Quarter Sluggish for S & Ls, Banks

Despite benefiting from lower interest rates, the biggest banks and savings and loans based in the San Fernando Valley area saw their recovery slow during the third quarter.

Seven of the 11 locally headquartered banks and S&Ls; with more than $100 million in assets said they made more money than in the corresponding three-month period last year. Several, however, either were bolstered by one-time gains or showed slimmer profit increases than in the second quarter.

Moreover, one bank reported declining profits, and three institutions chalked up losses that either matched or exceeded the deficits that they reported for the same three months in 1984.

Two of the unprofitable institutions--American Pacific State Bank and Camino Real Savings Bank--traced their shortfalls to the sort of bad real estate loans that plagued many of their counterparts last year. The other institution that lost money, Independence Bank, attributed its red ink to accounting adjustments connected with the acquisition of the bank earlier this month.

Softening Performance

In the second quarter, only Camino Real lost money.

The softening performance by the local banks and S&Ls; during the three-month period ended Sept. 30 came while most lenders were helped by falling interest rates. The declining rates boosted profits by widening the spreads between the amount of interest banks and S&Ls; pay on their deposits and receive from loans.

The spreads typically fatten when interest rates drop, partly because interest on floating-rate loans is not reduced as quickly as the interest paid on deposits. Lower interest rates also improve the profits from fixed-rate loans because the deposits used to fund those loans cost banks and S&Ls; less.

Interest rates on so-called jumbo certificates of deposit--deposits of $100,000 or more--bucked the trend and rose during the second half of the quarter. But most local banks and S&Ls; said they did not hold enough of those deposits to suffer much.

Losses on Loans

The losses many California financial institutions took on real-estate loans last year also made the latest third-quarter results look comparatively strong.

“Most of the banks that got stuck two and three years ago have gotten to the point where most of it is behind them,” said Gerry Findley, a Brea-based banking consultant.

“We had a number of banks that did very well,” he said.

While most of the area’s financial institutions were shrinking or growing slowly during the third quarter, nearly all took the precaution of putting more money into loan-loss reserves. That reduced the institutions’ profits because injections into reserves, known as loan-loss provisions, are subtracted from earnings.

Analysts said loan-loss provisions usually are made when banks or S&Ls; expect bad loans to surface. Industry experts added, however, that some institutions are raising provisions because of concerns raised by industry regulators and because heftier profits have made it easier to pump up reserves.

‘This Is the Time’

“This is the time to do it,” said Salvatore Serrantino, president of the California Research Corp. consulting firm.

Based on industry standards for returns on assets, the overall financial performance of local banks and savings and loans was modest. A return on assets, determined by dividing an institution’s profits by its average assets, reflects how efficiently a bank or S&L; operates.

Keefe, Bruyette & Woods, a brokerage firm specializing in the stocks of financial institutions, said the median return on assets during the third quarter for 24 U.S. banks it follows was .67%. Four of the seven locally based banks with assets of more than $100 million had higher returns.

A Keefe, Bruyette analyst estimated that most of the major California S&Ls; would have returns on assets of close to 1.0% for the third quarter. None of three local S&Ls; with more than $100 million in assets had returns anywhere near that level.

Ran a Deficit

APSB Bancorp of North Hollywood, the parent of American Pacific State Bank, said that it ran a deficit in the last quarter because of the provision the company made for the expected $257,000 loss from a loan for a Palm Springs hotel project.

Frank J. Ures Jr., the bank’s president and chief executive, said that loss should mark the end of nearly all of its recent real estate losses. “We did a housecleaning in the third quarter,” Ures said.

For the quarter, APSB reported a loss of $53,697. It lost $38,152 in the third quarter last year.

After suffering massive losses from bad construction loans and then coming under pressure from regulators, Camino Real was sold to Orange County developer Mervyn Phelan on July 1. Now based in San Fernando, the S&L;, which has $245.3 million in assets, plans to move its headquarters to Orange.

Although Camino Real has yet to finish compiling its quarterly results, the S&L; said it expects its third-quarter loss to be about as large as last year’s deficit of $430,000.

Sale of Bank

Encino-based Independence Bank said that its operating profit was erased by accounting adjustments made as part of the conditions of sale of the bank for about $23 million to Ghaith Pharaon, a Saudi Arabian financier. Morton R. Michaels, Independence’s president and chief executive, said the terms of the sale, rather than any deterioration in the bank’s loan portfolio, prompted it to inject $947,000 in its loan-loss reserve and declare loan losses, or charge-offs, of $634,000.

During the same period last year, Independence, the largest bank based in the San Fernando Valley area with $220.4 million in assets, put $41,000 in its loan-loss reserve and charged off $272,000 in loans.

“Anything that was less than squeaky clean was cleared from the books of the bank,” said Michaels, who predicted Independence would show a profit for 1985.

Independence’s $156,000 loss for the third quarter contrasted with a profit of $277,000 in the same quarter last year.

Profits Held Down

Valley State Bank, which lost $139,458 in last year’s third quarter, turned a profit of $29,563 in the quarter this year. Jules Huppert, Valley State’s president and chief executive, said the bank’s profits were held down by an upturn in the interest rates it pays on its jumbo certificates of deposit and by the extra $60,000 it injected into its loan loss reserves this year. In the second quarter, Valley State earned $443,612.

Although very profitable in the third quarter, Santa Clarita National Bank’s net income of $438,000 was down 12.0% from the same quarter last year.

Frank Ficke, a senior vice president for the Valencia-based bank, said earnings fell largely because it took in new deposits faster than it issued new loans. Pay raises and an increased loan-loss provision also reduced profits, he said.

Santa Clarita National remained one of the area’s faster-growing financial institutions, with assets of $168.2 million, up 17.6% over the last 12 months.

Highest Percentage Gain

With a 80.1% rise in profits to $232,208, Thousand Oaks-based First State Bank of the Oaks showed the highest percentage gain in net income among the area’s banks and S&Ls.; Much of that increase, however, stemmed from the bank’s acquisition of three branch offices from Union Bank last year.

That acquisition came too late to influence the Bank of the Oaks’ profits in the third quarter of 1984, but has contributed substantially to its earnings this year. The bank’s return on average assets of .94% was second only to Santa Clarita National’s ROA of about 1.1%.

Encino Savings & Loan Assn. bounced back from a $34,000 loss in 1984’s third quarter to turn a profit of $228,000 in the three months ended Sept. 30. The turnaround stemmed chiefly from a one-time gain, however.

The S&L;’s gain from selling mortgages and mortgage-backed securities climbed from $119,000 a year ago to $510,000 in 1985’s third quarter. Eugene Cazier, senior vice president for finance at Encino Savings, said the S&L; took advantage of the appreciation in its home-loan portfolio that resulted from declining interest rates.

Higher Loan Fees

Lincoln Bancorp, the parent of Lincoln National Bank, chalked up a 28% gain in profits in the third quarter, with earnings of $245,895. John Keating, the bank’s chairman and chief executive, attributed the higher profits to the growth in Lincoln National’s commercial lending and its higher loan fees.

After Camino Real, Lincoln was the fastest-growing local bank or S&L.; The holding company’s assets rose 40.9% during the 12 months ended Sept. 30, to $144.3 million.

Even so, the company’s results were a comedown from its second-quarter performance, when profits jumped 51.4%, to $272,140. In addition, Lincoln Bancorp’s third-quarter profits were bolstered by a reduction in its loan-loss provision from $221,000 in the third quarter last year to $160,000 this year.

Among the more impressive showings during the third quarter was the turnaround of Valley Federal Savings & Loan Assn., which lost $1.7 million in 1984’s third quarter.

Aided by Declining Interest

Valley Federal, by far the area’s largest financial institution with assets of nearly $2.6 billion, rebounded with a profit of $3.0 million this year. Jack Allewaert, Valley Federal’s senior vice president and treasurer, said the S&L; was aided by declining interest rates and the emerging “profitability” of a subsidiary that issues and sells loans for mobile homes.

The S&L;, meanwhile, took in long-term deposits to insulate itself from interest-rate fluctuations and scaled back its lending slightly.

“Profitability has taken precedence over growth for us now,” Allewaert said.

TransWorld Bancorp and Investment Savings & Loan Assn. also made strong gains in the third quarter. TransWorld, the parent of TransWorld Bank, posted profits of $274,000, a 32.2% rise, even though it raised its provision for loan losses from $215,000 last year to $350,000 this year.

Increased Lending

Howard J. Stanke, TransWorld’s senior vice president for finance, credited its performance to lower interest rates and the company’s cost controls and increased lending.

Investment Savings increased its earnings 8.0% to $447,772, despite putting $225,000 in its loan loss reserves. During the third quarter last year, the S&L; did not add any money to its reserves.

Besides helpful interest-rate trends, the S&L; credited the recent profits from its mortgage banking subsidiary, which sells mortgage loans.

Although fattened by the $225,000 that it put in reserve, the S&L;’s net worth was the lowest of the local financial institutions. Investment Savings’ net worth, as measured by its capital-to-assets ratio, stood at 2.04% at Sept. 30. Regulators have told the S&L; to increase that ratio, an indication of a financial institution’s ability to withstand losses, to close to 3% by the end of 1989.

THIRD-QUARTER REPORT FROM THE VALLEY’S LARGEST FINANCIAL INSTITUTIONS BB Banks Assets Net income Return Change (loss) on assets in earnings Independence Bank $220.4 million ($156,000) -.28% NA Santa Clarita National $168.2 million $438,000 1.1%* -12.0% TransWorld Bancorp $149.7 million $274,000 .73% 32.2% (parent of TransWorld Bank) Lincoln Bancorp $144.3 million $245,895 .73% 28.0% (parent of Lincoln National Bank) APSB Bancorp $141.5 million ($53,697) -.16% -40.7% (parent of American Pacific State Bank) Valley State Bank $122.6 million $29,563 .10% NA First State Bank of the Oaks $105.6 million $232,208 .94% 80.1% Savings and loans

Assets Net income Return Change on assets in earnings Valley Federal $2,562.0 million $3,005,000 .46% NA Investment Savings $324.5 million $447,772 .54% 8.0% Encino Savings $171.7 million $228,000 .53% NA EB * * Estimated Figure