Downey S&L; Planning Conversion to Federal Charter : Finance: Corporate restructuring will be completed early next year by last major thrift still under state authority.

Downey Savings & Loan, the last major thrift still operating under California authority, said Thursday it will create a holding company and convert its operations to a federal charter.

Downey, with $3.9 billion in loans and other assets, expects to complete its new corporate structure by early next year, issuing shareholders stock in a new holding company called Downey Financial Corp.

The charter conversion will leave only 11 thrifts still holding on to state charters. The California Department of Savings and Loan was a bustling office in the mid-1980s and was responsible for supervising and auditing more than 150 of the 219 S&Ls; then based in the state. But the thrift industry’s financial debacle of the late ‘80s--mainly a result of relaxed investment laws, insider fraud and lax supervision--led to strict federal regulations that overrode most state laws, and the agency has now shrunk to just three full-time employees.

“It just makes sense to convert to a federal charter,” said Stephen W. Prough, Downey’s president. To keep a state charter while adhering to federal rules was too costly, he said. “Every time we file an application and pay a fee, we have to do it twice, once with federal regulators and once with the state.”

The conversion and the creation of a holding company will also simplify entering new businesses, acquiring other thrifts and buying branches in other states. Downey said it has no acquisitions planned.

Last year, directors put the thrift up for sale but decided in November to take it off the market and instead boost its growth both internally and through purchases of branches and smaller thrifts. Since December, it has increased its assets by 11%, mainly by making more loans.

As a holding company, Downey Financial could also repurchase its own stock, a strategy that companies use routinely to increase dividends and boost share prices. Though industry analysts speculated that Downey might launch a buy-back plan, Thomas Prince, Downey’s chief financial officer, said executives have not proposed any such action.

For the first six months of this year, Downey’s earnings of $12.2 million were well below income of $31.7 million for the same period of 1993. Prince said the comparison is misleading, though, because a one-time accounting change in 1993 gave the S&L; a benefit that amounted to nearly the entire difference in profits between the two periods.

In Thursday’s trading on the New York Stock Exchange, Downey’s stock closed at $20.25 a share, up 25 cents.