Downey S&L; Posts 41% Drop in Profits for ’91

Downey Savings & Loan said Thursday that its profits fell 41% last year, but analysts said the thrift’s operations were impressive during a period of regulatory constraints and recession.

Downey reported 1991 net income of $24.9 million, or $1.54 a share, compared to $42 million, or $2.60 a share, the previous year. Revenue dropped 15% to $340.2 million from $399.2 million in 1990.

Analysts and Downey officials attributed the lower revenue to a drop in interest rates and lower mortgage demand during the first part of the year.

Reduced rates were a double-edged sword. They produced a 40% increase in the Newport Beach thrift’s interest margin--the difference between its interest income from loans and interest expenses for deposits. But they also “resulted in a significant increase in prepayments and refinancing of Downey’s existing loan portfolio, which has affected Downey’s ability to increase its earning asset base,” said Kurt L. Kemper, chief executive.

It was questionable whether Downey would be able to post a profit for the year after the thrift disclosed in August that demands by regulators during a routine audit would result in a third-quarter loss. The loss for that quarter turned out to be $9.6 million.

With the continuing recession, regulators wanted Downey to devalue its $252-million government bond portfolio and to set aside extra reserves for possible losses on loans, real estate holdings and other investments. Downey sold the portfolio for a loss of $13.7 million which, with the added reserves, resulted in a total charge against earnings of $31.6 million.

“The regulators foolishly forced them to sell those bonds,” said Michael Abrahams, an investment banker with Oppenheimer & Co. in Los Angeles. “Downey could have booked a big gain if it had waited a few months.”

Downey’s fourth-quarter results, though lower, were also a sign of the thrift’s financial strength, he said. The S&L; posted quarterly net income of $11 million, or 68 cents a share, down 17% from $13.2 million, or 82 cents a share, in the 1990 quarter. With interest rates at their lowest levels, revenue fell 23% to $81 million from $105.7 million.

What impressed Abrahams and James F. Wilson, an analyst at Montgomery Securities in San Francisco, was the strength of Downey’s core operations. Its bigger interest margin last year left it with $115.2 million in net interest income--the amount left over after interest expenses on deposits and borrowings. In 1990, that figure was $86.4 million.

“Their net interest income was higher than I expected,” Wilson said. “The real question for the coming quarters is their ability to invest all that cash at attractive rates.”

Downey’s assets at the end of December fell 9.5% to $3.8 billion from $4.2 billion a year earlier. The decline in assets, along with its earnings, helped the thrift to boost its ratio of capital to assets.