UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
----------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from to
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Commission File Number: 0-25808
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GREAT AMERICAN BANCORP, INC.
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(Exact name of small business issuer as specified in its charter)
Delaware 52-1923366
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1311 S. Neil St., P.O. Box 1010, Champaign, IL 61824-1010
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(Address of principal executive offices)
(217) 356-2265
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(Issuer's telephone number)
At July 31, 2003, the Registrant had 758,732 shares of Common Stock
outstanding, for ownership purposes, which excludes 1,294,018 shares held as
treasury stock.
Transitional Small Business Disclosure Format (Check One): Yes No X
--- ---
Table of Contents
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Income
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis or
Plan of Operation
Item 3. Controls and Procedures
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security
Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Great American Bancorp, Inc. and Subsidiary
Condensed Consolidated Balance Sheets
As of June 30, 2003 and December 31, 2002
(in thousands except share data)
June 30, 2003 Dec. 31, 2002
(unaudited)
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ASSETS
Cash and due from banks $ 6,395 $ 4,990
Interest-bearing demand deposits 43,786 27,344
--------------------------------
Cash and cash equivalents 50,181 32,334
Held-to-maturity securities (fair value of
$879 and $1,329 at June 30, 2003 and
December 31, 2002, respectively) 836 1,262
Mortgage loans held for sale 1,614 1,658
Loans, net of allowance for loan losses
of $1,187 and $1,188 in 2003 and 2002,
respectively 106,072 122,336
Premises and equipment 6,162 6,146
Federal Home Loan Bank stock 1,281 1,227
Interest receivable 578 683
Cash value of life insurance 276 268
Insurance premiums receivable 385 225
Deferred income taxes 46 46
Income taxes receivable 129 --
Mortgage servicing rights 170 192
Other 958 873
--------------------------------
Total assets $ 168,688 $ 167,250
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest-bearing deposits $ 13,002 $ 12,399
Interest-bearing deposits
Savings, NOW and money market 62,698 57,343
Time 58,847 61,549
--------------------------------
Total deposits 134,547 131,291
Federal Home Loan Bank advances 14,000 15,000
Deferred compensation - directors 636 645
Advances from borrowers for taxes
and insurance 211 265
Accrued postretirement benefit obligation 280 255
Accrued real estate taxes 134 138
Premiums due insurance companies 662 201
Dividend payable 85 90
Income taxes payable -- 55
Interest payable 55 62
Other 286 310
--------------------------------
Total liabilities 150,896 148,312
--------------------------------
Commitments and Contingent Liabilities
(continued)
Great American Bancorp, Inc. and Subsidiary
Condensed Consolidated Balance Sheets (Continued)
As of June 30, 2003 and December 31, 2002
(in thousands except share data)
June 30, 2003 Dec. 31, 2002
(unaudited)
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STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value
Authorized and unissued --
1,000,000 shares $ -- $ --
Common stock, $0.01 par value
Authorized -- 7,000,000 shares
Issued -- 2,052,750 shares
Outstanding: 2003 - 769,732 shares,
2002 - 818,490 shares 21 21
Additional paid-in-capital 20,166 20,166
Retained earnings 20,112 19,374
--------------------------------
40,299 39,561
Treasury stock, at cost
Common: 2003 - 1,283,018 shares,
2002 - 1,234,260 shares (22,443) (20,557)
Unearned incentive plan shares:
2003 - 4,469 shares,
2002 - 4,589 shares (64) (66)
--------------------------------
Total stockholders' equity 17,792 18,938
--------------------------------
Total liabilities and
stockholders' equity $ 168,688 $ 167,250
================================
See notes to condensed consolidated financial statements.
Great American Bancorp, Inc. and Subsidiary
Condensed Consolidated Statements of Income
For the Six Months Ended June 30, 2003 and 2002
(Unaudited, in thousands except share data)
2003 2002
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Interest income
Loans $ 4,252 $ 5,256
Held-to-maturity securities 34 62
Deposits with banks and other 244 121
--------------------------------
Total interest income 4,530 5,439
--------------------------------
Interest expense
Deposits 1,272 1,829
Federal Home Loan Bank advances 304 442
Other 13 15
--------------------------------
Total interest expense 1,589 2,286
--------------------------------
Net interest income 2,941 3,153
Provision for loan losses -- 110
--------------------------------
Net interest income after
provision for loan losses 2,941 3,043
--------------------------------
Noninterest income
Insurance sales commissions 801 811
Brokerage commissions 45 68
Customer service fees 277 273
Other service charges and fees 119 94
Net gains on loan sales 552 221
Net loan servicing fees (costs) (56) 11
Other 5 7
--------------------------------
Total noninterest income 1,743 1,485
--------------------------------
(continued)
Great American Bancorp, Inc. and Subsidiary
Condensed Consolidated Statements of Income (Continued)
For the Six Months Ended June 30, 2003 and 2002
(Unaudited, in thousands except share data)
2003 2002
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Noninterest expense
Salaries and employee benefits $ 1,853 $ 1,672
Net occupancy expense 283 286
Equipment expense 247 248
Data processing fees 34 37
Deposit insurance premium 11 11
Printing and office supplies 152 140
Legal and professional fees 127 107
Directors and committee fees 73 50
Insurance expense 36 30
Marketing and advertising expense 123 103
Other 252 245
--------------------------------
Total noninterest expense 3,191 2,929
--------------------------------
Income before income taxes 1,493 1,599
Provision for income taxes 585 626
--------------------------------
Net income $ 908 $ 973
================================
Per Share Data:
Earnings
Basic:
Net income $ 1.18 $ 1.14
================================
Average number of shares 772,244 849,908
================================
Diluted:
Net income $ 1.06 $ 1.06
================================
Average number of shares 856,851 917,894
================================
Dividends $ 0.22 $ 0.22
================================
See notes to condensed consolidated financial statements.
Great American Bancorp, Inc. and Subsidiary
Condensed Consolidated Statements of Income
For the Three Months Ended June 30, 2003 and 2002
(Unaudited, in thousands except share data)
2003 2002
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Interest income
Loans $ 2,044 $ 2,599
Held-to-maturity securities 15 30
Deposits with banks and other 142 72
--------------------------------
Total interest income 2,201 2,701
--------------------------------
Interest expense
Deposits 595 880
Federal Home Loan Bank advances 150 217
Other 6 8
--------------------------------
Total interest expense 751 1,105
--------------------------------
Net interest income 1,450 1,596
Provision for loan losses -- 50
--------------------------------
Net interest income after
provision for loan losses 1,450 1,546
--------------------------------
Noninterest income
Insurance sales commissions 395 349
Brokerage commissions 29 36
Customer service fees 151 148
Other service charges and fees 59 50
Net gains on loan sales 293 115
Net loan servicing fees (costs) (36) 7
Other 1 --
--------------------------------
Total noninterest income 892 705
--------------------------------
(continued)
Great American Bancorp, Inc. and Subsidiary
Condensed Consolidated Statements of Income (Continued)
For the Three Months Ended June 30, 2003 and 2002
(Unaudited, in thousands except share data)
2003 2002
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Noninterest expense
Salaries and employee benefits $ 945 $ 837
Net occupancy expense 142 147
Equipment expense 125 122
Data processing fees 17 18
Deposit insurance premium 6 5
Printing and office supplies 75 72
Legal and professional fees 54 59
Directors and committee fees 36 25
Insurance expense 18 16
Marketing and advertising expense 71 57
Other 123 125
--------------------------------
Total noninterest expense 1,612 1,483
--------------------------------
Income before income taxes 730 768
Provision for income taxes 287 299
--------------------------------
Net income $ 443 $ 469
================================
Per Share Data:
Earnings
Basic:
Net income $ 0.58 $ 0.55
================================
Average number of shares 764,747 845,132
================================
Diluted:
Net income $ 0.52 $ 0.51
================================
Average number of shares 849,894 917,931
================================
Dividends $ 0.11 $ 0.11
================================
See notes to condensed consolidated financial statements.
Great American Bancorp, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2003 and 2002
(Unaudited, in thousands)
2003 2002
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Operating Activities
Net income $ 908 $ 973
Items not requiring (providing) cash
Depreciation expense 213 235
Provision for loan losses -- 110
Amortization of loan-servicing rights 112 7
Amortization of deferred loan fees (18) (14)
Federal Home Loan Bank stock dividends (54) (31)
Incentive plan expense 2 5
Net gains on loan sales (552) (221)
Loans originated for sale (22,190) (8,296)
Proceeds from loan sales 22,696 10,559
Net gain on sales of premises and equipment -- (4)
Changes in:
Interest receivable 105 12
Income taxes receivable (129) (67)
Prepaid expenses and other assets (253) (43)
Interest payable (7) (13)
Other liabilities 449 258
Income taxes payable (55) (23)
--------------------------------
Net cash provided by
operating activities 1,227 3,447
--------------------------------
Investing Activities
Proceeds from paydowns of mortgage backed
securities 426 369
Net collections of loans 16,282 9,669
Purchase of premises and equipment (229) (147)
Proceeds from sales of premises and equipment -- 4
--------------------------------
Net cash provided by
investing activities 16,479 9,895
--------------------------------
(continued)
Great American Bancorp, Inc. and Subsidiary
Condensed Consolidated Statements of Cash Flows (Continued)
For the Six Months Ended June 30, 2003 and 2002
(Unaudited, in thousands)
2003 2002
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Financing Activities:
Net increase in demand deposits,
money market, NOW and savings accounts $ 5,958 $ 4,091
Net decrease in certificates of deposits (2,702) (5,474)
Proceeds from Federal Home Loan Bank advances -- 2,000
Repayment of Federal Home Loan Bank advances (1,000) (4,500)
Proceeds from stock options exercised 249 --
Purchase of treasury stock (2,135) (469)
Dividends paid (175) (188)
Net decrease in advances from
borrowers for taxes and insurance (54) (41)
--------------------------------
Net cash provided by (used in)
financing activities 141 (4,581)
--------------------------------
Increase in Cash and Cash Equivalents 17,847 8,761
Cash and Cash Equivalents, Beginning
of Period 32,334 11,166
--------------------------------
Cash and Cash Equivalents, End of
Period $ 50,181 $ 19,927
================================
Supplemental Cash Flows Information
Interest paid $ 1,596 $ 2,299
================================
Income taxes paid (net of refunds) $ 769 $ 715
================================
See notes to condensed consolidated financial statements.
Great American Bancorp, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
1. Background Information
Great American Bancorp, Inc. (the "Company") was organized in 1995 to be
the savings and loan holding company of First Federal Savings Bank of
Champaign-Urbana, Illinois, (the "Bank") in connection with the Bank's
conversion from a federally chartered mutual savings bank to a federally
chartered stock savings bank. The Company's common stock trades on the
Nasdaq SmallCap Market under the symbol "GTPS."
2. Statement of Information Furnished
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Form 10-QSB instructions and Item 310(b) of
Regulation S-B, and, in the opinion of management, contain all adjustments
necessary to present fairly the financial position as of June 30, 2003 and
December 31, 2002, the results of operations for the six months and three
months ended June 30, 2003 and 2002, and the cash flows for the six months
ended June 30, 2003 and 2002. All adjustments to the financial statements
were normal and recurring in nature. These results have been determined on
the basis of accounting principles generally accepted in the United States of
America. Reclassifications of certain amounts in the 2002 financial
statements have been made to conform to the 2003 presentation. The results
of operations for the six months and three months ended June 30, 2003 are not
necessarily indicative of the results to be expected for the entire fiscal
year.
The condensed consolidated financial statements are those of the Company
and the Bank. Certain information and note disclosures normally included in
the Company's financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. These condensed consolidated financial statements
should be read in conjunction with the audited financial statements and notes
thereto included in the Company's 2002 Annual Report to Shareholders. The
condensed consolidated balance sheet of the Company as of December 31, 2002
has been derived from the audited consolidated balance sheet of the Company
as of that date.
3. Stock Options
The Company has a stock-based employee compensation plan, which is
described more fully in Notes to Financial Statements included in the 2002
Annual Report to Shareholders. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based
employee compensation cost is reflected in net income, as all options granted
under the plan had an exercise price equal to the market value of the
underlying common stock on the grant date. The following table illustrates
the effect on net income and earnings per share if the Company had applied
the fair value provisions of Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
Three Months Ended Six Months Ended
--------------------- ---------------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
--------------------- ---------------------
Net income as reported $ 443 $ 469 $ 908 $ 973
Less: Total stock-based
employee compensation
cost determined under the
fair value based method,
net of income taxes (1) (1) (1) (6)
--------------------- ---------------------
Pro forma net income $ 442 $ 468 $ 907 $ 967
===================== =====================
Earnings per share:
Basic - as reported $ 0.58 $ 0.55 $ 1.18 $ 1.14
===================== =====================
Basic - pro forma $ 0.58 $ 0.55 $ 1.17 $ 1.14
===================== =====================
Diluted - as reported $ 0.52 $ 0.51 $ 1.06 $ 1.06
===================== =====================
Diluted - pro forma $ 0.52 $ 0.51 $ 1.06 $ 1.05
===================== =====================
PART I -- Item 2.
GREAT AMERICAN BANCORP, INC.
Management's Discussion and Analysis
or Plan of Operation
Forward-Looking Information
In addition to historical information, this Report on Form 10-QSB may
include certain forward-looking statements based on current management
expectations. The Company's actual results could differ materially from
those management expectations. Factors that could cause future results to
vary from current management expectations include, but are not limited to,
general economic conditions, legislative and regulatory changes, monetary and
fiscal policies of the federal government, changes in tax policies, rates and
regulations of federal, state and local tax authorities, changes in interest
rates, deposit flows, the cost of funds, demand for loan products, demand for
financial services, competition, changes in the quality or competition,
changes in the quality or composition of the Company's loan and investment
portfolios, changes in accounting principles, policies or guidelines, and
other economic, competitive, governmental and technological factors affecting
the Company's operations, markets, products, services and prices. Further
description of the risks and uncertainties to the business are included in
detail under the caption: Liquidity and Capital Resources.
General
The Company is the holding company for the Bank. The Bank operates a
wholly owned subsidiary, Park Avenue Service Corporation ("PASC"). PASC
operates the GTPS Insurance Agency ("Agency") which offers a variety of
insurance products, including life, health, automobile, and property and
casualty insurance. PASC also offers full service brokerage activities
through Scout Brokerage Services, Inc., a subsidiary of United Missouri Bank,
and also engages in the sale of fixed-rate and variable-rate tax deferred
annuities.
Financial Condition
The Company's total assets increased $1.44 million from $167.25 million
at December 31, 2002 to $168.69 million at June 30, 2003. The growth was
primarily in cash and cash equivalents, offset by a decrease in net loans.
Cash and cash equivalents increased $17.85 million, or 55.2%, from
$32.33 million at December 31, 2002 to $50.18 million at June 30, 2003. Cash
and cash equivalents, primarily interest-bearing demand deposits, increased
mainly as a result of proceeds generated from loan sales. Cash and cash
equivalents also increased due to loan repayments and an increase in customer
deposits, offset by repayments of Federal Home Loan Bank ("FHLB") advances
and purchases of treasury stock. Interest-bearing demand deposits with banks
and other grew from $27.34 million at December 31, 2002 to $43.79 million at
June 30, 2003, an increase of $16.45 million, or 60.2%.
Held-to-maturity securities declined from $1.26 million at December 31,
2002 to $836,000 at June 30, 2003 due to repayments of mortgage-backed
securities.
Mortgage loans held for sale decreased from $1.66 million at December
31, 2002 to $1.61 million at June 30, 2003. During the six months ended June
30, 2003, the Company sold $22.23 million in fixed rate one-to-four-family
home mortgage loans to the Federal National Mortgage Association ("FNMA").
During 2003, home mortgage rates declined to historically low levels.
Interest rates on 30-year fixed rate loans declined to levels not experienced
since the 1950's. The Company's 30-year mortgage rate decreased to as low as
5.50% during 2003, while the 15-year rate dropped as low as 4.75%. These low
rates prompted a significant number of customers to refinance their existing
home mortgage loans. In order to reduce the Company's interest rate risk
exposure, the Company sold the majority of these refinanced loans to FNMA.
During the six months ended June 30, 2003, the Company originated $22.19
million in mortgage loans held for sale, including refinanced loans. During
this period, the Company sold $22.23 million in loans. The $1.61 million
balance of mortgage loans held for sale at June 30, 2003 consists of loans
committed for sale to FNMA. At June 30, 2003 and December 31, 2002,
residential mortgage loans serviced for others totaled $41.60 million and
$30.68 million, respectively. During 2002 and 2003, the Company maintained
the servicing for all residential loans sold.
The following schedule shows the balances by loan category at June 30,
2003 compared to December 31, 2002, along with the change and percentage
change:
Balance Balance
June 30, December 31, Percentage
2003 2002 Change Change
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One-to-four-family mortgage
loans held for investment $ 44,088 $ 60,644 $(16,556) (27.3)%
Multi-family mortgage loans 19,261 20,249 (988) (4.9)
Commercial mortgage loans 16,284 16,092 192 1.2
Construction loans 2,176 2,077 99 4.8
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Total real estate loans 81,809 99,062 (17,253) (17.4)
Commercial loans 10,933 10,063 870 8.6
Consumer loans 14,517 14,399 118 0.8
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Total loans 107,259 123,524 (16,265) (13.2)
Allowance for loan losses (1,187) (1,188) 1 (0.1)
- ----------------------------------------------------------------------------
Total loans, net $ 106,072 $ 122,336 $(16,264) (13.3)%
============================================================================
Net loans declined from $122.34 million at December 31, 2002 to $106.07
million at June 30, 2003, a decrease of $16.26 million, or 13.3%. Net loans,
which do not include mortgage loans held for sale, declined mostly due to
principal repayments on one-to-four-family residential mortgage loans
exceeding loan originations. The majority of new and refinanced one-to-four-
family residential mortgage loans in 2003 were originated for sale rather
than for investment. Mortgage loans held for sale are separately reported on
the consolidated balance sheets. One-to-four-family mortgage loans decreased
$16.56 million from December 31, 2002 to June 30, 2003.
Total deposits increased $3.26 million, or 2.5%, from $131.29 million at
December 31, 2002 to $134.55 million at June 30, 2003. Noninterest-bearing
deposits increased by $600,000 and savings, NOW and money market deposits
grew by $5.36 million, while time deposits declined by $2.70 million during
the first six months of 2003. The decline in time deposits was mainly in
certificates of deposit maturing in one to two years.
The growth in savings, NOW and money market accounts was partly due to
customers transferring matured certificates of deposit into short-term,
interest-bearing demand accounts in anticipation that market interest rates
will climb in the near future. The growth in savings, NOW and money market
accounts was also due to seasonal fluctuations in these accounts.
The following table summarizes the balances of deposits at June 30, 2003
and December 31, 2002, the change in the balances and the percentage change:
Balance Balance
June 30, December 31, Percentage
2003 2002 Change Change
- -----------------------------------------------------------------------------
Noninterest bearing
checking accounts $ 13,002 $ 12,399 $ 603 4.9%
Interest bearing:
NOW accounts 22,205 20,388 1,817 8.9
IMMA accounts 21,915 19,507 2,408 12.3
Savings accounts 18,578 17,448 1,130 6.5
Certificates of deposit 58,847 61,549 (2,702) (4.4)
- -----------------------------------------------------------------------------
Total interest
bearing deposits 121,545 118,892 2,653 2.2
- -----------------------------------------------------------------------------
Total deposits $ 134,547 $ 131,291 $ 3,256 2.5%
=============================================================================
FHLB advances totaled $14.00 million at June 30, 2003 compared to $15.00
million at December 31, 2002. In March 2003, a $1.00 million FHLB advance
with a rate of 3.06% matured. The following schedule presents FHLB advances
at June 30, 2003, by maturity date:
Date Fixed First or
of Interest or Maturity Next Call
Advance Rate Variable Date Date Amount
- -----------------------------------------------------------------------------
March 2002 3.58 Fixed September 2003 non callable 1,000
October 1998 4.30 Fixed October 2008 July 2003 5,000
January 2001 4.55 Fixed January 2011 July 2003 5,000
September 2001 3.80 Fixed September 2011 September 2004 3,000
-------
$14,000
=======
The $10.00 million in advances callable in July 2003 were not called.
Both of these advances are callable quarterly. The $3.00 million advance has
only a one-time call date in September 2004.
Premiums due insurance companies increased from $201,000 at December 31,
2002 to $662,000 at June 30, 2003 due to fluctuations in billing cycles,
additional billings for new customers and an increase in premium rates.
Total stockholders' equity decreased $1.15 million, from $18.94 million
at December 31, 2002 to $17.79 million at June 30, 2003. Book value per
outstanding voting share decreased from $23.14 at December 31, 2002 to $23.11
at June 30, 2003.
The decrease in stockholders' equity is summarized as follows (in
thousands):
Stockholders' equity, December 31, 2002 $ 18,938
Net income 908
Purchase of treasury stock (2,135)
Stock options exercised 249
Dividends declared (170)
Incentive plan shares allocated 2
------
Stockholders' equity, June 30, 2003 $ 17,792
======
In March 2003, the Company completed a previously announced 5% stock
repurchase program. This program was for 41,150 shares, which the Company
repurchased at an average price of $29.79 per share. In February 2003, the
Company announced a 5% common stock repurchase program that was equal to
38,875 shares. As of July 31, 2003, the Company had repurchased 36,496
shares related to the stock repurchase program announced in February 2003 at
an average price of $30.49 per share. In July 2003, the Company announced an
additional 5% common stock repurchase program totaling 38,187 shares. All
repurchased shares will be held as treasury shares to be used for issuing
stock under stock option agreements and for general corporate purposes.
Results of Operations
Comparison of Six Month Periods Ended June 30, 2003 and 2002
Net income totaled $908,000 for the six months ended June 30, 2003
compared to $973,000 for the six months ended June 30, 2002, a decrease of
$65,000, or 6.7%. Basic earnings per share were $1.18 for the six months
ended June 30, 2003, compared to $1.14 for the six months ended June 30,
2002. Diluted earnings per share were $1.06 for both periods. Net income
decreased in 2003 primarily due to lower net interest income and an increase
in noninterest expense, offset by a reduction in the provision for loan
losses and an increase in noninterest income.
Net interest income decreased $212,000, or 6.7%, from $3,153,000 for the
six months ended June 30, 2002 to $2,941,000 for the same period in 2003.
Interest income declined $909,000, or 16.7%, from $5,439,000 for the six
months ended June 30, 2002 to $4,530,000 for the first six months of 2003.
Interest expense decreased $697,000, or 30.5%, from $2,286,000 in 2002 to
$1,589,000 in 2003.
Interest income from loans was $4,252,000 for the first six months of
2003, $1,004,000, or 19.1% less than the $5,256,000 recorded for the first
six months of 2002. Interest income from loans declined mainly as a result
of a decrease in total loans from a year ago and a reduction in average loan
yields. The average balance of total net loans, including mortgage loans
held for sale, was down $23.06 million in 2003, from $138.61 million in 2002
to $115.55 million in 2003.
The following schedule compares average total loan balances by major
categories for the first six months of fiscal 2003 to the same period in
2002:
Average Average
Balance Balance Percentage
2003 2002 Change Change
- ----------------------------------------------------------------------------
One-to-four-family
mortgage loans $ 53,668 $ 79,638 $(25,970) (32.6)%
Multi-family mortgage loans 19,777 19,477 300 1.5
Commercial mortgage loans 16,470 15,366 1,104 7.2
Construction loans 2,126 3,291 (1,165) (35.4)
- ----------------------------------------------------------------------------
Total real estate loans 92,041 117,772 (25,731) (21.8)
Commercial loans 10,211 9,172 1,039 11.3
Consumer loans 14,488 12,774 1,714 13.4
- ----------------------------------------------------------------------------
Total loans 116,740 139,718 (22,978) (16.4)
Allowance for loan losses (1,189) (1,109) (80) 7.2
- ----------------------------------------------------------------------------
Total loans, net $115,551 $138,609 $(23,058) (16.6)%
============================================================================
The average balance of total loans declined in 2003 mainly due to the
Company selling the majority of new and refinanced one-to-four-family
residential mortgage loans during 2003. The average balance of total one-to-
four-family mortgage loans decreased $25.97 million in 2003, from $79.64
million for the six months ended June 30, 2002 to $53.67 million for the six
months ended June 30, 2003. The average balance of one-to-four-family loans
serviced for others increased $22.61 million from $13.89 million for the six
months ended June 30, 2002 to $36.50 million for the six months ended June
30, 2003.
The average total balance of commercial mortgage loans increased by
$1.10 million, from $15.37 million for the six months ended June 30, 2002 to
$16.47 million for the six months ended June 30, 2003. This increase and the
$1.17 million decrease in the average total balance of construction loans was
mainly due to the transfer of one large loan totaling $1.67 million from
construction loans to commercial mortgage loans in May 2002. The $1.04
million increase in the average total balance of commercial loans is
primarily due to one commercial loan customer maintaining a higher balance on
their line of credit during 2003. Average total consumer loans were $1.71
million higher in 2003 due mainly to the average balance of total home equity
loans. The average balance of total home equity loans increased $2.28
million, from $2.46 million for the six months ended June 30, 2002 to $4.74
million for the period ending June 30, 2003. The average total balances of
other secured consumer loans declined during 2003.
Interest income from loans also declined in 2003 due to lower average
yields, which resulted from declining interest rates during 2002 and 2003.
The prime rate, the rate used by financial institutions in establishing the
majority of loan offering rates, was at 4.75% from January 2002 until the
rate dropped to 4.25% in November 2002. The prime rate declined again on
June 30, 2003 to 4.00%. The average yield on the Company's net loans
decreased from 7.65% for the first six months of 2002 to 7.42% for the first
six months of 2003.
Interest income from held-to-maturity securities declined from $62,000
for the six months ended June 30, 2002 to $34,000 for the same period in
2003, mainly due to a decline in the average balance of these investments.
The total average balance of held-to-maturity securities declined from $1.87
million during the first six months of 2002 to $1.07 million during the first
six months of 2003. Held-to-maturity securities were comprised of mortgage-
backed securities during both 2003 and 2002. The average yield on held-to-
maturity securities decreased from 6.70% for the first six months of 2002 to
6.42% for the first six months of 2003.
Interest income from deposits with banks and other increased $123,000,
from $121,000 for the six months ended June 30, 2002 to $244,000 for the
period ended June 30, 2003, due to an increase in the average balance of
these investments. The average balance of total deposits with banks and
other increased from $12.90 million during the first six months of 2002 to
$37.86 million during the same period in 2003. However, the average yield on
deposits with banks and other decreased from 1.89% for the six months ended
June 30, 2002 to 1.30% for the six months ended June 30, 2003. The majority
of these deposits are overnight funds, which were affected by a decline in
short-term market interest rates during 2003.
Interest expense decreased by $697,000, or 30.5%, from $2,286,000 for
the six months ended June 30, 2002 to $1,589,000 for the same period in 2003,
mainly interest expense on deposits and FHLB advances. Interest expense on
deposits declined $557,000, or 30.5%, from $1,829,000 for the six months
ended June 30, 2002 to $1,272,000 for the six months ended June 30, 2003.
This decrease was primarily in interest expense on certificates of deposit,
which declined $520,000, or 34.9% in 2003. Interest expense on certificates
of deposit was $971,000 in the first six months of 2003 compared to
$1,491,000 for the first six months of 2002.
Certificates of deposit interest expense declined due to a reduction in
the total average balance of certificates and a decrease in the average rate.
Average total certificates of deposit declined from $66.15 million in the
first six months of 2002 to $59.99 million in the first six months of 2003.
The decline in average certificates of deposit was primarily in the one-year
to two-year maturity categories. Because of the decline in market interest
rates during 2002 and 2003, the Company lowered offering rates for new and
renewing certificates. As a result, many customers moved maturing
certificates to shorter-term certificates or into demand or savings accounts.
The average rate on certificates of deposit declined from 4.55% for the six
months ended June 30, 2002 to 3.26% for the same period in 2003.
Interest expense on interest-bearing demand and savings deposits
declined only slightly in 2003, from $338,000 for the six months ended June
30, 2002 to $301,000 for the six months ended June 30, 2003. The average
balance of interest-bearing demand and savings accounts increased $11.71
million, or 23.5%, from $49.86 million in the first six months of 2002 to
$61.57 million for the same period in 2003. The weighted average rate
accrued on interest-bearing demand and savings deposits decreased from 1.37%
for the six months ended June 30, 2002 to 0.99% for the six ended June 30,
2003.
Interest expense on FHLB advances was $304,000 for the six months ended
June 30, 2003 compared to $442,000 for the same period in 2002. The average
balance of FHLB advances was $14.39 million for the first six months of 2003
compared to $19.16 million for the same period in 2002. The average rate on
FHLB advances decreased from 4.65% for the six months ended June 30, 2002 to
4.26% for the six months ended June 30, 2003.
Net interest income as a percent of interest earning assets was 3.84%
for the six months ended June 30, 2003 versus 4.15% for the same period in
2002. The spread between the yield on interest-earning assets and the rate
on interest bearing liabilities was 3.57% and 3.76% for the six months ended
June 30, 2003 and 2002, respectively.
The Company recorded no provision for loan losses for the first six
months of 2003 compared to $110,000 for the six months ended June 30, 2002.
Management's analyses of the allowance for loan losses during the first six
months of 2003 determined that no additional allocation to the allowance was
warranted for the period, primarily due to a decrease in non-performing loans
and a decrease in total loans. Management assesses the adequacy of the
allowance for loan losses based on evaluating known and inherent risks in the
loan portfolio and upon management's continuing analysis of the factors
underlying the quality of the loan portfolio. While management believes
that, based on information currently available, the allowance for loan losses
is sufficient to cover losses inherent in its loan portfolio at this time, no
assurance can be given that the level of the allowance for loan losses will
be sufficient to cover future possible loan losses incurred by the Company or
that future adjustments to the allowance for loan losses will not be
necessary if economic and other conditions differ substantially from the
economic and other conditions used by management to determine the current
level of the allowance for loan losses. Management may in the future
increase the level of the allowance for loan losses as a percentage of total
loans and non-performing loans in the event it increases the level of
commercial real estate, multifamily, or consumer lending as a percentage of
its total loan portfolio. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the allowance
for loan losses. Such agencies may require the Company to provide additions
to the allowance based upon judgements different from management.
During the first six months of 2003, the Company charged-off one
consumer loan totaling $3,000 and collected $2,000 in loans previously
charged-off. For the six months ended June 30, 2002, the Company charged-off
$1,000 in loans and collected $3,000 in recoveries.
Non-performing loans, which are loans past due 90 days or more and non-
accruing loans, totaled $19,000 at June 30, 2003, compared to $190,000 at
June 30, 2002. Non-performing loans at June 30, 2003 consisted of one
residential mortgage loan totaling $12,000 and two consumer loans totaling
$7,000. These loans were all past due 90 days or more at June 30, 2003, with
one consumer loan totaling $5,000 in non-accrual status. Non-performing
loans at June 30, 2002 consisted of four residential mortgage loans totaling
$133,000, and three consumer loans totaling $57,000. All of these loans were
past due 90 days or more at June 30, 2002, with one consumer loan totaling
$8,000 in non-accrual status. The residential mortgage loan with a balance
of $12,000 at June 30, 2003 and the consumer loan totaling $5,000 at June 30,
2003 were included in non-performing loans at both June 30, 2002 and June 30,
2003. The Company stops accruing interest on loans, including past due
loans, at such time that the ultimate collection of all principal and
interest becomes doubtful. The ratio of the Company's allowance for loan
losses to total loans was 1.09% at June 30, 2003 and .86% at June 30, 2002.
Noninterest income totaled $1,743,000 for the six months ended June 30
2003, compared to $1,485,000 for the same period in 2002, an increase of
$258,000, or 17.4%. This increase was mostly due to net gains from the sale
of mortgage loans, net of commissions. The Company sold $22.23 million in
loans during the first six months of 2003. The Company also committed to
sell $1.61 million in loans held for sale at June 30, 2003 and $2.98 million
in loan commitments outstanding to customers at June 30, 2003. The Company
recorded total net gains of $552,000 related to these sales, including gains
on the sale of loans totaling $463,000 and gains from capitalizing mortgage
servicing rights of $89,000. During the first six months of 2002, the
Company sold $10.45 million in loans, recording total gains of $221,000,
which was comprised of net cash gains of $106,000 and gains from capitalizing
mortgage servicing rights of $115,000. The Company sells loans in order to
provide funding for additional loans and also to reduce interest rate risk
due to the decline in home mortgage rates.
Insurance sales commissions decreased $10,000, or 1.2%, from $811,000
reported for the first six months of 2002 to $801,000 for the first six
months of 2003. Brokerage commissions declined $23,000, or 33.8%, from
$68,000 for the period ended June 30, 2002 to $45,000 for the six months
ended June 30, 2003 due to a reduction in brokerage activity. Other service
charges and fees increased $25,000, or 26.6%, from $94,000 for the first six
months of 2002 to $119,000 for the first six months of 2003, primarily ATM
fees, credit card income and debit card fees. Loan servicing fees decreased
from $11,000 in net fees for the first six months of 2002 to $56,000 in net
costs for the six months ended June 30, 2003 due to an increase in the
amortization of mortgage servicing rights.
Noninterest expense was $3,191,000 for the first six months of 2003,
$262,000 or 8.9% higher than the $2,929,000 recorded for the first six months
of 2002. Noninterest expense was higher in 2003 mainly due to increases in
salaries and employee benefits expense, legal and professional fees,
directors and committee fees and marketing expenses. Salaries and employee
benefits expense increased $181,000, or 10.8%, from $1,672,000 for the six
months ended June 30, 2002 to $1,853,000 for the first six months of 2003,
due partly to normal salary raises. Also, the Agency changed its method of
compensating some of the Agency's insurance producers from a salary basis to
a commission basis beginning in 2003. This resulted in higher salary costs
at the Agency compared to 2002 amounts. Legal and professional expenses were
$20,000 higher in 2003 primarily due to corporate matters, included legal
fees related to the implementation of the requirements of the Sarbanes-Oxley
Act of 2002. Directors and committee fees were $23,000 higher in 2003 due to
an increase in the monthly fee paid to directors, which was implemented in
the third quarter of 2002. Marketing expense was $20,000 higher in 2003 due
mainly to the additional costs of implementing a new web site for local area
youth sports: www.firstfedsports.com. The web site provides an additional
marketing source for the Company. The site highlights various teams in the
community involved in leagues and school sports, such as baseball and soccer.
Both individual and team accomplishments are presented and the site includes
game schedules, statistics and pictures.
Total income taxes were $585,000 for the six months ended June 30, 2003
and $626,000 for the same period in 2002. The effective tax rate for the six
months ended June 30, 2003 and 2002, were 39.2% and 39.1% respectively.
Comparison of Three Month Periods Ended June 30, 2003 and 2002
Net income for the three months ended June 30, 2003 was $443,000, a
decrease of $26,000, or 5.5%, from the $469,000 recorded for the three months
ended June 30, 2002. Basic earnings per share increased $0.03, from $0.55
for the three months ended June 30, 2002 to $0.58 for the same period in
2003, while diluted earnings per share increased $0.01, from $0.51 for 2002
to $0.52 in 2003.
Net income for the second quarter of 2003 was lower than net income for
the second quarter of 2002 mainly due to a reduction in net interest income
and an increase in noninterest expense, offset by an increase in noninterest
income and the recording of no provision for loan losses for 2003.
Net interest income was $1,450,000 for the quarter ended June 30, 2003
compared to $1,596,000 for the quarter ended June 30, 2002, a decrease of
$146,000, or 9.1%. Because of the significant decline in general interest
rates during 2003, both interest income and interest expense were lower in
the second quarter of 2003 compared to the second quarter in 2002; however,
the decline in interest income was greater.
Interest income decreased 18.5%, or $500,000, from $2,701,000 for the
quarter ended June 30, 2002 to $2,201,000 for the second quarter of 2003,
primarily due to reductions in interest income from loans. Interest income
from loans decreased $555,000, or 21.4%, from $2,599,000 for the quarter
ended June 30, 2002 to $2,044,000 for the same quarter in 2003 due primarily
to declines in both average outstanding loans and the average yield on net
loans. Total average outstanding loans, including loans held for sale,
declined from $136.66 million for the quarter ended June 30, 2002 to $111.65
million for the quarter ended June 30, 2003, a decline of $25.01 million or
18.3%. This decrease occurred primarily as a result of the Company selling
the majority of new and refinanced home mortgage loans to FNMA. The average
yield on net loans decreased from 7.63% for the second quarter of 2002 to
7.34% for the second quarter of 2003.
Interest income on investment securities decreased from $30,000 for the
three months ended June 30, 2002 to $15,000 for the same period in 2003, due
to a reduction in average total investments. Average total investments for
the second quarter of 2003 were $967,000, down $813,000, or 45.7%, from $1.78
million for the second quarter of 2002. This decline was due to principal
repayments on mortgage-backed securities. The average yield on investment
securities for the three months ended June 30, 2003 was 6.22%, while the
average yield was 6.78% for the same period in 2002.
Interest income on deposits with banks and other was $142,000 for the
quarter ended June 30, 2003 compared to $72,000 for the quarter ended June
30, 2002. The average balance of deposits with banks and other was $42.19
million for the quarter ended June 30, 2003 versus $15.75 million for the
same quarter in 2002. The increase was primarily in interest-bearing demand
deposits, which grew as a result of proceeds from loan sales and an increase
in customer deposits. The average yield on deposits with banks and other was
1.35% for the quarter ended June 30, 2003 compared to 1.83% for the quarter
ended June 30, 2002 due to the decline in short-term interest rates during
2003.
Interest expense decreased $354,000, or 32.0%, from $1,105,000 for the
three months ended June 30, 2002 to $751,000 for the same period in 2003.
The decrease was mainly due to a decline in the average rate paid on
interest-bearing deposits. This decline was due to the decrease in market
interest rates during 2003 and a shift in deposits from longer-term, higher
rate certificates of deposit to savings, NOW and money market accounts. The
average rate on interest-bearing deposits declined from 3.03% for the quarter
ended June 30, 2002 to 1.96% for the quarter ended June 30, 2003. Average
total interest-bearing deposits increased $5.56 million in 2003, from $116.37
million for the quarter ended June 30, 2002 to $121.93 million for the
quarter ended June 30, 2003. Average total interest-bearing demand deposits
- - NOW, savings and money market accounts increased $11.83 million, from
$51.58 million for the second quarter of 2002 to $63.41 million for the
second quarter of 2003. Average total certificates of deposit declined $6.28
million, from $64.79 million for the second quarter of 2002 to $58.51 million
for the second quarter of 2003. The majority of the decrease in average
certificates of deposit occurred in one-year to two-year certificates.
Interest expense on FHLB advances decreased $67,000, from $217,000 for
the three months ended June 30, 2002 to $150,000 for the same period in 2003,
due to a decline in total outstanding advances. The average total balance of
FHLB advances decreased from $18.92 million for the second quarter of 2002 to
$14.00 million for the second quarter of 2003. The average rate on FHLB
advances was 4.30% for the three months ended June 30, 2003, compared to
4.60% for the three months ended June 30, 2002.
Net interest income as a percent of interest earning assets was 3.76%
for the three months ended June 30, 2003 versus 4.15% for the same period in
2002. The spread between the yield on interest earning assets and the rate
on interest bearing liabilities was 3.50% and 3.76% for the three months
ended June 30, 2003 and 2002, respectively.
The Company recorded no provision for loan losses for the three months
ended June 30, 2003 compared to $50,000 for the three months ended June 30,
2002. Management's analyses of the allowance for loan losses during the
second quarter of 2003 determined that no additional allocation to the
allowance was warranted for the period.
Noninterest income increased $187,000, or 26.5%, from $705,000 for the
quarter ended June 30, 2002 to $892,000 for the three months ended June 30,
2003. The increase was mainly due to higher commission income from insurance
activities and net gains from loan sales. Insurance sales commissions were
$395,000 for the quarter ended June 30, 2003 compared to $349,000 for the
same period in 2002, an increase of $46,000, or 13.2%. The Company sold
$13.39 million in one-to-four-family residential mortgage loans during the
second quarter of 2003, recording net gains of $293,000, which includes both
the cash gains on the sale of loans totaling $239,000 and the gains from
capitalizing mortgage servicing rights of $54,000. During the second quarter
of 2002, the Company sold $5.35 million in home mortgage loans, recording net
gains of $115,000, including both the cash gains on the sale of loans
totaling $53,000 and the gains from capitalizing mortgage servicing rights of
$62,000.
Noninterest expense was $1,612,000 for the three months ended June 30,
2003 compared to $1,483,000 for the same period in 2002, an increase of
$129,000, or 8.7%. Noninterest expense was higher in 2003 primarily due to
increases in salary and benefits expense, which was $108,000, or 12.9%,
higher in the second quarter of 2003 compared to the second quarter of 2002.
Salary and benefits expense was higher in 2003 due mainly to normal salary
raises, higher salary costs at the Agency compared to 2002 amounts due to
changing to a commission basis for certain producers in 2003, increases in
health insurance premiums and payroll taxes.
Total income taxes for the three months ended June 30, 2003 were
$287,000, compared to $299,000 recorded for the same period in 2002, a
decrease of $12,000, or 4.0%. The effective tax rates for the three months
ended June 30, 2003 and 2002, were 39.3% and 38.9%, respectively.
Business Industry Segments
The Company's primary business involves the typical banking services of
generating loans and receiving deposits. Through PASC, the Company also
provides insurance and brokerage services to customers. The following
segment financial information has been derived from the internal
profitability reporting system used by management to monitor and manage the
financial performance of the Company.
Six Months Ended June 30, 2003
(unaudited, in thousands)
Insurance/
Banking Brokerage
Services Services Company Eliminations Total
- -----------------------------------------------------------------------------
Interest income $ 4,530 $ -- $ 4,530 $ -- $ 4,530
Interest expense 1,589 -- 1,589 -- 1,589
Noninterest income 934 851 1,785 (42) 1,743
Noninterest expense 2,514 719 3,233 (42) 3,191
Net income 828 80 908 -- 908
Total assets 168,952 1,833 170,785 (2,097) 168,688
Six Months Ended June 30, 2002
(unaudited, in thousands)
Insurance/
Banking Brokerage
Services Services Company Eliminations Total
- -----------------------------------------------------------------------------
Interest income $ 5,439 $ -- $ 5,439 $ -- $ 5,439
Interest expense 2,286 -- 2,286 -- 2,286
Noninterest income 646 879 1,525 (40) 1,485
Noninterest expense 2,393 576 2,969 (40) 2,929
Net income 787 186 973 -- 973
Total assets 165,293 1,220 166,513 (1,549) 164,964
Three Months Ended June 30, 2003
(unaudited, in thousands)
Insurance/
Banking Brokerage
Services Services Company Eliminations Total
- -----------------------------------------------------------------------------
Interest income $ 2,201 $ -- $ 2,201 $ -- $ 2,201
Interest expense 751 -- 751 -- 751
Noninterest income 488 425 913 (21) 892
Noninterest expense 1,269 364 1,633 (21) 1,612
Net income 406 37 443 -- 443
Three Months Ended June 30, 2002
(unaudited, in thousands)
Insurance/
Banking Brokerage
Services Services Company Eliminations Total
- -----------------------------------------------------------------------------
Interest income $ 2,701 -- 2,701 -- 2,701
Interest expense 1,105 -- 1,105 -- 1,105
Noninterest income 340 385 725 (20) 705
Noninterest expense 1,222 281 1,503 (20) 1,483
Net income 402 67 469 -- 469
Critical Accounting Policies
The accounting and reporting policies of the Company are in accordance
with accounting principles generally accepted in the United States and
conform to general practices within the banking industry. The notes to the
consolidated financial statements contain a summary of the Company's
significant accounting policies, including significant estimates, presented
on pages 34 through 38 of the Annual Report to Shareholders for the year
ended December 31, 2002. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions. The
financial position and results of operations can be affected by these
estimates and assumptions and are integral to the understanding of reported
results. Critical accounting policies are those policies that management
believes are the most important to the portrayal of the Company's financial
condition and results, and they require management to make estimates that are
difficult, subjective, or complex.
Allowance for Loan Losses - The allowance for loan losses provides
coverage for probable losses inherent in the Company's loan portfolio.
Management evaluates the adequacy of the allowance for credit losses each
quarter based on changes, if any, in underwriting activities, the loan
portfolio composition (including product mix and geographic, industry or
customer-specific concentrations), trends in loan performance, regulatory
guidance and economic factors. This evaluation is inherently subjective, as
it requires the use of significant management estimates. Many factors can
affect management's estimates of specific and expected losses, including
volatility of default probabilities, rating migrations, loss severity and
economic and political conditions. The allowance is increased through
provisions charged to operating earnings and reduced by net charge-offs.
The Company determines the amount of the allowance based on relative
risk characteristics of the loan portfolio. The allowance recorded for
commercial loans is based on reviews of individual credit relationships and
an analysis of the migration of commercial loans and actual loss experience.
The allowance recorded for homogeneous consumer loans is based on an analysis
of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy
experiences, and historical losses, adjusted for current trends, for each
homogeneous category or group of loans. The allowance for credit losses
relating to impaired loans is based on the loan's observable market price,
the collateral for certain collateral-dependent loans, or the discounted cash
flows using the loan's effective interest rate. A loan is considered
impaired when, based on current information and events, it is probable that
the Company will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for the
delay, the borrower's prior payment record and the amount of the shortfall in
relation to the principal and interest owed. Because the Company reviews
loans on an individual basis for impairment, the Company does not use a
specific timeframe of delinquency after which a specific loan is assumed to
be impaired.
Large groups of smaller balance homogenous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer and residential loans for impairment
disclosures.
Regardless of the extent of the Company's analysis of customer
performance, portfolio trends or risk management processes, certain inherent
but undetected losses are probable within the loan portfolio. This is due to
several factors including inherent delays in obtaining information regarding
a customer's financial condition or changes in their unique business
conditions, the judgmental nature of individual loan evaluations, collateral
assessments and the interpretation of economic trends. Volatility of
economic or customer-specific conditions affecting the identification and
estimation of losses for larger non-homogeneous credits and the sensitivity
of assumptions utilized to establish allowances for homogenous groups of
loans are among other factors. The Company estimates a range of inherent
losses related to the existence of these exposures. The estimates are based
upon the Company's evaluation of imprecision risk associated with the
commercial and consumer allowance levels and the estimated impact of the
current economic environment.
Mortgage Servicing Rights - Mortgage servicing rights ("MSRs")
associated with loans originated and sold, where servicing is retained, are
capitalized and included in the consolidated balance sheet. The value of the
capitalized servicing rights represents the present value of the future
servicing fees arising from the right to service loans in the portfolio.
Critical accounting policies for MSRs relate to the initial valuation and
subsequent impairment tests. The methodology used to determine the valuation
of MSRs requires the development and use of a number of estimates, including
anticipated principal amortization and prepayments of that principal balance.
Events that may significantly affect the estimates used are changes in
interest rates, mortgage loan prepayment speeds and the payment performance
of the underlying loans. The carrying value of the MSRs is periodically
reviewed for impairment based on a determination of fair value. For purposes
of measuring impairment, the servicing rights are compared to a valuation
prepared based on a discounted cash flow methodology, utilizing current
prepayment speeds and discount rates. Impairment, if any, is recognized
through a valuation allowance and is recorded as amortization of intangible
assets. As of June 30, 2003 and December 31, 2002, mortgage servicing rights
had carrying values of $170,000 and $192,000, respectively.
Postretirement Benefit Obligation - Management obtains an independent
actuarial calculation to estimate the postretirement benefit obligation. The
calculation is largely dependent on estimates relating to future health care
cost trends and the number of employees that will retire and be eligible for
benefits under the plan.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, FHLB advances and proceeds from mortgage loan sales.
While maturities and scheduled amortization of loans are predictable sources
of funds, deposit flows and mortgage prepayments are greatly influenced by
general interest rates, economic conditions, and competition. Office of
Thrift Supervision regulations require the Bank to maintain sufficient
liquidity to ensure its safe and sound operation.
A review of the Condensed Consolidated Statements of Cash Flows included
in the accompanying financial statements shows that the Company's cash and
cash equivalents ("cash") increased $17.85 million from December 31, 2002 to
June 30, 2003, compared to an increase of $8.76 million for the first six
months of 2002. During the six months ended June 30, 2003, cash was
primarily provided from earnings, proceeds from sales of one-to-four-family
residential mortgage loans, loan repayments in excess of loan originations,
and an increase in demand, money market, NOW and savings accounts. During
this period, cash was primarily used to fund originations of loans held for
sale, a decrease in certificates of deposit, repayment of FHLB advances, and
to purchase treasury stock.
During the six months ended June 30, 2002, cash was primarily provided
from earnings, proceeds from sales of one-to-four-family residential mortgage
loans, loan repayments in excess of loan originations, an increase in demand,
money market, NOW and savings accounts, and proceeds from FHLB advances.
During this period, cash was primarily used to fund originations of loans
held for sale, a decrease in certificates of deposit, and the repayment of
FHLB advances and to purchase treasury stock.
The Company's primary investment activity during the six months ended
June 30, 2003 was the origination of loans, including mortgage loans held for
sale. During the six months ended June 30, 2003 and 2002, the Company
disbursed funds for mortgage loans (not including refinanced mortgage loans)
in the amounts of $13.54 million and $13.11 million, respectively, commercial
loans in the amounts of $4.98 million and $3.12 million, respectively, and
consumer loans in the amounts of $7.22 million and $5.62 million,
respectively.
As of June 30, 2003, the Company had outstanding commitments (including
undisbursed loan proceeds) of $4.98 million. The Company anticipates it will
have sufficient funds available to meet its current loan origination
commitments. Certificates of deposit, which are scheduled to mature in one
year or less from June 30, 2003, totaled $41.39 million. Management believes
a significant portion of such deposits will remain with the Company.
At June 30, 2003, the Bank exceeded all of its regulatory capital
requirements with tangible capital and core capital both at $11.40 million or
7.02% of total adjusted tangible assets, core capital at $11.40 million or
7.02% of adjusted total assets, and risk-based capital at $12.54 million or
13.78% of total risk-weighted assets. The required ratios are 1.5% for
tangible capital to tangible assets, 2% for core capital to total adjusted
tangible assets, 4.0% for core capital to adjusted total assets and 8.0% for
risk-based capital to risk-weighted assets.
Current Accounting Issues
In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." This Statement establishes
standards for classifying and measuring as liabilities certain financial
instruments that embody obligations of the issuer and have characteristics of
both liabilities and equity. Statement No. 150 must be applied immediately
to instruments entered into or modified after May 31, 2003 and to all other
instruments that exist as of the beginning of the third quarter of 2003. The
adoption of Statement No. 150 did not have a material impact on the Company's
consolidated financial statements.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company
maintains controls and procedures designed to ensure that information
required to be disclosed in the reports that the Company files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed within 90 days of the filing of this
report, the chief executive officer and the principal financial officer of
the Company concluded that the Company's disclosure controls and procedures
were adequate.
(b) Changes in internal controls. The Company made no significant changes
in its internal controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation of those controls by
the chief executive officer and principal financial officer.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business.
Such routine legal proceedings, in the aggregate, are believed by management
to be immaterial to the Company's financial condition or results of
operations.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders held on April 22, 2003,
the Company's stockholders approved the following items:
1. Elected Clinton C. Atkins to a three-year term as
director:
Broker
For Withheld Non-Votes
----- -------- ---------
Number 663,737 15,315 0
Percent 97.7% 2.3% 0%
2. Elected Ronald Kiddoo to a three-year term as director:
Broker
For Withheld Non-Votes
----- -------- ---------
Number 660,898 18,154 0
Percent 97.3% 2.7% 0%
3. Approved the appointment of BKD, LLP, as independent
auditors of Great American Bancorp, Inc., for the fiscal
year ending December 31, 2003:
Broker
For Against Abstain Non-Votes
----- ------- ------- ---------
Number 658,298 16,214 4,540 0
Percent 96.9% 2.4% 0.7% 0%
The following directors held terms of office which continued
after the meeting:
Mr. Ronald Guenther
Mr. George Rouse
Mr. Jack Troxell
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
3.1 Certificate of Incorporation of Great American Bancorp, Inc.*
3.2 By-laws of Great American Bancorp, Inc.*
11.0 Statement re: computation of per share earnings
31.1 Rule 13a-14(a)/15d-14(a) Chief Executive Officer Certification
31.2 Rule 13a-14(a)/15d-14(a) Chief Financial Officer Certification
32.0 Section 1350 Certifications
b. Reports on Form 8-K
1. On April 15, 2003, the Registrant filed a Current Report on
Form 8-K reporting information under Items 5 and 7, incorporating by
reference a press release dated April 15, 2003, relating to the Registrant's
unaudited results for the quarter ended March 31, 2003.
_______________
* Incorporated herein by reference into this document from Form
S-1 Registration Statement, as amended, filed on March 24, 1995,
Registration No. 33-90614.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Great American Bancorp, Inc.
Dated: August 13, 2003 /s/ George R. Rouse
----------------------- ----------------------------
George R. Rouse
President and
Chief Executive Officer
Dated: August 13, 2003 /s/ Jane F. Adams
-------------------------- ----------------------------
Jane F. Adams
Chief Financial Officer,
Secretary and Treasurer
Exhibit 11.0
Statement re: computation of per share earnings
Earnings per share (unaudited)
Earnings per share (EPS) were computed as follows
(dollar amounts in thousands except share data):
Six Months Ended
June 30, 2003
-------------------------------
Weighted
Average Per Share
Income Shares Amount
-------------------------------
Basic Earnings Per Share
Income available to common stockholders $ 908 772,244 $ 1.18
Effect of Dilutive Securities
Stock options 79,239
Unearned incentive plan shares 5,368
-------------------------------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversion $ 908 856,851 $ 1.06
===============================
Six Months Ended
June 30, 2002
-------------------------------
Weighted
Average Per Share
Income Shares Amount
-------------------------------
Basic Earnings Per Share
Income available to common stockholders $ 973 849,908 $ 1.14
Effect of Dilutive Securities
Stock options 62,588
Unearned incentive plan shares 5,398
-------------------------------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversion $ 973 917,894 $ 1.06
===============================
Three Months Ended
June 30, 2003
-------------------------------
Weighted
Average Per Share
Income Shares Amount
-------------------------------
Basic Earnings Per Share
Income available to common stockholders $ 443 764,747 $ 0.58
Effect of Dilutive Securities
Stock options 79,810
Unearned incentive plan shares 5,337
-------------------------------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversion $ 443 849,894 $ 0.52
===============================
Three Months Ended
June 30, 2002
-------------------------------
Weighted
Average Per Share
Income Shares Amount
-------------------------------
Basic Earnings Per Share
Income available to common stockholders $ 469 845,132 $ 0.55
Effect of Dilutive Securities
Stock options 67,439
Unearned incentive plan shares 5,360
-------------------------------
Diluted Earnings Per Share
Income available to common stockholders
and assumed conversion $ 469 917,931 $ 0.51
===============================
EXHIBIT 31.1
RULE 13a-14(a)/15d-14(a)
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, George R. Rouse, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Great American
Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the small business
issuer, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which
this report is being prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on
such evaluation; and
(c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the small
business issuer's most recent fiscal quarter (the small business
issuer's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
small business issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of the small business issuer's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date: August 13, 2003 /s/ George R. Rouse
----------------------- -----------------------
George R. Rouse
President and Chief Executive Officer
EXHIBIT 31.2
RULE 13a-14(a)/15d-14(a)
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Jane F. Adams, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Great American
Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the small business issuer and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the small
business issuer, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on
such evaluation; and
(c) Disclosed in this report any change in the small business
issuer's internal control over financial reporting that occurred during
the small business issuer's most recent fiscal quarter (the small
business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the small business issuer's internal control over
financial reporting; and
5. The small business issuer's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the small business issuer's auditors and the
audit committee of the small business issuer's board of directors (or
persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the small business issuer's
ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting.
Date: August 13, 2003 /s/ Jane F. Adams
--------------------------- -----------------------------
Jane F. Adams
Chief Financial Officer,
Secretary and Treasurer
EXHIBIT 32.0
SECTION 1350 CERTIFICATIONS
In connection with the Quarterly Report of Great American Bancorp, Inc.
(the "Company") on Form 10-QSB for the fiscal quarter ended June 30, 2003 as
filed with the Securities and Exchange Commission (the "Report"), the
undersigned certify, pursuant to 18 U.S.C. 1350, as added by Section 906 of
the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company as of and for the period covered by the
Report.
/s/ George R. Rouse
-------------------------------------
George R. Rouse
President and Chief Executive Officer
/s/ Jane F. Adams
-------------------------------------
Jane F. Adams
Chief Financial Officer, Secretary and
Treasurer
Date: August 13, 2003
--------------------------------
A signed original of this written statement required by Section 906 has been
provided to Great American Bancorp, Inc. and will be retained by Great
American Bancorp, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
16