Downey Financial loses $219 million in 2nd quarter - Forbes.com

NEWPORT BEACH, Calif. -

Beleaguered regional bank Downey Financial Corp. said Thursday it swung to a loss in the second quarter, as it increased its provision for loan losses by nearly $250 million.

For the April to June period, the bank reported a loss of $218.9 million, or $7.86 per share, compared with a profit of $32.7 million, or $1.17 per share, in the year-ago period.

Analysts polled by Thomson Financial, on average, were expecting a loss of $4.60 per share.

Results were weighed down by a $258.9 million provision for credit losses, up from $9.5 million a year ago. The company also reported a $26.2 million increase in operating expenses, primarily due to higher costs related to the operation of real estate acquired in the settlement of loans.

Net loan charge offs, or loans written off as unpaid, totaled $70.2 million, compared with just $1 million in the second quarter of last year.

Net interest income, or income generated from loans and deposits, fell 26 percent to $82.9 million, reflecting a decline in average interest-earning assets and the effective interest rate spread. The decline in interest rate spread is primarily due to a higher proportion of non-performing assets.

Non-performing assets increased to $1.96 billion during the quarter, representing 15.5 percent of total assets, compared with 1.53 percent a year ago.

Other income declined 31 percent to $12.1 million, due in part to a $5.2 million decrease in income from real estate and joint ventures held for investment. The company also reported a decline in net gains on the sale of loans and mortgage-backed securities. These declines were partially offset by an increase in income from loan servicing fees, Downey said.

At June 30, the bank's primary subsidiary, Downey Savings and Loan Association, had capital ratios of 7.57 percent, and a total risk-based capital ratio of 14.31 percent. The bank's regulatory capital position was boosted by $62 million during the quarter by a contribution of equity from the holding company and a dividend paid by the bank's real estate subsidiary. This was more than offset by the net loss recorded in the quarter, the company said.

Friedman, Billings, Ramsey & Co. analyst Paul Miller Jr. downgraded the shares to "Underperform" from "Market Perform," and slashed his 12-month target price on the stock to $1 from $13.

Escalating credit losses due to further housing market deterioration in California will put the company's operations at risk, Miller said in a note to clients.

The company is currently exploring a variety of strategic alternatives, but finding a buyer could be extremely difficult in this market, Miller said. A capital raise is also unlikely, given the sharp decline in share price.

Shares plummeted 74 cents, or 27.1 percent, to $1.99 in midday trading. Shares are down about 94 percent this year.

"Given continued home price declines, rising losses, and the company's decision to look for strategic alternatives, we now believe there is little value left for common shareholders," Miller said.

Separately, Downey said Thursday that its Chief Executive Daniel Rosenthal has retired and that Executive Vice President and Chief Operating Officer Thomas E. Prince will replace him on an interim basis. Chairman Maurice "Mac" McAlister, the company's 83-year-old founder and largest shareholder, has also retired from the board.

Downey Financial operates 169 branches in California and five in Arizona.

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