Despite benefiting from lower interest rates, the biggest banks and savings and loans based in the San Fernando Valley area saw their recovery slow during the third quarter.
Seven of the 11 locally headquartered banks and S&Ls with more than $100 million in assets said they made more money than in the corresponding three-month period last year. Several, however, either were bolstered by one-time gains or showed slimmer profit increases than in the second quarter.
Moreover, one bank reported declining profits, and three institutions chalked up losses that either matched or exceeded the deficits that they reported for the same three months in 1984.
Two of the unprofitable institutions--American Pacific State Bank and Camino Real Savings Bank--traced their shortfalls to the sort of bad real estate loans that plagued many of their counterparts last year. The other institution that lost money, Independence Bank, attributed its red ink to accounting adjustments connected with the acquisition of the bank earlier this month.
In the second quarter, only Camino Real lost money.
The softening performance by the local banks and S&Ls during the three-month period ended Sept. 30 came while most lenders were helped by falling interest rates. The declining rates boosted profits by widening the spreads between the amount of interest banks and S&Ls pay on their deposits and receive from loans.
The spreads typically fatten when interest rates drop, partly because interest on floating-rate loans is not reduced as quickly as the interest paid on deposits. Lower interest rates also improve the profits from fixed-rate loans because the deposits used to fund those loans cost banks and S&Ls less.
Interest rates on so-called jumbo certificates of deposit--deposits of $100,000 or more--bucked the trend and rose during the second half of the quarter. But most local banks and S&Ls said they did not hold enough of those deposits to suffer much.
Losses on Loans
The losses many California financial institutions took on real-estate loans last year also made the latest third-quarter results look comparatively strong.
"Most of the banks that got stuck two and three years ago have gotten to the point where most of it is behind them," said Gerry Findley, a Brea-based banking consultant.
"We had a number of banks that did very well," he said.
While most of the area's financial institutions were shrinking or growing slowly during the third quarter, nearly all took the precaution of putting more money into loan-loss reserves. That reduced the institutions' profits because injections into reserves, known as loan-loss provisions, are subtracted from earnings.
Analysts said loan-loss provisions usually are made when banks or S&Ls expect bad loans to surface. Industry experts added, however, that some institutions are raising provisions because of concerns raised by industry regulators and because heftier profits have made it easier to pump up reserves.
'This Is the Time'
"This is the time to do it," said Salvatore Serrantino, president of the California Research Corp. consulting firm.
Based on industry standards for returns on assets, the overall financial performance of local banks and savings and loans was modest. A return on assets, determined by dividing an institution's profits by its average assets, reflects how efficiently a bank or S&L operates.
Keefe, Bruyette & Woods, a brokerage firm specializing in the stocks of financial institutions, said the median return on assets during the third quarter for 24 U.S. banks it follows was .67%. Four of the seven locally based banks with assets of more than $100 million had higher returns.
A Keefe, Bruyette analyst estimated that most of the major California S&Ls would have returns on assets of close to 1.0% for the third quarter. None of three local S&Ls with more than $100 million in assets had returns anywhere near that level.
Ran a Deficit
APSB Bancorp of North Hollywood, the parent of American Pacific State Bank, said that it ran a deficit in the last quarter because of the provision the company made for the expected $257,000 loss from a loan for a Palm Springs hotel project.
Frank J. Ures Jr., the bank's president and chief executive, said that loss should mark the end of nearly all of its recent real estate losses. "We did a housecleaning in the third quarter," Ures said.
For the quarter, APSB reported a loss of $53,697. It lost $38,152 in the third quarter last year.
After suffering massive losses from bad construction loans and then coming under pressure from regulators, Camino Real was sold to Orange County developer Mervyn Phelan on July 1. Now based in San Fernando, the S&L, which has $245.3 million in assets, plans to move its headquarters to Orange.
Although Camino Real has yet to finish compiling its quarterly results, the S&L said it expects its third-quarter loss to be about as large as last year's deficit of $430,000.
Sale of Bank