Magazine article American Banker

Despite Record Earnings, Surprises Cost Downey

Magazine article American Banker

Despite Record Earnings, Surprises Cost Downey

Article excerpt

Record profits were not enough to discourage Downey Financial Corp.'s shareholders from unloading its stock.

On Thursday the $10.9 billion-asset company, which owns Downey Savings and Loan Association of Newport Beach, Calif., reported a 15.7% rise in fourth-quarter earnings, to $23 million or 81 cents a share. Yet its stock plunged 18% that day, in heavy trading, to $43.95, and was selling at $44.5625 at midday Monday.

Why the selloff? One explanation could be that per-share earnings were still 9 cents below analysts' estimates.

Investors were also caught off guard by the company's announcement of two one-time charges totaling $6.1 million, according to Downey chief financial officer Thomas E. Prince. That included a $5 million adjustment in the valuation of Downey's servicing rights on mortgage loans sold to other banks. The company expects to lose some of those loans when borrowers refinance their mortgages because of the Federal Reserve's recent cut in interest rates.

"These items were not included in the analysts' expectation of earnings per share, and to the best of my knowledge that is what prompted the move in the stock," Mr. Prince said.

Moreover, one analyst said investors may have decided to act before the Fed lowered interest rates further -- many on Wall Street think that rates will be cut as many as six more times this year.

"I think that's why the stock went down as much as it did," said the analyst, who requested anonymity.

Nevertheless, he said, investors overreacted. …

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