Downey Savings Takes Profits a Quarter at a Time : Thrift: Newport Beach S&L; nets $13.2 million to start year, nearly equaling 1989 total. New CEO says officers are ‘pleased with the results’ and analysts expect continued strong gains.

Downey Savings & Loan, stashing away capital for a possible future conversion to a bank, posted net income of $13.2 million for the first quarter, nearly reaching its earnings for all of last year.

The Newport Beach-based thrift’s earnings were lower than the $21 million recorded in the corresponding period last year, but half of that quarter’s amount came from accounting changes.

The first-quarter profit marks a turnaround from losses in the second half of 1989, including a $9.4-million fourth-quarter loss, that dropped Downey’s annual earnings to $13.6 million.

“We’re pleased with the results,” said David L. Boyles, Downey’s recently named chief operating officer. “The first quarter came out very much how we thought it would.”

Industry analysts are predicting that the sale of Downey’s valuable real estate holdings this year should push 1990 earnings to as much as $100 million. The thrift has nearly $95 million in tax credits it must use this year or lose. More than $12 million of the thrift’s first-quarter earnings came from gains on its sale of properties.

What is driving Downey, though, isn’t its real estate sales, but its basic savings and loan operations, said James F. Wilson, an industry analyst with Montgomery Securities in San Francisco.

Operating earnings--excluding real estate sales and other nonrecurring gains or losses--increased roughly 40% to about $10.5 million for the first quarter, Wilson estimated.

“They’re simply doing well in the S&L; business,” he said. Downey’s profit margin on its loans has nearly doubled from the end of June, 1989, he said.

Downey has earned a solid reputation for building neighborhood shopping centers throughout California and in Arizona. Only a few years ago, it owned more than 90 centers and 55 other real estate projects. But a new federal law requires all thrifts to sell their real estate holdings by the end of 1994.

During the first quarter, which ended March 31, Downey sold or put into escrow 11 projects worth $149.9 million. And more properties are being added regularly to that category, said A.J. Morsillo, the S&L;’s controller.

Campbell Chaney, an analyst for Sutro & Co. in San Francisco, had expected Downey to post higher earnings. But Chaney said the timing of the real estate sales may simply be lagging. He said he expects Downey’s profits to rise in the next three quarters.

Downey’s real estate and securities portfolios took a major hit in the last quarter of 1989 when changes in federal law forced the thrift to write down the value of those assets.

Some of those problems continued through the first quarter as Downey socked away $5 million in reserves for writedowns on its mortgage-backed securities, which are bonds whose value fell during a rising interest rate market.

Downey’s deposits and assets fell during the quarter, mainly due to the results of a former subsidiary, Butterfield Savings & Loan in Santa Ana. Butterfield was seized by regulators in August, 1985, and Downey purchased it from regulators in September, 1988, acquiring $240 million in tax credits in the deal.

Downey then started dropping Butterfield’s interest rates on deposits, which led many Butterfield customers to take their money elsewhere. About $126 million in original Butterfield deposits were pulled out of Downey during the first quarter, giving the S&L; a net decline in deposits of $72.7 million to $3.4 billion.

Mainly as a result of the continuing drain in Butterfield deposits over the last year, Downey’s assets fell to $4 billion at the end of March from $4.2 billion a year earlier.

Downey already exceeds the capital requirements imposed by the new federal law and is trying to build its capital even higher in a bid to convert into a bank, though most industry analysts say little would be accomplished by that move because banks and S&Ls; are nearly identical now.

Boyles, a former Bank of America executive, was hired recently to increase Downey’s commercial banking activities and run the savings and loan operations while other executives concentrate on selling the thrift’s real estate.

DOWNEY SAVINGS AND LOAN’S PERFORMANCE

Here are revenue and net income and loss figures of Downey Savings and Loan during the past nine quarters.

Revenues (in millions of dollars): $101.4. Net Income and Loss (in millions of dollars): $13.2.