Downey Financial Corp. plans to file for bankruptcy this week after its savings and loan was seized by federal regulators on Friday.
The Newport Beach-based parent company said it plans to file for Chapter 7 bankruptcy, which usually leads to liquidation, by Wednesday.
On Friday, federal regulators shut down struggling Downey Savings and shifted its deposits to Minneapolis-based U.S. Bancorp’s U.S. Bank.
Downey had been the largest savings and loan based in the county with assets of $12.8 billion and deposits of $9.7 billion as of Sept. 30.
The thrift operator struggled for months with a rise in bad loans and increased costs related to homes it’s taken over.
Downey branches are open as usual as they transition to U.S. Bank under a government-backed acquisition.
The thrift has 34 Orange County branches and about 145 overall.
Besides a commercial real estate investment arm, Downey Savings made up the bulk of Downey Financial.
The Downey takeover had been expected for weeks.
Earlier this month, Downey warned that it needed to raise money or risk a government takeover.
Downey’s hopes faded as the prospect of it getting a government investment slimmed.
In October, the Treasury Department took a stake in Westminster-based Saigon National Bank,a small, healthy bank,but bypassed Downey.
That led some observers to speculate the Treasury’s rescue program would skip Downey as the government focuses on funding stable banks that in turn would loan to businesses.
For the third quarter, Downey saw several indicators worsen.
The thrift operator reported a widened $81.1 million loss and a 60% rise to $130.3 million in the amount of money it sets aside for bad loans.
Operating expenses rose 64% to $102.7 million as costs from Downey’s ownership of foreclosed homes grew. The company also paid more in deposit insurance premiums and professional fees and consulting fees.
Downey’s net interest income, the equivalent of revenue for the thrift, fell 22% to $76 million.
The company sold $65.2 million worth of real estate in the quarter as part of its efforts to raise cash.
The company’s core capital ratio, a measure of financial health for banks and thrifts, was 7.48% at the end of the quarter, down from 7.5% at the end of June, despite a $69 million cash infusion from the thrift’s parent company and a subsidiary.
Regulators like to see a core capital ratio of at least 5%.
Downey’s assets were $12.8 billion at the end of the quarter, down 11% from a year ago.
Maurice “Mac” McAlister cofounded Downey in 1957 with the late Gerald H. McQuarrie.
Downey got its start lending to returning soldiers looking to buy homes after the wars. The thrift also lent for shopping centers and other commercial real estate buildings.
McAlister ruled Downey with a firm hand for much of its existence, shuffling through chief executives.
The Bullhead City, Ariz., resident stepped down as chairman in July.
McAlister took a tough line with appraisers, mortgage brokers and others as he tried to focus on good loans for Downey, according to a recent Forbes article.
The thrift’s undoing proved to be a decision to allow option adjustable rate mortgages, which offered low interest rates up front and then rose a few years later.
The loans also allowed borrowers to make minimum, credit card style payments, which caused the size of loans to ballon.
