Great American First Savings Bank reported a sharp decline in third-quarter profit Thursday after having to set aside a significantly higher provision for probable loan losses.
Great American's profit of $8.3 million, off 63% from the $22.6-million profit for the same quarter a year ago, was made possible by a $17.5-million gain on the sale of some of its stock in Federal Home Loan Mortgage Corp., or Freddie Mac. The S&L;'s results were also boosted by a non-recurring $12.2-million gain over the quarter on the sale of its credit-card operation.
The S&L; has been grappling with problem real estate loans over the past nine months. Great American's non-performing assets--foreclosed real estate and loans delinquent 90 days or more--totaled $440 million as of Sept. 30, or 2.81% of its $15.8 billion in assets.
The current dollar total of Great American's bad loans is down from $510 million on June 30, which represented 3.26% of assets, but is still above the 1.5% to 2% of assets that analysts have said is characteristic of most healthy S&Ls.; A high percentage of non-performing loans is looked on with disfavor because the loans produce no income for the S&L.;
To help whittle down the bad loans, Great American set aside a $33.2-million provision during the quarter to cover probable losses on disposal or settlement of the loans. The provision, which detracts from earnings, is an increase from the $18.8-million provision taken the previous quarter and the $5-million provision taken in third quarter 1987.
Great American's sale of 175,500 Freddie Mac shares at a gain of $17.5 million was described by one analyst who asked not to be identified as a "real coup" because the S&L; can "squirrel the gains away" by using them for loan-loss provisions to improve the financial structure of the S&L.;
Great American still owns 680,000 Freddie Mac shares, which, at today's prices, it could sell for a gain of $78 million.
But the same analyst said Great American's "core earnings," those provided by net interest income plus fees minus overhead and loss provisions, place it in the bottom 40% of the industry. In recent years, Great American has relied too much on non-operating sources of income such as asset sales that are "prone to disappear, particularly if interest rates rise," the analyst said.
"Great American reported a profit of $3.30 a share last year, but only a third of that was core earnings. The rest came from the sale of assets," the analyst said.
David Hochstim, an equity analyst with Shearson Lehman Hutton in San Francisco, said Great American was making progress in reducing its bad loans. "They are still struggling with non-performing loans but (future gains on) Freddie Mac stock gives them a nice cushion," Hochstim said.
For the nine months ended Sept. 30, Great American's profit stands at $30.2 million, down from $75.1 million over the same three quarters last year. Current assets are up from $15.3 billion a year ago. As of Sept. 30, deposits were $11 billion, up from $9.5 billion a year ago. Total loans were $10.6 billion, up from $8.8 billion a year ago.