Problem Loans, Lower Interest Rates Take Their Toll : Banking: Five of the area’s largest financial institutions report lower earnings compared to the year-ago quarter, while two others post losses.
Earnings at most major local banks and savings and loans dropped in the second quarter compared to a year earlier as interest rates declined and pressure grew to bolster their reserves against recession-driven loan losses.
Five of the area’s nine largest financial institutions reported lower earnings compared to the year-ago quarter, while two others posted losses.
Only one local bank--American Pacific State Bank--posted higher earnings than a year ago, as its profit rose 13% to $509,000. Of the area’s three largest savings and loans, only one--Citadel Holding, parent of Fidelity Federal Bank--reported a higher quarterly profit. In the quarter that ended June 30, Citadel’s earnings inched up 4% to $7.09 million.
For most financial institutions, however, the recession and the commercial real estate slump crimped earnings as bankers were forced to make higher contributions to their loan-loss reserves. Financial institutions routinely add to their reserves as a cushion against higher loan losses, but lately have increased those contributions because of the recession.
The biggest quarterly loss posted by a local financial institution was at Glenfed Inc., parent of Glendale Federal Bank, which lost $137.1 million in the June 30 quarter, contrasted with a $24.4-million profit a year earlier. Glenfed attributed the loss to a big jump in its loan-loss reserves for its commercial finance subsidiaries and its investment lending business.
In the second quarter of 1990, it was a different story as most local banks and savings and loans posted significantly higher earnings.
This year, however, lower interest rates plus increased loan-loss reserves made for rough going during the quarter. After the Federal Reserve in April lowered the discount rate, the interest it charges on loans to member banks, most banks lowered their prime rates, the interest they charge their most credit-worthy corporate customers. Banks earn their profit on the spread, known as the “net interest margin,” between what they pay for deposits and cash acquired in the money markets, and the interest they charge borrowers.
While banks and savings and loans usually wait as long as possible to lower the rates they charge on loans after the Fed lowers its rate, eventually competitive pressures force them to cut their rates. When that happens, however, it crimps their spread because financial institutions can’t lower the interest rates they pay depositors too far or depositors shift to potentially higher-yielding investments such as stocks and bonds.
“So you’re trapped,” said Frank J. Ures Jr., president and chief executive of American Pacific State Bank. “As the spread gets thinner, you just can’t reduce the CDs or the interest you pay on deposits proportional to the reduction you pay on the loans.”
Nevertheless, American Pacific’s profit jumped 13% in the latest quarter thanks to cost-cutting and what Ures said was continued strong demand for federally guaranteed Small Business Administration loans--the bank’s specialty. In addition, American Pacific reported a 6% increase in assets, to $209 million from $197 million a year earlier.
Of the region’s largest financial institutions, American Pacific had the best quarterly return on average assets (ROA) of 1.0%. The ROA is calculated by dividing a bank’s profit by its average assets during a quarter, then multiplying by four to get an annualized figure. An ROA of 1% or better is considered to be exceptional performance.
“Over the past five years, we anticipated that the good life was going to come to a halt,” Ures said. “So we overloaded the loan-loss reserves. Now I have probably got an extra $1 million to $1.5 million in reserves over and above what I would normally require.”
One victim of the sour economy was CU Bancorp, the Encino parent of California United Bank, whose earnings fell 40% contrasted with the year-earlier quarter. The company earned $1.1 million, as opposed to $1.8 million during the second quarter last year. In the most recent quarter, CU had an ROA of 0.89%.
CU also doubled its loss provisions, to $900,000 from $450,000 a year ago, for a total contribution of $2 million for the first half of this year.
“We expect to consistently add to loss reserves for the balance of the year to . . . withstand unforeseen adverse circumstances,” John J. Keating, CU president and chief executive, said in a statement.
CU’s non-performing loans totaled $13.6 million, or 4.6% of total loans as of June 30, contrasted with $5.2 million, or 1.8% of total loans last year.
Also suffering from the recession was Levy Bancorp, the Ventura parent company of Bank of A. Levy. The company’s earnings dropped 39%, to $1.17 million from $1.93 million a year earlier.
Loans charged off at the end of the second quarter totaled $1.44 million, up from $344,000 in the first quarter this year. As a result, A. Levy has boosted loan-loss provisions while its net interest margin has shrunk, to 4.87% at midyear from 5.78% a year earlier.
Ventura County National Bancorp, which owns Ventura County National Bank and Frontier Bank, said its second-quarter profit dropped 27% from a year ago, to $592,000 from $814,000. The Oxnard-based company saw narrower interest margins and incurred one-time charges associated with converting Frontier’s computer system.
The recession hasn’t been the only problem facing Independence Bank of Encino, the region’s largest bank in terms of assets.
Independence has been in the news in recent months because of allegations by the Federal Reserve Board that it is controlled by scandal-plagued Bank of Credit & Commerce International, the Luxembourg-based bank whose operations were seized last month by regulators in 32 countries.
The Fed charged that Saudi Arabian businessman Ghaith R. Pharaon concealed that he was acting on behalf of BCCI when he purchased Independence six years ago. The Fed moved to bar Pharaon and three BCCI officials from banking activities in the United States. Pharaon, through his attorney, has denied any wrongdoing.
The bank is under pressure from federal banking regulators to find a buyer, and it is reportedly negotiating with two groups for a possible sale.
Meanwhile, Independence lost $9.5 million in the second quarter, contrasted with net income of $1.3 million last year. The loss follows a $16.9-million loss in the first quarter of this year--the bank’s largest quarterly loss ever. The first-quarter loss was caused in part by a $6.2-million provision for possible loan losses and a $6.1-million writeoff of investments in real estate joint ventures.
The bank’s assets, as of June 30, were $684.2 million, a 5% drop from a year earlier but a 4% increase from the first quarter of this year, said Fulvio V. Dobrich, Independence’s chairman and chief executive.
Dobrich said the bad publicity has not led to a run on the bank’s deposits. “I’ve been surprised about the support and loyalty of our customers,” he said.
Glenfed also had its problems in the latest quarter as it set aside $90 million for losses on the sale of foreclosed real estate and assets in its real estate development subsidiary. Overall, the savings and loan lost $231.7 million in its fiscal year that ended June 30.
Two other large savings and loans, Citadel Holding and Valley Federal, bucked the S & L trend by posting profits for the quarter.
Although Citadel Holding, the Glendale parent of Fidelity Federal Bank, saw its second-quarter profit rise to $7.09 million from $6.82 million for the first half of this year, its earnings are down 18% from a year earlier. The problems, the company said, were mainly due to sharply higher loan-loss provisions and increased operating expenses.
However, Citadel escaped many problems afflicting other savings and loans by concentrating on loans for residential housing, which generally have less credit risk than commercial real estate loans. Residential loans make up 92% of Citadel’s loan portfolio.
In the latest quarter, Valley Federal’s earnings dropped 19% to $5.1 million from $6.3 million a year earlier. Citing a rise in its non-performing commercial real estate loans, Valley Federal boosted its loan-loss provisions during the first half of the year to $5.1 million from $1.5 million a year ago.
The savings and loan’s non-performing real estate loans and foreclosed properties nearly doubled, to $87 million as of June 30, from $45 million as of Dec. 31.
For the last year and a half, Valley Federal has been under orders to come up with additional capital or be taken over by federal regulators. Scott A. Braly, Valley Federal’s chief executive, said last quarter’s results were better than expected.
“Clearly we can make a case to the government in the near term that resolution, a seizure or forced takeover mechanism is not in the best interest of the government, taxpayers or shareholders,” Braly said.
As part of its restructuring, Valley Federal expects to close or sell its unprofitable branches by the end of the year, Braly said. That would leave Valley Federal with about half the 33 branches it began the year with, he said.
Quarterly Return From the Region’s Largest Financial Institutions
Assets June 30 Change from Profit Banks (millions) Year ago (loss) Independence Bank $684.2 -5% ($9.5 million) Levy Bancorp $642.4 +4% $1.17 million (parent of Bank of A. Levy) CU Bancorp $548.7 +3% $1.1 million (parent of California United Bank) Ventura County National Bank $381.4 -7% $592,000 (parent of Ventura County National Bank and Frontier Bank) TransWorld Bancorp $236.7 +8% $516,000 (parent of TransWorld Bank) American Pacific State Bank $209.0 +6% $509,000 Savings & Loans Glenfed* $21,501.14 -15% ($137.1 million) (parent of Glendale Federal Bank) Citadel Holding $5,574.5 +9% $7.09 million (parent of Fidelity Federal Bank) Valley Federal $2,473.3 -13% $5.1 million
Return on Change from Average Year ago Assets Independence Bank NA NA Levy Bancorp -39% 0.73% CU Bancorp -40% 0.89% Ventura County National Bank -27% 0.59% TransWorld Bancorp -14% 0.91% American Pacific State Bank +13% 1.00% Savings & Loans Glenfed* NA NA Citadel Holding +4% 0.51% Valley Federal -18% 0.75%
