Two Sides of Coin on Interest Rates : Steady Increases Made 1988 a Heady Year for Banks, a Toss-Up for Thrifts

Times Staff Writer

Major banks in the San Fernando Valley will remember 1988 as a banner year that enriched them with sharply higher profits. But for most of the area's big savings and loans institutions, last year was hardly memorable.

Of the six biggest commercial banks with headquarters between Glendale and Camarillo, all but one posted double-digit profit gains for the fourth quarter and for all of 1988, compared with year-earlier periods.

The exception, Valley National Bank in Glendale, reported earnings gains of only 5% and 6% for the quarter and the year, respectively. Nonetheless, Valley National had one of the highest return-on-assets ratios, meaning it was one of the most effective banks in wringing profits from the assets at its disposal.

Earnings came a lot harder to the region's thrifts. Three of the four biggest savings institutions suffered double-digit profit declines in 1988, and the fourth, Valley Federal Savings & Loan in Van Nuys, had a $3-million loss.

The divergent showings of the banks and S&Ls; stemmed largely from the same source: interest rates.

Steady Increase

Rates rose steadily during 1988, increasing the cost that banks and S&Ls; had to pay to acquire the money that they lend out again to their customers.

For instance, the rate on federal funds, which are reserves that banks borrow from one another overnight, climbed to 9% from 7% during 1988. Rates paid on 3-month certificates of deposit rose to about 8.5% from 6.3%.

But the banks were able to absorb the rise in interest rates much better than the S&Ls;, and even benefited from higher rates.

Many of the banks' loans are to businesses and carry lending charges that are priced at a fixed level above market rates. For example, a dry-cleaning store might borrow money at 1.5 points above the prime rate; if the prime rate goes up, the store's rate automatically goes up.

That's what happened last year. Market rates rose, lifting the banks' interest income and fattening profit margins.

Mortgage Specialists

No so at the savings and loans. They specialize in residential mortgage loans, and nearly all of the mortgages written today are adjustable-rate loans, which feature below-market interest rates for the first few months or years of the mortgage.

The relatively low introductory rates help home buyers qualify for mortgage loans and generate new business for S&Ls.; But last year, rates on adjustable mortgages did not rise as quickly as market rates, so the S&Ls;' interest income did not keep pace with their higher cost of obtaining funds. Result: profits narrowed.

Mortgage rates overall "didn't rise nearly as fast as the actual cost of funds," said Norman M. Coulson, president of Glenfed, the holding company for Glendale Federal Savings & Loan. Glenfed is by far the area's biggest thrift, with $25 billion in assets.

In the quarter that ended Dec. 31, which is the second quarter of Glenfed's fiscal year, its net interest income--the amount of interest it collects minus the interest it pays on deposits--fell 11% to $109.9 million from $123.9 million.

Overall, Glenfed's profit fell 27% in the quarter, to $35.2 million from $48.2 million a year earlier, when Glenfed's results included $15.6 million in one-time gains. For the first half of its current fiscal year, Glenfed's profit dropped 28% to $66.6 million from $92.3 million.

The lower earnings also left Glenfed's return on average assets at 0.55% for 1988, well below the 1% ratio that is considered an excellent performance. Indeed, none of the area's big S&Ls; managed a return of 1% or more for the fourth quarter or the full year, but several of the banks did.

The return on average assets is a key gauge of performance because it indicates how profitably a bank or S&L; is employing its assets. The ratio is calculated by dividing an institution's profit by its average assets during the quarter, then multiplying that figure by four to produced an annualized rate of return.

Citadel Holding Corp., the Glendale parent of Fidelity Federal Savings & Loan, also blamed the rise in interest rates last year for lower profits. In the fourth quarter, Citadel's net income fell 44% to $4.88 million from $8.77 million, and for the year its profit dropped 15% to $24.1 million from $28.2 million.

Sears Savings Bank, also in Glendale, ended a roller-coaster 1988 on an upswing. The company, a unit of giant retailer Sears, Roebuck & Co., has two separate operations. One, 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.

The other division, called Sears Mortgage Corp., is a mortgage banker that makes loans and resells most of them to other financial institutions--while keeping the rights to collect the borrowers' monthly payments and otherwise service the loans for a fee. Sears Mortgage also can sell those rights to generate additional income.

Sears Soared

That's what it did in the fourth quarter, which helped Sears Savings' net income soar to $9.1 million from $1.7 million, said Sears Savings President Ronald F. Danner. But losses earlier in the year left its profit for all of 1988 at $3.6 million, down 92% from $46.9 million in 1987, when the company recorded big gains from selling all but one of its 51 Sears Savings branch offices.

Sears Savings has continued streamlining this year. Recently it moved some of its accounting and treasury functions to Riverwoods, Ill., where Sears Mortgage is headquartered, Danner said. The move resulted in the layoff of about 80 people in Glendale, he said.

The other major S&L;, Valley Federal, eked out a $116,000 profit in the fourth quarter, compared with a $2.4-million loss a year earlier. For the year, Valley Federal lost $3 million compared with a $16.5-million profit in 1987.

Valley Federal, which fought off a takeover threat from Citadel Holding early in 1988, blamed its poor showing last year on several factors, including a pre-tax operating loss of $11.5 million by its All Valley Acceptance Co. unit, which provides financing for manufactured housing. Valley Federal Chairman Dan E. Nelms also cited the rise in interest rates, which cut the thrift's profit margin.

The picture was much brighter among the banks.

Independence Bank in Encino, the area's biggest, reported a 16% rise in fourth-quarter profit to $2.43 million from $2.10 million, and full-year earnings nearly doubled to $4.90 million from $2.52 million. Privately held Independence also had the highest return on average assets, 1.62%, in the fourth quarter.

Valley National Bank's fourth-quarter profit edged up to $1.04 million from $993,000, and its full-year net income rose to $4.08 million from $3.86 million. Valley National's return on average assets of 1.63% was the highest among the local banks for all of 1988.

Lincoln Bancorp, the Encino parent of Lincoln National Bank, continued its recent string of solid earnings gains. Lincoln's fourth-quarter net income rose 78% to $1.44 million from $807,496, and its full-year earnings nearly doubled to $4.19 million from $2.12 million.

28% Gain Posted

In Valencia, Santa Clarita National Bank posted a 28% gain in fourth-quarter earnings, to $778,000 from $606,000, and its 1988 profit rose 36% to $3.18 million from $2.34 million.

Sherman Oaks-based TransWorld Bancorp, the parent of TransWorld Bank, reported a 67% surge in fourth-quarter profit to $491,000 from $294,000, while its full-year earnings rose 42% to $1.50 million from $1.06 million.

APSB Bancorp, the North Hollywood parent of American Pacific State Bank, said fourth-quarter profit rose 34% to $396,539 from $296,179, and its earnings for 1988 totaled $1.34 million, up 32% from $1.02 million the previous year.

Three smaller banks also reported results for last year:

Charter Pacific Bank in Agoura Hills, with assets of $54.5 million as of Dec. 31, said its profit in 1988 rose to $686,000 from $420,000.

Bank of Granada Hills' net income for last year surged to $415,341 from $17,943 the previous year. The bank's assets at the end of 1988 totaled $34.1 million.

BNB Bancorp, the parent of the single-office Burbank National Bank, lost $37,473 last year, an improvement from its $112,840 loss in 1987. The company's assets totaled $14.1 million as of Dec. 31.


Change Return on Profit From Average BANK (Loss) Year ago Assets Independence Bank $4.9 million +94% 0.94% Lincoln Bancorp $4.2 million +98% 1.35% (parent of Lincoln Natl. Bank) Santa Clarita Natl. Bank $3.2 million +36% 1.46% Valley National Bank $4.1 million +6% 1.63% TransWorld Bancorp $1.5 million +42% 0.83% (parent of TransWorld Bank) APSB Bancorp $1.3 million +32% 0.89% (parent of American Pacific State Bank) SAVINGS & LOAN Glenfed* $66.6 million -28% 0.55% (parent of Glendale Federal) Sears Savings $3.6 million -92% 0.07% Citadel Holding $24.1 million -15% 0.58% (parent of Fidelity Federal) Valley Federal ($3.0 million) NA NA

* First six months of fiscal year, ended Dec. 31

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


Assets Change Change Dec. 31 From Profit From BANK (millions) Year Ago (Loss) Year Ago Independence Bank $605.8 +46% $2.4 million +16% Lincoln Bancorp $416.5 +38% $1.4 million +78% (parent of Lincoln Natl. Bank) Santa Clarita Natl. Bank $248.1 +23% $778,000 +28% Valley National Bank $233.2 +7% $1.0 million +5% TransWorld Bancorp $196.0 +20% $491,000 +67% (parent of TransWorld Bank) APSB Bancorp $165.1 +14% $396,540 +34% (parent of American Pacific State Bank) SAVINGS & LOAN Glenfed* $25,025.0 +8% $35.2 million -27% (parent of Glendale Federal) Sears Savings $4,843.6 -14% $9.1 million +442% Citadel Holding $4,641.9 +21% $4.9 million -44% (parent of Fidelity Federal) Valley Federal $3,480.4 +5% $116,000 NA

Return on Average BANK Assets Independence Bank 1.62% Lincoln Bancorp 1.56% (parent of Lincoln Natl. Bank) Santa Clarita Natl. Bank 1.31% Valley National Bank 1.61% TransWorld Bancorp 1.01% (parent of TransWorld Bank) APSB Bancorp 0.97% (parent of American Pacific State Bank) SAVINGS & LOAN Glenfed* 0.57% (parent of Glendale Federal) Sears Savings 0.75% Citadel Holding 0.44% (parent of Fidelity Federal) Valley Federal 0.01%

* Fiscal 2nd quarter ended Dec. 31

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

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