These are good times on Wall Street for Irvine-based Downey Savings & Loan and other thrifts. But is the party just getting started or winding down?
Shares in the thrift’s parent Downey Financial Corp. have nearly doubled since April to around 38 last week. Analysts point to a stabilization of interest rates, cost-cutting and a still-strong Southern California housing market as drivers of a big second-quarter jump in Downey’s earnings and assets.
“Investors are getting more excited about thrifts in general,” said Paul Miller, an analyst with Friedman, Billings, Ramsey Group Inc. “Washington Mutual Inc. and Golden State Bancorp Inc. have done the same.”
But there are signs of slowing. Downey’s single-family home loans dipped 17% in the second quarter to $1.4 billion. And last week, the thrift’s shares, like those of other savings and loans, pulled back amid a downturn in the broader market. Analysts said the thrift faces challenges keeping up its recent pace.
“The growth of the balance sheet will slow,” said Christopher Buonafede, a research associate with Fox-Pitt Kelton Inc. He expects the company’s asset base to grow about 9% next year, down from the torrid 50% growth rate it saw for the 12 months ended June 30.
“We do not anticipate that our asset growth will continue at the same pace in future periods,” Downey Chief Executive Daniel D. Rosenthal said in the company’s second-quarter earnings announcement.
In the second quarter, Downey recorded a 43% increase in assets to $10.5 billion from a year earlier. The bigger balance sheet has helped the company produce more earnings, analysts said. For the second quarter the company had earnings of $22.5 million, or 80 cents per share, up from 53 cents a share a prior period.
Analysts are expecting strong third-quarter results when Downey reports in coming weeks. The consensus estimate is for Downey to earn 83 cents per share for the quarter, up from 59 cents a year ago.
“Wall Street loves fast earnings-per-share growth and that is what we are seeing,” Miller said.
Downey’s shares have followed the same pattern as Washington Mutual’s, which have gone from 25 in April to around 40 last week. Golden State’s shares have followed a similar pattern.
Downey’s growth in assets was a result of the company taking advantage of consumer demand for loans said Tom Prince, the thrift’s chief financial officer.
“We had the ability to do so and we did it,” Prince said. n
