Bank Profits Climb Again; S&L; Slump Continues
Every major bank based in the San Fernando Valley area posted higher profits in the third quarter while all of the area’s savings and loans continued their longtime slump by posting significant earnings declines or losses.
Five of the six biggest commercial banks with headquarters between Glendale and Camarillo reported third-quarter profit gains of 4% to 112%, compared to the year-earlier period. Independence Bank in Encino posted the biggest profit in the group, with $1.7 million contrasted with a loss of $109,000 in the same period a year earlier. The banks attributed their improved results to higher net interest income and an increase in deposits brought about by the region’s growth.
Net interest income is the difference between the interest a bank or S&L; earns on its loans and investments, and the interest they have to pay to attract deposits or borrow funds.
“Right now, most of us are benefiting,” said David Hender, president of Transworld Bancorp, the Sherman Oaks holding company for TransWorld Bank. “The spread between the costs of deposits and the interest we generate on loans and investments is a good one.”
S&L; Figures
That was not true for S&Ls.; They suffered from lower net interest income largely because interest rates on mortgages did not keep up with rising money market rates during the quarter. On Sept. 30, when the quarter ended, the prime, or base, lending rate was 10%. But many of the home loans S&Ls; have made recently are adjustable rate mortgage loans, which offer initial interest rates of less than the prevailing market rate.
Among banks, Lincoln Bancorp reported the biggest increase in profits. The Encino-based holding company of Lincoln National Bank said its net income rose 112%, to $1.3 million, from $593,000 in the same period a year earlier. Lincoln’s assets as of Sept. 30 were up 40% to $393 million, from $281 million a year earlier.
Lincoln caters mostly to smaller businesses and makes mostly commercial loans. Its lending to this “middle” market tends to be highly profitable because the loans carry interest rates that are higher than the prime rate.
President John J. Keating said Lincoln’s 40% jump in assets during the third quarter is not unusual. “We have steadily been growing about 40% a year,” he said. Lincoln National gained about 300 business customers during the third quarter, which Keating said, is average.
Lincoln Bancorp posted a return on average assets, or ROA, of 1.50%, the third-highest ROA among the area banks. The ROA is a key indicator that shows how profitably a bank or S&L; is using its assets. The 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.
Performance Measure
An ROA of more than 1% is considered an excellent performance, and four of the Valley area’s six major banks reported an ROA of greater than 1%. Santa Clarita National Bank in Valencia had the highest at 1.73%.
Valley National Bank had an ROA of 1.60%, the second highest among the area banks, but it also posted the smallest quarterly profit gain. The Glendale-based bank earned $986,000, or 4% more than the $945,000 it earned in the same quarter in 1987.
President Joseph Valentine said the bank is still trying to recover from an aborted merger with an Italian bank, Instituto Bacario San Paolo di Torino. While the two banks were holding merger talks, Valley National did not replace executives who resigned or retired and did not renew advertising and other marketing programs. But the planned merger was canceled in March when approval from Italy’s central bank was delayed.
“We lost a lot of momentum when something like that happens,” Valentine said. “Employees are apprehensive, and you have high turnover. Customers are apprehensive about what is going to happen to their bank.”
Independence Bank, a privately held concern, recovered from a loss in the second quarter to post a third-quarter profit of $1.7 million and an ROA of 1.16%. In the same period a year earlier, Independence lost $109,000.
TransWorld Bancorp reported a 44% profit gain to $456,000 in the quarter, for an ROA of 0.98%. Besides citing higher net interest income, President Hender said the bank’s profit improved because it gained customers when it moved its main office during the quarter from Van Nuys to Sherman Oaks.
APSB Bancorp, the North Hollywood parent of American Pacific State Bank, said earnings rose 30% to $371,000, from $285,000, for an ROA of 0.94%.
Santa Clarita National reported a 91% jump in net income to $946,000 from $494,000 in the same quarter a year before.
Increase Downplayed
But Don Guglielmino, Santa Clarita’s chairman, downplayed the bank’s jump in profits and its unusually high ROA, attributing both to the boom under way in the Santa Clarita Valley. “We’re seeing a lot of new people moving into the area and new businesses and industries starting up, and these have an impact on the bank’s earnings,” Guglielmino said. “We didn’t do anything different this quarter than we’ve done in the last 23 years.”
Sears Savings Bank was the only loser among S&Ls.; The Glendale-based company, a unit of the giant retailer Sears Roebuck & Co., lost $4.9 million, contrasted with a profit of $2 million a year earlier.
President Ronald F. Danner cited a $3.6-million operating loss at Sears Mortgage Co., and a $5-million settlement the S&L; paid to resolve a real estate development project lawsuit.
Sears Mortgage Co. originally was a mortgage banker that made loans, then resold them to other financial institutions but continued to collect the borrowers’ monthly payments for a fee.
However, all but one of Sears Mortgage’s 51 branch offices, along with its $1.7 billion in mortgage loans, were sold to Citicorp in June, 1987. Danner said Sears Mortgage lost money this quarter because it still has not rebuilt a healthy loan servicing business.
Smallest Decline
The Valley area’s largest S&L; had the smallest dip in net income and the highest ROA among thrifts. Glenfed, parent of Glendale Federal Savings & Loan, earned a profit of $31 million in the quarter that ended Sept. 30 (its fiscal first quarter), a 29% decrease from $44 million a year earlier. The company’s ROA was 0.52%.
Glenfed, with $24.4 billion in assets, said its lower income was due to lower net interest income and costs incurred from consolidating 12 of its 20 mortgage banking offices.
Valley Federal Savings & Loan in Van Nuys did not fare as well. Its ROA was a skimpy 0.02%, and profits in the third quarter fell 98% to $132,000 compared to a profit of $5.9 million a year earlier.
Chairman Dan Nelms did not return phone calls. But Valley Federal has previously blamed its poor performance on All Valley Acceptance, a subsidiary that lends to buyers of mobile homes and other types of manufactured housing.
Valley Federal has also built up sizable legal expenses while fighting a takeover attempt by Citadel Holding, the Glendale-based parent company of Fidelity Federal Savings & Loan. Valley Federal said it has spent $3.3 million on legal expenses in the first 9 months of 1988, and most of that was spent on the Citadel takeover battle.
Last week, both companies issued a statement that they had agreed to some ground rules that would allow Citadel to buy Valley Federal. No terms were revealed. But they also cautioned that the deal might not go through and that there was a possibility regulatory agencies would not approve the merger.
Citadel Holding posted a 40% drop in profits to $5.3 million from $8.8 million a year earlier for an ROA of only 0.5%. Chief operating officer Samuel McCarver blamed Citadel’s performance on low net interest income and a huge increase in provisions for bad loans.
For the third quarter of 1987, Citadel had $15,000 in bad loans. But this quarter, the S&L; reserved $1.1 million for bad loans.
THIRD QUARTER REPORT FROM THE VALLEY’S LARGEST FINANCIAL INSTITUTIONS
Assets Sept. 30 Change from Profit Bank (millions) Year ago (Loss) Independence Bank $582.2 +50% $1,685,000 Lincoln Bancorp $393.1 +40% 1,255,100 (parent of Lincoln Natl. Bank) Valley National Bank $246.4 +2% 986,000 Santa Clarita Natl. Bank $222.8 +10% 946,000 TransWorld Banncorp $195.0 +18% 456,000 (parent of TransWorld Bank) APSB Bancorp $162.0 +14% 371,000 (parent of American Pacific State Bank) S&L; Glenfed*(parent of $24,392.0 +10% $31,446,000 Glendale Federal) Sears Savings Bank 4,893.1 -14% (4,893,000) Citadel Holding 4,338.2 +17% 5,298,000 (parent of Fidelity Federal) Valley Federal 3,447.8 +10% 132,000
Return on Change from Average Bank Year ago Assets Independence Bank NA 1.16% Lincoln Bancorp +112% 1.50% (parent of Lincoln Natl. Bank) Valley National Bank +4% 1.60% Santa Clarita Natl. Bank +91% 1.73% TransWorld Banncorp +44% 0.98% (parent of TransWorld Bank) APSB Bancorp +30% 0.94% (parent of American Pacific State Bank) S&L; Glenfed*(parent of -29% 0.52% Glendale Federal) Sears Savings Bank NA NA Citadel Holding -40% 0.50% (parent of Fidelity Federal) Valley Federal -98% .02%
* Fiscal 1st quarter ended Sept. 30
NA: Not applicable for comparison due to current or year-earlier losses.
