxes ............................................. 140,799 125,593
Income taxes ........................................................... 59,606 53,509
----------------------------------------------------------------------------------------------------------
Net income before cumulative effect of change in accounting principle .. 81,193 72,084
Cumulative effect of change in accounting principle, net of income taxes 36 --
----------------------------------------------------------------------------------------------------------
Net income (1) ......................................................... $ 81,229 $ 72,084
==========================================================================================================
(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 $0.5 million in
the third quarter of 2001, compared to net income of $2.3 million in the
year-ago quarter. The decline was primarily attributed to lower gains from
sales, lower recapture of valuation allowances and 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
------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2001 2001 2001 2000 2000
------------------------------------------------------------------------------------------------------------------
Net interest income (loss) .................... $ (26) $ 10 $ 28 $ 58 $ 73
Other income .................................. 1,083 1,072 1,268 1,079 4,112
Operating expense ............................. 1,864 1,278 260 606 260
Net intercompany expense ...................... 92 84 97 99 83
------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (benefit) ... (899) (280) 939 432 3,842
Income taxes (benefit) ........................ (364) (116) 384 175 1,584
------------------------------------------------------------------------------------------------------------------
Net income (loss) .......................... $ (535) $ (164) $ 555 $ 257 $ 2,258
==================================================================================================================
AT PERIOD END:
Assets:
Investment in real estate and joint ventures $ 38,043 $ 19,950 $ 18,690 $ 17,641 $ 15,851
Other ...................................... 1,629 1,673 3,337 3,584 6,347
------------------------------------------------------------------------------------------------------------------
Total assets ............................. 39,672 21,623 22,027 21,225 22,198
------------------------------------------------------------------------------------------------------------------
Equity ........................................ $ 33,642 $ 18,307 $ 18,471 $ 17,916 $ 17,659
==================================================================================================================
Our investment in real estate and joint ventures amounted to $38 million at
September 30, 2001, compared to $18 million at December 31, 2000 and $16 million
at September 30, 2000. During the quarter, our investment increased by $16
million due primarily to a settlement of litigation with former joint venture
partners wherein we became the sole owner of two shopping centers.
For the first nine months of 2001, our net loss from real estate investment
operations totaled $0.1 million, down from net income of $4.2 million during the
same period a year ago.
The following table sets forth our real estate investment operational
results for the periods indicated.
Nine Months Ended September 30,
----------------------------------
(In Thousands) 2001 2000
--------------------------------------------------------------------------------
Net interest income ....................... $ 12 $ 185
Other income .............................. 3,423 8,069
Operating expense ......................... 3,402 867
Net intercompany expense .................. 273 298
--------------------------------------------------------------------------------
Income (loss) before income taxes (benefit) (240) 7,089
Income taxes (benefit) .................... (96) 2,917
--------------------------------------------------------------------------------
Net income (loss) ...................... $ (144) $ 4,172
================================================================================
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 $69 million during the third quarter to a total of $9.9 billion
or 92.5% of assets at September 30, 2001. The decrease represents a lower level
of single family loans held for investment, which declined $34 million during
the quarter as prepayments slightly exceeded originations. Given the low
interest rate environment and borrower preference for fixed rate loans, our
annualized prepayment speed in the current quarter was 39%, compared to 17% a
year ago, but down from the record 44% of second quarter 2001.
The following table sets forth loans originated, including purchases, for
investment and for sale during the periods indicated.
Three Months Ended
--------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2001 2001 2001 2000 2000
------------------------------------------------------------------------------------------------------------------
Loans originated for investment:
Residential one-to-four units:
Adjustable .......................... $ 867,271 $ 814,696 $ 636,988 $ 887,064 $ 382,828
Fixed ............................... 4,445 10,849 4,117 2,713 3,896
Other .................................. 56,554 43,492 28,964 57,901 82,343
------------------------------------------------------------------------------------------------------------------
Total loans originated for investment 928,270 869,037 670,069 947,678 469,067
Loans originated for sale (1) ............. 1,116,589 1,296,877 796,801 335,726 482,595
------------------------------------------------------------------------------------------------------------------
Total loans originated ................. $2,044,859 $2,165,914 $1,466,870 $1,283,404 $ 951,662
==================================================================================================================
(1) Residential one-to-four unit loans, primarily fixed.
Originations of residential one-to-four unit loans totaled $1.988 billion
in the third quarter of 2001, of which $872 million were for portfolio and
$1.117 billion were for sale. This was 6.3% below the record $2.122 billion we
originated in the second quarter of 2001 but 128.7% above the $869 million we
originated in the year-ago third quarter. Of the current quarter originations
for portfolio, $101 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 35% in the year-ago third quarter. In addition to single
family loans, we originated $57 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
20
cannot exceed 110% of the original loan amount. During the third quarter, we
raised the limit on new loans with loan-to-value ratios of 80% or less to 125%
of the original loan amount. This increased limit does not apply to subprime
loans.
At September 30, 2001, $6.9 billion of the adjustable rate mortgages in our
loan portfolio were subject to negative amortization of which $185 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 $1.120 billion of loans in the third quarter of 2001, compared to
$1.364 billion in the previous quarter and $620 million in the third quarter of
2000. All were secured by residential one-to-four unit property, and at
September 30, 2001, loans held for sale totaled $373 million.
At September 30, 2001, our unfunded loan application pipeline totaled $1.8
billion. Within that pipeline, we had commitments to borrowers for short-term
interest rate locks of $787 million, of which $533 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 $85
million and loans in process of $54 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
--------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2001 2001 2001 2000 2000
------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
Loans originated:
Loans secured by real estate:
Residential one-to-four units:
Adjustable ...................................... $ 767,246 $ 620,539 $ 501,945 $ 675,943 $ 339,983
Adjustable - subprime ........................... 100,025 106,148 135,043 210,915 41,982
------------------------------------------------------------------------------------------------------------------------------------
Total adjustable ............................... 867,271 726,687 636,988 886,858 381,965
Fixed ........................................... 3,294 7,455 4,117 2,312 3,629
Fixed - subprime ................................ 1,103 3,394 -- -- --
Residential five or more units:
Adjustable ...................................... -- -- -- -- --
Fixed ........................................... -- 125 -- 163 515
------------------------------------------------------------------------------------------------------------------------------------
Total residential ............................. 871,668 737,661 641,105 889,333 386,109
Commercial real estate ........................... -- -- -- -- 22,500
Construction ..................................... 27,649 23,154 18,888 30,767 35,493
Land ............................................. 4,870 6,219 -- 9,785 1,025
Non-mortgage:
Commercial ....................................... 8,440 4,970 165 7,029 4,850
Automobile ....................................... 957 1,502 2,091 4,442 6,135
Other consumer ................................... 7,965 7,522 7,570 5,715 10,770
------------------------------------------------------------------------------------------------------------------------------------
Total loans originated .......................... 921,549 781,028 669,819 947,071 466,882
Real estate loans purchased:
One-to-four units .................................. 48 88,009 -- 401 631
One-to-four units - subprime ....................... -- -- -- 206 499
Other (1) .......................................... 6,673 -- 250 -- 1,055
------------------------------------------------------------------------------------------------------------------------------------
Total real estate loans purchased ................ 6,721 88,009 250 607 2,185
------------------------------------------------------------------------------------------------------------------------------------
Total loans originated and purchased ............ 928,270 869,037 670,069 947,678 469,067
Loan repayments ....................................... (968,918) (1,095,547) (705,116) (621,199) (485,831)
Other net changes (2) ................................. (24,333) 5,813 32,585 28,565 (65,442)
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for investment (64,981) (220,697) (2,462) 355,044 (82,206)
------------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO
Residential, one-to-four units:
Originated whole loans ............................. 1,115,345 1,296,270 796,216 333,985 469,101
Originated whole loans - subprime .................. -- -- -- 794 13,494
Loans purchased .................................... 1,244 607 585 947 --
Loans transferred from (to) the investment portfolio (1,108) (787) (2,392) (1,745) 83,164
Originated whole loans sold ........................ (129,237) (292,552) (134,352) (75,205) (330,306)
Loans exchanged for mortgage-backed securities ..... (991,232) (1,071,840) (462,744) (167,637) (286,339)
Other net changes .................................. (530) (649) (3,179) (6,343) (2,957)
SFAS 133 capitalized basis adjustment (3) .......... 2,447 (753) 558 -- --
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for sale ... (3,071) (69,704) 194,692 84,796 (53,843)
------------------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities, net:
Received in exchange for loans ..................... 991,232 1,071,840 462,744 167,637 286,339
Sold ............................................... (991,232) (1,071,840) (462,744) (167,637) (289,542)
Repayments ......................................... (686) (647) (4,417) (2,459) (1,759)
Other net changes .................................. 14 39 56 231 91
------------------------------------------------------------------------------------------------------------------------------------
Net decrease in mortgage-backed securities
available for sale .............................. (672) (608) (4,361) (2,228) (4,871)
------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in loans held for sale and
mortgage-backed securities available for sale ... (3,743) (70,312) 190,331 82,568 (58,714)
------------------------------------------------------------------------------------------------------------------------------------
Total net increase (decrease) in loans and
mortgage-backed securities ...................... $ (68,724) $ (291,009) $ 187,869 $ 437,612 $ (140,920)
====================================================================================================================================
(1) Includes one commercial loan for the three months ended September 30, 2001,
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.
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2001 2001 2001 2000 2000
------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO
Loans secured by real estate:
Residential one-to-four units:
Adjustable .................................. $ 7,191,929 $ 7,097,270 $ 7,215,128 $ 7,200,400 $ 6,922,891
Adjustable - subprime ....................... 1,588,573 1,683,302 1,748,715 1,726,526 1,634,342
Fixed ....................................... 375,533 408,757 437,197 454,838 470,384
Fixed - subprime ............................ 17,421 18,256 16,941 17,388 18,120
------------------------------------------------------------------------------------------------------------------------------------
Total residential one-to-four units ..... 9,173,456 9,207,585 9,417,981 9,399,152 9,045,737
Residential five or more units:
Adjustable .................................. 6,199 13,359 13,462 14,203 14,284
Fixed ....................................... 5,290 5,464 5,453 5,257 5,444
Commercial real estate:
Adjustable .................................. 41,987 47,236 47,583 37,374 36,590
Fixed ....................................... 100,493 110,513 114,586 127,230 127,715
Construction .................................. 99,161 99,261 96,564 118,165 120,179
Land .......................................... 21,121 21,283 21,230 26,880 26,294
Non-mortgage:
Commercial .................................... 22,762 21,648 21,312 21,721 23,454
Automobile .................................... 29,109 32,594 36,590 39,614 40,303
Other consumer ................................ 53,243 56,096 58,610 60,653 60,362
------------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment ............. 9,552,821 9,615,039 9,833,371 9,850,249 9,500,362
Increase (decrease) for:
Undisbursed loan funds ........................ (62,880) (59,940) (59,206) (72,328) (72,393)
Net deferred costs and premiums ............... 79,540 78,621 80,010 79,109 73,579
Allowance for losses .......................... (35,043) (34,301) (34,059) (34,452) (34,014)
------------------------------------------------------------------------------------------------------------------------------------
Total loans held for investment, net ........ 9,534,438 9,599,419 9,820,116 9,822,578 9,467,534
------------------------------------------------------------------------------------------------------------------------------------
SALE PORTFOLIO, NET
Loans held for sale:
Residential one-to-four units ................. 371,237 376,755 445,706 251,014 163,726
Residential one-to-four units - subprime ...... -- -- -- 558 3,050
SFAS 133 capitalized basis adjustment (1) ..... 2,252 (195) 558 -- --
------------------------------------------------------------------------------------------------------------------------------------
Total loans held for sale ................... 373,489 376,560 446,264 251,572 166,776
Mortgage-backed securities available for sale:
Adjustable .................................... 4,562 5,234 5,835 6,050 6,240
Fixed ......................................... -- -- 7 4,153 6,191
------------------------------------------------------------------------------------------------------------------------------------
Total mortgage-backed securities available
for sale ................................ 4,562 5,234 5,842 10,203 12,431
------------------------------------------------------------------------------------------------------------------------------------
Total loans held for sale and mortgage-backed
securities available for sale ........... 378,051 381,794 452,106 261,775 179,207
------------------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed securities .. $ 9,912,489 $ 9,981,213 $ 10,272,222 $ 10,084,353 $ 9,646,741
====================================================================================================================================
(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 September 30,
2001, no valuation allowance was required as the market value exceeded book
value on an aggregate basis.
At September 30, 2001, our residential one-to-four units subprime portfolio
consisted of approximately 77% "A-" credit, 19% "B" credit and 4% "C" credit
loans. At September 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 September 30, 2001, reflected an unrealized loss of $44,000. 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 September 30, 2001, our deposits totaled $8.9 billion, up $1.2 billion
or 15.3% from the year-ago quarter end but down $171 million or 1.9% from the
previous quarter. While our preference is to grow deposits, the rates being
offered on new certificates of deposit have remained above borrowing rates. As a
result, we elected not to retain all of our certificates of deposit that matured
during the quarter. Compared to the year-ago period, our transaction
accounts--i.e., checking, regular passbook and money market--increased $665
million or 45.2% and our certificates of deposit increased $512 million or 8.2%.
Within transaction accounts, our regular passbook accounts increased $532
million or 68.6% and our total checking accounts (non-interest and interest
bearing) increased $123 million or 20.3%.
The following table sets forth information concerning our deposits and
weighted average rates paid at the dates indicated.
September 30, 2001 June 30, 2001 March 31, 2001 December 31, 2000 September 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 ............ -- % $ 327,335 -- % $ 328,338 -- % $ 335,404 -- % $ 244,311 -- % $ 225,442
Interest-bearing
checking (1) ........ 0.42 403,134 0.42 401,126 0.42 416,636 0.78 395,640 0.78 381,596
Money market .......... 2.29 97,548 2.79 89,949 2.87 91,733 2.88 89,408 2.87 88,505
Regular passbook ...... 2.96 1,308,959 3.44 986,488 3.38 807,503 3.41 754,127 3.42 776,527
-------------------------------------------------------------------------------------------------------------------------------
Total transaction
accounts .......... 2.00 2,136,976 2.11 1,805,901 1.92 1,651,276 2.12 1,483,486 2.18 1,472,070
Certificates of deposit:
Less than 3.00% ....... 2.41 39,217 2.48 27,473 2.14 7,620 2.41 6,357 2.41 7,188
3.00-3.49 ............. 3.26 379,901 3.36 8,342 3.45 26 3.45 25 3.45 26
3.50-3.99 ............. 3.83 508,383 3.83 82,191 3.81 20,748 3.97 384 3.82 1
4.00-4.49 ............. 4.22 888,123 4.29 387,442 4.38 7,279 4.19 26,916 4.23 33,660
4.50-4.99 ............. 4.73 815,711 4.74 691,800 4.72 293,442 4.82 80,844 4.83 162,903
5.00-5.99 ............. 5.36 1,883,498 5.50 2,791,697 5.62 2,288,745 5.71 1,901,166 5.69 2,106,639
6.00-6.99 ............. 6.46 2,213,180 6.59 3,233,032 6.64 4,424,756 6.63 4,558,730 6.58 3,889,166
7.00 and greater ...... 7.04 3,793 7.03 12,186 7.03 14,383 7.02 24,781 7.02 20,129
-------------------------------------------------------------------------------------------------------------------------------
Total certificates of
deposit ........... 5.24 6,731,806 5.82 7,234,163 6.21 7,056,999 6.33 6,599,203 6.22 6,219,712
-------------------------------------------------------------------------------------------------------------------------------
Total deposits .... 4.46% $8,868,782 5.08% $9,040,064 5.40% $8,708,275 5.56% $8,082,689 5.44% $7,691,782
===============================================================================================================================
(1) Includes amounts swept into money market deposit accounts.
BORROWINGS
During the 2001 third quarter, our borrowings increased $35 million to $927
million. The current quarter increase occurred as we took advantage of obtaining
long-term advances from the FHLB at attractive borrowing rates. This increase
followed a decrease of $564 million during the second quarter of 2001.
The following table sets forth information concerning our FHLB advances and
other borrowings at the dates indicated.
September 30, June 30, March 31, December 31, September 30,
(Dollars in Thousands) 2001 2001 2001 2000 2000
-------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank advances ................ $ 927,398 $ 892,670 $1,457,046 $1,978,348 $1,860,255
Other borrowings ............................... 29 94 145 224 248
-------------------------------------------------------------------------------------------------------------------------
Total borrowings ............................ $ 927,427 $ 892,764 $1,457,191 $1,978,572 $1,860,503
=========================================================================================================================
Weighted average rate on borrowings during
the period ................................. 5.01% 5.67% 6.14% 6.34% 6.39%
Total borrowings as a percentage of total assets 8.65 8.25 13.21 18.16 17.95
=========================================================================================================================
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 third 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 September 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.
September 30, 2001
--------------------------------------------------------------------------------
Within 7 - 12 1 - 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) $ 327,089 $ 58,654 $ 30,992 $ 68 $ -- $ 416,803
Loans and mortgage-backed securities:(2)
Loans secured by real estate:
Residential:
Adjustable .................... 8,010,875 304,260 523,345 -- -- 8,838,480
Fixed ......................... 468,635 70,684 203,411 25,952 3,435 772,117
Commercial real estate .......... 47,866 13,617 72,093 3,208 1,635 138,419
Construction .................... 50,687 -- -- -- -- 50,687
Land ............................ 12,256 9 67 798 -- 13,130
Non-mortgage loans:
Commercial ...................... 13,602 -- -- -- -- 13,602
Consumer ........................ 59,373 5,832 16,287 -- -- 81,492
Mortgage-backed securities ........ 4,562 -- -- -- -- 4,562
----------------------------------------------------------------------------------------------------------------------------
Total loans and mortgage-backed
securities ........................ 8,667,856 394,402 815,203 29,958 5,070 9,912,489
----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets ..... $8,994,945 $ 453,056 $846,195 $ 30,026 $ 5,070 $10,329,292
============================================================================================================================
Transaction accounts:
Non-interest-bearing checking ....... $ 327,335 $ -- $ -- $ -- $ -- $ 327,335
Interest-bearing checking ...........(3) 403,134 -- -- -- -- 403,134
Money market ........................(4) 97,548 -- -- -- -- 97,548
Regular passbook ....................(4) 1,308,959 -- -- -- -- 1,308,959
----------------------------------------------------------------------------------------------------------------------------
Total transaction accounts ........ 2,136,976 -- -- -- -- 2,136,976
Certificates of deposit ................(1) 4,854,594 1,497,210 380,002 -- -- 6,731,806
----------------------------------------------------------------------------------------------------------------------------
Total deposits ...................... 6,991,570 1,497,210 380,002 -- -- 8,868,782
Borrowings ............................. 123,041 78,255 267,131 459,000 -- 927,427
Capital securities ..................... -- -- -- -- 120,000 120,000
----------------------------------------------------------------------------------------------------------------------------
Total deposits, borrowings and
capital securities ................ $7,114,611 $ 1,575,465 $647,133 $ 459,000 $ 120,000 $ 9,916,209
============================================================================================================================
Excess (shortfall) of interest-earning
assets over deposits, borrowings and
capital securities .................... $1,880,334 $(1,122,409) $199,062 $(428,974) $(114,930) $ 413,083
Cumulative gap ......................... 1,880,334 757,925 956,987 528,013 413,083
Cumulative gap - as a % of total assets:
September 30, 2001 .................. 17.55% 7.07% 8.93% 4.93% 3.85%
December 31, 2000 ................... 28.66 7.13 5.94 3.13 3.13
September 30, 2000 .................. 31.93 7.31 5.77 2.88 3.19
============================================================================================================================
(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 September 30, 2001 was a positive 17.55%. 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 31.93% at September 30, 2000. We continue to
pursue our strategy of emphasizing the origination of adjustable rate mortgages.
For the twelve months ended September 30, 2001, we originated and purchased for
investment $3.4 billion of adjustable rate loans which represented approximately
99% of all loans we originated and purchased for investment during the period.
At September 30, 2001, essentially all of our interest-earning assets
mature, reprice or are estimated to prepay within five years, up from 98% at
December 31, 2000 and 97% at September 30, 2000. At September 30, 2001, loans
held for investment and mortgage-backed securities with adjustable interest
rates represented 91% of those portfolios. During the third 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 September 30, 2001, $9.1 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 $9.0 billion or 93% at September
30, 2000.
The following table sets forth the interest rate spread between our
interest-earning assets and interest-bearing liabilities at the dates indicated.
September 30, June 30, March 31, December 31, September 30,
2001 2001 2001 2000 2000
-------------------------------------------------------------------------------------------------------------
Weighted average yield:
Loans and mortgage-backed securities 7.68% 8.24% 8.56% 8.45% 8.40%
Federal Home Loan Bank stock ....... 6.00 6.00 5.51 5.52 5.52
Investment securities .............. 5.18 5.54 6.00 6.45 6.42
-------------------------------------------------------------------------------------------------------------
Interest-earning assets yield .... 7.59 8.12 8.46 8.36 8.32
-------------------------------------------------------------------------------------------------------------
Weighted average cost:
Deposits ........................... 4.46 5.08 5.40 5.56 5.44
Borrowings:
Federal Home Loan Bank advances .. 4.70 5.36 5.94 6.26 6.37
Other borrowings ................. 7.88 7.88 7.88 8.12 7.88
-------------------------------------------------------------------------------------------------------------
Total borrowings .............. 4.70 5.36 5.94 6.26 6.37
Capital securities ................. 10.00 10.00 10.00 10.00 10.00
-------------------------------------------------------------------------------------------------------------
Combined funds cost .............. 4.55 5.16 5.53 5.75 5.68
-------------------------------------------------------------------------------------------------------------
Interest rate spread .......... 3.04% 2.96% 2.93% 2.61% 2.64%
=============================================================================================================
The period-end weighted average yield on our loan portfolio decreased to
7.68% at September 30, 2001, down from 8.45% at December 31, 2000 and 8.40% at
September 30, 2000. At September 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 7.68%,
compared to $9.0 billion with a weighted average rate of 8.47% at December 31,
2000 and $8.6 billlion with a weighted average rate of 8.38% at September 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 $15 million during the quarter to
$75 million or 0.70% of total assets. This increase was due to a rise in
residential non-performers, of which $7 million were subprime. 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.
September 30, June 30, March 31, December 31, September 30,
(Dollars in Thousands) 2001 2001 2001 2000 2000
------------------------------------------------------------------------------------------------------------------------
Non-accrual loans:
Residential one-to-four units ................... $29,266 $22,494 $16,965 $20,746 $17,976
Residential one-to-four units - subprime ........ 31,076 25,737 26,353 22,296 20,389
Other ........................................... 2,927 3,054 3,367 1,708 1,867
------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans ........................ 63,269 51,285 46,685 44,750 40,232
Troubled debt restructure - below market rate (1) ... 204 204 205 206 209
Real estate acquired in settlement of loans ......... 11,870 8,366 11,634 9,942 9,161
Repossessed automobiles ............................. 28 37 15 76 --
------------------------------------------------------------------------------------------------------------------------
Total non-performing assets ..................... $75,371 $59,892 $58,539 $54,974 $49,602
========================================================================================================================
Allowance for loan losses:
Amount .......................................... $35,043 $34,301 $34,059 $34,452 $34,014
As a percentage of non-performing loans ......... 55.21% 66.62% 72.64% 76.63% 84.11%
Non-performing assets as a percentage of total assets 0.70 0.55 0.53 0.50 0.48
========================================================================================================================
(1) Represents a single residential one-to-four unit loan.
Delinquent Loans
During the 2001 third quarter, our delinquencies as a percentage of total
loans outstanding increased from 0.81% to 0.96% and were above the 0.63% of a
year ago. The increase 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.
September 30, 2001 June 30, 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 .............. $18,515 $ 8,165 $25,131 $51,811 $15,190 $ 7,262 $17,291 $39,743
One-to-four units - subprime ... 11,212 8,569 21,649 41,430 11,402 6,513 20,772 38,687
Five or more units ............. -- -- -- -- -- -- 248 248
Commercial real estate ........... -- -- -- -- -- -- -- --
Construction ..................... -- -- -- -- -- -- -- --
Land ............................. -- -- -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Total real estate loans ........ 29,727 16,734 46,780 93,241 26,592 13,775 38,311 78,678
Non-mortgage:
Commercial ....................... -- -- 1,290 1,290 -- -- 1,290 1,290
Automobile ....................... 269 54 80 403 112 63 32 207
Other consumer ................... 253 38 264 555 287 28 185 500
-------------------------------------------------------------------------------------------------------------------------------
Total loans .................... $30,249 $16,826 $48,414 $95,489 $26,991 $13,866 $39,818 $80,675
===============================================================================================================================
Delinquencies as a percentage of total
loans ............................ 0.30% 0.17% 0.49% 0.96% 0.27% 0.14% 0.40% 0.81%
===============================================================================================================================
March 31, 2001 December 31, 2000
-------------------------------------------------------------------------------------
Loans secured by real estate:
Residential:
One-to-four units .............. $14,166 $ 6,961 $15,490 $36,617 $12,400 $ 8,611 $15,246 $36,257
One-to-four units - subprime ... 11,223 6,651 17,860 35,734 7,300 7,658 14,427 29,385
Five or more units ............. -- -- 508 508 -- -- -- --
Commercial real estate ........... -- -- -- -- -- -- -- --
Construction ..................... -- -- -- -- -- -- -- --
Land ............................. -- -- -- -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Total real estate loans ........ 25,389 13,612 33,858 72,859 19,700 16,269 29,673 65,642
Non-mortgage:
Commercial ....................... -- 1,290 -- 1,290 -- -- -- --
Automobile ....................... 230 55 74 359 393 26 151 570
Other consumer ................... 189 31 190 410 98 29 246 373
-------------------------------------------------------------------------------------------------------------------------------
Total loans .................... $25,808 $14,988 $34,122 $74,918 $20,191 $16,324 $30,070 $66,585
===============================================================================================================================
Delinquencies as a percentage of total
loans ............................ 0.25% 0.15% 0.33% 0.73% 0.20% 0.16% 0.30% 0.66%
===============================================================================================================================
September 30, 2000
----------------------------------------
Loans secured by real estate:
Residential:
One-to-four units .............. $14,970 $ 3,037 $16,176 $34,183
One-to-four units - subprime ... 7,701 5,422 11,911 25,034
Five or more units ............. -- -- -- --
Commercial real estate ........... -- -- -- --
Construction ..................... -- -- -- --
Land ............................. -- -- -- --
----------------------------------------------------------------------------------
Total real estate loans ........ 22,671 8,459 28,087 59,217
Non-mortgage:
Commercial ....................... -- -- -- --
Automobile ....................... 356 50 116 522
Other consumer ................... 200 86 433 719
----------------------------------------------------------------------------------
Total loans .................... $23,227 $ 8,595 $28,636 $60,458
==================================================================================
Delinquencies as a percentage of total
loans ............................ 0.24% 0.09% 0.30% 0.63%
==================================================================================
(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 $38 million at both September 30,
2001 and December 31, 2000, and $37 million at September 30, 2000.
Our provision for loan losses was $0.8 million in the current quarter and
exceeded our net loan charge-offs by $0.7 million resulting in an increase in
the allowance for loan losses to $35.0 million at September 30, 2001. The
current quarter allowance increase reflected an increase of $0.7 million in
general valuation allowances to $27.1 million due to an increase in
delinquencies. Allocated allowances increased by $0.4 million in our single
family portfolio and $0.2 million in our commercial non-mortgage portfolio,
which was essentially offset by a $0.6 million decrease in the commercial real
estate mortgage portfolio. There was no change in the unallocated allowance of
$2.8 million. Since year-end 2000, our allowance for loan losses increased by
$0.6 million, as allocated allowances increased by $0.4 million and general
valuation allowances increased by $0.2 million.
The following table is a summary of the activity of our allowance for loan
losses during the periods indicated.
Three Months Ended
---------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2001 2001 2001 2000 2000
-----------------------------------------------------------------------------------------------------
Balance at beginning of period $ 34,301 $ 34,059 $ 34,452 $ 34,014 $ 33,237
Provision .................... 791 431 52 511 1,007
Charge-offs .................. (198) (326) (508) (346) (234)
Recoveries ................... 149 137 63 273 4
-----------------------------------------------------------------------------------------------------
Balance at end of period ..... $ 35,043 $ 34,301 $ 34,059 $ 34,452 $ 34,014
=====================================================================================================
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
------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(Dollars in Thousands) 2001 2001 2001 2000 2000
-------------------------------------------------------------------------------------------------------------------------
GROSS LOAN CHARGE-OFFS
Loans secured by real estate:
Residential:
One-to-four units ............................ $ 25 $ 115 $ 268 $ 69 $ 153
One-to-four units - subprime ................. 60 92 136 136 21
Five or more units ........................... -- -- -- -- --
Commercial real estate .......................... -- -- -- -- --
Construction .................................... -- -- -- -- --
Land ............................................ -- -- -- -- --
Non-mortgage:
Commercial ...................................... -- -- -- -- --
Automobile ...................................... 26 72 48 98 --
Other consumer .................................. 87 47 56 43 60
-------------------------------------------------------------------------------------------------------------------------
Total gross loan charge-offs ................. 198 326 508 346 234
-------------------------------------------------------------------------------------------------------------------------
GROSS LOAN RECOVERIES
Loans secured by real estate:
Residential:
One-to-four units ............................ 86 121 59 19 --
One-to-four units - subprime ................. 61 5 -- -- --
Five or more units ........................... -- -- -- -- --
Commercial real estate .......................... -- 1 -- 250 --
Construction .................................... -- -- -- -- --
Land ............................................ -- -- -- -- --
Non-mortgage:
Commercial ...................................... -- -- -- -- --
Automobile ...................................... -- 4 -- -- --
Other consumer .................................. 2 6 4 4 4
-------------------------------------------------------------------------------------------------------------------------
Total gross loan recoveries .................. 149 137 63 273 4
-------------------------------------------------------------------------------------------------------------------------
NET LOAN CHARGE-OFFS
Loans secured by real estate:
Residential:
One-to-four units ............................ (61) (6) 209 50 153
One-to-four units - subprime ................. (1) 87 136 136 21
Five or more units ........................... -- -- -- -- --
Commercial real estate .......................... -- (1) -- (250) --
Construction .................................... -- -- -- -- --
Land ............................................ -- -- -- -- --
Non-mortgage:
Commercial ...................................... -- -- -- -- --
Automobile ...................................... 26 68 48 98 --
Other consumer .................................. 85 41 52 39 56
-------------------------------------------------------------------------------------------------------------------------
Total net loan charge-offs ................... $ 49 $ 189 $ 445 $ 73 $ 230
=========================================================================================================================
Net loan charge-offs as a percentage of average loans - % 0.01% 0.02% - % 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.
September 30, 2001 June 30, 2001 March 31, 2001
----------------------------------------------------------------------------------------------------
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 ...... $16,598 $7,567,462 0.22% $15,139 $7,506,027 0.20% $14,613 $7,652,325 0.19%
One-to-four units -
subprime ............. 10,385 1,605,994 0.65 10,826 1,701,558 0.64 11,057 1,765,656 0.63
Five or more units ..... 86 11,489 0.75 141 18,823 0.75 142 18,915 0.75
Commercial real estate ... 2,262 142,480 1.59 2,703 157,749 1.71 2,709 162,169 1.67
Construction ............. 1,164 99,161 1.17 1,171 99,261 1.18 1,142 96,564 1.18
Land ..................... 262 21,121 1.24 263 21,283 1.24 261 21,230 1.23
Non-mortgage:
Commercial ............... 650 22,762 2.86 422 21,648 1.95 424 21,312 1.99
Automobile ............... 196 29,109 0.67 175 32,594 0.54 234 36,590 0.64
Other consumer ........... 640 53,243 1.20 661 56,096 1.18 677 58,610 1.16
Not specifically allocated .. 2,800 -- -- 2,800 -- -- 2,800 -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total loans held for
investment ............. $35,043 $9,552,821 0.37% $34,301 $9,615,039 0.36% $34,059 $9,833,371 0.35%
===================================================================================================================================
December 31, 2000 September 30, 2000
---------------------------------------------------------------
Loans secured by real estate:
Residential:
One-to-four units ...... $15,254 $7,655,238 0.20% $15,143 $7,393,275 0.20%
One-to-four units -
subprime ............. 10,157 1,743,914 0.58 9,946 1,652,462 0.60
Five or more units ..... 146 19,460 0.75 148 19,728 0.75
Commercial real estate ... 2,935 164,604 1.78 2,930 164,305 1.78
Construction ............. 1,390 118,165 1.18 1,412 120,179 1.17
Land ..................... 332 26,880 1.24 325 26,294 1.24
Non-mortgage:
Commercial ............... 442 21,721 2.03 287 23,454 1.22
Automobile ............... 269 39,614 0.68 234 40,303 0.58
Other consumer ........... 727 60,653 1.20 789 60,362 1.31
Not specifically allocated .. 2,800 -- -- 2,800 -- --
----------------------------------------------------------------------------------------------
Total loans held for
investment ............. $34,452 $9,850,249 0.35% $34,014 $9,500,362 0.36%
==============================================================================================
At September 30, 2001, the recorded investment in loans for which we
recognized impairment totaled $15 million. The total allowance for losses
related to these loans was $1 million. During the third quarter of 2001, total
interest recognized on the impaired loan portfolio was $0.4 million, increasing
the year-to-date total to $1.3 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
-------------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2001 2001 2001 2000 2000
--------------------------------------------------------------------------------------------------------
Balance at beginning of period $ 782 $ 798 $ 800 $ 791 $ 792
Provision (reduction) ........ 428 (16) (2) 9 (1)
Charge-offs .................. -- -- -- -- --
Recoveries ................... -- -- -- -- --
--------------------------------------------------------------------------------------------------------
Balance at end of period ..... $1,210 $ 782 $ 798 $ 800 $ 791
========================================================================================================
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
------------------------------------------------------------------
September 30, June 30, March 31, December 31, September 30,
(In Thousands) 2001 2001 2001 2000 2000
--------------------------------------------------------------------------------------------------
Balance at beginning of period $ 3,063 $ 3,030 $ 2,997 $ 2,961 $ 3,561
Provision (reduction) ........ (374) 33 33 36 (600)
Charge-offs .................. -- -- -- -- --
Recoveries ................... -- -- -- -- --
--------------------------------------------------------------------------------------------------
Balance at end of period ..... $ 2,689 $ 3,063 $ 3,030 $ 2,997 $ 2,961
==================================================================================================
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 third quarter of 2001 were
from:
o principal repayments--including prepayments, but excluding refinances
of our existing loans--on loans and mortgage-backed securities of $790
million; and
o maturities and sales of U.S. Treasury securities, agency obligations
and other investment securities available for sale of $62 million.
We used these funds for the following purposes:
o to originate and purchase loans held for investment of $745 million;
o for a net decrease in deposits of $171 million; and
o to purchase U.S. Treasury securities, agency obligations and other
investment securities available for sale of $94 million.
At September 30, 2001, the Bank's ratio of regulatory liquidity was 4.1%,
compared to 4.3% at December 31, 2000 and 4.9% at September 30, 2000.
Downey currently has liquid assets, including due from Bank--interest
bearing balances, of $21 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 $698 million at September 30, 2001, up from
$625 million at December 31, 2000 and $603 million at September 30, 2000.
33
REGULATORY CAPITAL COMPLIANCE
Our core and tangible capital ratios were 7.04% and our risk-based capital
ratio was 14.11%. 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. During the quarter, the net investment in our real estate
subsidiary increased by $16 million due to a settlement of litigation with
former joint venture partners wherein we became the sole owner of two shopping
centers. This increase reduced regulatory capital until we are able to sell the
shopping centers and return the capital to the bank.
The following table is a reconciliation of the Bank's stockholder's equity
to federal regulatory capital as of September 30, 2001.
Tangible Capital Core Capital Risk-Based Capital
---------------------- ---------------------- ----------------------
(Dollars in Thousands) Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------------------------------------------------
Stockholder's equity ......................... $793,071 $793,071 $793,071
Adjustments:
Deductions:
Investment in subsidiary, primarily real
estate ................................. (34,440) (34,440) (34,440)
Goodwill ................................. (3,263) (3,263) (3,263)
Non-permitted mortgage servicing rights .. (3,751) (3,751) (3,751)
Additions:
Unrealized gains on securities available
for sale ............................... (897) (897) (897)
General loss allowance - investment in DSL
Service Company ....................... 196 196 196
Allowance for loan losses,
net of specific allowances (1) ........ -- -- 34,592
--------------------------------------------------------------------------------------------------------------------------
Regulatory capital ........................... 750,916 7.04% 750,916 7.04% 785,508 14.11%
Well capitalized requirement ................. 159,968 1.50 (2) 533,226 5.00 556,667 10.00 (3)
--------------------------------------------------------------------------------------------------------------------------
Excess ....................................... $590,948 5.54% $217,690 2.04% $228,841 4.11%
==========================================================================================================================
(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 13.49%.
34
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
(B) Form 8-K filed July 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: November 1, 2001 /s/ Daniel D. Rosenthal
----------------------------------------------------
Daniel D. Rosenthal
President and Chief Executive Officer
Date: November 1, 2001 /s/ Thomas E. Prince
----------------------------------------------------
Thomas E. Prince
Executive Vice President and Chief Financial Officer
35