Beleaguered S&L; Has the Chance to Bail Itself Out : Profits again: Valley Federal may be one of the few down-and-out thrifts with an opportunity to fight its own way out of trouble.

Just a few months ago, Valley Federal Savings & Loan looked like it would soon become just another troubled thrift on the federal dole.

The badly undercapitalized S&L; was hit in January with a tough federal crackdown that barred it from accepting deposits larger than $100,000 and from making any loans. The restrictions put the Van Nuys-based S&L; in a limbo that was widely viewed as a mere stop-off before the government took it over.

Under the restrictions, Valley Federal couldn’t write home mortgages, a business it had curtailed anyway. It couldn’t even offer its checking-account customers overdraft protection because the service is really just a short-term loan. These were bad signs: Not long after the government sent similar “lock-down letters” to Santa Barbara Savings, Imperial Savings and Mercury Savings, all were seized.

But today it seems that Valley Federal may be different--one of the few down-and-out thrifts with the chance to fight its own way out of trouble.

The change has come quickly. After losing $138 million last year, Valley Federal announced in April that its core operations earned $5.7 million in the first quarter of 1990. In fairly short order, the U.S. Office of Thrift Supervision approved Valley Federal’s plan to boost its capital reserves in time to meet a June 30, 1991, deadline. And last week the agency even lifted the onerous operating restrictions that it imposed in January.

Amid all these changes, Valley Federal also appointed a new chief executive, Scott A. Braly, when Dan E. Nelms resigned after holding the post for two years.

The thrift supervision office--which is habitually tight-lipped about its plans--has essentially given Valley Federal a chance to prove it can remain profitable for a year. To meet federal capital standards by June 30, 1991, however, Valley Federal will still have to be taken over by a buyer than can give it millions in additional capital.

The road to such a merger--or any other happy ending for Valley Federal--won’t be smooth.

“Even if a thrift’s capital plan is approved, they’re still in intensive care,” said Bert Ely, a Virginia-based industry analyst.

On June 30, 1991, the thrift, which has about $2.9 billion in assets, will still require $135 million in additional capital to meet the government’s most stringent requirements, even if it uses earnings to reduce the capital gap according to its plan.

Valley Federal also will have to rid itself of problems with its loss-plagued mobile home lending business. And the thrift could still face a problem in finding a buyer. The market for thrifts is now glutted with the most desirable parts of S&Ls; taken over and offered for sale by the Resolution Trust Corp., the federal agency in charge of disposing failed thrifts.

Fortunately for Valley Federal, right now the OTS is busy with thrifts in more immediate danger. “They’ve got their hands full of institutions that are taking big losses,” said Michael Abrahams, an analyst with the securities firm Bateman Eichler, Hill Richards in Los Angeles.

Unlike those institutions, Valley Federal is making money in its core business--on the margin between what it pays on deposits and what it earns on loans.

Valley Federal must keep that up. Braly declined to say what Valley Federal’s target earnings are for the coming year according to its government-approved plan. If Valley Federal misses those targets, he said, the OTS could slap the S&L; with even tighter restrictions than it imposed in January.

The plan still calls for Valley Federal to shrink its assets in order to bring down its capital requirements. But with its restrictions lifted, now the thrift can resume some “moderate” lending. That means Valley Federal can offer services like overdraft protection that could be important to retaining deposit customers and preserving the value of the S&L;’s branch network. Valley Federal could also offer write a small number of mortgages.

And even though its plan calls for Valley Federal to pay back most of its uninsured deposits--those over $100,000--on maturity, the S&L; may now roll over a few, as necessary, to avoid a liquidity crunch.

Although Valley Federal is for sale now, it’s unlikely to find a buyer soon--at least one willing to pay its stockholders a premium for their shares. “It’s very much of a buyer’s market,” Ely said.

For one thing, any acquirer today would have to come up with about $78 million in additional capital on top of any acquisition price, just to meet the least stringent interim federal requirement for capital reserves. (The interim requirement is less strict than the final one Valley Federal must meet by July, 1991.) But if Valley Federal keeps making money and shrinking its assets according to plan, that capital gap should shrink.

Another barrier to a sale now is that buyers have plenty of assets to choose from. The RTC plans to sell off 141 thrifts by the end of June. The agency recently said it’s trying to hurry up the sale of the thrifts now in receivership by cutting them up and marketing the desirable and risk-free parts--mostly deposits--and keeping the risky parts to sell later.

It’s impossible to say whether that situation will be any better a year from now.

While it’s trying to prove that it can remain profitable over the next year, Valley Federal will also have to definitively end the nagging problem that got it into trouble in the first place: its loss-plagued mobile-home loan business, called AVAC.

From 1983 through 1988, AVAC made about $1 billion in mobile-home loans, keeping some of them as assets. The rest it sold to investors, keeping a part of the income stream to itself and agreeing to absorb a small part of any losses on the loans.

But the loans suffered worse-than-expected defaults and repossessions, so Valley Federal last year began getting out of the business by writing down the value of its mobile-home loan assets by $119 million--the main reason Valley Federal suffers from such a large capital deficit.

And earlier this year, Valley Federal agreed to pay a Minnesota-based mobile-home lender, Green Tree Acceptance Inc., to service both the mobile-home loans Valley Federal still owns and those it sold to investors.

But to get rid of its AVAC problem once and for all, Valley Federal must drastically reduce its liability for any future losses from defaults and repossessions under the loans. That’s a complicated task.

First, Valley Federal is working to convince investors who bought pools of the loans totaling about $300 million to stop holding the thrift liable for any potential losses. In exchange, it would offer the investors the right to take more of the loans’ income.

Investors who don’t like that option could essentially resume full responsibility for the loans and have another company service them.

Braly said Valley Federal has already reached or is about to reach such agreements covering a little more than half of the loans it sold to investors.

That still leaves a portfolio of loans that Valley Federal owns outright and plans to sell, without any recourse, to investors. To do that, the thrift is in the process of taking those loans, pooling them and preparing to sell them in pieces as securities, much like bonds that are backed by conventional mortgages.

Even if Valley Federal pulls off such a deal and reduces its mobile-home loan problem to a manageable size--even if it remains profitable for a year--there’s still no guarantee it will find a buyer next year. And without a buyer, it won’t meet the capital standards on June 30, 1991.

In that case, Braly is hoping that the OTS will give Valley Federal even more time to prove itself.