A Tale of 2 S&Ls; Valley Fed, Glenfed Cope With New Rules : Valley Fed: S&L; admits receivership could result if capital levels can’t be raised. Many of its problems have stemmed from mobile home loan losses.
Valley Federal Savings and Loan Assn., an ailing Van Nuys-based thrift, says it is failing to meet new government standards for capital reserves and admits it could ultimately be placed in receivership if it is unable to improve those capital levels.
The admissions don’t mean the S&L; is any more likely to be placed in receivership than 800 or so other institutions nationwide that don’t meet the capital requirements put in effect last Thursday. But the disclosure, made in a quarterly filing with the Securities and Exchange Commission, marked the first time the thrift acknowledged the most dire possibilities that could result from its troubled finances.
Valley Federal President and Chief Executive Dan E. Nelms declined to comment on the filing.
Much of Valley Federal’s business problems have stemmed from recurring losses at its All Valley Acceptance Co. subsidiary (AVAC), which makes loans on mobile homes. And ironically, its attempts to end those losses have taken the biggest bite out of Valley Federal’s capital--which is essentially a thrift’s assets minus its liabilities.
Last month, the thrift took a total of about $90 million in pretax charges against its third-quarter earnings--$62 million of that because of AVAC. The conservative move, designed to write off Valley Federal’s expected profits from mobile home loans, essentially meant the S&L; had to subtract a similar amount from its asset base, because those expected earnings had earlier been booked as assets.
That cut severely into Valley Federal’s capital, because an S&L;’s capital essentially rises and falls with the amount of its assets. And as a result of those and other charges, Valley Federal also reported a net loss of $70.6 million for the third quarter, compared with net income of $132,000 during the same period in 1988.
Valley Federal said in its quarterly SEC filing that it could start mending its problems by selling some branch offices. Such sales could help the S&L; by simultaneously reducing its total assets and raising its cash reserves, which contribute to capital.
But the thrift has a long way to go to meet the tougher new capital requirements that took effect last Thursday. The requirements are designed to give thrifts a bigger cushion against losses and thus avoid a repeat of the government’s current bailout of the industry.
Valley Federal said in its SEC filing that it had about 68 cents in so-called tangible capital--which excludes some non-cash assets that are included in broader capital measures--for every $100 in assets as of Sept. 30, instead of the required $1.50 per $100. Meanwhile, the S&L; said it had $1.28 in so-called risk-based capital--a different measure designed to take account of an S&L;’s riskier assets such as unsecured commercial loans--for every $100 in assets, compared to a requirement of $6.40.
Valley Federal said that because of its capital shortfalls, the thrift must submit a business plan for improving its position to the Office of Thrift Supervision, a federal S&L; regulatory body.
But Valley Federal warned that if it fails to meet the goals of such a plan, or the new capital rules in general, regulators might decide “to place the institution in receivership or take other drastic supervisory or enforcement action.”
Problems at AVAC weren’t apparent before 1987.
Before that time, AVAC was considered a thriving subsidiary of Valley Federal--one whose executives were featured in a cheery photograph in the 1986 annual report, standing at sunset in front of several mobile homes. The report pointed out that AVAC’s loan originations that year increased a whopping 64% to $263 million from $160 million.
The unit’s business seemed like a sure bet. AVAC’s mobile-home loans were mostly in then-booming states such as Texas and Colorado. After making loans, AVAC turned around and sold the loans--bearing a much lower interest rate--to investors, and agreed to continue doing the paper work and handling collections.
The spread between the interest paid by the borrowers and the interest AVAC passed on to the investors who bought the loans paid for Valley Federal’s servicing and contributed to the unit’s earnings. AVAC converted the stream of income it expected from the loans into a principal amount and carried it on its books as an asset.
But AVAC was no sure bet. Economic busts in Colorado and Texas led to much higher-than-expected rates of foreclosures and early payments of loans. That meant that the revenues from the loans diminished, while the division still had to cover loan-processing costs.
In 1987, Valley Federal wrote off $11 million in AVAC’s expected profits. In 1988, AVAC lost another $11.5 million and Valley Federal predicted that “AVAC will incur significant additional losses during 1989.”
Valley Federal was right. Excluding the big $62-million write-off at AVAC in the third quarter, AVAC’s operations lost $14.3 million in the nine months that ended Sept. 30.
Doing away with the AVAC problem hasn’t been easy. In 1987, Valley Federal put the unit on the sales block but found no buyers. And other remedies, such as cutting down on new loans to stem losses, have been a two-edged sword.
AVAC used to take care of repossession problems with the help of new loans. When AVAC repossessed a mobile home because the borrower defaulted, it sold the home to another individual buyer--along with new financing. But to cut down on new loans, AVAC tried selling the repossessed mobile homes to dealers. As a result, AVAC didn’t get as good a price and its losses on each repossession climbed higher than ever.
Valley Federal declined to comment on how successful its cost-cutting efforts at AVAC have been. But the recent SEC filing indicates that the thrift believes it won’t be possible to cut enough to make the unit break even with its current business. The filing said AVAC would try to service other lenders’ mobile-home loans for a fee to make use of what it called the unit’s “existing servicing infrastructure.”
Valley Federal predicted that until such fees start flowing in, “AVAC will generate modest operating losses.”
VALLEY FEDERAL S&L; AT A GLANCE Valley Federal Savings and Loan, based in Van Nuys, recently has been troubled by losses from a subsidiary that makes loans on mobile homes. The savings and loan, founded in 1925, has 846 full-time employees.
Total Assets, as of Dec. 31 (In billions): 1989* $3.2
‘88 $3.5; ’87 $3.3; ’86 $2.7; ’85 $2.5
Net income (loss) In millions: 1989* $(73.0)
‘88 ($3.0); ’87 $16.5; ’86 $17.0; ’85 $10.4
* Assets as of Sept. 30, 1989.
** For nine months ended Sept. 30, 1989.
UNDERSTANDING THE NEW S&L; REGULATIONS
As part of the federal government’s attempt to avoid another disaster in the savings and loan industry, last week regulations took effect forcing S&Ls; to raise their financial reserves as a cushion against future losses from bad loans. The rules require S&Ls; to meet various yardsticks. Listed below are some of the new rules and their key terms:
Capital: Capital is generally counted by adding up an S&L;’s total assets (loans, cash and investments) and subtracting its total liabilities (deposits and other borrowed money). The resulting figure is essentially a thrift’s “net worth.”
Tangible Capital: This is an S&L;’s capital minus its so-called “intangible assets.” One type of intangible asset is “goodwill,” the premium paid for a company above the value of all its individual assets. S&Ls; are now required to have tangible capital equal to 1.5% of total assets.
Core Capital: This is a less stringent standard that allows a thrift to count both tangible capital, plus a certain amount of “supervisory goodwill,” which is goodwill acquired in the purchase of another troubled S&L.; Thrifts are now required to have core capital equal to 3% of total assets.
Risk-based Capital: Just another way of counting capital and assets, this requirement is designed to ensure that S&Ls; carry more capital for its assets that are deemed risky, such as junk bonds or unsecured commercial loans. S&Ls; must now maintain capital equal to 6.4% of risk-based assets.
