WASHINGTON — The Office of Thrift Supervision issued a cease-and-desist order instructing Downey Financial Corp. to raise capital this year, the $13 billion-asset Newport Beach, Calif., thrift company disclosed Friday.
The regulator ordered Downey to reduce its assets, submit a real estate owned disposition plan, decrease its concentration of payment option adjustable-rate mortgages and stated-income loans, and strengthen its executive management.
The OTS ordered the struggling company to meet and maintain a minimum Tier 1 capital ratio of 7% and a minimum total risk-based capital ratio of 14%.
Downey said it has already made progress in meeting the agency's requirements.
"We have been working closely with our regulators to aggressively address the challenges Downey has been facing in this unprecedented financial environment and are pleased to have reached agreement on a formal plan that addresses the OTS' concerns," Michael Bozarth, Downey's chairman, said in a press release. "The orders reflect a number of measures that Downey has already undertaken and, in some cases, is close to completing. Having reached agreement on these orders, and having successfully raised a significant amount of new capital, Downey has made substantial progress."
Downey also announced the sale of certain real estate assets to a third party (which it did not name) for $110 million. It said it expects to report a net pretax profit of $68 million from the sale. The company said that profit, combined with a dividend from a wholly owned subsidiary, will result in a capital increase of $109 million.
Downey, which has been foundering under the weight of bad mortgages, posted a $219 million second-quarter loss — nearly double what analysts on average had forecast — and its loan-loss provision soared 27-fold from a year earlier, to $259 million.
In a monthly report released in August, Downey, a big originator of ARMs that have soured rapidly this year, said its nonperforming assets soared to 15.08% of $13.4 billion of total assets at July 31. A year earlier it said nonperformers were 1.81% of its $14.7 billion of total assets.
In July, Downey said it had hired Sandler O'Neill Partners LP to advise it as it explored a "broad range of strategic alternatives" — a phrase analysts have said typically means a company is considering either a sale or a capital infusion to help it ride out a downturn. Downey's shares soared 33% Friday, benefiting from strong overall gains among bank stocks. But the stock, at $3.10 a share, is still down 95% from its 52-week high set on Sept. 20.