Valley State Scrambles to Recover After Big 1985 Loss

Jules Huppert, president of Valley State Bank, boasted a year ago that his Encino-based institution was poised “to emerge from the pack of little community banks.”

As it turned out, Valley State eventually did distinguish itself from the competition. Trouble is, the bank did it by going deep in the hole at a time when its counterparts were making money.

Last week Valley State disclosed revised figures showing that it suffered a loss of $1.7 million in 1985, making last year its worst since it opened in 1979. On top of that, the bank revealed that it is under orders from federal regulators to boost its capital, now about $5 million, by at least $3 million before October, 1987. Regulators regard a bank’s capital, or net worth, as its ultimate cushion against loan losses.

John C. Bedrosian, Valley State’s chairman, said he is certain the needed $3 million will be raised but he wouldn’t elaborate on the bank’s plans.

“Nobody is that concerned about it,” said Bruce Ackerman, a Valley State board member and the executive vice president of the Van Nuys Chamber of Commerce.

1 Option Is to Sell Bank

Banking experts speculated that Valley State’s directors would contribute the new capital themselves. Otherwise, they said, Valley State will be hard pressed to stay afloat as an independent institution because most investors would be reluctant to buy new stock in a small, beleaguered bank.

One banker who didn’t want to be identified said a more likely possibility than a stock offering is for Valley State, the fifth-largest bank based in the San Fernando Valley, to be bought out.

For Valley State, 1985 was the third bad year in a row. After making modest profits during each of its first four years, it lost a total of $976,035 in 1983 and 1984. This year hasn’t been a huge success either, with the bank reporting a slim profit of $103,500 for the first six months.

Merger Fell Through

“We’ve hit a big bump in the road, but we’re back on course,” said Dwight D. Ham, Valley State’s executive vice president and chief operating officer.

Last July, however, Huppert had big plans. He was working on a merger with Olympic National Bancorp, a Westside bank-holding company, and talked about expanding into Ventura County. And after Valley State chalked up a profit of $618,270 for the first half of 1985, Huppert projected that it would make close to $1 million for the year.

But the agreement with Olympic fell apart and several of Valley State’s large real estate and business loans went sour.

Bedrosian said the bank originally told federal regulators that it lost $383,000 in 1985 but revised its figures after a routine review showed that more loans had gone bad than originally thought.

Now, Bedrosian said, Valley State is more interested in controlling its growth than in expanding. As of June 30, its assets were $107.8 million, down 9% from a year before. Ten jobs were cut over the past six months, and employment now stands at 126.

Valley State recently scaled back its Universal City and Van Nuys Airport branches, reassigning lenders from there to the bank’s remaining full-service offices in Encino, Van Nuys and Woodland Hills.

“If you go fast, you take the risk of taking in some business you wouldn’t if you weren’t in a growth mode,” Bedrosian said.

Valley State over the last year also has suffered frustration in the courts. It witnessed the dismissal of a suit in which it accused Huppert’s predecessor as chief executive, Mark de Gorter, of wrongfully accusing Huppert of making improper loans and using drugs.

Lawsuit Dismissed

But De Gorter’s countersuit, which contends that Valley State was trying through public comments to injure De Gorter’s reputation and hurt his chances of starting a new bank, is pending. Huppert replaced De Gorter in December, 1983.

One of Valley State’s bright spots is its lending for investors buying gold and other precious metals, one of Huppert’s pet programs. Most bankers shun the business, considering it too esoteric and risky. It has been profitable for Valley State, however, and now accounts for more than 20% of the bank’s assets.

Valley State’s most immediate concern is raising capital. The Federal Deposit Insurance Corporation has ordered it to raise at least half of the $3 million by Dec. 3 and the rest by October, 1987.

The new capital would improve Valley State’s capital-to-assets ratio--a gauge of a financial institution’s ability to withstand losses-- from 4.6% on June 30 to 6.5% by the end of this year and 7.5% by October, 1987. Regulators normally require banks to maintain capital equal to at least 6% of their assets.

Tightened Loan Procedures

Bedrosian, in a letter to shareholders, said Valley State has taken steps to satisfy additional demands by regulators, including tightening its loan review procedures, reducing its level of brokered deposits, adopting a new budget and further diversifying its assets.

According to the bank’s annual report, however, Valley State also was ordered to retain “management acceptable to the FDIC.” Although three of Valley State’s four senior vice presidents left over the past year, Bedrosian said the departures were not related to the FDIC order. Bedrosian said the board will keep its current management.

“We are on the right path with the right management and we will go farther and grow,” said Bedrosian, a senior executive vice president with National Medical Enterprises, a corporate giant listed on the New York Stock Exchange.

Largest Shareholder

Huppert, 46, a former car stereo distributor, declined to return telephone calls from The Times. According to the bank’s proxy, he was the largest shareholder as of June 30, with a 16% stake, and he was paid $150,000 in salary and bonuses last year.

In a telephone interview, Bedrosian said “90% of the language in the order is standard, bureaucratic terminology. Most of it didn’t apply to us.”

But Richard E. Condon, a review examiner with the FDIC in San Francisco, said instructions to retain “acceptable management” aren’t in all of his agency’s orders. He said such orders sometimes reflect concern over the quality of executives beneath the chief executive. However, Condon wouldn’t discuss the FDIC’s stance on Valley State.

VALLEY STATE BANK AT A GLANCE

Founded in 1979, Valley State bank has offices in Woodland Hills, Universal City, Van Nuys and Encino, where it is based. It has 126 employees. One of the bank’s specialties is financing investments in gold and other precious metals.