Low Earnings Mask Signs of Recovery at Great Western Bank

Telling investors that your quarterly earnings just sank 95%, as Great Western Financial Corp. recently did, usually doesn’t trigger a wave of applause.

But hidden within Great Western Bank’s recent minuscule profit, analysts say, is evidence that the company, after years of effort, is finally close to hitting its stride.

The nation’s second biggest thrift has been beset by bad real estate loans, heavy layers of management and a loss of market share in mortgage lending, its basic business.

So in the fourth quarter that ended Dec. 31, Great Western posted a net profit of $5.1 million, down from a $98.6-million profit in the same period a year earlier. And for all of last year, Great Western’s profit fell 56% to $116 million, compared with a $261-million profit in 1995.

The final fourth-quarter profit, though slim, “was pretty much in line with our expectations,” said Thomas Theurkauf, bank analyst with Keefe, Bruyette & Woods in New York.

Most of this big profit slide was due to a series of cost-cutting steps that Great Western announced in December, including laying off 800 employees, selling some delinquent mortgage loans, consolidating branches and overhauling its antiquated computer system.

“But the overall outlook is that Great Western is benefiting from the improvement in the Southern California market, and while it’s frustrating to the bank and investors that the rate of improvement has been slow, progress has been made,” Theurkauf said.

Indeed, he now expects Great Western’s net income to jump to $377 million this year, and to $420 million in 1998.

For one thing, Great Western has finally thinned out some of its bad real estate loans made during 1989 to 1992. As of Dec. 31, Great Western’s nonperforming assets were $546 million, or 1.27% of its total assets, a noticeable improvement from $768 million in nonperforming assets, or 1.72% of its total assets, a year earlier.

With an improving economy and rising profits, Theurkauf says Great Western will have “a fairly strong amount of excess capital” to keep spending on a stock buyback program.

Last July, Great Western said it would buy back up to 7.5 million shares of its common stock. At the time, Great Western’s stock was $22 a share. On Monday, its stock closed at $32.625 per share, up 37.5 cents, on the New York Stock Exchange.

Companies typically launch stock buyback plans to help boost their stock price. H.F. Ahmanson & Co., the biggest thrift in the U.S. and based in Irwindale, has also had a stock buyback program.

Last month, Great Western said that it had nearly completed its first stock buyback program, and that it plans to repurchase up to 5 million shares more in the next 12 months.

Another lingering headache that Great Western appears close to resolving is its mutual fund business.

The company has been hit with two class-action lawsuits by customers, many of them elderly, who claim that Great Western sold them mutual funds, which they later lost money in, without fully explaining the risks of these investments and whether they were government insured.

Last week, a federal judge tentatively approved a $17.2-million settlement for the two class-action suits filed. As many as 17,000 customers may share in the settlement.

U.S. District Judge Irving Hill is expected to make a final ruling April 14.

Meanwhile, Great Western had already set up an $8-million reserve to help cover any settlement, and the company expects that its insurance will pick up the remaining bill.

Since last fall Great Western has also been trying to find a buyer for its mutual fund subsidiary, Sierra Capital Management Corp. Settling the mutual fund suits may now clear the way for a sale, Theurkauf said.

He said Great Western may get $50 million to $60 million for the Sierra funds group, and most of that would be a profit.

Great Western plans to keep its separate broker-dealer unit, which has about 200 employees in California and Florida.

Another plus for Great Western is that its federal deposit insurance bill is coming down.

For years, Great Western, along with the rest of the nation’s S&Ls;, have paid a far higher rate of deposit insurance than banks. This is an outgrowth of the savings and loan crisis of the 1980s when many S&Ls; were seized by the government and the number of S&Ls; shrank from 3,000 to about 2,000 institutions today.

Those thrifts still in business have been paying more for deposit insurance into the Savings Assn. Insurance Fund, than banks have paid into their own Bank Insurance Fund.

But last fall, Congress came up with a way to settle this disparity.

S&Ls; were hit with a one-time extra deposit insurance payment--Great Western contributed $188 million last fall. And for the next three years, S&Ls; will still pay about five times as much as banks do for their deposit insurance. But starting in the year 2000, banks and S&Ls; will pay the same deposit insurance rate.