The End of an Era : S & L crisis: New government regulations and management mistakes in the 1980s force the sale of Valley Federal, a key player in the area’s growth.

It took more than 60 years of slow, methodical growth for Valley Federal Savings & Loan Assn. to amass more than $2 billion in assets and become one of the biggest financial institutions in the San Fernando Valley.

Then it took one day to wipe Valley Federal off the face of the earth.

The end came April 10 when the federal government arranged for the S & L’s sale to American Savings Bank, a thrift based in Stockton and Irvine. Overnight, American Savings bought Valley Federal’s 22 branches, immediately sold four of them to other banks, draped its signs over Valley Federal’s at the remaining 18 offices and reopened them as American Savings branches.

Although Valley Federal disappeared in one day, its sale was deemed necessary by regulators because the thrift was battered by losses in the late 1980s, which left the S & L woefully short of the capital it needed under new guidelines set by Congress in 1989. The guidelines were part of the thrift bailout law and were aimed at heading off another S & L fiasco by ensuring that thrifts have enough capital to cushion them against future losses.

Valley Federal, however, was more than $100 million short with no sign of closing the gap soon. So it was sold, just as regulators have arranged the sale of hundreds of other ailing thrifts nationwide.

Regulators figure that the taxpayers’ cost of bailing out Valley Federal--that is, the amount they’ll have to provide to make up the shortfall between the actual value of the S & L’s assets and the cash owed to its depositors--will be about $190 million.

In Valley Federal’s case, there’s plenty of blame for the demise of an institution that had existed since 1925 and, in the last three decades, assisted in the rapid urbanization and growth of the San Fernando Valley.

The federal government, bad management decisions in the mid-1980s and economic downturns all conspired to close Valley Federal’s doors. They are the same factors responsible for the collapse of many other S & Ls around the country.

For most of its existence, Valley Federal was like any other S & L, mainly making home mortgage loans. Formed in Van Nuys by local businessman W. P. Whitsett, who originally called the thrift Provident Building & Loan Assn., Valley Federal’s mortgage lending was stodgy but steady. By the early 1980s, Valley Federal had more than 50 branches across California.

Meanwhile, from 1980 to 1982, Congress deregulated the S & L industry. Suddenly, thrifts were better able to compete for depositors’ cash, and to invest more directly in real estate and start other businesses. It also meant that many S & Ls rushed into new lines of business--as did Valley Federal.

In 1983, Valley Federal had its initial public stock offering and announced that it was forming a new subsidiary: All Valley Acceptance Co., which would lend money to buyers of mobile homes. Valley Federal’s management figured that making loans on mobile homes would be as easy as conventional mortgages.

For a few years, AVAC was a key performer for Valley Federal under supervision of the late Robert E. Gibson, then the S & L’s chairman, and Donald C. Headlund, president and head of AVAC. In 1986, AVAC’s loan originations totaled $263 million, up a sizzling 64% from the prior year. Valley Federal’s overall profit in 1986 totaled $17 million, then a record for the thrift.

But the wheels started coming off. The economies in Texas and Colorado, where many of AVAC’s loans were made, plunged into deep recession, and a growing number of AVAC’s borrowers either defaulted or paid off their loans early, depriving AVAC of future interest income.

Management seemed helpless to stop the bleeding. In 1987, Valley Federal wrote off $11 million in AVAC’s expected profits, and the S & L’s overall profit slipped to $16.5 million.

The next year, Valley Federal lost $3 million under the new leadership of President Dan E. Nelms, who also had to spend much of his time fighting an unwelcome takeover bid from Citadel Holding Corp., the Glendale-based parent of Fidelity Federal Bank. Citadel finally dropped its bid, and soon after Valley Federal suffered a whopping loss of $137.7 million in 1989 as the S & L slashed the value of its remaining AVAC assets.

Worse yet, the rest of the real estate market--particularly in California--and the economy overall was going south, deteriorating Valley Federal’s bread-and-butter residential mortgage business.

And the biggest effect of these problems was that Valley Federal’s capital--essentially its net worth, or its assets minus its liabilities--was eroding just as the Congress was raising the guidelines for thrifts to have more capital on hand.

It was the lethal one-two punch from which Valley Federal never recovered.

The thrift certainly tried. In early 1990L named a young executive, Scott A. Braly, as president and chief executive. He launched a plan to cut costs and sell assets that led Valley Federal back to profitability in 1990, when it earned $25.7 million.

But the profit came too late for Valley Federal’s stockholders. The thrift’s stock, which had traded around $21 a share in early 1988, was worth less than a buck three years later.

And by late 1991, Braly ran out of time. With Valley Federal still $125 million short of its capital needs, the federal government decided to sell it.

The U. S. Office of Thrift Supervision, which is overseeing the industry’s bailout, put Valley Federal on the block and early this month embraced the American Savings deal.

So in the end, Valley Federal is just one more casualty in the S & L fiasco--along with the nation’s taxpayers.

A Valley Federal Chronology

Here are key dates in the history of Valley Federal Savings & Loan Assn., one of the oldest thrifts in the San Fernando Valley. This month, the thrift was sold by order of federal regulators because of Valley Federal’s perilous finances.

* 1925--W. P. Whitsett, a local businessman, starts Provident Building & Loan Assn. in Van Nuys.

* 1954--Opens first branch office in Canoga Park.

* 1974--Shortens name from San Fernando Valley Federal Savings & Loan Assn. to Valley Federal Savings & Loan Assn.

* 1982--Congress deregulates S & L industry. Thrifts can expand beyond traditional home mortgages and invest directly in real estate and start new businesses.

* 1983--Valley Federal, now with 58 branches, makes initial public stock offering. Also creates All Valley Acceptance Co. to finance sales of mobile homes.

* 1987--Wall Street analysts laud AVAC’s potential, say Valley Federal might fetch $50 a share in a takeover.

* 1988--Citadel Holding Corp., parent of Fidelity Federal Savings, offers to buy Valley Federal for $18.50 a share. Bid is rejected.

* 1989--Citadel drops takeover plans as Valley Federal’s problems mount. Valley Federal ends year with loss of $137.7 million because of troubles at AVAC. Congress, meanwhile, passes thrift bailout law, forcing S & Ls to sharply raise capital. Valley Federal warns that it faces receivership if it can’t raise capital quickly.

* 1990--Valley Federal posts $25.7-million profit thanks to cost cutting and assets sales. Branches reduced to 32. But it’s too late. S & L still can’t meet capital requirements. Stock ends year at 87 1/2 cents a share.

* 1991--Federal regulators formally put Valley Federal up for sale.

* 1992--Valley Federal is sold to American Savings Bank.