NEWPORT BEACH, Calif., April 18 /PRNewswire-FirstCall/ -- Downey Financial Corp. reported net income for the first quarter of 2007 of $42.9 million or $1.54 per share on a diluted basis, down 1.9% from $43.7 million or $1.57 per share in the first quarter of 2006. (Please refer to Income Taxes below for a discussion regarding revisions to prior period results.)
The decline in net income between first quarters was primarily due to: - A $3.8 million or 6.2% increase in general and administrative expense; - A $2.9 million decline in net gains on sales of loans and mortgage-backed securities, primarily due to a lower volume of loans sold and, to a lesser extent, a lower gain per dollar of loan sold; - A $1.8 million decline in income from real estate and joint ventures held for investment; - A $0.8 million decline in net interest income due to a lower level of interest-earning assets; and - A $0.6 million unfavorable change in income from loan servicing activities.
Those unfavorable items were partially offset by a $9.4 million decline in provision for credit losses.
Daniel D. Rosenthal, President and Chief Executive Officer, commented, "Last year's challenging business environment, characterized by a softening in the residential housing market and an inverted yield curve, has carried into 2007 and contributed to further declines in our loan portfolio. In addition, there has been much publicity this year about credit quality issues associated with subprime lending that has lead to the closing of numerous subprime lenders and the declaring of bankruptcy by others. Downey has historically been involved in subprime lending and has had very few losses. Our subprime portfolio has declined and represents less than 6% of our loan portfolio. We continue to have a strong capital position which will allow us to take advantage of any opportunities that may arise."
Net Interest Income
Net interest income totaled $125.1 million in the first quarter of 2007, down $0.8 million or 0.6% from a year ago, reflecting a $1.7 billion or 10.2% decline in average interest-earning assets. The effective interest rate spread averaged 3.28% in the current quarter, up 0.31% from 2.97% a year ago, and up 0.06% from 3.22% in the fourth quarter of 2006. The increase in the effective interest rate spread between first quarters was primarily the result of two factors. First, interest-earning assets in the current quarter were funded with a higher proportion of interest free funds (the excess of interest-earning assets over interest-bearing deposits and borrowings), and the value of those funds was worth more due to the higher interest rate levels prevalent in the current quarter. Second, the yield on interest-earning assets rose more between first quarters than did the cost of interest-bearing liabilities. Those two favorable items were partially offset by a lower proportion of loan prepayment fees to the amount of deferred loan origination costs written-off as a result of those payoffs. Loan prepayment fees in the first quarter of 2007 represented 84.5% of deferred loan origination costs written-off, compared to 97.4% a year ago. The decline was the result of a higher proportion of loans being repaid that were no longer subject to a prepayment fee.
Provision for Credit Losses
During the current quarter, the provision for credit losses totaled $0.6 million, down $9.4 million from a year ago. At March 31, 2007, the allowance for credit losses was the same as at year-end 2006, $62 million, comprised of $61 million for loan losses and $1 million for unfunded loan commitments which is reported in the category accounts payable and accrued liabilities. Although the California residential real estate market continued to show signs of weakening during the current quarter, a $823 million or 6.2% drop in the single-family residential loan portfolio mitigated the need to increase the associated allowance for loan losses. Net charge-offs totaled $0.7 million in the current quarter, up from $0.1 million a year ago.
Other Income
Other income totaled $17.7 million in the current quarter, down $5.5 million from a year ago. Contributing to the decline between first quarters was:
- A $2.9 million decline in net gains on sales of loans and mortgage-backed securities, primarily due to a lower volume of loans sold. Net gains in the current quarter totaled $8.7 million, including a $0.3 million gain due to the SFAS 133 impact of valuing derivatives associated with the sale of loans. Excluding the impact of SFAS 133, a gain was realized equal to 1.19% on secondary market sales of $714 million, compared with the year-ago gain of 1.30% on secondary market sales of $876 million. - A $1.8 million decline in income from real estate and joint ventures held for investment, primarily due to higher operating charges from investments in joint ventures and lower gains from sales. Gains from sales totaled $0.5 million in the current quarter, compared to $1.0 million a year ago. - A $0.6 million unfavorable change in income from loan servicing activities, as the current quarter reflected a loss of $0.4 million compared to income of $0.2 million a year ago. The unfavorable change primarily reflected a $0.8 million increase in payoff and curtailment interest costs, which 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. It should be noted that this cost does not include the benefit derived from the use of repaid loan funds until remitted to the investor which results in an increase in net interest income.
Operating Expense
Operating expense totaled $65.6 million in the current quarter, up $4.1 million or 6.7% from a year ago. The increase primarily reflected a $1.8 million increase associated with higher deposit insurance premiums and regulatory assessments and a $1.5 million or 3.6% increase in salaries and related costs.
Income Taxes
The effective tax rate in the current quarter was 44.00%, compared to 43.64% in the year-ago quarter. The difference in effective tax rates was due primarily to interest associated with a potential underpayment of taxes, as discussed in more detail below.
The IRS is currently auditing Downey's 2004 tax return, including its treatment of certain loan origination costs. As a result, Downey has determined there is substantial ambiguity surrounding the treatment of certain loan origination costs on its tax returns for 2003 through 2005. Since year-end 2006, Downey has made payments of taxes (previously accrued for in prior period financial statements) and interest to federal and state taxing authorities in the amount of $88.9 million for the purpose of avoiding penalties and further interest pending resolution of this ambiguity. The potential after-tax interest assessment related to Downey's tax returns for 2003 through 2005 totals $10.8 million. Of that amount, $1.6 million was accrued for 2007 and has been recorded as additional income taxes in the current quarter, and $9.2 million was accrued for 2004 through 2006 and will be reflected in income taxes in those prior periods in future SEC filings. (The impact of these prior period adjustments on net income and earnings per share is shown below in Supplemental Information, Tax Deduction of Loan Origination Costs. A comprehensive footnote describing this situation and its impact on previously filed financial statements will be included in Downey's first quarter Form 10-Q. However, previously filed financial statements on Form 10-K and Form 10-Q will not be amended as the impact on all prior periods is considered immaterial.)
While the IRS may assert a $9.2 million penalty (including penalty interest) against Downey related to its 2004 tax return, Downey has determined it is unlikely any such penalty would be sustained, and it would vigorously contest any penalty that would be proposed.
Assets, Loan Originations and Deposits
At March 31, 2007, assets totaled $15.238 billion, down $2.565 billion or 14.4% from a year ago. During the current quarter, assets declined $970 million or 6.0 % due primarily to declines of $865 million in loans held for investment and $95 million in loans held for sale. Included within loans held for investment at quarter end were $10.055 billion of one-to-four unit adjustable rate mortgages subject to negative amortization, down $1.145 billion from year-end 2006. These loans comprised 81% of the one-to-four unit residential portfolio at quarter end, compared to 92% a year ago. The amount of negative amortization included in loan balances increased $37 million during the current quarter to $358 million or 3.56% of loans subject to negative amortization. During the current quarter, approximately 31% of loan interest income represented negative amortization, up from both 29% in the fourth quarter of 2006 and 25% in the year-ago first quarter.
Loan originations (including purchases) totaled $1.261 billion in the current quarter, down $1.552 billion or 55.2% from $2.813 billion a year ago. Loans originated for sale declined $339 million or 34.6% to $641 million, while single family loans originated for portfolio declined $1.116 billion or 64.9% to $603 million. In addition to single family loans, $17 million of other loans were originated in the current quarter.
Deposits totaled $11.647 billion at quarter end, down 4.5% from a year ago and down $137 million or 1.2% from year-end 2006. At quarter end, the number of branches totaled 173 (169 in California and four in Arizona), up one branch from December 31, 2006. During the current quarter, one traditional branch was opened. At quarter end, the average deposit size of our 82 traditional branches was $112 million, while the average deposit size of our 91 in-store branches was $27 million. Since the end of 2006, borrowings declined $766 million and represented 13.4% of total assets.
Non-Performing Assets
Non-performing assets increased during the quarter by $33 million to $143 million and represented 0.94% of total assets, compared with 0.68% at year-end 2006 and 0.22% a year ago.
Regulatory Capital Ratios
At March 31, 2007, Downey Financial Corp.'s primary subsidiary, Downey Savings and Loan Association, F.A., had core and tangible capital ratios of 9.64% and a risk-based capital ratio of 19.57%. These capital levels were well above the "well capitalized" standards of 5% and 10%, respectively, as defined by regulation.
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, fluctuations in interest rates, credit quality, the outcome of the IRS audit currently underway, 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.
SUPPLEMENTAL INFORMATION TAX DEDUCTION OF LOAN ORIGINATION COSTS
The following table sets forth the impact to net income for financial statement purposes of the change in treatment of certain loan origination costs in Downey's tax returns for 2003 through 2005. This table reflects by quarter for 2004 through 2006 the after-tax interest assessment that is recorded as additional income taxes, as interest begins accruing after the due date for filing each year's tax return. (Data in the table is unaudited.)
Net Income Previously (Dollars in Thousands) Reported Adjusted Change 2004: 1st quarter $ 8,912 $ 8,874 $ (38) (0.4)% 2nd quarter 27,821 27,568 (253) (0.9) 3rd quarter 24,510 24,303 (207) (0.8) 4th quarter 46,419 46,170 (249) (0.5) Total $107,662 $106,915 $ (747) (0.7)% ======== ======= ======== ====== 2005: 1st quarter $ 51,739 $51,416 $ (323) (0.6)% 2nd quarter 64,070 63,271 (799) (1.2) 3rd quarter 59,736 58,883 (853) (1.4) 4th quarter 41,889 40,907 (982) (2.3) Total $217,434 $214,477 $(2,957) (1.4)% ======== ======= ======== ====== 2006: 1st quarter $ 44,757 $43,697 $(1,060) (2.4)% 2nd quarter 49,540 48,224 (1,316) (2.7) 3rd quarter 57,176 55,620 (1,556) (2.7) 4th quarter 53,701 52,115 (1,586) (3.0) Total $205,174 $199,656 $(5,518) (2.7)% ======== ======= ======== ====== Grand Total $530,270 $521,048 $(9,222) (1.7)% ======== ======= ======== ====== Earnings Per Share (diluted) Previously Reported Adjusted Change 2004: 1st quarter $ 0.32 $ 0.32 $ - (0.9)% 2nd quarter 0.99 0.98 (0.01) (0.5) 3rd quarter 0.88 0.87 (0.01) (1.2) 4th quarter 1.66 1.66 - (0.2) Total $ 3.85 $ 3.83 $(0.02) (0.6)% ====== ====== ======= ===== 2005: 1st quarter $ 1.86 $ 1.84 $(0.02) (0.9)% 2nd quarter 2.30 2.27 (0.03) (1.3) 3rd quarter 2.14 2.11 (0.03) (1.3) 4th quarter 1.50 1.47 (0.03) (2.2) Total $ 7.80 $ 7.69 $(0.11) (1.4)% ====== ====== ======= ===== 2006: 1st quarter $ 1.61 $ 1.57 $(0.04) (2.7)% 2nd quarter 1.77 1.73 (0.04) (2.3) 3rd quarter 2.05 1.99 (0.06) (2.7) 4th quarter 1.93 1.87 (0.06) (3.2) Total $ 7.36 $ 7.16 $(0.20) (2.7)% ====== ====== ======= ===== Grand Total $19.01 $18.68 $(0.33) (1.7)% ====== ====== ======= ===== DOWNEY FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in Thousands, Except Per Share Data) Mar. 31, Dec. 31, Mar. 31, 2007 2006 2006 ASSETS Cash $ 157,084 $ 124,865 $ 168,822 Federal funds -- 1 -- Cash and cash equivalents 157,084 124,866 168,822 U.S. Treasury, government sponsored entities and other investment securities available for sale, at fair value 1,411,258 1,433,176 730,402 Loans held for sale, at lower of cost or fair value 267,862 363,215 561,511 Mortgage-backed securities available for sale, at fair value 117 251 271 Loans held for investment 13,002,795 13,868,227 15,912,318 Allowance for loan losses (60,758) (60,943) (44,504) Loans held for investment, net 12,942,037 13,807,284 15,867,814 Investments in real estate and joint ventures 61,663 59,843 49,182 Real estate acquired in settlement of loans 17,212 8,524 385 Premises and equipment 115,534 114,052 110,595 Federal Home Loan Bank stock, at cost 126,125 152,953 182,557 Mortgage servicing rights, net 20,689 21,196 20,165 Other assets 118,288 122,022 111,055 $15,237,869 $16,207,382 $17,802,759 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $11,647,431 $11,784,869 $12,198,903 Securities sold under agreements to repurchase 546,870 469,971 -- Federal Home Loan Bank advances 1,298,197 2,140,785 3,825,811 Senior notes 198,305 198,260 198,129 Accounts payable and accrued liabilities 93,977 220,262 317,976 Deferred income taxes 13,626 - 17,301 Total liabilities 13,798,406 14,814,147 16,558,120 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 Mar. 31, 2007, Dec. 31, 2006 and Mar. 31, 2006; outstanding 27,853,783 shares at Mar. 31, 2007, Dec. 31, 2006 and Mar. 31, 2006 282 282 282 Additional paid-in capital 93,792 93,792 93,792 Accumulated other comprehensive loss (1,676) (5,204) (6,196) Retained earnings 1,363,857 1,321,157 1,173,553 Treasury stock, at cost, 381,239 shares at Mar. 31, 2007, Dec. 31, 2006 and Mar. 31, 2006 (16,792) (16,792) (16,792) Total stockholders' equity 1,439,463 1,393,235 1,244,639 $15,237,869 $16,207,382 $17,802,759 =========== =========== =========== DOWNEY FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands, Except Per Share Data) Three Months Ended Mar. 31, 2007 2006 INTEREST INCOME Loans $252,172 $255,345 U.S. Treasury and government sponsored entities securities 19,174 7,336 Mortgage-backed securities 3 3 Other investment securities 2,471 2,279 Total interest income 273,820 264,963 INTEREST EXPENSE Deposits 113,575 91,835 Federal Home Loan Bank advances and other borrowings 31,830 43,914 Senior notes 3,301 3,298 Total interest expense 148,706 139,047 NET INTEREST INCOME 125,114 125,916 PROVISION FOR CREDIT LOSSES 617 10,057 Net interest income after provision for credit losses 124,497 115,859 OTHER INCOME, NET Loan and deposit related fees 8,836 8,558 Real estate and joint ventures held for investment, net 476 2,289 Secondary marketing activities: Loan servicing income (loss), net (436) 189 Net gains on sales of loans and mortgage-backed securities 8,740 11,654 Other 72 520 Total other income, net 17,688 23,210 OPERATING EXPENSE Salaries and related costs 42,234 40,780 Premises and equipment costs 8,809 8,538 Advertising expense 1,191 1,242 Deposit insurance premiums and regulatory assessments 2,764 1,014 Professional fees 559 792 Other general and administrative expense 9,795 9,175 Total general and administrative expense 65,352 61,541 Net operation of real estate acquired in settlement of loans 291 (9) Total operating expense 65,643 61,532 INCOME BEFORE INCOME TAXES 76,542 77,537 Income taxes 33,679 33,840 NET INCOME $ 42,863 $ 43,697 ======== ======== PER SHARE INFORMATION Basic $ 1.54 $ 1.57 Diluted $ 1.54 $ 1.57 Cash dividends declared and paid $ 0.12 $ 0.10 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 27,853,783 27,853,783 Diluted 27,884,030 27,883,221 DOWNEY FINANCIAL CORP. AND SUBSIDIARIES SELECTED FINANCIAL DATA (Dollars in Thousands) Three Months Ended Mar. 31, 2007 2006 NET INCOME BY BUSINESS SEGMENT Banking $ 42,423 $ 42,516 Real estate investment 440 1,181 Total net income $ 42,863 $ 43,697 =========== =========== SELECTED FINANCIAL RATIOS Effective interest rate spread 3.28% 2.97% Efficiency ratio (a) 45.92 41.91 Return on average assets 1.09 1.00 Return on average equity 12.10 14.28 ASSET AND LIABILITY ACTIVITY Loans for investment portfolio: Originations: (b) Residential one-to-four units $ 602,898 $ 1,719,368 All other 17,500 113,670 Repayments (1,560,187) (1,393,957) Loans originated for sale portfolio (b) 640,669 980,164 Loans and mortgage-backed securities sold (714,430) (876,286) Increase (decrease) in loans and mortgage-backed securities (960,734) 607,673 Increase (decrease) in assets (969,513) 707,096 Increase (decrease) in deposits (137,438) 322,055 Increase (decrease) in borrowings (765,644) 268,338 Mar. 31, Dec. 31, Mar. 31, 2007 2006 2006 CAPITAL RATIOS (BANK ONLY) Tangible and core 9.64% 8.76% 7.53% Risk-based 19.57 17.78 14.83 BOOK VALUE PER SHARE $ 51.68 $ 50.02 $ 44.68 NUMBER OF BRANCHES INCLUDING IN-STORE LOCATIONS 173 172 173 (a) The amount of general and administrative expense 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 Mar. 31, 2007 Average Average Yield/ Balance Interest Rate AVERAGE BALANCE SHEET DATA Interest-earning assets: Loans: Loan prepayment fees 21,804 0.64 Write-off of deferred costs and premiums from loan payoffs (25,814) (0.76) All other 256,182 7.49 Total loans $13,678,775 $252,172 7.37% Mortgage-backed securities 152 3 5.80 Investment securities (a) 1,578,946 21,645 5.56 Total interest-earnings assets 15,257,872 273,820 7.18 Non-interest-earning assets 469,512 Total assets $15,727,385 =========== Transaction accounts: Non-interest-bearing checking $ 755,063 $ -- -% Interest-bearing checking (b) 488,174 395 0.33 Money market 150,385 385 1.04 Regular passbook 1,243,823 2,949 0.96 Total transaction accounts 2,637,445 3,729 0.57 Certificates of deposit 9,004,183 109,846 4.95 Total deposits 11,641,628 113,575 3.96 FHLB advances and other borrowings (c) 2,227,592 31,830 5.79 Senior notes 198,289 3,301 6.66 Total deposits and borrowings 14,067,509 148,706 4.29 Other liabilities 243,070 Stockholders' equity 1,416,806 Total liabilities and stockholders' equity $15,727,385 =========== Net interest income/interest rate spread $125,114 2.89% Excess of interest-earning assets over deposits and borrowings $ 1,190,363 Effective interest rate spread 3.28 Dec. 31, 2006 Average Average Yield/ Balance Interest Rate AVERAGE BALANCE SHEET DATA Interest-earning assets: Loans: Loan prepayment fees 27,409 0.75 Write-off of deferred costs and premiums from loan payoffs (27,893) (0.76) All other 272,723 7.42 Total loans $14,703,050 $272,239 7.41% Mortgage-backed securities 254 4 5.60 Investment securities (a) 1,472,000 18,390 4.96 Total interest-earnings assets 16,175,304 290,633 7.19 Non-interest-earning assets 450,768 Total assets $16,626,072 =========== Transaction accounts: Non-interest-bearing checking $ 776,986 $ -- -% Interest-bearing checking (b) 488,383 418 0.34 Money market 146,991 384 1.04 Regular passbook 1,311,124 3,225 0.98 Total transaction accounts 2,723,484 4,027 0.59 Certificates of deposit 9,117,252 111,897 4.87 Total deposits 11,840,736 115,924 3.88 FHLB advances and other borrowings (c) 2,867,151 41,234 5.71 Senior notes 198,245 3,300 6.66 Total deposits and borrowings 14,906,132 160,458 4.27 Other liabilities 351,312 Stockholders' equity 1,368,628 Total liabilities and stockholders' equity $16,626,072 =========== Net interest income/interest rate spread $130,175 2.92% Excess of interest-earning assets over deposits and borrowings $ 1,269,172 Effective interest rate spread 3.22 Mar. 31, 2006 Average Average Yield/ Balance Interest Rate AVERAGE BALANCE SHEET DATA Interest-earning assets: Loans: Loan prepayment fees 21,471 0.53 Write-off of deferred costs and premiums from loan payoffs (22,044) (0.54) All other 255,918 6.34 Total loans $16,137,510 $255,345 6.33% Mortgage-backed securities 276 3 4.35 Investment securities (a) 848,460 9,615 4.60 Total interest-earnings assets 16,986,246 264,963 6.24 Non-interest-earning assets 419,058 Total assets $17,405,304 =========== Transaction accounts: Non-interest-bearing checking $ 699,971 $ -- -% Interest-bearing checking (b) 515,516 435 0.34 Money market 164,212 423 1.04 Regular passbook 1,727,033 4,384 1.03 Total transaction accounts 3,106,732 5,242 0.68 Certificates of deposit 8,904,238 86,593 3.94 Total deposits 12,010,970 91,835 3.10 FHLB advances and other borrowings (c) 3,689,386 43,914 4.83 Senior notes 198,112 3,298 6.66 Total deposits and borrowings 15,898,468 139,047 3.55 Other liabilities 283,060 Stockholders' equity 1,223,776 Total liabilities and stockholders' equity $17,405,304 =========== Net interest income/interest rate spread $125,916 2.69% Excess of interest-earning assets over deposits and borrowings $ 1,087,778 Effective interest rate spread 2.97 (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 Mar. 31, Dec. 31, Mar. 31, 2007 2006 2006 LOAN AND DEPOSIT RELATED FEES Loan related fees $ 842 $ 918 $ 1,066 Deposit related fees: Automated teller machine fees 2,305 2,346 2,149 Other fees 5,689 5,879 5,343 Total loan and deposit related fees $ 8,836 $ 9,143 $ 8,558 ========= ======== ======== LOAN SERVICING INCOME (LOSS), NET Net cash servicing fees $ 1,607 $ 1,647 $ 1,566 Payoff and curtailment interest cost (a) (1,063) (1,269) (218) Amortization of mortgage servicing rights (1,024) (1,087) (1,198) (Provision for) reduction of impairment of mortgage servicing rights 44 (149) 39 Total loan servicing income (loss), net $ (436) $ (858) $ 189 ========= ======== ======== NET GAINS (LOSSES) ON SALES OF LOANS AND MORTGAGE-BACKED SECURITIES Mortgage servicing rights $ 1,341 $ 2,122 $ 1,022 All other components excluding SFAS 133 7,148 6,682 10,394 SFAS 133 251 (309) 238 Total net gains on sales of loans and mortgage-backed securities $ 8,740 $ 8,495 $ 11,654 ========= ======== ======== Secondary marketing gain excluding SFAS 133 as a percentage of associated sales 1.19% 1.23% 1.30% MORTGAGE SERVICING RIGHTS ACTIVITY Gross balance at beginning of period $ 21,435 $ 20,483 $ 21,157 Additions (b) 1,341 2,122 1,022 Amortization (1,024) (1,087) (1,198) Sales (868) -- -- Impairment write-down (13) (83) (561) Gross balance at end of period 20,871 21,435 20,420 Allowance balance at beginning of period 239 173 855 Provision for (reduction of) impairment (44) 149 (39) Impairment write-down (13) (83) (561) Allowance balance at end of period 182 239 255 Total mortgage servicing rights, net $ 20,689 $ 21,196 $ 20,165 ========= ======== ======== As a percentage of associated mortgage loans 0.88% 0.89% 0.85% Estimated fair value (c) $ 22,461 $ 22,828 $ 21,894 Weighted average expected life (in months) 56 54 51 Custodial account earnings rate 5.26% 5.28% 4.90% Weighted average discount rate 10.27 10.28 9.45 Mar. 31, Dec. 31, Mar. 31, 2007 2006 2006 MORTGAGE LOANS SERVICED FOR OTHERS Total $6,021,673 $5,908,233 $5,794,067 With capitalized mortgage servicing rights: (c) Amount 2,348,060 2,394,754 2,372,534 Weighted average interest rate 5.77% 5.75% 5.63% Total loans sub-serviced without mortgage servicing rights: (d) Term - less than six months $ 125,425 $ 93,074 $ 153,655 Term - indefinite 3,533,200 3,404,342 3,248,012 Custodial account balances $ 176,171 $ 172,462 $ 124,324 (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) Included minor amounts repurchased. (c) The estimated fair value may exceed book value for certain asset strata and excluded loans sold or securitized prior to 1996 and loans sub-serviced without capitalized mortgage servicing rights. (d) Servicing is performed for a fixed fee per loan each month. DOWNEY FINANCIAL CORP. AND SUBSIDIARIES SELECTED FINANCIAL DATA - (Continued) (Dollars in Thousands) Mar. 31, Dec. 31, Mar. 31, 2007 2006 2006 LOANS HELD FOR INVESTMENT Loans secured by real estate: Residential one-to-four units $12,404,020 $13,227,004 $15,150,729 Home equity loans and lines of credit 168,442 187,939 250,804 Residential five or more units 110,228 113,488 135,432 Commercial real estate 26,296 26,700 28,846 Construction 61,955 52,922 78,095 Land 58,795 58,910 27,379 Non-mortgage: Commercial 2,200 2,400 3,481 Consumer 6,143 6,778 6,658 Total loans held for investment 12,838,079 13,676,141 15,681,424 Increase (decrease) for: Undisbursed loan funds and net deferred costs and premiums 164,716 192,086 230,894 Allowance for losses (60,758) (60,943) (44,504) Total loans held for investment, net $12,942,037 $13,807,284 $15,867,814 =========== =========== =========== LOANS HELD FOR SALE Residential one-to-four units $ 266,162 $ 358,128 $ 556,365 Net deferred costs and premiums 2,156 4,789 6,646 Capitalized basis adjustment (a) (456) 298 (1,500) Total loans held for sale, net $ 267,862 $ 363,215 $ 561,511 =========== =========== =========== RESIDENTIAL ONE-TO-FOUR UNIT LOANS SUBJECT TO NEGATIVE AMORTIZATION Held for investment: Amount $10,054,917 $11,199,870 $13,865,945 Amount as a percentage of total residential one-to- four unit adjustable rate loans 81% 85% 92% Negative amortization included in the loan balance 357,630 320,466 181,559 Negative amortization as a percentage of the associated loan balance 3.56% 2.86% 1.31% NON-PERFORMING ASSETS Non-accrual loans: Residential one-to-four units $ 114,833 $ 90,218 $ 38,503 Land 11,345 11,345 -- Other 28 275 1 Total non-accrual loans 126,206 101,838 38,504 Real estate acquired in settlement of loans 17,212 8,524 385 Total non-performing assets$ 143,418 $ 110,362 $ 38,889 =========== =========== =========== Non-performing assets as a percentage of total assets 0.94% 0.68% 0.22% DELINQUENT LOANS 30-59 days $ 48,032 $ 57,042 $ 26,791 60-89 days 31,592 24,313 10,497 90+ days (b) 93,464 63,162 22,111 Total delinquent loans $ 173,088 $ 144,517 $ 59,399 =========== =========== =========== Delinquencies as a percentage of total loans 1.32% 1.03% 0.37% (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) 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.
Downey Financial Corporation
CONTACT: Brian E. Cote, CFO of Downey Financial Corp., +1-949-509-4420
