Regulators Bar Valley Federal S&L; From Issuing Loans
Federal regulators ordered ailing Valley Federal Savings & Loan to stop making new loans and investments while they review its plan to boost capital reserves, the thrift announced Friday.
The orders are so strict that Valley Federal will not even be allowed to make new home loans, which have been the S&L;’s backbone business.
The moderate-sized Van Nuys-based S&L; also said it wrote off $66 million from the value of its assets at the urging of regulators, and it now has a negative net worth of $31 million. That means its liabilities exceed its assets by that amount.
The severe restrictions, imposed by the federal Office of Thrift Supervision on Thursday, are among the toughest placed on any S&L; nationwide since new capital rules went into effect late last year. The restrictions on Valley Federal follow similar ones placed recently on Imperial Savings of San Diego and Santa Barbara Savings & Loan.
Federal regulators, as is their usual practice, would not comment on whether the restrictions are a prelude to a federal takeover of the thrift.
The thrift, one of the state’s 30 largest, won’t be allowed to pay dividends to stockholders or bonuses to officers and directors. But Valley Federal will still be allowed to take deposits of $100,000 or less and pay interest on them. Those deposits remain fully insured; savers with deposits under $100,000 need not worry about losing their money. And the S&L; said it will keep all its branches open during usual business hours and will be allowed to fund loans it agreed to on or before Thursday.
The S&L; said it will ask regulators to ease some of the restrictions, but the action clearly unsettled investors. Valley Federal stock closed at $1.25 per share Friday, down $1.625, in over-the-counter trading. As recently as early 1988, the stock traded at more than $22.
Valley Federal is one of about 800 S&Ls; nationwide that have failed to meet tougher new capital requirements meant to force thrifts to have more of a cushion against possible losses.
Valley Federal President and Chief Executive Dan E. Nelms predicted that the thrift will eventually meet capital requirements with “no accounting gimmickry, no restructuring, no big writeoffs.”
But with $3.1 billion in total assets, Valley Federal said it had a “tangible” capital deficit of about $43 million. New guidelines require a thrift of Valley Federal’s size to have about $46.5 million in tangible capital. Thus, Valley Federal will have to raise nearly $90 million in capital to come into compliance with current standards.
In general, a thrift’s capital is equal to its assets minus its liabilities. Tangible capital is a more conservative measure that excludes some kinds of non-cash assets.
Unlike some beleaguered savings and loans that made highly speculative real estate investments or bought risky junk bonds, troubles at the Van Nuys thrift stem from a subsidiary that made loans on mobile homes.
The subsidiary, All Valley Acceptance Co. (AVAC), made many of its loans in states such as Colorado and Texas that were hit hard by recent economic downturns. AVAC suffered from higher than expected prepayments and defaults on the loans, cutting severely into the unit’s profits.
But AVAC had counted anticipated profits from the loans--most of which it sold to investors--as assets. Thus, each time Valley Federal has revised its income projections for AVAC, it has had to write off more assets.
Most of the $66 million in charges announced Friday were from such writeoffs. The thrift said regulators urged it to take the charges. Last November, Valley Federal announced another big pretax charge of $89.9 million, much of it due to AVAC.
After the most recent charges, Valley Federal said it had reduced to zero the $30 million in assets it once booked in anticipation of profits from mobile home loans it sold to investors.
The thrift also reduced the value of the mobile home loans it still owns by $27 million. Valley Federal wrote off another $9 million in assets related to real estate loans that it sold to investors.
Nelms said the S&L; can climb out of its capital deficit by selling some branches that aren’t in its core territory--the San Fernando Valley--and by bolstering capital with what he predicted would be record profits in 1990.
And analyst Dan B. Williams of Sutro & Co. in San Francisco said Valley Federal’s main business, excluding AVAC, is still healthy.
But the restrictions could cause a problem, because Valley Federal’s current plan for meeting capital requirements essentially calls for reaping record profits in 1990. Nelms said, however, that the ban on new loans and investments could dampen profits.
