Trust Departments No Longer ‘Loss Leaders’ for Banks

John A. Mason, a 27-year veteran of the banking trust industry who on Monday became chief trust officer of BSD Bancorp’s Bank of San Diego subsidiary, remembers when bank trust departments effectively served as “a loss leader . . . one (inexpensive) way of stroking big customers.”

Those days are gone, done in by the financial industry’s increased emphasis on the bottom line and potential liabilities generated by operating a trust business, according to Mason, who previously spent a total of 27 years in Los Angeles with First Interstate Bank and Security Pacific National Bank.

The growing importance that banks attach to a successful trust department has been obvious during the past year:

First National Corp.’s desire to own a trust business played a key role in its recent but unsuccessful attempt to buy Bank of San Diego’s assets for a $600,000 premium over the bank’s book value of $6.7 million.

First National’s failed bid for Bank of San Diego’s assets was driven largely by a desire to bolster its commercial banking business by grabbing Bank of San Diego’s branches around the county. But First National--which wants its own trust department--also saw Bank of San Diego’s trust department, with $742 million in assets, as one way to establish an immediate presence.

Late last year, Grossmont Bank formed Western Trust, a unique operation that provides trust services to financial institutions that lack trust departments. Its asset base already has grown to $55 million.

Wells Fargo shook up the normally staid trust department business recently with a pair of acquisitions that gave Wells Fargo the state’s largest trust department, with $25 billion in assets under management.

Those developments were driven by bottom line considerations, because most banks, including First National, Wells Fargo and Grossmont, now view trust departments as profit centers rather than loss leaders.

Fee income--such as that generated by a trust department--is increasingly important because “there’s no cost of money involved,” according to Gerald Lewis, trust group manager for San Diego Trust & Savings Bank, San Diego’s largest locally based trust department, with $2.7 billion in assets under management. “On the lending side, you have the cost of money and the spread, which is determined by what you can make on the money.”

San Diego Trust & Savings feels “very comfortable if we can bring anywhere between 15% to 20% (of gross fees) to the bottom line” on a pretax basis, said Lewis, “And we hope our gross fees can be improved upon as we add more office automation.”

Banks usually charge annual fees of from .3% to 1% of the asset total--depending on whether or not the trust department takes an active role in managing the assets. That arrangement generally means that the trust department and the customer benefit as managed assets grow in value.

However, most trust operations have a minimum fee that is designed to screen out accounts that are too small--and consequently too unwieldly--to effectively manage.

And some trust operations, including Bank of San Diego, perform only custodial work, with customers determining how assets are best managed. That arrangement also frees the bank from potentially expensive liability, according to Mason.

Bank of San Diego’s trust department, which had just $6 million in assets when it was formed in 1981, had grown to $742 million as of June 30.

A Novel Operation

Grossmont Bank’s novel Western Trust Division was formed late last year with that custodial role in mind, according to President Donald A. Levi, who, along with Executive Vice President Murray R. Steeg, left Bank of San Diego to form Western.

Competitors described Western as one of very few trust companies that hopes to cater to customers of other financial institutions.

Western’s trust business has grown to $55 million in assets, but only about 12% of those assets are owned by Grossmont customers. The overwhelming majority comes from non-Grossmont customers, according to Levi, who envisions Western Trust as “a provider of trust services for financial institutions within San Diego County that don’t offer trust services.”

Western serves as a “back office or a private label supplier” for financial institutions that don’t want to fund the creation of a full-range trust department, Levi said. “We collect fees based on the number of transactions conducted, charging for what we do as we do it.”

Perhaps the biggest change in California’s trust industry was the expansion of Wells Fargo’s trust department following its 1986 merger with Crocker Bank, and its subsequent acquisition of Bank of America’s personal trust business.

Wells Fargo rocked the normally staid trust business on the heels of those moves by announcing a hefty fee increase that alienated many customers. Wells Fargo subsequently postponed the fee increase.

Competing trust departments responded to Wells Fargo’s stumbling with advertisements aimed at luring away disgruntled Wells Fargo customers. One out-of-town bank advertised that “our trust department is going nowhere,” in a reference to Wells Fargo’s acquisition of Bank of America’s personal trust business.