Great American Earnings Plunge
Blaming reduced profits from the sale of loans and mortgage-backed securities, Great American First Savings reported a 53% drop in first-quarter earnings at its annual shareholders meeting Tuesday. The S&L; also acknowledged that its bad loans had reached an unacceptably high level and that it had formed a special team to try to reduce them.
After riding a 27% annual compounded growth rate since 1980, Great American will take a slow approach to asset growth in 1988, executives said. The nation’s seventh-largest S&L;, with $15.2 billion in assets, will limit growth to 5% to 10% in a bid to improve performance ratios and to increase capital as a percentage of assets, said James Krzeminski, chief financial officer.
Great American’s problem loans--those delinquent 90 days or more or in foreclosure--totaled $502 million, or 3.26% of total assets at the end of 1987, a significant increase from $280 million in bad loans the previous year.
Joseph Jolson, an analyst of Montgomery Securities in San Francisco, said Tuesday that the average bad-loan portfolio among the “healthy” S&Ls; he follows is only about 1.8% of total assets.
Although analysts say that the bad loans pose no serious threat to Great American’s financial stability, the loans are not producing income and therefore constitute a “drag on earnings,” Great American President Roger Lindland said in an interview. Great American insists it has already made adequate provisions for losses that may result from disposing of the loans.
Great American’s problem loan team, headed by senior vice president Thomas F. Carter, will try to reduce the bad-loan total by $200 million in 1988, Carter told shareholders. Many of the bad loans are on apartment and commercial real estate projects in Arizona and Texas. Over the first quarter, the team succeeded in putting about $43.5 million of the properties in escrow.
Over half the bad loans were inherited by Great American through acquisitions. In October, 1987, Great American merged with Capital Savings Bank, a 40-branch, $674-million S&L; based in Olympia, Wash., and, in March, 1986, acquired Home Federal Savings of Tucson, a 41-branch, $2.4-billion thrift.
Great American’s net income for the quarter ended March 31 was $14.3 million, down from $30.5 million over the same three months a year ago. The difference in performance was because of Great American’s gain this year of only $32.8 million from the sale of loans and mortgage-backed securities, down from a $70.6-million gain over last year’s quarter.
Net interest income after provisions for loan losses and interest reserves was $39.3 million this quarter, down slightly from $40.2 million for first quarter last year. But Great American improved its primary spread as of March 31 to 2%, from 1.87% as of Dec. 31.
The increase in spread, which is the difference between what Great American earns on its loans and investments and what it pays on its deposits and borrowings, is encouraging given the hot competition among California financial institutions for deposits, said David Hochstim, an analyst with Shearson Lehman Hutton in San Francisco.
Loan originations for the quarter totaled $1.1 billion, up from $609 million over the same quarter last year. Of those loans, about 94% featured adjustable rates tied to Great American’s cost of funds. As of March 31, 62% of Great American’s loan portfolio were ARMs, up from 53% five quarters ago.
Great American’s assets as of March 31 were $15.2 billion, up from $13.5 billion a year ago. Loans grew to $10 billion from $8.7 billion over the same period, and deposits grew to $10.9 billion from $9.2 billion. The increases reflect that acquisition last October of Capital Savings.
Krzeminski said Great American’s previously announced sale of its credit-card operation will be completed sometime this quarter, but he would not say whether Great American will post a gain on the sale or not.
Great American is also proceeding with its plans to form a joint venture with Santa Fe Southern Pacific Corp. to build a headquarters building at Broadway and Pacific Highway, Chairman Gordon Luce said. A formal joint venture agreement is expected soon, he said.
