There is good news and bad news in the monthly report released Friday by option ARM specialist Downey Financial Corp. (DSL). First, the good: growth in non-performing assets slowed dramatically during July, to just over 3 percent compared to June. And July's growth in NPAs was the slowest rate this year, by far; the previous low-growth month was May's 5.26 percent. And some surprising news, too: the bank saw its non-performing assets drop as a percentage of total assets for the first time in well over a year; but Downey officials noted this was an artifact of total assets increasing moreso than any decrease in troubled loans. Also good news is that Downey recovered roughly 45 percent of the deposit outflow that hit in late July so far in August; depositors over the FDIC's insured limit had pulled their funds out over concerns that the bank may be nearing failure, after the bank's second-quarter earnings results. "Management believes this occurred as a result of depositor concern over deposit insurance coverage following the failure of a large California financial institution as well as publicity and speculation regarding Downey and the performance of its loan portfolio," the company said in its press statement, although it didn't go far enough as to suggest that such speculation was unwarranted. Now for the not-so-good news: for one, the reversal of deposit outflows apparently came only after the bank aggressively advertised for deposits; the bank said it made a "decision to reinstitute deposit advertising following a long period of not doing so." Downey also went to the well for more FHLB and other borrowings in July, to the tune of an extra $1.3 billion over June's totals. The bank said that the extra borrowing activity was due to the decline in deposits, but remained optimistic about its near-term prospects. "Provided deposit flows remain stable with withdrawals at historic levels, Downey believes its current sources of funds are adequate to meet its obligations while maintaining liquidity at appropriate levels," the company said. And, of course, the NPA picture -- while not horribly worse -- is still worse: HousingWire calculated rough dollar estimates of non-performing assets, which found that total NPAs cross the $2 billion mark in July; more than $1.5 billion of this total was in the form of traditional non-performing assets. The rest was comprised of so-called "troubled debt restructuring" efforts by the bank to put at-risk option ARM borrowers into more traditional loans. The graph below illustrates NPA growth at Downey in estimated real-dollar terms. [caption id="attachment_4595" align="alignright" width="550" caption="Non-performing assets at DSL crossed the $2bn threshold in July. (source: company)"]Non-performing assets at DSL crossed the $2bn threshold in July.[/caption] For more information, visit Disclosure: The author held no positions in DSL when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.