Downey stops cash loss but warns on liquidity

Times Staff Writers

Struggling thrift Downey Financial Corp. said Monday that it succeeded in stanching a recent outflow of deposits. But the lender warned that if cash began 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 a filing with the Securities and Exchange Commission that “the bank experienced elevated levels of deposit withdrawals” after June 30, when deposits totaled about $9.8 billion.

Reeling from losses on adjustable-rate mortgages, Downey has for months been high on Wall Street lists of seriously troubled lenders.

The failure of Pasadena-based IndyMac Bank on July 11 heightened concerns about depositors’ risk of losing money if their savings exceeded deposit insurance limits.


But in the first week of August, the bank recovered 40% of the net deposits lost in July, Downey’s new chief executive said in an interview. “We now have some distance from the IndyMac situation, and people are starting to feel more confident about their deposits,” CEO Tom Prince said.

Downey warned, however, that it was close to maxing out its $3-billion line of credit with the Federal Home Loan Bank system, which provides credit to cash-needy thrifts. Downey’s borrowings from the system surged from $1.5 billion on June 30 to $2.8 billion on Friday, the bank said. Prince said Downey increased its borrowing in case it needed cash to meet deposit-redemption requests.

But if “net deposit outflows resume, the bank’s usual sources of liquidity could become depleted,” and there’s no certainty that it could obtain new financing or raise additional capital, Downey said. The firm’s board ousted top management July 24 and signaled interest in selling the business.

Downey’s shares slid 14 cents to $2.10 after the filing.