Higher Interest Rates Helping Banks, Hurting S&Ls; in Valley
Many people say the distinction between banks and savings and loans is increasingly blurred because of ongoing changes in banking laws. But in terms of profit, the two could not have been more different in the first quarter, at least in the San Fernando Valley.
Earnings of major banks with headquarters between Glendale and Camarillo continued to rise sharply in the three months that ended March 31, with most posting double-digit gains. But at the area’s biggest savings and loans, the double-digit changes they reported in the first quarter marked declines in their profits.
For both the banks and the S&Ls;, the main cause of the shift in profits was the continuing rise in interest rates, which began in early 1988. The higher rates have benefited the banks but penalized the thrifts.
For most of the banks, their first-quarter returns on average assets--a key financial measure that indicates how profitably a bank uses the assets at its disposal--climbed above the 1% mark, which is considered an excellent showing. Local S&Ls;, however, did not even manage returns approaching half that.
Interest rates determine how much it costs banks and S&Ls; to obtain money for lending and how much they will charge on their loans. But the structure of loans offered by banks and S&Ls; differs greatly, contributing to the disparity in their earnings.
Banks make lots of loans whose interest charges are tied to their prime lending rate or to other market interest rates. When those rates go up, the banks instantly raise the rates on those loans.
By contrast, S&Ls; mostly make long-term home mortgage loans. True, most mortgages also carry adjustable rates these days, but most also feature below-market “teaser” rates for the first year or two of the mortgage. The mortgages also have “caps” that limit how much the S&L; can increase the rate each year.
As interest rates have risen recently, S&Ls; have found that their cost of obtaining money is more expensive, yet they’ve been unable to immediately raise rates on their mortgage loans. So their profits have narrowed.
Profits Drop 51%
For example, Citadel Holding, the parent company of Fidelity Federal Savings & Loan with $4.8 billion in assets, reported a 51% drop in first-quarter profit, to $3 million from $6.1 million a year earlier, which left it with a return on average assets of 0.26%. Citadel said its net interest rate margin--its average interest rate on loans minus the average rate it pays for deposits--tumbled to 1.14% from 1.98% a year ago.
And Glenfed, the holding company of Glendale Federal Bank, which is six times Citadel’s size with $26 billion in assets as of March 31, fared little better. Its profit skidded 56%, to $20.2 million from $45.6 million, giving it a return on average assets of only 0.31%.
Sears Savings Bank in Glendale is mostly a mortgage banker. That means it makes mortgage loans, then sells many of them to investors but continues to service the loans for a fee. At times, Sears Savings also sells its servicing rights for additional cash.
Time Delay
But Sears Savings has also struggled under the weight of rising interest rates. The company lost $7 million in the latest quarter, compared with a year-earlier loss of $6 million. J. Clarke Smith, chief financial officer, blamed the latest loss in large part on the lag between Sears Savings’ need to pay more for money and the time it takes for rates on its adjustable-rate mortgages to climb to profitable levels.
Smith added that later this year, the thrift might sell more of its loan-servicing business to offset the losses.
Some S&Ls; had other problems that compounded the effect of higher interest rates. Valley Federal Savings & Loan in Van Nuys continues to be saddled with problems at its All Valley Acceptance unit, which finances mobile homes and lost $3.8 million in the first quarter. That helped leave Valley Federal with a paltry profit of $178,000, down 87% from $1.4 million a year earlier.
For local banks, however, the first quarter’s results were an entirely different story, even though interest rates have been shooting up. Between Jan. 1 and March 31, the rate on three-month Treasury bills climbed from 8.1% to 8.9%, rates on three-month certificates of deposit, or CDs, rose from about 8.5% to 9.5%, and the banks’ prime rate jumped from 10.5% to 11.5%.
That rise in rates will eventually increase the banks’ cost of doing business by lifting the interest rates they must pay for deposits. But many bank deposits, such as CDs, have maturities of six to 12 months. That means the banks don’t have to increase the rate they pay on those deposits for some time.
Because most commercial loans that banks make have adjustable rates, the interest income from their loans goes up immediately when interest rates shoot up, whereas the interest expense on deposits rises more slowly or even steadies. And that widens their profit.
Time of Opportunity
“We’re all benefiting from this rare time when our cost of money has remained relatively stable and interest rates on loans have gone up,” said Frank J. Ures Jr., president of APSB Bancorp, the North Hollywood parent of American Pacific State Bank.
APSB’s first-quarter profit climbed 22%, to $371,000 from $304,000 a year earlier, giving it a return on average assets of 0.87%.
“I wish I could say that it was primarily due to the brilliance of management, but it’s just that sometimes in banking we get a little lucky,” he said, adding that APSB has also benefited from keeping a lid on its operating costs.
Among the banks, Lincoln Bancorp posted the best showing. The Encino parent of Lincoln National Bank, which caters mostly to businesses, reported its profit more than doubled to $1.4 million from $616,561, and its return on average assets was a lofty 1.71%.
Lincoln has benefited over the past several quarters from strong loan demand and its ability to attract many of its deposits in the form of “demand deposits,” or checking accounts, which don’t require Lincoln to pay substantial interest rates. That has helped limit Lincoln’s costs.
Other Gains
Three other banks also posted impressive returns on average assets: Santa Clarita National Bank in Valencia at 1.53%, Valley National Bank in Glendale at 1.5%, and TransWorld Bancorp, the holding company for TransWorld Bank in Sherman Oaks, at 1.03%.
Santa Clarita also said its net income jumped 30% from a year earlier, to $935,000 from $722,000, and TransWorld’s profit nearly doubled, to $497,000 from $252,000.
But Valley National’s earnings fell 11% in the quarter, to $968,000 from $1.09 million. Joseph H. Valentine, president, said the bank’s results would have been flat except that in the 1988 quarter, Valley National’s profit included a $137,000 extraordinary gain.
“Loan demand has been soft the last two or three years for us,” Valentine said. That’s partly because Valley National makes fewer car loans now that the finance subsidiaries of the major U.S. auto makers, such as General Motors and Ford, handle an increasing amount of vehicle loans, he said.
The area’s biggest bank by assets, privately held Independence Bank in Encino with $622 million in assets, said it earned $1.1 million in the quarter compared with a loss of $300,000 a year earlier.
QUARTERLY RESULTS FOR THE VALLEY’S LARGEST FINANCIAL INSTITUTIONS
Assets March 31 Change from Bank (millions) Year ago Independence Bank $621.9 +36% Lincoln Bancorp $393.7 +38% (parent of Lincoln Natl. Bank) Valley National Bank $253.5 +6% Santa Clarita Natl. Bank $245.7 +19% TransWorld Bancorp $198.0 +16% (parent of TransWorld Bank) APSB Bancorp $176.0 +22% (parent of American Pacific State Bank) Savings & Loan Glenfed* $25,976.8 +13% (parent of Glendale Federal) Citadel Holding $4,778.8 +22% (parent of Fidelity Federal) Sears Savings $4,057.9 -27% Valley Federal $3,440.7 +5%
Return on Profit Change from Average Bank (Loss) Year ago Assets Independence Bank $1.1 million NA 0.72% Lincoln Bancorp $1.4 million +128% 1.71% (parent of Lincoln Natl. Bank) Valley National Bank $968,000 -11% 1.50% Santa Clarita Natl. Bank $935,000 +30% 1.53% TransWorld Bancorp $497,000 +97% 1.03% (parent of TransWorld Bank) APSB Bancorp $371,000 +22% 0.87% (parent of American Pacific State Bank) Savings & Loan Glenfed* $20.2 million -56% 0.31% (parent of Glendale Federal) Citadel Holding $3.0 million -51% 0.26% (parent of Fidelity Federal) Sears Savings ($7.0 million) NA NA Valley Federal $178,000 -87% 0.02%
* Fiscal 3rd quarter ended March 31
NA: Not applicable for comparison due to current or year-earlier losses.
