Costs of Funds Vary : S&L; Earnings Mixed; Bank Profits Increase
Most major banks based in the San Fernando Valley posted higher earnings in the second quarter, but the area’s big savings and loans repeated their mixed performance of the first three months of 1988.
The banks generally attributed their gains to their ability to manage a gradual rise in interest rates during the quarter. Most banks earned higher net interest income, that is, the interest earned on loans and investments comfortably exceeded the interest they had to pay to attract deposits or borrow funds.
By contrast, the S&Ls; largely suffered from lower net interest income; their cost of funds outpaced the interest they earned on loans and eroded their overall earnings in the quarter ended June 30. The main culprit? The thrifts weren’t able to increase mortgage rates as fast as rising money-market rates lifted the S&Ls;’ own cost of funds.
Higher Net Income
Still, some thrifts were able to report higher net income in the quarter because of asset sales, lower overhead costs, strong gains by their non-lending subsidiaries and other one-time factors.
Five of the six biggest commercial banks with headquarters between Glendale and Camarillo reported higher second-quarter profits. The exception, Valley National Bank in Glendale with $244.1 million in assets, said its profit fell 7% from a year earlier.
In another financial performance category, return on average assets (ROA), Valley National scored the highest among the region’s big financial institutions. An ROA above 1% is considered an excellent performance, and Valley National’s return was 1.55%.
The ROA is closely monitored by banking analysts because it indicates how profitably a bank or S&L; is using the assets at its disposal. The return 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.
No Merger Affects Profits
Valley National’s profit decline, to $956,000 from $1.02 million a year earlier, mostly reflected a planned merger that did not take place between Valley National and an Italian bank, Instituto Bancario San Paolo di Torino.
While the merger was pending, Valley National effectively stopped growing, said Valley National President Joseph H. Valentine. Valley National’s marketing chief and other bank officials who had left or retired were not replaced. Its advertising and other marketing programs were not renewed, and equipment and supplies were not reordered, he said.
But after the merger fell apart in March, “we had to play catch-up,” Valentine said. The company has been adding staff and equipment and is preparing new marketing plans, all of which helped lift the bank’s second-quarter operating costs by $500,000 and cut into its profit.
Two other banks posted ROAs above 1%, and both have been standout performers in recent quarters: Santa Clarita National Bank in Valencia, with an ROA of 1.38%, and Lincoln Bancorp, the Encino parent of Lincoln National Bank, with a return of 1.23%.
Location Helps Bank
Santa Clarita’s second-quarter profit rose 11%, to $732,000 from $658,000. The bank is thriving in part because of its location in the fast-growing Santa Clarita Valley. Meanwhile, Lincoln, which caters mostly to small- and medium-size businesses, said earnings more than doubled to $881,965 from $408,250.
Lincoln said its gain reflected a 52% jump in its net interest income, despite a steady rise in money-market interest rates that forced it to pay more for deposits during the second quarter.
That jump in rates prompted banks in mid-May to raise their prime, or base, lending rates to 9%, from 8.5% in mid-May; a year earlier, the prime was 8.25%. (The prime has since climbed to 10%.) And most local rates on conventional, fixed-rate 30-year home mortgages were between 10% and 11% on June 30, up from 8.75% to 9.25% a year earlier.
Independence Bank in Encino, the biggest area bank with $521.2 million in assets, said profit soared to $1.05 million from $226,000, for an ROA of 0.88%. Morton R. Michaels, president of the privately held concern, did not return telephone calls.
TransWorld Bancorp, the Sherman Oaks holding company for TransWorld Bank, said earnings jumped 34% to $302,000 from $226,000, for an ROA of 0.71%. The gain reflected an 11% gain in net interest income, and efforts to curb overhead costs, said chief financial officer Howard Stanke.
‘Tight Controls’
APSB Bancorp, the North Hollywood parent of American Pacific State Bank, said earnings rose 17% to $271,000 from $231,000 a year ago, for an ROA of 0.73%. APSB also credited the gain to a higher interest margin and “tight controls over expenses.”
Most banks have a combination of residential and commercial loans on their books. The commercial loans typically have floating rates, that is, the rates change automatically if money-market rates change. That leaves the bank’s profit margin on those loans intact.
S&Ls;, by contrast, concentrate on home mortgages, and most mortgages being written by S&Ls; and banks also have adjustable rates. But usually the mortgage rates adjust only every six months or a year. So if money-market rates rise quickly, there’s a lag before the mortgage holders must start paying the S&L; more interest. And that lag often squeezes a thrift’s profit margin.
For example, Valley Federal Savings & Loan in Van Nuys. About $700 million, or 24%, of the thrift’s $2.9 billion in loans are adjustable and still paying the low, introductory rates common on such loans.
‘Dramatic Drop’
At the same time, though, Valley Federal had to pay more interest on deposits because money-market rates were rising. As a result, the thrift’s spread--the difference between its interest income and interest costs--fell to 1.85% in the second quarter from 2.61% a year ago, “a dramatic drop” Valley Federal President Dan Nelms said.
Valley Federal had other problems. A settlement of a lawsuit, legal fees to block a takeover by Citadel Holding Corp. and other one-time charges left Valley Federal with a net loss of $4.7 million, contrasted with profit of $6.2 million a year ago.
But Nelms said that in the second half of 1988, rates on Valley Federal’s adjustable mortgage are due to go up to match the recent jump in money market rates, “which will help substantially on our earnings.”
Citadel, the Glendale parent of Fidelity Federal Savings & Loan, reported a 28% earnings gain to $7.8 million from $6.1 million, producing an ROA of 0.80%. But Citadel’s net interest income slipped to $21.8 million from $22.7 million. Citadel was able to post higher earnings mostly because it sold securities for an after-tax gain of $1.5 million.
Interest Margin Drop
Glenfed, parent of Glendale Federal and the area’s biggest S&L; with $23.7 billion in assets, likewise had a drop in its interest margin and in its net interest income.
But strong earnings from its home-building unit and a 6% drop in overhead costs helped give Glenfed a 33% profit gain, to $52.1 million from $39.2 million, and an ROA of 0.89% for its fiscal fourth quarter ended June 30.
Another Glendale institution, Sears Savings Bank, a unit of Sears, Roebuck & Co., showed an 88% plunge in net income to $5.5 million from $44.2 million. However, Sears Savings Treasurer Edwin D. Volk said the bulk of the year-earlier earnings came from Sears Savings’ sale in June 1987 of all but one of the 51 branch offices of its savings bank unit to Citicorp. Sears Savings, whose ROA was a meager 0.41%, also has mortgage banking unit.
SECOND QUARTER REPORT FROM THE VALLEY’S LARGEST FINANCIAL INSTITUTIONS BANKS
Assets Change Change June 30 from Profit from Bank (millions) Year Ago (Loss) Year Ago Independence Bank $521.2 +47% $1,046,000 +367% Lincoln Bancorp $355.4 +31% $881,965 +116% (parent of Lincoln National Bank) Valley National Bank $244.1 +4% $956,000 -7% Santa Clarita National Bank $213.7 +6% $732,000 +11% TransWorld Bancorp $181.9 +11% $302,000 +34% (parent of TransWorld Bank) APSB Bancorp $151.0 +8% $271,000 +17% (parent of American Pacific State Bank)
Return on Average Bank Assets Independence Bank 0.88% Lincoln Bancorp 1.23% (parent of Lincoln National Bank) Valley National Bank 1.55% Santa Clarita National Bank 1.38% TransWorld Bancorp 0.71% (parent of TransWorld Bank) APSB Bancorp 0.73% (parent of American Pacific State Bank)
SAVINGS AND LOANS
Assets Change Change June 30 from Profit from S&L; (millions) Year Ago (Loss) Year Ago Glenfed* $23,711.4 +9% $52,149,000 +33% (parent of Glendale Federal) Sears Savings Bank $5,279.6 -2% $5,473,000 -88% Citadel Holding $4,137.0 +19% $7,768,000 +28% (parent of Fidelity Federal) Valley Federal $3,331.5 +14% ($4,651,000) NA
Return on Average S&L; Assets Glenfed* 0.89% (parent of Glendale Federal) Sears Savings Bank 0.41% Citadel Holding 0.80% (parent of Fidelity Federal) Valley Federal NA
* Fiscal 4th quarter ended June 30
NA: Not applicable for comparison due to current or year-earlier losses.
