Downey Financial Corp.'s latest monthly data seems to indicate the Newport Beach, Calif., thrift company is making progress on both the asset and the liability side of the balance sheet.

But analysts say its prospects for recovery remain under a cloud of dangerously high nonperforming assets and uncertainty about its ability to maintain deposit levels.

Last week Downey said it reversed a bruising deposit runoff in July by recouping nearly half its losses in August. And the company, which has been dogged by credit deterioration for months, seemed to show a decline in nonperforming assets from the previous month.

However, analysts say that the appearance of a nonperformer decline is primarily a function of efforts to prop up cash levels in the face of last month's $507 million of deposit losses, which created a different situation than it faced in the past year.

In figures released Friday, Downey said it had wooed back 45% of the lost deposits. However, it also said it borrowed about $1.3 billion in July. The difference between the cash it took in through loans and the money it lost on deposits got tacked on to Downey's asset total, skewing the nonperformer figures.

"Things should be getting better at some point, but when you strip away the misleading asset figures, you didn't see that improvement in July," Gary Gordon, an analyst at Portales Partners LLC, said in an interview Monday.

Downey said its nonperforming assets rose to 15.08% of its $13.38 billion of total assets July 31. A year earlier it said 1.81% of its $14.66 billion of assets were nonperforming.

The company also said that conditions have improved since June, when its nonperformer rate stood at 15.5%. On the surface, that appeared to be positive news, since nonperformers had climbed every month for a year. At first glance, it also would be a sign that California's beleaguered housing market might have hit a bottom.

However, Downey noted that the decline was "due to an increase in total assets" last month.

Bart Narter, an analyst and senior vice president of the banking group at Marsh & McLennan Cos.' Celent, said in an interview Monday that market watchers are hungry for any morsel of information that points to an improvement at weakened lenders such as Downey and, by extension, in the California housing market.

"But even a modest slowing in the growth of nonperformers isn't much. If they're still way up, you can't say the end is necessarily near. You can just say it's not getting a lot worse from here," Mr. Narter said. "I wouldn't break out the party hats just yet and declare that we've hit bottom."

A similar level of skepticism applies to Downey's deposits. The company said new advertising helped it recoup nearly half the deposits it lost last month, when it said customers got spooked by the IndyMac Bancorp Inc. collapse.

"We are encouraged by our positive relationships with our valued depositors, and by the stabilization we have seen in deposit activity this month," Thomas E. Prince, Downey's interim chief executive, said in a press release.

But Downey's report shows that it still is down more than $250 million of deposits from the end of June.

Analysts say all eyes will be on next month's report to see whether the deposit recovery continues — or whether problems linger.

Despite its deposit losses, Downey does not appear in imminent danger of failure, analysts said.

Christopher Whalen, a partner at Lord, Whalen LLC's Institutional Risk Analytics, wrote in a research report this week on his company's Web site that only 10% of Downey's assets are funded by Federal Home Loan bank advances. If conditions do not improve this month, Downey still could borrow more to maintain liquidity, he wrote.

Downey did not return calls Tuesday. Last month it said it had hired Sandler O'Neill & Partners LP to advise it as it explores a "broad range of strategic alternatives" — a phrase many analysts interpreted as an announcement that it is shopping for bidders.

Mr. Whalen wrote that, with a market capitalization of about $61 million, Downey is trading at a mere 6% of its book value. With a retail network of 170 branches and nearly $10 billion of deposits in Southern California, it could attract buyers this year if sold at a steep discount, eliminating concern about future deterioration, he wrote.

"Strategic acquirers are well aware of the value locked up inside both sides of the balance sheet at strong retail banking franchises" like Downey, Mr. Whalen wrote. Its shares, which have dropped about 95% in the past year, are undervalued and have been hurt in part by "hysteria and media hype."

However, Mr. Gordon said Downey's performance bears the bulk of the blame. Last month it 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.

"It's hard to find encouragement in those numbers," he said.

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