Area S&Ls;, Banks Enjoy Healthy First Quarter

In the first three months of 1990, savings & loans in the area stretching from Glendale to Oxnard turned in their best overall performance in more than two years in a surge in profits that even swept up troubled Valley Federal Savings & Loan in Van Nuys.

Meanwhile, area banks had a good quarter as well, with Independence Bank leading the way, followed by traditionally strong performers like Levy Bancorp and TransWorld Bancorp.

Changing interest-rate conditions were behind the performances of both banks and S&Ls.; The two types of financial institutions operate differently in how they buy money--mostly through deposits--and how they turn around and invest it, mostly through loans.

Banks are generally more able to maintain profits as interest rates change, because interest rates on bank loans usually adjust quickly along with their costs of attracting and keeping deposits. And other things being equal, banks can often thrive on higher interest rates, because checking accounts--a large portion of their deposits--often don’t pay interest at all.

By contrast, the adjustable-rate mortgages (ARMs) that constitute a large portion of most S&Ls;’ loan portfolios tend to adjust only slowly to the thrifts’ borrowing costs. That means that when market interest rates rise--pushing up S&Ls;’ borrowing costs--their profits often erode because the interest rates they charge on loans don’t quickly catch up.

Thus, a year ago, interest rates that were dramatically higher than in 1988 pushed up bank profits but squeezed thrifts severely.

But in this year’s first quarter, market rates were lower than a year ago. For example, the federal funds rate--the rate banks charge each other on overnight loans--had fallen to under 8.5% from around 10% a year before. So the interest rates on the thrifts’ adjustable-rate mortgages, which were slowly climbing, finally caught up with the thrifts’ interest costs.

A good example of the pattern was Citadel Holding Co., the Glendale parent of Fidelity Federal Bank.

On March 31, 1989, Citadel’s net interest margin--the S&L;’s yield on its loans and investments minus its interest costs on deposits and other borrowings--stood at a mere 1.14%, leaving little room for profits. But on March 31, 1990, that margin was more than twice as wide, at 2.38%.

Buoyed by better yields, Citadel’s net income in the first quarter thus increased 141% from a year earlier to $7.3 million, even while the thrift’s assets increased only 5% to $5 billion as of March 31.

Samuel C. McCarver, chief financial officer of Citadel, said the thrift even reaped the benefits of falling interest rates in the first quarter. “Our ARM loans move down slowly at a time when interest rates are dropping somewhat faster,” McCarver said. “When the rates are coming down, we definitely enjoy the lag.”

In a key measure of profitability, however, Citadel showed some room for improvement. A return on average assets (ROA) of 1% is considered excellent, but Citadel’s first-quarter return on average assets was only 0.59%.

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

Even Valley Federal, which lost $138 million in 1989, did well in the first quarter with its profit soaring to $9.7 million, more than 50 times the level of year ago. Although that figure was boosted by a $4.5-million gain from the sale of some branches, much of the improved performance was due to better interest-rate conditions. Valley Federal’s ROA was a respectable 1.30%.

And in a sign that the better results may have impressed regulators, the federal government last week approved Valley Federal’s plan to boost its sagging capital reserves. But the thrift admitted there is virtually no way for it to meet capital requirements in the long run without being acquired by another thrift or stronger financial institution.

Meanwhile, Valley Federal’s assets shrank 14% from a year before to $2.96 billion on March 31.

Glenfed, the parent of Glendale Federal Bank, also performed well in the period ended March 31, which is the thrift’s financial third quarter. Glenfed said its net income increased 30% to $26.3 million, giving it an ROA of 0.41%. The S&L;’s assets dropped by 2% to $25.5 billion on March 31.

Lincoln Bancorp’s results were fairly typical among banks in the region. Lincoln is the parent of California United Bank, which recently changed its name from Lincoln National Bank to avoid confusion with the loss-plagued Lincoln Savings & Loan in Irvine.

A year ago, Lincoln Bancorp thrived on high market interest rates. Yet even while rates during the first quarter of 1990 were about 1.25% lower than a year ago, Lincoln still managed to perform well, with its net interest margin eroding only about 0.25%, said Robert Vecci, chief financial officer of Lincoln. That’s because Lincoln keeps its interest costs low by concentrating on checking account deposits that pay little or no interest.

Consequently, Lincoln boosted its profit 15% to $1.6 million for the first quarter--in part because its assets soared 26% to $498 million as of March 31. Lincoln reported an impressive return on average assets of 1.56%.

Ventura County National Bancorp, the Oxnard parent of Ventura County National Bank and Frontier Bank, had a little more difficulty adjusting to narrowing net interest margins for banks.

And Ventura also saw its personnel costs increase--by as much as $800,000 a year compared to costs a year ago--in order to start up new specialized loan units.

Nevertheless, Ventura’s net income for the first quarter inched up 4% to $731,000, giving the bank an ROA of 0.94%. Meanwhile, Ventura’s assets jumped 42% to $341 million as of March 31, fueled in part by the acquisition of Frontier Bank last October.

Independence Bank in Encino said its net income rose 33% to $1.5 million, and the bank’s assets increased 21% to $752 million on March 31. Independence had a first-quarter ROA of 0.80%.

Levy Bancorp, the Ventura parent of Bank of A. Levy, said its profit increased 31% to $1.8 million in the first quarter, giving the bank an ROA of 1.26%. Levy Bancorp’s assets increased 9% to $617 million as of March 31.

Santa Clarita National Bank, based in Valencia, said its net income slipped 1% to $921,000 for the first quarter. But Santa Clarita still turned in a robust return on average assets of 1.44% for the period and its assets increased 5% to $259 million on March 31.

In March, Santa Clarita agreed to be acquired by Security Pacific Corp. for about $52.5 million in stock.

TransWorld Bancorp, the Sherman Oaks parent of TransWorld Bank, said its profit for the first period increased 24% to $615,000 compared to a year before, giving the bank an ROA of 1.18%. Trans-World’s assets on March 31 were $218 million, a 10% increase from a year before.

APSB Bancorp, the North Hollywood parent of American Pacific State Bank, said its first-quarter net income rose 18% to $437,000 from a year earlier. APSB’s return on average assets was 0.92%, and the bank’s assets increased 9% from a year earlier to $192 million.

FIRST QUARTER REPORT FROM THE REGION’S LARGEST FINANCIAL INSTITUTIONS

Assets Dec. 31 Change from Profit Change from Banks (millions) Year ago (Loss) Year ago Independence $752.1 +21% $1.5 million +33% Bank Levy Bancorp $617.1 +9% $1.8 million +31% (parent of Bank of A. Levy) Lincoln $498.4 +26% $1.6 million +15% Bancorp (parent of California United Bank*) Ventura Co. $340.7 +42% $731,000 +4% Natl Bncrp (parent of Ventura County National Bank and Frontier Bank) Santa Clarita $258.8 +5% $921,000 -1% National TransWorld Bancorp $218.4 +10% $615,000 +24% (parent of TransWorld Bank) APSB Bancorp $192.0 +9% $437,000 +18% (parent of American Pacific State Bank) Savings & Loans Glenfed** $25,456.5 -2% $26.3 million +30% (parent of Glendale Federal Bank) Citadel $5,004.3 +5% $7.3 million +141% Holding (parent of Fidelity Federal Bank) Valley Federal $2,960.0 -14% $9.7 million +5,349%

Return on Average Banks Assets Independence 0.80% Bank Levy Bancorp 1.26% (parent of Bank of A. Levy) Lincoln 1.56% Bancorp (parent of California United Bank*) Ventura Co. 0.94% Natl Bncrp (parent of Ventura County National Bank and Frontier Bank) Santa Clarita 1.44% National TransWorld Bancorp 1.18% (parent of TransWorld Bank) APSB Bancorp 0.92% (parent of American Pacific State Bank) Savings & Loans Glenfed** 0.41% (parent of Glendale Federal Bank) Citadel 0.59% Holding (parent of Fidelity Federal Bank) Valley Federal 1.30%

*Formerly Lincoln National Bank

** Fiscal 3rd quarter ended Mar. 31

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