Loan Problems Gouge Bank and S & L Profits : Economy: Seven of the region’s nine largest financial institutions end 1991’s first quarter with lower earnings than a year earlier.

Profits for most of the largest banks and savings and loans in the region stretching from Ventura to Glendale fell during the first three months of 1991, thanks to loan problems and declining market interest rates.

Seven of the area’s nine largest financial institutions recorded lower profits for the first quarter, compared to a year earlier. Falling interest rates dampened profits for a few banks. But the wide differences in results depended mainly on whether banks and S&Ls; had to add more money than usual to the reserves they maintain to cover possible losses from loans that go sour.

Banks routinely add some money to those reserves, but those contributions--called loan loss provisions--generally increase when economic troubles put more loans in jeopardy.

For instance, Independence Bank in Encino, the worst performer during the period, reported the largest loss in its history--$16.9 million--because of writeoffs and large additions to its reserves for possible loan losses. Meanwhile, American Pacific State Bank, based in Sherman Oaks, reported no such large additions to its reserves and was the only institution that said its profit rose--by about 15% to $504,000.

Representative of the problems faced by some institutions, Ventura County National Bancorp, the parent of Ventura County National Bank and Frontier Bank, saw its net income plunge 68% for the first quarter to $236,000. Meanwhile the bank’s assets grew 13% to $383.7 million.

The main problem for Ventura was that the bank holding company added $498,000 to its loan loss reserves, compared to $43,000 last year, said William E. McAleer, chief executive of Ventura. Most of the increase was due to the fact that Ventura’s Frontier Bank subsidiary had to write off a $300,000 business loan that soured.

“We inherited that one,” said McAleer, explaining that the loan was made before Ventura acquired Frontier in October, 1989.

Without that increase--as well as some other one-time expenses--Ventura’s results would have been better, but McAleer said it was still a “terrible” quarter for banks because of falling interest rates.

“I think almost any independent bank is feeling the effect of the interest-rate drop,” McAleer said.

Of course, both banks and S&Ls; make their money on the spread between the interest payments they receive from people who take out loans and the interest that they must pay to people who deposit money with the institution. From early 1990, the prime rate, the rate large banks charge to their best customers, fell from about 10% to about 9% in late March. When rates generally fall that much, most banks sooner or later have to lower interest rates on virtually all their loans, hurting profits.

At Independence Bank, however, what really caused trouble during the first quarter was a $6.2-million addition it made to its reserves for problem loans, as well as a $6.1-million writeoff of its investment in some real estate joint ventures. Independence’s problem loans were mostly made to finance construction of projects in Southern California. Independence’s assets declined 12% from a year earlier, to $659 million as of March 31.

In an unrelated action, the Federal Reserve Board said two weeks ago that it believes that a Luxembourg-based bank that once pleaded guilty to money laundering charges actually has a majority of the voting shares of Independence, rather than Ghaith R. Pharaon, the Saudi financier who has been Independence’s owner of record since 1985.

Levy Bancorp, the Ventura parent of Bank of A. Levy, said its net income fell 17% to $1.5 million for the first quarter. The bank’s assets rose 6% to $651.7 million as of March 31. In one measure of financial institution performance, Levy recorded a return on average assets of 0.92%, slightly below the 1% level that is considered very good.

Return on average assets is calculated by taking a bank’s quarterly earnings, multiplying by four to arrive at an annualized figure, then dividing by the average level of assets at the bank during the period.

CU Bancorp, the Encino-based parent of California United Bank, said its net income for the first quarter was $986,000, 39% lower than a year earlier, giving CU a return on average assets of 0.91%. The main reason was that CU’s loan-loss provision increased to $1.1 million for the first quarter, compared to $300,000 a year before. The bank’s assets fell 2% to $487 million as of March 31.

TransWorld Bancorp, the Sherman Oaks parent of TransWorld Bank, said net income fell 19% for the first three months of the year, to $501,000. But the year-ago figure was inflated by a one-time gain of $66,000 when TransWorld sold the lease rights to its former headquarters. The bank’s assets as of March 31 were $227.3 million, up 4% from a year before. TransWorld’s first-quarter return on average assets was 0.92%.

American Pacific State Bank’s 15% increase in profit helped it rack up a respectable 1% return on average assets, as its assets grew 7% to $205 million as of March 31.

It was not market interest rates, but loan problems, that were most important to the performance of area S&Ls; in the recent quarter.

Glenfed Inc. posted net income of $1 million in the quarter--an amount 94% smaller than Glenfed’s year-ago profit, and so small that it amounted to a return on average assets of only 0.02%. The thrift nearly doubled its loan-loss provision to $21.9 million for the three-month period--its fiscal third quarter--from $11.6 million a year ago.

But that was nevertheless an improvement for the parent of Glendale Federal Bank, which recorded a huge $140.8-million loss in its fiscal second quarter, which ended Dec. 31, 1990, mainly because problems with real estate loans forced it to bolster its reserves. The thrift’s assets fell 13% to $22 billion as of March 31.

Citadel Holding, the Glendale parent of Fidelity Federal Bank, said its net income for the period fell 39% to $4.4 million, mainly because of a $3.8-million increase in its loan-loss provision and an increase of $2.7 million in its operating expenses, thanks in part to two thrift acquisitions it made last year. With assets of $5.68 billion, Citadel posted a return on average assets of 0.31%.

Valley Federal Savings & Loan Assn. saw its profit for the first quarter drop 78% to $2.1 million. Part of the problem was a $4.5-million gain from branch sales recorded by the S&L; a year ago, inflating its earnings in that period. But Valley Federal also suffered some real estate lending problems, and had to increase its loan-loss provision to $2.3 million for the first three months of this year, from $214,000 a year ago. The thrift’s assets fell 10% to $2.67 billion as of March 31.

Valley Federal is operating under a newly amended agreement with federal regulators under which it must boost its capital to government-mandated levels by the end of the year. The plan, which calls for Valley Federal to meet certain profit targets and to shrink its assets, was imposed because Valley Federal saw its capital wiped out by a huge loss in 1989, due mainly to problems in its mobile-home lending business. The S&L; said it was meeting the terms of the agreement as of March 31.

QUARTERLY REPORT FROM THE REGION’S FINANICAL INSTITUTIONS

Assets Mar.31 Change from (millions) Year ago Banks Independence Bank $659.0 -12% Levy Bancorp $651.7 +6% (parent of Bank of A. Levy) CU Bancorp $487.0 -2% (parent of California United Bank) Ventura Co. Natl. Bancorp $383.7 +13% (parent of Ventura County National Bank and Frontier Bank) TransWorld Bancorp $227.3 +4% (parent of TransWorld Bank) APSB Bancorp $205.0 +7% (parent of America Pacific State Bank) Savings & Loans Glenfed* $21,980.2 -13% (parent of Glendale Federal Bank) Citadel Holding $5,676.5 +13% (parent of Fidelity Federal Bank) Valley Federal $2,666.9 -10%

Return on Profit Change from Banks (Lost) Year ago Banks Independence Bank ($16.9) NA Levy Bancorp $1.5 million -17% (parent of Bank of A. Levy) CU Bancorp $986,000 -39% (parent of California United Bank) Ventura Co. Natl. Bancorp $236,000 -68% (parent of Ventura County National Bank and Frontier Bank) TransWorld Bancorp $501,000 -19% (parent of TransWorld Bank) APSB Bancorp $504,000 +15% (parent of America Pacific State Bank) Savings & Loans Glenfed* $1.0 million -94% (parent of Glendale Federal Bank) Citadel Holding $4.4 million -39% (parent of Fidelity Federal Bank) Valley Federal $2.1 million -78%

Average Banks Assets Banks Independence Bank NA Levy Bancorp .92% (parent of Bank of A. Levy) CU Bancorp .91% (parent of California United Bank) Ventura Co. Natl. Bancorp .25% (parent of Ventura County National Bank and Frontier Bank) TransWorld Bancorp .92% (parent of TransWorld Bank) APSB Bancorp 1.00% (parent of America Pacific State Bank) Savings & Loans Glenfed* 0.02% (parent of Glendale Federal Bank) Citadel Holding 0.31% (parent of Fidelity Federal Bank) Valley Federal 0.32%

* Fiscal 3rd quarter ended Mar. 31 NA: Not aplicable for comparison due to current or year-earlier losses.