Downey Seeking OK to Absorb Butterfield

A year after rescuing Butterfield Savings & Loan and operating it as a subsidiary, Downey Savings & Loan wants to merge Butterfield’s operations into its own.

Downey is asking federal and state regulators to approve the consolidation, which would allow it to avoid costly duplication of services and fees. The move would also allow Downey to use tax benefits Butterfield holds as a result of four years of massive losses before regulators sold it in September, 1988.

“A consolidation eliminates a tremendous amount of dual work--accounting, examination fees and so forth,” said Gerald H. McQuarrie, Downey’s chief executive. “We’ve got to keep operating expenses down.”

McQuarrie said he hopes regulators will approve the merger by the end of the year.

Once the merger is approved, Downey also would consider moving Butterfield’s Santa Ana headquarters into Downey’s Costa Mesa branch across from South Coast Plaza, he said. And Downey also plans to sell Butterfield’s only other branch, which is in Bakersfield, unless Downey is able to buy additional branches in California’s central valley.

Downey, based in Newport Beach, has 47 branches, all of which are in Southern California and the San Jose area. It has no branches in the central part of the state except for Butterfield’s branch, and McQuarrie said it doesn’t make financial sense to keep a lone branch there.

In the last year, he said, Butterfield’s operation has been reduced substantially as Downey executives have worked to sell Butterfield’s bad assets and other unwanted operations. Butterfield’s Brea facility was shut down after its auto loan and credit card businesses were sold earlier this year, McQuarrie said. In the process, Butterfield cut its staff to about 50 employees from 140 when Downey took over.

McQuarrie said he plans to keep Butterfield’s good real estate assets and the successful money desk operation, which solicits large certificates of deposit nationwide. Deposits, however, aren’t rolling in quite so fast, he said, since Downey has been reducing the above-market interest rates that Butterfield had been offering before the sale.

The consolidation will also allow Downey, with $3.8 billion in assets and $26.8 million in net income for the first six months, to use $216 million in tax-loss carry forwards that Butterfield accumulated in its money-losing days.

Those benefits can be used only for a limited period and only when an S&L earns money. The higher the profits, the more an S&L can use the benefits. Only Butterfield can use the benefits now, and close to half must be used in the next year or lost. With $6.1 million in profits in the first six months of 1989 and $657.5 million in assets, Butterfield can’t take advantage of those benefits as well as a consolidated Downey could.

In 1985, regulators had declared Butterfield insolvent and seized it. They continued to operate it as losses mounted until they worked out a deal to provide Downey with $281.1 million in federal assistance to take over Butterfield. Downey put $40 million in cash into its subsidiary as new capital.