Banks Gain, Thrifts Lose : S&Ls; Struggling to Make Mortgage Portfolios Pay

Most major banks based in the San Fernando Valley enjoyed solid profit gains in this year’s first quarter, but the period was rough going for most of the region’s savings and loans.

The S&Ls; said their weak showing partly reflected their inability to earn substantially more on their mortgage loans than they paid for deposits. But a new accounting rule, a rebuilding effort and a takeover fight also helped drain profits at the various thrifts.

Of the six biggest commercial banks with headquarters between Glendale and Camarillo, all but the largest--Independence Bank in Encino--reported improved earnings in the first quarter.

Loss at Independence

Independence, a privately held bank with $459 million in assets, suffered a $265,000 loss contrasted with a profit of $304,000 a year earlier. Its president, Morton R. Michaels, did not return a telephone call requesting elaboration on the loss.

Among the four largest savings institutions, only Citadel Holding Corp., the Glendale-based parent of Fidelity Federal Savings & Loan, enjoyed higher net income. The largest, Glenfed Inc., the holding company for Glendale Federal Savings & Loan, and Valley Federal Savings & Loan in Van Nuys, reported lower profits.

Sears Savings Bank, also headquartered in Glendale, incurred a $6.04 million loss, compared to a $1 million loss a year earlier. The latest loss was expected, and should be offset by profits later this year, Sears Savings President Ronald F. Danner said.

Unit of Retailing Giant

The company, a unit of the giant retailer Sears Roebuck & Co., has separate operations. One division, also called Sears Savings Bank, accepts savers’ deposits and manages a portfolio of loans it has bought from other lenders, but does not make loans itself. That division is profitable, Danner said.

But the other division, called Sears Mortgage Corp., lost money in the quarter, leaving Sears Savings with an overall loss. Sears Mortgage is a mortgage banker with 73 offices in 20 states. It makes loans, then resells most of them to other financial institutions--while keeping the right to collect the borrowers’ monthly payments and otherwise service the loans for a fee.

However, last June, Sears Savings sold all but one of its 51 branch offices and its $1.7 billion in mortgage loans to Citicorp. Sears Mortgage had been servicing those loans, and the sale wiped out a large portion of Sears Mortgage’s fee income. The division is now rebuilding its loan-servicing business, but has yet to reach a profitable level.

Danner said nationwide demand for mortgages was soft in the first quarter, although business remained brisk in California. But the Valley’s big S&Ls; had other problems.

‘Spread’ Narrowed

Glenfed, Citadel and Valley Federal complained that rates on their adjustable-rate mortgage loans dropped faster during the quarter than the rates the S&Ls; paid for deposits. Money-market rates, and thus the banks’ cost of obtaining funds generally, also were higher than in the year-earlier quarter. Both trends narrowed the thrifts’ net interest income or “spread”--the difference between their interest income and the interest they paid out--and sent profits lower.

In addition, the S&Ls; said they had lots of new adjustable-rate mortgages on their books that were still paying the low introductory rates common to such loans. That helped make their profit margin even narrower.

Glenfed said its earnings in the quarter ended March 31--its fiscal third quarter--dropped 24% to $36.2 million from $47.5 million. The year-earlier profit included a $9.13 million special gain, but even if the gain is excluded, Glenfed’s net income was off 5.7%.

0.63% Return for Quarter

The profit gave Glenfed a return on average assets of 0.63% for the quarter, well below the 1% level that’s considered an excellent banking performance. A financial institution’s return on average assets (ROA) is closely tracked by financial analysts because it indicates how profitably a bank or thrift is employing the assets at its disposal.

An ROA is calculated by dividing the institution’s quarterly profit by its average assets during the quarter, then multiplying that figure by four to produce an annualized rate of return.

Keith P. Russell Jr., Glenfed’s chief operating officer, said the S&L;’s fee income also was down in the latest quarter because Glenfed “went through a slightly more significant seasonal slowdown” in mortgage demand than normally occurs early in the year.

Valley Federal had other, more unusual costs that contributed to a 68% plunge in its first-quarter profit, to $1.39 million from $4.35 million a year ago. The company, which had a paltry ROA of 0.17%, said it spent $900,000 in legal fees as part of its ongoing effort to fend off a hostile takeover bid from Citadel.

Year-Earlier Charge Helped

Citadel itself had a 36% gain in first-quarter profit to $6.13 million from $4.51 million, producing an ROA of 0.63%. But the improvement was due solely to year-earlier results that were depressed by a one-time, $3.9 million after-tax charge related to the settlement of lawsuits. Without that charge, Citadel’s latest profit would have dropped 27%.

Valley and Citadel also said their fee income was reduced by a new rule from the Financial Accounting Standards Board, an independent rule-making body for the accounting industry.

The rule, called FASB No. 91 and adopted Jan. 1, applies to the fees banks and S&Ls; receive for making a loan, fees commonly called “points.” The rule says that the financial institution must show that its cost of making the loan equaled the fee it got. If the fee exceeded the cost, the excess income must be deferred and amortized, meaning the money is gradually added back to the institution’s income statement over the life of the loan. Previously, many institutions often recorded the fees immediately on their books as a lump sum payment.

Glenfed said it was not yet affected by the new accounting rule because the S&L; does not plan to adopt it until the S&L;’s new fiscal year begins July 1.

Among the banks, Lincoln Bancorp enjoyed the biggest surge in net income. Lincoln, the Encino-based parent of Lincoln National Bank, which caters mostly to business customers, said its profit doubled to $616,561 from $308,144, giving it an ROA of 0.98%.

Sizable earnings gains are becoming a habit for Lincoln. The bank attributes its success to solving the interest-rate matchup that lately seems to have eluded most of the S&Ls; in the residential mortgage-loan market.

Rates Protect Profit

Lincoln has worked to build a portfolio of commercial loans that carry interest rates that fluctuate with money-market rates--just as the S&L;’s adjustable-rate mortgages do. But unlike the mortgages, Lincoln’s loan rates consistently stay well above the changing cost that Lincoln must pay to obtain new funds for lending, thereby protecting its profit.

Santa Clarita National Bank, based in Valencia, continued to show strong profitability with an ROA of 1.42% in the first quarter, and earnings that rose 23% to $722,000 from $586,000.

TransWorld Bancorp, the Sherman Oaks-based holding company for TransWorld Bank, reported 14% higher earnings, to $252,000 from $221,000. But TransWorld’s ROA, 0.60%, was the worst of the big banks.

APSB, the North Hollywood-based parent of American Pacific State Bank, enjoyed a 45% jump in profit to $303,891 from $209,388, for an ROA of 0.84%. Frank J. Ures Jr., APSB’s president, said the gain reflected strong demand for loans from businesses, “which created a substantial increase in our net interest income.”

The new loans average about $500,000, and many of the commercial borrowers needed the money for plant expansion and buying new equipment, a bullish sign for the local economy, he said.

But even Ures admitted that APSB’s profit gain was part luck. “You can go through a drought for six months then, all of a sudden, you get a nice, solid request for loans that you dream about all year long,” he said.

Until two months ago, Valley National Bank in Glendale thought it had a solid merger agreement with an Italian bank, Instituto Bancario San Paolo di Torino of Turin. Terms had been reached for the Italian bank to pay about $47 million for Valley National. But in March, the deal fell apart when approval from Italy’s central bank was delayed.

Up until then, Valley National had lost momentum in generating new business because of the expected merger, said bank president Joseph H. Valentine. “We had very little deposit growth, virtually no loan growth” and assets edged up only 1%, to $239.4 million from $238.2 million a year earlier, he said.

But Valley National also kept its costs down, and in the first quarter the bank posted a strong showing despite having relatively little new business. Its net income rose 21% to $1.09 million from $901,000, giving it a sparkling return on assets of 1.77%.

Here’s one reason costs stayed low: Valley National, expecting the merger to go through, ordered few new supplies. “We ran out of stationery,” Valentine said.

FIRST QUARTER REPORT FROM THE VALLEY’S LARGEST FINANCIAL INSTITUTIONS

Assets Change March 31 from Bank (millions) Year Ago Independence Bank $458.9 +37% Lincoln Bancorp $285.7 +45% (parent of Lincoln National Bank) Valley National Bank $239.4 +1% Santa Clarita National Bank $206.1 +6% TransWorld Bancorp $170.2 +8% (parent of TransWorld Bank) APSB Bancorp $144.4 +2% (parent of American Pacific State Bank) S&L; Glenfed* $23,132.5 +8% (parent of Glendale Federal) Sears Savings Bank $5,527.1 -13% Citadel Holding $3,913.3 +21% (parent of Fidelity Federal) Valley Federal $3,283.2 +26%

Change Return Profit from on Average Bank (Loss) Year Ago Assets Independence Bank ($265,000) NA NA Lincoln Bancorp $616,600 +100% 0.98% (parent of Lincoln National Bank) Valley National Bank $1,091,000 + 21% 1.77% Santa Clarita National Bank $722,000 +23% 1.42% TransWorld Bancorp $252,000 +14% 0.60% (parent of TransWorld Bank) APSB Bancorp $303,900 +45% 0.84% (parent of American Pacific State Bank) S&L; Glenfed* $36,153,000 -24% 0.63% (parent of Glendale Federal) Sears Savings Bank ($6,036,000) NA NA Citadel Holding $6,134,000 +36% 0.63% (parent of Fidelity Federal) Valley Federal $1,394,000 -68% 0.17%

* Fiscal 3rd quarter ended March 31

NA: Not applicable for comparison due to current or year-earlier losses.