FDIC Closes Valencia Bank of Santa Ana

Valencia Bank of Santa Ana was seized and declared insolvent by federal and state regulators Friday, succumbing to three years of losses totaling more than $10.4 million.

The bank closure, the first in California and ninth nationwide this year, capped three unsuccessful efforts by Valencia’s directors in the last two years to find a buyer for the bank, which had $101 million in assets at the end of 1985 and is the county’s oldest independently owned bank.

Valencia is the eighth Orange County bank to fail since 1982.

About 40 examiners from the State Banking Department and the Federal Deposit Insurance Corp., which insures deposits up to $100,000, moved into Valencia’s black-glass building at 1820 East 1st St. shortly after 6 p.m. Friday to begin counting cash, reviewing the bank’s books and changing the locks.

The possibility of the 15-year-old bank reopening Monday was in doubt Friday night as regulators continued their search for one or more buyers.

“We will make every effort to merge this institution into a healthy institution,” said Scott Jones, FDIC closing manager. “Right now, we just have to wait for the dust to settle. But negotiations are going on to see if the bank can reopen Monday under a new name and it can be business as usual.”

“Our main goal is to make the deposits viable as soon as possible,” Jones said, addingf that the average deposit is about $10,000, Jones said.

Valencia officials could not be reached for comment Friday.

At the time the bank was closed, 9,838 customers had $96 million on deposit, state officials said. Only $2 million of those deposits are in accounts in excess of the federal $100,000 insurance limit, according to state officials. It was unclear Friday if the FDIC would pay off those uninsured amounts in the event the bank is liquidated.

Plagued by problem real estate loans that began going sour three years earlier, Valencia Bank reported a 1985 loss of $2.7 million. Earlier annual losses of $5.7 million in 1984 and $2 million in 1983 drained Valencia of its capital and reserves.

Most Customers Didn’t Know

Only a few customers trickled in before the seizure Friday evening and most did not know about the impending FDIC takeover.

Michael DuFour of Anaheim, who arrived to get $50 out of his account from an automated teller machine, learned of the closing and said, “I better get $100 in that case.”

Lisa Tomionni of Santa Ana deposited a number of checks for her employer. “He thought about closing his accounts today, but decided against it. For me, I don’t care. My account is small.”

Harry Abercrombie of Garden Grove said he deposited in another bank two checks totaling $27,000 drawn on Valencia Bank and then wrote a check for that amount.

“Damn, I should have come here and cashed those checks,” he said.

A major stumbling block in finding a buyer to reopen Valencia, executives of area banks said, is that regulators want the purchasing bank to have at least $7.5 million in excess capital. Few independent banks would have that much extra capital.

The fact that regulators would close Valencia seemed inevitable for most of the past year. Only the timing was uncertain.

“We’ve had the fear of closing for the last year,” said Gerry Findley, a Brea-based financial institutions consultant.

No Fraud or Impropriety

Unlike previous bank failures in the last few years, Valencia’s demise was not caused by any apparent fraud, insider dealing or other major improprieties, Findley said.

Still, in June the bank chose to settle a lawsuit over alleged trust department mismanagement, paying a group of trust department clients about $8 million. The bank has sued several former trust department officers over what has been described as an “isolated” incident. That suit is still pending.

“They got to where they are because they made some pretty bad decisions, especially in relation to expansion,” Findley said. But the top management team, he said, “worked so hard at trying to salvage this thing.”

Findley said the lower-level supervisors did not have the expertise to handle the construction and small business loans that the bank was making.

But he also criticized the FDIC for failing to help Valencia, especially after the bank asked the agency for financial assistance last fall. He accused regulators of maintaining a double standard, bailing out the major banks, such as Continental Illinois Corp., but giving small institutions “no service, no consideration and no ability to work out survival programs.”

Rescue Seemed at Hand

Still, regulators let the bank continue operations even though its capital base was dwindling because Valencia seemed on the verge of being rescued at least three times in the last two years.

Valencia opened its doors in Placentia two days after Christmas, 1971. During the next nine years, it opened branches in Fullerton, Anaheim, Irvine and Orange. It also established a trust department and diversified into other areas, establishing an escrow company and forming divisions for leasing and data processing.

Riding high during the real estate boom of the late 1970s and early 1980s, the bank built a five-story administrative headquarters and branch in Santa Ana in 1981. The building looms above the Santa Ana Freeway at 1st Street and looks, wrapped in dark reflecting glass, as ominous as its future would become.

“They (managers) took on a heavy overhead in Santa Ana with the anticipation they would be a half-billion-dollar bank in two years,” Findley said. “And they had a reasonable belief that would occur.”

The bank opened branches in Lake Forest and Newport Beach, where it “got locked into a very expensive lease,” Findley said.

Developers in Default

But the real estate boom went bust. Valencia found that many of the developers it had lent to defaulted on loans because they could not sell their units. The bank foreclosed and ended up with property whose value did not cover the amount of the loans.

In an internal report obtained by The Times last year, Harvey Ferguson, president and chief executive officer of Valencia, acknowledged that the bank’s “liquidity position” had deteriorated significantly, “primarily because of overinvestment in questionable real estate.”

The bank reorganized under a holding company, Valencia Bancorp, in 1983 and reported a $2.1-million loss for the year, its first annual loss. The situation snowballed, though, and the bank could not sell assets, which had reached $177 million at the end of 1983, quickly enough to cover losses, Findley said.

Although it sold the Lake Forest branch to Pacific Regency Bank, closed the Newport Beach branch and took other measures to cut the red ink, Valencia lost $5.7 million the following year.

In July, 1984, Valencia signed an agreement to be purchased by Credito del Peru Holding Corp., a Peruvian company incorporated in the Cayman Islands and owner of Peru’s largest bank, Banco de Credito del Peru.

During those negotiations, Gene W. Hobday, Valencia president since 1973 and architect of the bank’s growth, quit in a dispute with Credito. Ferguson took over as president.

At the same time, a rift also developed between Hobday and Ray L. Smith, the bank’s chairman, chief executive and major shareholder, according to Findley, who was once a consultant to Valencia and still owns about 158 shares of stock in the bank.

“It was a question of Smith not listening and beginning to operate more in a non-communicative way,” Findley said. “He was not open and candid with his own people.”

New Executive Team Formed

Hobday joined the newly formed Bank of Anaheim. Neither Smith nor Hobday could be reached for comment. Smith retired as chairman and chief executive last April, and Ferguson formed a new executive team.

A week before the new team was formed, Valencia canceled the merger with Credito del Peru, charging breach of contract and seizing $5.2 million that the Peruvian company had deposited in escrow. The dispute, the nature of which has not been revealed, is still pending and the money is being held in escrow by Security Pacific National Bank.

At the same time, Valencia acknowledged a misappropriation of more than $6 million from its trust department. It also said it was under FDIC orders to raise its shrinking capital to cover its huge losses.

A month later, Valencia announced plans to sell its $30-million trust department to Pacific Inland Bancorp of Anaheim for an undisclosed sum. Valencia, however, would continue to assume the $6-million liability, which turned into an $8.2-million settlement the following month. Pacific Inland backed out of the agreement in July, but no reason was given.

Tentative Sale Falls Through

Last August, Valencia signed a tentative agreement to sell a controlling 70% share of the company’s stock to a group of six investors, but the deal was later postponed indefinitely because investors could not acquire funding for the purchase, a bank source said.

In recent months, a number of potential suitors have looked into buying the bank, but Valencia officials said previously that no other serious negotiations have been held.

In a filing with the Securities and Exchange Commission in November, Valencia acknowledged that a “failure to cure an impairment of capital in a timely fashion could result in the California State Banking Department . . . taking possession of the bank.”