Downey Sees Better-Than-Expected Loss, Other Indicators Worsen

Newport Beach’s Downey Financial Corp. reported a better-than-expected loss but several other indicators for the savings and loan operator worsened in the third quarter.

Downey, which is wrestling with a rising tide of bad mortgages, reported a loss of $81.1 million, up from $23.4 million a year earlier.

Analysts had been expecting a loss of $155 million.

While Downey did better than Wall Street expected, the thrift operator continued to set aside money for bad loans and saw rising expenses from homes it has taken over.

The company saw a 60% rise to $130.3 million in the amount of money it sets aside for bad loans. Downey said it saw a higher level of bad loans and bigger losses on them in the quarter.

Operating expenses rose 64% to $102.7 million as costs from Downey’s ownership of foreclosed homes grew. The company also paid more in deposit insurance premiums and professional fees and consulting fees.

Downey’s net interest income, the equivalent of revenue for the thrift, fell 22% to $76 million.

The company sold $65.2 million worth of real estate in the quarter as part of its efforts to raise cash.

“We continue to work with our financial adviser towards raising additional external capital and we are reviewing the recently announced governmental programs to determine which programs, if any, might be available and appropriate for us,” said Charles Rinehart, a banking veteran tapped as Downey’s chief executive in September.

Some see the government’s recently passed $700 billion financial rescue plan as a potential life preserver for Downey.

The company’s core capital ratio, a measure of financial health for banks and thrifts, was 7.48% at the end of the quarter, down from 7.5% at the end of June, despite a $69 million cash infusion from the thrift’s parent company and a subsidiary.

Regulators require a core capital ratio of at least 5%.

Downey’s assets were $12.8 billion at the end of the quarter, down 11% from a year ago.

The company was one of the largest originators of option adjustable-rate mortgages, which gave borrowers low teaser rates then reset at unaffordable levels a couple years later.

Shares of Downey closed down 8% Wednesday on a market value of about $50 million. The shares are down about 95% in the past 12 months.