Wall Street Whacks Downey Stock

Downey Financial Corp. took a drubbing Thursday on Wall Street, where its stock dropped 18% after the Newport Beach company recorded lower-than-expected fourth-quarter earnings.

Loan refinancings late in the year forced the parent of Downey Savings & Loan to set aside $5 million in the final quarter for the estimated future loss on loan-servicing fees.

Though the company posted record annual income of $99.2 million, the stock lost $9.56 to close at $43.94 a share on the New York Stock Exchange.

Downey earned $23 million, or 81 cents per share, in the fourth quarter, up 16% from $19.8 million, or 70 cents per share, in the same quarter a year earlier. The results fell far short of analysts’ earnings estimates, which averaged 95 cents a share.

Downey blamed the shortfall mainly on a projected decrease in the fees it earns for billing customers and collecting payments on loans it has sold to investors. With interest rates falling, customers are starting to refinance their mortgages.

Under accounting rules, Downey is required to set aside enough money--$5 million in this case--to make up for the projected drop in fees as loans are refinanced, said Thomas E. Prince, the company’s finance chief.

The amount set aside was about 10.5 cents per share. Downey also put aside $1.1 million, or about 2.5 cents per share, to cover a one-time increase in its pension obligations. It didn’t elaborate.

Success in expanding its own portfolio of adjustable-rate loans was largely responsible for Downey’s record annual earnings, which amounted to $3.51 per share, up from $63.8 million, or $2.26 per share, the year before. Last year’s figures also include a $5.6-million after-tax gain from the sale of an automobile-finance business.

Buoyed by those results and takeover rumors, Downey’s share price more than tripled last year, peaking Dec. 22 at $61.94, before tailing off again.

Downey’s chief executive, Daniel D. Rosenthal, noted that the company cut its operating expenses by more than 5% last year. He said Downey expects to adjust to falling interest rates by originating more fixed-rate loans that it would sell but believes it also will be able to add to its highly profitable portfolio of adjustable-rate loans.