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, 1997
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, 13,884,866 shares
as of May 6, 1997.
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
PART II. OTHER INFORMATION 20
SIGNATURES 21
GREAT FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
1997 1996
----------- ------------
(unaudited)
Assets
Cash and cash equivalents ....................... $ 50,564 $ 126,323
Available-for-sale securities, at fair value .... 832,379 667,542
Mortgage loans held for sale .................... 70,779 65,546
Loans receivable, net of allowance for loan
losses of $14,128 (1997) and $13,538 (1996) .. 1,880,560 1,867,511
Federal Home Loan Bank stock, at cost ........... 35,417 34,816
Property and equipment .......................... 34,879 34,127
Mortgage servicing rights ....................... 36,274 37,187
Other assets .................................... 61,290 64,110
----------- -----------
Total assets ......................................... $3,002,142 $2,897,162
=========== ===========
Liabilities
Deposits:
Non-interest bearing ............................ $ 125,024 $ 112,129
Interest bearing ................................ 1,710,471 1,691,874
----------- -----------
Total deposits ................................ 1,835,495 1,804,003
Borrowed funds .................................... 817,441 781,297
Other liabilities ................................. 70,099 31,408
----------- -----------
Total liabilities ............................. 2,723,035 2,616,708
----------- -----------
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 ...................... 162,872 162,279
Retained earnings - subject to restrictions ..... 182,446 177,201
Treasury stock, 2,457,960 shares (1997) and
2,414,518 shares (1996), at cost ............. (50,704) (48,845)
Unearned ESOP shares ............................ (9,918) (10,194)
Unearned compensation - stock compensation plans. (2,733) (3,058)
Net unrealized gains (losses) on
available-for-sale securities ................. (3,021) 2,906
----------- -----------
Total stockholders' equity ................... 279,107 280,454
----------- -----------
Total liabilities and stockholders' equity ........... $3,002,142 $2,897,162
=========== ===========
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,
----------------------------
1997 1996
---------- ----------
(unaudited)
Interest income
Loans ................................... $40,042 $37,534
Securities .............................. 12,236 7,567
Other ................................... 217 245
---------- ----------
Total interest income ................ 52,495 45,346
---------- ----------
Interest expense
Deposits ................................ 21,796 18,376
Borrowed funds .......................... 10,299 9,092
---------- ----------
Total interest expense ............... 32,095 27,468
---------- ----------
Net interest income .......................... 20,400 17,878
Provision for loan losses .................... 723 620
---------- ----------
Net interest income after provision for loan
losses ...................................... 19,677 17,258
---------- ----------
Non-interest income
Servicing fee income .................... 6,352 7,016
Amortization of mortgage servicing rights (2,042) (1,841)
Service charges on deposit accounts...... 708 458
Gain on sale of mortgage loans .......... 1,362 1,513
Gain on sale of retail banking office.... 772
Gain on sale of securities............... 528 656
Other ................................... 1,505 955
---------- ----------
Net non-interest income .............. 9,185 8,757
---------- ----------
Non-interest expense
Compensation and benefits ............... 8,900 7,782
Office occupancy and equipment .......... 2,245 2,076
Office supplies, postage and telephone .. 1,502 1,264
Advertising and marketing ............... 805 952
Federal deposit insurance premiums ...... 266 826
Other ................................... 3,789 3,206
---------- ----------
Total non-interest expense ........... 17,507 16,106
---------- ----------
Income before income taxes.................... 11,355 9,909
Income tax expense............................ 3,902 3,478
---------- ----------
Net income.................................... $ 7,453 $ 6,431
========== ==========
Earnings per share $0.53 $0.44
========== ==========
See notes to consolidated financial statements.
4
GREAT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Three Months Ended March 31,
------------------------------
1997 1996
------------ ------------
(unaudited)
Net cash provided by operating activities...... $ 13,344 $ 3,200
------------ ------------
Investing activities:
Purchases of available-for-sale securities. (304,285) (109,980)
Maturities of available-for-sale securities 80,045 55,581
Principal collected on mortgage-backed
securities ............................... 17,230 14,711
Proceeds from sales of available-for-sale
securities ............................... 67,204 32,018
(Increase) decrease in loans receivable.... (14,909) 130
Purchases of property and equipment and
other assets ............................. (1,770) (2,401)
Originations of mortgage servicing rights.. (1,116) (944)
Purchases of Federal Home Loan Bank Stock.. (1,743)
Cash used in sale of retail banking office. (14,900)
Other ..................................... 909 305
------------ ------------
Net cash used in investing activities..... (171,592) (12,323)
------------ ------------
Financing activities:
Increase in deposits ...................... 47,324 87,734
Decrease in short-term borrowings.......... (13,238) (133,445)
Long-term advances from Federal Home Loan
Bank ..................................... 100,000 41,000
Payments on long-term advances from Federal
Home Loan Bank ........................... (50,618) (3,093)
Increase in mortgage escrow funds ......... 3,088 2,766
Purchases of treasury stock ............... (3,129) (6,392)
Dividends paid ............................ (1,560) (1,378)
Exercise of stock options ................. 622
------------ ------------
Net cash provided by (used in) financing
activities ........................... 82,489 (12,808)
----------- ------------
Net decrease in cash and cash equivalents ..... (75,759) (21,931)
Cash and cash equivalents at beginning of
period ...................................... 126,323 84,167
------------ ------------
Cash and cash equivalents at end of period..... $ 50,564 $ 62,236
============ ============
Cash paid (received) during the period for:
Interest .................................. $ 32,554 $ 27,758
Income taxes, net ......................... $ 279 $ (52)
Supplemental disclosure of noncash activities:
Amounts due brokers for securities
purchased but not settled ................. $ 33,423
Additions to real estate acquired in
settlement of loans ....................... $ 795 $ 198
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. 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, 1996. 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,
1997 1996
--------- ------------
(in thousands)
Cash and due from banks $38,622 $ 27,702
Interest-bearing deposits with banks 11,942 1,315
Federal funds sold 33,200
Securities purchased under agreements to resell 64,106
--------- ------------
Total cash and cash equivalents $50,564 $126,323
========= ============
3. SECURITIES
March 31, 1997
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
Available-for-sale securities:
U.S. Government and agency obligations $122,560 $ 26 $ (649) $121,937
Other debt securities ................ 21,208 10 (101) 21,117
--------- ---------- ---------- ---------
Total debt securities ............... 143,768 36 (750) 143,054
Mortgage-backed securities ........... 693,159 2,993 (8,037) 688,115
Equity securities .................... 99 1,111 1,210
--------- ---------- ---------- ---------
Total available-for-sale securities ... $837,026 $4,140 $(8,787) $832,379
========= ========== ========== =========
6
December 31, 1996
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
Available-for-sale securities:
U.S. Government and agency obligations $189,048 $ 686 $ (299) $189,435
Other debt securities ................ 1,875 23 1,898
--------- ---------- ---------- ---------
Total debt securities .............. 190,923 709 (299) 191,333
Mortgage-backed securities ........... 471,873 5,183 (2,388) 474,668
Equity securities .................... 275 1,268 (2) 1,541
--------- --------- --------- ---------
Total available-for-sale securities .... $663,071 $7,160 $(2,689) $667,542
========= ========= ========= =========
Gross realized gains for the three months ended March 31, 1997 and 1996
were $562,527 and $1,054,683, respectively. Gross realized losses for the
same periods were $34,460 and $398,303, respectively. 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.
4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses is summarized as follows:
Three Months
Ended March 31,
---------------------
1997 1996
-------- --------
(in thousands)
Balance, beginning of period ....... $13,538 $11,821
Provision charged to income ........ 723 620
Charge-offs ........................ (253) (244)
Recoveries ......................... 120 17
-------- --------
Balance, end of period ............. $14,128 $12,214
======== ========
5. LOAN SERVICING
The Company was servicing a portfolio consisting of 83,000 mortgage loans
at March 31, 1997 and December 31, 1996, 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,
1997 1996
------------- ------------
(in thousands)
GNMA .............................. $3,090,927 $3,184,843
FNMA .............................. 957,756 970,435
FHLMC ............................. 692,953 672,976
Other investors ................... 350,421 240,642
------------- ------------
Total servicing portfolio ......... $5,092,057 $5,068,896
============= ============
7
In addition to servicing mortgage loans for others, the Company is a
subservicer for third-party servicing owners, including GNMA and FHLMC.
At March 31, 1997 and December 31, 1996, the Company subserviced a total
of 10,000 and 10,700 loans, respectively.
Custodial escrow balances maintained in connection with the foregoing
loan servicing were $111,125,000 and $102,339,000, at March 31, 1997
and December 31, 1996, respectively, of which $90,034,000 and
$76,257,000, respectively, are included in deposits in the accompanying
consolidated balance sheets.
6. BORROWED FUNDS
March 31, 1997 December 31, 1996
------------------- -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- -------- -------- --------
(dollars in thousands)
Short-term borrowings:
Securities sold under agreements to
repurchase ......................... $100,000 5.43% $ 9,000 5.37%
Advances from Federal Home Loan Bank . 143,835 6.32% 200,924 5.62%
Borrowings under lines of credit ..... 40,180 4.65% 87,329 5.51%
-------- --------
Total short-term borrowings ........ 284,015 297,253
-------- --------
Long-term borrowings from Federal Home
Loan Bank:
Adjustable rate advances, interest
based on LIBOR; 5.53% (1997) and
5.61%(1996) ......................... 100,000 150,000
Fixed rate advances, 6.13% (1997)
and 6.27% (1996) .................... 398,543 298,561
Mortgage matched and other advances
payable monthly through 2026 with
interest rates from 3.88% to 8.05% .. 34,883 35,483
-------- --------
Total long-term borrowings ......... 533,426 484,044
-------- --------
Total borrowed funds ................... $817,441 $781,297
======== ========
Information concerning borrowings under securities sold under agreements
to repurchase is summarized as follows:
At or For the Three Months
Ended March 31,
--------------------------
1997 1996
---------- ----------
(dollars in thousands)
Average balance during the period .......... $ 57,356 $51,248
Average interest rate during the period .... 5.41% 5.59%
Maximum month-end balance during the
period .................................... $100,000 $62,777
Mortgage-backed securities underlying
the agreements at end of period:
Carrying value .......................... $101,454 $57,557
Fair value .............................. $101,955 $58,382
8
Mortgage-backed securities sold under agreements to repurchase 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 the Company substantially identical securities at
the maturities of the agreements. The agreements outstanding at March
31, 1997 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 and subservicing loans for others. 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. SALE OF RETAIL BANKING OFFICE
On March 14, 1997, the Company completed the sale of the Bank's retail
banking office in Liberty, Kentucky. Property and equipment with a
depreciated value of $142,000 and deposits with a carrying value of
$15,832,000 were transferred as well as cash of $14,900,000 and loans of
$24,000. The net gain on the sale was $772,000.
9. EARNINGS PER SHARE
In February 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per
Share." This statement simplifies the standards for computing earnings
per share previously found in APB Opinion No. 15, "Earnings per Share."
This statement is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. Earlier
application is not permitted. The pro forma effects of implementation of
this statement on the Company's reported net income and earnings per
share are presented below.
Three Months Ended March 31,
----------------------------
1997 1996
---------- ----------
(in thousands, except per share amounts)
Net income As reported $7,453 $6,431
Income available to common stockholders Pro forma 7,453 6,431
Primary earnings per share As reported $0.53 $0.44
Basic earnings per share Pro forma 0.57 0.47
Fully diluted earnings per share As reported $0.53 $0.44
Diluted earnings per share Pro forma 0.53 0.44
10. 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, 1997
----------------------------------------------------------------
Mortgage
Banking Banking Other Eliminations Consolidated
----------- ----------- ---------- ------------ ------------
(in thousands)
Interest income:
Unaffiliated customers $ 47,563 $ 4,929 $ 3 $ 52,495
Intersegment 3,320 1,557 340 $ (5,217)
----------- ----------- ---------- ------------ ------------
Total interest income 50,883 6,486 343 (5,217) 52,495
----------- ----------- ---------- ------------ ------------
Interest expense:
Unaffiliated customers 31,506 589 32,095
Intersegment 1,897 3,320 (5,217)
----------- ---------- ---------- ------------ ------------
Total interest expense 33,403 3,909 (5,217) 32,095
----------- ---------- ---------- ------------ ------------
Net interest income 17,480 2,577 343 20,400
Provision for loan losses (723) (723)
Non-interest income 2,589 8,218 903 (2,525) 9,185
Non-interest expense (10,079) (8,842) (1,111) 2,525 (17,507)
----------- ---------- ---------- ------------ ------------
Income before income taxes $ 9,267 $ 1,953 $ 135 $ 11,355
=========== ========== ========== ============ ============
Identifiable assets $2,737,127 $291,694 $277,578 $(304,257) $3,002,142
=========== ========== ========== ============ ============
Depreciation and amortization
of property and equipment $ 597 $ 228 $ 8 $ 833
=========== ========== ========== ============ ============
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 1,853 8,799 217 (2,112) 8,757
Non-interest expense (9,385) (8,295) (538) 2,112 (16,106)
----------- ---------- ---------- ------------ ------------
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
=========== ========== ========== ============ ============
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, mutual fund and insurance 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, as discussed above. Actual results could differ
materially from those expressed or implied.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1997 TO DECEMBER 31, 1996
Assets increased $105.0 million during the first quarter of 1997 to $3.0
billion. The two largest components of asset growth were net loans receivable,
which increased $13.0 million during the first quarter, and available-for-sale
securities, which increased $164.8 million.
Net loans receivable totaled $1.9 billion at March 31, 1997. The Company
continues to diversify its loan portfolio and enhance portfolio yield by
increasing the percentage of consumer and commercial loans in the portfolio. The
following table shows the composition of the loan portfolio at March 31, 1997 in
comparison to December 31, 1996:
Loan Portfolio Composition at
-----------------------------
March 31, December 31,
1997 1996
------------- ------------
Loan category:
One-to-four family residential ..... 71.3% 72.4%
Multi-family residential ........... 8.4% 7.8%
Commercial real estate ............. 6.1% 5.3%
Construction and land .............. 5.7% 6.7%
Non-mortgage, primarily consumer ... 8.5% 7.8%
------------- ------------
100.0% 100.0%
============= ============
During the first three months of 1997, the Company replaced certain lower
yielding debt and equity securities with higher yielding mortgage-backed
securities, thereby reducing excess liquid assets from the balances held by the
Bank at year-end. The Company also purchased mortgage-backed securities, funded
by repurchase agreements, and debt securities, funded by advances from the FHLB.
Certain of the leveraged purchases were structured to grow the Company without
incurring significant interest rate risk, and others were structured to manage
interest rate risk related to borrowed funds. The change in unrealized gains
(losses) on available-for-sale securities, from an unrealized net gain of $4.5
million at December 31, 1996 to an unrealized net loss of $4.6 million at March
31, 1997, resulted from the upward shift in market interest rates during the
first quarter. Mortgage-backed securities increased 45.0% during the first
quarter of 1997 and debt and equity securities decreased 25.2%. In total,
available-for-sale securities increased 24.7% during the first three months of
1997.
11
Deposits increased $31.5 million or 1.8% during the first quarter of 1997. This
increase was the result of growth in deposits of $47.3 million, offset by a sale
of $15.8 million of deposits (See note 8 - "Sale of Retail Banking Office").
Approximately $32 million of the growth in deposits was due to increased retail
deposits attracted through advertising, competitive deposit rates and retail
sales efforts. The remainder was primarily due to an increase in custodial
account balances associated with the portfolio of loans serviced for others.
Borrowed funds increased $36.1 million during the first three months of 1997,
with long-term FHLB advances increasing by $49.4 million, and short-term
borrowings decreasing $13.2 million. Long-term fixed rate FHLB advances were
increased as part of the Company's strategy to manage interest rate risk related
to borrowed funds. The Company also replaced certain long-term adjustable rate
FHLB advances with short-term repurchase agreements to improve cash management
flexibility. The net decrease in short-term borrowings was the result of payoffs
of advances from the FHLB and borrowings under lines of credit funded by certain
maturing short-term liquid assets, partially offset by an increase in repurchase
agreements used to payoff certain long-term FHLB advances and to fund purchases
of mortgage-backed securities.
Stockholders' equity totaled $279.1 million at March 31, 1997 or 9.3% of total
assets, which was $1.3 million less than at year-end 1996. The decline in total
equity was the net result of the Company purchasing 105,000 shares of its common
stock at a cost of $3.1 million; a decrease of $5.9 million in unrealized gains
(losses) on available-for-sale securities; dividends of $1.6 million; a
reduction in unearned balances of stock compensation plans by $1.8 million; and
earnings of $7.5 million for the three months ended March 31, 1997.
RESULTS OF OPERATIONS
OVERVIEW. The Company's net income of $7.5 million for the three months ended
March 31, 1997 was $1.0 million or 15.9% greater than the first quarter of 1996.
These results were primarily due to increased net interest income and gain on
the sale of a retail banking office, partially offset by increased non-interest
expense.
NET INTEREST INCOME. For the first quarter of 1997, net interest income
increased 14.1%, or $2.5 million versus the first quarter of 1996. This increase
was the result of substantial 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 $397.9 million and $423.5
million, respectively, in the first quarter of 1997 versus the first quarter of
1996, resulting in a $1.6 million increase in net interest income. These average
balance increases were the result of growth from normal business operations, the
acquisition of Lexington Federal in June 1996 and the effects of liquidity and
interest rate risk management strategies on the securities portfolio and
borrowed funds. The average yield on interest-earning assets decreased from
8.06% for the first three months of 1996 to 8.00% for the first three months of
1997. This decrease was primarily due to a shift in the mix of interest-earning
assets resulting in a higher percentage of available-for-sale securities and a
lower percentage of loans receivable. The average cost of interest-bearing
liabilities decreased from 5.60% in the 1996 first quarter to 5.43% in the first
quarter of 1997 primarily due to the growth in shorter-term, lower rate
certificate accounts decreased borrowing costs. These average rate changes
resulted in an $897,000 increase in net interest income and an increase in the
interest rate spread from 2.46% in the first quarter of 1996 to 2.57% in the
1997 first quarter. Net interest margin decreased to 3.11% in the first quarter
of 1997 from 3.18% in the same period last year primarily due to the reduction
in the ratio of interest-earning assets to interest-bearing liabilities
resulting from stock repurchases.
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,
1997 and 1996. The yields and costs are derived by dividing income or expense by
the average balance of assets and liabilities, respectively. For 1997, average
balances are derived from daily balances. For 1996, 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. Interest includes fees which are
considered adjustments to yields and costs.
Three Months Ended March 31,
----------------------------------------------------------------
1997 1996
------------------------------- ------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost (5) Balance Interest Cost (5)
---------- -------- --------- ---------- -------- --------
(dollars in thousands)
Assets:
Interest-earning assets:
Loans receivable, net (1) ...... $1,932,677 $40,042 8.40% $1,806,751 $37,534 8.36%
Mortgage-backed securities (2).. 515,649 9,181 7.22% 348,097 6,192 7.15%
Debt and equity securities (2).. 159,736 2,454 6.23% 65,647 966 5.92%
Other .......................... 17,226 217 5.11% 18,262 245 5.40%
FHLB stock ..................... 34,822 601 7.00% 23,502 409 7.00%
---------- -------- --------- ---------- -------- --------
Total interest-earning assets . 2,660,110 52,495 8.00% 2,262,259 45,346 8.06%
-------- --------- -------- --------
Non-interest-earning assets ......... 182,586 174,871
---------- ----------
Total assets ................... $2,842,696 $2,437,130
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Passbook accounts .............. $ 133,078 1,003 3.06% $ 125,309 956 3.07%
Demand deposit accounts......... 178,028 1,661 3.78% 85,034 622 2.94%
Money market accounts .......... 197,367 2,162 4.44% 155,590 1,801 4.66%
Certificate accounts ........... 1,183,229 16,970 5.82% 1,014,222 14,997 5.95%
Short-term borrowings .......... 175,290 2,388 5.52% 169,591 2,593 6.15%
Long-term borrowings ........... 530,874 7,911 6.04% 424,666 6,499 6.16%
---------- -------- --------- ---------- -------- --------
Total interest-bearing
liabilities ................. 2,397,866 32,095 5.43% 1,974,412 27,468 5.60%
-------- --------- -------- --------
Non-interest-bearing liabilities .... 165,220 177,548
---------- ----------
Total liabilities .............. 2,563,086 2,151,960
Stockholders' equity ................ 279,610 285,170
---------- ----------
Total liabilities and
stockholders' equity $2,842,696 $2,437,130
========== ==========
Net interest income / interest
rate spread (3) ...................... $20,400 2.57% $17,878 2.46%
Net interest earning assets / net ======== ========= ======== ========
interest margin (4) ................. $ 262,244 3.11% $ 287,847 3.18%
========== ========= ========== ========
Ratio of interest-earning assets
to interest-bearing liabilities ..... 110.94% 114.58%
========== ==========
- ---------------
13
<FN>
(1) Loans receivable, net include mortgage loans held for sale.
(2) Yields on securities do not give effect to changes in fair value that are
reflected as a component of stockholders' equity.
(3) Interest rate spread represents the difference between the average yield
on average interest-earning assets and the average cost of average
interest-bearing liabilities.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
(5) For purposes of calculating these figures, all interest amounts are
annualized.
</FN>
14
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,
1997 vs. 1996
-------------------------------
Increase (Decrease) Due to
-------------------------------
Volume Rate Total
--------- -------- ---------
(in thousands)
Interest-earning assets:
Loans receivable, net .............. $2,347 $ 161 $2,508
Mortgage-backed securities ......... 2,929 60 2,989
Debt and equity securities ......... 1,436 52 1,488
Other ............................... (14) (14) (28)
FHLB stock ......................... 192 0 192
-------- -------- ---------
Total ......................... 6,890 259 7,149
-------- -------- ---------
Interest-bearing liabilities:
Passbook accounts .................. 51 (4) 47
Demand deposit accounts ............ 824 215 1,039
Money market accounts .............. 450 (89) 361
Certificate accounts ............... 2,319 (346) 1,973
Short-term borrowings .............. 78 (283) (205)
Long-term borrowings ............... 1,543 (131) 1,412
-------- -------- ---------
Total ......................... 5,265 (638) 4,627
-------- -------- ---------
Net change in net interest income ....... $1,625 $ 897 $2,522
======== ======== =========
15
PROVISION FOR LOAN LOSSES. The provision for loan losses was $723,000 or 0.15%
(annualized) of average loans in the 1997 first quarter, compared to $620,000 or
0.14% of average loans in the first quarter last year. Net charge-offs decreased
from $227,000 or 0.05% of average loans in the 1996 first quarter to $133,000 or
0.03% of average loans in this year's first quarter.
NON-INTEREST INCOME. The increase in non-interest income of $428,000 was
primarily attributable to gain on the sale of a retail banking office and
increased service charges on deposit accounts, partially offset by decreased
servicing fee income and increased amortization of mortgage servicing rights.
The Company's decision to sell the Bank's retail banking office in Liberty,
Kentucky, was based on analysis concluding that the branch no longer had
sufficient market share for profitable operations. The increase in service
charges on deposit accounts was primarily due to growth in transaction accounts.
Servicing fee income for the first quarter of 1997 decreased in comparison to
the 1996 first quarter due to a decrease in the number of loans the Company is
subservicing for third-parties. Increased amortization of mortgage servicing
rights was attributable to an increase in originated mortgage servicing rights.
Increases in other non-interest income was primarily due to increased sales of
investment and insurance products.
NON-INTEREST EXPENSE. Non-interest expense for the three months ended March 31,
1997 was $1.4 million more than for the same period last year. As a percentage
of average assets, non-interest expense was 2.50% for the first quarter of 1997,
down from 2.66% for the same period last year. This gain in efficiency was
primarily the result of lower FDIC insurance premiums and the growth in average
assets outpacing increases in all other operating expenses. Compensation and
benefits expense increased as the result of growth in the staff needed to
deliver and provide operational support for an expanded line of retail banking
and investment products to the Company's growing customer base. The increase in
other non-interest expense includes increased amortization of goodwill of
$179,000.
INCOME TAX EXPENSE. Income tax expense of $3.9 million for the three months
ended March 31, 1997 and $3.5 million for the three months ended March 31, 1996
resulted in effective income tax rates of 34.4% and 35.1%, respectively. The
decrease 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 part of its community reinvestment activities.
16
NON-PERFORMING ASSETS
The following table sets forth information regarding the Company's
non-performing assets at the dates indicated.
March 31, December 31,
1997 1996
------------- ------------
(dollars in thousands)
Non-performing loans:
Non-accrual loans ............................ $ 6,865 $ 7,185
Accruing loans which are contractually
past due 90 days or more:
FHA/VA loans (limited credit risk - see
discussion below) ......................... 88,006 88,185
Other loans ................................ 3,090 5,931
Restructured loans ........................... 1,982 1,992
------------ ------------
Total non-performing loans ................... 99,943 103,293
Real estate owned .............................. 2,669 2,815
------------ ------------
Total non-performing assets .................... $102,612 $106,108
============ ============
Non-performing loans to total loans:
Including FHA/VA loans ....................... 4.99% 5.19%
Excluding FHA/VA loans ....................... 0.60% 0.76%
Non-performing assets to total assets:
Including FHA/VA loans ....................... 3.42% 3.66%
Excluding FHA/VA loans ....................... 0.49% 0.62%
Allowance for loan losses to total loans ....... 0.70% 0.68%
Allowance for loan losses to non-performing
loans:
Including FHA/VA loans ....................... 14.14% 13.11%
Excluding FHA/VA loans ....................... 118.36% 89.61%
Allowance for loan losses to non-performing
assets:
Including FHA/VA loans ....................... 13.77% 12.76%
Excluding FHA/VA loans ....................... 96.73% 75.53%
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 March 31, 1997, the Company
held in its portfolio $147.2 million of FHA/VA loans most of which were
delinquent at the time of purchase. Such loans totaled $144.7 million at
December 31, 1996. 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, 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 as
compensation to the Company for the credit and interest rate risks associated
with the loans. No purchases were made from third parties during the first
quarter of 1997.
The Company also has certain impaired loans. The Company has defined impaired
loans as commercial real estate and commercial business loans classified as
substandard, doubtful, or loss, as defined by OTS regulations. Impaired loans,
net of related allowance, decreased from $6.8 million at December 31, 1996, to
$5.0 million at March 31, 1997.
17
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 March 1997, the Bank had liquidity and short-term liquidity ratios of 8.3%
and 6.8%, respectively.
At March 31, 1997, the Company had outstanding commitments to fund portfolio
loans totaling $106.4 million. The Company anticipates that it will have
sufficient funds available to meet these 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 March 31, 1997, the Bank
had tangible capital of 8.2% of tangible assets, core capital of 8.2% of
adjusted tangible assets, and risk-based capital of 18.9% of risk-weighted
assets.
IMPACT OF NEW ACCOUNTING STANDARD
In February 1997 the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." This statement simplifies the standards for computing
earnings per share (EPS) previously found in APB Opinion No. 15, "Earnings per
Share," and makes them comparable to international EPS standards. It replaces
the presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation.
This statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. Earlier application is not
permitted.
The pro forma effects of implementation of this statement on the Company's
reported net income and earnings per share are presented in note 9 to the
consolidated financial statements.
18
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 11 - Statement regarding computation of per share
earnings.
(b) There have been no reports filed on Form 8-K during the
quarterly period ended March 31, 1997.
19
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, 1997 By Paul M. Baker
--------------------------------------------
Paul M. Baker
President and Chief Executive Officer
Date: May 14, 1997 By Richard M. Klapheke
--------------------------------------------
Richard M. Klapheke
Treasurer and Secretary
(Chief Accounting Officer)
20