James W. Lokey knew he was going to be under the gun when he became chief executive officer of Downey Financial Corp.
In early 1997, the career commercial banker became the fifth CEO hired in six years by Maurice L. McAlister, the Southern California thrift's chairman.
But after nearly two years on the job, Mr. Lokey is bullish on his future. He said he assumes Mr. McAlister, 73, "is happy with the way things are going. I'm still here."
By cautiously moving to create a less traditional thrift, Mr. Lokey, a 23-year veteran of First Interstate Bancorp, has helped turn $5.9 billion- asset Downey into one of the strongest-performing financial institutions in the state.
It is one of the few thrifts "that never lost money in a single year throughout the entire California recession," said Campbell K. Chaney, an analyst at Sandler O'Neill & Partners.
Downey earned $12.8 million in the third quarter, a 21% gain from a year earlier.
Return on assets was 0.87%, compared with 0.74% in the third quarter of 1997, and return on equity rose to 11.01% from 10.31%.
Rather than expanding through acquisitions-its last purchase was made a decade ago-Downey has opted for strategic alliances. In July, for example, it created a partnership with First American Trust Co. to offer trust services to its customers.
"We have none of the infrastructure costs in providing this, but we'll share in the revenues," Mr. Lokey said in a recent interview. "It's all on First American's dime."
The thrift has also expanded via supermarket branches. It has opened 28 such branches and put 50 automated teller machines in Hughes Family Markets since it struck a deal with the grocery chain in March 1996.
In contrast to Wells Fargo & Co., the biggest supermarket branch operator in the state, the thrift's strategy is not to replace full-service offices with cheaper supermarket branches. Rather, the in-store branches are used to fill in gaps in Downey's traditional-branch network, Mr. Lokey said.
"We are trying to attract more checking accounts to bring our cost of funds down, and to do that, we need to offer more and more convenience," he said.
Like many thrifts, Downey has tried to change its product mix. In the past several years, it has expanded into consumer lending, personal lines of credit, home equity loans, and indirect auto loans, Mr. Lokey said.
Downey is even dabbling in commercial lending. "We are finding it a very hard market to crack, so we are not putting a lot of infrastructure or expense in it," Mr. Lokey said.
The company has not neglected core businesses either, originating more than $962 million of single-family mortgages in the third quarter.
That compares with $464 million in the third quarter of 1997.
"Our lending officers are working overtime," Mr. Lokey said.
"We matched our runoff with new originations of adjustable mortgages and managed to avoid shrinking our assets."
The financial industry consolidation in California in the past couple of years also has been a boon, Mr. Lokey said.
As a result, Downey has become the largest thrift with headquarters in Southern California and the third-largest in the state, after Golden State Bancorp and Golden West Financial Corp.
"Customers now have far less to choose from," Mr. Lokey said, "and we'll be a very good alternative to someone who doesn't want to be a part of a big bank."
The thrift is planning a direct-mail marketing campaign to reach neighborhoods that have branches of Great Western Financial Corp. and H.F. Ahmanson & Co., which are slated to close in the wake of the two companies' acquisition by Seattle-based Washington Mutual Inc.
Analysts said Downey is attractive enough to be eyed by other acquisition-minded thrifts. However, since it is performing well and Mr. McAlister owns roughly 20% of its stock, the company seems unlikely to be sold anytime soon.
"McAlister feels he has one of the best thrifts around, so why would he want to trade it for Wamu's, or CalFed's, or someone else's paper?" asked Michael Abrahams, an analyst at Sutro & Co. in San Francisco.