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 September 30, 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, 14,153,732 shares
as of November 13, 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 Operations 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 12
PART II. OTHER INFORMATION 20
SIGNATURES 21
GREAT FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
1996 1995
----------- ------------
(unaudited)
Assets
Cash and cash equivalents ....................... $ 47,561 $ 84,167
Available-for-sale securities, at fair value .... 604,267 461,330
Mortgage loans held for sale .................... 177,518 144,163
Loans receivable, net of allowance for loan
losses of $13,228 (1996) and $11,821 (1995) .. 1,842,008 1,667,363
Federal Home Loan Bank stock, at cost ........... 31,775 21,917
Property and equipment .......................... 34,103 26,871
Mortgage servicing rights ....................... 37,380 35,751
Other assets .................................... 56,072 44,694
----------- -----------
Total assets ......................................... $2,830,684 $2,486,256
=========== ===========
Liabilities
Deposits:
Non-interest bearing ............................ $ 130,312 $ 103,969
Interest bearing ................................ 1,627,595 1,354,892
----------- -----------
Total deposits ................................ 1,757,907 1,458,861
Borrowed funds .................................... 759,609 714,209
Other liabilities ................................. 39,791 26,076
----------- -----------
Total liabilities ............................. 2,557,307 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 ...................... 161,752 159,786
Retained earnings - subject to restrictions ..... 171,852 163,822
Treasury stock, 2,347,518 shares (1996) and
1,608,355 shares (1995), at cost ............. (46,891) (28,230)
Unearned ESOP shares ............................ (10,470) (11,296)
Unearned compensation - stock compensation plans (3,383) (4,359)
Net unrealized appreciation on
available-for-sale securities ................. 352 7,222
----------- -----------
Total stockholders' equity ................... 273,377 287,110
----------- -----------
Total liabilities and stockholders' equity ........... $2,830,684 $2,486,256
=========== ===========
See notes to consolidated financial statements.
3
GREAT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1996 1995 1996 1995
--------- -------- --------- ---------
(unaudited)
Interest income
Loans ................................... $40,746 $35,611 $116,572 $ 97,082
Securities .............................. 11,408 6,400 28,621 18,649
Other ................................... 134 192 681 449
-------- -------- --------- ---------
Total interest income ................ 52,288 42,203 145,874 116,180
-------- -------- --------- ---------
Interest expense
Deposits ................................ 21,597 17,654 59,421 47,350
Borrowed funds .......................... 11,167 8,397 30,109 22,827
-------- -------- --------- ---------
Total interest expense ............... 32,764 26,051 89,530 70,177
-------- -------- --------- ---------
Net interest income .......................... 19,524 16,152 56,344 46,003
Provision for loan losses .................... 675 575 1,911 1,678
-------- -------- --------- ---------
Net interest income after provision for loan
losses ...................................... 18,849 15,577 54,433 44,325
-------- -------- --------- ---------
Non-interest income
Service fee income ...................... 6,615 6,994 20,375 19,881
Amortization of mortgage servicing rights (1,958) (1,891) (5,747) (4,576)
Gain on sale of mortgage loans .......... 1,480 1,542 4,882 2,759
Gain on sale of mortgage servicing rights 1,212 119 2,515 170
Gain (loss) on sale of securities ....... (17) (5) 369 221
Other ................................... 1,891 1,031 4,525 3,080
-------- -------- --------- ---------
Net non-interest income .............. 9,223 7,790 26,919 21,535
-------- -------- --------- ---------
Non-interest expense
Compensation and benefits ............... 8,246 7,157 24,271 20,092
Office occupancy and equipment .......... 2,516 1,806 6,740 5,186
Office supplies, postage and telephone .. 1,319 1,108 3,824 3,288
Advertising and marketing ............... 922 550 2,756 1,828
Federal deposit insurance premiums ...... 10,680 746 12,368 2,089
State tax on deposits ................... 464 342 1,231 991
Other ................................... 4,361 2,751 10,464 7,085
-------- -------- --------- ---------
Total non-interest expense ........... 28,508 14,460 61,654 40,559
-------- -------- --------- ---------
Income (loss) before income taxes ............ (436) 8,907 19,698 25,301
Income tax expense (benefit).................. (49) 3,194 7,093 9,081
-------- -------- --------- ---------
Net income (loss)............................. $ (387) $ 5,713 $12,605 $ 16,220
======== ======== ========= =========
Earnings (loss) per share $ (0.03) $ 0.39 $0.88 $ 1.07
======== ======== ========= =========
See notes to consolidated financial statements.
4
GREAT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended September 30,
------------------------------
1996 1995
------------ -----------
(unaudited)
Net cash used in operating activities ......... $ (1,636) $(31,613)
----------- ----------
Investing activities
Purchases of available-for-sale securities (289,726) (41,372)
Maturities of available-for-sale securities 71,756 26,322
Principal collected on mortgage-backed
securities ............................... 48,599 24,976
Proceeds from sale of available-for-sale
securities ............................... 71,684
Proceeds from sale of mortgage servicing
rights ................................... 2,610 170
Proceeds from sale of property and
equipment ................................ 395
Increase in loans receivable .............. (48,791) (200,560)
Purchase of Lexington Federal Savings
Bank, FSB, net of cash and cash
equivalents acquired ..................... (30,363)
Purchase of First Federal Savings Bank, FSB
of Richmond, net of cash and cash
equivalents acquired ..................... (9,143)
Purchases of Federal Home Loan Bank stock . (6,771)
Purchases of property and equipment and
other assets ............................. (8,147) (2,175)
Purchases of mortgage servicing rights .... (4,247) (13,753)
Originations of mortgage servicing
rights ................................... (3,225) (712)
Proceeds from sale of real estate owned ... 897
----------- ----------
Net cash used in investing activities . (195,329) (216,247)
----------- ----------
Financing activities
Increase in deposits ...................... 130,892 160,316
Increase (decrease) in short-term
borrowings ............................... (20,502) 18,518
Long-term advances from Federal Home Loan
Bank ..................................... 90,750 115,985
Payments on long-term advances from Federal
Home Loan Bank ........................... (25,176) (2,566)
Increase in mortgage escrow funds ......... 7,631 11,359
Purchases of treasury stock ............... (18,793) (28,277)
Exercise of stock options ................. 100 26
Dividends paid ............................ (4,543) (4,008)
----------- ----------
Net cash provided by financing
activities ........................... 160,359 271,353
----------- ----------
Net increase (decrease) in cash and cash
equivalents .................................. (36,606) 23,493
Cash and cash equivalents, beginning of period 84,167 17,013
----------- ----------
Cash and cash equivalents, end of period ...... $ 47,561 $ 40,506
=========== ==========
Cash paid during the period for
Interest .................................. $ 89,306 $ 71,138
Income taxes .............................. $ 5,336 $ 5,523
Supplemental disclosure of noncash activities
Additions to real estate acquired in
settlement of loans ....................... $ 2,245 $ 1,799
Accrual of purchase of mortgage servicing
rights .................................... $ 1,528
Accrual of proceeds from sale of mortgage
servicing rights .......................... $ 1,083
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 subsidiary
Great Financial Bank, FSB (Bank). 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. 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. SECURITIES
September 30, 1996
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
Available-for-sale securities:
U.S. Government and agency obligations $ 75,123 $ 309 $ (339) $ 75,093
Other debt securities ................ 1,892 37 1,929
--------- ---------- ---------- ---------
Total debt securities .............. 77,015 346 (339) 77,022
Mortgage-backed securities ........... 526,435 3,771 (4,350) 525,856
Equity securities .................... 275 1,119 (5) 1,389
--------- ---------- ---------- ---------
Total available-for-sale securities ... $603,725 $5,236 $(4,694) $604,267
========= ========== ========== =========
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
========= ========= ========= =========
6
Gross realized gains for the three and nine months ended September 30,
1996 were $261,000 and $1,534,000, respectively. Gross realized losses
for the same periods were $278,000 and $1,165,000, respectively. Gross
realized gains for the nine months ended September 30, 1995 were $226,000.
Gross realized losses for the three and nine months ended September 30,
1995 were $5,000. 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.
3. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
(in thousands)
Balance, beginning of period ....... $13,031 $11,174 $11,821 $11,076
Provision charged to income ........ 675 575 1,911 1,678
Charge-offs ........................ (493) (315) (1,057) (1,366)
Recoveries ......................... 15 30 53 76
Acquired in merger ................. 200 500 200
-------- -------- -------- --------
Balance, end of period ............. $13,228 $11,664 $13,228 $11,664
======== ======== ======== ========
4. LOAN SERVICING
The Company was servicing a portfolio consisting of 85,200 and 79,300
mortgage loans at September 30, 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:
September 30, December 31,
1996 1995
------------- ------------
(in thousands)
GNMA .............................. $3,297,937 $3,215,249
FNMA .............................. 993,594 1,226,666
FHLMC ............................. 581,439 510,068
Other investors ................... 277,095 215,567
------------- ------------
Total servicing portfolio ......... $5,150,065 $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
September 30, 1996 and December 31, 1995, the Company subserviced a total
of 9,200 and 20,000 loans, respectively.
Custodial escrow balances maintained in connection with the foregoing
loan servicing were $111,781,000 and $108,424,000, at September 30,
1996 and December 31, 1995, respectively, of which $95,875,000 and
$86,554,000, respectively, are included in deposits in the accompanying
consolidated balance sheets.
5. BORROWED FUNDS
September 30, 1996 December 31, 1995
------------------- -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- -------- -------- --------
(dollars in thousands)
Short-term borrowings:
Reverse repurchase agreements ........ $103,700 5.49% $176,433 6.03%
Advances from Federal Home Loan Bank . 37,600 5.79% 2,150 6.14%
Borrowings under lines of credit ..... 133,656 5.42% 116,875 5.27%
-------- --------
Total short-term borrowings ........ 274,956 295,458
-------- --------
Long-term borrowings from Federal Home
Loan Bank:
Adjustable rate advances, interest
based on Libor; 5.59% (1996) and
6.00%(1995) ......................... 150,000 100,000
Fixed rate advances, 6.27% (1996)
and 6.29% (1995) .................... 298,579 278,489
Mortgage matched and other advances
payable monthly through 2026 with
interest rates from 3.88% to 8.05% .. 36,074 40,262
-------- --------
Total long-term borrowings ......... 484,653 418,751
-------- --------
Total borrowed funds ................... $759,609 $714,209
======== ========
Information concerning borrowings under reverse repurchase agreements
is summarized as follows:
At or For the Three Months At or For the Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
(dollars in thousands)
Average balance during the period .......... $101,171 $147,595 $ 73,416 $140,149
Average interest rate during the period .... 5.48% 5.93% 5.50% 6.06%
Maximum month-end balance during the
period .................................... $140,341 $167,812 $140,341 $220,452
Mortgage-backed securities underlying
the agreements at end of period:
Carrying value .......................... $111,995 $161,081
Fair value .............................. $111,850 $164,565
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 substantially identical securities
at the maturities of the agreements. The agreements at September 30,
1996 mature within one year.
6. SEGMENT INFORMATION
The schedules on pages 10 and 11 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, 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 and nine months ended September 30, 1996 in the schedules
which follows. The income and expense applicable to these operations
for the three and nine months ended September 30, 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%.
7. ACQUISITION
On June 7, 1996, the Company completed the acquisition of LFS Bancorp,
Inc., parent company of Lexington Federal Savings Bank, FSB (Lexington
Federal). The acquisition was accounted for using the purchase method
of accounting, and accordingly, the results of operations of the acquired
bank prior to the acquisition date have not been included in the
consolidated statements of income. Lexington Federal merged with the Bank
upon acquisition.
8. 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 September 30, 1996
----------------------------------------------------------------
Mortgage
Banking Banking Other Eliminations Consolidated
----------- ----------- ---------- ------------ ------------
(in thousands)
Interest income:
Unaffiliated customers $ 45,915 $ 6,371 $ 2 $ 52,288
Intersegment 3,332 2,180 430 $ (5,942)
----------- ----------- ---------- ------------ ------------
Total interest income 49,247 8,551 432 (5,942) 52,288
----------- ----------- ---------- ------------ ------------
Interest expense:
Unaffiliated customers 30,881 1,883 32,764
Intersegment 2,610 3,332 (5,942)
----------- ---------- ---------- ------------ ------------
Total interest expense 33,491 5,215 (5,942) 32,764
----------- ---------- ---------- ------------ ------------
Net interest income 15,756 3,336 432 19,524
Provision for loan losses (675) (675)
Non-interest income 1,392 9,833 379 (2,381) 9,223
Non-interest expense (20,647) (9,540) (702) 2,381 (28,508)
----------- ---------- ---------- ------------ ------------
Income (loss) before income taxes $ (4,174) $ 3,629 $ 109 $ (436)
=========== ========== ========== ============ ============
Identifiable assets $2,495,634 $381,326 $261,024 $(307,300) $2,830,684
=========== ========== ========== ============ ============
Depreciation and amortization
of property and equipment $ 533 $ 331 $ 7 $ 871
=========== ========== ========== ============ ============
Three Months Ended September 30, 1995
----------------------------------------------------------------
Mortgage
Banking Banking Other Eliminations Consolidated
----------- ---------- ---------- ------------ ------------
(in thousands)
Interest income:
Unaffiliated customers $ 36,404 $ 5,798 $ 1 $ 42,203
Intersegment 3,269 1,637 310 $ (5,216)
----------- ---------- ---------- ------------ ------------
Total interest income 39,673 7,435 311 (5,216) 42,203
----------- ---------- ---------- ------------ ------------
Interest expense:
Unaffiliated customers 24,555 1,496 26,051
Intersegment 1,947 3,269 (5,216)
----------- ---------- ---------- ------------ ------------
Total interest expense 26,502 4,765 (5,216) 26,051
----------- ---------- ---------- ------------ ------------
Net interest income 13,171 2,670 311 16,152
Provision for loan losses (575) (575)
Non-interest income 1,252 8,743 59 (2,264) 7,790
Non-interest expense (8,411) (7,765) (548) 2,264 (14,460)
----------- ---------- ---------- ------------ ------------
Income (loss) before income taxes $ 5,437 $ 3,648 $ (178) $ 8,907
=========== ========== ========== ============ ============
Identifiable assets $2,099,568 $277,749 $259,278 $(315,642) $2,320,953
=========== ========== ========== ============ ============
Depreciation and amortization
of property and equipment $ 414 $ 303 $ 717
=========== ========== ========== ============ ============
10
SEGMENT INFORMATION
Nine Months Ended September 30, 1996
----------------------------------------------------------------
Mortgage
Banking Banking Other Eliminations Consolidated
----------- ----------- ---------- ------------ ------------
(in thousands)
Interest income:
Unaffiliated customers $ 127,528 $ 18,337 $ 9 $ 145,874
Intersegment 9,402 5,398 1,101 $ (15,901)
----------- ----------- ---------- ------------ ------------
Total interest income 136,930 23,735 1,110 (15,901) 145,874
----------- ----------- ---------- ------------ ------------
Interest expense:
Unaffiliated customers 84,112 5,418 89,530
Intersegment 6,500 9,400 1 (15,901)
----------- ---------- ---------- ------------ ------------
Total interest expense 90,612 14,818 1 (15,901) 89,530
----------- ---------- ---------- ------------ ------------
Net interest income 46,318 8,917 1,109 56,344
Provision for loan losses (1,911) (1,911)
Non-interest income 3,970 28,840 871 (6,762) 26,919
Non-interest expense (39,895) (26,561) (1,960) 6,762 (61,654)
----------- ---------- ---------- ------------ ------------
Income (loss) before income taxes $ 8,482 $ 11,196 $ 20 $ 19,698
=========== ========== ========== ============ ============
Identifiable assets $2,495,634 $381,326 $261,024 $(307,300) $2,830,684
=========== ========== ========== ============ ============
Depreciation and amortization
of property and equipment $ 1,576 $ 966 $ 16 $ 2,558
=========== ========== ========== ============ ============
Nine Months Ended September 30, 1995
----------------------------------------------------------------
Mortgage
Banking Banking Other Eliminations Consolidated
----------- ---------- ---------- ------------ ------------
(in thousands)
Interest income:
Unaffiliated customers $ 101,089 $ 15,077 $ 14 $ 116,180
Intersegment 8,035 4,456 1,804 $ (14,295)
----------- ---------- ---------- ------------ ------------
Total interest income 109,124 19,533 1,818 (14,295) 116,180
----------- ---------- ---------- ------------ ------------
Interest expense:
Unaffiliated customers 65,914 4,263 70,177
Intersegment 6,260 8,035 (14,295)
----------- ---------- ---------- ------------ ------------
Total interest expense 72,174 12,298 (14,295) 70,177
----------- ---------- ---------- ------------ ------------
Net interest income 36,950 7,235 1,818 46,003
Provision for loan losses (1,275) (403) (1,678)
Non-interest income 3,510 23,921 347 (6,243) 21,535
Non-interest expense (25,295) (19,639) (1,868) 6,243 (40,559)
----------- ---------- ---------- ------------ ------------
Income (loss) before income taxes $ 13,890 $ 11,114 $ 297 $ 25,301
=========== ========== ========== ============ ============
Identifiable assets $2,099,568 $277,749 $259,278 $(315,642) $2,320,953
=========== ========== ========== ============ ============
Depreciation and amortization
of property and equipment $ 1,170 $ 892 $ 2,062
=========== ========== ========== ============ ============
11
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.
Any forward-looking statements included in this report or in any report
included by reference, which reflect management's best judgement based on
factors known, involve risks and uncertainties, including but not limited to
those discussed above. Actual results could differ materially from those
expressed or implied.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1996 TO DECEMBER 31, 1995
Assets increased 13.9% or $344.4 million during the first nine months of 1996 to
$2.8 billion. Contributing significantly to this increase was the acquisition of
Lexington Federal, which was completed in the second quarter of 1996. Total
assets acquired from Lexington Federal were approximately $240 million.
Net loans receivable totaled $1.8 billion at September 30, 1996, increasing
10.5% in the first nine months of 1996. While the Company continues to focus on
its one-to-four family residential mortgage lending business, it also is
diversifying its loan portfolio by pursuing both commercial and consumer loans.
Commercial mortgage loans increased 45.1% during the first nine months of 1996
and consumer loans increased 46.4%. The following table shows the composition of
the loan portfolio at September 30, 1996 in comparison to December 31, 1995:
Loan Portfolio Composition at
-----------------------------
September 30, December 31,
1996 1995
------------- ------------
Loan category:
One-to-four family residential ..... 73.5% 78.6%
Multi-family residential ........... 8.2% 7.8%
Commercial real estate ............. 5.4% 3.6%
Construction and land .............. 6.0% 5.1%
Non-mortgage, primarily installment. 6.9% 4.9%
------------- ------------
100.0% 100.0%
============= ============
During the first nine months of 1996, the Company repositioned its securities
portfolio, replacing lower yielding debt and equity securities with higher
yielding mortgage-backed securities. The Company also purchased mortgage-backed
securities funded by borrowings from the Federal Home Loan Bank. The leveraged
purchases were structured to grow the Company without incurring significant
interest rate risk. Mortgage-backed securities increased 52.8% during the first
nine months of 1996 and debt and equity securities decreased 33.0%. In total the
securities portfolio increased 31.0% or $143 million during the first nine
months of 1996.
12
Deposits increase $299.0 million or 20.5 during the first nine months of 1996.
Approximately $122 million of this increase was due to growth in retail deposits
attracted through advertising, competitive deposit rates and increased retail
sales efforts. The balance of the increase was due to deposits acquired from
Lexington Federal totaling $168.2 million and an increase in custodial account
balances associated with the portfolio of loans serviced for others.
Borrowed funds increased $45.4 million during the first nine months of 1996,
with long-term FHLB advances increasing by $65.9 million and short-term
borrowings decreasing $20.5 million. The Company increased long-term fixed and
variable rate borrowings from the FHLB to fund purchases of mortgage-backed
securities. Growth in deposits enabled the Company to decrease short-term
borrowings.
Stockholders' equity totaled $273.4 million at September 30, 1996 or 9.7% of
total assets, which was $13.7 million less than at year-end 1995. This decline
in total equity was primarily the net result of the Company purchasing 739,163
shares of its common stock at a cost of $18.7 million; after-tax net unrealized
gains on available-for-sale securities decreasing by $6.9 million; dividends
of $4.5 million; and earnings of $12.6 million for the nine months ended
September 30, 1996.
RESULTS OF OPERATIONS
Overview. The Company reported a net loss of $387,000 for the three months ended
September 30, 1996, as compared to net income of $5.7 million for the third
quarter of 1995. For the nine months ended September 30, 1996, net income
totaled $12.6 million, down from net income of $16.2 million for the same period
last year. The third quarter loss resulted primarily from a charge of $9.7
million ($6.3 million, net of income tax benefit), taken in response to the
Deposit Insurance Funds Act of 1996 passed by Congress and signed into law by
the President on September 30, 1996. This legislation includes provisions
designed to recapitalize the Savings Association Insurance Fund (SAIF) and
requires all insured savings institutions to pay a special assessment of 65.7
cents for every $100 (0.657%) of applicable deposits held as of March 31, 1995.
The Company anticipates that, as a result of the recapitalization of SAIF,
federal deposit insurance rates will be reduced by approximately 70% effective
January 1, 1997, thus enhancing future earnings.
Net Interest Income. For the third quarter of 1996, net interest income
increased 20.9%, or $3.4 million versus the third quarter of 1995. This increase
was primarily due to the growth in the Company's balance sheet and an increase
in the interest rate spread. Average interest-earning assets and average
interest-bearing liabilities increased $511.2 million and $539.0 million,
respectively, in the third quarter of 1996 versus the third quarter of 1995,
resulting in a $2.3 million increase in net interest income. These average
balance increases were the result of growth from normal business operations and
the acquisition of Lexington Federal in the second quarter of 1996. The average
yield on interest-earning assets rose slightly from 7.85% in the third quarter
of 1995, to 7.87% in the third quarter of 1996. The average cost of
interest-bearing liabilities decreased from 5.70% in the 1995 third quarter to
5.54% in the third quarter of 1996, primarily due to a shift to shorter maturity
certificate accounts with lower interest rates. These average rate changes
resulted in a $1.1 million increase in net interest income and an increase in
the interest rate spread from 2.15% in the third quarter of 1995 to 2.33% in the
1996 third quarter. Net interest margin decreased to 2.94% in the third quarter
of 1996 from 3.01% in the third quarter of 1995.
Net interest income was up $10.3 million, or 22.5%, for the first nine months of
1996 compared to the same period of 1995. Average interest-earning assets and
average interest-bearing liabilities increased $473.5 million and $481.8
million, respectively, in the first nine months of 1996 versus the same period
of 1995, resulting in a $7.6 million increase in net interest income. These
average balance increases were the result of growth from normal business
operations and the acquisitions of First Federal Savings Bank of Richmond (First
Federal) in the third quarter of 1995, and Lexington Federal in the second
quarter of 1996. The average yield on interest-earning assets increased from
7.88% for the first nine months of 1995 to 7.97% for the first nine months of
1996. This increase was the result of an increase in higher yielding commercial
mortgage and consumer loans, partially off-set by an increase in lower yielding
adjustable rate mortgage-backed securities. The average cost of interest-bearing
liabilities decreased from 5.63% for the first nine months of 1995 to 5.57% for
the first nine months of 1996 primarily due to an increase in long-term
borrowings with lower adjustable interest rates. These rate changes resulted in
a $2.7 million increase in net interest income and the interest rate spread
increasing to 2.40% in 1996, up from 2.25% in 1995. Net interest margin declined
to 3.08% in the first nine months of 1996 from 3.12% in the same period last
year primarily due to the effect of the stock repurchase plan on average
interest-earning assets.
13
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 operations for the three and nine month periods ended
September 30, 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 September 30,
----------------------------------------------------------------
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) ...... $1,998,099 $40,746 8.11% $1,762,909 $35,611 8.01%
Mortgage-backed securities ..... 522,299 9,524 7.25% 277,192 5,160 7.39%
Debt and equity securities ..... 80,704 1,335 6.58% 60,040 909 6.01%
Federal funds sold ............. 7,708 103 5.29% 13,377 192 5.69%
Interest-bearing deposits with
banks ........................ 3,485 31 3.51%
FHLB stock ..................... 31,220 549 7.00% 18,776 331 6.99%
---------- -------- --------- ---------- -------- --------
Total interest-earning assets . 2,643,515 52,288 7.87% 2,132,294 42,203 7.85%
-------- --------- -------- --------
Non-interest-earning assets ......... 174,269 122,635
---------- ----------
Total assets ................... $2,817,784 $2,254,929
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Passbook accounts .............. $ 139,744 1,107 3.15% $ 131,366 1,052 3.18%
Interest-bearing demand deposit
accounts ..................... 138,081 1,308 3.77% 56,809 356 2.49%
Money market accounts .......... 185,905 2,259 4.83% 133,514 1,618 4.81%
Certificate accounts ........... 1,154,548 16,923 5.83% 956,605 14,628 6.07%
Short-term borrowings .......... 247,726 3,765 6.05% 248,347 3,772 6.03%
Long-term borrowings ........... 484,867 7,402 6.07% 285,186 4,625 6.43%
---------- -------- --------- ---------- -------- --------
Total interest-bearing
liabilities ................. 2,350,871 32,764 5.54% 1,811,827 26,051 5.70%
-------- --------- -------- --------
Non-interest-bearing liabilities .... 192,372 169,897
---------- ----------
Total liabilities .............. 2,543,243 1,981,724
Stockholders' equity ................ 274,541 273,205
---------- ----------
Total liabilities and
stockholders' equity $2,817,784 $2,254,929
========== ==========
Net interest income / interest
rate spread (2) ...................... $19,524 2.33% $16,152 2.15%
Net interest earning assets / net ======== ========= ======== ========
interest margin (3) ................. $ 292,644 2.94% $ 320,467 3.01%
========== ========= ========== ========
Ratio of interest-earning assets
to interest-bearing liabilities ..... 112.45% 117.69%
========== ==========
- ---------------
<FN>
(1) Loans receivable, net include loans held for sale.
(2) 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>
14
Nine Months Ended September 30,
----------------------------------------------------------------
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) ...... $1,891,081 $116,572 8.23% $1,612,489 $ 97,082 8.05%
Mortgage-backed securities ..... 438,365 23,908 7.29% 271,495 15,151 7.46%
Debt and equity securities ..... 71,423 3,300 6.17% 59,618 2,588 5.80%
Federal funds sold ............. 16,302 650 5.32% 10,246 449 5.85%
Interest-bearing deposits with
banks......................... 1,170 31 3.51%
FHLB stock ..................... 26,982 1,413 7.00% 18,011 910 6.76%
---------- -------- --------- ---------- -------- --------
Total interest-earning assets . 2,445,323 145,874 7.97% 1,971,859 116,180 7.88%
-------- --------- -------- --------
Non-interest-earning assets ......... 163,942 119,890
---------- ----------
Total assets ................... $2,609,265 $2,091,749
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Passbook accounts .............. $ 131,873 3,061 3.10% $ 128,428 3,072 3.20%
Interest-bearing demand deposit
accounts ..................... 110,978 2,894 3.48% 51,583 996 2.58%
Money market accounts .......... 167,905 5,927 4.72% 118,021 4,259 4.82%
Certificate accounts ........... 1,078,468 47,539 5.89% 886,427 39,023 5.89%
Short-term borrowings .......... 201,862 9,202 6.09% 264,154 12,071 6.11%
Long-term borrowings ........... 457,316 20,907 6.11% 217,995 10,756 6.60%
---------- -------- --------- ---------- -------- --------
Total interest-bearing
liabilities ................. 2,148,402 89,530 5.57% 1,666,608 70,177 5.63%
-------- --------- -------- --------
Non-interest-bearing liabilities .... 182,687 147,045
---------- ----------
Total liabilities .............. 2,331,089 1,813,653
Stockholders' equity ................ 278,176 278,096
---------- ----------
Total liabilities and
stockholders' equity $2,609,265 $2,091,749
========== ==========
Net interest income / interest
rate spread (2) ...................... $56,344 2.40% $46,003 2.25%
Net interest earning assets / net ======== ========= ======== ========
interest margin (3) ................. $ 296,921 3.08% $ 305,251 3.12%
========== ========= ========== ========
Ratio of interest-earning assets
to interest-bearing liabilities ..... 113.82% 118.32%
========== ==========
- ---------------
<FN>
(1) Loans receivable, net include loans held for sale.
(2) 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>
15
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 September 30, Nine Months Ended September 30,
1996 vs. 1995 1996 vs. 1995
------------------------------- -------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------- -------------------------------
Volume Rate Total Volume Rate Total
--------- -------- -------- --------- -------- --------
(in thousands)
Interest-earning assets:
Loans receivable, net .............. $4,696 $ 439 $ 5,135 $17,257 $2,233 $19,490
Mortgage-backed securities ......... 4,463 (99) 4,364 9,110 (353) 8,757
Debt and equity securities ......... 334 92 426 539 173 712
Federal funds sold ................. (76) (13) (89) 245 (44) 201
Interest-bearing deposits with banks 16 15 31 16 15 31
FHLB stock ......................... 217 1 218 470 33 503
-------- -------- -------- --------- -------- ---------
Total ......................... 9,650 435 10,085 27,637 2,057 29,694
-------- -------- -------- --------- -------- ---------
Interest-bearing liabilities:
Passbook accounts .................. 65 (10) 55 84 (95) (11)
Demand deposit accounts ............ 700 252 952 1,457 441 1,898
Money market accounts .............. 634 7 641 1,758 (90) 1,668
Certificate accounts ............... 2,896 (601) 2,295 8,516 0 8,516
Short-term borrowings .............. (14) 7 (7) (2,830) (39) (2,869)
Long-term borrowings ............... 3,049 (272) 2,777 11,005 (854) 10,151
-------- -------- -------- --------- -------- ---------
Total ......................... 7,330 (617) 6,713 19,990 (637) 19,353
-------- -------- -------- --------- -------- ---------
Net change in net interest income ....... $2,320 $1,052 $ 3,372 $ 7,647 $2,694 $10,341
======== ======== ========= ========= ======== =========
16
Provision for Loan Losses. The provision for loan losses was $675,000 or 0.13%
(annualized) of average loans in the 1996 third quarter, compared to $575,000 or
0.13% of average loans in the third quarter last year. Net charge-offs increased
from $285,000 or 0.06% of average loans in the third quarter last year to
$478,000 or 0.10% of average loans in this year's third quarter. The provision
for loan losses for the nine months ended September 30, 1996 was $1.9 million or
0.13% of average loans during the period, compared to $1.7 million or 0.14% of
average loans for the same period last year. Net charge-offs decreased when
comparing the two nine-month periods, from $1.3 million or 0.11% of average
loans last year to $1.0 million or 0.07% of average loans this year.
Non-Interest Income. For the three months ended September 30, 1996, non-interest
income increased 18.4% or $1.4 million in comparison to the same period last
year. This increase was substantially due to an increase of $1.1 million in gain
on sale of mortgage servicing rights. The increase in non-interest income of
25.0% or $5.4 million for the nine months ended September 30, 1996 in comparison
to the same period last year, was primarily due to increases in gains on sales
of mortgage loans and mortgage servicing rights, partially offset by an increase
in amortization of mortgage servicing rights. Gain on sale of mortgage loans
increased $2.1 million for the first nine months of 1996 over the first nine
months of 1995. The current favorable interest rate environment related to
mortgage lending allowed the Company's mortgage banking business to originate a
larger portion of loans for sale in the secondary market. Gain on sale of
mortgage servicing rights increased $2.3 million for the first nine months of
1996 compared to the same period of 1995, due to bulk sales of servicing rights
related to approximately $194 million of mortgage loans. The Company actively
manages interest rate prepayment risk inherent in its mortgage banking business
by periodically selling mortgage servicing rights. The increased amortization of
servicing rights of $1.2 million for the nine months ended September 30, 1996,
in comparison with 1995, was due to the effect of the acquisition of servicing
rights on a $1.0 billion GNMA servicing portfolio on March 31, 1995 and the
Company's implementation of Statement of Financial Accounting Standard No. 122,
"Accounting for Mortgage Banking Activities," in July 1995, related to
originated mortgage servicing rights. Increases in other non-interest income for
the three and nine months ended September 30, 1996 in comparison with the same
periods of 1995 are primarily due to increases in service charges attributable
to growth in transaction accounts.
Non-Interest Expense. Non-interest expense for the three and nine months ended
September 30, 1996 increased $14.0 million and $21.1 million, respectively, in
comparison to the same periods of 1995. These significant increases were
primarily due to the special insurance premium assessed to recapitalize SAIF.
The Company's assessment, based on applicable deposits, was $9.7 million.
Without this one-time charge, non-interest expense as a percentage of average
assets was 2.66% for the three and nine months ended September 30, 1996,
compared to 2.54% and 2.59% for the three months and nine months ended September
30, 1995, respectively, indicating that operating expenses are increasing
proportionate to the Company's growth which include the acquisitions of First
Federal and Lexington Federal. Increases in compensation and benefits resulted
primarily 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 and support an expanded line of retail banking and investment products.
Office occupancy and equipment expense increased as a result of banking office
construction and renovation initiated to enhance service to retail banking
customers. The rise in other non-interest expense was primarily due to (i) a
provision of $1.5 million recorded in the third quarter of 1996 for possible
reimbursement to borrowers based on the Office of Thrift Supervision's (OTS)
determination that Truth-in-Lending disclosures on certain adjustable rate
mortgages were inaccurate, (see Part II. Other Information, Item 1. Legal
Proceedings) and (ii) increased expenses related to increased payoffs of
serviced loans and increased costs associated with an increase in the number
of defaulted FHA/VA loans being serviced.
Income Tax Expense. Income tax expense for the nine months ended September 30,
1996 and 1995, resulted in effective income tax rates of 36.0% and 35.9%,
respectively.
17
NON-PERFORMING ASSETS
The following table sets forth information regarding the Company's
non-performing assets at the dates indicated.
September 30, December 31,
1996 1995
------------- ------------
(dollars in thousands)
Non-performing loans:
Non-accrual loans ............................ $ 7,322 $ 7,446
Accruing loans which are contractually
past due 90 days or more:
FHA/VA loans (limited credit risk - see
discussion below) ......................... 74,282 88,852
Other loans ................................ 5,380 3,865
Restructured loans ........................... 2,003 2,033
--------- -----------
Total non-performing loans ................... 88,987 102,196
Real estate owned .............................. 2,521 1,136
--------- -----------
Total non-performing assets .................... $91,508 $103,332
========= ===========
Non-performing loans to total loans:
Including FHA/VA loans ....................... 4.28% 5.52%
Excluding FHA/VA loans ....................... 0.71% 0.72%
Non-performing assets to total assets:
Including FHA/VA loans ....................... 3.23% 4.16%
Excluding FHA/VA loans ....................... 0.61% 0.58%
Allowance for loan losses to total loans ....... 0.64% 0.64%
Allowance for loan losses to non-performing
loans:
Including FHA/VA loans ....................... 14.87% 11.57%
Excluding FHA/VA loans ....................... 89.96% 88.59%
Allowance for loan losses to non-performing
assets:
Including FHA/VA loans ....................... 14.46% 11.44%
Excluding FHA/VA loans ....................... 76.79% 81.63%
Certain accruing FHA/VA loans which are contractually past due 90 days or more
are purchased by the Company from GNMA pools it services. The Company also
purchases portfolios of insured FHA and guaranteed VA loans, most of which are
90 days or more past due, from third parties. At September 30, 1996, the Company
held in its portfolio $129.6 million of FHA/VA loans most of which were
delinquent at the time of purchase. Such loans totaled $128.7 million at
December 31, 1995.
As a servicer of 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 from the pools, assumes
only the interest rate risk associated with investing in a fixed-rate loan if
foreclosure does not occur.
The FHA/VA loans acquired from third parties are purchased at a discount
adequate to compensate the Company for the credit and interest rate risks
associated with their purchase. The Company purchased $4.5 million of insured
FHA and guaranteed VA loans from third parties during the first nine months of
1996.
The Company also has certain impaired loans. The Company has defined impaired
loans as commercial loans classified as substandard, doubtful, or loss, as
defined by OTS regulations. Impaired loans, net of related allowance, decreased
from $7.1 million at December 31, 1995, to $6.7 million at September 30, 1996.
18
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.
The Bank 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 OTS regulations. The minimum required
liquidity and short-term liquidity ratios are currently 5% and 1%, respectively.
For September 1996, the Bank had liquidity and short-term liquidity ratios of
5.7% and 3.0%, respectively.
At September 30, 1996, the Company had outstanding commitments to originate for
portfolio first mortgage loans totaling $54.4 million. The Company anticipates
that it will have sufficient funds available to meet its current origination
commitments.
The Bank is 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 September 30, 1996, the
Bank had tangible capital of 8.1% of tangible assets, core capital of 8.1% of
adjusted tangible assets, and risk-based capital of 18.1% of risk-weighted
assets.
19
GREAT FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
A regular compliance examination by the OTS raised questions
about the accuracy of the Bank's Truth-in-Lending (TIL)
disclosures on certain adjustable rate mortgages. The TIL
disclosure errors were brought about as a result of problems
incurred in the use of certain computer programs for the
calculation of the disclosures. Under applicable federal law,
in certain circumstances, the fact that improper
truth-in-lending disclosures were generated as a result of
errors in a computer program may provide a defense. However,
the OTS regional compliance director has rejected the Bank's
computer error defense. As a result of that rejection, the
Bank investigated the extent of the restitution which could be
required under applicable law and determined that the most
probable recovery in the event that the computer error and
other defenses are unsuccessful (along with related attorney
fees) is $1.5 million. Management intends to aggressively
assert available defenses to this proceeding and to attempt to
minimize any damage award. In addition to current cash
payments, the Bank would also be responsible in certain
circumstances for reducing future mortgage interest payments
on affected loans, a result of which would be reduced earnings
for the Bank. Management does not believe that future
interest payment reductions would have a material adverse
affect on the financial condition or results of operations of
the Bank or the Company.
Except as discussed above, the Company and it subsidiary are
not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of
business. Such routine legal proceedings in the aggregate are
believed by management to be immaterial to the Company's
financial condition or results of operations.
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 11 - Statement regarding compution of per share
earnings.
(b) There have been no reports filed on Form 8-K during the
quarterly period ended September 30, 1996.
20
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: November 13, 1996 By Paul M. Baker
--------------------------------------------
Paul M. Baker
President and Chief Executive Officer
Date: November 13, 1996 By Richard M. Klapheke
--------------------------------------------
Richard M. Klapheke
Treasurer and Secretary
(Chief Accounting Officer)
21