Downey Announces First Quarter 2007 Earnings
NEWPORT BEACH, Calif., April 18 /PRNewswire-FirstCall/ -- Downey Financial Corp. (NYSE: DSL) 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 interestbearing
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
These are not official records and will not be reported to the IRS. Please use this information only as a tool to assist your financial management. Always refer to your Schwab statements and/or trade confirmations for a
complete and accurate record of your securities.
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.
These are not official records and will not be reported to the IRS. Please use this information only as a tool to assist your financial management. Always refer to your Schwab statements and/or trade confirmations for a
complete and accurate record of your securities.
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)%
*** STORY TRUNCATED due to excessive length. ***
These are not official records and will not be reported to the IRS. Please use this information only as a tool to assist your financial management. Always refer to your Schwab statements and/or trade confirmations for a
complete and accurate record of your securities. |
