It's hard to make a banker smile these days. Despite two local banks reporting record earnings for the fourth quarter, most local bankers talk of potential troubles ahead from rising interest rates, competition for borrowers and curbs on popular U.S. Small Business Administration loans that could stall the industry's rebound in the year ahead.
The SBA imposed a $500,000 limit on the size of loans backed by its loan-guarantee program on Jan. 1 because the agency is running out of money. This new ceiling on loans could cut into the profits of such banks as Sherman Oaks-based American Pacific State Bank, which is one of the largest SBA lenders in California.
"Basically, what it will mean is that we will have to work twice as hard to lend the same money," said Jim Whitney, manager of American Pacific's SBA loan program.
For the moment, though, there's little bad news to report for local banking institutions. Profits grew at the six largest area banks and savings and loans that reported their results for the Dec. 31 quarter, in stark contrast to a year ago, when three reported losses and at least one--Glendale Federal--had just barely averted government seizure.
The local institutions are Great Western Financial Corp., Glendale Federal, TransWorld Bancorp, Levy Bancorp, CU Bancorp and American Pacific.
The change in the profit situation reflects in part the regional economic recovery and in part a push by banking institutions to unload some of the bad real-estate loans they accumulated during the recession. The percent of non-performing assets on the six institutions' balance sheets declined to an average of 1.68%; about 2% or below is considered desirable in the industry.
The local institutions are not only clearing bad loans off the books, they are "not getting as many new ones," said Steve Hawkins, spokesman for Great Western Financial, the giant savings and loan in Chatsworth.
Great Western's delinquent loans and other non-performing assets dropped 25% to $845 million during 1994. Non-performing assets are now 1.97% of total assets, down from 2.90% a year ago. That drop helped Great Western post a profit of $88.7 million in its fourth quarter, which ended Dec. 31, a remarkable jump from its year-earlier loss of $18.2 million. For the full year, profit was $251 million, a fourfold rise from the $62 million of 1993.
Great Western is continuing to watch for ways to cuts costs. Last year it laid off about 1,000 workers, and it announced on Feb. 9 that it would lay off an additional 500 workers in Florida in the coming year. Great Western also recently sold 31 of its Florida branches, netting a tidy $62.3 million.
"That raised earnings considerably," Hawkins said.
Glendale Federal, which underwent a massive overhaul in 1993, showed a profit in its second fiscal quarter, which ended Dec. 31, marking two consecutive profitable quarters for this once-shaky savings and loan. Earnings in that quarter were $12.7 million, in contrast to a loss of $39.8 million the year before. For the latest six months, Glendale Federal's earnings were $22 million.
And Glendale Federal's non-performing assets have dropped to 2.62% of total assets from 4.83% a year ago.
Glendale Federal got a boost for much of last year from a favorable interest margin; that is, the difference between the rates it charged its borrowers and the rates it paid its depositors. But that margin changed toward the end of the year as the Federal Reserve Board continued to raise interest rates.
The reason: Savings and loans usually don't realize an immediate gain from higher interest rates on adjustable-rate mortgages, but at the same time those higher rates mean they must pay more to entice new depositors. So Glendale Federal is now predicting that profits will be squeezed in the first quarter as its interest margins shrink.
By contrast, banks enjoy a short window of higher profits when interest rates go up because most of their commercial loans are pegged to the prime interest rate and adjust almost immediately. Sherman Oaks-based TransWorld Bancorp posted record profits in the fourth quarter, in part due to a surge in interest margins. TransWorld's earnings of $912,000 for the quarter were 86% higher than last year's comparable period, and its earnings for the full year were also up the same percentage, to $2.6 million.
Levy Bancorp in Ventura, which was bought in January by First Interstate Bancorp, posted record earnings too, ending its 112-year history on a high note. For the fourth quarter, Levy's earnings were $2.5 million against a year-earlier loss of $1 million. For the year, earnings were $7.9 million, a good jump from the previous year's loss of $5.7 million.