Downey “going concern” warning
November 11, 2008 – 2:40 am
Back in September, option ARM lender Downey Savings and Loan (ticker: DSL) entered into a “Consent Order” with its regulator, the Office of Thrift Supervision. Among other stipulations, OTS ordered DSL to raise new capital by December 31st, 2008. In their 10-Q published late yesterday, DSL seems pretty sure that can’t be done:
In the current economic environment, there is a significant risk that the Bank will not be able to raise sufficient additional capital to ensure compliance with the capital requirements of the Bank Consent Order by year-end.
They also dropped this bombshell (see Note 11 on pages 23-24):
The circumstances described above, raise substantial doubt concerning the ability of the Holding Company and the Bank to continue as going concerns for a reasonable period of time.
Why would a bank issue a “going concern” warning when management knows doing so could cause depositors to panic?
Their auditors probably forced them.
With nearly $13 billion of assets, Downey would be the second-largest bank to end up in FDIC receivership so far this year. IndyMac was #1. WaMu and Wachovia are far larger than both, but FDIC arranged for them to be sold before they could fail. (Do I have all that right readers?)
Some other interesting notes from the 10-Q:
—Net charge-offs to average loans was 3.62% in the current quarter, higher than the 0.43% in the fourth quarter of 2007 and 0.28% in the year-ago third quarter.
—At September 30, 2008, the recorded investment in loans for which we recognized impairment totaled $1.477 billion, up from $486 million at December 31, 2007 and $12 million at September 30, 2007.
—The aggregate amount of non-accrual loans…was $1.723 billion and $364 million at September 30, 2008 and 2007, respectively.
Sixteen percent of DSL’s loans held for investment are now in the non-accrual bucket. That is to say, they are in the “foreclosure process, being restructured, contractually past due 90 days or more as to principal or interest, or collection is doubtful.” Not a pretty book of business.
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On a related note, if any of you are subscribers to Housing Wire Magazine, watch for my article on option arm lender BankUnited coming out in the next issue.
Posted in accounting, banking, bankruptcy, credit crunch, stocks |
2 Responses to “Downey “going concern” warning”
What a shame the current management wasn’t as good as the old management back in the 80s. If I remember correctly, Downey was one of the few that weathered the Southern California S&L crisis by having disciplined lending practices back in the go-go condo building days of the mid-80s. Now they are cooked!
By Don, Detroit Motor City on Nov 11, 2008
Don, maybe they just wised up! They saw everybody else getting bailed out around them and said, we won’t make the mistake of prudence ever again!
By linda on Nov 11, 2008