Downey says deposits are returning, but funding still iffy

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

Struggling thrift Downey Financial Corp. said today that it succeeded in staunching a recent outflow of deposits. But the firm warned that if cash begins to flee again it could face a hard time lining up new sources of capital.

Newport Beach-based Downey, parent of Downey Savings & Loan, said in its quarterly financial filing with the Securities and Exchange Commission that ‘after the end of the second quarter the bank experienced elevated levels of deposit withdrawals.’

But ‘more recently, in response to steps taken by management to address the situation, the bank has experienced net deposit inflows,’ Downey said. It didn’t quantify those inflows. Total deposits were about $9.8 billion as of June 30. UPDATE: Downey CEO Tom Prince told my colleague William Heisel this afternoon that the bank last week recovered about 40% of the deposits that left in July. ‘We now have some distance from the IndyMac situation, and people are starting to feel more confident about their deposits,’ Prince said.

The company, reeling from losses on adjustable-rate mortgage loans, has for months been high on Wall Street’s list of the most seriously troubled lenders.

The failure of Pasadena-based IndyMac Bank on July 11 heightened concerns about the potential for depositors to lose money if their savings exceeded federal deposit insurance limits. IndyMac had about $1 billion in uninsured accounts.

Bank industry analysts expected some nervous depositors to exit Downey and other loss-ridden thrifts in the wake of IndyMac’s collapse. Downey’s filing today confirmed that. Another ailing Southland bank, Vineyard National Bancorp of Corona, said in a filing today that it has suffered a ‘significant amount of customer deposit withdrawals.’

Although Downey said its deposit situation now has stabilized, the firm warned that it was close to maxing out its line of credit with the Federal Home Loan Bank System, which provides a credit backstop for cash-needy thrifts. The company said its borrowings from the system surged from $1.5 billion on June 30 to $2.8 billion as of Aug. 8. Its credit line currently is capped at $3 billion. Prince said Downey ramped up its borrowing from the FHLB as a safety measure, in case it needed cash to meet deposit-redemption requests.

‘If elevated levels of net deposit outflows resume, the bank’s usual sources of liquidity could become depleted, and the bank would be required to raise additional capital or enter into new financing arrangements to satisfy its liquidity needs,’ Downey said in its SEC filing. ‘In the current economic environment, there are no assurances that we would be able to raise additional capital or enter into additional financing arrangements.’

The firm’s board ousted top management on July 24 and signaled it would consider selling the business, but there has been no news on that effort since.

Downey’s shares slid after the filing was reported. They closed down 14 cents at $2.10.