Ailing Valencia Bank--which lost $7.6 million in the first quarter of this year--is selling its $30-million trust division to Pacific Inland Bancorp of Anaheim for an undisclosed sum.
The deal will relieve the bank of a troubled department but will do little to shore up Valencia's precarious financial position.
The Santa Ana bank earned $193,000 in the first quarter a year ago, but lost $5.7 million for all of 1984 and $2 million in 1983. Valencia--Orange County's third largest independent bank with $128.7 million in assets as of March 31--is operating under orders from the Federal Deposit Insurance Corp. to raise several million dollars in new capital in order to cover its losses. As of March 31, the bank's capital had fallen to just 2.8% of its total assets, far below the 7.5% level demanded by the FDIC.
The trust department, which invests and manages clients' money--including personal assets and individual and corporate pension funds--has been the focus of concern since December, 1983, when Valencia officials uncovered the misappropriation of more than $6 million. The bank said the money was invested illegally in real estate deals by several former Valencia employees.
Officials for both Pacific Inland and Valencia said Thursday that Valencia would continue to assume the $6 million trust department liability, which Valencia has not yet recognized as a loss.
"I think the sale is the proper move for Valencia as they try to retrench and try to keep their bank going forward," said Gerry Findley, an independent banking consultant analyst. "They're trying to pare it down to the basics where they can manage it."
However, Findley said the sale of the trust division "won't affect the bank's larger problems"--including its huge losses and declining capital base.
Ken Slezak, senior vice president for Valencia, agreed, saying that while the sale will allow the bank to focus on the basic business of banking, "it won't have a significant effect on the capital-to-asset ratio," a number used by government regulators as a primary indicator of a bank's financial health.
Step Toward Profitability
Slezak added, however, that the sale of the trust division "was a step toward improving profitability."
Valencia recently sold its auto leasing division and several other assets the bank has refused to identify, raising more than $10 million. Slezak would not comment on what other assets Valencia is planning to sell.
But citing Valencia's "new management team," Slezak said, "We definitely plan to show a profit for the end of this year."
If the agreement between Pacific Inland and Valencia is approved by the state Banking Department, Pacific Inland's trust department assets will jump to $60 million.
Although trust divisions historically have been a losing proposition for small banks because they are costly to operate and generally bring in only small fees, Pacific Inland officials "see it as a profitable business," said Chairman Richard Meyer.
He said there are a growing number of people seeking to have their money invested by trust departments and that Pacific Inland believes these customers will pay higher fees than independent banks traditionally have charged. The combination, Meyer said, will reverse the losing trend and make trust departments a profitable venture.