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SOUTHERN CALIFORNIA ENTERPRISE : Downey but Not Out : Newport Beach-Based Thrift Bounces Back From Debacle of '80s


NEWPORT BEACH — Downey Savings & Loan was a well-run, unconventional thrift that earned a good chunk of money by developing and leasing neighborhood shopping centers for more than 30 years.

In the tumultuous 1980s, though, numerous thrift executives with less expertise--and, often, fewer scruples--bankrupted hundreds of savings and loans, prompting Congress to enact investment laws so strict that the industry's eventual demise seemed certain.

Downey's game plan was ruined, but the Newport Beach-based financial institution has since transformed itself, going to great lengths to prove that it was not ready for the graveyard.

"And it did it profitably," maintaining its strong financial health and continuing to pay quarterly dividends, notes industry analyst Campbell K. Chaney of Rodman & Renshaw brokerage in San Francisco.

Like many survivors of the industry debacle, Downey was a bystander to the carnage wreaked by high-flying, free-spending S&Ls. It was a conservatively run organization that had to sell most of its solid money-making real estate operations because of congressional mandates passed in 1989 after so many recklessly operated thrifts failed.

Over five years, Downey sold 85% of its shopping centers and apartment complexes during Southern California's worst recession since the 1930s, reducing its property holdings from $370 million to $55.7 million at the end of December.

Although it made the transition, the cost has been steep. Downey today is a far more conventional financial institution whose long-term future is now as uncertain as the industry in which it operates.

Downey's changeover reflects both how healthy thrifts have adapted to the new regulatory environment and how they are benefiting from the slow but steady recovery of the Southern California economy.

For four years, Downey seemed to do little as it tested several heirs-apparent to its aging co-founders and sold most of its real estate holdings. Downey seemed ready for the auction block, not for the competitive mortgage market.

Last year, however, the thrift found its new leader in veteran thrift executive Stephen W. Prough. It then used much of its extra cash to raise deposits and fund $1.9 billion in mortgage loans, nearly twice the amount loaned in the previous year, and to spur its growth 34%. By the end of December, it was the state's 12th-largest S&L with $4.7 billion in loans, securities and other assets.

Now, the thrift and its newly formed holding company, Downey Financial Corp., will grow at a much slower pace as it rolls out new programs to sell annuities and to provide car loans through dealers and other auto brokers.

"The potential for Downey is absolutely excellent," says co-founder Maurice L. McAlister, its 69-year-old chairman. "We have no fear at all of competing with the larger institutions. We can make decisions faster, and we can compete on both the loan and the deposit sides."


Downey's resiliency aside, analysts believe that savings and loans will one day simply be absorbed into the commercial banking industry--one result of the 1980s bailout that is expected to cost U.S. taxpayers more than $500 billion over 30 years.

The reason, says analyst Chaney, is that the key indicators of profitability among S&Ls are down from 20 years ago and aren't likely to rise much again, according to a study that his brokerage is wrapping up. The study argues that S&Ls should sell out.

"Everybody following the thrift industry agrees that the industry is in decline," he said. "That's not to say that all will fail or go out of business; that won't happen. But they won't attract shareholder capital, and that will inhibit growth."

The industry is falling apart, he said, mainly because federal regulations have all but strangled operations. The latest affront is the Federal Deposit Insurance Corp.'s decision to reduce premiums that commercial banks pay for insuring deposits to 4 cents for every $100 in accounts while continuing to require that S&Ls pay 23 cents for every $100.

"With $3 billion in deposits, a thrift would pay $6.9 million a year in deposit insurance premiums, while a bank would pay only $1.2 million," Chaney said. "It all leads us to the consolidation argument. Though thrifts can survive, they're not going to make enough money to attract shareholders."

Regulations now require banks and thrifts to demand such detailed documentation from borrowers that business owners and home buyers are going elsewhere for loans, analysts said. Non-regulated companies such as General Motors Acceptance Corp., for instance, which was created to finance car loans, now offer mortgages and other consumer loans with many fewer documents demanded from borrowers.

"When the smoke clears in a couple of decades, the only things left standing will be large super-regional banks and small community banks, which will exist because they have the loyalty of their local communities," said a former top executive at Downey.

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