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, 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, 13,873,909 shares
as of November 10, 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 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 13
PART II. OTHER INFORMATION 22
SIGNATURES 23
GREAT FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
Assets
Cash and cash equivalents ....................... $ 42,686 $ 126,323
Available-for-sale securities, at fair value .... 698,821 667,542
Mortgage loans held for sale .................... 75,463 65,546
Loans receivable, net of allowance for loan
losses of $14,663 (1997) and $13,538 (1996) .. 1,898,928 1,867,511
Federal Home Loan Bank stock, at cost ........... 38,562 34,816
Property and equipment .......................... 33,296 34,127
Mortgage servicing rights ....................... 39,052 37,187
Other assets .................................... 66,697 64,110
----------- -----------
Total assets ......................................... $2,893,505 $2,897,162
=========== ===========
Liabilities
Deposits:
Non-interest bearing ............................ $ 152,661 $ 112,129
Interest bearing ................................ 1,766,617 1,691,874
----------- -----------
Total deposits ................................ 1,919,278 1,804,003
Borrowed funds .................................... 635,448 781,297
Other liabilities ................................. 47,432 31,408
----------- -----------
Total liabilities ............................. 2,602,158 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 ...................... 165,284 162,279
Retained earnings - subject to restrictions ..... 192,352 177,201
Treasury stock, 2,707,812 shares (1997) and
2,414,518 shares (1996), at cost ............. (60,863) (48,845)
Unearned ESOP shares ............................ (9,368) (10,194)
Unearned compensation - stock compensation plans. (2,082) (3,058)
Net unrealized gains on available-for-sale
securities .................................... 5,859 2,906
----------- -----------
Total stockholders' equity ................... 291,347 280,454
----------- -----------
Total liabilities and stockholders' equity ........... $2,893,505 $2,897,162
=========== ===========
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,
-------------------- -------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(unaudited)
Interest income
Loans ................................... $41,551 $40,746 $122,612 $116,572
Securities .............................. 12,523 11,408 39,427 28,621
Other ................................... 100 134 376 681
--------- --------- --------- ---------
Total interest income ................ 54,174 52,288 162,415 145,874
--------- --------- --------- ---------
Interest expense
Deposits ................................ 23,665 21,597 68,225 59,421
Borrowed funds .......................... 9,791 11,167 32,435 30,109
--------- --------- --------- ---------
Total interest expense ............... 33,456 32,764 100,660 89,530
--------- --------- --------- ---------
Net interest income .......................... 20,718 19,524 61,755 56,344
Provision for loan losses .................... 825 675 2,323 1,911
--------- --------- --------- ---------
Net interest income after provision for loan
losses ...................................... 19,893 18,849 59,432 54,433
--------- --------- --------- ---------
Non-interest income
Servicing fee income .................... 6,067 6,615 18,715 20,375
Amortization of mortgage servicing rights (2,257) (1,958) (6,403) (5,747)
Commissions from sales of investment and
insurance products...................... 847 670 2,618 1,629
Service charges on deposit accounts...... 715 616 2,159 1,684
Gain on sale of mortgage loans .......... 2,619 1,480 5,762 4,882
Gain on sale of mortgage servicing rights 245 1,212 1,751 2,515
Gain on sale of retail banking office.... 772
Gain (loss) on sale of securities ....... 981 (17) 1,498 369
Other ................................... 980 697 2,248 1,378
--------- --------- --------- ---------
Net non-interest income .............. 10,197 9,315 29,120 27,085
--------- --------- --------- ---------
Non-interest expense
Compensation and benefits ............... 9,251 8,246 27,102 24,271
Office occupancy and equipment .......... 2,426 2,516 7,002 6,740
Office supplies, postage and telephone .. 1,275 1,319 4,140 3,824
Advertising and marketing ............... 627 922 2,328 2,756
Federal deposit insurance premiums ...... 288 10,680 845 12,368
Other ................................... 3,665 4,917 11,128 11,861
--------- --------- --------- ---------
Total non-interest expense ........... 17,532 28,600 52,545 61,820
--------- --------- --------- ---------
Income (loss) before income taxes ............ 12,558 (436) 36,007 19,698
Income tax expense (benefit) ................. 4,410 (49) 12,485 7,093
--------- --------- --------- ---------
Net income (loss) ............................ $ 8,148 $ (387) $23,522 $12,605
========= ========= ========= =========
Earnings (loss) per share
Primary $0.59 $(0.03) $1.69 $0.88
========= ========= ========= =========
Fully diluted $0.59 $(0.03) $1.67 $0.88
========= ========= ========= =========
See notes to consolidated financial statements.
4
GREAT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months Ended
September 30,
---------------------------
1997 1996
----------- -----------
(unaudited)
Net cash provided by (used in) operating
activities................................... $ 26,893 $ (1,636)
----------- -----------
Investing activities:
Purchases of available-for-sale securities. (467,614) (289,726)
Maturities of available-for-sale securities 107,545 71,756
Principal collected on mortgage-backed
securities ............................... 48,175 48,599
Proceeds from sales of available-for-sale
securities ............................... 288,117 71,684
Increase in loans receivable............... (36,294) (48,791)
Purchases of property and equipment and
other assets ............................. (2,522) (8,147)
Originations of mortgage servicing rights.. (3,671) (3,225)
Purchases of mortgage servicing rights..... (4,913) (4,247)
Proceeds from sale of mortgage servicing
rights.................................... 2,031 2,610
Purchases of Federal Home Loan Bank Stock.. (1,789) (6,771)
Proceeds from sale of other real estate
owned..................................... 3,067 897
Cash used in sale of retail banking office. (14,900)
Purchase of Lexington Federal Savings Bank,
FSB, net of cash and cash equivalents
acquired.................................. (30,363)
Other ..................................... (490) 395
----------- -----------
Net cash used in investing activities..... (83,258) (195,329)
----------- -----------
Financing activities:
Increase in deposits ...................... 131,107 130,892
Decrease in short-term borrowings.......... (54,757) (20,502)
Long-term advances from Federal Home Loan
Bank ..................................... 100,550 90,750
Payments on long-term advances from Federal
Home Loan Bank ........................... (191,642) (25,176)
Increase in mortgage escrow funds ......... 7,859 7,631
Purchases of treasury stock ............... (17,779) (18,793)
Dividends paid ............................ (5,411) (4,543)
Exercise of stock options ................. 2,801 100
----------- ------------
Net cash provided by (used in) financing
activities.............................. (27,272) 160,359
----------- ------------
Net decrease in cash and cash equivalents ..... (83,637) (36,606)
Cash and cash equivalents at beginning of
period ...................................... 126,323 84,167
----------- ------------
Cash and cash equivalents at end of period..... $ 42,686 $ 47,561
=========== ============
Cash paid during the period for:
Interest .................................. $ 101,833 $ 89,306
Income taxes............................... $ 8,371 $ 5,336
Supplemental disclosure of noncash activities:
Additions to real estate acquired in
settlement of loans........................ $ 1,561 $ 2,245
Accrual of proceeds from sale of mortgage
servicing rights........................... $ 513 $ 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. 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
September 30, December 31,
1997 1996
------------- ------------
(in thousands)
Cash and due from banks $38,813 $ 27,702
Interest-bearing deposits with banks 3,873 1,315
Federal funds sold 33,200
Securities purchased under agreements to resell 64,106
------------- ------------
Total cash and cash equivalents $42,686 $126,323
============= ============
3. SECURITIES
September 30, 1997
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(in thousands)
Available-for-sale securities:
U.S. Government and agency obligations $ 96,142 $ 82 $ (56) $ 96,168
Other debt securities ................ 28,655 92 (1) 28,746
--------- ---------- ---------- ---------
Total debt securities ............... 124,797 174 (57) 124,914
Mortgage-backed securities ........... 564,958 8,339 (890) 572,407
Equity securities .................... 52 1,448 1,500
--------- ---------- ---------- ---------
Total available-for-sale securities ... $689,807 $9,961 $ (947) $698,821
========= ========== ========== =========
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 and nine months ended September 30,
1997 were $1,277,383 and $2,026,321, respectively. Gross realized losses
for the same periods were $295,816 and $527,901, respectively. Gross
realized gains for the three and nine months ended September 30, 1996
were $261,599 and $1,534,485, respectively. Gross realized losses for
the same periods were $278,201 and $1,165,526, 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 Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
(in thousands)
Balance, beginning of period ....... $14,593 $13,031 $13,538 $11,821
Provision charged to income ........ 825 675 2,323 1,911
Charge-offs ........................ (814) (493) (1,414) (1,057)
Recoveries ......................... 59 15 216 53
Acquired in merger ................. 500
-------- -------- -------- --------
Balance, end of period ............. $14,663 $13,228 $14,663 $13,228
======== ======== ======== ========
5. LOAN SERVICING
The Company was servicing a portfolio consisting of 77,800 and 83,000
mortgage loans at September 30, 1997 and December 31, 1996, 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,
1997 1996
------------- ------------
(in thousands)
GNMA .............................. $2,885,977 $3,184,843
FNMA .............................. 761,278 970,435
FHLMC ............................. 717,205 672,976
Other investors ................... 362,968 240,642
------------ ------------
Total servicing portfolio ......... $4,727,428 $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 September 30, 1997 and December 31, 1996, the Company subserviced a
total of 18,200 and 10,700 loans, respectively.
Custodial escrow balances maintained in connection with the foregoing
loan servicing were $135,305,000 and $102,339,000, at September 30, 1997
and December 31, 1996, respectively, of which $116,656,000 and
$76,257,000, respectively, are included in deposits in the accompanying
consolidated balance sheets.
6. BORROWED FUNDS
September 30, 1997 December 31, 1996
------------------- -------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
-------- -------- -------- --------
(dollars in thousands)
Short-term borrowings:
Securities sold under agreements to
repurchase ......................... $202,777 5.68% $ 9,000 5.37%
Advances from Federal Home Loan Bank . 37,000 5.96% 200,924 5.62%
Borrowings under lines of credit ..... 2,719 1.14% 87,329 5.51%
-------- --------
Total short-term borrowings ........ 242,496 297,253
-------- --------
Long-term borrowings from Federal Home
Loan Bank:
Adjustable rate advances, interest
based on LIBOR; 5.72% (1997) and
5.61%(1996) ......................... 100,000 150,000
Fixed rate advances, 5.83% (1997)
and 6.27% (1996) .................... 258,749 298,561
Mortgage matched and other advances
payable monthly through 2026 with
interest rates from 2.00% to 8.05%
(1997) and from 3.88% to 8.05% (1996) 34,203 35,483
-------- --------
Total long-term borrowings ......... 392,952 484,044
-------- --------
Total borrowed funds ................... $635,448 $781,297
======== ========
Information concerning borrowings under securities sold under agreements
to repurchase is summarized as follows:
At or For the Three Months At or For the Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
(dollars in thousands)
Average balance during the period .......... $155,489 $101,171 $129,793 $ 73,416
Average interest rate during the period .... 5.66% 5.48% 5.63% 5.50%
Maximum month-end balance during the
period .................................... $202,777 $140,341 $208,999 $140,341
Mortgage-backed securities underlying
the agreements at end of period:
Carrying value .......................... $209,106 $111,995
Fair value .............................. $212,624 $111,850
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 to the Company substantially identical securities
at the maturities of the agreements. The agreements outstanding at
September 30, 1997 mature within one year.
7. SEGMENT INFORMATION
The schedules on pages 11 and 12 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 an 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 Nine Months Ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
(in thousands, except per share amounts)
Net income (loss) As reported $ 8,148 $ (387) $23,522 $12,605
Income (loss)available to common stockholders Pro forma 8,148 (387) 23,522 12,605
Primary earnings (loss) per share As reported $0.59 $(0.03) $1.69 $0.88
Basic earnings (loss) per share Pro forma 0.63 (0.03) 1.82 0.94
Fully diluted earnings (loss) per share As reported $0.59 $(0.03) $1.67 $0.88
Diluted earnings (loss) per share Pro forma 0.59 (0.03) 1.67 0.88
9
10. PENDING MERGER
On September 15, 1997, the Company entered into a definitive merger
agreement with Star Banc Corporation (Star Banc). The terms of the
agreement call for 70% of the Company's outstanding shares to be
exchanged for common shares of Star Banc stock at an exchange ratio of
0.949 Star Banc share for each Company share. The remaining 30% of the
Company's shares would be exchanged for $44 in cash for each share. The
merger is structured as a tax-free exchange for shareholders receiving
stock, and will be accounted for as a purchase transaction. Additionally,
the Company granted Star Banc an option to purchase 19.9% of its shares,
exercisable under certain conditions. The merger is expected to be
completed in the first quarter of 1998.
11. RECLASSIFICATIONS
Certain amounts have been reclassified in the previous year's financial
statements to conform with the current year's classifications.
10
SEGMENT INFORMATION
Three Months Ended September 30, 1997
----------------------------------------------------------------
Mortgage
Banking Banking Other Eliminations Consolidated
----------- ----------- ---------- ------------ ------------
(in thousands)
Interest income:
Unaffiliated customers $ 49,075 $ 5,095 $ 4 $ 54,174
Intersegment 3,478 2,045 322 $ (5,845)
----------- ----------- ---------- ------------ ------------
Total interest income 52,553 7,140 326 (5,845) 54,174
----------- ----------- ---------- ------------ ------------
Interest expense:
Unaffiliated customers 32,987 469 33,456
Intersegment 2,367 3,478 (5,845)
----------- ----------- ---------- ------------ ------------
Total interest expense 35,354 3,947 (5,845) 33,456
----------- ----------- ---------- ------------ ------------
Net interest income 17,199 3,193 326 20,718
Provision for loan losses (808) (17) (825)
Non-interest income 2,753 9,314 901 (2,771) 10,197
Non-interest expense (10,153) (8,955) (1,195) 2,771 (17,532)
----------- ----------- ---------- ------------ ------------
Income before income taxes $ 8,991 $ 3,535 $ 32 $ 12,558
=========== =========== ========== ============ ============
Identifiable assets $2,657,803 $314,487 $266,586 $(345,371) $2,893,505
=========== =========== ========== ============ ============
Depreciation and amortization
of property and equipment $ 683 $ 213 $ 9 $ 905
=========== =========== ========== ============ ============
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 1,484 9,833 379 (2,381) 9,315
Non-interest expense (20,739) (9,540) (702) 2,381 (28,600)
----------- ----------- ---------- ------------ ------------
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
=========== =========== ========== ============ ============
11
SEGMENT INFORMATION
Nine Months Ended September 30, 1997
----------------------------------------------------------------
Mortgage
Banking Banking Other Eliminations Consolidated
----------- ----------- ---------- ------------ ------------
(in thousands)
Interest income:
Unaffiliated customers $ 147,260 $ 15,144 $ 11 $ 162,415
Intersegment 10,244 5,421 948 $ (16,613)
----------- ----------- ---------- ------------ ------------
Total interest income 157,504 20,565 959 (16,613) 162,415
----------- ----------- ---------- ------------ ------------
Interest expense:
Unaffiliated customers 98,858 1,802 100,660
Intersegment 6,369 10,244 (16,613)
----------- ----------- ---------- ------------ ------------
Total interest expense 105,227 12,046 (16,613) 100,660
----------- ----------- ---------- ------------ ------------
Net interest income 52,277 8,519 959 61,755
Provision for loan losses (2,306) (17) (2,323)
Non-interest income 6,786 27,777 2,739 (8,182) 29,120
Non-interest expense (30,514) (26,684) (3,529) 8,182 (52,545)
----------- ----------- ---------- ------------ ------------
Income before income taxes $ 26,243 $ 9,595 $ 169 $ 36,007
=========== =========== ========== ============ ============
Identifiable assets $2,657,803 $314,487 $266,586 $(345,371) $2,893,505
=========== =========== ========== ============ ============
Depreciation and amortization
of property and equipment $ 1,935 $ 669 $ 26 $ 2,630
=========== =========== ========== ============ ============
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 4,136 28,840 871 (6,762) 27,085
Non-interest expense (40,061) (26,561) (1,960) 6,762 (61,820)
----------- ----------- ---------- ------------ ------------
Income 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
=========== =========== ========== ============ ============
12
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 borrowed funds.
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.
PENDING MERGER
On September 15, 1997, the Company entered into a definitive merger agreement
with Star Banc Corporation (Star Banc). The terms of the agreement call for 70%
of the Company's outstanding shares to be exchanged for common shares of Star
Banc stock at an exchange ratio of 0.949 Star Banc share for each Company share.
The remaining 30% of the Company's shares would be exchanged for $44 in cash for
each share. The merger is structured as a tax-free exchange for shareholders
receiving stock, and will be accounted for as a purchase transaction.
Additionally, the Company granted Star Banc an option to purchase 19.9% of its
shares, exercisable under certain conditions. The merger is expected to be
completed in the first quarter of 1998.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 TO DECEMBER 31, 1996
During the first nine months of 1997 assets decreased slightly from $2.897
billion to $2.894 billion. Although total assets decreased, the two largest
categories of assets, loans receivable and available-for-sale securities,
increased $31.4 million and $31.3 million, respectively.
Net loans receivable totaled $1.9 billion at September 30, 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 September 30,
1997 in comparison to December 31, 1996:
Loan Portfolio Composition at
-----------------------------
September 30, December 31,
1997 1996
------------- ------------
Loan category:
One-to-four family residential ..... 69.3% 72.4%
Multi-family residential ........... 8.6% 7.8%
Commercial real estate ............. 7.1% 5.3%
Construction and land .............. 4.2% 6.7%
Non-mortgage, primarily consumer ... 10.8% 7.8%
------------- ------------
100.0% 100.0%
============= ============
During the first nine months of 1997, the Company 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
Company also sold certain securities to realize market gains and to reduce
long-term borrowings. Mortgage-backed securities increased 20.6% during the
first nine months of 1997 while debt and equity securities decreased by 34.5%.
In total, available-for-sale securities increased 4.7% during the first nine
months of 1997.
13
Deposits increased $115.3 million or 6.4% during the first nine months of 1997.
This increase was the result of growth in deposits of $131.1 million, offset by
a sale of $15.8 million of deposits (See note 8 - "Sale of Retail Banking
Office"). Approximately $91.1 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 escrow balances associated with the portfolio of loans serviced for
others.
Borrowed funds increased $145.8 million during the first nine months of 1997,
with long-term FHLB advances decreasing $91.0 million, and short-term borrowings
decreasing $54.8 million. The Company replaced certain maturing long-term FHLB
advances with short-term repurchase agreements to improve cash management
flexibility. Growth in deposits enabled the Company to decrease short-term
borrowings.
Stockholders' equity totaled $291.3 million at September 30, 1997 or 10.07% of
total assets, which is an increase of $10.9 million over year-end 1996. The
increase in total equity was the net result of earnings of $23.5 million;
dividends of $5.4 million; the Company purchasing 562,800 shares of its common
stock at a cost of $17.8 million; proceeds from the exercise of stock options of
$2.8 million; a reduction in unearned balances of stock compensation plans by
$4.8 million; and an increase of $3.0 million in net unrealized gains on
available-for-sale securities.
RESULTS OF OPERATIONS
OVERVIEW. The Company reported net income of $8.1 million for the three months
ended September 30, 1997, as compared to a net loss of $387,000 for the third
quarter of 1996. The third quarter 1996 net loss included a charge of $6.3
million, net of taxes, to recapitalize the Savings Association Insurance Fund
(SAIF). For the nine months ended September 30, 1997 net income totaled $23.5
million, up from net income of $12.6 million for the same period last year.
NET INTEREST INCOME. For the third quarter of 1997, net interest income
increased 6% or $1.2 million versus the third quarter of 1996. This increase was
primarily the result of 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 $80.4 million and $76.9 million,
respectively, in the third quarter of 1997 versus the third quarter of 1996,
resulting in $331,000 of the increase in net interest income. These average
balance increases were the result of growth from normal business operations. The
average yield on interest-earning assets rose slightly from 7.87% for the third
quarter of 1996 to 7.89% for the third quarter of 1997. This increase was
primarily due to the shift in the mix of the loan portfolio. The average cost of
interest-bearing liabilities decreased from 5.54% for the 1996 third quarter to
5.47% for the 1997 third quarter, primarily due to decreased borrowing costs.
Changes in rates resulted in $863,000 of the increase in net interest income and
the increase in interest rate spread from 2.33% for the third quarter of 1996 to
2.42% for the third quarter of 1997. Net interest margin increased to 3.02% for
the third quarter of 1997 from 2.94% for the same period last year.
Net interest income was up $5.4 million or 10% for the first nine months of 1997
compared to the same period of 1996. Average interest-earning assets and average
interest-bearing liabilities increased $290.9 million and $310.1 million,
respectively, in the first nine months of 1997 versus the same period of 1996,
resulting in $3.5 million of the increase in net interest income. These average
balance increases were the result of growth from normal business operations, the
acquisition of Lexington Federal Savings Bank 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 7.97% for the first nine months of 1996 to 7.94% for the first
nine 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 5.57% for the first nine months of
1996 to 5.47% for the first nine months of 1997, primarily due to the growth in
shorter-term, lower rate certificates of deposit and decreased borrowing costs.
Changes in rates resulted in $1.9 million of the increase in net interest income
and an increase in the interest rate spread from 2.40% for the first nine months
of 1996 to 2.47% for the same period of 1997. Net interest margin decreased to
3.02% for the first nine months of 1997 from 3.08% for 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. The Company's
initiative to increase shareholder value by repurchasing certain of its
outstanding common stock results in cash being used to repurchase stock, which
would otherwise be invested in interest-earning assets or used to reduce
interest-bearing borrowings, thereby lowering the ratio of interest-earning
assets to interest-bearing liabilities.
14
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income earned on
interest-earning assets and expense incurred 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
and nine month periods ended September 30, 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 September 30,
----------------------------------------------------------------
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) ...... $1,992,562 $41,551 8.27% $1,998,099 $40,746 8.11%
Mortgage-backed securities (2).. 558,010 10,007 7.11% 522,299 9,524 7.25%
Debt and equity securities (2).. 127,844 1,824 5.66% 80,704 1,335 6.58%
Other .......................... 7,582 100 5.23% 11,193 134 4.76%
FHLB stock ..................... 37,877 692 7.25% 31,220 549 7.00%
---------- -------- --------- ---------- -------- --------
Total interest-earning assets . 2,723,875 54,174 7.89% 2,643,515 52,288 7.87%
-------- --------- -------- --------
Non-interest-earning assets ......... 197,757 174,269
---------- ----------
Total assets ................... $2,921,632 $2,817,784
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Passbook accounts .............. $ 118,057 807 2.71% $ 139,744 1,107 3.15%
Demand deposit accounts......... 198,086 1,946 3.90% 138,081 1,308 3.77%
Money market accounts .......... 205,582 2,427 4.68% 185,905 2,259 4.83%
Certificate accounts ........... 1,248,078 18,485 5.88% 1,154,548 16,923 5.83%
Short-term borrowings .......... 218,249 3,160 5.74% 247,726 3,765 6.05%
Long-term borrowings ........... 439,765 6,631 5.98% 484,867 7,402 6.07%
---------- -------- --------- ---------- -------- --------
Total interest-bearing
liabilities ................. 2,427,817 33,456 5.47% 2,350,871 32,764 5.54%
-------- --------- -------- --------
Non-interest-bearing liabilities .... 208,205 192,372
---------- ----------
Total liabilities .............. 2,636,022 2,543,243
Stockholders' equity ................ 285,610 274,541
---------- ----------
Total liabilities and
stockholders' equity $2,921,632 $2,817,784
========== ==========
Net interest income / interest
rate spread (3) ...................... $20,718 2.42% $19,524 2.33%
Net interest earning assets / net ======== ========= ======== ========
interest margin (4) ................. $ 296,058 3.02% $ 292,644 2.94%
========== ========= ========== ========
Ratio of interest-earning assets
to interest-bearing liabilities ..... 112.19% 112.45%
========== ==========
- ---------------
<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>
15
Nine Months Ended September 30,
----------------------------------------------------------------
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) ...... $1,965,678 $122,612 8.34% $1,891,081 $116,572 8.23%
Mortgage-backed securities (2).. 579,874 31,011 7.15% 438,365 23,908 7.29%
Debt and equity securities (2).. 144,454 6,459 5.98% 71,423 3,300 6.17%
Other .......................... 9,740 376 5.16% 17,472 681 5.21%
FHLB stock ..................... 36,504 1,957 7.17% 26,982 1,413 7.00%
---------- -------- --------- ---------- -------- --------
Total interest-earning assets . 2,736,250 162,415 7.94% 2,445,323 145,874 7.97%
-------- --------- -------- --------
Non-interest-earning assets ......... 188,214 163,942
---------- ----------
Total assets ................... $2,924,464 $2,609,265
========== ==========
Liabilities and stockholders' equity:
Interest-bearing liabilities:
Passbook accounts .............. $ 126,021 2,774 2.94% $ 131,873 3,061 3.10%
Demand deposit accounts......... 189,349 5,489 3.88% 110,978 2,894 3.48%
Money market accounts .......... 200,845 7,037 4.68% 167,905 5,927 4.72%
Certificate accounts ........... 1,211,642 52,925 5.84% 1,078,468 47,539 5.89%
Short-term borrowings .......... 231,125 9,878 5.71% 201,862 9,202 6.09%
Long-term borrowings ........... 499,507 22,557 6.04% 457,316 20,907 6.11%
---------- -------- --------- ---------- -------- --------
Total interest-bearing
liabilities ................. 2,458,489 100,660 5.47% 2,148,402 89,530 5.57%
-------- --------- -------- --------
Non-interest-bearing liabilities .... 184,751 182,687
---------- ----------
Total liabilities .............. 2,643,240 2,331,089
Stockholders' equity ................ 281,224 278,176
---------- ----------
Total liabilities and
stockholders' equity $2,924,464 $2,609,265
========== ==========
Net interest income / interest
rate spread (3) ...................... $61,755 2.47% $56,344 2.40%
Net interest earning assets / net ======== ========= ======== ========
interest margin (4) ................. $ 277,761 3.02% $ 296,921 3.08%
========== ========= ========== ========
Ratio of interest-earning assets
to interest-bearing liabilities ..... 111.30% 113.82%
========== ==========
- ---------------
<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>
16
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,
1997 vs. 1996 1997 vs. 1996
-------------------------------- --------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------------- --------------------------------
Volume Rate Total Volume Rate Total
--------- -------- --------- --------- -------- ---------
(in thousands)
Interest-earning assets:
Loans receivable, net .............. $ (99) $ 904 $ 805 $ 4,849 $1,191 $ 6,040
Mortgage-backed securities ......... 663 (180) 483 7,632 (529) 7,103
Debt and equity securities ......... 696 (207) 489 3,274 (115) 3,159
Other .............................. (56) 22 (34) (322) 17 (305)
FHLB stock ......................... 122 21 143 513 31 544
-------- -------- --------- --------- -------- ---------
Total ......................... 1,326 560 1,886 15,946 595 16,541
-------- -------- --------- --------- -------- ---------
Interest-bearing liabilities:
Passbook accounts .................. (158) (142) (300) (129) (158) (287)
Demand deposit accounts ............ 591 47 638 2,249 346 2,595
Money market accounts .............. 238 (70) 168 1,172 (62) 1,110
Certificate accounts ............... 1,412 150 1,562 5,942 (556) 5,386
Short-term borrowings .............. (423) (182) (605) 1,296 (620) 676
Long-term borrowings ............... (665) (106) (771) 1,952 (302) 1,650
-------- -------- --------- --------- -------- ---------
Total ......................... 995 (303) 692 12,482 (1,352) 11,130
-------- -------- --------- --------- -------- ---------
Net change in net interest income ....... $ 331 $ 863 $1,194 $ 3,464 $1,947 $ 5,411
======== ======== ========= ========= ======== =========
17
PROVISION FOR LOAN LOSSES. The provision for loan losses was $825,000 or 0.16%
(annualized) of average loans in the 1997 third quarter, compared to $675,000 or
0.13% of average loans in the third quarter last year. Net charge-offs increased
from $478,000 or 0.10% of average loans in the third quarter of last year to
$755,000 or 0.15% of average loans in this year's third quarter. The provision
for loan losses for the nine months ended September 30, 1997 was $2.3 million or
0.16% of average loans during the period, compared to $1.9 million or 0.13% of
average loans for the same period last year. Net charge-offs increased when
comparing the two nine-month periods, from $1.0 million or 0.07% of average
loans last year to $1.2 million or 0.08% of average loans this year. These
increases in net charge-offs resulted primarily from the increased proportion of
non-mortgage consumer loans in the portfolio.
NON-INTEREST INCOME. For the three months ended September 30, 1997, non-interest
income increased 9% or $882,000 in comparison to the same period last year. This
increase was primarily due to increased gain on sales of mortgage loans and
securities, partially off-set by decreased gain on sale of mortgage servicing
rights and decreased net servicing fee income. The increase in non-interest
income of 8% or $2.0 million for the nine months ended September 30, 1997 in
comparison to the same period last year, was primarily attributable to the gain
on the sale of a retail banking office, increased gain on sales of mortgage
loans and securities, and increased fee income, partially offset by decreased
servicing fee income and increased amortization of mortgage servicing rights.
The Company was able to take advantage of certain market opportunities to
increase income from gain on sales of mortgage loans and securities. Gain on
sale of mortgage loans includes fee income from loan origination services
provided to third parties. Through an expanded sales staff and product line, the
Company increased fee income from sales of investment, insurance, loan and
deposit products to customers. 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.
Servicing fee income decreased in comparison to the prior year 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.
NON-INTEREST EXPENSE. Non-interest expense for the three and nine months ended
September 30, 1997 decreased $111.1 million and $9.2 million, respectively, in
comparison to the same periods of 1996. Third quarter 1996 non-interest expense
included a special SAIF assessment of $9.7 million and a provision of $1.5
million for possible reimbursement to borrowers related to a truth-in-lending
disclosure error. Without these one time charges, non-interest expense for the
three and nine months ended September 30, 1997 increased $81,000 and $1.9
million, respectively, in comparison to the same periods of 1996. As a
percentage of average assets, total non-interest expense was 2.38% and 2.40% of
average assets for the three and nine months of 1997, respectively, as compared
to 2.46% and 2.59% for the same periods last year, excluding the one time
charges. This gain in efficiency was primarily due to lower FDIC insurance
premiums resulting from the recapitalization of SAIF, and the growth in average
assets outpacing the net increase in all other operating expenses, including the
increases due to the acquisition of Lexington Federal. 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.
INCOME TAX EXPENSE. Income tax expense for the nine months ended September 30,
1997 and 1996, resulted in effective income tax rates of 34.7% and 36.0%,
respectively. The decrease in the effective income tax rate is primarily due to
increased income tax credits earned in connection with the Company's investment
in low income housing partnerships as part of its community reinvestment
activities and increased income from tax-exempt securities.
18
NON-PERFORMING ASSETS
The following table sets forth information regarding the Company's
non-performing assets at the dates indicated.
September 30, December 31,
1997 1996
------------- ------------
(dollars in thousands)
Non-performing loans:
Non-accrual loans ............................ $ 7,324 $ 7,185
Accruing loans which are contractually
past due 90 days or more:
FHA/VA loans (limited credit risk - see
discussion below) ......................... 75,379 88,185
Other loans ................................ 3,534 5,931
Restructured loans ........................... 1,959 1,992
------------ ------------
Total non-performing loans ................... 88,196 103,293
Real estate owned .............................. 1,670 2,815
------------ ------------
Total non-performing assets .................... $ 89,866 $106,108
============ ============
Non-performing loans to total loans:
Including FHA/VA loans ....................... 4.43% 5.30%
Excluding FHA/VA loans ....................... 0.64% 0.77%
Non-performing assets to total assets:
Including FHA/VA loans ....................... 3.11% 3.66%
Excluding FHA/VA loans ....................... 0.50% 0.62%
Allowance for loan losses to total loans ....... 0.74% 0.69%
Allowance for loan losses to non-performing
loans:
Including FHA/VA loans ....................... 16.63% 13.11%
Excluding FHA/VA loans ....................... 114.41% 89.61%
Allowance for loan losses to non-performing
assets:
Including FHA/VA loans ....................... 16.32% 12.76%
Excluding FHA/VA loans ....................... 101.22% 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 September 30, 1997, the Company
held in its portfolio $136.0 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
nine months 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
$4.2 million at September 30, 1997.
19
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 1997, the Bank had liquidity and short-term liquidity ratios of
7.2% and 6.4%, respectively.
At September 30, 1997, the Company had outstanding commitments to fund portfolio
loans totaling $109.3 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 September 30, 1997, the
Bank had tangible capital of 8.6% of tangible assets, core capital of 8.6% of
adjusted tangible assets, and risk-based capital of 18.8% 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.
20
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
On September 15, 1997, Great Financial Corporation, a Delaware
corporation, entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Star Banc Corporation, an Ohio corporation ("Star") pursuant to
which Great Financial will merge with and into Star (the "Merger"). In
accordance with the terms of the Merger Agreement, each share of Great Financial
common stock, par value $.01 per share ("Great Financial Common Stock"),
outstanding immediately prior to the effective time of the Merger (the
"Effective Time") will be converted into the right to receive, at the election
of the holder thereof, either (i) .949 of a share of Star common stock, par
value $5.00 per share ("Star Common Stock"), and the associated preferred share
purchase rights under Star's Rights Agreement, dated October 27, 1989, or (ii)
$44.00 in cash, provided that the aggregate number of shares of Great Financial
Common Stock that shall be converted in the Merger into the right to receive
Star Common Stock shall equal seventy percent of the issued and outstanding
shares of Great Financial Common Stock immediately prior to the Effective Time.
The Merger Agreement is attached as EXHIBIT 2.1.
The Merger is intended to constitute a tax-free reorganization under the
Internal Revenue Code of 1986, as amended, and to be accounted for as a
purchase.
Consummation of the Merger is subject to various conditions, including: (i)
receipt of approval by the shareholders of Great Financial of appropriate
matters relating to the Merger Agreement and the Merger; (ii) receipt of
requisite regulatory approvals from the Board of Governors of the Federal
Reserve System and other federal and state regulatory authorities as necessary;
(iii) receipt by each of Great Financial and Star of an opinion of counsel in
reasonably satisfactory form as to the tax treatment of certain aspects of the
Merger; (iv) registration of the shares of Star Common Stock to be issued in the
Merger under the Securities Act of 1933, as amended (the "1933 Act") and all
applicable state securities laws; and (v) satisfaction of certain other
conditions.
The Merger Agreement and the transactions contemplated thereby will be submitted
for approval at a meeting of the shareholders of Great Financial. Prior to such
meeting, Star will file a registration statement with the Securities and
Exchange Commission registering under the Securities Act of 1933, as amended,
the Star Common Stock to be issued in the Merger. Such shares of Star Common
Stock will be offered to Great Financial shareholders pursuant to a prospectus
that will also serve as a proxy statement for the shareholders' meeting.
In connection with the Merger Agreement, Star and Great Financial entered into a
Stock Option Agreement, dated September 23, 1997 (the "Stock Option Agreement"),
pursuant to which Great Financial granted to Star an irrevocable option to
purchase, under certain circumstances, up to 2,747,083 authorized and unissued
shares of Great Financial Common Stock, subject to certain adjustments, at a
price of $36.00 Per share (the "Star Option"), subject to certain adjustments.
The Star Option, if exercised, would equal, before giving effect to the exercise
of the Star Option, 19.9% of the total number of shares of Great Financial
Common Stock outstanding. The Star Option was granted by Great Financial as a
condition and inducement to Star's willingness to enter into the Merger
Agreement. Under certain circumstances, Great Financial may be required to
repurchase the Star Option or the shares acquired pursuant to the exercise of
the Star Option. The Stock Option Agreement is attached as EXHIBIT 2.2.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 2.1 - Agreement and plan of merger between Star Banc
Corporation as buyer, and Great Financial Corporation as seller.
(b) Exhibit 2.2 - Stock option agreement.
(c) Exhibit 11 - Statement regarding computation of per share
earnings.
(d) There have been no reports filed on Form 8-K during the quarter
ended September 30, 1997.
21
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 12, 1997 By Paul M. Baker
--------------------------------------------
Paul M. Baker
Chairman and Chief Executive Officer
Date: November 12, 1997 By Richard M. Klapheke
--------------------------------------------
Richard M. Klapheke
Treasurer and Secretary
(Chief Accounting Officer)
22
EXHIBITS INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE(S)
2.1 Agreement and plan of merger between Star Banc 27-79
Corporation as buyer, and Great Financial
Corporation as seller
2.2 Stock Option Agreement 80-96
11 Statement regarding computation of per share 97
earnings
23