Magazine article American Banker

2Q Earnings: Downey off 32% as Option ARMs Lose Their Luster

Magazine article American Banker

2Q Earnings: Downey off 32% as Option ARMs Lose Their Luster

Article excerpt

Downey Financial Corp. said Wednesday that its second-quarter earnings fell 32.1%, to $32.7 million, from a year earlier, as its shrinking loan portfolio contributed to a $20.9 million drop in net interest income and credit provisions jumped 42.7%, to $9.5 million.

Low long-term interest rates have made the thrift company's principal offering, option adjustable-rate mortgages, less appealing.

Downey's loan portfolio has gotten steadily smaller since early last year, even though negative-amortization balances have been increasing.

The Newport Beach, Calif., company's assets fell 14.7%, to $14.9 billion. Mortgages subject to negative amortization fell 32.6%, to $8.9 billion, and negative-amortization balances rose 64.7%, to $377.3 million.

In late April, Downey announced a "fully amortized home loan" twinned with a savings account that pays the same interest rate as the loan on balances of up to 10% of the loan amount. It said the product encourages borrowers to save more.

Downey blamed the higher provision on "continued weakness of the California residential real estate market" and changes in the yield curve that have made it harder for borrowers to refinance.

Chargeoffs were $1 million; in last year's second quarter Downey had virtually no chargeoffs. Nonperforming assets as a percentage of total assets were 1.53% on June 30, more than six times the year-earlier level.

Downey also said that falling prepayment fees resulting from a higher proportion of redemptions of loans that had passed the prepayment-penalty period pressured its "effective interest rate spread. …

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