Valley-Area Bank Profits Rise, Outpacing S
Most major banks based in the San Fernando and Santa Clarita valleys posted higher profits in the second quarter, outperforming major local savings and loans, which showed large drops in profits or even losses for the period.
The S&Ls; continued to struggle with higher interest rates relative to a year ago, although rates dipped late in the second quarter. As rates have climbed, so have the S&Ls;’ interest costs for deposits, yet the S&Ls; have not been able to earn significantly more interest from their loans.
That’s because most S&Ls; write large numbers of adjustable-rate mortgages, which typically offer low introductory interest rates for the first year or two, and the rates on those mortgages haven’t kept pace with the S&Ls;’ money costs.
By contrast, most of the banks continued to thrive with the same interest-rate conditions. The banks typically peg interest on their loans to rates in the broader financial market for money, thereby ensuring that they keep the same profit margin whether rates rise or fall. In addition, many bank deposits are often in checking accounts on which the bank pays no interest at all.
Drop in Rates
The drop in money-market rates occurred late in the quarter. On June 5, many major banks lowered their prime, the rate they charge their best corporate customers, from 11.5% to 11%. Also, the discount rate on three-month Treasury bills fell from 8.85% to 7.77% during the quarter, while the rate on three-month certificates of deposit fell from 9.5% to 8.65%.
A number of the banks did particularly well by one measure of performance, called the return on average assets (ROA). An ROA of 1% is considered excellent. Lincoln Bancorp, Santa Clarita National Bank, Valley National Bank and TransWorld Bancorp all had ROAs of more than 1%.
The ROA is considered an important gauge because it measures how profitably a bank or S&L; invests the assets at its disposal. The figure is reached by dividing an institution’s net income by its quarterly average assets to arrive at a quarterly rate of return--then multiplying by four to produce an annual rate.
Among banks, Santa Clarita National’s performance was indicative of business conditions for local banks from April through June. Valencia-based Santa Clarita reported a 33% increase in net income to $977,000 from $732,000 a year earlier.
Santa Clarita Chairman Don F. Guglielmino said that in addition to benefiting from higher interest rates, the bank reduced its provision for loan losses 32%, to $425,000 from $628,000 a year ago. (The provision for loan losses is the amount of money a bank sets aside to cover any bad loans.) Cutting that reserve helped boost profits.
But Guglielmino, 69, said he could not point to one factor to explain how the bank managed to achieve a return on average assets of 1.57%. “We haven’t got any geniuses here,” he said. Santa Clarita’s ROA has been above 1% since the fourth quarter of 1987.
Assets Rose
Lincoln Bancorp, the Encino parent of Lincoln National Bank with $395.7 million in assets, said its second-quarter net income rose 82% to $1.6 million from $881,965 last year. While Lincoln’s assets rose 11%, the bank also pushed its net interest margin--the interest it earns when it lends money minus the interest it pays to borrow money--from 6.75% to 8.97%.
Like many banks, Lincoln benefited from being able to delay lowering the interest rates it charges on loans even while its cost of money began to fall off in the latest quarter. “The prime started moving down on June 2 or June 5,” said Chief Financial Officer Robert Vecci. He said the bank did not lower loan rates until three weeks later.
TransWorld Bancorp, the Sherman Oaks holding company for TransWorld Bank, and APSB Bancorp, the North Hollywood parent of American Pacific State Bank, both also reported stronger second quarters. TransWorld’s earnings jumped 75% to $530,000 from $302,000, while APSB’s climbed 34% to $362,000 from $271,000. TransWorld achieved an ROA of 1.08%; APSB’s ROA was 0.85%.
But the area’s largest bank, Independence in Encino, with $631.8 million in assets, struggled in the quarter. Independence lost $324,000 during the quarter, compared with net income of $1 million during the same period last year and $1.1 million in the first quarter of 1989.
The loss came even though Independence’s assets rose 33% over last year. Independence Chairman and Chief Executive Fulvio Dobrich said the loss was due to an $800,000 out-of-court settlement in a case in which the bank was alleged to have called in a loan prematurely.
Loan Losses
Dobrich said another factor was that the bank doubled its provision for loan losses--from $2 million during the second quarter of 1988 to $4.2 million this year--to bring its reserve in line with that of comparable banks.
Glendale-based Valley National’s net income, meanwhile, declined 5% to $910,000 from $956,000 while its assets climbed 5% to $255.4 million. But the bank maintained an impressive return on average assets of 1.44%.
Citadel Holding, the parent of Fidelity Federal Savings & Loan, pointed up the problems troubling the large local thrifts. Citadel, with $4.9 billion in assets, reported a 52% drop in profit, to $3.8 million from $7.8 million a year earlier. The Glendale company reported an ROA of 0.29%.
Citadel’s executive vice president and chief operating officer, Samuel C. McCarver, said the thrift continued to be pinched by the high cost of money and fairly low earnings on its adjustable-rate mortgages. “It was June before we started to see some of those rates declining,” McCarver said. “It did give us some benefit for that month--but not enough to have an impact on the period.”
Glenfed, the parent of the Valley’s largest thrift, Glendale Federal Bank, reported that its profit fell 43% to $29.2 million from $51.5 million, even while its assets climbed 9% to $25.6 billion. Glenfed, whose fiscal year ended June 30, attributed some of its drop-off in profit to a $16-million increase in its provision for loan losses.
The Glendale-based savings and loan’s ROA for the period was 0.45%, the best performance among the area’s larger thrifts. But Glenfed said its net interest margin in the latest quarter was 1.74%, down from 2.56% a year earlier.
Mortgage Banker
Sears Savings Bank, which is not an S&L; but primarily a mortgage banker, reported that it lost $7.8 million in the second quarter compared with a $5.5-million profit a year earlier. Glendale-based Sears Savings had assets at the end of the period of $4.6 billion. Like S&Ls;, Sears Savings has suffered from a lag between a rise in the cost of money and its ability to quickly raise rates on adjustable-rate mortgages.
Valley Federal Savings in Van Nuys said it lost $2.6 million in the second quarter compared to a $4.7-million loss a year ago. It attributed the latest results to a pretax loss of $4.9 million at a subsidiary that specializes in loans for trailer homes.
Without those losses, Valley Federal, which has assets of $3.4 billion, said it would have shown a modest profit for the quarter. But Jack Allewaert, Valley Federal’s executive vice president and chief operating officer, said the thrift also suffered from the same interest-rate pinch squeezing other S&Ls.;
Commenting on the narrowing gap between the thrift’s interest income and interest costs, Allewaert said, “We reached a low point in the month of May.”
SECOND QUARTER REPORT FROM THE VALLEY’S LARGEST FINANCIAL INSTITUTIONS
Assets June 30 Change from Profit Change from Bank (millions) Year ago (Loss) Year ago Independence Bank $631.8 +33% (324,000) NA Lincoln Bancorp $395.7 +11% $1.6 million +82% (parent of Lincoln Natl. Bank) Valley National $255.4 +5% $910,000 -5% Bank Santa Clarita $253.8 +19% $977,000 +33% Natl. Bank TransWorld $200.8 +10% $530,000 +75% Bancorp (parent of Trans- World Bank) APSB Bancorp $172.9 +15% $362,000 +34% (parent of American Pacific State Bank)
Return on Average Bank Assets Independence Bank NA Lincoln Bancorp 1.83% (parent of Lincoln Natl. Bank) Valley National 1.44% Bank Santa Clarita 1.57% Natl. Bank TransWorld 1.08% Bancorp (parent of Trans- World Bank) APSB Bancorp 0.85% (parent of American Pacific State Bank)
Assets June 30 Change from Profit Change from Savings & Loan (millions) Year ago (Loss) Year ago Glenfed* $25,626.2 +9% $29.2 million -43% (parent of Glendale Federal) Citadel Holding $4,868.0 +18% $3.8 million -52% (parent of Fidelity Federal) Sears Savings $4,606.8 -21% ($7.8 million) NA Valley Federal $3,368.1 +1% ($2.6 million) NA
Return on Average Savings & Loan Assets Glenfed* 0.45% (parent of Glendale Federal) Citadel Holding 0.29% (parent of Fidelity Federal) Sears Savings NA Valley Federal NA
* Fiscal 4th quarter ended June 30
NA: Not applicable for comparison due to current or year-earlier losses.
