Great American Crows Despite Drop in Profits

Great American First Savings Bank reported a first-quarter profit of $11.1 million, down from $14.3 million for the year-ago quarter.

Despite the decline, Great American executives at Tuesday’s annual shareholders meeting hailed the results as evidence that the S&L;’s core earnings, or those from lending activities and real estate income, are improving and that asset quality is on the rebound.

Of this year’s profit, about 85% flowed from core earnings, whereas last year Great American lost money on its lending activities. Last year’s first-quarter profit was made possible only by $32.5 million in gains from investment transactions and the sale of packaged mortgage loans. This year those gains added up to less than $5 million.

Great American’s core earnings were stunted last year by problems connected with the S&L;’s commercial loan portfolio in Arizona, which was inherited when it acquired Home Federal Savings of Tucson. Great American ended up taking $154 million in loan-loss provisions last year, which amount to charges on earnings.

For example, during the first quarter of last year, Great American set aside $22.2 million for probable loan and interest losses. Its loss provisions in the current year’s first quarter dropped to $7.6 million, according to chief financial officer Jim Krzeminski.

Great American has now reduced its non-performing loans and foreclosures to $389 million, or 2.3% of its $16.4 billion in assets. That is a significant improvement from this time last year, when bad loans were $556 million, or 3.68% of assets.

Although Great American’s bad loans are still above the 2%-of-assets benchmark characteristic of healthy thrifts, analysts commended the S&L; for facing the bad loans head-on.

“There seems to be a trend of improvement,” said David Hochstim, a thrift industry analyst with Bear, Stearns & Co. in New York. “The strategy was to get all (the bad loans) behind them and go forward. When you have non-performing loans at the high levels they had, they become a real drag on earnings, and the best thing is to get them off the books.”

Great American’s interest rate “spread,” or difference between what it collects in interest on its loans and other assets and what it pays out on liabilities such as deposits, was 1.87% of assets during the quarter. That is less than the 2.5%-or-higher spread of several top-performing S&Ls;, but is noteworthy in that Great American was able to keep it from eroding further in the environment of rising interest rates.

“Great American’s spread is low relative to their competitors, but it only dropped 10 basis points (0.10%) from Dec. 31, while most S&Ls; saw their spread decline by 30 to 40 basis points,” said Gary Gordon, a stock analyst with PaineWebber of New York. “Borrowing costs over the first quarter were rising much faster than S&Ls;’ variable-rate loans could adjust for.”

Bruce Harting, an analyst with Salomon Bros. in New York, said Great American’s reduced provision for loan losses demonstrates confidence for the coming year: “Most S&Ls; won’t try to ‘front load’ earnings in the first quarter by taking too low a (loan loss) provision. They prefer to show a stair-step increase in earnings through the year.”

Despite improvements in some areas, Great American Chairman Gordon Luce said in an interview that he is still cautious about the Arizona portfolio and the effect rising interest rates could have on the loans there and elsewhere in the system.

“I don’t know if they’re completely out of the woods yet, but I think it’s fair to say they are starting to see their way out of the woods,” PaineWebber’s Gordon said.

Krzeminski said Great American’s assets will grow only 5% this year and that 1989 loan originations will drop to $4.3 billion in 1989 from $5.6 billion last year. The reduction is due mainly to the softer secondary market for loans because of uncertainty surrounding future interest rates.

Deposits as of March 31 totaled $11.3 billion, up from $10.9 billion a year ago. Loans were $11.6 billion, up from $10 billion a year ago, and assets of $16.4 billion were up from $15.2 billion. Great American is the eighth-largest publicly held S&L.;