(There is much conjecture about the the state of Downey Savings today. In this article I am attempting to identify some of the patterns of language and behavior exhibited by the lenders and their regulators. If anyone out there has some insight into the method to determine the relationship between these and other factors that may affect the decay of a lending institution’s equity, such as portfolio size and strength, rate of loss of equity in assets, etc. please offer up some theories. It would be interesting to build an objective model for determining and tracking the relative health of lending institutions individually, and the industry as a whole. Any smart folks out there to ’splain it to me?)
If looks as if Downey Savings and Loan is definitely under the boot of their “principle regulators” as evidenced by the language found in Section 2 of their current SEC 10-Q. And a comparison with the IMB 10-Q dated almost exactly 2 months to the day prior to the FDIC storming the gates shows it may be that the Feds don’t want to be the target of flack for not getting in there early enough again.
Where IMB merely alludes to the possibility that regulators could impose some restrictions if market conditions and bank portfolios continued to sour, Downey is actually having the restrictions imposed upon them. But Downey’s core capital ratio as of 7.57% June 30th 2008 is (significantly?) greater than Indymac’s 5.74% as reported March 31st 2008, but both are still above the threshhold of 5% that represents the regulatory level to be considered well capitalized. Also, Downey’s total risk based capital ratio was 14.31% as compared to Indmac’s 10.26%, also both falling above the 10% regulatory threshhold.
It certainly seems that the Feds are putting regulatory pressure on Downey where they were not inclined to intervene at Indymac, even when Indymac’s liquidity situation was much more grim than Downey’s is currently. Are we seeing a new and tougher Federal Regulatory presence beginning to emerge? Me thinks I hear the rumblings of a long sleeping giant.
These conclusions are based on my analysis of the SEC 10-Q filings from Indymac Bank as published on May 12, 2008, as well as Indymac’s 8-K published on July 8, 2008 and the SEC 10-Q filings from Downey Savings and Loan as published on August 11, 2008.
Source: Downey S&L 8-11-08 SEC 10-Q
“In light of the current operating environment and Downey’s recent quarterly losses, the Holding Company and the Bank have been working closely with the Bank’s federal banking regulators. In that regard, the OTS, the Bank’s principal regulator, has also imposed the following limitations on the Holding Company and the Bank:”
“The Bank may not pay dividendsto the Holding Company without prior OTS approval, and the Holding Company may not pay dividends without prior non-objection of the OTS”
“The Bank may not increase its assetsduring any quarter in excess of an amount equal to net interest credited on deposit liabilities without prior OTS approval”
“The Holding Company and the Bank must provide prior notice to the OTS regarding any additions or changes to directors or senior executive officers (or changes in the responsibilities of senior executive officers)”
“The Holding Company and the Bank may not pay certain kinds of severance and other forms of compensation without regulatory approval; the Bank may not enter into, renew, extend or revise any contract related to compensation or benefits with any director or senior executive officer without prior regulatory approval”
“The Holding Company may not issue or renew debt without the prior non-objection of the OTS”
“Downey is subject to higher regulatory assessments and FDIC deposit insurance premiums than those prevailing in prior periods”
“The Bank must provide prior notice to the OTS (and not receive any objection) before engaging in transactions with any affiliate or subsidiary”
“DSL recently, in response to steps taken by management to address the situation, the Bank has experienced net deposit inflows. If the Bank’s deposit levels continue to stabilize with withdrawals at historical levels, Downey believes its current sources of funds, including deposits; advances from the FHLB and other borrowings; proceeds from the sale of loans and real estate; payments of loans and payments for and sales of loan servicing; and income from other investments would enable Downey to meet its obligations while maintaining liquidity at appropriate levels. However, if elevated levels of net deposit outflows resume, the Bank’s usual sources of liquidity could become depleted, and the Bank would be required to raise additional capital or enter into new financing arrangements to satisfy its liquidity needs. In the current economic environment, there are no assurances that we would be able to raise additional capital or enter into additional financing arrangements. Management believes that the Holding Company, on a stand-alone basis, currently has adequate liquid assets to meet its current obligations, which are primarily interest payments on $199 million of senior notes. Limitations imposed by the OTS currently prohibit the Bank from providing a dividend to the Holding Company without prior OTS approval, and currently prohibit the Holding Company from paying a dividend (other than the quarterly dividend payable in August 2008) without prior non-objection of the OTS. At June 30, 2008, the Holding Company’s liquid assets, including amounts deposited with the Bank, totaled $53 million, down from $102 million at the end of 2007 due primarily to a $50 million capital contribution to the Bank.”
“At June 30, 2008, Downey Savings and Loan Association, F.A. (the “Bank”), our primary subsidiary, had capital-to-asset ratios of 7.57% for both tangible and core capital, and 14.31% for total risk-based capital’
Source: Indymac Bank May 12, 2008 SEC 10-Q
(Memorandum of Understanding 6-11-08; FDIC takeover 7-11-08)
“In addition, the OTS and the FDIC have broad discretion to impose various restrictions or remedial requirements upon us when they deem it appropriate which may adversely affect our operations Although we are not currently under any such restrictions or subject to any such remedial requirements, such supervisory restrictions may include:“
“Restrictions on the payment of dividends or capital distributions”
“Restrictions on increasing our assets during any quarter in excess of established thresholds”
“Restrictions on adding or changing directors or senior executive officers without giving prior notice to the OTS”
“Prior review by the OTS of all employment contracts or compensation arrangements, including severance payments, to directors and senior executive officers”
“The issuance of debt securities or other incurrence of debt, and payments of any kind in excess of established thresholds, without the prior written approval of the OTS”
“Other possible consequences of classification as an “adequately capitalized” institution include the potential for increases in our borrowing costs and terms from the FHLB and other financial institutions, as well as in our premiums to the Deposit Insurance Fund”
IMB, 2008-07-8 8K Filing: “In light of the current environment and related deterioration of our financial position since last quarter, we have been working closely with our federal banking regulators with respect to the actions that they and we must take to meet our mutual goal of keeping Indymac safe and sound through this crisis period. In that respect, based on information we have provided to our regulators, they have advised us that we are no longer “well capitalized”, which we stated on May 12 was a possible scenario. Our regulators have also asked us to submit to them a new business plan for their review and approval, something on which we have been working with them for some time. We have agreed on the basic elements of the plan, and the regulators have directed us to begin executing on it. An important element of our plan is to improve our capital ratios. Without an external capital raise, the traditional way to improve safety and soundness is to sell assets and shrink the balance sheet, which in normal times generally has the effect of improving capital ratios and bolstering liquidity. Yet in this environment, where either there are no bids for most of IMB’s mortgage loans and securities or the bid/ask spreads are abnormally wide, “fire-selling” assets would actually deplete capital further. As a result, the most realistic and cost-effective way to shrink both our balance sheet and our servicing rights asset (which, as discussed in previous communications, is up against the regulatory cap limit), is to curtail most new loan production. In addition to needing to shrink our assets to improve our capital ratios, we also need to do so to ensure that we maintain prudent operating liquidity. A consequence of falling below well-capitalized is that we are no longer permitted to accept new brokered deposits or renew or roll over existing ones, unless we get a waiver from the FDIC. While we have submitted a waiver application, it is uncertain as to whether such a waiver will be granted.”
Indymac Bancorp, 2008-03-12 8K: “At March 31, 2008, Indymac Bank’s Tier 1 “core” capital ratio was 5.74 percent, our Tier 1 risk-based ratio was 9.00 percent, and our total risk-based capital ratio was 10.26 percent, above the ‘well-capitalized’ regulatory levels of 5.00 percent, 6.00 percent and 10.00 percent, respectively.”
(c) Anthony M. Freed
All Rights Reserved
All Rights Reserved
August 12, 2008 at 9:59 pm |
I enjoyed this article just as much as yesterday’s. Keep up the good work!
August 13, 2008 at 1:34 am |
Your Mortgage or Your Life… appropriate as a “mortgage” is loosely translated as a “death deed”
August 15, 2008 at 10:35 pm |
Thanks for the support and the anecdote you two. I have been so busy trying to tweak the site I have only had time to do some snippets. More indepth stories to follow, perhaps a couple of on going series on certain subjects TBD. Thanks for being some of the first to read and respond!