Downey Announces First Quarter 2008 Results and Dividend
NEWPORT BEACH, Calif., April 21 /PRNewswire-FirstCall/ -- Downey Financial Corp. (NYSE:DSL) reported a net loss for first quarter 2008 of $247.7 million or $8.89 per share on a diluted basis, compared to net income of $42.9 million or $1.54 per share in the year-ago first quarter.
In addition, the Board of Directors has declared a quarterly cash dividend of $0.12 per share payable on May 20, 2008, to shareholders of record on May 6, 2008. The Board also decided to suspend future dividend payments. Maurice McAlister, Chairman of the Board, commented, "Although it was a difficult decision, our Board of Directors believes the suspension of future dividends is in Downey's best interest, as it will allow us to preserve capital during this difficult operating environment. The Board plans to reassess the dividend when economic conditions normalize." A significant factor contributing to the unfavorable change in net income/(loss) between first quarters was the recording of a $111.3 million valuation allowance against deferred tax assets in the current quarter within income taxes due to uncertainty regarding their realization. In addition, the $309.7 million unfavorable change in pre-tax income/(loss) between first quarters was due primarily to:
-- A $236.3 million increase in provision for credit losses;
Mr. McGill continued, "While we deal with problem loans, we have not lost sight of our long-term future. In lending, we continue to enhance our home loan underwriting guidelines. The favorable results of such changes can be seen in the loans originated in the current quarter, which had an average FICO score of 745 and loan-to-value ratio of 65%, compared with averages of 721 and 67% in the year-ago quarter. The improved quality of our current loan portfolio also is reflected by the significant decline in our concentration of Option ARM loans. Our Option ARM loans declined by $3.1 billion from a year ago and currently represent 65% of our single family loans, compared to 81% a year ago. Financially, we believe our retail branch system and borrowing capacity at the Federal Home Loan Bank provide adequate liquidity. Our focus is on capital management and our capital levels continue to exceed the "well capitalized" levels established by banking regulation." NET INTEREST INCOME Net interest income totaled $83.7 million in the first quarter of 2008, down $41.4 million or 33.1% from a year ago, reflecting a $2.513 billion or 16.5% decline in average interest-earning assets to $12.744 billion and a decline in the effective interest rate spread. The average effective interest rate spread was 2.63% in the current quarter, down 0.65% from a year ago and down 0.04% from the fourth quarter of 2007. Compared to a year ago, the current quarter effective interest rate spread was unfavorably impacted by a higher proportion of non-performing assets and a higher proportion of interest-earning assets comprised of investment securities and hybrid adjustable rate mortgage loans, both of which have lower yields than those of option ARM loans that comprised a larger proportion of interest-earning assets a year ago. In addition, the current quarter effective interest rate spread was unfavorably impacted by a lower proportion of loan prepayment fees to the amount of deferred loan origination costs written-off as a result of those payoffs, which declined to 27% in the current quarter from 84% a year ago. This decline was primarily the result of a higher proportion of loans being repaid that were no longer subject to prepayment fees primarily due to the increasing age of the loan portfolio. PROVISION FOR CREDIT LOSSES During the current quarter, the provision for credit losses totaled $236.9 million, up $236.3 million from a year ago. At March 31, 2008, the allowance for credit losses was $547.7 million, comprised of $546.7 million for loan losses and $1.0 million for unfunded loan commitments which is reported within accounts payable and accrued liabilities. The allowance increased $198.4 million this quarter, of which $24.0 million is related to the specific allowance associated with certain troubled debt restructurings resulting from a borrower retention program which is discussed more fully below in the section entitled "Non-Performing Assets." The balance of the increase to the allowance reflects further declines in the value of underlying home collateral as well as further increases in delinquent loans. This has been particularly true in certain geographic areas such as the greater Sacramento, Stockton, Modesto and Contra Costa areas of Northern California, the Inland Empire and San Diego County. Net loan charge-offs totaled $37.0 million in the current quarter, compared to $0.7 million a year ago. The current quarter net charge-offs are primarily related to residential one-to-four unit loans, with the annualized net charge-off ratio associated with these loans increasing to 0.97% from 0.02% a year ago. In addition, current quarter net charge-offs included $10.6 million associated with a $29 million residential lot land loan that was foreclosed upon during the quarter. OTHER INCOME Other income totaled $8.9 million in the current quarter, down $8.8 million or 49.5% from a year ago. Primary contributors to the decline between first quarters were: -- A $7.1 million decline in net gains on sale of loans and OPERATING EXPENSE Operating expense totaled $89.0 million in the current quarter, up $23.3 million or 35.6% from a year ago. The increase primarily reflected an increase of $23.9 million in net operations of real estate acquired in the settlement of loans due to a higher number of foreclosed properties, while general and administrative expense declined $0.6 million or 0.9% between first quarters. The decline in general and administrative expense was primarily attributable to a $2.5 million or 6.0% decline in salaries and related costs due to a decline in staff from a year ago and a $1.3 million decline in the other general and administrative expense category. Partially offsetting those declines was a $3.1 million goodwill impairment charge in the current quarter to eliminate the remaining goodwill balance and a $0.9 million increase in deposit insurance premiums and regulatory assessments. INCOME TAXES Due to providing a $111.3 million valuation allowance for deferred tax assets, a $14.5 million tax expense was recorded in the current quarter even though there was a loss before income taxes. In the year-ago quarter, the effective tax rate was 44.0% and reflected $1.6 million of interest expense associated with an underpayment of taxes related to certain loan origination costs. ASSETS, LOAN ORIGINATIONS AND DEPOSITS At March 31, 2008, assets totaled $13.131 billion, down $2.107 billion or 13.8% from a year ago. During the current quarter, assets declined $278 million due primarily to a decline of $417 million in loans held for investment, as loan payoffs exceeded originations and the reduction due to the increase in the allowance for loan losses. That decline was partially offset by a $74 million increase in real estate acquired in settlement of loans and a $53 million increase in investment securities available for sale. Included within loans held for investment at quarter end were $7.0 billion of single family adjustable rate mortgages subject to negative amortization, down $567 million from December 31, 2007. These loans comprised 65% of the single family residential loan portfolio held for investment at quarter end, compared to 81% a year ago. The amount of negative amortization included in loan balances declined $3 million during the current quarter to $375 million or 5.39% of loans subject to negative amortization. During the current quarter, approximately 20% of loan interest income represented negative amortization, down from 24% in the fourth quarter of 2007 and 31% in the year-ago first quarter. Loan originations (including purchases) totaled $676 million in the current quarter, down $585 million or 46.4% from $1.261 billion a year ago. Loans originated for sale declined $403 million or 63.0% to $237 million, while single family residential loans originated for portfolio declined $168 million or 27.8% to $435 million. In addition to single family residential loans, $3 million of other loans were originated in the current quarter, down from $17 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 $280 million of loans associated with the 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 $40 million of loans at below market interest rates in loan workout situations. Most of the modifications related to option ARM loans that were modified into ARMs with interest rates that adjust annually but do not permit negative amortization. Deposits totaled $10.244 billion at quarter end, down $1.403 billion or 12.0% from a year ago. Although deposits declined from a year ago, the number of checking accounts increased 1.7%. 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 $97 million, while the average deposit size of our 90 in-store branches was $23 million. During the current quarter, borrowings increased by $341 million and at quarter end represented 13% of total assets. NON-PERFORMING ASSETS Non-performing assets increased during the quarter by $521 million to $1.562 billion and represented 11.90% of total assets, compared with 7.77% at year-end 2007 and 0.94% a year ago. Of the current quarter increase, $189 million or 36% represented loans modified as part of a borrower retention program 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 option ARM 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 $8.8 million of interest income was recognized. 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. At the current quarter end, $49 million met the performance threshold and were removed from non-performing status. 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 March 31, 2008, approximately 91% of such borrowers had made all loan payments due. Accordingly, when those performing troubled debt restructurings are excluded from the ratio of non-performing assets to total assets, the adjusted ratio drops to 7.41% compared to the actual ratio of 11.90%. At March 31, 2008, real estate acquired in settlement of loans totaled $189 million. Included are 575 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, 316 new single family homes were acquired, while 67 were sold. As of quarter end, 62 single family homes were in escrow to be sold and offers were being negotiated on an additional 72 homes. REGULATORY CAPITAL RATIOS At March 31, 2008, Downey Financial Corp.'s primary subsidiary, Downey Savings and Loan Association, F.A., had core and tangible capital ratios of 8.43% and a risk-based capital ratio of 15.04%. 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 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. 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 Mar. 31, Dec. 31, Mar. 31, Loans held for investment, LIABILITIES AND STOCKHOLDERS' Total liabilities 12,040,865 12,074,640 13,798,406 STOCKHOLDERS' EQUITY Total stockholders' equity 1,090,484 1,334,417 1,439,463 $13,131,349 $13,409,057 $15,237,869 DOWNEY FINANCIAL CORP. AND SUBSIDIARIES Three Months Ended Total interest income 199,126 273,820 INTEREST EXPENSE Total interest expense 115,401 148,706 NET INTEREST INCOME 83,725 125,114 Net interest income (loss) after OTHER INCOME, NET Total other income, net 8,938 17,688 OPERATING EXPENSE Total general and administrative expense 64,795 65,352 Total operating expense 88,991 65,643 INCOME (LOSS) BEFORE INCOME TAXES (233,198) 76,542 NET INCOME (LOSS) $(247,697) $ 42,863 DOWNEY FINANCIAL CORP. AND SUBSIDIARIES Three Months Ended Total net income (loss) $(247,697) $ 42,863 ASSET AND LIABILITY ACTIVITY Loans originated for sale portfolio (b) 237,356 640,669 Loans and mortgage-backed securities sold (228,987) (714,430) Decrease in loans and mortgage-backed Decrease in assets (277,708) (969,513) Decrease in deposits (251,752) (137,438) Increase (decrease) in borrowings 340,551 (765,644) Mar. 31, Dec. 31, Mar. 31, BOOK VALUE PER SHARE $39.15 $47.91 $51.68 NUMBER OF BRANCHES INCLUDING (a) The amount of general and administrative expense, excluding the DOWNEY FINANCIAL CORP. AND SUBSIDIARIES Three Months Ended Total loans $10,976,680 177,557 6.47 Total interest-earnings assets 12,744,409 199,126 6.25 Total assets $13,429,588 Total transaction accounts 2,279,298 3,303 0.58 Total deposits 10,348,396 96,428 3.75 Total deposits and borrowings 11,957,785 115,401 3.88 Total liabilities and Net interest income/interest Three Months Ended Total loans $11,495,709 194,587 6.77 Total interest-earnings assets 13,401,958 218,179 6.51 Total assets $13,941,057 Total transaction accounts 2,338,754 3,219 0.55 Total deposits 10,602,590 105,084 3.93 Total deposits and borrowings 12,232,449 128,884 4.18 Total liabilities and Net interest income/interest Three Months Ended Total loans $13,678,775 252,172 7.37 Total interest-earnings assets 15,257,873 273,820 7.18 Total assets $15,727,385 Total transaction accounts 2,637,445 3,729 0.57 Total deposits 11,641,628 113,575 3.96 Total deposits and borrowings 14,067,509 148,706 4.29 Total liabilities and Net interest income/interest (a) Yields for securities available for sale are calculated using
Total loan and deposit related Total net gains on sales of DOWNEY FINANCIAL CORP. AND SUBSIDIARIES Three Months Ended Total loan servicing loss, net $(1,196) $(1,660) $ (436) Additions (c) 1,122 945 1,341 Allowance balance at beginning of Provision for (reduction of) Allowance balance at end of period -- 2,461 182 Total mortgage servicing rights, Mar. 31, Dec. 31, Mar. 31, (a) Represents the difference between the contractual obligation to DOWNEY FINANCIAL CORP. AND SUBSIDIARIES Mar. 31, Dec. 31, Mar. 31, Total loans held for NON-PERFORMING ASSETS Total non-accrual loans 1,373,362 926,146 126,206 Total non-performing assets $ 1,562,489 $ 1,041,769 $ 143,418 DELINQUENT LOANS (a) Reflected the change in fair value of the interest rate lock
CONTACT: Brian E. Cote, CFO of Downey Financial Corp., +1-949-509-4420 Web site: http://www.downeysavings.com/
2008-04-21 18:31:38 0341206 PRNEWSWIRE
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