Feds put restrictions on Downey until it boosts capital

From Times staff writer William Heisel:

Facing a host of new regulatory orders from the federal Office of Thrift Supervision, struggling Downey Financial Corp. said today it had sold some assets and had pulled money out of one of its subsidiaries to build up the cash cushion the OTS wants it to have on hand.

The Newport Beach-based lender, which has been slammed by a surge in mortgage defaults over the last year, said it raised $109 million in fresh capital. But its regulators want it to boost the cushion further by year's end.

Until then, Downey will be limited in how much interest it can pay on deposits, among other restrictions.

Michael Bozarth, Downey's chairman, said in a news release that the lender reached an agreement with the OTS to "aggressively address the challenges Downey has been facing."

The OTS’ directives include a "cease and desist" order that requires the bank to seek regulatory permission before making certain management changes or revising any pay agreements with executives.

To raise capital, Downey said it sold some of its real estate assets to an undisclosed third party for a pretax gain of $68 million. Also, one of the firm’s subsidiaries paid the parent firm a dividend.

The company, with $13 billion in assets, now is considered by the OTS to be "adequately capitalized," a step below "well capitalized," which is the top ranking by the OTS.

The news was announced after the markets had closed. In regular trading, Downey’s stock price jumped 77 cents, or 33%, to $3.10. But the shares plunged to $2.40 in after-hours trading.

Photo: A Downey branch in Costa Mesa. Lori Shepler / Los Angeles Times