Downey Financial Corp.’s future has been the source of speculation for years. Now the rumor mill is heating up again.
Speculation that the parent of Downey Savings and Loan Association could be in play is partly behind the company’s recent big runup on Wall Street. Downey’s shares surged 20% in April and May, giving it a $2 billion market value. The shares are up 34% for the year.
As a regional thrift, Newport Beach-based Downey could be a nice entree to California for an out-of-state bank, analysts say. But most discount a buyout in the near term.
Besides, it’s been here before. A decade ago, Downey’s name was floated as a possible acquisition when Washington Mutual Inc. bought Irvine-based American Savings Bank. Downey’s stock surged 20% in four weeks back then.
A couple of years later, Downey speculation heated up again as two other big thrifts, Golden State Bancorp and First Nationwide Holdings, combined.
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McAlister in late 1990s: now a healthy 80 |
For its part, Downey,controlled by cofounder and Chairman Maurice L. McAlister and other insiders,shrugs off the talk.
“There have been people to make such conjecture,and put it in the paper,” said Thomas Prince, chief financial officer. “We just stick to what we do, and that’s it.”
A couple of things have fueled the speculation:
n Some Downey directors actively have been buying shares.
n McAlister, who is extremely private, is 80, leading some to wonder if the still-healthy leader might want to finally cash out.
“There have been rumors of him selling from time to time and they’ve always proved false,” said Paul Miller, an analyst with Friedman Billings Ramsey in Arlington, Va. “At some point, Downey will sell, I just don’t know the timing of the sale.”
McAlister has a reputation of running through chief executives as fast as it takes him to fly in from Arizona for board meetings and other visits to Downey’s Back Bay headquarters.
“CEOs come and think it is their company, but they realize that they don’t have any decision-making,” Miller said.
Last summer, current Downey Chief Executive Dan Rosenthal returned to replace Marangal Domingo, who left after seven months on the job. Rosenthal, McAlister’s former son-in-law, couldn’t be reached for comment.
The targeting of Downey by short sellers also has some wondering what’s up at the thrift. They could be betting the shares are due for a fall with a potential shift in the mortgage market, which has fueled Downey’s growth of late.
Shares shorted in Downey doubled from 438,000 in February to 855,000 in May. That’s equal to just more than 4% of the company’s 19.6 million shares outstanding.
Most of Downey’s loans have adjustable rates that could sour as interest rates rise. The risk is that borrowers bail on adjustable-rate loans for fixed ones, or, worse, struggle to make escalating payments.
Downey has taken steps to shore up its business. Late last year, the thrift sold off most of the mortgages it serviced for other lenders for a fee. The service portfolio had swung wildly from quarter to quarter, making Downey’s results unpredictable.
Meanwhile, Down-ey’s own loan originations are up 44% in the past 12 months to $4.25 billion.
But they’re slowing of late. Downey did $1.4 billion in mortgages in April, down 14% from March. Downey kept about a third of the April mortgages on its books and sold $945 million as mortgage-backed securities.
“The loan originations have slowed down in March and April,” said Scott Carmel, an analyst with Moors & Capital Markets in Boston.
Others seem to discount the slowing mortgage business or possible negative fallout from adjustable loans.
Insiders at Downey are buying thousands of shares, as is evidenced by a handful of top officials filing forms with the Securities and Exchange Commission on their stock purchases in recent months.
From Feb. 22 to May 24, two directors, James Hunter and Brent McQuarrie, bought 90,000 shares.
Hunter, an executive vice president of planning and acquisition with Corky McMillin Cos., a San Diego based housing developer, called Downey a “very desirable lender in this environment.”
When asked if he believed Downey was an acquisition target, Hunter responded, “I can’t comment on that. But no unusual information is anticipated.”
In three months, Hunter paid $5 million for 83,124 Downey shares. As of last week, he was up about $1 million on his investment.
“It continues to be a well run organization, and is as good as an investment as any,” Hunter said.
