U.S. Gives Downey $281 Million in Butterfield Bailout

With about $281 million in federal assistance, Downey Savings & Loan will take over operations today of Butterfield Savings & Loan, one of the biggest insolvent thrifts still in business in California.

Under the agreement approved by the Federal Home Loan Bank Board late Thursday, federal regulators will provide a $238-million promissory note, payable over 10 years, to erase Butterfield’s negative net worth. Regulators estimate it will cost $43 million more to cover loss of capital and to maintain the interest yields on some assets.

Downey, which will provide $40 million in new capital to Butterfield, also would get all the tax benefits from operational losses that Butterfield has accumulated over the past five years.

The deal ends a year of often frustrating negotiations between Downey and federal regulators, and returns Butterfield to solvency with with more than twice the net worth regulators normally require.

Butterfield, headquartered in Santa Ana, will reopen today as a subsidiary of Newport Beach-based Downey, which has $3.2 billion in assets.

While some of Butterfield’s 140 employees are expected to be laid off, Downey plans to keep most of them working in Butterfield’s branches in Santa Ana and Bakersfield and its consumer loan office in Brea, said John Dennis, a Downey spokesman.

“We’ll figure out in the next week or so how many will stay,” Dennis said. Anne Bacon, Butterfield’s president, will remain a month or so to help with the transition, he said.

Downey also will evaluate the need for each office and decide whether to merge one or all into existing Downey operations.

The sale removes Butterfield from the list of insolvent institutions plaguing the bank board and its insurance unit, the Federal Savings and Loan Insurance Corp.

The bank board and FSLIC, which regulate S&Ls;, have sold or liquidated 116 insolvent institutions this year. Still, some 400 of the industry’s nearly 3,100 institutions are insolvent or close to it.

The bank board declared Butterfield insolvent in August, 1985, removed its management and placed it in its management consignment program, retaining Downey to operate it. In January, 1987, FSLIC, as receiver, named Bacon as Butterfield’s president.

At the end of July, Butterfield had $541.3 million in assets and a deficit--assets minus liabilities--of $132.7 million, according to the bank board.

“This has been a grueling thing for negotiators, but it’s an important sale for the FSLIC,” Dennis said. “It shows the progress FSLIC has made in recent months to help cleanse the industry of some” of the more poorly performing thrifts.

Employees at Butterfield’s two branches--Santa Ana and Bakersfield--say they are upbeat about their new owner.

“I’m glad the sale went through, and I’m glad the people here have jobs with Downey,” said Nancy Garner, a senior vice president who expects to leave within a week because her own job as head of marketing and savings has been eliminated.

For the past year, many employees have been buoyed as the deal with Downey seemed ready to close, then disappointed when the deal seemed ready to fall apart.

Even Butterfield’s former operators, ousted by regulators in the 1985 takeover, were pleased with the sale.

“I see it as a positive,” said William Endresen, the former chief executive. “I think Downey sees some substantially undervalued properties as well as the tax benefits. I think it’s favorable for them.”

Under Donald W. Endresen, Butterfield’s president and William’s brother, Butterfield was a fast-growing institution that used new state laws to get involved in investments of all kinds. It bought two fast-food restaurant operations--a Wendy’s hamburger franchise and the Love’s Wood-Pit Barbecue chain. It started a securities operation and toll-free banking to acquire large deposits over the telephone. It also acquired an insurance company.

But the Endresens wanted Downey to be known as a national real estate investment syndicator and wholesale mortgage banker. But much of the property it bought was overvalued, and the S&L; ended up in worse shape, regulators said.

Under Downey and Bacon, Butterfield shed itself of the restaurants, much of the overvalued properties and 10 of its 11 units or divisions. In the process, the number of employees was cut from 1,200 to its present level of about 140.

Still, with a growing deficit and a need for deposits, Butterfield had been pegged for the junk heap by industry consultants.

But Downey, which earned its reputation as one of the best run S&Ls; for its handling of direct real estate investments, figures it can work out the real estate problems. It also hopes to take advantage of the tax benefits that Butterfield has been piling up during five years of losses.