Downey Plummets Ahead of Weekend

Banks and thrifts need to maintain leverage and risk-based capital ratios of 5% and 10% to be considered well-capitalized.

Downey went on to say that 78% of its assets were funded by deposits gathered via its branch network and that none of its deposits were originated through brokers. This had been a major concern for IndyMac, because under Federal Deposit Insurance Corp. regulations, an insured institution can't gather new deposits through brokers or renew brokered CD deposits if the institution is not well-capitalized.

Downey went further to ease concerns about its liquidity, stating it had "unused sources of liquidity in excess of $3.4 billion," including about $2.3 billion in borrowing capacity at the Federal Home Loan Bank of San Francisco.

The press release did not initially seem to carry weight with investors, as Downey's common shares slid to a low of $1.06 on Wednesday, but shares rose with the rally in financials over the next two days, closing at $3.88 Thursday. Despite Friday's swoon, shares were still 87% above levels a week earlier.

Unlike most other institutions, Downey releases monthly updates of some financial information, including lending volume, interest rate spreads, a balance sheet summary and nonperforming assets.

Excluding restructured performing loans required to be reported as nonperforming, all other nonperforming assets (including problem loans and repossessed real estate) comprised 9.77% of total assets as of May 31. Here's a summary for the past six months:

Click here for larger image.

As you can see, Downey's slide in loan quality has been relentless. The interim numbers don't include capital and loan loss reserves. Loan loss reserves covered 35.39% of nonperforming loans as of March 31. More alarmingly, the ratio of problem loans to core capital and reserves was 82.33%.

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