Valley Federal Seeks More Time to Boost Capital in a Bid to Save Itself
Scott A. Braly’s problems are pretty clear.
The chief executive of Valley Federal Savings & Loan Assn. in Van Nuys since April, Braly is sitting at the helm of a profitable but technically insolvent thrift that must somehow come up with about $166 million in additional capital before June 30, or risk a government takeover.
The only way to find that much capital would be for Valley Federal to be bought by a bank or S&L; with deep pockets. But that may be a contradiction in terms today, when many institutions are scrambling to shore up their own problems. “We’re not going to be acquired,” Braly said simply. “There’s no source of capital.”
So Valley Federal’s chief executive is doing the only thing he can: asking the government for more time. Specifically, Valley Federal wants until the end of 1992 to meet the federal government’s capital standards.
No one knows whether regulators will agree. But Bert Ely, an Alexandria, Va.-based banking and S&L; analyst, said that--given the choice between a costly seizure now and giving Valley Federal more time to boost capital--regulators may let Valley Federal have the extension. “What else can they do?”
Lately, Valley Federal’s results have been fairly strong, mainly because since early last year it has made money on its remaining business of collecting deposits and making home loans. The thrift had a net income of $25.7 million in 1990, compared to a hefty loss of $137.7 million in 1989.
As part of Valley Federal’s plan to satisfy government regulators, it has been shrinking the size of its assets. For every dollar of assets, a thrift must have a certain amount of capital as a cushion against losses. Valley Federal has shrunk about 12% to $2.69 billion in assets on Dec. 31, from $3.04 billion a year ago.
There are several federal capital standards, one of which requires a savings and loan to have more capital if it has assets that the government considers risky. By that measure, Valley Federal has now narrowed its capital shortfall from $219 million, as of Dec. 31, 1989, to $166 million on Dec. 31, 1990.
But about a year ago the thrift looked as if it could not escape government seizure for long. After chalking up a large loss for 1989, mainly because of problems with its mobile home lending business, Valley Federal had been slapped with a “lock-down” letter from the federal government, severely restricting its operations in the wake of the huge 1989 loss. A ban on making any new loans was so severe that Valley Federal wasn’t even allowed to offer overdraft protection on checking accounts.
Other California institutions that were similarly restricted--like Mercury Savings, Santa Barbara Savings, and Imperial Savings--were all soon seized. But unlike those S&Ls;, Valley Federal last spring reached a deal with the government that allowed it to keep operating and gave it until June 30, 1991, to meet all federal capital requirements.
One factor that may have helped convince top officials of the federal Office of Thrift Supervision to accept the plan was “seeing the company make some management changes,” Braly said. Indeed, Braly’s predecessor, Dan E. Nelms, has maintained that the OTS actually “requested” his resignation, according to Securities and Exchange Commission documents. But Valley Federal disputes the claim.
Braly, a 37-year-old former accountant with Touche Ross & Co., was hired by Valley Federal in June, 1989, as chief financial officer, from Bel-Air Savings, where he’d held the same position. He became Valley Federal’s chief executive last year. Braly talks bluntly about his plans for the thrift: “We’re trying to buy as much time as we can for ourselves.”
Valley Federal’s problems started with mobile home loans, which Braly now calls “our own junk bonds.” The mobile home loans earned generally higher interest rates than ordinary single-family house mortgages, but they also turned out to be far more risky.
From 1983 through 1988, Valley Federal’s mobile home loan subsidiary made $1 billion of the loans. But the loans suffered worse-than-expected defaults and repossessions, so Valley Federal was forced in late 1989 and early 1990 to write down the value of its mobile home loan assets by a total of $127 million. In addition to those writeoffs, Valley Federal also added $24.4 million to reserves to cover possible real estate loan losses.
It was those writedowns that wiped out Valley Federal’s capital and put it on the OTS’s critical list.
But Braly and other Valley Federal executives managed to keep the thrift out of government hands by convincing the OTS that their plan to make money and bolster Valley Federal’s capital was workable.
Early in 1990, even before the agreement, Valley Federal sold nine branches and then later, it closed down three others, reducing its branches from 45 to 33.
Last spring, Braly finished shutting down Valley Federal’s mobile home lending unit--called All Valley Acceptance Co. (AVAC)--which had already stopped making loans in 1988. Valley Federal paid Green Tree Acceptance Inc., a mobile home lender in Minnesota, to service both the loans Valley Federal still owned and the others it had been administering for other investors.
Between shutting down AVAC, reducing its branch network and laying off other employees, Valley Federal reduced its payroll from just over 700 a year ago to about 430 recently. Braly said that helped the thrift reduce its operating costs from about $63 million in 1989 to about $40 million in 1990.
Such cuts are never painless. Angry about the way the cuts were being administered, the manager of one branch in Fresno fired off a memo to Braly last October announcing that he and his four fellow branch workers were resigning.
Another big problem Valley Federal has tried to deal with over the last year is the mobile home loan portfolio itself.
To do that, Valley Federal induced some investors who had bought the loans to stop holding the S&L; responsible for potential losses on the loans--offering them, in return, more of the income stream from the loans as an incentive. Meanwhile, borrowers making principle payments on the loans reduced the size of the portfolio too.
In addition, Valley Federal sold off about $68 million, or 60%, of the $113 million in mobile home loans that it owned outright.
There’s still more work to be done. Braly said he plans to sell off another dozen branches this year--a difficult task, he admitted, since widespread problems in the financial industry make it “not an ideal time” for the sales.
One problem that has apparently not hit Valley Federal as badly as other banks and S&Ls; is the souring of the commercial real estate market. The S&L; has about $550 million in such loans and another $250 million in loans on apartment buildings. But Braly said the S&L;’s nonperforming assets (a measure of how many loans have gone bad or are in danger of going bad) haven’t risen much since a year ago.
At the end of September, Valley Federal’s reserves to cover potential loan losses totaled $31.7 million, or about 53% of its nonperforming loans--a reserve level that industry analyst James M. Marks, of SNL Securities in Charlottesville, Va., called “pretty good.” Braly said he was “comfortable” with the reserves.
Perhaps Braly’s biggest task will be simply convincing the OTS to accept Valley Federal’s latest inch-thick capital boosting plan and give the institution more time. His argument for keeping the S&L; out of government hands will be unflattering but direct: “We are doing a better job than the government could do.”
Valley Federal S&L;’s Capital Shortage When the Van Nuys-based thrift posted a net loss of $137.7 million in 1989, mainly due to problems with its mobile home loans, it cut deeply into the S&L;’s capital, a financial reserve tha1948279393has been technically insolvent, and it has struggled to meet federal captial requirements to stave off government seizure.
All capital requirements essentially require that S&Ls; have a certain amount of capital for every dollar in assets. The graph below shows Valley Federal’s progress in meeting the government661856371*Federal capital requirements increased as of Dec. 31, 1990
