Banks and S & Ls Post Mixed Gains in Quarter

Times Staff Writer

The earnings performance of major banks and savings and loans in the San Fernando Valley was mixed in the second quarter contrasted with a year earlier, with some savings and loan associations posting particularly poor results.

Of the 10 local banks and S&Ls; with more than $100 million in assets, five showed year-to-year gains in second-quarter net income. Three others had lower profits, and two S&Ls--Investment; Savings in Woodland Hills and Encino Savings--suffered losses.

Most of the institutions also reported a lower return on assets (ROA), another key measure of performance, than they did in the second quarter of 1986. However, most also said their ROAs were higher than in the first three months of this year.

The ROA is the most recent rate of profit based on the average amount of assets the institution has, but expressed as an annual rate. An ROA of 1% or more is considered outstanding performance, and the number is closely watched because it indicates whether a bank or thrift is earning the most out of each dollar of assets at its disposal.


The local institution with the highest ROA was Santa Clarita Bank in Valencia, which reported an ROA of 1.26%. It was the only bank or S&L; in the area with a return above 1%, although First State Bank of the Oaks in Thousand Oaks came close with a return of 0.96%.

By comparison, four institutions posted ROAs of 1% or more in last year’s second quarter.

Top Spot Becoming Habitual

Topping the performance list is becoming a habit for Santa Clarita, a low-key, conservatively run bank that concentrates on making loans to small businesses and medium ones while generally eschewing the home-mortgage business.


“We don’t have any magic formula, but we do try to use common sense,” said Don Guglielmino, Santa Clarita chairman. “We’re very conscious of expense, the type of personnel we have and of the type of credit we get into,” he said, referring to lending.

In the second quarter, Valley banking institutions had to contend with commercial interest rates that gradually edged higher, while fixed rates on home mortgages rose more sharply.

The banks’ prime commercial lending rate stood at 8.25% on June 30, up from 7.75% on March 31, and the yield on 30-year Treasury bonds rose to 8.5% from 7.875%. In the second quarter, local rates on conventional, 30-year fixed-rate mortgages climbed to between 9.75% and 10.75% from 8.75% to 9.25%. The rise in rates affected institutions differently depending on their main line of business, but “those with significant mortgage banking operations had difficulties when the rates went up,” said Gary Findley, a banking consultant in Brea.

For example, mortgage lenders frequently try to boost earnings by selling their loans to the so-called “secondary market,” where companies such as Federal National Mortgage Assn. buy the loans and thereby provide the primary lenders with more money to make additional mortgage loans.

But as mortgage rates rose in the second quarter, the loans that mortgage lenders had already made at lower rates became less attractive to the buyers in the secondary market, and profits on those sales were hard to come by.

“The market just hasn’t provided the opportunity for a gain on the sale of loans,” said Stan Reed, chief financial officer of Investment Savings. As a result, Investment lost $36,000 in the second quarter, against a $15,000 profit a year ago, he said. Encino Savings ran into the same problem trying to sell its loans to the market, and it too finished in the red, losing $15,000 against a year-earlier $661,000 profit, said Eugene Cazier, Encino’s chief financial officer.

Encino previously had maintained a sizable portfolio of securities, primarily mortgage-backed securities that are investments in pools of mortgages. But over the past year, Encino sold much of its portfolio in order to make more mortgage loans itself, Cazier said. It now has about $30 million in securities, down from $70 million in late 1985, he said.

“In that conversion we were able to generate profits on the sales of the securities” that helped Encino’s profit, such as in the year-ago quarter, he said. But now Encino is struggling to earn the same profit from mortgage lending.


“We think we’re on track and will improve, but we haven’t had the investment income to help us in the first half of this year,” Cazier said.

The area’s biggest financial institution, Valley Federal Savings & Loan in Van Nuys, said a surge in fee income helped it post a 15% earnings gain in the second quarter to $4.7 million, from $4.1 million. Valley’s ROA also edged up to 0.68% from 0.64% a year ago.

Shift in Focus

Valley, with $2.9 billion in assets, used the jump in fixed-rate mortgage charges to switch its attention to making new loans with adjustable rates, which did not rise nearly as much as fixed-rate loans and thus quickly became more popular with home buyers, said Jack Allewaert, Valley Federal’s chief financial officer.

The interest income from those adjustable loans “doesn’t really impact your immediate results, because you’re initiating loans at low rates,” he said, adding that he was speaking relatively. “However, the big benefit we got was because of loan originations; it had a dramatic impact on our fee income.”

The interest on adjustable-rate loans typically starts at two or three percentage points below that on fixed-rate loans, and is then ratcheted upward over the first few years of the loan. After that the rate fluctuates with money-market rates.

The other major S&L;, Republic Federal in Woodland Hills, earned $49,000 in the second quarter (giving it a modest ROA of 0.21%) after a year-earlier loss of $1.1 million. The thrift is a unit of Weyerhaeuser Co., the Tacoma, Wash., forest-products concern.

The biggest gain in net income was recorded by Lincoln Bancorp, the Encino parent of Lincoln National Bank and the area’s second-biggest bank behind Independence Bank, which is also headquartered in Encino.


Lincoln’s second-quarter profit rose 37% to $408,250, from $297,756, and its return on assets rose to 0.75% from 0.67% a year ago. The bank attributed the rise largely to an increase in new loans and deposits.

The gradual rise in money-market rates during the quarter also helped, said Alton Cogert, Lincoln’s chief financial officer. He explained that 98% of Lincoln’s loans are commercial loans that carry interest rates tied to such floating money-market rates as the prime rate.

Lincoln might have fared even better in the latest quarter except that its sales of securities, mostly Treasury notes and other debt issued by government agencies, resulted in a $4,000 loss during the quarter. In the second quarter a year ago, its securities sales produced a $186,000 profit.

Net Income Drops

Independence’s net income, meanwhile, plummeted 60% to $290,750, from $724,560 a year ago, and its ROA skidded to 0.34% from 1.16%. Dan Geary, senior vice president of the privately held bank, declined to release details of Independence’s results, but said the drop stemmed from higher expenses, a sharp decline in gains from securities sales and a “substantially” higher loan-loss provision, all of which overwhelmed gains in interest and fee income, Geary said.

He said the higher loan-loss provision, which is money set aside for possible bad loans, was taken to keep pace with an increase in the bank’s outstanding loans and did not reflect a rash of new problem loans.

TransWorld Bancorp in Van Nuys said its second-quarter profit rose 11% to $226,000 from $203,000, and the bank’s return on assets also improved, to 0.64% from 0.54% a year ago.

The other two banks--APSB Bancorp, the North Hollywood parent of American Pacific State Bank, and First State Bank of the Oaks--showed small profit declines in the latest quarter. APSB’s profit slipped 1% to $230,268 from $231,964, and its return on assets fell to 0.66% from 0.70% a year ago.

First State’s earnings were off 7% to $310,336, from $332,557. Its 0.96% ROA also was down from 1.21% a year ago but was up from the 0.80% return it showed in the first quarter of 1987.


Listings are for financial institutions in the Valley with assets of at least $100 million.

Banks Assets Net income (loss) Independence Bank $353.8 million $290,750 Lincoln Bancorp $271.3 million $408,250 (parent of Lincoln National Bank) Santa Clarita National $201.2 million $658,000 TransWorld Bancorp $164.3 million $226,000 (parent of TransWorld Bank) APSB Bancorp $139.5 million $230,268 (parent of American Pacific State Bank) First State Bank of the Oaks $132.8 million $310,336

Banks Return Change on assets in earnings Independence Bank .34% -60% Lincoln Bancorp .75% +37% (parent of Lincoln National Bank) Santa Clarita National 1.26% +19% TransWorld Bancorp .64% +11% (parent of TransWorld Bank) APSB Bancorp .66% -1% (parent of American Pacific State Bank) First State Bank of the Oaks .96% -7%

Savings and loans Assets Net income Return (loss) on assets Valley Federal $2,923.6 million $4.7 million .68% Republic Federal $951.8 million $49,000 .21% Investment Savings $268.8 million ($36,000) 0% Encino Savings $192.6 million ($15,000) 0%

Savings and loans Change in earnings Valley Federal +15% Republic Federal NA Investment Savings NA Encino Savings NA

NA= Not Applicable