UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________________
Commission File Number 0-23122
GREAT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 61-1251805
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
ONE FINANCIAL SQUARE, LOUISVILLE, KENTUCKY 40202
(Address of principal executive offices) (Zip Code)
(502) 562-6000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. X Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, 14,277,595 shares
as of May 14, 1996.
GREAT FINANCIAL CORPORATION
I N D E X
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
and Results of Operations
PART II. OTHER INFORMATION 18
SIGNATURES 19
GREAT FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
1996 1995
---------- -----------
(unaudited)
Assets
Cash and cash equivalents ....................... $ 62,236 $ 84,167
Available-for-sale securities, at fair value .... 463,242 461,330
Mortgage loans held for sale .................... 155,366 144,163
Loans receivable, net of allowance for loan
losses of $12,214 (1996) and $11,821 (1995) .. 1,665,575 1,667,363
Federal Home Loan Bank stock, at cost ........... 24,068 21,917
Property and equipment .......................... 28,518 26,871
Mortgage servicing rights ....................... 34,908 35,751
Other assets .................................... 43,291 44,694
----------- -----------
Total assets ......................................... $2,477,204 $2,486,256
=========== ===========
Liabilities
Deposits ........................................ $1,546,594 $1,458,861
Borrowed funds .................................. 618,671 714,209
Other liabilities ............................... 30,733 26,076
----------- -----------
Total liabilities ............................ 2,195,998 2,199,146
----------- -----------
Commitments and contingencies
Stockholders' equity
Preferred stock, $1.00 par value; 1,000,000
shares authorized and unissued
Common stock, $.01 par value; 24,000,000
shares authorized; 16,531,250 shares issued .. 165 165
Additional paid-in capital ...................... 160,159 159,786
Retained earnings - subject to restrictions ..... 168,875 163,822
Treasury stock, 1,878,655 shares (1996) and
1,608,355 shares (1995), at cost ............. (34,622) (28,230)
Unearned ESOP shares ............................ (11,021) (11,296)
Unearned compensation - stock compensation plans (4,033) (4,359)
Net unrealized gains (losses) on
available-for-sale securities 1,683 7,222
----------- -----------
Total stockholders' equity ................... 281,206 287,110
----------- -----------
Total liabilities and stockholders' equity ........... $2,477,204 $2,486,256
=========== ===========
See notes to consolidated financial statements
3
GREAT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Three Months Ended March 31,
----------------------------
1996 1995
--------- ---------
(unaudited)
Interest income
Loans ................................... $ 37,534 $ 29,579
Securities .............................. 7,567 6,165
Federal funds sold ...................... 245 22
-------- --------
Total interest income ................ 45,346 35,766
-------- --------
Interest expense
Deposits ................................ 18,376 13,944
Borrowed funds .......................... 9,092 6,677
-------- --------
Total interest expense ............... 27,468 20,621
-------- --------
Net interest income .......................... 17,878 15,145
Provision for loan losses .................... 620 628
-------- --------
Net interest income after provision for loan
losses ...................................... 17,258 14,517
-------- --------
Non-interest income
Servicing fee income .................... 7,016 6,056
Amortization of mortgage servicing rights (1,841) (905)
Gain on sale of mortgage loans .......... 1,513 356
Gain on sale of investments,net ......... 656
Other ................................... 1,386 1,077
-------- --------
Net non-interest income .............. 8,730 6,584
-------- --------
Non-interest expense
Compensation and benefits ............... 7,782 6,353
Office occupancy and equipment .......... 2,076 1,668
Office supplies, postage and telephone .. 1,264 1,072
Advertising and marketing ............... 952 725
Federal deposit insurance premiums ...... 826 672
State tax on deposits ................... 374 328
Lock box, custodial and other bank
services ............................... 113 138
Servicing settlement costs .............. 245 92
Other ................................... 2,447 1,700
-------- --------
Total non-interest expense ........... 16,079 12,748
-------- --------
Income before income taxes ................... 9,909 8,353
Income tax expense ........................... 3,478 3,007
-------- --------
Net income ................................... $ 6,431 $ 5,346
======== ========
Earnings per share
Primary ................................. $ 0.44 $ 0.34
======== ========
Fully diluted ........................... $ 0.44 $ 0.34
======== ========
See notes to consolidated financial statements.
4
GREAT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended March 31,
----------------------------
1996 1995
----------- ----------
(unaudited)
Net cash provided by operating activities ..... $ 3,200 $ 2,299
----------- ----------
Investing activities
Purchases of securities ................... (109,980) (6,338)
Maturities of securities .................. 55,581 16,500
Proceeds from sale of available-for-sale
securities ............................... 32,018
Principal collected on mortgage-backed
securities ............................... 14,711 6,370
Purchases of Federal Home Loan Bank stock . (1,743)
Increase (decrease) in loans receivable ... 130 (79,754)
Purchases of property and equipment and
other assets ............................. (2,401) (660)
Purchases of mortgage servicing rights .... (18) (3,080)
Additions to originated mortgage servicing
rights ................................... (944)
Proceeds from sale of real estate owned ... 323
----------- ----------
Net cash used in investing activities . (12,323) (66,962)
----------- ----------
Financing activities
Increase in deposits ...................... 87,734 42,090
Increase (decrease) in short-term
borrowings ............................... (133,445) 37,043
Long-term advances from Federal Home Loan
Bank ..................................... 41,000
Payments on long-term advances from Federal
Home Loan Bank ........................... (3,093) (585)
Increase in mortgage escrow funds ......... 2,766 6,769
Purchases of treasury stock ............... (6,392) (14,275)
Dividends paid ............................ (1,378) (1,223)
----------- ----------
Net cash provided by (used in)
financing activities ................. (12,808) 69,819
----------- ----------
Net increase (decrease) in cash and cash
equivalents .................................. (21,931) 5,156
Cash and cash equivalents, beginning of period 84,167 17,013
----------- ----------
Cash and cash equivalents, end of period ...... $ 62,236 $ 22,169
=========== ==========
Cash paid (received) during the period for
Interest .................................. $ 27,758 $ 21,279
Income taxes, net ......................... $ (52) $ (513)
Supplemental disclosure of noncash activities
Additions to real estate acquired in
settlement of loans ....................... $ 198 $ 1,033
Accrual of purchase of mortgage servicing
rights .................................... $ 12,318
See notes to consolidated financial statements.
5
GREAT FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Great Financial Corporation (Company) and its subsidiaries,
Great Financial Bank, FSB (Great Financial), and First Federal Savings
Bank of Richmond, Kentucky (First Federal). All material intercompany
balances and transactions have been eliminated. The consolidated
financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
consolidated financial statements. In the opinion of management, all
adjustments necessary for a fair presentation have been included. Such
adjustments consist only of normal recurring accruals. It is suggested
that these consolidated financial statements be read in conjunction with
the Company's audited financial statements included in its annual report
on Form 10-K for the year ended December 31, 1995. Results of operations
for interim periods are not necessarily indicative of the results that
may be expected for the entire fiscal year.
2. CASH AND CASH EQUIVALENTS
March 31, December 31,
1996 1995
--------- ------------
(in thousands)
Cash and due from banks ............ $37,486 $29,792
Federal funds sold ................. 24,750 54,375
--------- ------------
Total cash and cash equivalents .... $62,236 $84,167
========= ============
3. SECURITIES
March 31, 1996
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(in thousands)
Available-for-sale securities:
U.S. Government and agency obligations $ 62,972 $ 280 $ (515) $ 62,737
Other debt securities ................ 1,994 26 2,020
--------- ---------- ---------- --------
Total debt securities .............. 64,966 306 (515) 64,757
Mortgage-backed securities ........... 393,476 4,664 (2,816) 395,324
Equity securities .................... 2,211 950 3,161
--------- ---------- ---------- --------
Total available-for-sale securities ... $460,653 $5,920 $(3,331) $463,242
========= ========== ========== ========
6
December 31, 1995
--------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
(in thousands)
Available-for-sale securities:
U.S. Government and agency obligations $112,082 $ 793 $ (100) $112,775
Other debt securities ................ 2,077 34 2,111
--------- ---------- ---------- --------
Total debt securities .............. 114,159 827 (100) 114,886
Mortgage-backed securities ........... 334,946 9,317 (171) 344,092
Equity securities .................... 1,115 1,237 2,352
--------- --------- --------- --------
Total available-for-sale securities .... $450,220 $11,381 $ (271) $461,330
========= ========= ========= ========
Gross realized gains on the sale of available-for-sale securities totaled
$1,054,683 and gross realized losses totaled $398,303 during the three
months ended March 31, 1996. In computing gains and losses, cost is
determined by the specific identification method for debt and
mortgage-backed securities. Cost is determined by the average cost method
for equity securities. There were no sales of securities during the three
months ended March 31, 1995.
4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
Three Months
Ended March 31,
---------------------
1996 1995
-------- --------
(in thousands)
Balance, beginning of period ....... $11,821 $11,076
Provision charged to income ........ 620 628
Charge-offs ........................ (244) (524)
Recoveries ......................... 17 40
-------- --------
Balance, end of period ............. $12,214 $11,220
======== ========
5. LOAN SERVICING
The Company was servicing a portfolio consisting of 78,200 and 79,300
mortgage loans at March 31, 1996 and December 31, 1995, respectively,
that are owned by investors and are not included in the accompanying
financial statements. Mortgage loans serviced for others are summarized
as follows:
March 31, December 31,
1996 1995
---------- ------------
(in thousands)
GNMA .............................. $3,093,901 $3,215,249
FNMA .............................. 1,226,389 1,226,666
FHLMC ............................. 525,939 510,068
Other investors ................... 230,287 215,567
---------- ------------
Total servicing portfolio ......... $5,076,516 $5,167,550
========== ============
7
In addition to servicing mortgage loans for others, the Company is a
subservicer for third-party servicing owners, including GNMA. At March
31, 1996 and December 31, 1995, the Company subserviced a total of 20,500
and 20,000 loans, respectively.
Custodial escrow balances maintained in connection with the foregoing
loan servicing were $128,888,000 and $108,424,000, at March 31, 1996 and
December 31, 1995, respectively, of which $111,936,000 and $86,554,000,
respectively, are included in deposits in the accompanying consolidated
balance sheets.
6. BORROWED FUNDS
March 31, 1996 December 31, 1995
------------------- -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- -------- -------- --------
(dollars in thousands)
Short-term borrowings:
Reverse repurchase agreements ........ $ 56,598 5.47% $176,433 6.03%
Advances from Federal Home Loan Bank . 1,250 6.25% 2,150 6.14%
Borrowings under lines of credit ..... 104,159 5.23% 116,875 5.27%
-------- --------
Total short-term borrowings ........ 162,007 295,458
-------- --------
Long-term borrowings from Federal Home .
Loan Bank:
Adjustable rate advances, interest
based on Libor; 5.38% (1996) and
6.00%(1995) ......................... 100,000 100,000
Fixed rate advances, 6.24% (1996)
and 6.29% (1995) .................... 319,816 278,489
Mortgage matched and other advances
payable monthly through 2008 with
interest rates from 5.51% to 8.05% .. 36,848 40,262
-------- --------
Total long-term borrowings ......... 456,664 418,751
-------- --------
Total borrowed funds ................... $618,671 $714,209
======== ========
Information concerning borrowings under reverse repurchase agreements is
summarized as follows:
At or For the Three Months
Ended March 31,
--------------------------
1996 1995
---------- ----------
(dollars in thousands)
Average balance during the period .......... $51,248 $ 80,315
Average interest rate during the period .... 5.59% 6.14%
Maximum month-end balance during the
period .................................... $62,777 $203,538
Mortgage-backed securities underlying
the agreements at end of period:
Carrying value .......................... $57,557 $212,490
Fair value .............................. $58,382 $212,374
8
Mortgage-backed securities sold under reverse repurchase agreements were
delivered to the broker-dealers who arranged the transactions. The
broker-dealers may have sold, loaned, or otherwise disposed of such
securities to other parties in the normal course of their operations, and
have agreed to resell to the Company identical securities at the
maturities of the agreements. The agreements at March 31, 1996 mature
within one year.
7. SEGMENT INFORMATION
The schedules on page 10 present information concerning the Company's
operations which include two reportable segments: banking and mortgage
banking businesses. The banking segment is composed of those operations
involved in making loans held for investment, primarily on single family
residences; investing in government and government agencies' securities
and receiving deposits from customers. The mortgage banking segment is
made up of those operations involved in originating and purchasing
residential mortgage loans for resale in the secondary mortgage market
and in servicing loans for others. The Company's operations involved in
purchasing delinquent FHA and VA loans have previously been classified
within the banking segment. Since these loans are purchased from GNMA
pools the Company services in its mortgage banking business and due to
the unique servicing requirements of these loans, the Company determined
that these operations are more properly classified within the mortgage
banking segment and has so classified the applicable income and expense
for the three months ended March 31, 1996 in the schedule which follows.
The income and expense applicable to these operations for the three
months ended March 31, 1995 have been reclassified to the mortgage
banking segment. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a further discussion of this
business activity. Intersegment interest income and expense represent (i)
interest on advances from the banking segment to the mortgage banking
segment to fund the origination of loans computed at a rate tied to a
short-term index and to fund the investment in mortgage servicing
rights computed at a rate tied to a medium-term index, (ii) interest on
custodial balances of the mortgage banking segment on deposit with the
banking segment computed at a rate tied to a medium-term index, (iii)
interest on advances from the Parent Company (in "other" segment) to
the banking segment computed at a rate tied to a short-term index, and
(iv) interest expense incurred by the banking segment on a loan from
the Parent Company to the ESOP computed at 6%.
8. ACQUISITION
On November 23, 1995, the Company entered into an agreement to acquire
all of the outstanding common stock of LFS Bancorp, Inc. (LFS), parent
company of Lexington Federal Savings Bank, FSB for cash totaling
approximately $75,500,000. Regulatory and LFS stockholder approvals for
the acquisition have been received. The acquisition, to be accounted for
as a purchase, is expected to be completed in June 1996.
9. RECLASSIFICATIONS
Certain amounts have been reclassified in the previous year's financial
statements to conform with the current year's classifications.
9
SEGMENT INFORMATION
Three Months Ended March 31, 1996
----------------------------------------------------------------
Mortgage
Banking Banking Other Eliminations Consolidated
----------- ----------- ---------- ------------ ------------
(in thousands)
Interest income:
Unaffiliated customers $ 39,574 $ 5,769 $ 3 $ 45,346
Intersegment 2,809 1,074 419 $ (4,302)
----------- ----------- ---------- ------------ ------------
Total interest income 42,383 6,843 422 (4,302) 45,346
----------- ----------- ---------- ------------ ------------
Interest expense:
Unaffiliated customers 25,676 1,792 27,468
Intersegment 1,493 2,809 (4,302)
----------- ---------- ---------- ------------ ------------
Total interest expense 27,169 4,601 (4,302) 27,468
----------- ---------- ---------- ------------ ------------
Net interest income 15,214 2,242 422 17,878
Provision for loan losses (620) (620)
Non-interest income 1,826 8,799 217 (2,112) 8,730
Non-interest expense (9,358) (8,295) (538) 2,112 (16,079)
----------- ---------- ---------- ------------ ------------
Income before income taxes $ 7,062 $ 2,746 $ 101 $ 9,909
=========== ========== ========== ============ ============
Identifiable assets $2,170,246 $357,675 $273,809 $(324,526) $2,477,204
=========== ========== ========== ============ ============
Depreciation and amortization
of property and equipment $ 463 $ 315 $ 2 $ 780
=========== ========== ========== ============ ============
Three Months Ended March 31, 1995
----------------------------------------------------------------
Mortgage
Banking Banking Other Eliminations Consolidated
----------- ---------- ---------- ------------ ------------
(in thousands)
Interest income:
Unaffiliated customers $ 31,353 $ 4,403 $ 10 $ 35,766
Intersegment 2,250 1,370 878 $ (4,498)
----------- ---------- ---------- ------------ ------------
Total interest income 33,603 5,773 888 (4,498) 35,766
----------- ---------- ---------- ------------ ------------
Interest expense:
Unaffiliated customers 19,271 1,350 20,621
Intersegment 2,249 2,249 (4,498)
----------- ---------- ---------- ------------ ------------
Total interest expense 21,520 3,599 (4,498) 20,621
----------- ---------- ---------- ------------ ------------
Net interest income 12,083 2,174 888 15,145
Provision for loan losses (225) (403) (628)
Non-interest income 1,068 7,302 150 (1,936) 6,584
Non-interest expense (8,530) (5,422) (732) 1,936 (12,748)
----------- ---------- ---------- ------------ ------------
Income before income taxes $ 4,396 $ 3,651 $ 306 $ 8,353
=========== ========== ========== ============ ============
Identifiable assets $1,834,763 $202,303 $274,007 $(309,433) $2,001,640
=========== ========== ========== ============ ============
Depreciation and amortization
of property and equipment $ 363 $ 292 $ 655
=========== ========== ========== ============ ============
10
GREAT FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's consolidated results of operations are dependent primarily on net
interest income, which is the difference between the interest income earned on
interest-earning assets, such as loans and securities, and the interest expense
incurred on interest-bearing liabilities, such as deposits and borrowings. The
results are also significantly affected by its mortgage banking activities
which involve the origination, purchase, sale, servicing and subservicing of
residential mortgage loans. The Company also generates non-interest income such
as transactional fees and gain or loss on sale of mortgage loans, mortgage
servicing rights and securities. In addition, commissions are earned from the
sale of annuity and mutual fund products. The Company's operating expenses
consist primarily of employee compensation, occupancy expenses, federal deposit
insurance premiums and other general and administrative expenses. The Company's
results of operations are significantly affected by its periodic amortization of
mortgage servicing rights and by its provisions for loan losses. The Company's
results of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory agencies.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1996 TO DECEMBER 31, 1995
During the 1996 first quarter, the Company's total assets decreased only
slightly, from $2.49 billion to $2.48 billion. The largest asset category, loans
receivable, net, totaled $1.7 billion at March 31, 1996, also having decreased
slightly during the quarter. As part of its strategy to enhance the loan
portfolio yield, the Company further reduced the percentage of one-to-four
family residential loans in the portfolio mix during the first quarter while the
percentage of each of the other loan categories increased as shown in the
following table:
Loan Portfolio Composition at
-----------------------------
March 31, December 31,
1996 1995
------------ ------------
Loan category:
One-to-four family residential ..... 76.8% 78.6%
Multi-family residential ........... 8.2% 7.8%
Commercial real estate ............. 3.8% 3.6%
Construction and land .............. 5.5% 5.1%
Non-mortgage, primarily installment 5.7% 4.9%
------------ ------------
100.0% 100.0%
============ ============
While the size of the Company's securities portfolio increased only $1.9 million
during the first quarter, its composition shifted as mortgage-backed securities
were increased by $51.2 million and $50.0 million of FHLB short-term debt
securities matured.
11
Deposits increased $87.7 million or 6.0% during the first three months of 1996.
Over two-thirds of this increase was in retail deposits attracted through
expanded advertising and marketing efforts, with the balance in custodial
deposits associated with the portfolio of loans serviced for others.
others.
Borrowed funds decreased $95.5 million during the first quarter. This change was
the net effect of the decrease of $133.4 million in short-term borrowings,
primarily reverse repurchase agreements, and the increase in long-term
borrowings of $37.9 million, primarily FHLB fixed rate advances.
Stockholders' equity totaled $281.2 million at March 31, 1996 or 11.4% of total
assets, which was $5.9 million less than at December 31, 1995. This decline in
total equity was substantially the net result of: (i) the Company's purchase
during the period of 270,300 shares of its common stock at a total cost of $6.4
million; (ii) the decrease from $7.2 million to $1.7 million in after-tax net
unrealized gains on available-for-sale securities due primarily to the rise in
the general level of interest rates; (iii) the first quarter dividend of $1.4
million; and (iv) earnings in the first quarter of $6.4 million.
RESULTS OF OPERATIONS
Overview. The Company's net income of $6.4 million for the three months ended
March 31, 1996 was $1.1 million or 20.3% greater than for the first quarter last
year. This earnings growth resulted primarily from an 18.1% increase in net
interest income, a 32.6% increase in non-interest income, net of a 26.1%
increase in non-interest expense.
Net Interest Income. Net interest income earned during the first quarter of 1996
was $2.7 million more than during the first quarter last year. This increase was
achieved primarily through growth in the Company's balance sheet. When comparing
the two periods, the average balance of interest earning assets was $420.5
million greater and the average balance of interest-bearing liabilities was
$430.4 million greater, resulting in growth of $8.5 million in interest income
and $6.2 million in interest expense, respectively. The average yield on
interest-earning assets for the 1996 first quarter was 8.06%, up from 7.87% for
the same period last year. The average cost of interest-bearing liabilities rose
similarly, from 5.42% last year to 5.60% in 1996. These average rate changes
resulted in growth of $1.0 million in interest income and $686,000 in interest
expense. These rate changes resulted in a fairly constant interest rate spread
of 2.46% for the 1996 first quarter compared to 2.45% for the 1995 first
quarter, while the net interest margin declined to 3.18% in the 1996 first
quarter from 3.33% for the 1995 first quarter due to the combined effect of
these average rate and volume changes.
12
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
on the volume of interest-earning assets and interest-bearing liabilities and
the rates earned or paid on them. The following tables set forth certain
information relating to the Company's average consolidated balance sheets and
consolidated statements of income for the three month periods ended March
31,1996 and 1995. The yields and costs are derived by dividing income or expense
by the average balance of assets and liabilities, respectively. Average balances
for interest-earning assets and interest-bearing liabilities are derived from
daily balances. All other average balances are derived from month-end balances.
Management does not believe that the use of average monthly balances instead of
average daily balances has caused any material differences in the information
presented. The average balance of loans receivable includes loans on which the
Company has discontinued accruing interest. The yields and costs include fees
which are considered adjustments to yields and costs.
Three Months Ended March 31,
----------------------------------------------------------------
1996 1995
Average Average
Average Yield/ Average Yield/
Balance Interest Cost (4) Balance Interest Cost (4)
---------- -------- --------- ---------- -------- --------
(dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable, net (1) ...... $1,806,751 $37,534 8.36% $1,489,944 $29,579 8.05%
Mortgage-backed securities ..... 348,097 6,192 7.15% 269,342 5,004 7.53%
Debt and equity securities ..... 65,647 966 5.92% 63,475 876 5.60%
Federal funds sold ............. 18,262 245 5.40% 1,523 22 5.93%
FHLB stock ..................... 23,502 409 7.00% 17,461 285 6.62%
---------- -------- --------- ---------- -------- --------
Total interest-earning assets . $2,262,259 45,346 8.06% 1,841,745 35,766 7.87%
-------- --------- -------- --------
Non-interest-earning assets ......... 174,871 111,061
---------- ----------
Total assets ................... $2,437,130 $1,952,806
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Passbook accounts .............. $ 125,309 956 3.07% $ 130,536 1,031 3.20%
NOW accounts ................... 85,034 622 2.94% 48,422 306 2.56%
Money market accounts .......... 155,590 1,801 4.66% 107,453 1,238 4.67%
Certificate accounts ........... 1,014,222 14,997 5.95% 833,692 11,369 5.53%
Short-term borrowings .......... 169,591 2,593 6.15% 256,332 3,874 6.13%
Long-term borrowings ........... 424,666 6,499 6.16% 167,572 2,803 6.78%
---------- -------- --------- ---------- -------- --------
Total interest-bearing
liabilities ................. 1,974,412 27,468 5.60% 1,544,007 20,621 5.42%
-------- --------- ---------- -------- --------
Non-interest-bearing liabilities .... 177,548 123,910
---------- ----------
Total liabilities .............. 2,151,960 1,667,917
Stockholders' equity ................ 285,170 284,889
---------- ----------
Total liabilities and
stockholders' equity $2,437,130 $1,952,806
========== ==========
Net interest income / interest
rate spread (2) ...................... $17,878 2.46% $15,145 2.45%
Net interest earning assets / net ======== ========= ======== ========
interest margin (3) ................. $ 287,847 3.18% $ 297,738 3.33%
========== ========= ========== ========
Ratio of interest-earning assets
to interest-bearing liabilities ..... 114.58% 119.28%
========== ==========
- - ---------------
<FN>
(1) Loans receivable, net include loans held for sale.
(2) Net interest rate spread represents the difference between the average
yield on average interest-earning assets and the average cost of average
interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average
interest-earning assets.
(4) For purposes of calculating these figures, all
interest income and interest costs are annualized.
</FN>
13
RATE / VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate
(changes in rate multiplied by prior volume), and (iii) the net change. The
changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
Three Months Ended March 31,
1996 vs. 1995
--------------------------------
Increase (Decrease) Due to
--------------------------------
Volume Rate Total
--------- -------- ---------
(in thousands)
Interest-earning assets:
Loans receivable, net .............. $6,735 $1,220 $7,955
Mortgage-backed securities ......... 1,447 (259) 1,188
Debt and equity securities ......... 34 56 90
Federal funds sold ................. 225 (2) 223
FHLB stock ......................... 106 18 124
-------- -------- ---------
Total ......................... 8,547 1,033 9,580
-------- -------- ---------
Interest-bearing liabilities:
Passbook accounts .................. (37) (38) (75)
NOW accounts ....................... 264 52 316
Money market accounts .............. 566 (3) 563
Certificate accounts ............... 2,686 942 3,628
Short-term borrowings .............. (1,294) 13 (1,281)
Long-term borrowings ............... 3,976 (280) 3,696
-------- -------- ---------
Total ......................... 6,161 686 6,847
-------- -------- ---------
Net change in net interest income ....... $2,386 $ 347 $2,733
======== ======== =========
14
Provision for Loan Losses. The provision for loan losses was $620,000 or 0.14%
(annualized)of average loans in the 1996 first quarter, compared to $628,000 or
0.17% of average loans in the first quarter last year. Net charge-offs decreased
from $484,000 or 0.13% of average loans in the first quarter last year to
$227,000 or 0.05% of average loans in this year's first quarter.
Non-Interest Income. The increase of $2.1 million in non-interest income was
primarily due to increases of $1.2 million in gain on sale of mortgage loans and
$656,000 in gain on sale of available-for-sale securities. Gain on sale of
mortgage loans for the three months ended March 31, 1996 includes $944,000 from
the capitalization of originated mortgage servicing rights pursuant to the
Company's adoption on July 1, 1995 of Statement of Financial Accounting
Standards (SFAS) No. 122. An increase in the proportion of mortgage loans
originated for sale from approximately 33% of total originations in the 1995
first quarter to approximately 64% in the 1996 first quarter also contributed to
the rise in gain on sale of mortgage loans. This shift from portfolio production
to secondary market production was made in response to improved conditions for
sale of loans in the secondary market following a reduction in interest rates
between the periods. The 1996 first quarter gain on sale of investments followed
the Company's transfer of all held-to-maturity securities to the
available-for-sale category on December 31, 1995 to allow maximum flexibility in
managing the securities portfolio. The 1996 first quarter sales allowed the
Company to realize additional income while restructuring a portion of the
securities portfolio. Most of the securities sold were mortgage-backed
securities backed by loans with higher than market interest rates, making them
more susceptible to prepayment risk. The increase of $960,000 in servicing
fee income and the increase of $936,000 in amortization of servicing rights
resulted primarily from growth in the average size of the portfolio of loans
serviced and subserviced for others.
Non-Interest Expense. Total non-interest expense for the three months ended
March 31, 1996 was $3.3 million more than for the same period last year. As a
percent of average assets, total non-interest expense was 2.65% for the first
quarter of both 1995 and 1996. The 1996 first quarter total included the
operating expenses of First Federal, acquired in July 1995, totaling $840,000.
The increase in compensation and benefits resulted largely from a reduction in
origination costs deferred in connection with the shift in origination of single
family loans from portfolio production to secondary market production, as well
as the cost of additional staff required to deliver an expanded line of retail
banking and investment products. Office occupancy and equipment costs were
higher primarily due to costs associated with banking office construction and
renovation for enhanced service to retail banking customers. The rise in other
non-interest expense was largely due to increased costs associated with a $1.0
billion GNMA servicing portfolio acquired on March 31, 1995.
Income Tax Expense. Income tax expense of $3.5 million for the three months
ended March 31, 1996 and $3.0 million for the three months ended March 31, 1995
resulted in effective income tax rates of 35.1% and 36.0%, respectively, on
income before income taxes. The reduction in the effective income tax rate is
primarily due to income tax credits earned in connection with the Company's
investment in low income housing partnerships as a part of its community
reinvestment activities.
15
NON-PERFORMING ASSETS
The following table sets forth information regarding the Company's
non-performing assets at the dates indicated.
March 31, December 31,
1996 1995
--------- ------------
(dollars in thousands)
Non-performing loans:
Non-accrual loans ............................ $ 7,916 $ 7,446
Accruing loans which are contractually
past due 90 days or more:
FHA/VA loans (limited credit risk - see
discussion below) ......................... 87,684 88,852
Other loans ................................ 4,434 3,865
Restructured loans ........................... 2,023 2,033
--------- -----------
Total non-performing loans ................... 102,057 102,196
Real estate owned .............................. 976 1,136
--------- -----------
Total non-performing assets .................... $103,033 $103,332
========= ===========
Non-performing loans to total loans:
Including FHA/VA loans ....................... 5.47% 5.52%
Excluding FHA/VA loans ....................... 0.77% 0.72%
Non-performing assets to total assets:
Including FHA/VA loans ....................... 4.16% 4.16%
Excluding FHA/VA loans ....................... 0.62% 0.58%
Allowance for loan losses to total loans ....... 0.66% 0.64%
Allowance for loan losses to non-performing
loans:
Including FHA/VA loans ....................... 11.97% 11.57%
Excluding FHA/VA loans ....................... 84.98% 88.59%
Allowance for loan losses to non-performing
assets:
Including FHA/VA loans ....................... 11.85% 11.44%
Excluding FHA/VA loans ....................... 79.58% 81.63%
Accruing FHA/VA loans which were contractually past due 90 days or more were
purchased by the Company from GNMA pools it services. At March 31, 1996, the
Company held in its portfolio $135.9 million of FHA/VA loans which were
delinquent at the time of purchase. Such loans totaled $128.7 million at
December 31, 1995. As a servicerof GNMA pools, the Company is obligated to remit
to security holders interest at the coupon rate regardless of whether such
interest is actually received from the underlying borrower. The Company, by
purchasing such delinquent loans out of the pools, is able to retain the benefit
of the net interest rate differential between the coupon rate it would otherwise
be obligated to pay to the GNMA security holder and the Company's current cost
of funds. Most of the Company's investment in delinquent FHA and VA loans is
recoverable through claims made against the FHA or VA, and any credit losses
incurred are not greater or less than if the FHA/VA loans remained in the GNMA
pools and the Company remained as servicer. The same risk from foreclosure or
from loss of interest exists for the Company as servicer or owner of the loan,
and the Company, by purchasing delinquent FHA/VA loans, assumes only the
interest rate risk associated with investing in a fixed-rate loan if foreclosure
does not occur.
16
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of funds are deposits; principal and interest
payments on loans and mortgage-backed securities; proceeds from the sale of
available-for-sale securities; proceeds from maturing debt securities; advances
from the FHLB; other borrowed funds; and sale of stock. Another source of
funds is mortgage banking activities which generate loan servicing fees and
proceeds from the sale of loans. While scheduled maturities of securities and
amortization of loans are predictable sources of funds, deposit flows and
prepayments on mortgage loans and mortgage-backed securities are greatly
influenced by the general level of interest rates, economic conditions,
and competition.
Each of the Company's subsidiary banks is required to maintain an average daily
balance of liquid assets and short-term liquid assets as a percentage of net
withdrawable deposit accounts plus short-term borrowings as defined by Office of
Thrift Supervision (OTS) regulations. The minimum required liquidity and
short-term liquidity ratios are currently 5% and 1%, respectively. For March
1996, each of the Company's subsidiary banks had liquidity and short-term
liquidity ratios of at least 6.8% and 3.3%, respectively.
At March 31, 1996, the Company had outstanding commitments to originate for
portfolio first mortgage loans totaling $11.6 million. In addition, the Company
had outstanding commitments totaling $50.7 million for the purchase of
mortgage-backed securities for the available-for-sale securities portfolio, with
settlement in April 1996. The Company anticipates that it will have sufficient
funds available to meet its origination and purchase commitments.
The Company's subsidiary banks are each required by federal regulations to
maintain minimum amounts of capital. Currently, the minimum required levels are
tangible capital of 1.5% of tangible assets, core capital of 3.0% of adjusted
tangible assets, and risk-based capital of 8.0% of risk-weighted assets. At
March 31, 1996, each of the Company's subsidiary banks had capital which
substantially exceeded each of the regulatory capital requirements.
PROPOSAL TO RECAPITALIZE THE SAVINGS ASSOCIATION INSURANCE FUND
During July 1995 hearings before the U. S. Senate Banking Committee regarding
the Savings Association Insurance Fund (SAIF), a plan was proposed by several
federal banking agencies to assess a special federal deposit insurance premium
in an amount sufficient to fully capitalize the SAIF. The Company's share of
such a special premium, if assessed at .75% of insured deposits as of March 31,
1996, would amount to approximately $11.6 million ($7.5 million net of income
tax benefit). The proposed plan also provides that, once the SAIF is fully
capitalized, federal deposit insurance rates applicable to SAIF deposits would
be reduced to be initially equal to the rates applicable to Bank Insurance Fund
(BIF) deposits. The Company is currently at a competitive disadvantage due to
the deposit premium differential between SAIF- and BIF-insured institutions.
Legislation that would have recapitalized the SAIF was dropped from the 1996
Budget Appropriations package passed by Congress in late April 1996. Many
industry observers believe legislation to recapitalize the SAIF is likely to
eventually pass, but that the prospects for such action occurring in this
presidential election year have been reduced by the recent Congressional
actions.
17
GREAT FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10 - Material contracts.
(b) Exhibit 11 - Statement regarding compution of per share
earnings.
(c) There have been no reports filed on Form 8-K during the
quarterly period ended March 31, 1996.
18
GREAT FINANCIAL CORPORATION
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GREAT FINANCIAL CORPORATION
-------------------------------------
(Registrant)
Date: May 14, 1996 By Paul M. Baker
--------------------------------------------
Paul M. Baker
President and Chief Executive Officer
Date: May 14, 1996 By Richard M. Klapheke
--------------------------------------------
Richard M. Klapheke
Treasurer and Secretary
(Chief Accounting Officer)
19