Downey Savings (symbol:dsl) is one bank showing some clear stress fractures. This bank is almost exclusively a California Option Arm lender. Here are a few highlights:
net income declined 23% yoy due to huge decrease in gain on sales of loans.
For the first six months of 2006, net income totaled $94.3 million or $3.38 per share on a diluted basis, down 18.6% from the $115.8 million or $4.16 per share for the first six months of 2005.
Daniel D. Rosenthal, President and Chief Executive Officer, commented, "As we previously indicated, several months ago we increased the minimum payment or start rate on option ARMs we originate for portfolio to reduce the potential for negative amortization. We also indicated that our future production of option ARMs for portfolio might not offset loan payoffs, as our minimum payment rate was likely to remain higher than most of our competitors. Although we offer other types of adjustable rate loans for portfolio that do not permit negative amortization, there is less consumer demand for these products and, therefore, loan originations for portfolio did indeed fall short of loan payoffs in the second quarter. We will continue to closely monitor trends in the residential housing and lending markets, especially the pricing of our competitors, and we will make pricing adjustments as deemed appropriate and necessary."
rovision for credit losses totaled $6.7 million in the second quarter of 2006, up $6.1 million from a year ago. During the current quarter, California residential real estate markets continued to show signs of slower sales and flattening home values. In addition, the amount of negative amortization associated with option ARM loans continued to increase and may result in certain borrowers reaching their limit of negative amortization permitted under the terms of their loan, thereby resulting in an increase in their minimum monthly loan payment and the potential for higher delinquencies. Although there were virtually no net charge-offs in the current quarter, an increase in the allowance for credit losses was deemed appropriate. The allowance for credit losses was $53 million at June 30, 2006, comprised of $51 million for loan losses and $2 million for unfunded loan commitments which is reported in the category accounts payable and accrued liabilities. That compares to an allowance for credit losses of $36 million at year-end 2005.
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