Butterfield: Tale of a Man Who Didn’t Adapt

Monday, Aug. 5, was to have been a day of celebration at Butterfield Equities Corp.

President and co-founder Donald Endresen was about to turn 40 and the corporate staff had planned a party.

They were determined to enjoy the day, even though the diversified financial corporation Endresen had founded with his father, David, and a close family friend nine years earlier was awash in red ink, hounded by regulators and split by an internal debate over the Endresens’ future.

But at 8:45 a.m. the phone in the president’s office rang, bringing an end to any plans for a celebration. While no one at Butterfield knew it then, the call signaled the end of the diverse Endresen empire which ran the gamut from real estate and restaurants to savings and loans and securities.

It was an empire built largely by one man, Donald Endresen, and--as many co-workers and friends now say--was brought down by the same combination of entrepreneurial drive and bullheadedness that enabled it to be built at all.

The call was from the Securities and Exchange Commission’s enforcement chief in Washington. The agency, which serves as a corporate watchdog on behalf of the government and the investment community, had heard that Butterfield Equities was anticipating a huge fourth-quarter loss--a loss that would plunge the $800-million Butterfield Savings and Loan Assn. into a deficit position.

Endresen was told that trading in Butterfield’s stock had been halted and that the company had to issue a public statement that afternoon disclosing its financial status.

For the next four hours, as the party food piled on the polished rosewood table in the directors meeting room grew cold, Butterfield executives worked feverishly to craft a statement that would satisfy the SEC’s demands, meet the approval of the California Department of Savings and Loan and the Federal Home Loan Bank Board and, at the same time, minimize damage to the company’s public image.

But the public image that Butterfield wanted to project--a record of fabulous growth and successes--doesn’t jibe with insiders’ story of how Butterfield grew, and why it died.

That story, pulled together from company documents, interviews with real estate and savings and loan industry professionals, a number of current and former Butterfield insiders, and discussions with Don Endresen, provide a case study of a corporation that grew too big and a manager who couldn’t--or wouldn’t--recognize that the time had come to change or step aside.

Other entreprenuers have realized their own limitations. Lorraine Mecca, the former teacher who built an idea into a $100-million-a-year computer parts distributorship in five years, recently retired as chairman of her company, Micro D. She said she left because the company no longer could benefit--and could even be hurt--by her entrepreneurial style of management; that it was time to turn over the reins to a more structured, business-oriented management team.

Don Endresen, whose entrepreneurial style was largely successful for making Butterfield S&L; one of the fastest-growing and most talked about thrifts in the nation during the early 1980s, could have taken a lesson from Mecca, as even he now admits.

Endresen ‘Not Suited’

In an interview Thursday evening--just 24 hours after the Federal Home Loan Bank Board seized control of Butterfield S&L; and its subsidiaries--Endresen acknowledged that he is “not suited� to be a manager in such a tightly regulated business as the S&L; industry.

“Don knew where we were going and what we were doing, and he knew that he knew best,� said one former Butterfield official. The official, who asked not to be identified, said he likes and admires Endresen, but--as did more than a dozen others interviewed for this article--said Endresen’s need to be in total control of every aspect of the business was a primary factor in Butterfield’s decline.

Randy Grimm, who served as Butterfield S&L;’s marketing director from January, 1983, until May, 1984, agreed. “This is a case history of a good concept with good resources and good people being destroyed by an entrepreneur who was unwilling or unable to put a solid business plan under it all. Many, many people there have told Endresen he needs a plan, but he won’t listen,� Grimm said in an interview just six hours before the bank board took control of Butterfield.

Grimm said that when he was hired to establish a marketing unit for Butterfield Equities, the company still was in Brea, with 75 core management people and 275 line employees spread out among nearly a dozen operating divisions housed in four office buildings.

“I had all the support I needed to hire good people,� Grimm said, “but I saw a real penchant by management to spend heavily. I was always told not to worry about where the money was coming from, that Don had always found the money somewhere.�

That, said an insider still with the company when the S&L; was taken over last week, was one of Butterfield’s major problems.

As a growing young company, mainly involved in real estate syndication, letting Don Endresen find the money worked fine. But when Butterfield acquired its savings and loan and began using depositors’ funds to finance mortgages, huge real estate investments and two restaurant chains, thrift industry regulators--and competitors in the S&L; business--took a dim view of letting him continue with what many saw as a seat-of-the-pants approach to managing a conglomerate.

Lost Some Executives

Regulators and competitors weren’t the only ones at odds with Endresen. A number of executives left the company in 1984 and 1985 because they could not envision Endresen changing and could not see the company surviving without that change, sources said. Even Daniel Kiernan, a co-founder of the company, left in January, reportedly for the same reason.

Endresen decided to push his company into the S&L; business when the Federal Depository Institutions Deregulation Act was passed in 1980--the first signal that the government was serious about lifting many of the controls it had long imposed on financial institutions.

The company, then a real estate syndicator involved primarily in purchasing rundown apartments and refurbishing them, bought a large minority interest in Butterfield S&L; of Temecula and arranged for Don Endresen to become president of the S&L.; His younger brother, William, was named executive vice president and chief executive officer.

A year after Butterfield S&L; opened for business, it purchased Kern Savings & Loan Assn. of Bakersfield, doubling its assets to a total of nearly $100 million.

The assets, according to Don Endresen, were used during 1981 and 1982 to finance loans on expensive residential properties in the coastal areas of Southern California.

The loans, mostly for homes valued at $500,000 or more, were risky because there was little secondary market for such large mortgages at the time, meaning Butterfield would have to hold on to them and take any losses that occurred because of defaults.

“But our policy was based on the belief--my belief and others’--that real estate values in Southern California would never go down,� Endresen said.

They did go down, however, and those that went down first, fastest and furthest were expensive coastal residences.

Writing Off Millions

Endresen said that in 1983 and 1984, at the same time it was aggressively seeking deposits from money brokers and institutions to fuel its purchases of raw land, apartment complexes and restaurants, Butterfield was writing off millions of dollars of losses incurred on its early residential loans. Borrowers were seeing the value of their homes--many of them purchased for speculation--drop 25% or more and were simply walking away from the loans, Endresen said.

The same story has been told by dozens of Southland banking and S&L; officials in recent years, but in most cases the institutions survived by taking their losses, retrenching and rethinking their business plans.

In Butterfield’s case, Endresen decided that the way out lay in growth.

“The only way I could figure we as a management group could solve the problem was to attempt to aggressively make new loans, to dilute the impact of the problem by doing aggressive loan originations,� he said. “We did that in the second half of fiscal 1984, when we had probably $350 million in loan production.

“So we grew dramatically, with about $50 million monthly in loan production to dilute the impact of those losses . . . and because we were growing and had a need for capital, we went out and acquired real estate.�

Butterfield traded preferred stock--$25 million worth of it--for apartments and raw land in Texas, Louisiana, Oregon, Washington and California during late 1983 and 1984. The land, which several insiders say was overvalued at the time of purchase, was pumped into the S&L;, where its appraised value was added to the books to prop up the net worth.

During that period of frantic growth, Endresen occasionally made public statements about the need for further deregulation of the S&L; industry. He was considered a leader of the Young Turk movement in California’s thrift industry and quickly was ostracized by the S&L; establishment.

Criticism From Gray

Endresen also came under fire from Edwin Gray, chairman of the Federal Home Loan Bank board who missed few chances to publicly criticize Butterfield’s decision to invest S&L; assets in a restaurant division that owned the Love’s chain of barbecue restaurants and a large Wendy’s hamburger restaurant franchise territory.

And Butterfield S&L;, because of its growth and its reliance on expensive brokered deposits to fuel that growth, often was cited by regulators as an example of an institution that was misusing deregulation, growing too fast, getting involved in too many high-risk ventures and jeopardizing the S&L; deposit insurance fund in the process.

The end began late in 1984 when the bank board told Butterfield to sign a no-growth agreement. “With the overhead we had,� Endresen said, “we needed to be close to $1 billion in assets to break even. When growth was limited at the $830-million range, we had no chance to get to the break-even point.

“I think in a large sense we were caught in the backlash of deregulation. Financial Corp. of America (which suffered a $7-billion deposit run) was a part of it, and we were part of it. The regulators couldn’t measure and evaluate our business with the criteria they had to measure by.�

Although in several interviews in 1983 and 1984 Endresen was highly critical of the bank board’s growing re-regulation of the S&L; industry, he said Thursday that he now understands what was happening.

He was particularly upset when the national telephone banking system he developed for Butterfield came under fire--the bank board called it a scheme on Wednesday--and said Thursday that he believes history will prove that it was a great innovation in deposit-gathering for the industry.

But, Endresen said, he believes that his ideas were misunderstood--that, “because of my person and temperament, I’m not the right one to implement them at this point in the evolution of the industry.�

The statement Butterfield Equities Corp. finally issued on Monday said that the company had been improving its operating performance but still anticipated a fiscal fourth-quarter loss in excess of $15 million. The loss would pull the S&L;’s net worth down to a negative $10 million or worse, the statement said, adding that Butterfield Equities was doing everything it could to return to profitability, including selling off half of the S&L; branches and most of its vast real estate holdings.

Two days later, at 4 p.m., on Wednesday, agents of the Federal Home Loan Bank Board seized Butterfield S&L;, ousted the board of directors--including Endresen and his father and brother--and established the S&L; as a “new� federal mutual association.

The Endresens were left with Butterfield Equities Corp., a holding company that not only has lost its major asset but has rung up net losses of more than $42 million in the past two years.

On Thursday, Don Endresen said he was not bitter, was in fact “excited about tomorrow� and was planning to leave his Laguna Beach home the next morning for a week of fishing and thinking.

Butterfield Equities Corporation (Fiscasl years ending June 30) Net Income (Loss), in thousands of dollars

1985 ’84 ’83 ’82 ’81 ’80 ($36,200) (6,500) 388 190 112 80

Company’s estimated fiscal year-end results. Butterfield Equities Corporation Assets in millions of dollars

1985 ’84 ’83 ’82 ’81 ’80 $802 677.5 155.5 31.2 9.5 1.3

Company’s estimated fiscal year-end results.