Thrift’s Success May Bring Wolf to Door : Valley Federal’s Size and Virtues Could Prove Attractive to Suitors

Valley Federal Savings & Loan Assn. had a great year in 1986. Profits rose sharply, the mortgage business boomed, and the Van Nuys-based company remains by far the San Fernando Valley’s largest financial institution.

Then why is management so nervous?

Because some people say Valley Fed is a likely takeover target. Valley Fed vigorously denies this, but it recently adopted some mild anti-takeover measures, and management is so edgy about the whole subject that president and chief executive Donald C. Headlund won’t sit still for an interview, at least until after tomorrow’s annual meeting.

Wall Streeters such as industry analyst Jerome Baron, at Prudential Bache, call Valley Fed a company “waiting to be taken over.” Alan Bortel, a savings-and-loan analyst at Shearson Lehman, adds, “It’s better for companies of this size to find a good merger partner.”

Investors and analysts cite several factors making Valley Fed attractive to suitors. They say it is a good performer but without enough capital to grow very fast. In a merger with another California institution, analysts said, Valley Federal’s expenses could be cut dramatically by combining back-office operations, closing overlapping branches and cutting overlapping staff.

Besides its strength in the San Fernando Valley, Valley Fed has an extensive branch network in the San Joaquin Valley. Thus, Valley Fed could also be attractive to someone like Citicorp, enabling it to expand rapidly in the lucrative California market.

Any takeover would bring some faster-than-usual changes to a 62-year-old Valley financial institution that has traditionally emphasized stability over sudden shifts. The door to the executive suite, for example, is not exactly revolving: Headlund joined Valley Fed in 1960 and became chief executive last month after the death of Robert E. Gibson, who joined Valley Fed in 1956 and became chief executive in 1977.

Valley Fed’s unusual concentration of ownership makes a takeover more likely. Just four investor groups collectively own nearly 40% of the stock, and, if a suitor turned those four groups into allies, Valley Federal probably would be sold.

“For them to really advance, they have to get much bigger,” said the head of one investor group, who asked not to be named. He added that the only means to that end is for Valley Fed to be acquired.

One of the main Valley Fed investor groups is Hecco Ventures, a partnership headed by theater executive James J. Cotter. Hecco also has a substantial stake in Citadel Holding Corp., parent of Glendale-based Fidelity Federal Savings, and Citadel is rumored to be a potential suitor of Valley Fed.

Other potential suitors, analysts said, include several large California savings institutions, such as Home Federal and Great Western.

Valley Federal’s chief weakness is its in-between size, said Bortel: “I call it a mezzanine-size company. Tall people should go up to the upper floors.”

In other words, with $2.7 billion in assets, Valley Fed is too big for the rapid growth and low overhead associated with much smaller institutions. Yet it remains too small to get bigger institutions’ lower cost of funds and other advantages.

Need for Middle Management

“You don’t have the resources to put on all of the middle management you need to grow,” said Bortel. “In the smallest category, you don’t need a lot of middle management.”

Bigger institutions can raise funds overseas, or more effectively package mortgage securities, analysts said, noting that, in a multibillion-dollar financial institution, even a small difference in the cost of funds can make a big difference.

The same is true for other expenses, said Gerald S. Haims, an industry analyst with Seidler Amdec Securities.

Valley Federal, for example, spent the equivalent of 2.9% of assets on general and administrative expenses last year, slightly more than well-run, bigger institutions spend, Haims said. And, for a $2.7-billion institution, a reduction of even a quarter of a point in this expense ratio would add $6.75 million to pretax income.

A takeover might also mean some management changes. Analysts and investors say the management star is actually Jack R. Allewaert, the executive vice president and treasurer, who is credited with helping Valley Fed exploit falling interest rates while keeping variable-rate loans on the books, thus hedging against higher rates.

Unlike many Valley Fed executives, Allewaert only joined the institution in 1984. He was previously corporate accounting manager for a major engineering firm, and before that served with Deloitte, Haskins & Sells in Brussels.

Thanks in part to lower interest rates, Valley Fed’s performance last year turned around. Earnings were $17 million, up from $10.4 million in 1985 and a loss of $11.5 million in 1984. Valley Fed’s stock, presumably reflecting the company’s performance, the takeover talk and a rising market, rose from $23.75 on Jan. 2 to close at $30.50 Monday.

Apparently to help ward off a takeover, Valley Fed’s directors increased to 20 days (from five) the notice required for shareholder nominations to the board, or for shareholder initiatives at annual meetings.

Bylaws Amended

The board also amended the bylaws so that, when it chooses a director to fill a vacancy, the new director will serve out the three-year term of his predecessor instead of serving until the next annual meeting. And the number of directors was cut by one, to nine.

Haims said Valley Fed’s situation is analogous to the recent acquisition of Guarantee Financial Corp., a $3-billion Fresno-based financial institution, by GlenFed, parent of Glendale Federal. GlenFed’s acquisition of Guarantee was valued at about $205 million, or about 2.4 times Guarantee’s book value, and Valley Fed is more profitable than Guarantee.

There is no agreement on what Valley Federal might sell for in a takeover, but one investor suggested 1.5 times the book value, which would be about $43 a share. Baron suggested about $48 a share. Another analyst suggested a price above $50.

Analysts and investors also see great potential in 4-year-old All Valley Acceptance, a Valley Fed subsidiary that lends money for manufactured housing. Irvine-based All Valley operates nationwide and last year originated $263 million in loans. Loans on manufactured homes generally carry higher interest rates than loans on conventional homes, and thus can be highly profitable.

Baron noted that, even at $50 a share, Valley Fed could be had for less than $150 million. That would be no big deal for a major institution such as Citicorp, which already is established in Northern California with Oakland-based Citicorp Thrift, formerly the troubled Fidelity Savings & Loan.

PROFILE Headquarters: Van Nuys Branches: 52 Current Employees: 1200 Assets: $2.7 billion* Profit: $17 million* Earnings per share: $5.51* Net worth per share: $28.53* Share price on 4/13: $30.50 Return on assets: .65% Return on equity: 20%* *as of Dec. 31