For most of the leading banks and savings and loans based in the San Fernando Valley area, the second quarter presented a win-win situation: they either reported big profit increases right away or instead stashed away extra money to help out down the road.
And, in a couple of cases, they did both.
North Hollywood-based APSB Bancorp, parent of American Pacific State Bank, led the way in earnings growth from the same period last year. Its net income was up 193.5%, to $231,965, for the April through June period.
Taking the other approach, Van Nuys-based Valley Federal Savings & Loan put nearly $2.4 million into loan-loss reserves, 32.7% more than it did in the year-ago quarter, and still posted a hefty 48.4% gain in profit. For accounting purposes, money injected into reserves to protect a financial institution from future losses is subtracted from earnings.
Big 10 All Show Profit
None of the 10 biggest financial institutions based in the area that reported their results showed a loss. Moreover, four recorded annualized returns on assets, or ROAs, of more than 1%, a measure of strong performance. An ROA is derived by dividing annual profits by average assets.
Woodland Hills-based Investment Savings & Loan lagged behind the others, however, reporting profits down 90%, to $14,885. Valley State Bank's earnings were down 91.5%, to $37,780, but the bank's officials say the institution's profits this year represent a recovery from an overall 1985 loss of $1.7 million.
Of the financial institutions with more than $100 million in assets based in the area extending from Burbank to Camarillo, only Unified Savings Bank of Northridge refused to disclose its second-quarter results. According to the Federal Home Loan Bank Board, it lost $1.3 million during the first quarter and had assets of $105.1 million as of March 31.
Camino Real Savings Bank was not included in the survey because it moved its administrative offices from San Fernando to Orange.
The second-quarter results were in line with the statewide pattern of rising profitability despite slow growth in assets. Gerry Findley, a Brea-based consultant, said independent banks and S & Ls are doing a better job of controlling expenses and are more careful in making loans than in the past.
He said, however, that slow business conditions coupled with the new cautiousness are preventing bankers from building their assets by making lots of new loans.
The decline in interest rates over the past year tended to hurt the banks and help the S & Ls. The profit margin, or spread, between what banks take in from customers' loans and pay out on customers' deposits narrows when market interest rates decline. That happens because interest rates on business loans generally are adjusted for changes in the financial markets more quickly than the rates on deposits.
S & L Revenue Fluctuates Less
Because S & Ls tend to have lots of fixed-rate loans, their revenue from loans fluctuates less. Thus, interest rate declines cut their costs more than their revenue, boosting earnings.
Independence Bank, the area's biggest bank, with assets of $283.3 million, recorded the sharpest percentage gain in assets and the second-biggest earnings increase. Its assets were up 29.5% from a year before, largely as a result of its acquisition during the second quarter of Center National Bank of Woodland Hills.
The bank, which has become increasingly aggressive since being bought last year by Saudi Arabian financier Ghaith Pharaon, also stepped up its construction and business lending and started making loans on mobile homes. Independence's profit rose 113.6%, to $801,434, while it cut its injection into loan-loss reserves 61%, to $90,000.
Michael English, Independence's senior vice president, attributed the earnings increase to reduced loan problems, bond sales and new loans.
Some Boost Loss Provision
The next biggest bank, Valencia-based Santa Clarita National, took a different tack. Its profit climbed a relatively low 6.1%, to $555,000, while it boosted its provision for loan losses 69%, to $240,000. "We took care of what we thought would be the loan losses for the year," said Kenneth Koehler, Santa Clarita's cashier and vice president.
Even so, Santa Clarita's ROA, at 1.24%, was second only to Encino Savings & Loan's 1.52% among the Valley area institutions. In addition, its assets were up 13.7% over the 12 months, to $184.0 million.
Encino-based Lincoln Bancorp, parent of Lincoln National Bank, reported a 9.4% rise in profit, to $297,756, at the same time it increased its loan-loss provision 50%, to $240,000. Lincoln officials said the increased provision reflected a desire to boost the company's reserves rather than any concern about its loan portfolio.
Profits climbed, they said, because a higher percent of Lincoln's deposits were converted into loans and average assets climbed 25% during the period.
At Sherman Oaks-based Trans-World Bancorp, profit rose a modest 4.6%, to $203,000, and assets were flat, at $152.3 million. "We're just a stable type of institution that isn't fast-growing," said Howard J. Stanke, senior vice president for finance.
APSB, on the other hand, is bouncing back from a miserable year. Frank J. Ures Jr., president and chief executive, attributed the comeback principally to the elimination of 23 employees and the withdrawal of customer deposits on which it paid high interest.
Thousand Oaks-based First State Bank of the Oaks, a big mortgage lender, was perhaps the only area bank to benefit from the lower interest rates. The declining rates widened its interest-rate spread and spurred mortgage refinancings, raising profit 77.4%, to $332,600.
Valley State's second-quarter profit was cut by declining interest rates and a $100,000 injection into loan-loss reserves, said Dwight Ham, the bank's executive vice president and chief operating officer. Assets declined 9% from a year ago, to $107.8 million.
Hot Refinancing Market
Valley Federal, the biggest bank or thrift in the Valley area, with assets of $2.6 billion, chalked up the most impressive performance among the S & Ls. "We're being opportunistic, taking advantage of the hot market for refinancing," said Jack Allewaert, chief financial officer.
Increased lending from a subsidiary specializing in financing mobile homes also contributed to the gain. Allewaert said Valley Federal boosted its loan-loss provision because of the S & L's resumed growth--assets were up 2% from a year before--rather than because of any anticipated loan problems.
But Investment Savings, which didn't inject money into its loan-loss reserve from April to June last year, put in $555,000 this year because of problems with loans for constructing single-family homes and office buildings.
"We've taken all the hits that I think we're going to take for this year," said Ted C. Hill, Investment Savings' president.
Although its assets were $322.6 million as of June 30--up 11% from a year before--Investment Savings' capital, or net worth, equaled 2% of its assets. That was the lowest capital-to-assets ratio reported by the Valley area institutions and below the 3% standard regulators normally require for S & Ls.
Hill said Investment Savings' net worth, however, continues to meet regulators' requirements for his S & L.
Encino Savings' big gain in earnings partly reflected more profitable real estate lending but also masked some weaknesses, acknowledged Eugene Cazier, senior vice president and chief financial officer. He said the S & L, which has been hurt by carrying a large portfolio of low-interest mortgages, would have lost money if it hadn't sold securities at a profit.
SECOND-QUARTER REPORT FROM THE VALLEY'S LARGEST FINANCIAL INSTITUTIONS
Assets Net income (loss) Independence Bank $283.3 million $801,434 Santa Clarita National $184.0 million $555,000 Lincoln Bancorp $158.6 million $297,756 (parent of Lincoln National Bank) TransWorld Bancorp $152.3 million $203,000 (parent of TransWorld Bank) APSB Bancorp $133.7 million $231,965 (parent of American Pacific State Bank) First State Bank of the Oaks $118.1 million $332,600 Valley State Bank $107.8 million $37,780
Return Change on assets in earnings Independence Bank 1.16% +113.6% Santa Clarita National 1.24% +6.1% Lincoln Bancorp .77% +9.4% (parent of Lincoln National Bank) TransWorld Bancorp .54% +4.6% (parent of TransWorld Bank) APSB Bancorp .70% +193.5% (parent of American Pacific State Bank) First State Bank of the Oaks 1.2% 77.4% Valley State Bank .0% -91.5%
Savings and loans
Assets Net income Return Change on assets in earnings Valley Federal $2,631.0 million $4,098,000 .64% 48.4% Investment Savings* $322.6 million $14,885 .0% -90.0% Encino Savings $176.1 million $661,000 1.52% 73.9%
*Figures for first quarter ended June 30.