Downey Lags as Servicing Income Falls.(Financial report)

NEWPORT BEACH, CA -- Downey Financial Corp. saw its second-quarter earnings fall 32% from last year's level as lower net interest income, a decline in loan servicing income, an increase in loan-loss provisioning and other factors dragged on the company's performance.

The biggest component of Downey's weakness was a $20.9 million decline in net interest margin, which reflected a lower level of interest earning assets.

The company also increased its loan loss provision by $2.8 million, saw a $2.7 million decline in income from real estate and joint ventures held for investment, and a $1.2 million decline in income from loan servicing.

Daniel Rosenthal, president and CEO, said in the company's earnings release that the "ongoing softening of the housing market" as well as challenging interest rate conditions contributed to declines in the company's loan portfolio and an increase in nonperforming loans.

Downey said that net interest margin totaled $111.5 million in the second quarter of this year as average interest earning assets fell nearly 16%. However, the company's effective interest rate spread of 3.07% remained unchanged.

The company also said it generated less income from prepayment penalties than it had in the year-earlier period. Downey said a lower proportion of loans that prepaid during the quarter did so while prepayment fees were still in effect.

Also, the mix of loans on its balance sheet included more investment securities and hybrid adjustable-rate mortgages, and fewer high-margin option-payment ...