NEWPORT BEACH, Calif., July 24 CA-Downey-2Q-Earns
NEWPORT BEACH, Calif., July 24 /PRNewswire-FirstCall/ -- Downey Financial
Corp. (NYSE: DSL) reported a net loss for second quarter 2008 of $218.9
million or $7.86 per share on a diluted basis, compared with net income
of $32.7 million or $1.17 on a diluted basis per share in the year-ago second
quarter.
The $309.5 million unfavorable change in pre-tax income/(loss) between
second quarters was due primarily to:
-- A $249.4 million increase in the provision for credit losses;
-- A $28.5 million or 25.6% decline in net interest income due to a lower
level of interest-earning assets and a lower effective interest rate
spread;
-- A $26.2 million increase in operating expense primarily due to higher
costs related to the operation of real estate acquired in settlement of
loans; and
-- A $5.2 million unfavorable change in income from real estate and joint
ventures held for investment, as an increase in gains from sales was
more than offset by provisions for loss to reflect declines in the
value of single family home lots in which the company is a joint
venture partner.
For the first six months of 2008, the net loss totaled $466.6 million or
$16.75 per share on a diluted basis, compared to net income of $75.6 million
or $2.71 per share on a diluted basis for the first six months of 2007.
Downey separately announced today that its Board of Directors has
appointed Thomas E. Prince, currently Downey's Executive Vice President and
Chief Operating Officer, as the Company's interim Chief Executive Officer,
replacing Daniel D. Rosenthal, who has retired. The Company also announced
that Maurice L. "Mac" McAlister, Chairman of the Board and the Company's
founder and largest shareholder, has retired from the Board of Directors.
Two independent directors, Michael D. Bozarth and Gary W. Brummett will become
Chairman and Vice Chairman of the Board, respectively, succeeding Messrs.
McAlister and Rosenthal in those capacities.
NET INTEREST INCOME
Net interest income totaled $82.9 million in the second quarter of 2008,
down $28.5 million or 25.6% from a year ago, reflecting a $2.367 billion or
16.3% decline in average interest-earning assets to $12.168 billion and a
decline in the effective interest rate spread. The average effective interest
rate spread was 2.73% in the current quarter, down 0.34% from a year ago but
up 0.10% from the first quarter of 2008. The decline in the current quarter
effective interest spread from a year ago primarily reflected the negative
impact of a higher proportion of non-performing assets. Although non-
performing assets increased in the current quarter from the first quarter of
2008, the earning asset yield did not decline as rapidly as the cost of funds,
resulting in an increase in the effective interest rate spread.
For the first six months of 2008, net interest income totaled
$166.7 million, down $69.9 million or 29.6% from the year-ago period.
PROVISION FOR CREDIT LOSSES
During the current quarter, the provision for credit losses totaled
$258.9 million, up $249.4 million from a year ago.
At June 30, 2008, the allowance for credit losses was $733.7 million,
comprised of $732.3 million for loan losses and $1.4 million for unfunded loan
commitments which is reported within accounts payable and accrued liabilities.
The allowance for credit losses increased $186.0 million this quarter, of
which $29.8 million was related to specific allowances associated with certain
troubled debt restructurings pursuant to our borrower retention program which
is discussed more fully below in the section entitled "Non-Performing Assets."
These specific allowances will be accreted into interest income over the
remaining life of the modified loans as long as they remain on accrual status.
The balance of the increase in the allowance for credit losses primarily
reflects further declines in the value of underlying home collateral as well
as further increases in delinquent loans.
Downey's allowance methodology incorporates assumptions related to default
probabilities, loss severities and loss horizons based on historical
experience, current market conditions, and the unique characteristics of each
borrower, loan and underlying collateral. On a comparative basis, these
factors individually increase or decrease the amount of the allowance for loan
losses from prior periods. Both default probabilities and loss severities
increased in the current quarter as a result of the challenging market
conditions continuing to affect the residential housing market. In particular,
collateral values have been trending downward in the greater Sacramento,
Stockton, Modesto and Contra Costa areas of Northern California, the Inland
Empire and San Diego County. Also, the horizon over which borrower defaults
are projected to occur has shortened. The shorter default horizon reflects our
recent experience of losses emerging earlier in the current environment
compared with prior periods as the loan portfolio has continued to age, real
estate values have continued to decline and borrowers have continued to
experience reduced levels of equity in their homes.
Net loan charge-offs totaled $70.2 million in the current quarter,
compared with $1.0 million a year ago. Net charge-offs in the current quarter
are primarily related to residential one-to-four unit loans, with the
annualized net charge-off ratio associated with these loans increasing to
2.60% from 0.03% a year ago.
For the first six months of 2008, the provision for credit losses totaled
$495.7 million and net charge-offs were $107.3 million. This compares with a
$10.1 million provision for credit losses and net charge-offs of $1.7 million
a year ago.
OTHER INCOME
Other income totaled $12.1 million in the current quarter, down
$5.5 million or 31.2% from a year ago. Primary contributors to the decline
between second quarters were:
-- A $5.2 million unfavorable change in income from real estate and joint
ventures held for investments. Net gains from sales totaled
$6.2 million in the current quarter, up $5.8 million from a year ago.
More than offsetting the increase in gains from sales was an
$11.1 million increase in provision for losses between second quarters,
as the current quarter included provisions for loss to reflect declines
in the value of single family home lots in which the company is a joint
venture partner.
-- A $4.4 million decline in net gains on sale of loans and mortgage-
backed securities, reflecting both a decline in loans sold and a lower
gain per dollar of loan sold. Net gains in the current quarter totaled
$4.6 million, including a $2.1 million gain due to the impact of
valuing derivatives associated with the sale of loans. Excluding the
impact of the SFAS 133 derivative valuation, a gain was realized equal
to 1.05% on secondary market sales of $235 million, compared with the
year-ago gain of 1.42% on secondary market sales of $570 million.
These unfavorable items were partially offset by a $4.8 million increase in
income from loan servicing fees due primarily to a favorable change in the
fair value of mortgage servicing rights.
For the first six months of 2008, other income totaled $21.0 million, down
$14.2 million or 40.4% from a year ago.
OPERATING EXPENSE
Operating expense totaled $88.5 million in the current quarter, up
$26.2 million or 42.0% from a year ago. The increase primarily reflected an
increase of $23.2 million in net operations of real estate acquired in the
settlement of loans due to a higher number of foreclosed properties. General
and administrative expense increased $3.0 million or 4.8% between second
quarters, due primarily to an increase in the other general and administrative
expense category, which was up $2.8 million. That increase was primarily
attributable to an adjustment in the prior year period related to reserves
associated with workers' compensation insurance claims. Also contributing to
the increase between second quarters was a $1.2 million increase in regulatory
assessments due primarily to a special credit received in the prior period.
Partially offsetting these unfavorable items was a $1.1 million decline in
advertising expense. Although salaries and related costs were essentially
unchanged between second quarters, the current quarter included severance
costs of approximately $1.0 million associated with the previously announced
departure of Downey's former President.
For the first six months of 2008, operating expense totaled
$177.5 million, up $49.5 million or 38.7% from a year ago.
INCOME TAXES
A tax benefit of $33.5 million was recorded in the current quarter,
reflecting an effective tax rate of 13.3%, compared with the year-ago
effective tax rate of 42.7%. For the first six months of 2008, the effective
tax rate was 3.9%, compared with 43.4% a year ago.
The lower effective tax rates for the current year resulted from the
establishment of a valuation allowance against the deferred tax asset. The
deferred tax asset resulted from a significant increase in the loan loss
allowance due, in part, to the factors discussed above in "Provision for
Credit Losses." To the extent the loan loss allowance is not allocable to
specific loans, it represents future tax benefits which would be realized when
actual charge-offs are made against the allowance. To the extent available
sources of taxable income, including prior years' tax returns, are deemed per
generally accepted accounting principles to be insufficient to absorb tax
losses, a valuation allowance is necessary. The valuation allowance was
increased by $72 million in the current quarter to $183 million against tax
assets of $240 million.
Since generally accepted accounting principles require Downey to spread
its expected annual tax benefit across the entire year through an effective
tax rate, we expect to continue realizing a tax benefit in future months, but,
as explained above, at much smaller levels than in the prior year.
ASSETS, LOAN ORIGINATIONS AND DEPOSITS
At June 30, 2008, assets totaled $12.632 billion, down $2.271 billion or
15.2% from a year ago. During the current quarter, assets declined
$499 million due primarily to a decline of $605 million in investment
securities. That decline was partially offset by a $72 million increase in
real estate acquired in settlement of loans, net, and a $64 million increase
in income tax receivable. Although gross loans held for investment increased
by $231 million, this growth was substantially offset by a $186 million
increase in the allowance for loan losses. Included within loans held for
investment at quarter end were $6.242 billion of single family adjustable rate
mortgages subject to negative amortization, down $721 million from March 31,
2008. These loans comprised 57% of the single family residential loan
portfolio held for investment at quarter end, compared with 76% a year ago.
The amount of negative amortization included in loan balances declined
$31 million during the current quarter to $344 million or 5.5% of loans
subject to negative amortization. During the current quarter, approximately
15% of loan interest income represented negative amortization, down from 20%
in the first quarter 2008 and 29% in the year-ago second quarter.
Loan originations (including purchases) totaled $1.027 billion in the
current quarter, down $182 million or 15.0% from $1.209 billion a year ago,
but up from $676 million in the first quarter of 2008. Loans originated for
sale declined $283 million or 57.2% to $212 million, while single family
residential loans originated for portfolio increased $52 million or 7.4% to
$751 million from a year ago. In addition to single family residential loans,
$65 million of other loans were originated in the current quarter, up from
$15 million a year ago.
Not included in the above originations are loans for which we modify the
terms of a borrower's loan. During the current quarter, we modified
$320 million of loans associated with our portfolio retention program, wherein
the borrower was current with their loan payments and the new interest rate
was no less than that afforded new borrowers, and $79 million of loans at
below market interest rates in loan workout situations. Most of the
modifications were adjustable rate loans, which permitted negative
amortization, that were modified into five-year interest-only adjustable rate
loans with interest rates that adjust semi-annually but do not permit negative
amortization.
Deposits totaled $9.881 billion at quarter end, down $1.366 billion or
12.1% from a year ago. Although deposits declined from a year ago, the number
of checking accounts were up modestly over a year ago. At quarter end, the
number of branches totaled 174 (169 in California and five in Arizona). At
quarter end, the average deposit size of our 84 traditional branches was
$94 million, while the average deposit size of our 90 in-store branches was
$22 million. During the current quarter, borrowings increased by $85 million
and represented 14% of total assets at quarter end.
NON-PERFORMING ASSETS
Non-performing assets increased during the quarter by $395 million to
$1.958 billion and represented 15.50% of total assets, compared with 7.77% at
year-end 2007 and 1.53% a year ago.
A borrower retention program was initiated at the beginning of the third
quarter of 2007 to provide borrowers who are current with their loan payments
a cost effective means to change from an adjustable rate loan that permits
negative amortization to a less costly financing alternative. Those loans are
considered troubled debt restructurings and have been placed on non-accrual
status even though the interest rate following modification was no less than
that afforded new borrowers. The reason for this is because the modified
interest rate was lower than the interest rate on the original loan and the
loan was not re-underwritten to prove that the new interest rate was, in fact,
a market interest rate for a borrower with similar credit quality. Interest
income is recorded as these borrowers make their loan payments and in the
current quarter $11.3 million was recognized, including $1.5 million of
amortization of the associated impairment allowance. If these borrowers
perform pursuant to the modified terms for six consecutive months, the loans
will be placed back on accrual status and, while still reported as troubled
debt restructurings, they will no longer be classified as non-performing
assets because the borrower will have demonstrated an ability to perform in
accordance with the loan modification and the interest rate was no less than
those afforded new borrowers at the time of modification.
To the extent borrowers whose loans were modified pursuant to the borrower
retention program are current with their loan payments and included in non-
performing assets, it is relevant to distinguish those from total non-
performing assets because, unlike other loans classified as non-performing
assets, these loans are paying interest at interest rates no less than those
afforded new borrowers. At June 30, 2008, $548 million or 82% of such
borrowers had made all loan payments due. Accordingly, the 15.50% ratio of
non-performing assets to total assets includes 4.34% related to performing
troubled debt restructurings, resulting in an adjusted ratio of 11.16%.
Through June 30, 2008, $347 million of loans modified pursuant to our
borrower retention program have been removed from non-performing status
because they met the six-month payment performance threshold. Of all loans
modified pursuant to the borrower retention program, including both those
classified as non-performing as well as those removed from non-performing
status, 87% have made all payments due.
At June 30, 2008, real estate acquired in settlement of loans totaled
$262 million. Included are 888 single family homes, one property consisting of
113 single family lots and one property consisting of raw land for
approximately 545 single family lots. During the quarter, 522 new single
family homes were acquired, while 209 were sold. As of quarter end, 87 single
family homes were in escrow to be sold and offers were being negotiated on an
additional 84 homes.
REGULATORY CAPITAL RATIOS
At June 30, 2008, Downey Financial Corp.'s primary subsidiary, Downey
Savings and Loan Association, F.A., had core and tangible capital ratios of
7.57%, and a total risk-based capital ratio of 14.31%. As previously reported,
the Bank's regulatory capital position was enhanced by $62 million during the
current quarter from a contribution of $50 million of equity from the holding
company and a $12 million dividend paid by DSL Service Company, the Bank's
wholly-owned real estate subsidiary. This was more than offset by the net loss
recorded in the current quarter.
Certain statements in this release may constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995, which
involve risks and uncertainties. Forward-looking statements do not relate
strictly to historical information or current facts. Some forward-looking
statements may be identified by use of terms such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," or words of similar
meaning, or future or conditional verbs such as "will," "would," "should,"
"could" or "may." Downey's actual results may differ significantly from the
results discussed in such forward-looking statements. Factors that might cause
such a difference include, but are not limited to, economic conditions,
competition in the geographic and business areas in which Downey conducts its
operations, new, changed or increased regulatory restrictions, pending or
threatened litigation, a decrease in Downey's customers, including a decrease
in Downey's deposit base, the possible loss of key personnel, the inability to
successfully implement strategic initiatives, changes in deposit flows and
loan demand, risks associated with industry concentration with respect to
deposits, risk of credit losses, risk associated with residential mortgage
lending, risk associated with a slowdown in the housing market or high
interest rates, fluctuations in interest rates, credit quality, the outcome of
ongoing audits by taxing authorities and government regulation. Downey does
not update forward-looking statements to reflect the impact of circumstances
or events that arise after the date the forward-looking statements were made,
except as required by law. Downey is not able to make any assurances,
including but not limited to any assurances that the increased rate of sale of
foreclosed homes will continue in future periods, the percentage of unsold
homes in escrow or under negotiation will be representative of the number or
percentage of homes sold in future periods, the improved quality of our loan
portfolio will continue in future periods, we will have adequate liquidity in
future periods, or capital levels will exceed "well-capitalized" levels in
future periods.
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
Jun. 30, Dec. 31, Jun. 30,
2008 2007 2007
ASSETS
Cash $82,072 $83,840 $ 149,308
Federal funds and interest
earning due from banks11,0605,900 --
Cash and cash equivalents 93,132 89,740 149,308
U.S. Treasury, government
sponsored entities and other
investment securities
available for sale, at fair
value998,4571,549,8791,917,603
Loans held for sale, at lower
of cost or fair value 85,558 103,384 187,752
Mortgage-backed securities
available for sale, at fair
value106 111 114
Loans held for investment 11,363,366 11,381,327 12,273,307
Allowance for loan losses(732,354)(348,167) (69,107)
Loans held for investment,
net 10,631,012 11,033,160 12,204,200
Investments in real estate and
joint ventures63,182 68,679 64,997
Real estate acquired in
settlement of loans, net 261,536 115,623 29,925
Premises and equipment, net 115,064 115,846 115,823
Federal Home Loan Bank stock,
at cost 78,813 70,964 72,429
Mortgage servicing rights:
Measured at fair value23,558 -- --
Amortized -- 19,512 21,619
Other assets 129,293 113,761 113,212
Income tax receivable 95,5056,312 25,988
Deferred tax asset, net57,103 122,086 --
$12,632,319 $13,409,057 $14,902,970
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Deposits $ 9,880,978 $10,496,041 $11,246,806
Securities sold under
agreements to repurchase 97,838 --587,544
Federal Home Loan Bank
advances 1,525,0341,197,1001,104,373
Senior notes 198,543 198,445 198,351
Accounts payable and accrued
liabilities 70,989 183,054 289,937
Deferred income taxes-- -- 11,486
Total liabilities 11,773,382 12,074,640 13,438,497
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; issued
28,235,022 shares at Jun. 30,
2008, Dec. 31, 2007 and
Jun. 30, 2007; outstanding
27,853,783 shares at Jun. 30,
2008, Dec. 31, 2007 and
Jun. 30, 2007282 282 282
Additional paid-in capital 93,792 93,792 93,792
Accumulated other
comprehensive income (loss) (304) 2,768 (6,068)
Retained earnings 781,9591,254,3671,393,259
Treasury stock, at cost,
381,239 shares at Jun. 30,
2008, Dec. 31, 2007 and
Jun. 30, 2007(16,792) (16,792) (16,792)
Total stockholders' equity 858,9371,334,4171,464,473
$12,632,319 $13,409,057 $14,902,970
=========== =========== ===========
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Dollars in Thousands, Except Per Share Data)
Three Months Ended Six Months Ended
Jun. 30, Jun. 30,
2008 20072008 2007
INTEREST INCOME
Loans $ 161,157 $230,383 $ 338,714 $482,555
U.S. Treasury and
government sponsored
entities securities 15,865 20,120 36,353 39,294
Mortgage-backed
securities 3 3 6 6
Other investment
securities 1,025 1,718 2,103 4,189
Total interest income178,050252,224 377,176526,044
INTEREST EXPENSE
Deposits 78,893111,888 175,321225,463
Federal Home Loan Bank
advances and other
borrowings12,922 25,576 28,591 57,406
Senior notes3,304 3,301 6,608 6,602
Total interest expense95,119140,765 210,520289,471
NET INTEREST INCOME82,931111,459 166,656236,573
PROVISION FOR CREDIT
LOSSES 258,874 9,505 495,744 10,122
Net interest income
(loss) after
provision for credit
losses (175,943) 101,954(329,088) 226,451
OTHER INCOME, NET
Loan and deposit
related fees 8,204 9,338 16,443 18,174
Real estate and joint
ventures held for
investment, net (5,271) (111) (5,876) 365
Secondary marketing
activities:
Loan servicing income
(loss), net 3,976 (789) 2,780 (1,225)
Net gains on sales of
loans and mortgage-
backed securities 4,572 8,978 6,221 17,718
Net gains on sales of
investment securities -- -- 837 --
Other 584109 598181
Total other income,
net 12,065 17,525 21,003 35,213
OPERATING EXPENSE
Salaries and related
costs 40,884 40,998 80,586 83,232
Premises and equipment
costs 9,181 9,122 18,178 17,931
Advertising expense 816 1,878 1,277 3,069
Deposit insurance
premiums and
regulatory assessments 3,689 2,482 7,392 5,246
Professional fees 843731 1,146 1,290
Impairment writedown of
goodwill-- -- 3,149 --
Other general and
administrative expense 8,974 6,201 17,454 15,996
Total general and
administrative
expense 64,387 61,412 129,182126,764
Net operation of real
estate acquired in
settlement of loans 24,139948 48,335 1,239
Total operating
expense 88,526 62,360 177,517128,003
INCOME (LOSS) BEFORE
INCOME TAXES (TAX
BENEFITS) (252,404)57,119(485,602) 133,661
Income taxes (tax
benefits)(33,485)24,375 (18,986)58,054
NET INCOME (LOSS) $(218,919) $ 32,744 $(466,616) $ 75,607
========== ======== ========== ========
PER SHARE INFORMATION
Basic $ (7.86) $ 1.17 $ (16.75) $ 2.71
Diluted $ (7.86) $ 1.17 $ (16.75) $ 2.71
Cash dividends declared
and paid $0.12 $ 0.12 $0.24 $ 0.24
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic 27,853,783 27,853,783 27,853,783 27,853,783
Diluted27,853,783 27,884,062 27,853,783 27,884,046
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(Dollars in Thousands)
Three Months EndedSix Months Ended
Jun. 30, Jun. 30,
2008200720082007
NET INCOME (LOSS) BY
BUSINESS SEGMENT
Banking $(215,707)$32,614 $(462,965)$75,037
Real estate investment (3,212)130 (3,651)570
Total net income
(loss) $(218,919)$32,744 $(466,616)$75,607
================= =================
SELECTED FINANCIAL
RATIOS
Effective interest
rate spread 2.73% 3.07% 2.68% 3.18%
Efficiency ratio (a) 64.22 47.57 65.12 46.70
Return on average
assets (6.76) 0.87 (7.08) 0.98
Return on average
equity (85.33) 9.01 (80.67) 10.54
ASSET AND LIABILITY
ACTIVITY
Loans for investment
portfolio:
Originations: (b)
Residential one-to-
four units $ 750,578 $ 698,952 $1,185,904 $1,301,850
All other 64,765 14,876 68,147 32,376
Repayments(412,751) (1,489,999) (965,693) (3,050,186)
Loans originated for
sale portfolio (b) 211,726 494,871 449,082 1,135,540
Loans and mortgage-
backed securities
sold (235,113) (569,940) (464,100) (1,284,370)
Decrease in loans and
mortgage-backed
securities (9,189) (817,950) (419,979) (1,778,684)
Decrease in assets (499,030) (334,899) (776,738) (1,304,412)
Decrease in deposits (363,311) (400,625) (615,063) (538,063)
Increase (decrease) in
borrowings 85,319(153,104)425,870(918,748)
Jun. 30,Dec. 31,Jun. 30,
200820072007
CAPITAL RATIOS (BANK ONLY)
Tangible and core 7.57% 9.98% 10.08%
Risk-based14.31 19.82 20.86
BOOK VALUE PER SHARE $30.84 $47.91 $52.58
NUMBER OF BRANCHES INCLUDING
IN-STORE LOCATIONS 174 172 172
(a) The amount of general and administrative expense, excluding the
impairment writedown of goodwill, expressed as a percentage of
net interest income plus other income, excluding income
associated with real estate held for investment.
(b) Included loans purchased.
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
SELECTED FINANCIAL DATA - (Continued)
(Dollars in Thousands)
Three Months Ended Jun. 30, 2008
Average
Average Yield/
Balance Interest Rate
AVERAGE BALANCE SHEET DATA
Interest-earning assets:
Loans:
Loan prepayment fees$ 1,199 0.05%
Write-off of deferred costs and
premiums from loan payoffs (4,847) (0.18)
All other164,805 6.10
Total loans $10,804,289161,157 5.97
Mortgage-backed securities 108 3 5.78
Investment securities (a)1,363,159 16,890 4.98
Total interest-earnings assets 12,167,556 $178,050 5.85%
Non-interest-earning assets 779,766
Total assets $12,947,322
===========
Transaction accounts:
Non-interest-bearing checking (b) $ 695,040 $ -- -%
Interest-bearing checking (b) 450,563501 0.45
Money market 136,739353 1.04
Regular passbook 1,021,936 2,346 0.92
Total transaction accounts 2,304,278 3,200 0.56
Certificates of deposit 7,747,572 75,693 3.93
Total deposits 10,051,850 78,893 3.16
FHLB advances and other
borrowings (c) 1,547,973 12,922 3.36
Senior notes198,518 3,304 6.66
Total deposits and borrowings 11,798,341 95,119 3.24
Other liabilities 122,723
Stockholders' equity 1,026,258
Total liabilities and stockholders'
equity$12,947,322
===========
Net interest income/interest rate
spread $ 82,931 2.61%
========
Excess of interest-earning assets
over deposits and borrowing$ 369,215
Effective interest rate spread 2.73
Three Months Ended Jun. 30, 2007
Average
Average Yield/
Balance Interest Rate
AVERAGE BALANCE SHEET DATA
Interest-earning assets:
Loans:
Loan prepayment fees$ 17,591 0.55%
Write-off of deferred costs and
premiums from loan payoffs (24,325) (0.76)
All other237,117 7.39
Total loans $12,835,907230,383 7.18
Mortgage-backed securities 116 3 5.92
Investment securities (a)1,698,378 21,838 5.16
Total interest-earnings assets 14,534,401 $252,224 6.94%
Non-interest-earning assets 480,034
Total assets $15,014,435
===========
Transaction accounts:
Non-interest-bearing checking (b) $ 800,910 $ -- -%
Interest-bearing checking (b) 486,909382 0.31
Money market 145,230376 1.04
Regular passbook 1,190,524 2,814 0.95
Total transaction accounts 2,623,573 3,572 0.55
Certificates of deposit 8,768,716108,316 4.95
Total deposits 11,392,289111,888 3.94
FHLB advances and other
borrowings (c) 1,734,014 25,576 5.92
Senior notes198,333 3,301 6.66
Total deposits and borrowings 13,324,636140,765 4.24
Other liabilities 235,991
Stockholders' equity 1,453,808
Total liabilities and stockholders'
equity$15,014,435
===========
Net interest income/interest rate
spread $111,459 2.70%
========
Excess of interest-earning assets
over deposits and borrowing$ 1,209,765
Effective interest rate spread 3.07
Six Months Ended Jun. 30, 2008
Average
Average Yield/
Balance Interest Rate
AVERAGE BALANCE SHEET DATA
Interest-earning assets:
Loans:
Loan prepayment fees$ 3,169 0.06%
Write-off of deferred costs and
premiums from loan payoffs (12,278) (0.23)
All other347,823 6.39
Total loans $10,890,484338,714 6.22
Mortgage-backed securities 110 6 5.78
Investment securities (a)1,565,388 38,456 4.94
Total interest-earnings assets 12,455,982 $377,176 6.06%
Non-interest-earning assets 732,473
Total assets $13,188,455
===========
Transaction accounts:
Non-interest-bearing checking (b) $ 673,172 $ -- -%
Interest-bearing checking (b) 455,061 1,066 0.47
Money market 135,906702 1.04
Regular passbook 1,027,649 4,735 0.93
Total transaction accounts 2,291,788 6,503 0.57
Certificates of deposit 7,908,335168,818 4.29
Total deposits 10,200,123175,321 3.46
FHLB advances and other
borrowings (c) 1,479,443 28,591 3.89
Senior notes198,497 6,608 6.66
Total deposits and borrowings 11,878,063210,520 3.56
Other liabilities 153,572
Stockholders' equity 1,156,820
Total liabilities and stockholders'
equity$13,188,455
===========
Net interest income/interest rate
spread $166,656 2.50%
========
Excess of interest-earning assets
over deposits and borrowing$ 577,919
Effective interest rate spread 2.68
Six Months Ended Jun. 30, 2007
Average
Average Yield/
Balance Interest Rate
AVERAGE BALANCE SHEET DATA
Interest-earning assets:
Loans:
Loan prepayment fees$ 39,395 0.59%
Write-off of deferred costs and
premiums from loan payoffs (50,139) (0.75)
All other493,299 7.44
Total loans $13,257,340482,555 7.28
Mortgage-backed securities 134 6 5.89
Investment securities (a)1,638,663 43,483 5.35
Total interest-earnings assets 14,896,137 $526,044 7.06%
Non-interest-earning assets 474,773
Total assets $15,370,910
===========
Transaction accounts:
Non-interest-bearing checking (b) $ 777,986 $ -- -%
Interest-bearing checking (b) 487,542777 0.32
Money market 147,807761 1.04
Regular passbook 1,217,173 5,763 0.95
Total transaction accounts 2,630,508 7,301 0.56
Certificates of deposit 8,886,450218,162 4.95
Total deposits 11,516,958225,463 3.95
FHLB advances and other
borrowings (c) 1,980,803 57,406 5.84
Senior notes198,311 6,602 6.66
Total deposits and borrowings 13,696,072289,471 4.26
Other liabilities 239,531
Stockholders' equity 1,435,307
Total liabilities and stockholders'
equity$15,370,910
===========
Net interest income/interest rate
spread $236,573 2.80%
========
Excess of interest-earning assets
over deposits and borrowing$ 1,200,065
Effective interest rate spread 3.18
(a) Yields for securities available for sale are calculated using
historical cost balances and are not adjusted for changes in
fair value that are reflected as a separate component of
stockholders' equity.
(b) Included amounts swept into money market deposit accounts.
(c) The impact of interest rate swap contracts was included, with
notional amounts totaling $430 million of receive-fixed, pay-
3-month London Inter-Bank Offered Rate ("LIBOR") variable
interest, which contracts serve as a permitted hedge against a
portion of our FHLB advances.
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
SELECTED FINANCIAL DATA - (Continued)
(Dollars in Thousands)
Three Months Ended Six Months Ended
Jun. 30, Jun. 30,
2008 2007 20082007
LOAN AND DEPOSIT RELATED
FEES
Loan related fees $ 377$ 819$ 799 $ 1,661
Deposit related fees:
Automated teller machine
fees 1,859 2,440 3,856 4,745
Other fees 5,968 6,079 11,788 11,768
Total loan and deposit
related fees $ 8,204$ 9,338$16,443$18,174
============================
NET GAINS ON SALES OF LOANS
AND MORTGAGE-BACKED
SECURITIES
Mortgage servicing rights $ 1,557$ 1,926$ 2,679$ 3,267
All other components
excluding SFAS 133916 6,186 1,512 13,334
SFAS 133 2,099866 2,030 1,117
Total net gains on sales
of loans and mortgage-
backed securities$ 4,572$ 8,978$ 6,221$17,718
============================
Secondary marketing gain
excluding SFAS 133 as a
percentage of associated
sales1.05% 1.42% 0.90% 1.29%
LOAN SERVICING INCOME
(LOSS), NET
Net cash servicing fees$ 1,750$ 1,598$ 3,515$ 3,205
Payoff and curtailment
interest cost (a)(350)(1,391) (821)(2,454)
Change in fair value of
mortgage servicing
rights due to: (b)
Changes in valuation
model inputs or
assumptions (c)3,325 -- 1,574 --
Other changes (d)(749) --(1,488) --
Amortization of mortgage
servicing rights --(967)-- (1,991)
(Provision for) reduction
of impairment of mortgage
servicing rights -- (29)-- 15
Total loan servicing
income (loss), net $ 3,976$ (789) $ 2,780$(1,225)
============================
MORTGAGE SERVICING RIGHTS
ACTIVITY
Balance at beginning of
period$19,425$20,871$21,973$21,435
Remeasurement of mortgage
servicing rights to fair
value (b)-- -- (918) --
Adjusted balance at
beginning of period 19,425 20,871 21,055 21,435
Additions (e)1,557 1,926 2,679 3,267
Amortization -- (967) -- (1,991)
Sales -- -- (262) (868)
Impairment write-down -- (123) -- (136)
Changes in fair value due
to:
Changes in valuation
model inputs or
assumptions (c)3,325 --1,574 --
Other changes (d)(749) -- (1,488) --
Balance at end of period 23,558 21,707 23,558 21,707
Allowance balance at
beginning of period -- 182 2,461239
Remeasurement of mortgage
servicing rights to fair
value-- -- (2,461) --
Adjusted balance at
beginning of period -- 182 -- 239
Provision for (reduction
of) impairment -- 29 -- (15)
Impairment write-down -- (123) -- (136)
Allowance balance at end
of period -- 88 --88
Total mortgage servicing
rights, net $23,558$21,619$23,558$21,619
============================
As a percentage of
associated mortgage loans0.95% 0.91% 0.95% 0.91%
Fair value (f) $23,558$25,080$23,558$25,080
Weighted average expected
life (in months) 69 65 69 65
Custodial account earnings
rate 3.75% 5.35% 3.75% 5.35%
Weighted average discount
rate11.78 10.13 11.78 10.13
Jun. 30, Dec. 31, Jun. 30,
(Dollars in Thousands) 2008 2007 2007
MORTGAGE LOANS SERVICED FOR
OTHERS
Total$5,435,529$5,525,357$6,002,907
With capitalized mortgage
servicing rights: (f)
Amount 2,471,000 2,436,278 2,383,290
Weighted average interest
rate 5.87% 5.88% 5.79%
Total loans sub-serviced
without mortgage servicing
rights: (g)
Term - less than six months $ 103,972$ 81,123$ 398,530
Term - indefinite2,857,191 2,995,119 3,207,087
Custodial account balances $ 67,710$ 81,778$ 156,433
(a) Represents the difference between the contractual obligation to
pay interest to the investor for an entire month and the actual
interest received when a loan prepays prior to the end of the
month. However, loan servicing activities do not include the
benefit of the use of total loan repayments to increase net
interest income.
(b) Effective January 1, 2008, Downey adopted the fair value
provision of Statement of Financial Accounting Standards No.
156, Accounting for Servicing of Financial Assets - an
amendment of FASB Statement No. 140 ("SFAS 156") and remeasured
its mortgage servicing rights ("MSRs") at fair value. Downey
recorded a pretax adjustment to increase MSRs by $1.5 million
and a corresponding cumulative effect adjustment of
$0.9 million, after tax, to increase the 2008 beginning balance
of retained earnings in stockholders' equity.
(c) Reflects changes in assumptions for discount rates, prepayment
speeds, etc.
(d) Represents changes due to realization of expected cash flows
over time.
(e) Included minor amounts repurchased.
(f) Excludes loans sub-serviced without capitalized mortgage
servicing rights. The estimated fair values for periods
presented prior to 2008 may exceed book value for certain asset
strata and excluded loans sold or securitized prior to 1996.
(g) Servicing is performed for a fixed fee per loan each month.
DOWNEY FINANCIAL CORP. AND SUBSIDIARIES
SELECTED FINANCIAL DATA (Continued)
(Dollars in Thousands)
Jun. 30, Dec. 31, Jun. 30,
2008 2007 2007
LOANS HELD FOR INVESTMENT
Loans secured by real
estate:
Residential one-to-four
units $10,894,889 $10,877,228 $11,714,635
Home equity loans and lines
of credit 131,531 138,305 154,980
Residential five or more
units 121,403 100,963 108,302
Commercial real estate 22,63326,42726,767
Construction 105,99181,09852,699
Land10,52449,52164,262
Non-mortgage:
Commercial 5,505 5,000 2,700
Consumer 5,823 5,989 6,346
Total loans held for
investment 11,298,29911,284,53112,130,691
Increase (decrease) for:
Undisbursed loan funds and
net deferred costs and
premiums 65,06796,796 142,616
Allowance for losses (732,354) (348,167) (69,107)
Total loans held for
investment, net $10,631,012 $11,033,160 $12,204,200
=========== =========== ===========
LOANS HELD FOR SALE
Residential one-to-four
units $85,854 $ 103,320 $ 189,189
Net deferred costs and
premiums (146) (109) 285
Capitalized basis
adjustment (a)(150) 173(1,722)
Total loans held for sale,
net $85,558 $ 103,384 $ 187,752
=========== =========== ===========
RESIDENTIAL ONE-TO-FOUR UNIT
LOANS SUBJECT TO NEGATIVE
AMORTIZATION
Held for investment:
Amount $ 6,242,406 $ 7,530,590 $ 8,914,448
Amount as a percentage of
total residential one-to-
four unit loans57% 69% 76%
Negative amortization
included in the loan
balance 344,376 378,664 377,327
Negative amortization as a
percentage of the
associated loan balance 5.52% 5.03% 4.23%
NON-PERFORMING ASSETS
Non-accrual loans:
Residential one-to-four
units:
Performing troubled debt
restructurings (b) $ 548,096 $ 400,562 $ --
Other troubled debt
restructurings 240,22031,218 --
All other 894,659 448,516 178,504
Construction12,79015,933 7,067
Land -- 29,08011,345
Other 566 837 525
Total non-accrual loans 1,696,331 926,146 197,441
Real estate acquired in
settlement of loans261,536 115,62329,925
Total non-performing
assets$ 1,957,867 $ 1,041,769 $ 227,366
=========== =========== ===========
Non-performing assets as a
percentage of total assets:
Performing troubled debt
restructurings (b) 4.34% 2.99%-%
All other non-performing
assets 11.16 4.78 1.53
Total non-performing
assets as a percentage of
total assets 15.50% 7.77% 1.53%
====== ===== =====
DELINQUENT LOANS
30-59 days $ 269,658 $ 239,338 $77,527
60-89 days 209,615 135,17757,076
90+ days (c)796,924 314,365 125,283
Total delinquent loans $ 1,276,197 $ 688,880 $ 259,886
=========== =========== ===========
Delinquencies as a
percentage of total loans11.21% 6.05% 2.11%
(a) Reflected the change in fair value of the interest rate lock
derivative from the date of rate lock to the date of funding.
(b) Represents troubled debt restructurings (TDRs) associated with
Downey's borrower retention program wherein all loan payments
were current and interest rates were modified to no less than
that offered new borrowers at the time of loan modification.
These TDR loans will be on non-accrual status until six
consecutive months of successful payment history has been
established, at which time they will be removed from non-
accrual status and will no longer be reported as non-performing
assets, just TDRs.
Interest income is being recognized on these TDR loans as paid
on a cash basis.
(c) All 90 day or greater delinquencies are on non-accrual status
and reported as part of non-performing assets.
Note: Certain prior period amounts have been reclassified to
conform to the current presentation.
SOURCE Downey Financial Corporation
