A Phoenix in Phoenix?

PHOENIX - "It is astounding that we are even still here," says Richard J. Lehmann, chairman and chief executive officer of Valley National Corp., recalling the darkest days of Arizona's real estate depression.

Soured loans and repossessed real estate ravaged the Phoenix-based banking company. Losses mounted. The company's stock price last year slid to $8.50 a share, a real comedown from the $50 a share it had commanded five years before.

Valley is now on the rebound. Bad loans have declined for six consecutive quarters. The company earned $32.4 million in the first nine months of the year, exceeding analysts' expectations.

But Valley, with $10.4 billion in assets, is not out of the woods. Its ratio of nonperforming assets lingers at an uncomfortably high 6.10% of loans and foreclosed real estate. Costs remain high. And the company is still working under regulatory fiat to improve its financial condition.

"We have a way to go," admitted Mr. Lehmann. "We have not declared victory."

Indeed, Valley now faces a new set of challenges. It has been the largest banking company in the state for decades. But it will be eclipsed once the Arizona units of BankAmerica Corp. and Security Pacific Corp. are combined.

Takeover rumors continually swirl around the company, pushing its stock up to a recent high of $31 a share. Valley is known to have held talks with Norwest Corp., Minneapolis, and Wells Fargo & Co., San Francisco. Valley's shares were trading Tuesday afternoon at $26.375, unchanged on the day.

Mr. Lehmann sidesteps questions on the prospect of a merger. "The primary focus is to fix the problems," he said. "If the performance is adequate, the future will take care of itself. But a bank like ours cannot stand pat. We have to get bigger and more diversified."

Mr. Lehmann knows firsthand about being bigger and more diversified. The Seattle native joined Valley as No. 2 executive in February 1988 after working two decades at Citicorp. Although his last job at Citi was running the Europe/Middle East/Africa division, he had gained retail banking experience running the company's consumer finance unit, Person-to-Person, from 1977 to 1984.

"He moves aggressively but doesn't cause panic or lack of hope," said Edwin P. Hoffman, president and chief operating officer of Household International Inc., Prospect Heights, Ill., and a former boss of Mr. Lehmann at Citicorp. "He thinks things through carefully, which is important in a troubled situation."

Exploiting BankAmerica Deal

Mr. Lehmann has still got a lot of thinking to do about how to face down the new competition and fix Valley's remaining problems.

Valley executives are gleefully predicting that it and other Arizona banks will pick up customers from the BankAmerica merger in the short run. "Short-term, the attempt to merge these two will create opportunities," said Mr. Lehmann, but he added, "They have the potential to be a formidable competitor."

So far, the company has no special marketing plan to take advantage of its status as the last big hometown bank. But Mr. Lehmann and his executives figure their window of opportunity is several years long.

Meanwhile, Valley is paring down expenses. Mr. Lehmann admitted that, after an initial flurry of cost cutting, management became so absorbed in reducing problem loans that it eased off on expense reduction.

High Noninterest Expense

In 1990, noninterest expense averaged 114% of net interest income, compared to the 98% averaged by the seven western banks followed by Montgomery Securities, San Francisco. Valley's expense ratio had grown to 131% by the third quarter. That is bloated by the costs of real estate problems, but analysts feel it is still excessive.

Robert F.B. Logan, Valley's president and chief operating officer, is responsible for whittling down expenses. He promised that, by the end of 1992, Valley's expense ratios would be better than those of its peers.

Last week, Valley announced that it was laying off about 300 employees in the branch system. But with 215 branches, that is fewer than two jobs per branch.

Although analysts applauded the layoffs as a step in the right direction, they noted that expected yearly savings of $8 million don't amount to much on an expense base of about $525 million a year.

Rewarding Cost-Cutting Ideas

Besides layoffs, Mr. Logan has whacked away at other expenses. Traditional perks such as company cars were eliminated early on. A "Costbusters" employee awards system is garnering good cost-cutting suggestions from employees. A commercial loan officer, for example, got $3,000 for suggesting a way to save money by changing the way Valley gets credit reports.

A few months ago, partly in an effort to shave costs, the bank even closed the Golden Eagle, a tony but money-losing restaurant it operated on the top floor of its headquarters.

On credit quality, "we're about where we thought we'd be," said Mr. Lehmann. Despite six consecutive quarters of declines, nonperformers remain at a high level, and Robert M. Walker, chief credit officer, said the next quarters may break the string of declines.

"There are no brilliant solutions" to working off problem loans, said the blunt-spoken Mr. Walker. "Money solves the problems."

Dividend Restoration |Closer'

Its problems caused Valley to lose $29 million during the last five years and finally, in 1989, to suspend its 36-cent-per-share quarterly dividend. Mr. Lehmann wouldn't say when the dividend will be restored.

"We're getting closer to paying a dividend," Mr. Lehmann said; "you only want to suspend a dividend once in your career."

Analysts predicted early this month that Valley would earn about $33.4 million this year, according to First Call Corp., an investment research distributor and affiliate of the American Banker.

Since then, third-quarter results have been reported, and Valley has already earned $32.4 million in the first nine months of 1991. This was partly boosted by one-time gains but still significantly better than analysts had predicted. The composite forecast of First Call's nine analysts is for $46.2 million in profit next year.

Restoring profitability will put Mr. Lehmann closer to his goal of making Valley larger and less dependent on Arizona. In the "longer term, this institution has to be bigger and has to have more diversification of earnings," he said.

But for now, Mr. Lehmann is still trying to fix Valley's problems. "A lot of people thought we wouldn't make it," he said, "but this is a good bank."

PHOTO : Valley National's Bad Loans Are Declining...

PHOTO : But Big Profits Remain Elusive

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