Bank Profits Continue to Rise as S&Ls; Post Losses : Finance: Thrifts cite higher interest rates--which tend to benefit banks--as the reason for their declining profits.

TIMES STAFF WRITER

Most banks in the San Fernando and Santa Clarita valleys continued to post higher profits in the third quarter from a year ago, while savings and loans suffered losses or significant declines in earnings.

The S&Ls;' problem was that interest rates were higher than a year ago, even though rates declined throughout the latest quarter. Although S&Ls; make adjustable-rate mortgage loans, those interest rates may adjust only every six months or a year. In the meantime, the interest rates S&Ls; must pay on their interest-bearing accounts are higher than they were a year ago.

Banks, by contrast, largely benefited from the higher interest rates because many of their commercial loans have interest rates tied to the prime rate. When the cost of money changes, the interest on those loans changes immediately. And for well-managed banks, their interest costs remain steady since they maintain hefty portfolios of checking accounts that pay no interest at all.

For example, APSB Bancorp, the North Hollywood parent of American Pacific State Bank, recorded an 18% increase in profits for the third period, to $436,000 from $371,000 a year before. The bank's assets rose 10% to $177.4 million as of Sept. 30, from $161 million a year earlier. And in another key measure of banking performance--the return on average assets--APSB continued to perform well. A return on average assets of 1% is considered excellent, and APSB recorded a return on average assets in the third quarter of 1.01%.

The return on average assets is calculated by multiplying a bank's earnings for the quarter by four to get an annual figure, then dividing by the bank's average assets for the period to get the rate of return.

Indeed, five of the area's biggest banks beat that 1% benchmark in the latest period--all but Independence Bank.

Still, two longtime top performers, Lincoln Bancorp in Encino and TransWorld Bancorp in Sherman Oaks, saw their earnings growth slow significantly.

Before the third quarter of 1989, Lincoln, the publicly held holding company for Lincoln National Bank, saw its profits grow at rates averaging 95% for the last eight quarters. But in the three months that ended Sept. 30, Lincoln's earnings were $1.5 million, up only 18% compared with the year-earlier period. Lincoln's return on average assets--an extraordinary 1.83% in the second quarter--continued to be strong, but it declined somewhat to 1.53%.

Lincoln Chief Executive John J. Keating said Lincoln's slower growth was due to a 1% decline in interest rates during the period. Since the interest that Lincoln charges on its mostly commercial loans is pegged to closely follow market interest rates, the drop meant less growth in interest income for Lincoln.

But Keating said the bank also had started, in effect, to outgrow its youthful growth spurt. "The bank is just getting larger and larger, and you're not able to sustain those levels" of growth, he said.

Similarly, profits at TransWorld Bancorp, the public parent of TransWorld Bank, grew an average of 71% for the last four quarters since July, 1988--about the time the bank refocused on getting more commercial business. But TransWorld's net income of $547,000 for the third quarter was only 20% higher than a year earlier.

TransWorld was little affected by the drop-off in interest rates during the period, but was hurt when the interest rates it pays on some deposits finally began to creep up--some months behind interest rates in the broader money market.

But TransWorld President David H. Hender also admitted he didn't expect TransWorld to begin growing 70% per quarter again. "I think we're going to stabilize," Hender said. "I don't think you're going to see any of us at the 40 or 50 or 60% growth rate."

Santa Clarita Bank, based in Valencia, continued its impressive performance in the third quarter, reporting earnings of about $1.1 million, an 11% increase from the year-earlier period. Santa Clarita's assets rose 15% to $255.1 million Sept. 30, from $222 million a year earlier. Santa Clarita's return on average assets was 1.55% in the latest quarter; the bank has now bested the 1% mark for eight quarters in a row.

Independence Bank in Encino, the area's largest bank, saw its earnings decline 34%, to $1.1 million from $1.7 million in the same period last year. The bank posted assets of $629.5 million Sept. 30, up 8%, from $582.1 million a year earlier. Independence achieved a return on average assets of 0.70%.

Valley National Bank's net income fell 2% in the period, to $963,000 from $986,000

a year before. The bank had assets of $255 million Sept. 30, an increase of about 3% from the year-earlier figure of $246.4 million. Despite the drop in earnings, Valley National reported a strong return on average assets of 1.50%.

The area's largest thrift also recorded the area's best performance among S&Ls;, even though its earnings fell steeply. Glenfed Inc., the Glendale parent of Glendale Federal Bank, recorded a net income of $19.6 million in the third quarter, 38% less than the $31.4 million it earned during the same period a year ago. Glenfed's assets crept up 1%, to $24.7 billion Sept. 30, from $24.4 billion a year before.

Glenfed said its return on average assets was only 0.31%. And its net interest margin--the interest rate the thrift charges on loans minus the interest rate it pays on deposits across the board--fell to 2.06%, from 2.35% a year earlier. But Glenfed pointed out that it managed to improve that interest rate spread, compared to the second quarter, when the margin was 1.74%.

Citadel Holding Corp., the Glendale holding company for Fidelity Federal Bank, wrote off $2.1 million in costs associated with its aborted merger talks with Valley Federal Savings & Loan and added $6 million to its loan-loss reserves, resulting in a $2.3-million loss for the third period.

That compared with a profit of $5.3 million a year earlier. Meanwhile Citadel's assets rose 14%, to $4.9 billion Sept. 30, from $4.3 billion a year before.

In an attempt to put an end to losses at a subsidiary that makes loans on mobile homes, Valley Federal Savings & Loan recorded a total of $89.9 million in pretax charges against its earnings, slashing the thrift's net worth and resulting in a $70.6 million loss for the third quarter. That loss contrasted to a $132,000 profit for the same period a year earlier. Valley Federal's assets, meanwhile, fell 8% as of Sept. 30, to $3.2 billion from $3.4 billion a year before.

The latest write-offs could force Valley Federal to sell some assets to meet federal standards for capital ratios, which by 1991 will require thrifts to maintain $1.50 in cash for every $100 in total assets. The charges reduced the thrift's net worth to $34 million Sept. 30, from $104 million a year before.

The S&L; wrote off $62 million in anticipated profits at the mobile home subsidiary, increased its loan-loss reserves by $18 million and eliminated about $9.9 million in intangible assets from its books.

Valley Federal Chief Executive Dan E. Nelms said he expected that after the charges, the thrift would enjoy "near record earnings in 1990."

THIRD QUARTER REPORT FROM THE VALLEY'S LARGEST FINANCIAL INSTITUTIONS

Assets September 30 Change from Bank (millions) Year ago Independence Bank $629.5 +8% Lincoln Bancorp $435.6 +11% (parent of Lincoln Natl. Bank) Santa Clarita Natl. Bank $255.1 +15% Valley National Bank $255.0 +3% TransWorld Bancorp $206.0 +6% (parent of TransWorld Bank) APSB Bancorp $177.4 +10% (parent of American Pacific State Bank) Savings & Loan Glenfed* (parent of $24,708.2 +1% Glendale Federal) Citadel Holding $4,949.2 +14% (parent of Fidelity Federal) Valley Federal $3,171.4 -8%

Return on Profit Change from Average Bank (Loss) Year ago Assets Independence Bank $1.1 million -34% 0.70% Lincoln Bancorp $1.5 million +18% 1.53% (parent of Lincoln Natl. Bank) Santa Clarita Natl. Bank $1.1 million +11% 1.55% Valley National Bank $963,000 -2% 1.50% TransWorld Bancorp $547,000 +20% 1.09% (parent of TransWorld Bank) APSB Bancorp $436,000 +18% 1.01% (parent of American Pacific State Bank) Savings & Loan Glenfed* (parent of $19.6 million -38% 0.31% Glendale Federal) Citadel Holding ($2.3 million) NA NA (parent of Fidelity Federal) Valley Federal ($70.6 million) NA NA

* Fiscal 1st quarter ended Sept. 30

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

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