Downey S&L; Could Become Downey Bank
Downey Savings & Loan’s days as a thrift may be numbered. It could soon become a bank and leave the woes of the thrift industry behind.
The likelihood of a Downey Bank sometime next year was revealed by Maurice L. McAlister, the thrift’s president, and David L. Boyles, the man who was hired Thursday to transform Downey’s operations into more bank-like services.
“We’re seriously looking at whether it makes sense to be an S&L;,” McAlister said. “We could convert in a year or so.”
Boyles has grasped the regulatory woes quickly: “We’re not going to be allowed to do anything more than what national banks can do, and yet we have to maintain 70% (of assets) in mortgage lending,” he said. “Profitability in that is low.”
Boyles, 41, a senior vice president at Bank of America, was named Downey’s executive vice president and chief operating officer. The appointment fills long-vacant positions and sets him up as the S&L;’s next leader.
McAlister, Downey’s co-founder who will soon turn 65, said Boyles will expand the S&L;’s car-loan and home-equity loan products, promote lines of credit for small businesses and oversee the thrift’s traditional mortgage-lending operation.
The S&L; needs Boyles’ commercial banking experience, McAlister said, because a recent federal law is forcing major changes in the beleaguered thrift industry--including healthy S&Ls; such as Downey. The new rules caused Downey to post a $9.4-million loss for the fourth quarter last fall, reducing its annual profit to $13.6 million.
Industry analysts greeted Downey’s hiring of Boyles and its intention to expand into banking operations--even possibly converting to a bank--as a smart move.
“The basic (profit) spreads on mortgages are small and getting smaller,” said Michael Abrahams, an analyst with Bateman Eichler, Hill Richards Inc. brokerage in Los Angeles. “So how do you make money? You go more into consumer loans and other bank activities.”
As a member of Bank of America’s senior management, Boyles had been in charge of consumer markets, consisting of all card services, automobile-dealer banking, consumer credit administration, merchant services and electronic banking.
As the person behind McAlister and Downey’s chief executive and co-founder, Gerald H. McQuarrie, 67, Boyles could become the heir apparent to Downey’s leadership. As one insider put it: “It’s now his to win or lose.”
McAlister said he and McQuarrie hope to spend less time at the helm of Downey but have no immediate plans to retire completely.
Downey’s long-successful business plan was driven by its real estate investments, and regulators allowed the S&L; to hold three times the amount that other thrifts could hold.
But that plan was derailed by the federal law enacted in August to rescue the industry’s deposit insurance system. Among its mandates, the law requires thrifts to rid themselves of all real estate holdings that are backed by insured deposits and to put 70% of its assets in home financing.
With Boyles in place to run daily operations, McAlister and McQuarrie are now free to work on the sale of the thrift’s real estate projects, which numbered 145 a year ago and included 94 neighborhood shopping centers.
The S&L;, regarded as one of the best-run shops in the nation, built an impressive empire with $4 billion in assets on its real estate holdings.
It typically took options on raw land and leased or sold the projects before it committed itself to buying the properties. Then, by undervaluing the properties on its books, the S&L; gained tremendous hidden value. In 1987, for instance, the real estate represented only 7.8% of Downey’s assets but generated 27% of both its total revenue and its operating earnings.
McAlister said he expects to sell the S&L;’s real estate holdings within 18 months. Already, it has sold or has in escrow 11 projects, including six shopping centers, for a total price of $149.9 million. The gain from those sales alone is expected to be about $28 million.
James F. Wilson, an analyst with Montgomery Securities in San Francisco, estimates that the sales will produce gains of at least $100 million.
In one way, the federal law has played into Downey’s hands. From the acquisition of insolvent Butterfield Savings & Loan in Santa Ana 18 months ago, the S&L; has $95 million in tax credits that it must use this year or lose.
Abrahams figures Downey will generate $45 million in pretax income this year. And with the sales of its properties, it should have no trouble producing the rest of the income it needs to use all of its tax credits, according to Campbell Chaney, an analyst with Sutro & Co. brokerage in San Francisco.
In addition, Wilson said, Downey has $105 million more available in tax credits from the Butterfield purchase.
The proceeds also will give Downey a gigantic capital base that will enable it to do just about anything it wants, including converting its charter to a bank charter, Downey executives believe.
The S&L; already exceeds all capital requirements mandated by federal law and regulations, and, as of Wednesday night, it had $148.2 million in excess capital--the amount above what it would be required to have in 1994.
Downey, however, won’t abandon the real estate development business, McAlister said. It plans to use its real estate subsidiary to borrow money--probably through short-term arrangements called commercial paper, which would be issued by banks--to resume its property acquisition.
As long as federally insured deposits are not supporting the ventures, he said, the subsidiary is free to obtain its capital elsewhere and continue operations.
Downey’s stock--it closed at $15.25 a share Thursday, up 25 cents a share from Wednesday’s close--is considered by the analysts to be undervalued and a good buy for investors. The market has been treating all S&Ls; the same, the analysts said, and has not been good to the industry.
