UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 (I.R.S. Employer
incorporation or organization) Identification No.)
329 W. Main St.
19th Floor
Louisville, Kentucky 40202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (502) 562-6000
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this 10-K or any amendment to this Form
10-K. [x]
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 filing
requirements for the past 90 days. Yes [ X ] No [ ]
<PAGE>
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 5, 1997 was $419,845,388. The number of shares
outstanding of the Registrant's Common Stock as of March 5, 1997 was
14,021,732.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the Form
10-K part indicated:
DOCUMENT FORM 10-K
(1) Annual report to security holders for Part I, II
the year ended December 31, 1996
(2) Proxy statement for the annual Part III
meeting of shareholders to be
held on April 23, 1997
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Great Financial Corporation (Company) was incorporated under the laws
of Delaware in December 1993 to become a savings and loan holding company, with
Great Financial Bank, FSB (Bank), a federally chartered stock savings bank, as
its sole first tier subsidiary. In March, 1994 the Company acquired all of the
capital stock of the Bank issued upon the Bank's conversion from mutual to stock
form. In July 1995 the Company acquired First Federal Savings Bank of Richmond
(FFSB). FFSB merged with the Bank in July 1996. In June 1996 the Company
acquired Lexington Federal Savings Bank (LFSB). LFSB merged with the Bank upon
acquisition. The Company currently engages in no significant business activities
other than those conducted through the Bank and the Bank's subsidiaries. The
Company is the largest (based on total assets of its subsidiaries) independently
owned financial institution headquartered in Kentucky.
The Bank's principal business is attracting retail deposits from the
general public in the areas surrounding its branch offices and investing those
deposits, together with funds generated from operations, loan and investment
principal repayments, and borrowings, in one-to-four family, owner-occupied,
residential mortgage loans, multi-family, commercial real estate, construction
and land loans, commercial business loans and consumer loans. In addition, the
Bank invests in securities issued by the U.S. Government and agencies thereof,
mortgage-backed securities and other investments permitted by federal laws and
regulations. The Bank originates and purchases loans for investment and for
sale. The Bank's revenue is derived principally from interest and fees on loans,
mortgage loan servicing and subservicing activities, interest and dividends on
its investments and mortgage-backed securities and mortgage banking activities.
The Bank's primary sources of funds are deposits, principal and interest
payments on loans, proceeds from the sale of loans and, to a lesser extent,
Federal Home Loan Bank (FHLB) advances and other borrowed funds.
MARKET AREA AND COMPETITION
The Bank is a community-oriented savings bank which offers its
customers a full range of retail products and services, as well as commercial
loan and mortgage loan products. The Bank's deposit gathering, consumer lending,
and a major portion of its retail lending markets are concentrated in the
communities surrounding its forty-five full service offices. The Bank's retail
lending activities primarily are concentrated in the three major markets of
Kentucky--Louisville metropolitan area, Owensboro metropolitan area and Central
Kentucky. The Bank also markets retail lending products nationwide through
telemarketing. The Bank conducts retail mortgage lending activities under the
names Great Financial Mortgage and Lincoln Service Mortgage through retail
production offices located in Louisville, Owensboro, Paducah and Lexington,
Kentucky.
Approximately 67% of the Bank's deposits are in branches located in the
Louisville metropolitan area (including a new office in New Albany, Indiana)
while 21% are located in the Owensboro metropolitan area and Western Kentucky
and 12% in Central Kentucky. With the acquisition of LFSB in June 1996, the
Bank's presence in Central Kentucky increased to 11 branch locations and
approximately $400 million in deposits.
The Kentucky economy is characterized by a relatively high
concentration of employment in the manufacturing and agricultural sectors.
Kentucky's economic performance typically mirrors the national economy and shows
moderate economic fluctuations. The Bank's three principal metropolitan markets
in Kentucky reflect the economic diversity in the Commonwealth of Kentucky.
The Louisville metropolitan area, the Bank's headquarters city and
principal market, has gradually transitioned during the past two decades from a
manufacturing economy to a service and retail economy. Louisville is a major hub
for health services, transportation, convention services and trade, while it
retains a significant industrial economy. Major employers in the Louisville
metropolitan area include UPS; Humana, Inc.; Ford Motor Company; Columbia/HCA
Health Care; General Electric; Brown Forman Corporation; Providian Corporation
and the University of Louisville.
<PAGE>
The Owensboro metropolitan area is the third largest metropolitan area
in Kentucky and is considered the industrial hub of Western Kentucky, with major
manufacturers in aluminum, steel, mining, and natural gas. Among the major
employers in this area are Commonwealth Aluminum, Pyramid Mining, Pinkerton
Tobacco, Texas Gas Transmission Corporation, and Kimberly-Clark.
Employment and income in the Lexington metropolitan area (the second
largest metropolitan area in Kentucky) and Central Kentucky area are somewhat
concentrated in the service sector, especially as it relates to tourism and
education.
The Bank faces significant competition in Kentucky in originating,
purchasing and selling loans on a retail basis. The Bank's principal competitors
are financial institutions (many of which are superregional banks) and mortgage
banking companies, many of which have greater financial resources than does the
Bank. The Bank's competition for loans comes principally from commercial banks,
thrift institutions, mortgage brokers and banking companies and insurance
companies. Competition for deposits has historically come from commercial banks
and thrift institutions. In addition, the Bank faces increasing competition for
deposits from non-bank institutions, such as brokerage firms and insurance
companies in such areas as short-term money market funds, corporate and
government securities funds, mutual funds and annuities. Competition in retail
lending may also increase as a result of the lifting of restrictions on the
interstate operations of financial institutions and from the acquisition of
Kentucky-based financial institutions by out-of-state financial institutions.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists
primarily of conventional first mortgage loans secured by one-to-four family
residences, with a growing emphasis on diversification by originating
multi-family residential and commercial real estate loans, construction and
permanent loans, consumer loans, and commercial business loans. The types of
loans that the Bank may originate or purchase are subject to federal and state
laws and regulations. Interest rates charged by the Bank on loans are affected
by the demand for such loans and the supply of money available for lending
purposes and the rates offered by competitors. These factors are, in turn,
affected by, among other things, economic conditions, monetary policies of the
federal government, including the Federal Reserve Board, and legislative tax
policies.
<PAGE>
The following table sets forth the composition of the Company's loan portfolio
in dollar amounts and in percentages of the respective portfolios at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------- ------------------- ------------------- -------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to-four family:
Held for investment $1,392,761 69.95% $1,342,667 72.50% $1,156,491 77.74% $ 829,517 57.39% $ 661,501 60.41%
Held for sale 65,546 3.29% 144,163 7.78% 91,725 6.16% 423,993 29.34% 291,096 26.58%
Multi-family 150,816 7.58% 132,055 7.13% 106,499 7.16% 97,215 6.73% 80,015 7.31%
Commercial real estate 102,409 5.14% 62,008 3.35% 44,652 3.00% 45,323 3.13% 34,548 3.16%
Construction and land 129,770 6.52% 87,509 4.73% 54,286 3.65% 30,774 2.13% 24,281 2.22%
---------- ------- ---------- ------- ----------- ------- ---------- ------- ----------- -------
Total mortgage loans 1,841,302 92.48% 1,768,402 95.49% 1,453,653 97.71% 1,426,822 98.72% 1,091,441 99.68%
Consumer and other loans 149,647 7.52% 83,568 4.51% 34,053 2.29% 18,462 1.28% 3,521 0.32%
---------- ------- ---------- ------- ----------- ------- ---------- ------- ----------- -------
Total loans 1,990,949 100.00% 1,851,970 100.00% 1,487,706 100.00% 1,445,284 100.00% 1,094,962 100.00%
======= ======= ======= ======= =======
Less:
Undisbursed portion of
mortgage loans (41,344) (24,138) (18,515) (8,694) (6,150)
Unearned discounts
and unamortized fees (3,010) (4,485) (4,304) (4,168) (3,295)
Allowance for loan losses (13,538) (11,821) (11,076) (10,108) (2,426)
---------- ---------- ---------- ----------- ----------
Loans receivable, net $1,933,057 $1,811,526 $1,453,811 $1,422,314 $1,083,091
========== ========== ========== =========== ==========
</TABLE>
<PAGE>
The following table shows the maturity of the Company's loans held for
investment at December 31, 1996. The table does not include the effects of
prepayments or scheduled principal amortization.
<TABLE>
<CAPTION>
At December 31, 1996
--------------------------------------------------------------------------------------------
One-to-Four Multi- Commercial Construction Consumer Total Loans
Family Family Real Estate and Land and Other Receivable
--------------- ------------ ------------- -------------- ------------- ---------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year $ 526 $ 271 $ 242 $ 66,951 $ 28,276 $ 96,266
--------------- ------------ ------------- -------------- ------------- ---------------
After one year:
Over 1 to 3 years 3,522 3,232 3,015 16,778 12,694 39,241
Over 3 to 5 years 10,554 3,731 1,399 74 39,558 55,316
Over 5 to 10 years 74,941 4,812 13,927 1,390 55,388 150,458
Over 10 to 20 years 386,058 77,171 60,229 17,169 13,678 554,305
Over 20 years 917,160 61,599 23,597 27,408 53 1,029,817
--------------- ------------ ------------- -------------- ------------- ---------------
Total due after one
year 1,392,235 150,545 102,167 62,819 121,371 1,829,137
--------------- ------------ ------------- -------------- ------------- ---------------
Total amounts due $1,392,761 $150,816 $102,409 $129,770 $149,647 1,925,403
=============== ============ ============= ============== =============
Less:
Undisbursed portion of
mortgage loans (41,344)
Unearned discounts and
unamortized fees (3,010)
Allowance for loan losses (13,538)
---------------
Loans receivable, net $1,867,511
===============
</TABLE>
<PAGE>
The following table sets forth as of December 31, 1996 the dollar amount of
loans due after December 31, 1997, and whether such loans have fixed interest
rates of adjustable interest rates.
<TABLE>
<CAPTION>
Fixed Adjustable
Rate Rate Total
------------ ------------ -------------
(in thousands)
<S> <C> <C> <C>
One-to-four family residential mortgage loans $752,456 $639,779 $1,392,235
Multi-family residential mortgage loans 38,437 112,108 150,545
Commercial real estate loans 33,526 68,641 102,167
Construction and land loans 15,882 46,937 62,819
Consumer and other loans 86,623 34,748 121,371
------------ ------------ -------------
Total $926,924 $902,213 $1,829,137
============ ============ =============
</TABLE>
The following table sets forth the Company's loan originations, purchases,
sales, principal repayments and principal charged off for the periods indicated
(including loans held for sale).
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------
1996 1995 1994
------------ ------------ -------------
(in thousands)
<S> <C> <C> <C>
Mortgage loans (gross):
At beginning of period $1,768,402 $1,453,653 $1,426,822
------------ ------------ -------------
Mortgage loans originated:
One-to-four family 540,966 532,701 1,202,341
Multi-family 26,796 18,418 14,512
Commercial real estate 39,376 24,418 9,963
Construction and land 156,222 131,616 97,071
------------ ------------ -------------
Total mortgage loans originated 763,360 707,153 1,323,887
Mortgage loans purchased 210,850 183,727 165,699
------------ ------------ -------------
Total mortgage loans
originated and purchased 974,210 890,880 1,489,586
Principal repayments (424,538) (308,995) (274,786)
Sales of mortgage loans (476,495) (265,898) (1,179,219)
Principal charged off (277) (1,238) (1,374)
Transfers to claims receivable (7,376)
------------ ------------ -------------
At end of period 1,841,302 1,768,402 1,453,653
------------ ------------ -------------
Consumer and other loans (gross):
At beginning of period 83,568 34,053 18,462
Other loans originated 136,952 76,088 31,912
Other loans purchased 2,701 12,995
Principal repayments (72,303) (38,962) (16,319)
Principal charged off (1,271) (606) (2)
------------ ------------ -------------
At end of period 149,647 83,568 34,053
------------ ------------ -------------
Total loans (gross) at end of period $1,990,949 $1,851,970 $1,487,706
============ ============ =============
</TABLE>
<PAGE>
ONE-TO-FOUR FAMILY MORTGAGE LENDING. The Bank offers conventional and
FHA/VA fixed-rate mortgage loans and adjustable rate mortgage (ARM) loans, with
maturities up to 30 years, secured by owner-occupied, one-to-four family
residences, including, to a much lesser extent, condominium units and
townhouses. Depending on market conditions, the Bank may either keep for
portfolio or sell these loans into the secondary market. See "Mortgage Banking
Activities." To a much lesser extent, the Bank makes loans on non-owner occupied
one-to-four family properties acquired as an investment by the borrowers.
Certain FHA/VA loans are also purchased for investment even though they are
delinquent. See "Delinquent Loans."
Loan originations are generally obtained from existing or past
customers, members of the local communities and referrals from local real estate
agents, builders, attorneys and other professionals. In addition, the Bank has a
network of commissioned originators who actively solicit mortgage loan
applications in the Bank's primary market areas and loan counselors and branch
managers who receive mortgage loan applications in the Bank's branch offices.
During 1996, the Bank originated mortgage loans through existing Bank
branches and three loan production offices. Also, mortgage loans continue to be
originated on a nationwide basis through the Bank's Corporate and Affinity
Relations Division (CARD), headquarted in Owensboro. CARD's primary focus has
been to develop business relationships with national corporations, credit unions
and professional associations for the purpose of providing residential first
mortgages to their relocating employees or members through a centralized
telesales environment. Although most of CARD's loan production is on a retail
basis, a portion continues to be purchased on a wholesale basis.
The Bank offers fixed-rate mortgage loans with terms ranging from ten
to thirty years. In addition, some longer term loan products have fixed rates
for 5-10 years, which adjust to market rates at the end of the initial term. The
Bank currently offers a number of ARM loan programs with interest rates which
adjust annually or every three years. These ARM loans may carry an initial
interest rate which is less than the fully indexed rate for the loan. The
initial discounted rate is determined by the Bank in accordance with market and
competitive factors. All ARM loans currently offered by the Bank have periodic
caps of 2% and lifetime ceilings and floors. Generally, ARM loans pose credit
risks somewhat greater than the risk inherent in fixed-rate loans primarily
because, as interest rates rise, the underlying payments of the borrower rise,
increasing the potential for default.
One-to-four family conventional residential mortgage loans are
generally underwritten according to Federal National Mortgage Association (FNMA)
and Federal Home Loan Mortgage Corporation (FHLMC) guidelines. The Bank's policy
on owner-occupied, one-to-four family residential mortgage loans is to lend up
to the lesser of the sales price or 80% of the appraised value of the property
securing the loan, or the lesser of the sales price or up to 95% if private
mortgage insurance is obtained on amounts which exceed 80% of the appraised
value of the property. In certain cases, on lower risk loans above 80% to 90%
loan-to-value, the Bank will waive the required private mortgage insurance in
exchange for higher yield. On non-owner occupied one-to-four family residential
mortgage loans, the Bank normally allows a maximum 80% loan-to-value ratio.
For a discussion of the origination and purchase of one-to-four family
residential loans for resale in the secondary market, see "Mortgage Banking
Activities."
MULTI-FAMILY RESIDENTIAL AND COMMERCIAL REAL ESTATE LENDING. As of
December 31, 1996, $102.4 million, or 5.1% of the Bank's total loan portfolio
(including mortgage loans held for sale), consisted of commercial real estate
loans and $150.8 million, or 7.6% of the Bank's total loan portfolio, consisted
of multi-family loans.
The commercial real estate and multi-family residential loans in the
Bank's portfolio consist of fixed-rate and ARM loans which were originated at
prevailing market rates. The Bank's policy has been to originate commercial real
estate or multi-family loans only in its market area. These loans are generally
made in amounts up to 75% of the appraised value of the property. In making such
loans, the Bank primarily considers the net operating income generated by the
real estate to support the debt service, the financial resources and income
level and managerial expertise of the borrower, the marketability of the
property, and the Bank's lending experience with the borrower. The Bank
generally obtains personal guarantees from the principals of the borrower. Loans
secured by commercial and multi-family real estate involve a greater degree of
risk than one-to-four family residential loans. To a much lesser extent, the
Bank participates with other lenders in making commercial and multi-family real
estate loans. To a limited extent, the Bank also invests in real estate
partnerships which generate low income housing and historic tax credits.
<PAGE>
At December 31, 1996, the average outstanding loan balance on
multi-family loans was approximately $548,200. The Bank's largest multi-family
loan at December 31, 1996 had an outstanding balance of $9.7 million and is
secured by a 395-unit apartment building and small retail shopping center
located in New Albany, Indiana and is currently performing according to its
terms.
The Bank's commercial real estate loans typically are secured by
properties such as retail stores, office buildings, and strip shopping centers.
At December 31, 1996, the average commercial real estate loan balance was
$514,700. The Bank's largest commercial real estate loan at December 31, 1996,
had an outstanding balance of $9.5 million and is secured by a multi-tenant
office building facility containing approximately 137,000 square feet located in
Louisville and is currently performing according to its terms.
At December 31, 1996, the Bank's largest borrower had an aggregate of
$29.1 million in loans which consisted of twenty-one loans secured by commercial
real estate, all of which are current. This aggregate amount does not exceed the
Bank's loans-to-one borrower limit.
CONSTRUCTION AND LAND LENDING. The Bank originates loans to finance the
construction of one-to-four family homes and, to a lesser extent, multi-family
and commercial real estate properties. In addition, the Bank also originates a
limited number of loans for the acquisition and development of land on which the
purchaser may then build. At December 31 1996 construction and land loans
totaled $117.2 million and $12.6 million, respectively, or 5.9% and 0.6%,
respectively, of the Bank's total loan portfolio.
Construction loans on single-family, owner-occupied residential
properties are made on a "pre-sold" basis, or for contractors who have
sufficient financial strength and a proven track record for model and
speculative purposes. Construction borrowers are approved in accordance with the
Bank's commercial loan policy and such borrowers primarily are builders.
Construction loans on one-to-four family properties generally provide for
interest-only payments and have terms of six to nine months. Longer terms of up
to 18 months are typically for construction loans secured by commercial or
multi-family properties. Construction loans on one-to-four family properties are
considered for loan-to-value ratios of up to 80%. Construction loans for
multi-family mortgage loans and commercial real estate loans are considered for
loan-to-value ratios of up to 75%. Loan proceeds are disbursed in increments as
construction progresses and as inspections warrant. Inspections generally are
made by an independent party or an independent Bank inspector. At December 31,
1996, $68.4 million or 58.3% of the Bank's construction loans were secured by
one- to-four family properties.
The Bank has made construction loans on commercial real estate
generally secured by properties used for business purposes such as small office
buildings, residential, industrial, and retail facilities located in the Bank's
primary market areas. At December 31, 1996, the Bank had $48.8 million in
construction loans secured by commercial/investment real estate and multi-family
residential properties.
Construction and land loans afford the Bank the opportunity to increase
the interest rate sensitivity of its loan portfolio and to receive yields
greater than those which are obtainable on loans secured by existing residential
properties. These higher yields correspond to the higher risks associated with
construction and land loans. Construction and land financing is generally
considered to involve a higher degree of risk of loss than long-term financing
on improved, occupied real estate. Risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction or development and the estimated cost
(including interest) of construction.
CONSUMER LENDING. At December 31, 1996, $125.6 million or 6.3% of the
Bank's total loan portfolio consisted of consumer loans, including home equity
loans, credit cards and lines of credit for consumer purposes. The Bank has
increased its level of consumer and other loans from $2.8 million at December
31, 1991, to $149.6 million at December 31, 1996. The Bank is attempting to
increase its level of consumer lending through a competitive pricing structure,
promotional activities, and cross-selling consumer products through its branch
offices, without incurring unacceptable credit risk.
The Bank's home equity and second mortgage loans are secured by
one-to-four family owner-occupied residences, on a fixed-rate basis with terms
of up to 10 years and on an adjustable basis up to 15 years. Generally, these
loans have loan-to-value ratios up to 90%.
<PAGE>
Consumer loans are offered primarily on a fixed-rate, short-term basis.
The underwriting standards employed by the Bank for consumer loans include a
determination of the applicant's payment history on other debts and an
assessment of the borrower's ability to make payments on the proposed loan and
other indebtedness, through the use of an automated application processing and
credit scoring system. In addition to the creditworthiness of the applicant, the
underwriting process also includes a comparison of the value of the security, if
any, to the proposed loan amount. The Bank's consumer loans tend to have higher
interest rates and shorter maturities than one-to-four family first mortgage
loans, but are considered to entail a greater risk of default.
The Bank has also entered into a Bank Card Agreement with another
Louisville financial institution, whereby the Bank issues MasterCard and Visa
cards to its customers. In general, the credit card program is administered by
the other institution, with the proceeds from the program being split between
such institution and the Bank.
The Bank has also implemented "branchless banking" through a "Direct
Bank" telesales environment. In 1996 the emphasis of the Direct Bank was on
cross-selling deposit products to the Bank's existing mortgage loan servicing
customers nationwide. This will be followed by cross-selling loan and deposit
products to new CARD residential mortgage customers and direct mail selling of
bank products to consumers in non-branch areas of Kentucky and nationwide.
LOAN APPROVAL PROCEDURES AND AUTHORITY. Loan approval authority has
been granted by the Board of Directors to certain approved Bank underwriters for
loans up to $400,000 on one-to-four family dwelling units. The Board has granted
loan approval authority for one-to-four-family mortgage loans up to $500,000 if
approved by three qualified Bank underwriters. Further approval authority has
been granted up to $1,000,000 for one-to-four family mortgage loans if approved
by four authorized Bank underwriters (which approval is subsequently reviewed by
the Executive Loan Committee). All one-to-four family loans over $1,000,000 must
be approved by the Executive Loan Committee.
Multi-family residential and commercial real estate loan relationships
under $1,000,000 are required to be approved by authorized Bank officers and
such relationships over $1,000,000 and below $2.5 million must also be approved
by the Senior Loan Committee. Any loans or relationships in excess of $2.5
million must be approved by the Executive Loan Committee and reviewed with the
Board of Directors.
Loan approval authority has been granted to certain loan officers for
consumer loans up to $500,000. Any consumer loan in excess of $500,000 must also
be approved by the Executive Loan Committee.
Generally, commercial business loans of $500,000 or more must be
approved by the Executive Loan Committee. However, commercial loan approval
authority has been granted to certain loan officers up to $500,000. Also,
certain members of the Executive Loan Committee may approve, under select
circumstances, commercial loan relationship exposure up to $1,000,000. Any loan
approved pursuant to this authority must be reported to the Executive Loan
Committee at the next regular scheduled meeting.
Loan participations up to $500,000 must be approved by the Senior Loan
Committee. Participations in excess of this amount must be approved by the
Executive Loan Committee.
Construction loan relationships under $1,000,000 may be approved by
certain officers. Such loan relationships in excess of this amount must be
approved by one or more of the appropriate Bank Loan Committees.
Upon receipt of a completed mortgage loan application from a
prospective borrower, the Bank verifies credit, income and other information
and, if necessary, obtains additional financial or credit related information.
An appraisal of the real estate used for collateral is also obtained on purchase
money mortgages and certain refinance transactions. All appraisals are performed
by licensed and/or certified general or residential appraisers. The Board
periodically reviews the Bank's appraisal policies, which are contained in the
Bank's Appraisal Policy Statement.
The Bank's policy is to require title and hazard insurance on all real
estate loans. Borrowers with a loan-to-value ratio over 80% generally are
required to advance funds together with each payment of principal and interest
to a mortgage impound account from which the Bank makes disbursements for items
such as real estate taxes, hazard insurance premiums and private mortgage
insurance premiums, if required.
<PAGE>
DELINQUENCIES, CLASSIFIED ASSETS AND IMPAIRED LOANS
LOAN COLLECTION PROCEDURES. When a borrower fails to make a required
payment on a loan, the Bank takes a number of steps to have the borrower cure
the delinquency and restore the loan to current status. In the case of
residential mortgage loans and consumer loans, the Bank generally sends the
borrower a written notice of non-payment after the loan is first past due. In
the event payment is not then received, additional letters and phone calls
generally are made. If the loan is still not brought current and it becomes
necessary for the Bank to take legal action, which typically occurs after a loan
is delinquent at least 90 days or more, the Bank will commence foreclosure
proceedings against any real property that secures the loan and attempt to
repossess any personal property that secures a consumer loan. If a foreclosure
action is instituted and the loan is not brought current, paid in full, or
refinanced before the foreclosure sale, the real property securing the loan
generally is sold at foreclosure. The Bank's procedures for repossession and
sale of consumer collateral are subject to various requirements under state
consumer protection laws.
In the case of commercial business loans, commercial real estate loans,
construction and land loans, and development loans, the Bank generally attempts
to contact the borrower by telephone after any loan payment is 15 days past due
and a senior loan officer reviews all collection efforts made if payment is not
received after the loan is 30 days past due. Decisions as to when to commence
foreclosure actions for commercial real estate loans, construction and land
loans, and development loans are made on a case-by-case basis. The Bank may
consider loan work-out arrangements with these types of borrowers in certain
circumstances.
DELINQUENT LOANS. Loans are placed on non-accrual status when, in the
judgment of management, the probability of collection of interest is deemed
to be insufficient to warrant further accrual.
At December 31, 1996, the Bank held in its portfolio $144.7 million of
FHA/VA loans which it had purchased from GNMA pools it services and from third
parties. These loans were delinquent at the time of purchase.
As a servicer of GNMA pools, the Bank 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 Bank, 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 Bank's current cost of
funds. Most of the Bank'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 Bank remained as servicer. The same risk from foreclosure or from
loss of interest exists for the Bank as servicer or owner of the loan, and the
Bank, 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 adequate to compensate the Bank for the credit and interest rate risks
associated with their purchase. The Bank purchased $4.5 million of insured FHA
and guaranteed VA loans from third parties during 1996.
<PAGE>
The following table sets forth information regarding the Company's
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Real estate loans:
One-to-four family residential $ 2,512 $ 2,774 $ 3,177 $ 3,718 $ 3,763
Commercial real estate 4,548 3,835 2,153 1,108 1,295
Construction and land 643 108
Consumer and other loans 125 194
------------ ------------ ------------ ------------ ------------
Total 7,185 7,446 5,330 4,826 5,166
------------ ------------ ------------ ------------ ------------
Accruing loans which are contractually
past due 90 days or more:
Real estate loans:
One-to-four family residential:
First mortgage, conventional 4,937 3,340 1,702 1,871 1,886
First mortgage, FHA/VA (1) 88,185 88,852 57,723 47,963 33,978
Multi-family residential 136 309
Commercial real estate 67 145 4 410
Construction and land 110 125 294
Consumer and other loans 817 255 26 52
------------ ------------ ------------ ------------ ------------
Total 94,116 92,717 59,591 49,886 36,877
------------ ------------ ------------ ------------ ------------
Restructured loans:
Real estate loans:
One-to-four family residential 125 127 313 317
Multi-family residential 1,867 1,906 1,930 1,947
Commercial real estate 68
------------ ------------ ------------ ------------ ------------
Total 1,992 2,033 2,243 2,332
------------ ------------ ------------ ------------ ------------
Total non-performing loans 103,293 102,196 67,164 57,044 42,043
Real estate owned 2,815 1,136 278 767 961
------------ ------------ ------------ ------------ ------------
Total non-performing assets $106,108 $103,332 $67,442 $57,811 $43,004
============ ============ ============ ============ ============
- ------
<FN>
(1) FHA and VA delinquent loans have limited credit risk.
</FN>
</TABLE>
<PAGE>
Non-performing assets increased $2.8 million during 1996 to $106.1
million at December 31, 1996. This increase resulted primarily from an increase
of $1.6 million in convention one-to-four family residential real estate loans
contractually past due 90 days or more and still accruing, and an increase of
$1.7 million in real estate owned. The $1.7 million increase in real estate
owned was due to (i) the increase in the number and average balance of GNMA
loans serviced and subserviced by the Company during 1996 and (ii) the Bank
taking title to fifteen single family residential properties in various stages
of construction that the Bank had made construction loans on, from a builder
experiencing financial difficulties. The Bank is completing the construction of
these properties and has them listed for sale. As of December 31, 1996, the Bank
had sold four of these properties.
Foregone interest income on the Bank's non-accrual loans and
restructured loans in accordance with their original terms totaled $717,000 for
the year ended December 31, 1996. Interest income attributable to non-accrual
and restructured loans included in the Bank's income during the year ended
December 31, 1996 was $662,000.
Real estate acquired through foreclosure is initially recorded at the
lower of the recorded investment in the loan or the fair value of the related
assets at the date of foreclosure, less costs to sell. Thereafter, if there is a
further deterioration in value, the Bank writes down the real estate and charges
expense for the diminution in value.
CLASSIFIED ASSETS. Federal regulations and the Bank's loan policies
require that the Bank utilize an internal rating system as a means of reporting
problem and potential problem assets. The Bank has incorporated the OTS internal
asset classifications as a part of its credit monitoring system. The Bank
currently classifies problem assets as "Substandard," "Doubtful" or "Loss". An
asset is considered "Substandard" if it is inadequately protected by the current
net worth and paying capacity of the obligor or of the value of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the insured institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "Doubtful" have all of
the weaknesses inherent in those classified "Substandard" with the added
characteristic that the weaknesses present make "collection or liquidation in
full", on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable". Assets classified as "Loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted.
When an insured institution classifies one or more assets, or
proportions thereof, as Substandard or Doubtful, it is required to establish a
general valuation allowance for loan losses in an amount deemed prudent by
management. General valuation allowances, which is a regulatory phrase,
represent loss allowances which have been established to recognize the inherent
risk associated with lending activities, but which, unlike specific allowances,
have not been allocated to particular problem assets. When an insured
institution classifies one or more assets, or proportions thereof, as "Loss," it
is required to charge off such amount, thereby reducing the general valuation
allowance.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS which can order the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on the allowance for loan and lease
losses. The policy statement provides guidance for financial institutions on
both the responsibilities of management for the assessment and establishment of
adequate allowances and guidance for banking agency examiners to use in
determining the adequacy of general valuation allowances. Generally, the policy
statement requires that institutions have effective systems and controls to
identify, monitor and address asset quality problems; have analyzed all
significant factors that affect the collectibility of the portfolio in a
reasonable manner; and have established acceptable allowance evaluation
processes that meet the objectives set forth in the policy statement.
The Bank's Asset Classification Committee quarterly reviews and
classifies the Bank's assets and reports the results of its review to the Board
of Directors. At December 31, 1996, the Bank had an aggregate of classified
assets in the amounts of $13.7 million, $6,500, and $261,100 classified as
substandard, doubtful and loss, respectively.
<PAGE>
IMPAIRED LOANS. The Bank has defined impaired loans as commercial
loans classified as Substandard, Doubtful or Loss, as defined by OTS
regulations. Impaired loans, net of related allowance, totaled $6.8 million and
$7.1 million at December 31, 1996 and 1995, respectively. All of the Bank's
impaired loans are valued based on the fair value of collateral.
ALLOWANCE FOR LOAN LOSSES
The Bank's allowance for loan losses historically has been established
based on management's evaluation of the risks inherent in its loan portfolio and
actual loss experience. For the periods prior to 1993, the Bank had no formal
general valuation allowance policy. The provisions were based primarily on
actual losses, which had been relatively insignificant.
In 1993, the Bank revised its allowance for loan losses policy in
response to changes in the portfolio mix, geographic dispersion of the loan
portfolio, increases in non-accrual and restructured loans, changing conditions,
and following a recommendation made during a regulatory examination. This policy
has been followed since that time. The allowance is based upon a number of
factors, including review of specific loans in the loan portfolio, changes in
the mix and geographic dispersion of the loan portfolio, trends in
non-performing assets, growth in loan portfolio, actual loss experience,
comparisons to general industry practices, including peer group statistics,
assessment of general trends in the real estate market, and current and
prospective economic and regulatory conditions. Accordingly, the provision for
loan losses charged to operating income during 1993 reflected the impact of the
revised allowance for loan losses policy.
Net charge-offs were .07% of average loans during 1996, and .10% of
average loans during 1995. The provision for loan losses to average loans was
.13% and .14% for 1996 and 1995, respectively.
As of December 31, 1996, the Bank's ratio of allowance for loan losses
to non-performing assets was 12.8%. The Bank's ratios of non-performing loans to
total loans and non-performing assets to total assets were 5.2% and 3.7%,
respectively, at December 31, 1996. The Bank's ratios of allowance for loan
losses to non-performing assets and non-performing loans to total loans compare
unfavorably with regional peers. The inclusion of delinquent FHA/VA loans which
have been purchased as part of the Bank's investment strategy, have adversely
affected the Bank's delinquency level. Management believes that when
consideration is given to the effects of this strategy, overall asset quality
and allowance ratios at December 31, 1996, compare more reasonably to peers. The
Bank will continue to monitor and modify its allowances for loan losses as
conditions warrant. Although management believes it uses the best information
available to make determinations with respect to the Bank's allowance for loan
losses, future adjustments may be necessary if economic and other conditions
differ substantially from the economic and other conditions in the assumptions
used in making the initial determinations. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's valuation allowance. These agencies may require the Bank to establish
additional valuation allowances, based on their judgments of the information
available at the time of the examination.
The Bank has also established an allowance for nonrecoverable
foreclosure costs in recognition of the potential for current and future
expenses attributable to servicing FHA and VA loans. See "Mortgage Banking
Activities."
A specific allowance is established for certain problem loans based on
an internal analysis, an appraisal, a drive-by inspection or a broker's opinion.
One or a combination of these methods may be used to determine the fair value of
the loan depending upon the size and type of the loan and other circumstances.
If the unpaid balance of the loan is greater than such estimated value, a
charge-off is recorded for the difference between the carrying value of the loan
and the estimated net realizable value of the property. General valuation
allowances, which is a regulatory term, represent loss allowances that have been
established to recognize the inherent risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets. As a result of weaknesses in certain real estate markets,
increases in the general valuation allowance may be required in future periods.
<PAGE>
The following table sets forth the Bank's allownace for loan losses and related
ratios at the dates indicated. (1)
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------- ------------- -------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for Loan Losses:
Balance at beginning of year $ 11,821 $11,076 $10,108 $ 2,426 $1,518
------------ ------------ ------------- ------------- -------------
Charge-offs:
Real estate loans:
One-to-four family (277) (1,067) (1,374) (621) (661)
Multi-family (168) (20)
Commercial real estate (3) (27) (153)
Consumer and other loans (1,271) (606) (2)
------------ ------------ ------------- ------------- -------------
Total charge-offs (1,548) (1,844) (1,376) (668) (814)
------------ ------------ ------------- ------------- -------------
Recoveries:
Real estate loans:
One-to-four family 9 34 116 212
Multi-family 11
Commercial real estate 8 12 20
Consumer and other loans 170 53 25
------------ ------------ ------------- ------------- -------------
Total recoveries 179 106 153 212 20
------------ ------------ ------------- ------------- -------------
Net charge-offs (1,369) (1,738) (1,223) (456) (794)
------------ ------------ ------------- ------------- -------------
Acquired in mergers 500 200 3,479
Transfers from allowance for
nonrecoverable foreclosure costs 405
Provision charged to income 2,586 2,283 1,786 4,659 1,702
------------ ------------ ------------- ------------- -------------
Balance at end of year $13,538 $11,821 $11,076 $10,108 $2,426
============ ============ ============= ============= =============
Ratio of net charge-offs during the
year to average loans outstanding
during the year 0.07% 0.10% 0.09% 0.04% 0.07%
============ ============ ============= ============= =============
Ratio of allowance for loan losses
to total loans at the end of the year 0.68% 0.64% 0.74% 0.70% 0.22%
============ ============ ============= ============= =============
Ratio of allowance for loan losses to
non-performing loans at the end of the year 13.11% 11.57% 16.49% 17.72% 5.77%
============ ============ ============= ============= =============
<FN>
(1) The table does not reflect the Company's allowance for nonrecoverable
foreclosure costs. See the table in "Mortgage Banking Activities" for
this information.
</FN>
</TABLE>
<PAGE>
The following table sets forth the Bank's allocation of its allowance for loan
losses by loan category and the percentage of loans in each category to total
loans at the dates indicated. The portion of the allowance for loan losses
allocated to each loan category is not necessarily indicative of future losses
and does not restrict the use of the total allowance to absorb losses in any
category.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
At end of period allocated to:
One-to-four family $ 3,294 73.25% $ 3,920 80.28% $ 4,900 83.90% $ 3,718 86.73% $1,409 87.00%
Multi-family 2,357 7.58% 2,775 7.13% 2,626 7.16% 2,330 6.73% 461 7.31%
Commercial real estate 2,536 5.14% 1,847 3.35% 2,320 3.00% 3,483 3.13% 479 3.15%
Construction and land 2,409 6.52% 1,687 4.73% 653 3.65% 140 2.13% 68 2.22%
Consumer and other loans 2,942 7.51% 1,592 4.51% 577 2.29% 437 1.28% 9 0.32%
-------- -------- -------- -------- -------- -------- -------- -------- ------- --------
Total $13,538 100.00% $11,821 100.00% $11,076 100.00% $10,108 100.00% $2,426 100.00%
======== ======== ======== ======== ======== ======== ======== ======== ======= ========
</TABLE>
<PAGE>
INVESTMENT ACTIVITIES
The investment policy of the Bank, which is approved by the Board of
Directors and implemented by certain officers as authorized by the Board, is
designed primarily to manage the interest rate sensitivity of its overall assets
and liabilities, to generate a favorable return without incurring undue interest
rate and credit risk, to provide a flow of earnings and a countercyclical
balance to earnings, to provide a balance of quality and diversification of the
Bank's assets and to provide and maintain liquidity. In establishing its
investment strategies, the Bank considers its business and growth plans, the
economic environment, its interest rate sensitivity position, the types of
securities to be held, and other factors. Federally chartered savings
institutions have authority to invest in various types of assets, including U.S.
Treasury obligations, securities of various federal agencies, mortgage-backed
and related securities, certain certificates of deposit of insured banks and
savings institutions, certain bankers acceptances, repurchase agreements, loans
of federal funds, and, subject to certain limits, corporate securities,
commercial paper and mutual funds.
At December 31, 1996, the Bank had $667.5 million in investment
securities consisting primarily of mortgage-backed securities and U.S.
government and agency obligations. The Bank's mortgage-backed securities
portfolio consists primarily of seasoned fixed-rate and adjustable-rate
mortgage-backed securities. At December 31, 1996, the Bank had $474.7 million in
mortgage-backed securities, or 16.4% of total assets, insured or guaranteed by
either the FNMA, FHLMC, GNMA or SBA. Included in the total portfolio of
mortgage-backed securities at December 31, 1996 are $57.5 million in fixed rate
collateralized mortgage obligations (CMOs). The Bank's CMOs have coupon rates
ranging from 5.25% to 9.00% and had a weighted average yield of 6.63% at
December 31, 1996. The Bank's current policy is to purchase CMOs rated AAA by
nationally recognized rating services or issued by U.S. government agencies.
CMOs are typically issued by a special purpose entity, which may be
organized in a variety of legal forms, such as a trust, a corporation or a
partnership. The entity aggregates pools of pass-through securities or whole
loans, which are used to collateralize the mortgage-backed securities. Once
combined, the cash flows can be divided into "tranches" or classes of individual
securities, thereby creating more predictable average lives for each security
than the underlying pools of loans or pass-through securities. Accordingly,
under this security structure, all principal paydowns from the various mortgage
pools of loans or pass-through securities may be allocated to a mortgage-related
securities class or classes structured to have priority until such classes are
paid off.
<PAGE>
The following table sets forth the amortized cost and fair value of the
Company's portfolio of securities at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------
1996 1995 1994
------------------------ ------------------------ ------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ----------- ----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Available-for-sale securities:
U.S. Government and agency obligations $189,048 $189,435 $112,082 $112,775 $ 69,847 $ 67,310
Other debt securities 1,875 1,898 2,077 2,111 1,454 1,493
----------- ----------- ----------- ----------- ----------- -----------
Total debt securities 190,923 191,333 114,159 114,886 71,301 68,803
Mortgage-backed securities 471,873 474,668 334,946 344,092 93,588 90,267
Equity securities 275 1,541 1,115 2,352 2,407 2,995
----------- ----------- ----------- ----------- ----------- -----------
Total available-for-sale securities $663,071 $667,542 $450,220 $461,330 $167,296 $162,065
=========== =========== =========== =========== =========== ===========
Held-to-maturity securities:
Mortgage-backed securities $178,102 $171,888
=========== ===========
</TABLE>
<PAGE>
The following table sets forth the scheduled maturities, amortized cost, and
average yields for the Company's debt securities at December 31, 1996, all of
which are classified as available-for-sale. Yields on tax-exempt obligations
have been computed on a tax-equivalent basis.
<TABLE>
<CAPTION>
At December 31, 1996
---------------------------------------------------------------------------------
1 Year or Less Over 1-5 Years Over 5-10 Years Total Debt Securities
------------------ ------------------ ------------------ ---------------------
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- ------- --------- ------- --------- ------- ---------- ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and agency
obligations $82,350 5.41% $81,697 6.52% $25,001 8.02% $189,048 6.23%
Other debt securities 1,000 7.25% 375 8.25% 500 6.50% 1,875 7.25%
--------- ------- --------- ------- --------- ------- ---------- --------
Total debt securities $83,350 5.43% $82,072 6.53% $25,501 7.99% $190,923 6.24%
========= ======= ========= ======= ========= ======= ========== ========
</TABLE>
<PAGE>
SOURCES OF FUNDS
GENERAL. Deposits; principal and interest payments on loans and
mortgage-backed securities; proceeds from maturities and sales of investment
securities; proceeds from mortgage banking activities; cash flows generated from
operations and, to a lesser extent, FHLB advances and other borrowed funds are
the primary sources of the Bank's funds for use in lending, investing and for
other general purposes.
CUSTODIAL ACCOUNTS. In connection with the Bank's mortgage banking
activities, the Bank maintains a large number of custodial deposit accounts.
These accounts are used to accumulate borrower payments for principal and
interest, and tax and insurance until such sums are remitted to investors,
insurance companies or taxing authorities. At December 31, 1996 and 1995 there
were $76.3 million and $86.6 million, respectively, in custodial accounts on
deposit with the Bank.
DEPOSITS. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposits consist of regular savings,
checking accounts, money market deposit accounts, and certificates of deposit.
The flow of deposits is influenced significantly by general economic conditions,
changes in interest rates and competition. The Bank's deposits are obtained
predominantly from the areas in which its branch offices are located. The Bank
relies primarily on customer service and long-standing relationships with
customers to attract and retain these deposits; however, market interest rates
and rates offered by competing financial institutions significantly affect the
Bank's ability to attract and retain deposits.
Certificate accounts in excess of $100,000 are actively solicited by
the Bank. However, the Bank does not use brokers to obtain such deposits. When
management determines the levels of the Bank's deposit rates, consideration is
given to local competition, U.S. Treasury securities offerings and the rates
charged on other sources of funds. Management continually monitors the Bank's
certificate accounts and, based on historical experience, management believes it
will retain a large portion of such accounts upon maturity.
<PAGE>
The following table represents the deposit activity of the Company for
the periods indicated.
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
(dollars in thousands)
<S> <C> <C> <C>
Beginning balance $1,458,861 $1,190,390 $1,293,738
Deposits from acquisitions 168,155 104,682
Net deposits (withdrawals) 118,985 122,841 (138,531)
Interest credited on deposits 58,002 40,948 35,183
-------------- -------------- --------------
Ending balance $1,804,003 $1,458,861 $1,190,390
============== ============== ==============
Net increase (decrease) $ 345,142 $ 268,471 $ (103,348)
============== ============== ==============
Percentage increase (decrease) 23.66% 22.55% (7.99%)
============== ============== ==============
</TABLE>
At December 31, 1996, the Company had $175.9 million in certificate of
deposit accounts in amounts of $100,000 or more as follows:
<TABLE>
<CAPTION>
MATURITY PERIOD Amounts
--------------
(in thousands)
<S> <C>
Three months or less $ 47,501
Over three through six months 38,315
Over six through twelve months 36,570
Over twelve months 53,473
--------------
Total $175,859
==============
</TABLE>
<PAGE>
The following table sets forth the distribution on the Bank's average deposits
for the periods indicated and the weighted average interest rates paid on each
category of deposits presented.
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------- -------------------------------- --------------------------------
Percent of Percent of Percent of
Average Weighted Average Weighted Average Weighted
Average Total Average Average Total Average Average Total Average
Balance Deposits Rates Paid Balance Deposits Rates Paid Balance Deposits Rates Paid
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
demand accounts $ 132,209 7.94% 0.00% $ 123,832 9.21% 0.00% $ 100,415 8.15% 0.00%
Demand deposit accounts 121,731 7.31% 3.64% 55,111 4.10% 2.68% 51,053 4.14% 1.98%
Passbook accounts 132,657 7.96% 3.15% 128,633 9.57% 3.19% 168,218 13.65% 2.86%
Money market accounts 174,646 10.48% 4.78% 125,083 9.31% 4.83% 113,744 9.23% 3.01%
Certificates of deposit 1,104,532 66.31% 5.89% 911,543 67.81% 5.95% 799,050 64.83% 5.01%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total deposits $1,665,775 100.00% 4.92% $1,344,202 100.00% 4.90% $1,232,480 100.00% 4.00%
========== ========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
The following table represents, by various rate categories, the amount of
certificates of deposit outstanding at the dates indicated and the periods to
maturity of the certificates of deposit outstanding at December 31, 1996.
<TABLE>
<CAPTION>
At December 31, Period to Maturity From December 31, 1996
------------------------------------- ---------------------------------------------------------------
Within One - Two Two - Three Over Three
1996 1995 1994 One Year Years Years Years Total
----------- ----------- ---------- ----------- ----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate
3.00% or less $ 1,493 $ 2,187 $ 433 $ 1,219 $ 239 $ 35 $ 1,493
3.01% to 4.00% 204 20,407 140,831 154 50 204
4.01% to 5.00% 90,596 84,873 203,573 73,856 13,819 2,390 $ 531 90,596
5.01% to 6.00% 779,787 425,124 184,871 501,764 182,241 41,405 54,377 779,787
6.01% to 7.00% 145,171 287,093 171,817 65,028 37,308 13,108 29,727 145,171
7.01% to 8.00% 152,546 159,834 71,089 98,899 5,646 9,783 38,218 152,546
8.01% to 9.00% 10,798 11,125 22,524 1,301 2,259 2,827 4,411 10,798
9.01% to 10.00% 9,488 12,496 13,165 853 22 8,613 9,488
10.01% and over 17 2,043
------------ ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total $1,190,083 $1,003,156 $810,346 $743,074 $241,584 $78,161 $127,264 $1,190,083
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
BORROWINGS. Although deposits are the Bank's primary source of funds,
the Bank's policy has been to utilize borrowings where appropriate as an
alternative or less costly source of funds. The increase in borrowings during
1996 was a result of the strategy to leverage the Company's capital base. The
Bank obtains advances from the FHLB, which are collateralized by certain of the
Bank's mortgage loans. Such advances are made pursuant to different credit
programs, each of which has its own interest rate and range of maturities. See
"Regulation and Supervision - Federal Home Loan Bank System."
The maximum amount that the FHLB will advance to member institutions,
including the Bank, for purposes other than meeting withdrawals, fluctuates from
time to time in accordance with the policies of the OTS and the FHLB. At
December 31, 1996, the Bank had $685.0 million in outstanding advances from the
FHLB and had $96.3 million in other borrowings.
The Bank has entered into sales of securities under agreements to
repurchase (repurchase agreements) with nationally recognized primary securities
dealers or other customers. Repurchase agreements are accounted for as
borrowings by the Bank and are secured by designated securities. The term of the
repurchase agreements may last up to one year; however, normally the agreements
last less than 60 days. At December 31, 1996, the Bank had repurchase agreements
totaling $9,000,000.
The Bank also has lines of credit available to finance mortgage loans
held for sale. Two line of credit arrangements permitted borrowings of up to
$175,000,000 and $125,000,000 at December 31, 1996 and 1995, respectively.
The borrowing limit under one of the line of credit agreements was
increased from $100,000,000 at December 31, 1995 to $150,000,000 during 1996.
Borrowings under this line of credit totaled $84,600,000 and $99,700,000 at
December 31, 1996 and 1995, respectively, and were used to finance mortgage
loans held for sale which were made to employees of a third party. The interest
rate on this line of credit is indexed to a certain short-term interest rate.
Borrowings under this line of credit are guaranteed by the third party to whom
the Bank has granted a security interest in these mortgage loans which are held
for sale. Gains and losses, if any, on the sale of such mortgage loans to
permanent investors accrue to the account of the third party guarantor.
Borrowings under the $25,000,000 line of credit totaled $2,729,000 and
$17,175,000 at December 31, 1996 and 1995, respectively. The interest rate on
this line of credit gives effect to, among other factors, fluctuations in
various short-term interest rates and cash balances on deposit with the lending
institution. Borrowings are collateralized by certain rights and interests in
various servicing agreements.
<PAGE>
The following table sets forth certain information regarding the Company's
short-term borrowings at or for the periods ended on the dates indicated.
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C>
Securities sold under agreements to repurchase:
Average balance outstanding $ 72,295 $147,651
Maximum amount outstanding at any month-end
during the period 140,341 240,750
Balance outstanding at end of period 9,000 176,433
Weighted average interest rate during the period 5.48% 6.02%
Weighted average interest rate at end of period 5.37% 6.03%
Borrowings under lines of credit:
Average balance outstanding $115,344 $ 96,699 $ 71,927
Maximum amount outstanding at any month-end
during the period 144,415 116,875 87,135
Balance outstanding at end of period 87,329 116,875 87,135
Weighted average interest rate during the period 6.54% 6.14% 4.14%
Weighted average interest rate at end of period 5.51% 5.27% 5.81%
Advances from Federal Home Loan Bank:
Average balance outstanding $ 29,144 $ 23,953 $ 51,229
Maximum amount outstanding at any month-end
during the period 200,924 164,200 161,600
Balance outstanding at end of period 200,924 2,150 161,600
Weighted average interest rate during the period 5.61% 6.27% 4.72%
Weighted average interest rate at end of period 5.62% 6.14% 7.00%
</TABLE>
<PAGE>
MORTGAGE BANKING ACTIVITIES
The Bank is engaged in a variety of mortgage banking activities, which
are primarily conducted through its mortgage banking division, which does
business as Great Financial Mortgage and Lincoln Service Mortgage. These
activities include the acquisition and sale of mortgage loans and the related
activity of servicing and subservicing such mortgages for investors. The Bank
limits its mortgage banking lending activity to mortgage loans on one-to-four
family individual properties. Mortgage banking revenues consist of loan
origination fees, interest income on mortgages during the period they are held
for sale, less the interest expense incurred to finance the mortgages, gains (or
losses) from the sale of mortgage loans, loan servicing fees and gains (or
losses) from the sale of any loan servicing or subservicing.
The Bank primarily produces mortgage loans through direct retail
originations. Retail mortgage loans are originated by loan officers through
referrals from real estate brokers, builders, developers and other sources and
through direct telemarketing and mail solicitations. Retail lending activities
are conducted through bank branches and three loan production offices located in
Kentucky. The telemarketing and mail solicitation functions, which serve
corporate customers and individual borrowers nationwide who are purchasing homes
or refinancing existing mortgages, are conducted primarily from the mortgage
division's headquarters. See "One-to-Four Family Mortgage Lending."
The Bank's mortgage originations include mortgage loans insured by the
FHA and guaranteed by the VA, as well as conventional loans. Except for loans
specifically originated for the Bank's loan investment portfolio, loans
originated or purchased through the mortgage banking division are originated for
eventual sale into the secondary mortgage market. As such, these loans must meet
the origination and underwriting criteria established by the final investors of
the loans. A portion of the FHA/VA loans are pooled to form securities
guaranteed by GNMA which are sold in the secondary mortgage market. The Bank
also originates FHA/VA loans for various state housing agency loan programs on a
servicing retained or servicing released basis. The Bank sells most of the
conventional mortgage loans it originates into mortgage-backed securities
purchase and guarantee programs sponsored by FNMA and FHLMC. These programs
provide either for direct sale of mortgage loans to FNMA or FHLMC, or for
pooling of mortgage loans in exchange for securities guaranteed by FNMA or
FHLMC. In connection with such exchanges, the Bank pays fees to either FNMA or
FHLMC who in return guarantee the payment of principal and interest to security
holders. It is this guarantee that enables the Bank to efficiently deliver loans
into the secondary mortgage market. Conventional mortgage loans originated for
sale by the Bank that do not meet FNMA and FHLMC guidelines are sold to private
institutional investors.
Exchanges of loans into agency securities and sales of loans are
generally made without recourse to the Bank in the event of default by the
borrower, except, in the case of VA loans used to form GNMA pools, which are
subject to limitations on the VA's loan guarantees. Subject to market
conditions, the Bank retains or sells the servicing rights on the mortgage loans
underlying the mortgage-backed securities as well as loans sold to institutional
investors.
Loans are sold pursuant to master commitments negotiated with FNMA,
FHLMC, GNMA and institutional investors to purchase loans meeting defined
criteria. The agreements generally do not require the Bank to deliver any
specific amount of mortgage loans. The Bank expects to enter into new
commitments with these entities and other investors in the ordinary course of
business.
Between the time origination or purchase commitments are issued and the
time the loans or the securities into which they are converted are sold, the
Bank is exposed to movements in the market price due to changes in interest
rates. The Bank attempts to manage this risk by utilizing forward cash sales to
FNMA, FHLMC and other approved investors or agencies, forward mortgage-backed
security sales to primary security dealers, national brokers, other financial
institutions and private investors, purchases of over-the-counter put and call
options relating to mortgage-backed securities and put and call options relating
to U.S. Treasury notes and bonds. The type, amount and delivery date of each of
the above instruments that are sold is based upon management's estimates as to
closing volumes and the length of the origination or purchase commitments. As
most loans are closed and funded, they are pooled to create mortgage-backed
securities which will be delivered to fulfill the contracts with the primary
dealers. The remaining loans are delivered to other investors or directly to
FNMA or FHLMC to fulfill delivery commitments with those entities. Differences
between the volume and timing of actual loan originations and purchases and
management's estimates can expose the Bank to losses. If the Bank is not able to
deliver the mortgage loans during the appropriate delivery period, the Bank may
be required to pay a non-delivery fee or repurchase the delivery commitments at
current market prices. Similarly, if the Bank has too many loans to deliver, the
Bank must sell additional cash forward commitments at current market prices.
<PAGE>
The Bank's loan servicing activities include (i) the collection and
remittance of mortgage loan payments, (ii) accounting for principal and
interest, (iii) holding and disbursing escrow or impound funds for real estate
taxes and insurance premiums, (iv) inspecting properties, (v) contacting
delinquent borrowers and (vi) acting as fiduciary on foreclosing and disposing
of collateral properties. In performing these activities, the Bank must comply
with secondary market guidelines or the general guidelines of private investors
and government regulations.
The Bank receives a servicing fee for performing these services for
others. For the years ended December 31, 1996 and 1995, the Bank earned $26.9
million and $27.0 million, respectively, in servicing fees. The Bank collects
and processes payments made by borrowers, remits funds to investors, taxing
authorities and insurers and acts as fiduciary in foreclosing and disposing of
collateral properties. In connection with its fiduciary responsibilities, the
Bank advances funds which are repaid from sale proceeds by way of reimbursement
from investors or through claims submitted to private mortgage insurance
companies, the FHA or the VA. These advances totaled $5.7 million and $4.1
million at December 31, 1996 and 1995, respectively, and are included in other
assets in the accompanying Consolidated Balance Sheets. Under certain
circumstances, and in the case of FHA/VA claims due largely to the contractual
nature of the loan insurance/guarantee contract, these reimbursement requests or
claims cannot be collected in full. In recognition of the potential for current
and future claims that may not be collected, the Bank has established an
allowance for nonrecoverable foreclosure costs with provisions for losses
charged against income.
While most of the Bank's servicing portfolio is generated through the
Bank's origination activities, when economically attractive, the Bank makes bulk
purchases of mortgage servicing rights from financial institutions. For the
years ended December 31, 1996 and 1995, the Bank acquired servicing rights to
approximately $400.7 billion and $1.0 billion, respectively, of unpaid principal
amounts of mortgage loans through bulk purchases. The mortgage loans underlying
the servicing rights purchased by the Bank have been originated, underwritten
and funded by retail originators or wholesalers who make representations and
warranties as to compliance with required standards. The price paid to acquire
servicing is based on the present value of the estimated future servicing
revenues, net of the expected servicing expenses, for each acquisition. Major
factors impacting the value of servicing rights include contractual service fee
rates, projected mortgage prepayment rates, projected delinquency and
foreclosure rates, investor servicing requirements, projected escrow, agency and
fiduciary funds to be held in connection with such servicing and the projected
benefit to be realized from such funds, geographic distribution, and whether the
loans are conforming or non-conforming conventional loans or loans insured or
guaranteed by the FHA or VA, respectively. The Bank bases its assumptions with
respect to these factors on historical and expected experience rather than on
conditions prevailing at any one point in time. The Bank employs computer
simulations to project and value cash flow streams after management has
evaluated applicable portfolio risks. Management determines an acceptable
discount rate to apply to the projected cash flow, after considering both
portfolio risk and market conditions in evaluating potential acquisitions of
servicing.
Also, when economically attractive, the Bank makes bulk sales of
mortgage servicing rights which it has created. During 1996, the Bank sold an
aggregate of $188 million of servicing rights for $2.6 million. During 1995, no
bulk sales of mortgage servicing rights were made by the Bank.
At December 31, 1996, the Bank serviced $5.1 billion of loans for others.
<PAGE>
The following table summarizes certain information as to the Company's portfolio
of loans serviced for others at the dates shown.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------------------------------
1996 1995 1994
------------------------- ------------------------- -------------------------
Number Amount Number Amount Number Amount
---------- ------------ ---------- ------------ ---------- ------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans serviced for others 83,000 $5,068,896 79,300 $5,167,550 66,300 $4,578,846
========== ============ ========== ============ ========== ============
Unamortized mortgage servicing rights $ 37,187 $ 35,751 $ 24,511
============ ============ ============
Ratio of net servicing fee income (1)
to net interest income 25.20% 32.91% 29.97%
============ ============ ============
- ------
(1) Net servicing fee income is servicing fee income less amortization of MSRs.
</TABLE>
The following table sets forth the Company's allowance for nonrecoverable
foreclosure costs related to loans serviced for others at the dates indicated.
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1996 1995 1994
------------ ------------ -----------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 2,319 $ 2,246 $2,542
Provisions charged to income 2,395 1,516 213
Charge-offs (2,699) (1,443) (104)
Transfers to allowance for loan losses (405)
------------ ------------ -----------
Balance, end of year $ 2,015 $ 2,319 $2,246
============ ============ ===========
</TABLE>
<PAGE>
In addition to servicing loans for others, mortgage banking activities
include subservicing loans for third-party servicing owners, including GNMA as
one of GNMA's Master Subservicers. Subservicing generally involves the normal
operational activities of loan servicing, but without the normal risks of
prepayments and defaults. Subservicing is generally priced for a stated fee per
loan, plus various ancillary income arrangements. The subservicing arrangements
are generally for a fixed term substantially shorter than the related loan
maturities. In some cases these arrangements can be terminated at the servicing
owner's option and sometimes without penalty for early termination. At December
31, 1996 the Company subserviced approximately 10,700 loans with unpaid
principal balances totaling $908.5 million.
In addition, at December 31, 1996, the Bank held in its portfolio
$144.7 million of FHA/VA loans which it had purchased from GNMA pools it
services and from third parties. These loans were delinquent at the time of
purchase. For a further discussion of these loans, see "Delinquent Loans."
BANK SUBSIDIARY ACTIVITIES
Great Financial Services, Inc. (GFS), a wholly-owned subsidiary of
the Bank, is currently engaged, on an agency basis through offices of an
independent agency and an independent registered broker-dealer, in the sale of
annuity products, securities and mutual funds primarily to the Bank's customers
and members of the local community. GFS is also a genreal lines insurance
agency, licensed in the state of Kentucky, and offers its customers products
such as long-term health care insurance, life insurance, and property and
casualty insurance.
The Bank also has three other wholly-owned subsidiaries: Great
Financial Properties, Inc., Lanidrac Service Corp. and First Appraisal Services,
Inc. Great Financial Properties, Inc. is periodically used to hold real estate
owned and is not material to the Bank's consolidated financial condition.
Lanidrac Service Corp. is a service corporation which invests in certain
low-income housing partnerships, which provide the Company with certain income
tax credits. First Appraisal Services, Inc. is an inactive service corporation
which provided real estate appraisal services.
PERSONNEL
At December 31, 1996 the Bank had 745 full-time employees and 75
part-time employees.
<PAGE>
SUPERVISION AND REGULATION
GENERAL
The Bank is subject to extensive regulation, examination and
supervision by the Office of Thrift Supervision (OTS), as its chartering agency,
and the Federal Deposit Insurance Corporation (FDIC), as the deposit insurer.
The Bank is a member of the FHLB System and its deposit accounts are insured up
to applicable limits by the Savings Association Insurance Fund (SAIF) managed by
the FDIC. The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition in addition to obtaining regulatory approvals
prior to entering into certain transactions such as mergers with, or
acquisitions of, other financial institutions. There are periodic examinations
by the OTS and the FDIC to test the Bank's compliance with various regulatory
requirements. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such policies, whether by the OTS, the FDIC or the Congress, could
have a material adverse impact on the Company, the Bank and their operations.
The Company, as a savings and loan holding company, is required to file certain
reports with, and otherwise comply with the rules and regulations of the OTS and
the SEC under the federal securities laws. Certain of the regulatory
requirements applicable to the Bank and to the Company are referred to below or
elsewhere herein.
FEDERAL SAVINGS INSTITUTION REGULATION. The activities of savings
institutions are governed by the Home Owner's Loan Act, as amended (HOLA) and,
in certain respects, the Federal Deposit Insurance Act (FDI Act). The HOLA and
the FDI Act were amended by the Financial Institution Reform, Recovery and
Enforcement Act of 1989 (FIRREA) and the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA). FIRREA was enacted for the purpose of
resolving problem savings institutions, establishing a new thrift insurance
fund, reorganizing the regulatory structure applicable to savings institutions,
and imposing bank-like standards on savings institutions. FDICIA, among other
things, requires that federal banking regulators intervene promptly when a
depository institution experiences financial difficulties, mandates the
establishment of a risk-based deposit insurance assessment system and requires
imposition of numerous additional safety and soundness operational standards and
restrictions. FIRREA and FDICIA both contain provisions affecting numerous
aspects of the operations and regulations of federally-insured savings
associations and empowers the OTS and the FDIC, among other agencies, to
promulgate regulations implementing their provisions.
BUSINESS ACTIVITIES. The federal banking statutes as amended by the
FIRREA and FDICIA (1) restrict the solicitation of brokered deposits by savings
institutions that are troubled or not well-capitalized, (2) prohibit the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories, (3) restrict the aggregate amount of loans secured by
non-residential real estate property to 400% of capital, (4) permit savings and
loan holding companies to acquire up to 5% of the voting shares of
non-subsidiary savings institutions or savings and loan holding companies
without prior approval, (5) permit bank holding companies to acquire healthy
savings institutions and (6) require the federal banking agencies to establish
by regulation standards for extensions of credit secured by real estate lending.
Under the HOLA, the Bank has the authority to make certain loans or investments,
not exceeding 5% of its total assets, on each of (i) non-conforming loans (loans
in excess of the specific limitations of the HOLA) and (ii) construction loans
without security, for the purpose of financing what is or is expected to be
residential property. To assure repayment of such loans, the Bank relies
substantially on the borrower's general credit standing, personal guarantees and
projected future income from the properties.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to one borrower.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of the Bank's unimpaired capital
and surplus. An additional amount may be lent, equal to 10% of unimpaired
capital and surplus, if such loan is secured by readily-marketable collateral,
which is defined to include certain securities and bullion, but generally does
not include real estate. At December 31, 1996, the Bank did not have any loans
in excess of the applicable regulatory limit.
<PAGE>
QTL TEST. The HOLA requires savings institutions to meet a qualified
thrift lender (QTL) test. Under the QTL test, as modified by FDICIA, at least
65% of a savings association's "portfolio assets" (total assets less (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill and (iii) the value of property used to conduct business) must be in
"qualified thrift investments" (primarily residential mortgages and related
investments, including certain mortgage-backed and related securities, and,
pursuant to recent legislation, credit card and education loans) on a monthly
basis in 9 out of every 12 months. The QTL test may also be met by qualifying as
a "domestic building and loan association" under the Internal Revenue Code of
1986, as amended.
A savings association that fails the QTL test must either convert to a
bank charter or operate under certain restrictions. If the savings association
does not convert to a bank charter generally it will be prohibited from (i)
engaging in any new activity not permissible for a national bank, (ii) paying
dividends not permissible under national bank regulations, (iii) obtaining
advances from any FHLB or (iv) establishing any new branch office in a location
not permissible under national bank regulations. In addition, beginning three
years after the association failed the QTL test, the association would be
prohibited from engaging in any activity not permissible for a national bank and
would have to repay any outstanding advances from an FHLB as promptly as
possible. For December 1996, the Bank maintained 87.6% of its portfolio assets
in qualified thrift investments and therefore, met the QTL test.
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to shareholders
of another institution in a cash-out merger and other distributions charged
against capital. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution and has not been advised by the OTS that it is in need of more than
normal supervision, could, after prior notice but without the approval of the
OTS, make capital distributions during a calendar year equal to the greater of:
(i) 100% of its net earnings to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year; or (ii) 75% of its net earnings for the previous four quarters. Any
additional capital distributions would require prior regulatory approval. In the
event the Bank's capital fell below its fully phased-in requirement or the OTS
notified it that it was in need of more than normal supervision, the
institution's ability to make capital distributions could be restricted. In
addition, the OTS could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the OTS
determines that such distribution would constitute an unsafe or unsound
practice. Furthermore, under the OTS prompt corrective action regulations, which
took effect on December 19, 1992, the institution would be prohibited from
making any capital distribution if, after the distribution, the institution
would have (i) a total risk-based capital ratio of less than 8%, (ii) a Tier 1
risk-based capital ratio of less than 4% or (iii) a Tier 1 leverage ratio of
less than 4%.
LIQUIDITY. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares of certain
mutual funds and certain corporate debt securities and commercial paper) equal
to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement may be changed from time to time by the OTS to any amount within the
range of 4% to 10% depending upon economic conditions and the savings flows of
member institutions, and is currently 5%. OTS regulations also require each
savings institution to maintain an average daily balance of short-term liquid
assets at a specified percentage (currently 1%) of the total of its net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Bank's average liquidity ratio for December 1996 was 8.05%,
which exceeded the then applicable requirements. The Bank has never been subject
to monetary penalties for failure to meet its liquidity requirements.
<PAGE>
FINANCIAL MANAGEMENT REQUIREMENTS. The FDICIA also imposes financial
reporting requirements on all depository institutions with assets of more than
$500 million, their management and their independent auditors and establishes
rules for the composition, duties, and authority of such institutions' audit
committees and boards of directors. Under FDIC regulations, all such depository
institutions are required to prepare and make available to the public annual
reports on their financial condition and management, including statements of
managements' responsibility for the financial statements, internal controls and
compliance with certain designated federal banking laws and regulations relating
to safety and soundness, and an assessment of the institution's compliance with
such internal controls, designated laws and regulations. The institution's
independent public accountants are required to attest to these management
assessments. Each such institution also is required to have an audit committee
composed of independent directors.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and its non-savings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal Reserve Act (FRA).
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with nonaffiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to nonaffiliated companies. Notwithstanding Sections 23A and 23B, savings
institutions are prohibited from lending to any affiliate that is engaged in
activities that are not permissible for bank holding companies under Section
4(c) of the Bank Holding Company Act (BHC Act). Further, no savings institution
may purchase the securities of any affiliate other than a subsidiary.
The Bank's authority to extend credit to executive officers, directors
and 10% shareholders, as well as certain related interests of such persons, is
currently governed by Sections 22(g) and 22(h) of the FRA, and Regulation O
thereunder. Among other things, these regulations require such loans to be made
on terms substantially the same as those offered to unaffiliated individuals
(provided that loans may be made on preferential terms to insiders if loans on
such terms are widely available to non-insider employees pursuant to a Bank
benefit or compensation plan) and to not involve more than the normal risk of
repayment, place limits on the amount of loans the Bank may make to such persons
based, in part, on the Bank's capital position, and require certain approval
procedures to be followed. The OTS regulations, with certain minor variances,
apply Regulation O to savings institutions.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Civil penalties cover a wide range of violations and
actions and range up to $25,000 per day unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. In addition, regulators have
substantial discretion to impose enforcement action on an institution that fails
to comply with its regulatory requirements, particularly with respect to the
capital requirements. Possible enforcement action ranges from the imposition of
a capital plan and capital directive to receivership, conservatorship or the
termination of deposit insurance. Under the FDI Act, the FDIC has the authority
to recommend to the Director of OTS that enforcement action be taken with
respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances.
<PAGE>
STANDARDS FOR SAFETY AND SOUNDNESS. FDICIA requires each federal
banking agency to prescribe for all insured depository institutions and their
holding companies standards relating to internal controls, information systems
and audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, fees and benefits, and such other
operational and managerial standards as the agency deems appropriate. In
addition, the federal banking regulatory agencies are required to prescribe by
regulation standards specifying (i) maximum classified assets to capital ratios;
(ii) minimum earnings sufficient to absorb losses without impairing capital;
(iii) to the extent feasible, a minimum ratio of market value to book value for
publicly traded shares of depository institutions or the depository institution
holding companies and (iv) such other standards relating to asset quality,
earnings and valuation as the agency deems appropriate. Finally, each federal
banking agency is required to prescribe standards for employment contracts and
other compensation arrangements of executive officers, employees, directors and
principal stockholders of insured depository institutions that would prohibit
compensation and benefits and arrangements that are excessive or that could lead
to a material financial loss for the institution. If an insured depository
institution or its holding company fails to meet any of its prescribed standards
as described above, it will be required to submit to the appropriate federal
banking agency a plan specifying the steps that will be taken to cure the
deficiency. If an institution fails to submit an acceptable plan or fails to
implement the plan, the appropriate federal banking agency will require the
institution or holding company, to correct the deficiency and until corrected,
may impose restrictions on the institution or the holding company including any
of the restrictions applicable under the prompt corrective action provisions of
FDICIA.
In addition, OTS regulations require each savings association to
establish and maintain written internal real estate lending standards consistent
with safe and sound banking practices and appropriate to the size of the
institution and the nature and scope of its real estate lending activities.
CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3% leverage (core capital) ratio and an 8% risk based capital standard. Core
capital is defined as common stockholder's equity (including retained earnings),
certain noncumulative perpetual preferred stock and related surplus, and
minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain qualifying supervisory goodwill and certain other
identifiable intangible assets. The OTS regulations require that, in meeting the
leverage ratio, tangible and risk-based capital standards, institutions must
deduct investments in and loans to subsidiaries engaged in activities not
permissible for a national bank.
OTS capital regulations respecting intangible assets permit purchased
mortgage servicing rights (PMSRs), originated mortgage servicing rights (OMSRs)
and purchased credit card relationships (PCCRs) to be included in a saving
association's capital, provided the aggregate amount of such intangibles, when
added together, do not exceed 50 percent of core capital. In addition, the
regulations provide that a savings association may include the same dollar
amount of these intangible assets in tangible capital that it includes in core
capital. These types of intangible assets must be valued at the lower of 90% of
fair market value or 100% of remaining unamortized book value. PMSRs, OMSRs and
PCCRs in excess of applicable limits, as well as core deposit intangibles, must
be deducted from both assets and capital in calculating core and tangible
capital.
The risk-based capital standard for savings institutions requires the
maintenance of total capital (which is defined as the sum of core capital and
supplementary capital) to risk weighted assets of 8%. In determining the amount
of risk-weighted assets, all assets, including certain off-balance sheet assets,
are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital
regulation based on the risks OTS believes are inherent in the type of asset.
The components of core capital are equivalent to those discussed earlier under
the 3% leverage standard. The components of supplementary capital include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock and
allowance for loan and lease losses. Allowance for loan and lease losses
includable in supplementary capital is limited to a maximum of 1.25%. Overall,
the amount of supplementary capital included as part of total capital cannot
exceed 100% of core capital.
<PAGE>
Under the OTS rules, savings associations with "above normal" interest
rate risk exposure are subject to a deduction from total capital for purposes of
calculating their risk-based capital requirements. A savings association's
interest rate risk is measured by the decline in the net portfolio value of its
assets (i.e., the difference between incoming and outgoing discounted cash flows
from assets, liabilities and off-balance sheet contracts) that would result from
a hypothetical 200-basis point increase or decrease in market interest rates
(except when the 3-month Treasury bond equivalent yield falls below 4%, then the
decrease will be equal to one-half of that Treasury rate) divided by the
estimated economic value of the association's assets, as calculated in
accordance with guidelines set forth by the OTS. A savings association whose
measured interest rate risk exposure exceeds 2% must deduct an interest rate
component in calculating its total capital under the risk-based capital rule.
The interest rate risk component is an amount equal to one-half of the
difference between the institution's measured interest rate risk and 2%,
multiplied by the estimated economic value of the association's assets. That
dollar amount is deducted from an association's total capital in calculating
compliance with its risk-based capital requirement. The rule also provides that
the Director of the OTS may waive or defer an association's interest rate risk
component on a case-by-case basis.
At December 31, 1996, the Bank met each of its capital requirements.
PROMPT CORRECTIVE REGULATORY ACTION. FDICIA establishes a system of
prompt corrective action to resolve the problems of undercapitalized
institutions. Under this system the banking regulators are required to take
certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institution's degree of undercapitalization.
Generally, subject to a narrow exception, FDICIA requires the banking regulator
to appoint a receiver or conservator for an institution that is critically
undercapitalized. FDICIA authorizes the banking regulators to specify the ratio
of tangible capital to assets at which an institution becomes critically
undercapitalized and requires that ratio be no less than 2% of assets.
Under the OTS final rule implementing the FDICIA standard, generally, a
savings institution is treated as "well capitalized" if its total risk-based
capital ratio is at least 10%, its Tier 1 risk-based capital ratio is at least
6%, its leverage ratio is at least 5%, and it is not subject to any written
agreement, order, capital directive, or prompt corrective action directive
issued by the OTS to meet and maintain a specific capital level. A savings
institution will be "adequately capitalized" if its total risk-based capital
ratio is at least 8%, its Tier 1 risk-based capital ratio is at least 4%, and
its leverage ratio is at least 4%, (3% if the institution is rated composite 1
under the CAMEL rating system in its most recent examination). A savings
institution will be "undercapitalized" if its total risk-based capital ratio is
under 8%, or its Tier 1 risk-based capital ratio is under 4%, or its leverage
ratio is under 4% (3% with a composite 1 CAMEL rating). A savings institution
that has a total risk-based capital ratio of less than 6%, or a Tier 1
risk-based capital ratio of less than 3%, or a leverage ratio of less than 3% is
considered to be "significantly undercapitalized." A savings institution that
has a ratio of tangible equity to total assets equal to or less than 2% is
deemed to be "critically undercapitalized." Generally, a capital restoration
plan must be filed with the OTS within 45 days of the date an association
receives notice that it is "undercapitalized," "significantly undercapitalized"
or "critically undercapitalized." In addition, numerous mandatory supervisory
actions become immediately applicable to the institution, including, but not
limited to, restrictions on growth, investment activities, capital
distributions, and affiliate transactions. The OTS could also take any one of a
number of discretionary supervisory actions, including the issuance of a capital
directive and the replacement of senior executive officers and directors.
<PAGE>
INSURANCE OF DEPOSIT ACCOUNTS. The FDIC has established a risk-based
assessment system for insured depository institutions that takes into account
the risks attributable to different categories and concentrations of assets and
liabilities. Under FDIC rules, the FDIC assigns an institution to one of three
capital categories based on the institution's financial information, as of the
reporting period ending seven months before the assessment period, consisting of
(i) well capitalized, (ii) adequately capitalized or (iii) undercapitalized, and
one of three supervisory subcategories within each capital group. The
supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution's primary federal
regulator and information which the FDIC determines to be relevant to the
institution's financial conditions and the risk posed to the deposit insurance
funds (which may include, if applicable, information provided by the
institution's state supervisor). An institution's assessment rate depends on the
capital category and supervisory category to which it is assigned. There are
nine assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
The FDIC is authorized to raise the assessment rates in certain
circumstances. If the FDIC determines to increase the assessment rates for all
institutions, institutions in all risk categories could be affected. The FDIC
has exercised this authority several times in the past and may raise insurance
premiums in the future. If such action is taken by the FDIC, it could have an
adverse effect on the earnings of the Bank.
Prior to 1997, assessments paid by healthy savings institutions
significantly exceeded those paid by healthy commercial banks. Pursuant to
legislation passed in September 1996, the SAIF was recapitalized to eliminate
this disparity. Under the recapitalization plan, thrifts paid a special
assessment of $.657 per $100 of SAIF deposits held at March 31, 1995, in order
to increase SAIF reserves to the level required by law. The Bank paid a one-time
special assessment of $9.7 million. Going forward, assessment rates in 1997 will
range from zero basis points for an institution in the highest category (i.e.
well-capitalized and healthy) to 27 basis points for an institution in the
lowest category (i.e. undercapitalized and substantial supervisory concern). The
Bank's assessment rate for 1997 is zero basis points of deposits. The plan also
provided that the cost of prior thrift failures will be shared by both the SAIF
and the Bank Insurance Fund (BIF), which will increase assessments for thrifts
and banks by $.0648 and $.013, respectively, for every $100 of deposits.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
OTS. The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLB System,
which consists of 12 regional FHLBs. The FHLB provides a central credit facility
primarily for member institutions. The Bank, as a member of the FHLB, is
required to acquire and hold shares of capital stock in its regional FHLB in an
amount at least equal to 1% of the aggregate principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each
year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater.
The Bank was in compliance with this requirement at December 31, 1996. FHLB
advances must be secured by specified types of collateral and all long-term
advances may only be obtained for the purpose of providing funds for residential
housing finance.
<PAGE>
FEDERAL RESERVE SYSTEM. The Federal Reserve Board regulations require
savings institutions to maintain non-interest-earning reserves against their
transaction accounts (primarily interest bearing and regular checking accounts).
The Federal Reserve Board regulations generally require that reserves be
maintained against aggregate transaction accounts. The Bank is in compliance
with the foregoing requirements. The balances maintained to meet the reserve
requirements imposed by the Federal Reserve Board may be used to satisfy
liquidity requirements imposed by the OTS. Because required reserves must be
maintained in the form of either vault cash, a non-interest bearing account at a
Federal Reserve Bank or a pass-through account as defined by the Federal Reserve
Board, the effect of this reserve requirement is to reduce the Bank's
interest-earning assets. FHLB System members are also authorized to borrow from
the Federal Reserve "discount window," but Federal Reserve Board regulations
require institutions to exhaust all FHLB sources before borrowing from a Federal
Reserve Bank.
HOLDING COMPANY REGULATION. The Company is a non-diversified unitary
savings and loan holding company within the meaning of the HOLA, as amended. As
such, the Company is required to register with the OTS and is subject to OTS
regulations, examinations, supervision and reporting requirements. In addition,
the OTS has enforcement authority over the Company and its non-savings
institution subsidiaries. Among other things, this authority permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution. The Bank must notify the OTS 30 days before
declaring any dividend to the Company.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS; acquiring or retaining, with certain exceptions, more than 5% of a
non-subsidiary savings institution, a non-subsidiary holding company, or a
non-subsidiary company engaged in activities other that those permitted by the
HOLA; or acquiring or retaining control of an institution that is not federally
insured. In evaluating applications by holding companies to acquire savings
institutions, the OTS must consider the financial and managerial resources and
future prospects of the company and institution involved, the effect of the
acquisition on the risk to the insurance funds, the convenience and needs of the
community and competitive factors.
As a unitary savings and loan holding company, the Company generally is
not restricted under existing laws as to the types of business activities in
which it may engage, provided that the Bank continues to be a QTL. Were the
Company to acquire another thrift and not merge that institution with the Bank,
the Company would become a multiple savings and loan holding company. As a
multiple savings and loan holding company, under HOLA the activities of the
Company and its non-insured institution subsidiaries would be limited primarily
to activities permissible for bank holding companies under Section 4(c)(8) of
the BHC Act, subject to the prior approval of the OTS, and activities authorized
by OTS regulation. In addition, in connection with legislation proposed to unify
the banking and thrift charters, the Company might become subject to more
restrictive holding company requirements.
<PAGE>
The Company is prohibited from making an acquisition of another savings
bank or savings association wherein the bank or association is located in a
state other than Kentucky and is held as a separate subsidiary of the Company,
except with respect to: (i) those made with the approval of interstate
supervisory acquisitions by savings and loan holding companies, or (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions.
Although the conditions imposed upon acquisitions in those states which have
enacted such legislation vary, some statutes are of the "regional reciprocity"
type which require both that the acquiring holding company be located (as
defined by the location of its subsidiary savings institutions) in a state
within a defined geographic region and that the state in which the acquiring
holding company is located have enacted reciprocal legislation allowing savings
institutions in the target state to purchase savings institutions in the
acquiror's home state on terms no more restrictive than those imposed by the
target state on the acquiror. Other states allow full nationwide reciprocal
banking. Some states authorize acquisitions by out-of-state holding companies
only in supervisory cases, and certain states do not authorize interstate
acquisitions under any circumstances.
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally-insured
savings institution without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
Such acquisitions of control may be disapproved if it is determined, among other
things, that (i) the acquisition would substantially lessen competition; (ii)
the financial condition of the acquiring person might jeopardize the financial
stability of the savings institution or prejudice the interests of its
depositors or (iii) the competency, experience or integrity of the acquiring
person or the proposed management personnel indicates that it would not be in
the interest of the depositors or the public to permit the acquisition of
control by such person.
In November, 1994, the OTS issued final regulations restricting stock
repurchases of recently converted stock savings institutions. These regulations
prohibit repurchases in the first year following conversion and restrict
repurchases in years two and three to five percent during any twelve-month
period. The regulations, however, do permit an association to petition for a
waiver of the regulatory limitations described above. As the Bank was the
subject of a conversion in March, 1994, it is subject to these limitations on
repurchases.
STATISTICAL DISCLOSURE BY BANK HOLDING COMPANIES. Certain information
required under Exchange Act Industry Guide 3 promulgated by the Securities and
Exchange Commission can be found in Part II, items 6., and 7., of this report
entitled "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
<PAGE>
ITEM 2. PROPERTIES
At December 31, 1996, the Company conducts its business through its
headquarters located in Louisville, Kentucky, and fourty-four full service
banking offices, three loan production offices and three stand-alone ATM or
drive-through locations. Of these business locations, 30 are owned by the
Company and 21 are leased. The Company's forty-fifth full service banking
office, located in New Albany, Indiana, opened for business on February 5, 1997.
This location is owned by the Company.
ITEM 3. LEGAL PROCEEDINGS
A regular compliance examination by the OTS has raised questions about
the accuracy of the Bank's Truth in Lending (TIL) disclosures on certain
adjustable-rate mortgages. The TIL disclosure errors were brought about as a
result of problems incurred in the use of certain computer programs for the
calculation of the disclosures. Under applicable federal law, in certain
circumstances, the fact that improper TIL disclosures were generated as a result
of errors in a computer program may provide a defense. However, the OTS regional
compliance director has rejected the Bank's computer error defense. As a result
of that rejection, the Bank investigated the extent of the restitution which
could be required under applicable law and determined that the most probable
amount in the event that the computer error and other defenses are
unsuccessful (along with related attorney fees) is $1.5 million. Management
intends to aggressively assert available defenses to this proceeding and to
attempt to minimize any damage award. In addition to current cash payments, the
Bank would also be responsible in certain circumstances for reducing future
mortgage interest payments on affected loans, a result of which would be reduced
earnings for the Bank. Management does not believe that future interest payment
reductions would have a material adverse effect on the financial condition or
results of operations of the Bank or the Company.
Except as discussed above, the Company and its subsidiaries are not
involved in any pending legal proceedings other than routine legal proceedings
occurring in the ordinary course of business. Such routine legal proceedings in
the aggregate are believed by management to be immaterial to the Company's
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through
solicitation of proxies or otherwise, during the fourth quarter of 1996.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of Great Financial Corporation is traded in the
over-the-counter market and is listed under the symbol "GTFN" on the NASDAQ
National Market System. The stock began trading on March 31, 1994. The
registered number of stockholders as of March 5, 1997, was 3,461.
<TABLE>
<CAPTION>
Stock Data
Dividends
Paid Per
Year Period High Low Share
<S> <C> <C> <C> <C>
1996 First Quarter 24 3/4 22 1/2 $0.10
Second Quarter 27 5/8 24 1/2 $0.12
Third Quarter 29 1/4 25 1/4 $0.12
Fourth Quarter 30 28 1/8 $0.12
1995 First Quarter 17 1/2 14 7/8 $0.08
Second Quarter 19 1/8 13 3/8 $0.10
Third Quarter 24 19 $0.10
Fourth Quarter 24 1/8 20 1/8 $0.10
</TABLE>
<PAGE>
ITEM 6. SELECTED FINANCIAL AND OTHER DATA
Set forth below are selected consolidated financial and other data of the
Company. This financial data is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements and Notes thereto
presented elsewhere in this report.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------
1996 1995 1994(1) 1993(2) 1992
------------ ------------- ------------- ------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets $2,897,162 $2,486,256 $1,912,497 $1,738,121 $1,397,688
Cash and cash equivalents 126,323 84,167 17,013 13,662 11,579
Securities 667,542 461,330 340,167 207,815 200,102
Mortgage loans held for sale 65,546 144,163 91,725 423,993 291,096
Loans receivable, net 1,867,511 1,667,363 1,362,086 998,321 791,995
Federal Home Loan Bank stock 34,816 21,917 17,304 13,677 10,796
Mortgage servicing rights 37,187 35,751 24,511 30,063 63,802
Deposits 1,804,003 1,458,861 1,190,390 1,293,738 1,127,392
Borrowed funds 781,297 714,209 416,648 297,073 122,459
Stockholders' equity/Retained earnings 280,454 287,110 284,636 128,653 131,575
For the Years Ended December 31,
-----------------------------------------------------------------------
1996 1995 1994(1) 1993(2) 1992
------------ ------------- ------------- ------------- ------------
(dollars in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income $199,255 $160,632 $119,466 $110,912 $106,693
Interest expense 123,417 98,088 61,120 57,927 64,628
------------ ------------- ------------- ------------- ------------
Net interest income 75,838 62,544 58,346 52,985 42,065
Provision for loan losses 2,586 2,283 1,786 4,659 1,702
------------ ------------- ------------- ------------- ------------
Net interest income after provision
for loan losses 73,252 60,261 56,560 48,326 40,363
------------ ------------- ------------- ------------- ------------
Non-interest income:
Servicing fee income 26,852 26,976 24,918 30,091 30,350
Amortization of mortgage servicing
rights (7,739) (6,391) (7,429) (44,739) (16,370)
Gain on sale of mortgage loans 6,890 4,308 7,203 12,800 6,152
Gain on sale of mortgage servicing
rights 2,519 170 4,780 2,588
Other 7,316 4,370 4,512 3,232 1,966
------------ ------------- ------------- ------------- ------------
Net non-interest income 35,838 29,433 33,984 3,972 22,098
------------ ------------- ------------- ------------- ------------
Non-interest expense:
Compensation and benefits 32,734 27,036 30,370 29,168 23,250
Office occupancy and equipment 9,265 7,150 7,734 6,370 5,696
Other non-interest expense 36,627 21,607 20,945 21,422 17,456
------------ ------------- ------------- ------------- ------------
Total non-interest expense 78,626 55,793 59,049 56,960 46,402
------------ ------------- ------------- ------------- ------------
Income (loss) before income taxes and
cumulative effect of change
in accounting principle 30,464 33,901 31,495 (4,662) 16,059
Income tax expense (benefit) 10,957 12,211 11,404 (2,709) 5,694
------------ ------------- ------------- ------------- ------------
Income (loss) before cumulative effect
of change in accounting principle 19,507 21,690 20,091 (1,953) 10,365
Cumulative effect to January 1, 1993 of
change in accounting for income taxes (969)
------------ ------------- ------------- ------------- ------------
Net income (loss) $19,507 $21,690 $20,091 $(2,922) $10,365
============ ============= ============= ============= ============
Earnings per share:
Primary $1.36 $1.46 $1.05(3)
============ ============= =============
Fully diluted $1.36 $1.44 $1.05(3)
============ ============= =============
Cash dividends declared per share $0.46 $0.38 $0.08
============ ============= =============
Dividend payout ratio 33.82% 26.39% 7.62%
============ ============= =============
<PAGE>
At or For the Year Ended December 31,
---------------------------------------------------------------------
1996 1995 1994(1) 1993(2) 1992
------------ ------------ ------------ ------------ ------------
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets 0.73% 1.00% 1.16% -0.19% 0.75%
Return on average equity 7.00% 7.78% 8.60% -2.22% 8.20%
Average equity to average assets 10.42% 12.89% 13.54% 8.47% 9.10%
Equity to total assets 9.68% 11.55% 14.88% 7.40% 9.41%
Interest rate spread(4) 2.38% 2.22% 2.82% 3.17% 2.66%
Net interest margin(5) 3.03% 3.07% 3.58% 3.66% 3.28%
Operating expense to average assets 2.94% 2.58% 3.42% 3.66% 3.34%
Average interest-earning assets to average
interest-bearing liabilities 113.19% 117.64% 120.51% 112.33% 112.28%
Asset Quality Ratios:
Non-performing loans to total loans(6)(8) 5.19% 5.52% 4.51% 3.95% 3.84%
Non-performing assets to total assets(7)(8) 3.66% 4.16% 3.53% 3.33% 3.08%
Allowance for loan losses to total loans 0.68% 0.64% 0.74% 0.70% 0.22%
Allowance for loan losses to non-performing
loans 13.11% 11.57% 16.49% 17.72% 5.77%
Allowance for loan losses to non-performing
assets 12.76% 11.44% 16.42% 17.48% 5.64%
Other Data:
Number of deposit accounts 180,100 153,500 126,800 134,300 112,800
Number of real estate loans in portfolio 24,000 23,400 21,100 20,000 15,000
Number of real estate loans serviced for
others 83,000 79,300 66,300 78,600 82,500
Number of facilities:
Full service offices 44 41 36 39 30
Loan origination offices 3 3 12 13 13
-------
<FN>
(1) The 1994 information includes the effects of the offering and sale of
the Company's common stock in connection with the conversion on March
30, 1994 of the Bank from a federal mutual savings and loan association
to a federal stock savings bank.
(2) The 1993 information includes the effects of the write-down of the
carrying value of purchased mortgage service rights in the amount of
$23.3 million.
(3) Earnings per share since conversion on March 30, 1994.
(4) The interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost
of interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) Non-performing loans consist of non-accrual loans, accruing loans 90
days or more past due, and restructured loans. Total loans include
loans held for sale.
(7) Non-performing assets consist of non-performing loans and foreclosed
real estate owned.
(8) Includes delinquent FHA/VA loans which have limited credit risk. See
"Management's Discussion and Analysis -- Non-Performing Assets."
</FN>
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Great Financial Corporation (GFC) became publicly held on March 30, 1994, when
its wholly-owned subsidiary completed a conversion from a federal mutual savings
and loan association to a federal stock savings bank, Great Financial Bank, FSB
(Bank). On July 14, 1995, GFC completed the acquisition of First Financial
Shares, Inc. (FFS), the holding company for First Federal Savings Bank of
Richmond, Kentucky (First Federal). On August 9, 1995, FFS merged into GFC,
leaving First Federal as the second wholly-owned subsidiary of GFC. On July 7,
1996, First Federal merged with the Bank, reducing the number of GFC's
wholly-owned subsidiaries to one. On June 7, 1996, GFC completed the acquisition
of LFS Bancorp, Inc. (LFS), parent company of Lexington Federal Savings Bank,
(Lexington Federal). LFS was dissolved upon acquisition and Lexington
Federal merged with the Bank. The purpose of the discussion that follows is to
provide insight into the consolidated financial condition and results of
operations of GFC and its subsidiary, the Bank (collectively the Company). This
discussion should be read in conjunction with the Consolidated Financial
Statements and Notes thereto printed elsewhere in this report.
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 judgment based on factors known,
involve risks and uncertainties, as discussed above. Actual results could differ
materially from those expressed or implied.
OVERVIEW
The Company's 1996 business activities continued to focus on the strategies
adopted in 1994 following its conversion to a stock company. These strategies
were to leverage the Company's capital base through internal and external growth
in order to increase the return on stockholders' equity, and to focus on the
delivery of retail banking products to new and existing customers in the primary
market area of Kentucky and southern Indiana. As a result, the Company's assets
increased 17%, or $411 million, to a total of $2.9 billion in 1996. Deposits
increased 24% to $1.8 billion, and loans receivable increased 12% to $1.9
billion. Contributing significantly to this growth was the acquisition of
Lexington Federal in June. At acquisition, Lexington Federal had total assets of
approximately $240 million and operated four offices in central Kentucky.
The long-awaited recapitalization of the Savings Association Insurance Fund
(SAIF), a major step toward merging the thrift and banking industries, occurred
in September. The Deposit Insurance Funds Act of 1996 required all insured
savings institutions to pay a special assessment of 65.7 cents for every $100
(0.657%) of applicable deposits held as of March 31, 1995. The Company took a
charge in the 1996 third quarter of $6.3 million net of taxes, or $.45 per
share, as required by this legislation. With the recapitalization of SAIF,
the FDIC lowered the Company's federal deposit insurance rates by 72%, effective
January 1, 1997, which will enhance earnings in future periods.
In 1996 the Company continued the stock repurchase plan initiative begun in 1995
to increase shareholder value by increasing earnings per share. The Company's
fourth stock repurchase plan was announced in August, and calls for the
repurchase of up to 5% or 709,000 shares of the Company's outstanding common
stock. As of December 31, 1996, the Company had repurchased 2,415,000 shares of
stock at an average cost of $20.23 per share under stock repurchase plans.
The quarterly cash dividend was increased by 20% in April.
<PAGE>
ASSET/LIABILITY MANAGEMENT
The Company monitors its interest rate risk, or sensitivity of its net interest
income to changes in interest rates, since the level of such risk significantly
affects certain of its operating strategies. Net interest income is subject to
volatility due to (i) a mismatch in the timing of maturity or repricing of
interest-earning assets and interest-bearing liabilities and (ii) changes in the
relative levels of interest rates for different maturities along the yield curve
(i.e., the shape of the yield curve). An Asset/Liability Committee, established
by the Bank's Board of Directors, is responsible for managing asset/liability
policies and the Company's interest rate risk position. This committee meets
monthly and reports interest rate risk levels and trends to the Board of
Directors on a quarterly basis.
One means of evaluating the sensitivity of an institution's net interest income
to changes in interest rates is to examine the extent to which its assets and
liabilities are "interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap". An asset or liability is said to be interest
rate sensitive within a specific time period if it will mature or reprice within
that time period. The interest rate sensitivity gap is defined as the difference
between the amount of interest-earning assets maturing or repricing within a
specific time period and the amount of interest-bearing liabilities maturing or
repricing within that same time period. A gap is considered positive when the
amount of interest rate sensitive assets exceeds the amount of interest rate
sensitive liabilities. A gap is considered negative when the amount of interest
rate sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of falling interest rates, the net interest income of an
institution with a positive gap may be adversely affected due to its
interest-earning assets repricing to a greater extent than its interest-bearing
liabilities, while an institution with a negative gap would likely have an
opposite result. Conversely, during a period of rising interest rates, the net
interest income of an institution with a positive gap position may increase
since it is able to increase the yield on its interest-earning assets more
rapidly than the cost of its interest-bearing liabilities, while an institution
with a negative gap would likely have an opposite result.
The following interest rate sensitivity table sets forth the Company's
interest-earning assets and interest-bearing liabilities at December 31, 1996,
which are anticipated, based upon certain assumptions, to reprice or mature in
each of the future time periods shown. Except as stated below, the amount of
assets and liabilities shown which reprice or mature during a particular period
were determined in accordance with the earlier of the term to repricing or the
contractual maturities of the asset or liability. The Company's loan prepayment
and deposit decay rate assumptions are management's estimates derived from
sources which the Asset/Liability Committee uses in monitoring the Company's
interest rate risk position.
Specifically, the table assumes a 25% annual prepayment rate for
adjustable-rate, single-family residential mortgage loans, substantially all of
which reprice at a margin over a current index such as the weekly average yield
of U.S. Treasury securities adjusted to a constant maturity of one-year
(one-year Treasury index). Fixed-rate mortgage loans were assigned prepayment
rates as follows:
<TABLE>
<CAPTION>
Assumed Annual
Loan Interest Rate Prepayment Rate
--------------------------------------------------------
<S> <C>
Less than 7% 7%
7 to 7.99% 9%
8 to 8.99% 15%
9 to 9.99% 23%
10% or greater 20%
</TABLE>
Decay rates estimate the annual rate at which balances in certain
interest-bearing liability accounts will reprice or be transferred by the
depositor to an account with a more favorable interest rate. The following table
assumes that passbook savings and DDA accounts are repriced or withdrawn at the
annual percentage rate of 20% in the first year, 53% of the remaining balance
during years two and three, and 100% of the remaining balance during years four
and five. Money market accounts are assumed to reprice within three months or
less since rates on such accounts are adjusted to market conditions.
<PAGE>
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY
Time to Repricing or Maturity from December 31, 1996
-----------------------------------------------------------------------------------
4 Months Over 1 Over 3 Over 5
3 Months through through through through Over 10
or Less 1 year 3 Years 5 Years 10 Years Years Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $293,210 $499,268 $586,412 $154,176 $189,377 $145,068 $1,867,511
Mortgage loans held for sale 65,546 65,546
Mortgage-backed securities 45,109 87,906 88,221 66,875 108,266 78,291 474,668
Debt and equity securities 79,880 28,571 15,464 66,653 15 37,107 227,690
Other 98,621 98,621
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets 582,366 615,745 690,097 287,704 297,658 260,466 2,734,036
----------- ----------- ----------- ----------- ----------- -----------
Non-interest-earning assets 163,126
-----------
Total assets $2,897,162
===========
Interest-bearing liabilities:
Passbook accounts 6,614 17,954 45,613 64,634 $ 134,815
Demand deposit accounts 8,246 22,383 56,866 80,199 167,694
Money market accounts 199,282 199,282
Certificate accounts 222,008 528,460 312,600 78,234 48,748 33 1,190,083
Borrowed funds 448,466 178,264 45,551 93,947 13,111 1,958 781,297
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities 884,616 747,061 460,630 317,014 61,859 1,991 2,473,171
----------- ----------- ----------- ----------- ----------- -----------
Non-interest-bearing liabilities
and stockholders' equity 423,991
-----------
Total liabilities and
stockholders' equity $2,897,162
===========
Interest sensitivity gap $(302,250) $(131,316) $ 229,467 $ (29,310) $235,799 $258,475 $ 260,865
=========== =========== =========== =========== =========== =========== ===========
Cumulative interest sensitivity
gap $(302,250) $(433,566) $(204,099) $(233,409) $2,390 $260,865
=========== =========== =========== =========== =========== ===========
Cumulative net interest-earning
assets as a percentage of
interest-bearing liabilities 65.83% 73.43% 90.25% 90.31% 100.10% 110.55%
=========== =========== =========== =========== =========== ===========
Cumulative interest sensitivity gap
as a percentage of total assets -10.43% -14.97% -7.04% -8.06% 0.08% 9.00%
=========== =========== =========== =========== =========== ===========
</TABLE>
<PAGE>
As the preceding table indicates, the Company has a moderate negative cumulative
gap for assets and liabilities maturing or repricing within one year equal to
14.97% of total assets. Thus, decreases in interest rates during this time
period would generally increase the Company's net interest income, while
increases in interest rates would generally decrease the Company's net interest
income. However, certain limitations are inherent in the method of analysis
presented in the foregoing table. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in the market interest rates, while interest rates on other types may
lag behind changes in market rates. Additionally, certain assets such as
adjustable rate mortgage (ARM) loans have features which restrict changes in
interest rates on a short-term basis and over the life of the asset. Further, in
the event of changes in interest rates, prepayment and decay rates may deviate
significantly from those assumed in calculating the table. Finally, the ability
of many borrowers to afford the payments on their ARM loans may decrease in the
event of an interest rate increase.
While the preceding table provides an indication of the sensitivity of the
Company's net interest income to future changes in interest rates, it does not
include any indication of the sensitivity to such changes of fee income earned
by the Company on loans serviced for others. These fees are included in
non-interest income in the Company's consolidated statements of income. The
monthly fees received for servicing loans for others are calculated as a
percentage of the principle balances of the loans being serviced. In periods of
rising interest rates, when prepayments on loans generally decline, the
servicing fee income on a given group of loans generally remains higher than if
rates had not increased. The converse generally occurs in periods of falling
interest rates. The rate at which mortgage servicing rights are amortized
generally decreases during periods of rising interest rates and increases during
periods of falling interest rates. Thus, the net servicing fees from the
portfolio of loans serviced for others will generally remain higher when
interest rates rise and will generally be reduced when interest rates fall.
The Company is also exposed to changes in interest rates in connection with its
mortgage banking activities. As part of its mortgage banking activities, the
Company originates loans for subsequent sale into the secondary market on either
a servicing retained or servicing released basis. Between the time that
origination commitments are issued and the time the loans are committed for
sale, the Company is exposed to movements in the price (due to changes in
interest rates) of such loans or of securities into which such loans are
converted. The Company attempts to manage this risk by utilizing the sale of
forward commitments through which the Company agrees to sell loans at a
specified price on a future specified date. The amount of such forward
commitments and the date on which they settle is based upon management's
estimates of closing volumes and the expiration dates of the origination
commitments. Differences between management's estimates and the volume or timing
of actual loan originations or actual sales of loans can expose the Company to
significant losses. This activity is managed daily. There can be no assurance
that the Company will be successful in its efforts to reduce the risk of
interest rate fluctuation between the time of origination of a mortgage loan and
the time of the ultimate sale of the loan.
<PAGE>
AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
on the volume of interest-earning assets and interest-bearing liabilities and
the rates earned or paid on them. The following table sets forth certain
information relating to the Company's average consolidated balance sheets and
consolidated statements of income for the years ended December 31, 1996, 1995
and 1994. The yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively. For 1996 and 1995,
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. For 1994, average balances for debt and equity securities,
other interest-earning assets, short-term borrowings and long-term borrowings
are derived from daily balances. All other average balances are derived from
month-end balances. Management does not believe that the use of average monthly
balances instead of average daily balances has caused any material differences
in the information presented. The average balance of loans receivable includes
loans on which the Company has discontinued accruing interest. The yields and
costs include fees which are considered adjustments to yields and costs.
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------------- -----------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
---------- --------- ------- ----------- --------- ------- ----------- -------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Loans receivable, net (1) $1,920,801 $157,893 8.22% $1,662,707 $134,244 8.07% $1,308,704 $99,975 7.64%
Mortgage-backed securities (2) 456,617 33,186 7.27% 280,848 20,675 7.36% 172,693 12,463 7.22%
Debt and equity securities (2) 80,749 5,159 6.39% 61,516 3,591 5.84% 91,688 4,658 5.08%
Other 20,061 1,039 5.18% 14,882 862 5.79% 40,524 1,529 3.77%
FHLB stock 28,280 1,978 6.99% 18,474 1,260 6.82% 14,758 841 5.70%
---------- --------- ------- ----------- --------- ------- ----------- -------- -------
Total interest-earning
assets 2,506,508 199,255 7.95% 2,038,427 160,632 7.88% 1,628,367 119,466 7.34%
--------- ------- --------- ------- -------- -------
Non-interest-earning assets 166,634 125,843 98,422
---------- ----------- -----------
Total assets $2,673,142 $2,164,270 $1,726,789
========== =========== ===========
Liabilities and stockholders'
equity:
Interest-bearing liabilities:
Passbook accounts $ 132,657 4,181 3.15% $ 128,633 4,103 3.19% $ 168,218 4,813 2.86%
Demand deposit accounts 121,731 4,433 3.64% 55,111 1,479 2.68% 51,053 1,012 1.98%
Money market accounts 174,646 8,343 4.78% 125,083 6,047 4.83% 113,744 3,427 3.01%
Certificate accounts 1,104,532 65,024 5.89% 911,543 54,217 5.95% 799,050 40,009 5.01%
Short-term borrowings 216,783 13,141 6.06% 268,303 16,326 6.08% 123,156 5,396 4.38%
Long-term borrowings 464,088 28,295 6.10% 244,036 15,916 6.52% 96,030 6,463 6.73%
---------- --------- ------- ----------- --------- ------- ---------- -------- -------
Total interest-bearing
liabities 2,214,437 123,417 5.57% 1,732,709 98,088 5.66% 1,351,251 61,120 4.52%
--------- ------- --------- ------- -------- -------
Non-interest-bearing liabilities 180,110 152,615 141,813
---------- ----------- ----------
Total liabilities 2,394,547 1,885,324 1,493,064
Stockholders' equity 278,595 278,946 233,725
---------- ----------- ----------
Total liabilities and stockholder $2,673,142 $2,164,270 $1,726,789
========== =========== ==========
Net interest income / interest rate
spread (3) $ 75,838 2.38% $ 62,544 2.22% $58,346 2.82%
========= ======= ========= ======= ======== =======
Net interest earning assets / net
interest margin (4) $ 292,071 3.03% $305,718 3.07% $277,116 3.58%
========== ======= =========== ======= ========== =======
Ratio of interest-earning assets
to interest-bearing liabilities 113.19% 117.64% 120.51%
========== =========== ==========
<PAGE>
<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.
</FN>
</TABLE>
<PAGE>
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.
<TABLE>
<CAPTION>
1996 vs. 1995 1995 vs. 1994
------------------------------------- -------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------- -------------------------------------
Volume Rate Total Volume Rate Total
------------ ---------- ----------- ------------ ---------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net (1) $21,176 $2,473 $23,649 $28,314 $5,955 $34,269
Mortgage-backed securities 12,778 (267) 12,511 7,957 255 8,212
Debt and equity securities 1,204 364 1,568 (1,690) 623 (1,067)
Other 221 (44) 177 (1,248) 581 (667)
FHLB stock 685 33 718 235 184 419
------------ ---------- ----------- ------------ ---------- ----------
Total 36,064 2,559 38,623 33,568 7,598 41,166
------------ ---------- ----------- ------------ ---------- ----------
Interest-bearing liabilities:
Passbook accounts 127 (49) 78 (1,220) 510 (710)
Demand deposit accounts 2,281 673 2,954 86 381 467
Money market accounts 2,368 (72) 2,296 371 2,249 2,620
Certificate accounts 11,367 (560) 10,807 6,086 8,122 14,208
Short-term borrowings (3,123) (62) (3,185) 8,219 2,711 10,930
Long-term borrowings 13,479 (1,100) 12,379 9,659 (206) 9,453
------------ ---------- ----------- ------------ ---------- ----------
Total 26,499 (1,170) 25,329 23,201 13,767 36,968
------------ ---------- ----------- ------------ ---------- ----------
Net change in net interest income $ 9,565 $3,729 $13,294 $10,367 $(6,169) $4,198
============ ========== =========== ============ ========== ==========
- -----------------
<FN>
(1) Loans receivable, net include mortgage loans held for sale.
</FN>
</TABLE>
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 TO DECEMBER 31, 1995
The Company's total assets grew 16.5%, or $411 million, during 1996 to $2.9
billion. Contributing significantly to this increase was the acquisition of
Lexington Federal, which was completed in the second quarter of 1996. Total
assets acquired from Lexington Federal were approximately $240 million,
including $128.2 million in net loans receivable and $56.5 million in investment
securities. Deposits acquired from Lexington Federal totaled $168.2 million.
Net loans receivable totaled $1.9 billion at year-end, increasing 12.0% from
year-end 1995. While the Company continues to focus on its one-to-four family
residential mortgage lending business, it also is continuing to diversify its
loan portfolio by pursuing both commercial and consumer loans. The following
table summarizes the growth in each loan category during 1996:
<TABLE>
<CAPTION>
Loan Portfolio Composition
1996 Loan Portfolio Growth at December 31,
-------------------------- --------------------------
Amount Percentage 1996 1995
----------- ------------ ------------ ------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Loan category:
One-to-four family residential $ 50,094 3.7% 72.4% 78.6%
Multi-family residential 18,761 14.2% 7.8 7.8
Commercial real estate 40,401 65.2% 5.3 3.6
Construction and land 42,261 48.3% 6.7 5.1
Non-mortgage, primarily
installment 66,079 79.1% 7.8 4.9
----------- ------------ ------------
217,596 12.7% 100.0% 100.0%
============ ============
Undisbursed portion of loans,
deferred fees and allowance
for loan losses (17,448)
-----------
Loans receivable, net $200,148 12.0%
===========
</TABLE>
The Company is diversifing its loan portfolio to enhance portfolio yield.
Commercial real estate loans, construction and land loans, and consumer loans
generally have higher interest rates than one-to-four family residential loans
since the credit risks associated with these types of lending are considered
greater than those associated with one-to-four family residential lending.
Management believes that the Bank has established appropriate underwriting
standards and loan review systems for such loans to adequately evaluate and
manage credit risks, thereby enabling the Company to increase loan portfolio
yield without incurring excessive losses.
Mortgage loans held for sale at December 31, 1996 decreased $78.6 million from
the balance outstanding at December 31, 1995, due to the timing of sales of
loans to secondary market investors. Average outstanding mortgage loans held for
sale during 1996 of $156.7 million exceeded average outstanding mortgage loans
held for sale in 1995 of $119.7 million by $37.0 million. Mortgage loans
originated for sale totaled $414.7 million for 1996, exceeding 1995 production
of $324.0 million by $90.7 million. Interest rates related to mortgage lending
remained at low levels throughout 1996 allowing the Company to originate a
larger portfolio of loans for sale in the secondary market in 1996 than in 1995.
Also, fewer mortgage loans were originated for the portfolio in line with the
Company's strategy to diversify its loan portfolio.
<PAGE>
Mortgage-backed securities increased $130.6 million or 38.0% in 1996. In
addition to $37.1 million of mortgage-backed securities acquired from Lexington
Federal, this increase was the result of the Company replacing certain lower
yielding debt and equity securities with higher yielding mortgage-backed
securities, and purchasing mortgage-backed securities funded by borrowings from
the Federal Home Loan Bank (FHLB). The leveraged purchases were structured to
increase the Company's assets without incurring significant interest rate risk.
U.S. Government and agency obligations increased $76.7 million or 68.0% in 1996.
A portion of this growth was the result of increased regulatory liquidity
requirements due to growth in the Company's assets. The Company also invested
excess liquidity available at year-end in short-term government securities.
Deposits increased $345.1 million or 23.7% in 1996. Approximately $184 million
of this increase was due to growth in retail deposits attracted through
advertising, competitive deposit rates and increased retail sales efforts. The
balance of the increase was primarily from deposits acquired from Lexington
Federal totaling $168.2 million, partially offset by a decrease of $10.3 million
in custodial account balances.
Borrowed funds increased $67.1 million or 9.4% during 1996, with long-term FHLB
advances increasing by $65.3 million and short-term borrowings increasing by
$1.8 million. The Company increased long-term fixed and variable rate borrowings
with the FHLB to fund purchases of mortgage-backed securities.
Stockholders' equity totaled $280.5 million at December 31, 1996, down $6.7
million from the previous year-end. Equity as a percentage of total assets
decreased from 11.5% at year-end 1995 to 9.7% at year-end 1996. This leveraging
of capital was the result of the Company purchasing 813,000 shares of stock
under stock repurchase programs at a cost of $20.7 million, internal growth in
assets, the cash acquisition of Lexington Federal and dividends declared of $6.1
million.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
1995
OVERVIEW. The Company's net income was $19.5 million in 1996 compared to $21.7
million in 1995. This decline was due to the one-time charge of $6.3 million net
of taxes required to recapitalize SAIF.
NET INTEREST INCOME. Net interest income increased 21.3%, or $13.3 million, in
1996 versus 1995. This increase was due to 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 $468.1 million and $481.7 million, respectively, in 1996 versus 1995,
resulting in a $9.6 million increase in net interest income. These average
balance increases were the result of growth from normal business operations and
the acquisition of Lexington Federal.
The average yield on interest-earning assets rose from 7.88% in 1995 to 7.95% in
1996, primarily due to a shift in the loan portfolio mix to a lower percentage
of one-to-four residential loans and a larger percentage of higher yielding
commercial and consumer loans. The average cost of interest-bearing liabilities
decreased from 5.66% in 1995 to 5.57% in 1996. This decease in cost of funds was
primarily due to a shift in certificate of deposit accounts to shorter
maturities, and lower interest rates. These average rate changes for
interest-earning assets and interest-bearing liabilities resulted in a $3.7
million increase in net interest income and an increase in the interest rate
spread from 2.22% in 1995 to 2.38% in 1996. Net interest margin declined from
3.07% in 1995 to 3.03% in 1996 primarily due to the effect of stock repurchases
on net interest-earning assets.
PROVISION FOR LOAN LOSSES. In evaluating the adequacy of the allowance for loan
losses to absorb potential losses in the loan portfolio, management regularly
analyzes many factors. These factors include the status of specific loans in the
portfolio, changes in the mix and geographic dispersion of the loan portfolio,
trends in non-performing assets, growth of the loan portfolio, actual loss
experience, comparisons to general industry practices including peer group
statistics, an assessment of general trends in the real estate market and in
commercial and consumer lending, and current and prospective economic and
regulatory conditions.
<PAGE>
While the provision for loan losses increased in 1996 from the year before, as a
percentage of average loans it decreased from 0.14% in 1995 to 0.13% in 1996. As
a percentage of average loans, net charge-offs decreased from 0.10% in 1995 to
0.07% in 1996. The decrease in net charge-offs included a decrease of $917,000
in net real estate charge-offs, partially offset by an increase of $549,000 in
net consumer loan charge-offs. The increase in net consumer loan charge-offs was
primarily due to growth in the outstanding balances of consumer loans over the
previous year. As a percentage of total loans, including mortgage loans held for
sale, the allowance for loan losses increased from 0.64% at December 31, 1995 to
0.68% at December 31, 1996.
NON-INTEREST INCOME. The increase of $6.4 million in non-interest income in 1996
from 1995 was substantially due to increases in gain on sale of mortgage loans
and mortgage servicing rights, partially offset by an increase in amortization
of mortgage servicing rights. The favorable interest rate environment related to
mortgage lending allowed the Company's mortgage banking business to originate a
larger number of loans for sale in the secondary market in 1996 than in 1995,
resulting in an increase of $2.6 million in gain on sale of mortgage loans. The
increase of $2.3 million in gain on sale of servicing rights for 1996 in
comparison to 1995, was due to an increase in bulk sales of servicing rights.
Servicing rights related to $196 million of mortgage loans were sold in 1996.
The Company actively manages interest rate prepayment risk inherent in its
mortgage banking business by periodically selling mortgage servicing rights. The
increased amortization of mortgage servicing rights of $1.3 million in 1996 from
1995, was primarily due to increased investments in mortgage servicing rights
during 1995 and 1996.
The increase in other non-interest income of $2.3 million for 1996 in comparison
to 1995, was primarily due to increases in service charges attributable to
growth in transaction accounts and increased fee income from sales of investment
products.
NON-INTEREST EXPENSE. In 1996 non-interest expense increased $22.8 million in
comparison with 1995. A significant portion of this increase was due to the
special insurance premium assessed to recapitalize SAIF. The Company's
assessment, based on applicable deposits, was $9.7 million. Without this
one-time charge, non-interest expense as a percentage of average assets remained
constant at 2.58% in comparison with 1995, indicating that operating expenses
are increasing proportionate to the Company's growth.
Increases in compensation and benefits resulted primarily from a reduction in
deferrals of origination costs in connection with the shift in origination of
single family loans from portfolio production to secondary market production, as
well as the cost of additional staff required to deliver and support an expanded
line of retail banking and investment products. Also, a portion of this increase
was attributable to an increase in the cost of the employee stock ownership plan
due to the higher average market price of the Company's stock in 1996.
Occupancy and equipment expense increased as a result of banking office
construction and renovation initiated to enhance service to retail banking
customers.
The rise in other non-interest expense was primarily due to a charge of $1.5
million for possible reimbursement to borrowers based on the determination by
the Office of Thrift Supervision (OTS) that Truth-in-Lending disclosures on
certain adjustable rate mortgages were inaccurate (see note 14 of Notes to
Consolidated Financial Statements), and increased expenses related to increased
payoffs of serviced loans and increased costs associated with growth in the
number of defaulted FHA/VA loans being serviced.
INCOME TAX EXPENSE. The effective income tax rate was 36.0% for both 1996 and
1995.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1995 TO DECEMBER 31, 1994
The Company's total assets grew by 30.0% during 1995 to $2.5 billion. Of the
growth of $574 million in total assets, $305 million was in loans receivable,
$52 million was in loans held for sale, and $121 million was in securities.
In 1995 the Company initiated a strategy to enhance loan portfolio yield by
reducing the percentage of one-to-four family residential loans in the portfolio
mix. This resulted in one-to-four family residential loan decreasing from 82.9%
of the loan portfolio in 1994 to 78.6% of the portfolio in 1995; and commercial,
construction and consumer loans increasing to 21.4% of the loan portfolio in
1995 from 17.1% in 1994. These results also include loans totaling $100.4
million obtained in the acquisition of First Federal.
<PAGE>
The substantial growth in the loans was achieved even though total mortgage loan
originations and purchases amounted to $891 million, down from $1.5 billion in
1994. Most of this decline was in origination of single family loans for sale in
the secondary market which followed a decrease in mortgage loan refinancing
activity. This decline was also attributed to aggressive contraction of the
Company's mortgage banking operations begun in the 1994 fourth quarter to focus
on the delivery of consumer-oriented banking products and services to customers
in the Company's primary market area of Kentucky and southern Indiana. While
medium- to long-term interest rate levels during 1995 were generally lower than
in 1994, loan prepayments remained fairly stable throughout the year.
Mortgage loans held for sale at December 31, 1995 increased over the balance at
December 31, 1994 due to the shift in the mix of single family loan production
in mid-1995 from portfolio production to secondary market production.
Growth of $11.6 million in mortgage servicing rights during 1995 included the
acquisition of $1.0 billion of GNMA servicing on March 31, 1995 at a cost of
$15.4 million and the capitalization of $1.7 million of originated mortgage
servicing rights following the adoption of Statement of Financial Accounting
Standards (SFAS) No. 122 effective July 1, 1995. Total loans serviced for others
amounted to $5.2 billion at December 31, 1995, up from $4.6 billion a year
earlier.
Deposits increased by $268.5 million or 22.6% during 1995. Most of this growth
was in certificates of deposit and resulted from expanded advertising and
marketing efforts, the introduction of new products in 1995, increases in
certain retail deposit rates and deposits of $105.0 million obtained in the
acquisition of First Federal.
Borrowed funds grew by $297.6 million or 71.4% in 1995. The additional borrowed
funds were used primarily to fund the purchase of mortgage-backed securities and
loan originations. In order to reduce borrowing costs, the Company repaid in the
1995 first quarter most of its short-term advances from the FHLB from the
proceeds of securities sold under agreements to repurchase. Also, in response to
reduced interest rates in mid-1995, the Company repaid certain of its short-term
borrowings with long-term advances from the FHLB.
Stockholders' equity at December 31, 1995 totaled $287.1 million, up $2.5
million from a year earlier. The Company's stockholders' equity as a percent of
total assets decreased from 14.88% at the beginning of the year to 11.55% at the
end of the year. This leveraging of capital resulted from the substantial
internal growth in assets, the cash acquisition of First Federal, completion of
two stock repurchase programs in which a total of 1.6 million shares at a cost
of $28.3 million were purchased, and continuation of a quarterly dividend. No
shares were purchased in 1995 under a third stock repurchase plan announced in
November 1995.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
1994
OVERVIEW. The Company's net income of $21.7 million in 1995 was up 8.0% over the
1994 net income of $20.1 million. This improvement resulted from increased net
interest income and reduced operating expenses, partially offset by a reduction
in non-interest income. The impact of adopting SFAS No. 122 was an increase in
net income of $1.1 million in 1995.
NET INTEREST INCOME. An increase of $4.2 million or 7.2% in net interest income
for 1995 over 1994 was achieved primarily through substantial growth in the
Company's interest-earning assets and interest-bearing liabilities. This growth
caused net interest income to increase by $10.4 million, more than offsetting
the decrease of $6.2 million caused by changes in rates.
The average balance of interest-earning assets grew by $410.1 million, while the
average balance of interest-bearing liabilities grew by $381.5 million. The
Company's growth in interest-earning assets was concentrated in loans and
mortgage-backed securities, while the growth in interest-bearing liabilities was
primarily in certificates of deposit and borrowed funds. The average yield on
interest-earning assets increased from 7.34% in 1994 to 7.88% in 1995, while the
average cost of interest-bearing liabilities increased more sharply from 4.52%
in 1994 to 5.66% in 1995. As a result of these rate changes, the average
interest rate spread declined from 2.82% to 2.22%. The combined effect of these
volume and rate changes reduced the net interest margin from 3.58% to 3.07%.
<PAGE>
PROVISION FOR LOAN LOSSES. While the provision for loan losses increased in 1995
from the year before, as a percentage of average loans it remained at 0.14%. As
a percentage of average loans, net charge-offs increased slightly from 0.09% in
1994 to 0.10% in 1995. The increase in net charge-offs was largely from the non-
mortgage consumer loan portfolio which grew substantially in 1995. As a
percentage of total loans, including mortgage loans held for sale, the allowance
for loan losses decreased from 0.74% at December 31, 1994 to 0.64% at December
31, 1995.
NON-INTEREST INCOME. The decrease of $4.6 million in total non-interest income
in 1995 from 1994 resulted primarily from the substantial decrease in gain on
sale of mortgage servicing rights. The 1994 gain of $4.8 million was from a bulk
sale of servicing rights. Servicing rights are sold on a bulk basis or a flow
basis to control prepayment risk and take advantage of market opportunities. In
addition, 1994 non-interest income included a $1.2 million gain on sale of
equipment. Servicing fee income increased 8.3% as the portfolio of loans
serviced and subserviced for others grew during 1995, while amortization of
mortgage servicing rights decreased by 14.0% as prepayment rates on mortgage
loans remained at fairly low levels throughout 1995. Gain on sale of mortgage
loans dropped sharply from the 1994 level as the volume of loan originations for
sale declined. The decrease in origination volumes was due both to a reduction
in the level of mortgage loan refinancing activity and the Company's strategy to
focus its originations in its primary market area of Kentucky and southern
Indiana. Excluding gain (loss) on sales of equipment and securities from both
1994 and 1995, growth of 25.0% was achieved in other non-interest income,
resulting primarily from increases in fees on new and existing retail loan and
deposit products. The Company invested significantly in training and technology
during 1995 to cross-sell these products to existing customers.
NON-INTEREST EXPENSE. Total non-interest expense was 5.5% less than in 1994. As
a percent of average assets, non-interest expenses were 2.58%, down from 3.42%
for 1994. This reduction was achieved primarily from aggressive contraction of
the Company's mortgage banking operations begun in June 1994 in response to much
lower loan origination volumes and further efficiencies gained when those
operations were merged into the Bank on January 1, 1995. As a result of these
efficiencies, compensation and benefits totaled 11.3% less in 1995, even with
the increased cost for the employee stock ownership plan resulting primarily
from the higher average market price of the Company's stock in 1995. Office
occupancy and equipment costs decreased 7.8% due to contraction of mortgage
banking operations, net of increased facility costs associated with banking
office construction and renovation. Advertising and marketing costs increased
26.5% as the Company continued a new identity campaign begun in the fourth
quarter of 1994 and promoted several new retail banking products introduced in
1995. The rise in other non-interest expense was largely due to increased costs
associated with a $1.0 billion GNMA servicing portfolio.
INCOME TAX EXPENSE. The effective income tax rate for 1995 was 36.0%, a small
decrease from 36.2% for 1994.
<PAGE>
NON-PERFORMING ASSETS
The following table sets forth information regarding the Company's
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994
-------- -------- -------
(dollars in thousands)
<S> <C> <C> <C>
Non-performing loans:
Non-accrual loans $ 7,185 $ 7,446 $ 5,330
Accruing loans which are
contractually past due 90 days
or more:
FHA/VA loans 88,185 88,852 57,723
Other loans 5,931 3,865 1,868
Restructured loans 1,992 2,033 2,243
---------- ---------- ----------
Total non-performing loans 103,293 102,196 67,164
Real estate owned 2,815 1,136 278
---------- ---------- ----------
Total non-performing assets $106,108 $103,332 $67,442
========== ========== ==========
Non-performing loans to total loans:
Including FHA/VA loans 5.19% 5.52% 4.51%
Excluding FHA/VA loans 0.76% 0.72% 0.63%
Non-performing assets to total assets:
Including FHA/VA loans 3.66% 4.16% 3.53%
Excluding FHA/VA loans 0.62% 0.58% 0.51%
Allowance for loan losses to total loans 0.68% 0.64% 0.74%
Allowance for loan losses to
non-performing loans:
Including FHA/VA loans 13.11% 11.57% 16.49%
Excluding FHA/VA loans 89.61% 88.59% 104.19%
Allowance for loan losses to
non-performing assets:
Including FHA/VA loans 12.76% 11.44% 16.42%
Excluding FHA/VA loans 75.53% 81.63% 101.21%
</TABLE>
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 December 31, 1996, the Company
held in its portfolio $144.7 million of FHA/VA loans most of which were
delinquent at the time of purchase. Such loans totaled $128.7 million at
December 31, 1995.
As a servicer of GNMA pools, the Company is obligated to remit to security
holders interest at the coupon rate regardless of whether such interest is
actually received from the underlying borrower. The Company, by purchasing such
delinquent loans out of the pools, is able to retain the benefit of the net
interest rate differential between the coupon rate it would otherwise be
obligated to pay to the GNMA security holder and the Company's current cost of
funds. Most of the Company's investment in delinquent FHA and VA loans is
recoverable through claims made against the FHA or VA, and any credit losses
incurred are not greater or less than if the FHA/VA loans remained in the GNMA
pools and the Company remained as servicer. The same risk from foreclosure or
from loss of interest exists for the Company as servicer or owner of the loan,
and the Company, by purchasing delinquent FHA/VA loans, assumes only the
interest rate risk associated with investing in a fixed-rate loan if foreclosure
does not occur.
The FHA/VA loans acquired from third parties are purchased at a discount
adequate to compensate the Company for the credit and interest rate risks
associated with their purchase. The Company purchased $4.5 million of insured
FHA and guaranteed VA loans from third parties during 1996.
<PAGE>
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 maturing debt
securities, advances from the FHLB, and other borrowed funds. Proceeds from
mortgage banking activities are also a source of funds. While scheduled
maturities of debt 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 December 1996, the Bank had liquidity and short-term liquidity ratios of
8.05% and 4.29%, respectively.
At December 31, 1996, the Company had commitments outstanding to originate loans
totaling $93.1 million, some of which were to be originated for sale in the
secondary market. The Company anticipates that it will have sufficient funds
available to meet its current loan origination commitments.
The Bank is subject to various regulatory capital requirements administered by
the OTS. Currently, the minimum required levels are a tangible capital ratio of
1.5% of tangible assets, a core capital ratio of 3.0% of adjusted tangible
assets, and a risk-based capital ratio of 8.0% of risk-weighted assets. At
December 31, 1996, the Bank's capital substantially exceeded each of the OTS
capital requirements.
In accordance with federal regulations, at the time the Bank converted to a
stock institution, the Bank restricted a portion of retained earnings by
establishing a liquidation account. The liquidation account is maintained for
the benefit of eligible account holders who continue to maintain their accounts
at the Bank. The liquidation account is reduced annually to the extent that
eligible account holders have reduced their qualifying deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation, each eligible
account holder is entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held.
Under current regulations, the Bank is not permitted to pay dividends to the
Parent Company on its stock after the conversion if its regulatory capital would
thereby be reduced below (i) the amount then required for the aforementioned
liquidation account or (ii) the Bank's regulatory capital requirements. As a
"Tier 1" institution (an institution with capital in excess of its capital
requirements, both immediately before the proposed capital distribution and on a
pro forma basis after giving effect to such distribution), the Bank may make
capital distributions without the prior consent of the OTS in any calendar year
up to the greater of (i) 100% of its net income to date during such calendar
year plus the amount that would reduce by one-half its capital surplus ratio at
the beginning of such calendar year, or (ii) 75% of its net income for the most
recent four quarters. At December 31, 1996, the Bank would be permitted to pay
up to $70.8 million in dividends to the Parent Company under these regulations.
The Company paid its initial quarterly cash dividend of $.08 during the 1994
fourth quarter. The quarterly dividend rate was increased 25% to $.10 per share
during the second quarter of 1995 and was again increased during the second
quarter of 1996 by 20% to $.12 per share. Total dividends of $.46 per share were
paid during 1996 and represented a dividend payout ratio of 33.8%. Although the
Company intends to pay a quarterly cash dividend, the payment of future
dividends will depend on consolidated earnings, financial condition, liquidity,
capital and other factors, including economic conditions and any regulatory or
statutory restrictions.
During 1996 the Company repurchased 813,000 shares of its outstanding common
stock at a total cost of $20.7 million pursuant to two Stock Repurchase Plans.
This included 67,000 shares under the plan announced in August 1996 for the
purchase of up to 709,000 shares. Management determined that the repurchases
were in the best interest of the Company's shareholders and that the Company
remained well capitalized.
<PAGE>
IMPACT OF NEW LEGISLATION
The Small Business Job Protection Act passed by Congress in August 1996 included
a provision that repealed the percentage of taxable income bad debt deduction
for federal income tax purposes. The Bank used this method to determine its bad
debt deduction when computing federal taxes in applicable years. This new
legislation also requires recapture of the excess of bad debt reserves over the
base year reserves (December 31, 1987). For years subsequent to the base year, a
deferred tax liability has been recorded by the Bank for an amount equal to the
excess of the bad debt reserves over the base year reserves; thus no additional
tax liability is required as a result of this legislation. Under the new
legislation, the Bank is required to use the specific charge-off method to
calculate the bad debt deduction for federal income tax purposes. The new
legislation is effective for calendar years beginning after December 31, 1995.
The Deposit Insurance Funds Act of 1996 was passed by Congress and signed into
law by the President on September 30, 1996. This legislation includes provisions
designed to recapitalize SAIF and required all insured savings institutions to
pay a special assessment of 65.7 cents for every $100 (0.657%) of applicable
deposits held as of March 31, 1995. The Company took a charge in the third
quarter of $6.3 million net of taxes, or $.45 per share, as required by this
legislation. As a result of the recapitalization, the FDIC lowered SAIF premiums
from $0.23 per $100 of insured deposits to $0.064 per $100 of insured deposits,
thereby lowering the Company's federal deposit insurance rates by 72%, effective
January 1, 1997, which will enhance earnings in future periods.
IMPACT OF NEW ACCOUNTING STANDARD
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," which requires adoption for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied prospectively. Earlier or retroactive application is
not permitted.
The accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities provided by this statement are based
on a financial-components approach that focuses on control. Under this approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished.
The statement requires that servicing assets and other retained interests in
transferred assets be measured by allocating the previous carrying amount
between the assets sold and the interests retained, if any, based on their
relative fair values at the date of transfer. Liabilities and derivatives
incurred or obtained as part of a transfer of financial assets are required to
be initially measured at fair value, if practicable. This statement also
requires that servicing assets and liabilities be subsequently measured by (a)
amortization in proportion to and over the period of estimated net servicing
income or loss and (b) assessment for asset impairment or increased obligation
based on their fair values.
SFAS No. 125 is not expected to have a material effect on the Company's
financial condition or results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of the Company's operations. Unlike industrial companies,
nearly all of the assets and liabilities of the Company are monetary in nature.
As a result, interest rates have a greater impact on the Company's performance
than do the effects of general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the price of
goods and services.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Board of Directors
Great Financial Corporation
Louisville, Kentucky
We have audited the accompanying consolidated balance sheets of Great Financial
Corporation and subsidiary (Company) as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Great Financial Corporation and
subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1995 the
Company implemented Statement of Financial Accounting Standards (SFAS) No. 122,
"Accounting for Mortgage Servicing Rights", and in 1994 the Company changed its
method of accounting for securities to conform with SFAS No. 115.
/s/ Deloitte & Touche LLP
February 10, 1997
Louisville, Kentucky
<PAGE>
GREAT FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
(in thousands,
except share data)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 126,323 $ 84,167
Available-for-sale securities, at fair value 667,542 461,330
Mortgage loans held for sale 65,546 144,163
Loans receivable, net of allowance for loan losses
of $13,538 (1996)and $11,821 (1995) 1,867,511 1,667,363
Federal Home Loan Bank stock, at cost 34,816 21,917
Property and equipment 34,127 26,871
Mortgage servicing rights 37,187 35,751
Other assets 64,110 44,694
---------- ----------
TOTAL ASSETS $2,897,162 $2,486,256
========== ==========
LIABILITIES:
Deposits:
Non-interest bearing $ 112,129 $ 103,969
Interest bearing 1,691,874 1,354,892
---------- ----------
Total depdosits 1,804,003 1,458,861
Borrowed funds 781,297 714,209
Other liabilities 31,408 26,076
---------- ----------
Total liabilities 2,616,708 2,199,146
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $1.00 par value; 1,000,000
shares authorized and unissued
Common stock, $.01 par value; 24,000,000 shares
authorized; 16,531,250 shares issued 165 165
Additional paid-in capital 162,279 159,786
Retained earnings - subject to restrictions 177,201 163,822
Treasury stock, 2,414,518 (1996) and
1,608,355 (1995) shares, at cost (48,845) (28,230)
Unearned ESOP shares (10,194) (11,296)
Unearned compensation - stock compensation plans (3,058) (4,359)
Net unrealized gains on available-for-sale
securities 2,906 7,222
---------- ----------
Total stockholders' equity 280,454 287,110
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,897,162 $2,486,256
========== ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
GREAT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands,
except per share amounts)
<S> <C> <C> <C>
INTEREST INCOME:
Loans $157,893 $134,244 $ 99,975
Securities 40,323 25,526 17,962
Other 1,039 862 1,529
-------- -------- --------
Total interest income 199,255 160,632 119,466
-------- -------- --------
INTEREST EXPENSE:
Deposits 81,981 65,846 49,261
Borrowed funds 41,436 32,242 11,859
-------- -------- --------
Total interest expense 123,417 98,088 61,120
-------- -------- --------
NET INTEREST INCOME 75,838 62,544 58,346
PROVISION FOR LOAN LOSSES 2,586 2,283 1,786
-------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 73,252 60,261 56,560
-------- -------- --------
NON-INTEREST INCOME:
Servicing fee income 26,852 26,976 24,918
Amortization of mortage servicing rights (7,739) (6,391) (7,429)
Gain on sale of mortgage loans 6,890 4,308 7,203
Gain on sale of mortgage servicing rights 2,519 170 4,780
Gain on sale of securities 848 221
Other 6,468 4,149 4,512
-------- -------- --------
Net non-interest income 35,838 29,433 33,984
-------- -------- --------
NON-INTEREST EXPENSE:
Compensation and benefits 32,734 27,036 30,370
Office occupancy and equipment 9,265 7,150 7,734
Office supplies, postage and telephone 5,045 4,481 4,750
Advertising and marketing 3,231 2,549 2,015
State tax on deposits 1,675 1,452 1,299
Federal deposit insurance premiums 13,133 2,892 2,934
Other 13,543 10,233 9,947
-------- -------- --------
Total non-interest expense 78,626 55,793 59,049
-------- -------- --------
INCOME BEFORE INCOME TAXES 30,464 33,901 31,495
INCOME TAX EXPENSE 10,957 12,211 11,404
-------- -------- --------
NET INCOME $ 19,507 $ 21,690 $ 20,091
======== ======== ========
EARNINGS PER SHARE:
Primary $ 1.36 $ 1.46
Fully diluted $ 1.36 $ 1.44
EARNINGS PER SHARE SINCE CONVERSION ON MARCH 30, 1994 $ 1.05
See notes to consolidated financial statements.
</TABLE>
<PAGE>
GREAT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (in thousands, except per share
amounts)
<TABLE>
<CAPTION>
Net Unrealized
Treasury Gains (Losses)
Common Stock Additional Stock Unearned on Available-
------------- Paid-in Retained ------------- ESOP Unearned for-Sale
Shares Amount Capital Earnings Shares Amount Shares Compensation Securites Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994 $128,653 $128,653
Cumulative effect to January 1, 1994,
of change in accounting for securities $2,454 2,454
Proceeds from sale of common stock,
net of costs of issuance of $4,239 16,531 $165 $160,909 $(13,225) 147,849
Shares purchased for stock compensation
plans (3,058) $(6,613) (9,671)
Net income 20,091 20,091
Cash dividends declared ($0.08 per share) (1,216) (1,216)
Fair value of shares committed to be
released from ESOP plan 526 827 1,353
Compensation expense under stock
compensation plans 957 957
Net change in unrealized gains (losses)
on available-for-sale securities (5,834) (5,834)
------- ---- -------- -------- ------ ------ -------- -------- ------- ---------
Balance, December 31, 1994 16,531 165 158,377 147,528 (12,398) (5,656) (3,380) 284,636
------- ---- -------- -------- ------ ------ -------- -------- ------- ---------
Net Income 21,690 21,690
Cash dividends declared ($0.38 per share) (5,376) (5,376)
Fair value of shares committed to be
released from ESOP plan 1,047 1,102 2,149
Compensation expense under stock
compensation plans 1,297 1,297
Net change in unrealized gains (losses)
on available-for-sale securities 10,602 10,602
Purchase of treasury stock 1,611 (28,277) (28,277)
Exercise of stock options (20) (3) 47 27
Other 362 362
------- ---- -------- -------- ------ ------- -------- -------- ------- ---------
Balance, December 31, 1995 16,531 165 159,786 163,822 1,608 (28,230) (11,296) (4,359) 7,222 287,110
------- ---- -------- -------- ------ ------- -------- -------- ------- ---------
Net income 19,507 19,507
Cash dividends declared ($0.46 per share) (6,095) (6,095)
Fair value of shares committed to be
released from ESOP plan 1,827 1,102 2,929
Compensation expense under stock
compensation plans 1,301 1,301
Net change in unrealized gains (losses)
on available-for-sale securities (4,316) (4,316)
Purchase of treasury stock 813 (20,748) (20,748)
Exercise of stock options (33) (7) 133 100
Other 666 666
------- ---- -------- -------- ------ ------- -------- -------- ------- ---------
Balance, December 31, 1996 16,531 $165 $162,279 $177,201 2,414 $(48,845)$(10,194) $(3,058) $2,906 $280,454
======= ==== ======== ======== ====== ======= ======== ======== ======= =========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
GREAT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 19,507 $ 21,690 $ 20,091
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of:
Deferred fees (1,627) (5,452) (1,593)
Mortgage servicing rights 7,739 6,391 7,429
Discounts on securities (315) (490) (1,087)
Intangible assets 659 244 121
Depreciation and amortization of property and equipment 3,484 2,904 2,841
Provision for loan losses 2,586 2,283 1,786
ESOP and stock compensation plans expense 4,230 3,446 2,310
Net gain on sale of available-for-sale securities (848) (221)
Gain on sale of mortgage loans (6,890) (4,308) (7,203)
Gain on sale of mortgage servicing rights (2,519) (170) (4,780)
Proceeds from sales of loans 500,220 275,936 1,184,925
Originations and purchases of loans held for sale (414,643) (324,066) (854,574)
Net (gain) loss on sales of property and equipment and other assets 19 522 (1,046)
Federal Home Loan Bank stock dividend (1,977) (3,601) (841)
Changes in assets and liabilities, net of business acquired:
Accrued interest receivable (1,457) (5,457) (3,575)
Other assets 12,315 1,428 249
Other liabilities (9,301) (4,701) 2,555
---------- ---------- ----------
Net cash provided by (used in) operating activities 111,182 (33,622) 347,608
---------- ---------- ----------
INVESTING ACTIVITIES:
Purchases of available-for-sale securities (431,528) (159,607) (411,745)
Maturities of available-for-sale securities 84,406 35,230 241,492
Principal collected on mortgage-backed securities 62,604 35,677 29,870
Proceeds from sale of available-for-sale securities 128,045 3,966
Increase in loans receivable (75,705) (210,078) (353,753)
Purchase of Lexington Federal Savings Bank,
net of cash and cash equivalents acquired (30,363)
Purchase of First Federal Savings Bank of Richmond
net of cash and cash equivalents acquired (9,142)
Purchases of property and equipment and other assets (9,067) (3,815) (7,790)
Proceeds from sale of property and equipment 394 204 1,717
Originations of mortgage servicing rights (4,928) (1,693)
Purchases of mortgage servicing rights (4,337) (13,754) (2,430)
Proceeds from sale of mortgage servicing rights 2,609 170 5,083
Purchases of Federal Home Loan Bank stock (9,247)
Proceeds from sale of other real estate owned 1,313
---------- ---------- ----------
Net cash used in investing activities (285,804) (322,842) (497,556)
---------- ---------- ----------
</TABLE>
<PAGE>
GREAT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
FINANCING ACTIVITIES:
Net proceeds from issuance of common stock $147,849
Increase (decrease) in deposits $176,989 $163,714 (103,348)
Increase in short-term borrowings 1,795 43,593 3,988
Long-term advances from Federal Home Loan Bank 90,758 250,985 125,000
Payments on long-term advances from Federal Home Loan Bank (25,793) (4,404) (9,413)
Dividends paid (6,095) (5,376) (1,216)
Purchases of treasury stock (20,748) (28,277)
Exercise of stock options 100 27
Purchase of shares for recognition and retention plans (9,671)
Other (228) 3,356 110
---------- ---------- ----------
Net cash provided by financing activities 216,778 423,618 153,299
---------- ---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 42,156 67,154 3,351
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 84,167 17,013 13,662
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $126,323 $ 84,167 $ 17,013
========== ========== ==========
CASH PAID DURING THE YEAR FOR:
Interest $122,231 $ 96,440 $ 61,185
Income taxes $ 5,371 $ 8,688 $ 9,499
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Additions to real estate acquired in settlement of loans $ 3,231 $ 2,145 $ 163
See notes to consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONVERSION, PRINCIPLES OF CONSOLIDATION AND BUSINESS - On March 30, 1994,
Great Financial Federal completed a conversion from a federal mutual
savings and loan association to a federal stock savings bank, Great
Financial Bank, FSB (Bank). All stock of the Bank was issued to Great
Financial Corporation (Parent Company), a holding company formed in
connection with the conversion. Simultaneously, the Parent Company
completed an offering and sale of its common stock. The accompanying
consolidated financial statements include the accounts of Great Financial
Corporation and its subsidiary, Great Financial Bank, FSB (collectively
the Company). All significant intercompany balances and transactions have
been eliminated.
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-earnings 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.
Non-interest income from mortgage banking activities includes mortgage
servicing fee income and net gains on sale of mortgage loans and mortgage
servicing rights.
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.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks, federal
funds sold and securities purchased under agreements to resell.
SECURITIES - Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." Available-for-sale securities
are reported at fair value and consist of debt and mortgage-backed
securities and certain equity securities. Unrealized holding gains and
losses, net of income tax, on available-for-sale securities are reported
as a net amount in a separate component of stockholders' equity until
realized.
Federal Home Loan Bank stock is not considered to be a marketable equity
security under SFAS No. 115 and, therefore, is carried at cost.
MORTGAGE LOANS HELD FOR SALE - Mortgage loans originated or purchased and
intended for sale in the secondary market are carried at the lower of cost
or aggregate market value. The Company controls its interest rate risk
with respect to mortgage loans held for sale and loan commitments expected
to close by entering into forward delivery contracts. The aggregate market
value of mortgage loans held for sale considers the sales prices of such
forward delivery contracts. The Company also provides currently for any
losses on uncovered commitments to lend or sell.
LOANS RECEIVABLE - Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or payoff are
reported at the principal amount outstanding net of unearned discount, net
deferred loan origination fees, undisbursed portions of loans in process
and allowance for loan losses.
Loan origination fees net of certain direct loan origination costs are
deferred and recognized over the contractual lives of the related loans as
an adjustment of the loans' yield using the level yield method.
The accrual of interest is discontinued on loans when, in the judgment of
management, the probability of collection of interest is deemed to be
insufficient to warrant further accrual (usually when a loan is delinquent
for more than 90 days). When interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest income on such loans is then
recognized only to the extent cash is received and future collection
of principal is probable.
<PAGE>
ALLOWANCES FOR LOSSES - The allowance for loan losses is maintained at an
amount management considers adequate to cover estimated losses in loans
receivable, which are deemed probable and estimable. The Company also
provides an allowance for nonrecoverable foreclosure costs in recognition
of the potential for losses related to loans serviced for others.
Consumer loans, other than revolving loans, are charged to the allowance
for loan losses when they become 120 days delinquent unless they are well
secured and in the process of collection. Unsecured revolving loans are
charged to the allowance for loan losses when a loss has been determined
or at 180 days delinquent, whichever comes first. Revolving loans secured
by real estate for which a loss has been determined or which have reached
180 days delinquent, are charged to the allowance for loan losses to the
extent that book value exceeds fair value, less estimated costs to sell.
All other loans are charged to the allowance for loan losses when, in
management's opinion, all or a portion of the loan balance is deemed to be
uncollectible.
Although management believes it uses the best information available to
make determinations with respect to the Company's allowances, future
adjustments may be necessary if economic and other conditions differ
substantially from the economic and other conditions in the assumptions
used in making the initial determinations, and such adjustments could be
material.
Effective January 1, 1995, the Company implemented SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118. SFAS No. 114 defines a loan as "impaired" when it is probable that a
creditor will be unable to collect all amounts due according to the
contractual terms of the loan agreement. The Company has defined its
population of impaired loans as commercial real estate loans and
commercial loans which are "classified" as substandard, doubtful, or loss,
as defined by Office of Thrift Supervision (OTS) regulations. The Company
recognizes interest income on an impaired loan when earned, unless the
loan is on nonaccrual status, in which case interest income is recognized
when received.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation is provided by both the straight-line and accelerated methods
over the estimated useful lives of the depreciable assets. Estimated lives
are 30 to 50 years for buildings and improvements, 5 to 10 years for
furniture, fixtures, and equipment, and 3 to 5 years for transportation
equipment.
MORTGAGE SERVICING RIGHTS (MSRs) - MSRs are capitalized and amortized in
proportion to, and over the period of, the estimated future net servicing
income.
Prior to July 1, 1995, the Company accounted for purchased mortgage
servicing rights in accordance with the provisions of SFAS No. 65,
"Accounting For Certain Mortgage Banking Activities." Under SFAS No. 65,
the costs of originating mortgage servicing rights were charged to
earnings when the related loans were sold and the costs of purchased
mortgage servicing rights (PMSRs) were capitalized.
Effective July 1, 1995, the Company adopted the SFAS No. 122, "Accounting
for Mortgage Servicing Rights," which amended SFAS No. 65. SFAS No. 122
eliminates the distinction between originated mortgage servicing rights
(OMSRs) and PMSRs and requires that an entity recognize, as separate
assets, rights to service mortgage loans for others, however those
servicing rights are acquired. An entity that acquires mortgage servicing
rights through either the purchase or origination of mortgage loans,
and sells or securitizes those loans with the servicing rights retained
must allocate the total cost of the mortgage loans to the mortgage
servicing rights and the loans (without the mortgage servicing rights)
based on their relative fair values. Further, SFAS No. 122 requires that
an entity assess its capitalized mortgage servicing rights for impairment
based on the fair value of those rights. Impairment of servicing rights
is recognized through a valuation allowance. The Company recorded
originated mortgage servicing rights totaling $1,693,000 during the six
months ended December 31, 1995. The impact of adopting SFAS No. 122 was
an increase in net income of $1,053,000 or $0.07 per share for the year
ending December 31, 1995.
<PAGE>
To determine the fair value of OMSRs, the Company uses market prices under
comparable servicing sale contracts when available or, alternatively, uses
a valuation model that calculates the present value of future servicing
cash flows. In applying this valuation method, the Company incorporates
assumptions that it believes market participants would use in estimating
future net servicing income which includes estimates of the cost of
servicing per loan, the discount rate, float value, an inflation rate,
ancillary servicing income, loan prepayment speeds, and default rates.
For purposes of evaluating and measuring impairment of capitalized
mortgage servicing rights, the Company stratifies such rights based upon
the predominate risk characteristics of the underlying loans. The Company
has determined those risk characteristics to be loan type, portfolio
seasoning and interest rate.
<PAGE>
GOODWILL - Goodwill, included in other assets, represents the excess of
the cost of acquired companies over the fair value of the net assets
acquired, and is being amortized on a straight-line basis over 15 years.
INCOME TAXES - Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled.
As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.
LOAN SERVICING - Loan servicing fees are credited to income as monthly
principal and interest payments are collected on mortgages. Costs of loan
servicing are charged to expense as incurred.
FINANCIAL INSTRUMENTS - In the ordinary course of business the Company
enters into off-balance sheet financial instruments consisting of
commitments to extend credit, commitments under credit card and related
arrangements, commercial letters of credit and standby letters of credit.
Such financial instruments are recorded in the financial statements when
they are funded or related fees are incurred or received.
FAIR VALUES OF FINANCIAL INSTRUMENTS - The following methods and
assumptions were used by the Company in estimating fair values of
financial instruments as disclosed herein:
Cash and cash equivalents - The carrying amount is a reasonable estimate
of fair value.
Available-for-sale securities - Fair value of debt and equity securities
equals quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities. The estimated fair value for mortgage-backed securities issued
by government-sponsored entities is based on quoted market prices or
quoted market prices of similar securities.
Mortgage loans held for sale - Estimated fair value is determined as the
current quoted secondary market price for such loans without regard to the
Company's other commitments to make and sell loans or mortgage-backed
securities.
Loans receivable - The fair value of adjustable rate one-to-four family
residential mortgage loans is estimated by discounting the cash flows
until the next repricing date at the yield at which the loans could be
sold into the secondary market. At the repricing date, it is assumed that
these loans will reprice at the then current market rate. For all other
loans, the fair value is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities.
Federal Home Loan Bank stock - The carrying amount is a reasonable
estimate of fair value.
Mortgage servicing rights - Fair value is determined based on market
prices of comparable servicing arrangements when available or
alternatively a valuation model that calculates the present value of
future servicing cash flows. Cash flows are estimated using assumptions
prevalent in the market with respect to such factors as cost of servicing
per loan, discount rate, float value, inflation rate, ancillary servicing
income, loan prepayment speeds, and default rates.
Deposits - The fair value of interest-bearing demand accounts, savings
accounts and certain money market deposits is the amount payable on demand
at the reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using the rates currently offered for deposits of
similar remaining maturities.
Borrowed funds - The fair value is estimated based on the estimated
present value of future cash outflows using the current rates at which
similar loans with the same remaining maturities could be obtained.
<PAGE>
Commitments to extend credit - The fair value of commitments to extend
credit is based upon the difference between the interest rate at which the
Company is committed to make the loans and the current rates at which
similar loans would be made to borrowers with similar credit ratings and
for the same remaining maturities, adjusted for the estimated volume of
loan commitments actually expected to close.
Commitments to sell - The fair value of commitments to sell loans or
mortgage-backed securities is based upon the difference between the prices
at which the Company is committed to sell the loans or mortgage-backed
securities and the current quoted secondary market price for similar loans
or mortgage-backed securities.
ESOP, STOCK COMPENSATION, AND STOCK OPTION PLANS - Shares of common stock
issued to the Company's employee stock ownership plan (ESOP) are initially
recorded as unearned ESOP shares in stockholders' equity at the fair value
of the shares at the date of issuance to the plan. As shares are committed
to be released as compensation to employees, the Company reduces the
carrying value of the unearned shares and records compensation expense
equal to the current fair value of the shares.
Shares of common stock awarded under the Company's stock compensation
plans are initially recorded as unearned compensation in stockholders'
equity at the fair value of the shares at the date of award. The total
compensation cost is measured by the fair value of the shares at the date
of the award and is being recognized as expense over sixty months, the
term over which the awards vest.
The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock.
EARNINGS PER SHARE - Primary earnings per share for 1996 and 1995 and
earnings per share since conversion on March 30, 1994 are computed on the
basis of the weighted average number of shares of common stock and common
stock equivalents outstanding of 14,293,326, 14,905,852, and 15,863,166
respectively. Shares of common stock held by the ESOP are considered
outstanding when they are committed to be released. Shares of common stock
held by the stock compensation plans are considered outstanding when they
are awarded to the participants.
Fully-diluted earnings per common share for 1996 and 1995 are computed on
the basis of 14,356,511 and 15,068,240 weighted average number of shares
of common stock and common stock equivalents outstanding. Fully diluted
earnings per share in 1994 were the same as primary earnings per share.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenue and
expense during the reporting periods. Actual results could differ from
those estimates.
RECLASSIFICATIONS AND PRESENTATIONS - Certain 1995 and 1994 amounts have
been reclassified to conform to the 1996 presentations.
<PAGE>
2. CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
1996 1995
(in thousands)
<S> <C> <C>
Cash and due from banks $ 27,702 $29,792
Interest-bearing deposits with banks 1,315
Federal funds sold 33,200 54,375
Securities purchased under agreements
to resell 64,106
-------- -------
Total cash and cash equivalents $126,323 $84,167
======== =======
</TABLE>
The Company is required by OTS regulations to maintain an average daily
balance of liquid assets equal to a monthly average of not less than a
specified percentage of its net withdrawable deposit accounts plus
short-term borrowings. The Company was in compliance with these
requirements at December 31, 1996.
The Company entered into agreements to purchase U.S. Treasury securities
under agreements to resell substantially identical securities. The
amounts advanced under these agreements represent short-term investments.
The securities are held by the Company. At December 31, 1996, these
agreements mature within 30 days. Securities purchased under agreements
to resell averaged approximately $3,628,000 during 1996, and the maximum
amount outstanding at any month-end was $64,106,000.
3. SECURITIES
<TABLE>
<CAPTION>
1996
------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
<S> <C> <C> <C> <C>
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
========= ========== ========== =========
1995
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
<S> <C> <C> <C> <C>
Available-for-sale securities:
U.S. Government and agency obligations $112,082 $ 793 $ (100) $112,775
Other debt securities 2,077 34 2,111
-------- -------- -------- --------
Total debt securities 114,159 827 (100) 114,886
Mortgage-backed securities 334,946 9,317 (171) 344,092
Equity securities 1,115 1,237 2,352
-------- -------- -------- --------
Total available-for-sale securities $450,220 $11,381 $ (271) $461,330
======== ======== ======== ========
</TABLE>
<PAGE>
On December 31, 1995, as permitted by the Financial Accounting Standards
Board's Special Report "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities," the
Company transferred held-to-maturity securities with an amortized cost of
$160,021,000 and unrealized gains of $5,501,000 to available-for-sale
securities. This reclassification had the effect of increasing
stockholders' equity by $3,576,000, net of taxes.
Gross realized gains on the sale of available-for-sale securities totaled
$2,013,956 and $226,684 and gross realized losses totaled $1,165,526 and
$5,334 during the years ended December 31, 1996 and 1995, respectively.
Cost is determined by the specific identification method in computing
gains and losses. There were no sales of securities in 1994.
The amortized cost and estimated fair value of available-for-sale debt
securities at December 31, 1996, by contractual maturity, are as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
(in thousands)
<S> <C> <C>
Due in one year or less $ 83,350 $ 83,373
Due after one year through five years 82,072 82,351
Due after five years through ten years 25,501 25,609
---------- ---------
Total debt securities $190,923 $191,333
========== =========
</TABLE>
Certain available-for-sale securities, with a fair value of $31,867,000 at
December 31, 1996, were pledged to secure public and other deposits.
<PAGE>
4. LOANS RECEIVABLE
<TABLE>
<CAPTION>
1996 1995
(in thousands)
<S> <C> <C>
Real estate loans:
Loans on residential properties:
One-to-four units $ 1,392,761 $ 1,342,667
More than four units 150,816 132,055
Commercial real estate loans 102,409 62,008
Construction and land loans 129,770 87,509
----------- -----------
Total real estate loans 1,775,756 1,624,239
Other loans - primarily consumer loans 149,647 83,568
----------- -----------
Total real estate and other loans 1,925,403 1,707,807
----------- -----------
Less:
Undisbursed portion of loans 41,344 24,138
Unearned discounts and unamortized fees 3,010 4,485
Allowance for loan losses 13,538 11,821
----------- -----------
Total reductions 57,892 40,444
----------- -----------
Loans receivable, net $ 1,867,511 $ 1,667,363
=========== ===========
</TABLE>
Approximately $1,161,585,000 and $998,470,000 of the Company's total real
estate loans at December 31, 1996 and 1995, respectively, represent loans
to borrowers in Kentucky and southern Indiana, the Company's primary
market. The balance of the loan portfolio is geographically dispersed
throughout the United States. The Company's policy is to make loans that
generally do not exceed 80% of appraised value of the underlying property
for conventional loans, and to require borrowers to purchase private
mortgage insurance where the borrower's down payment is less than 20%.
The Company purchases certain delinquent Federal Housing Administration
(FHA)/Department of Veterans Affairs (VA) insured/guaranteed loans from
GNMA pools it services for others and from third parties. Included in real
estate loans on one-to-four unit residential properties in the above table
are $144,688,000 and $128,692,000 of purchased FHA/VA loans at December
31, 1996 and 1995, respectively.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 11,821 $ 11,076 $ 10,108
Provision charged to income 2,586 2,283 1,786
Charge-offs (1,548) (1,844) (1,376)
Recoveries 179 106 153
Transfers from allowance for nonrecoverable
foreclosures costs 405
Acquired in mergers 500 200
-------- -------- --------
Balance, end of year $ 13,538 $ 11,821 $ 11,076
======== ======== ========
</TABLE>
<PAGE>
Information about the Company's investment in impaired loans, all of which are
commercial real estate loans, is as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
(in thousands)
<S> <C> <C>
Gross impaired loans which have allowances $ 2,601
Less: Related allowances for loan losses (258)
--------
Net impaired loans with related allowances 2,343
Impaired loans with no related allowances $ 6,827 4,734
-------- --------
Total $ 6,827 $ 7,077
======== ========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995
(in thousands)
<S> <C> <C>
Average impaired loans outstanding $ 6,604 $ 6,891
Interest income recognized $ 555 $ 544
Interest income received $ 534 $ 566
</TABLE>
All of the Company's impaired loans are valued based on the fair value of
collateral.
5. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1995
(in thousands)
<S> <C> <C>
Land $ 4,856 $ 3,473
Buildings and improvements 26,573 20,934
Furniture, fixtures and equipment 26,709 22,221
-------- --------
Total property and equipment 58,138 46,628
Less accumulated depreciation (24,011) (19,757)
-------- --------
Net property and equipment $34,127 $ 26,871
======== ========
</TABLE>
The Company is the lessee under long-term noncancelable operating leases
covering certain offices and equipment. Net rental expense was $1,287,000,
$1,201,000 and $2,162,000 for 1996, 1995 and 1994, respectively.
Minimum rental commitments as of December 31, 1996 are payable as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1997 $ 1,416
1998 1,331
1999 850
2000 658
2001 607
Thereafter 3,893
----------
Total minimum rental commitments $ 8,755
==========
</TABLE>
<PAGE>
6. LOAN SERVICING
The Company was servicing a portfolio consisting of 83,000, 79,300 and
66,300 loans owned by investors at December 31, 1996, 1995 and 1994,
respectively, that are not recorded in the financial statements. Mortgage
loans serviced for others are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
GNMA $3,184,843 $3,215,249 $2,576,015
FNMA 970,435 1,226,666 1,356,769
FHLMC 672,976 510,068 428,838
Other investors 240,642 215,567 217,224
---------- ---------- ----------
Total servicing portfolio $5,068,896 $5,167,550 $4,578,846
========== ========== ==========
</TABLE>
During the year ended December 31, 1996, the Company issued 47 GNMA loan
pools with security proceeds of $74,508,000. Additionally, the Company
was servicing 3,634 GNMA loan pools at December 31, 1996.
In addition to servicing loans for others, the Company is a subservicer
for third-party servicing owners, including GNMA and FHLMC. The
subservicing arrangements are generally for a fixed term substantially
shorter than the related loan maturities. In some cases, these
arrangements can be terminated at the servicing owner's option and
sometimes without penalty for termination. At December 31, 1996 and 1995,
the Company subserviced a total of 10,700 loans and 20,000 loans,
respectively, having an unpaid principal balance of $908,495,000 and
$1,126,144,000, respectively.
<PAGE>
Custodial escrow balances maintained in connection with the foregoing loan
servicing were $102,339,000 and $108,424,000 at December 31, 1996 and
1995, respectively, of which $76,257,000 and $86,554,000 are included in
deposits in the accompanying consolidated balance sheets.
The Company collects and processes payments made by borrowers, remits
funds to investors, taxing authorities, and insurers, and acts as
fiduciary in foreclosing and disposing of collateral properties. In
connection with its fiduciary responsibilities, the Company advances funds
that are repaid from sale proceeds by way of reimbursement from investors
or through claims submitted to private mortgage insurance companies, the
FHA, or the VA. These advances totaled $5,675,000 and $4,148,000 at
December 31, 1996 and 1995, respectively, and are included in other assets
in the accompanying consolidated balance sheets.
Under certain circumstances, and in the case of FHA/VA claims due largely
to the contractual nature of the loan insurance/guarantee contract, these
reimbursement requests or claims cannot be collected in full. In
recognition of the potential for current advances that may not be
collected, as well as for possible future unrecoverable foreclosure costs
that may be anticipated from the total population of loans serviced for
others, the Company has established an allowance for nonrecoverable
foreclosure costs with provisions for losses charged against income. The
allowance is included in other assets in the accompanying consolidated
balance sheets.
A summary of activity in the allowance account is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 2,319 $ 2,246 $ 2,542
Provision charged to income 2,395 1,516 213
Charge-offs (2,699) (1,443) (104)
Transfer to allowance for loan losses (405)
-------- -------- --------
Balance, end of year $ 2,015 $ 2,319 $ 2,246
======== ======== ========
</TABLE>
Following is an analysis of the changes in the balance of MSRs:
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year $35,751 $24,511 $30,063
Additions 9,265 17,631 2,430
Amortization (7,739) (6,391) (7,429)
Sales (90) (553)
--------- --------- ---------
Balance, end of year $37,187 $35,751 $24,511
========= ========= =========
</TABLE>
<PAGE>
7. DEPOSITS
<TABLE>
<CAPTION>
1996 1995
---------------------------------- ----------------------------------
Average Average
Rate Amount Percent Rate Amount Percent
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing accounts $ 112,129 6.22% $ 103,969 7.13%
Interest-bearing accounts: ----------- ------- ----------- -------
Non-certificate accounts:
Demand deposits 3.83% 167,694 9.29 2.87% 76,965 5.28
Money market 4.61% 199,282 11.05 4.87% 148,129 10.15
Passbook savings 3.22% 134,815 7.47 3.09% 126,642 8.68
----------- ------- ----------- -------
Total non-certificate accounts 501,791 27.81 351,736 24.11
----------- ------- ----------- -------
Certificates of deposit:
Less than 4.00% 2.80% 1,697 0.09 3.91% 22,594 1.55
4.01% to 6.00% 5.45% 870,383 48.25 5.46% 509,997 34.95
6.01% to 8.00% 7.00% 297,717 16.50 6.84% 446,927 30.64
8.01% to 10.00% 8.79% 20,286 1.13 8.89% 23,621 1.62
10.01% and above 10.24% 17 .00
----------- ------- ----------- -------
Total certificates of deposit 1,190,083 65.97 1,003,156 68.76
----------- ------- ----------- -------
Total interest-bearing accounts 1,691,874 93.78 1,354,892 92.87
----------- ------- ----------- -------
Total deposits $1,804,003 100.00% $1,458,861 100.00%
=========== ======= =========== =======
</TABLE>
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000 was $175,859,000 and $109,449,000 at December 31, 1996 and 1995,
respectively.
Contractual maturities of certificates of deposit at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Average
Amount Rate Percent
(in thousands)
<S> <C> <C> <C>
1997 $ 743,074 5.78% 62.44%
1998 241,584 5.79% 20.30
1999 78,161 6.49% 6.57
2000 64,981 6.15% 5.46
2001 13,537 6.55% 1.14
Thereafter 48,746 6.74% 4.09
------------ -------
Total certificates of deposit $1,190,083 100.00%
============ =======
</TABLE>
<PAGE>
Interest expense on deposits is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Demand deposits $ 4,433 $ 1,479 $ 1,012
Money market 8,343 6,047 3,428
Passbook savings 4,181 4,103 4,813
Certificates of deposit 65,024 54,217 40,008
-------- -------- --------
Total interest expense $81,981 $65,846 $49,261
======== ======== ========
</TABLE>
8. BORROWED FUNDS
<TABLE>
<CAPTION>
1996 1995
--------------------------- ---------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
(dollars in thousands)
<S> <C> <C> <C> <C>
Short-term borrowings:
Securities sold under agreements
to repurchase $ 9,000 5.37% $176,433 6.03%
Advances from Federal Home Loan Bank 200,924 5.62% 2,150 6.14%
Borrowings under lines of credit 87,329 5.51% 116,875 5.27%
--------- ---------
Total short-term borrowings 297,253 295,458
--------- ---------
Long-term borrowings from Federal
Home Loan Bank:
Adjustable rate advances, interest based
on LIBOR; 5.61% (1996) and 6.00% (1995) 150,000 100,000
Fixed rate advances, 6.27% (1996)
and 6.29% (1995) 298,561 278,489
Mortgage matched and other advances
payable monthly through 2026 with
interest rates from 3.88% to 8.05% (1996)
and from 5.51% to 8.05% (1995) 35,483 40,262
--------- ---------
Total long-term borrowings 484,044 418,751
--------- ---------
Total borrowed funds $781,297 $714,209
========= =========
</TABLE>
<PAGE>
Information concerning borrowings in 1996 and 1995 under securities sold under
agreements to repurchase is summarized as follows:
<TABLE>
1996 1995
(dollars in thousands)
<S> <C> <C>
Average balance during the period $ 72,295 $147,651
Average interest rate during the period 5.48% 6.02%
Maximum month-end balance during the period $140,341 $240,750
Mortgage-backed securities underlying
the agreements at end of period:
Carrying value $ 10,339 $176,973
Fair value $ 10,372 $182,234
</TABLE>
<PAGE>
Mortgage-backed securities sold under agreements to repurchase were
delivered to the broker-dealers who arranged the transactions. The
broker-dealers may have sold, loaned, or otherwise disposed of such
securities to other parties in the normal course of their operations, and
have agreed to resell the Company substantially identical securities at
the maturities of the agreements. The agreements at December 31, 1996
mature within one year.
Advances from the Federal Home Loan Bank are collateralized by a blanket
lien security agreement on the residential real estate loan portfolio in
the amount of $1,027,523,000 and $631,396,000 at December 31, 1996 and
1995, respectively.
Details of borrowings under lines of credit are as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------- ----------------------------
Line of Line of
Credit Borrowings Credit Borrowings
(in thousands)
<S> <C> <C> <C> <C>
Relocation loan funding line of credit $150,000 $84,600 $100,000 $ 99,700
Other line of credit 25,000 2,729 25,000 17,175
-------- ------- -------- --------
Totals $175,000 $87,329 $125,000 $116,875
======== ======= ======== ========
</TABLE>
Borrowings under the $150,000,000 line of credit were used to finance
mortgage loans held for sale which were made to relocating employees of a
third party. The interest rate on this line of credit is indexed to a
certain short-term interest rate. Borrowings under this line of credit are
guaranteed by the third party to whom the Company has granted a security
interest in mortgage loans that are held for sale. Gains and losses, if
any, on the sale of such mortgage loans to permanent investors accrue to
the account of the third-party guarantor.
The interest rate on the other line of credit gives effect to, among other
factors, fluctuations in various short-term interest rates and cash
balances on deposit with the lending institution. Borrowings are
collateralized by certain rights and interests in various servicing
agreements.
Annual maturities of the long-term borrowings as of December 31, 1996, are as
follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1997 $277,294
1998 22,987
1999 69,461
2000 67,194
2001 25,670
Thereafter 21,438
---------
Total long-term borrowings $484,044
=========
</TABLE>
Interest expense on borrowed funds is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Short-term borrowings $13,141 $16,326 $ 5,396
Long-term borrowings 28,295 15,916 6,463
------- ------- -------
Total interest expense on borrowed funds $41,436 $32,242 $11,859
======= ======= =======
</TABLE>
<PAGE>
9. REGULATORY CAPITAL REQUIREMENTS
The Company's subsidiary bank is subject to various regulatory capital
requirements administered by the OTS. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by the OTS that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, a bank must meet specific capital guidelines that involve
quantitative measures of a bank's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting
practices. The amounts and classification of a bank's capital are also
subject to qualitative judgment by the OTS about components, risk
weightings, and other factors.
Qualitative measures established by regulation to ensure capital adequacy
and to be classified as "well capitalized" require the Bank to maintain
minimum amounts and ratios of Total, Tier 1, Core and Tangible capital as
set forth in the following table. In their evaluation of capital
adequacy, the regulators assess exposure to declines in the economic value
of the Bank's capital adequacy, as well as exposure to declines in the
economic value of capital due to changes in interest rates. As of December
31, 1996, the most recent notification from OTS categorized the Bank as
"well capitalized" under the regulatory framework for prompt corrective
action. There are no conditions or events since that notification that
management believes have changed the Bank's category.
<TABLE>
<CAPTION>
To Be Considered
Well Capitalized
For Capital Under Prompt Correction
Actual Adequacy Purposes Action Provisions
------------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1996 (dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital
(to risk-weighted assets) $251,135 18.55% $108,301 8.00% $135,376 10.00%
Tier 1 capital (to risk-weighted assets) 237,862 17.57% N/A N/A 81,225 6.00%
Core capital (to adjusted tangible assets) 237,862 8.26% 86,461 3.00% 144,063 5.00%
Tangible capital (to tangible assets) 237,784 8.25% 43,218 1.50% N/A N/A
As of December 31, 1995:
Total risk-based capital
(to risk-weighted assets) $249,009 20.34% $ 97,928 8.00% $122,409 10.00%
Tier 1 capital (to risk-weighted assets) 239,706 19.58% N/A N/A 73,446 6.00%
Core capital (to adjusted tangible assets) 239,706 9.70% 74,162 3.00% 123,604 5.00%
Tangible capital (to tangible assets) 239,598 9.69% 37,080 1.50% N/A N/A
</TABLE>
<PAGE>
10. STOCKHOLDERS' EQUITY
In accordance with federal regulations, at the time the Bank converted
from a federal mutual savings and loan association to a federal stock
savings bank, the Bank restricted a portion of retained earnings by
establishing a liquidation account. The liquidation account is maintained
for the benefit of eligible account holders who continue to maintain their
accounts at the Bank. The liquidation account is reduced annually to the
extent that eligible account holders have reduced their qualifying
deposits. Subsequent increases will not restore an eligible account
holder's interest in the liquidation account. Only in the unlikely event
of a complete liquidation, each eligible account holder would be entitled
to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts
then held.
Under current regulations, the Bank is not permitted to pay dividends to
the Parent Company on its stock after the conversion if its regulatory
capital would thereby be reduced below (i) the amount then required for
the aforementioned liquidation account or (ii) the Bank's regulatory
capital requirements. As a "Tier 1" institution (an institution with
capital in excess of its capital requirements, both immediately before the
proposed capital distribution and on a pro forma basis after giving effect
to such distribution), the Bank may make capital distributions without the
prior consent of the OTS in any calendar year up to the greater of (i)
100% of net earnings to date during such calendar year, plus the amount
that would reduce by one-half the capital surplus ratio at the beginning
of such calendar year, or (ii) 75% of its net income for the most recent
four quarters. At December 31, 1996, the Bank would be permitted to pay up
to $70,827,000 in dividends to the Parent Company under these regulations.
11. INCOME TAXES
The Company files a consolidated federal income tax return. The Bank is
permitted under the Internal Revenue Code (Code) to deduct an annual
addition to a reserve for bad debts in determining taxable income, subject
to certain limitations. This addition differs from the provision for loan
losses recorded for financial accounting purposes. For years prior to
1996, the Bank's deduction was based on the percentage of taxable income
method as defined by the Code. Tax bad debt deductions for years prior to
1988 are included in taxable income of later years only if the reserve is
used subsequently for purposes other than to absorb bad debt losses.
Because the Bank does not intend to use the reserve for purposes other
than to absorb such losses, no deferred income taxes have been provided on
such bad debt deductions prior to January 1, 1988. Retained earnings at
December 31, 1996, includes approximately $43,077,000 representing bad
debt deductions for which no deferred income taxes have been provided.
In August 1996, legislation was passed by Congress that (i) repealed the
percentage of taxable income bad debt deduction and (ii) requires
recapture of the excess of bad debt reserves over the base year reserves
(December 31, 1987). These changes were effective for calendar year 1996.
For years subsequent to the base year, a deferred tax liability has been
recorded; thus no additional tax liability is required as a result of this
legislation.
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1996
and 1995, are as follows:
<TABLE>
<CAPTION>
1996 1995
(in thousands)
<S> <C> <C>
Deferred tax assets:
Mortgage loans, primarily due to allowance
for losses and deferred loan fees $ 2,561 $ 2,093
Mortgage servicing rights 835
Allowance for nonrecoverable foreclosures
costs 855 873
Purchase price adjustments on deposits acquired 368
Accrued compensation and benefits 1,446 1,104
Other 680 582
------- -------
Total gross deferred tax assets 5,542 5,855
------- -------
Deferred tax liabiliites:
Net unrealized gains on available-for-sale
securities 1,565 3,889
Mortgage servicing rights 359
Federal Home Loan Bank stock 3,564 2,516
Purchase price adjustments on assets acquired 176 676
Purchase price adjustments on deposits acquired 225
Other 946 818
------- -------
Total gross deferred tax liabilities 6,835 7,899
------- -------
Net deferred tax liability (included in other
liabilities) $(1,293) $(2,044)
======= =======
</TABLE>
The significant components of income tax expense are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Current income tax expense $ 9,774 $ 9,975 $ 8,525
Deferred income tax expense 1,183 2,236 2,879
------- ------- -------
Total income tax expense $10,957 $12,211 $11,404
======= ======= =======
</TABLE>
Income tax expense attributable to investment securities gains was $297,000
and $77,000 for 1996 and 1995, respectively. There were no investment securities
gains or losses in 1994.
A reconciliation of the Company's effective tax rate with the federal statutory
tax rate follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Federal statutory tax rate 35% 35% 35%
Tax-exempt income (1) (1)
State and local taxes, net of federal
income tax benefit 1 2
Nondeductible compensation and benefits 2
Tax credits (1)
Other 1
---- ---- ----
Company's effective tax rate 36% 36% 36%
==== ==== ====
</TABLE>
<PAGE>
12. EMPLOYEE BENEFIT PLANS
Effective March 30, 1994, the Company established an internally leveraged
ESOP that covers substantially all full-time employees. The Company makes
annual contributions to the ESOP equal to the ESOP's debt service less
dividends, if any, received by the ESOP and used for debt service.
Dividends received by the ESOP on shares held as collateral may be used to
pay debt service; dividends on allocated shares may be credited to
participants' accounts. Dividends of $520,000, $471,000 and $106,000 were
used in 1996, 1995, and 1994, respectively, to pay ESOP debt service. The
ESOP shares are pledged as collateral on the debt. As the debt is repaid,
shares are released from collateral and allocated to active participants
based on a formula specified in the ESOP agreement.
ESOP compensation was $2,929,000, $2,149,000 and $1,353,000 for 1996,
1995, and 1994, respectively. Shares released from collateral in 1996,
1995 and 1994, were 110,208 shares, 110,208 shares and 82,864 shares,
respectively. At December 31, 1996, there were 1,019,220 unreleased ESOP
shares having a fair value of $29,685,000.
Effective March 30, 1994, the Company established stock compensation
plans. Stock awards totaling 16,175 and 639,054 shares were granted to
directors and officers during the years ended December 31, 1995 and
1994, respectively. There were no shares granted or awarded in 1996.
The shares vest generally over a five-year period. Of the shares awarded
under the plans, 237,205 and 119,203 were vested at December 31, 1996 and
1995, respectively; none of the shares were vested at December 31, 1994.
Compensation expense attributable to these plans was $1,301,000,
$1,297,000 and $957,000 in 1996, 1995 and 1994, respectively.
The Company participates in the Financial Institutions Retirement Fund, a
multi-employer noncontributory trusteed defined benefit retirement plan
covering all full-time employees having at least one year of service.
Pension expense for this funded plan was $57,000 for 1994. There was no
expense for the plan in 1996 and 1995.
Pension expense for unfunded plans covering senior management and board
members and informal retirement arrangements with retired senior officers
was $353,000, $422,000 and $486,000 for 1996, 1995, and 1994,
respectively. Accrued pension expense related to these plans of
$2,543,000 and $2,283,000 is included in other liabilities in the
accompanying consolidated balance sheets at December 31, 1996 and 1995,
respectively.
The Company has an Employee Savings Plan that allows participating
employees to make tax-deferred contributions under Internal Revenue Code
Section 401(k) to various trusteed savings funds. The Company made
contributions to the Plan totaling $258,000, $234,000 and $474,000 for
1996, 1995 and 1994, respectively.
13. STOCK OPTION PLANS
The Company adopted stock option plans in 1994 for the benefit of
directors, officers, and other key employees. These fixed option plans
authorize the granting of options to purchase 1,783,125 shares of the
Company's common stock. The Company applies APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its plans. Had compensation cost for the Company's stock
option compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of
SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
<PAGE>
<TABLE>
<CAPTION>
1996 1995
(in thousands, except
per share amounts)
<S> <C> <C> <C>
Net Income As reported $19,507 $21,690
Pro forma 19,412 21,654
Primary earnings per share As reported $1.36 $1.46
Pro forma 1.36 1.45
Fully diluted earnings per share As reported $1.36 $1.44
Pro forma 1.35 1.44
</TABLE>
<PAGE>
A summary of the status of the Company's stock option plans as of December 31,
1996, 1995, and 1994, and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------- ----------------------------- -----------------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Options Exercise Price Options Exercise Price Options Exercise Price
---------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 1,657,114 $10.60 1,623,288 $10.27
Granted 71,000 27.92 62,471 18.95 1,623,288 $10.27
Exercised (6,837) 14.63 (2,645) 10.00
Forfeited (14,250) 18.63 (26,000) 10.00
--------- --------- ---------
Outstanding at end of year 1,707,027 11.24 1,657,114 10.60 1,623,288 10.27
========= ========= =========
Options exercisable at
year-end 527,898 254,798
Weighted-average fair value
of options granted during
the year $12.74 $7.79
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- -----------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$10.00 1,511,393 7.2 years $10.00 512,241 $10.00
14.63 to 17.25 111,634 7.9 16.06 10,657 16.47
20.25 to 23.38 28,000 9.0 22.91 5,000 21.50
28.06 to 29.50 56,000 9.9 29.20
--------- ---------
1,707,027 7.4 11.24 527,898 10.24
========= =========
</TABLE>
14. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. These include commitments
to extend credit, recourse arrangements on loans sold and forward
commitments to sell loans or mortgage-backed securities.
A regular compliance examination by the OTS raised questions about the
accuracy of the Bank's Truth-in-Lending (TIL) disclosures on certain
adjustable rate mortgages. It was determined that the TIL disclosure
errors were the result of problems incurred in the use of certain computer
programs for the calculation of the disclosures. The Bank estimated that
the most probable restitution in the event defenses are unsuccessful
(along with related attorney fees) is $1,450,000. A charge for this
amount was accrued in the third quarter of 1996. Management intends to
aggressively assert available defenses to this proceeding and to attempt
to minimize any damage award. In addition, the Bank would also be
responsible, in certain circumstances, for reducing future mortgage
interest payments on affected loans, a result of which would be reduced
earnings for the Bank. Management does not believe that future interest
payment reductions would have a material adverse effect on the financial
condition or results of operations of the Bank or Company.
<PAGE>
Except as discussed above, the Company and its subsidiary are not involved
in any pending legal proceedings other than routine legal proceedings
occurring in the ordinary course of business. Such routine legal
proceedings in the aggregate are believed by management to be immaterial
to the Company's financial condition or results of operations.
15. ACQUISITIONS
On July 14, 1995, the Company completed its acquisition of First Financial
Shares, Inc. (FFS), the holding company for First Federal Savings Bank of
Richmond (Kentucky) (FFSB). Under terms of the agreement, the Company paid
$17,600,000 for all outstanding shares of FFS. The acquisition has been
accounted for as a purchase. On August 9, 1995, FFS was dissolved, leaving
FFSB as a wholly-owned subsidiary of Great Financial Corporation. The
accompanying financial statements include the results of FFSB's operations
since July 14, 1995. Goodwill arising from this transaction was
$4,572,000. The pro forma effects of the FFS acquisition on interest
income, net income and earnings per share were not material to the
consolidated financial statements. In July 1996, the Company merged FFSB
with the Bank.
On June 7, 1996, the Company completed the acquisition of LFS Bancorp,
Inc. (LFS), parent company of Lexington Federal Savings Bank (LFSB).
Under terms of the agreement, the Company paid $75,760,000 for all
outstanding shares of LFS. LFS was dissolved as of the acquisition date
and LFSB merged with the Bank upon acquisition. The acquisition was
accounted for as a purchase, and accordingly, the results of operations of
LFSB prior to the acquisition date have not been included in the
consolidated statements of income. Goodwill arising from this transaction
was $6,867,000. The pro forma effects of the LFSB acquisition on interest
income, net income and earnings per share were not material to the
consolidated financial statements.
<PAGE>
16. FINANCIAL INSTRUMENTS
The Company is a party to financial instruments with off-balance sheet
risk of loss as part of its normal business operations to meet the
financing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. The Company has no financial instruments
held for trading purposes. Financial instruments held or issued include
commitments to extend credit, and forward commitments to sell loans
or mortgage-backed securities. The instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The contract or notional amounts of
those instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The Company extends binding commitments to prospective borrowers generally
without a fee to the customer. Such commitments assure the borrower of
financing for a specified period of time at a specified rate. The risk to
the Company under such loan commitments is limited by the terms of the
contract. For example, the Company may not be obligated to advance funds
if the customer's financial condition deteriorates or if the customer
fails to meet specific covenants. An approved, but undrawn, loan
commitment represents a potential credit risk once the funds are advanced
to the customer, a liquidity risk since the customer may demand immediate
cash that would require a funding source, and a interest rate risk since
interest rates may rise above the rate committed to the customer. The
Company's current liquidity position continues to meet its need for funds.
In addition, since a portion of these loan commitments normally expire
unused, total amount of outstanding commitments at any point in time will
not require a funding source. As of December 31, 1996 and 1995, the
Company had outstanding commitments to originate loans totaling
$93,054,000 and $76,028,000, respectively.
The Company had forward commitments to deliver loans to certain investors
or primary security dealers totaling $93,168,000 and $178,762,000 at
December 31, 1996 and 1995, respectively. The commitments are for delivery
at a specified price on a specified future date, but typically within 120
days. The risk associated with these instruments relates primarily to
loans not closing in sufficient volume or at appropriate yields to meet
mandatory obligations and subjects the Company to interest rate risk in a
decreasing rate environment. No material losses are anticipated with
regard to these commitments.
The estimated fair value amounts presented herein have been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value. Accordingly,
the estimates are not necessarily indicative of the amounts the Company
could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
<PAGE>
<TABLE>
<CAPTION>
1996 1995
---------------------------------------- ---------------------------------------
Notional Carrying Fair Notional Carrying Fair
Amount Amount Value Amount Amount Value
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 126,323 $ 126,323 $ 84,167 $ 84,167
Available-for-sale securities 667,542 667,542 461,330 461,330
Mortgage loans held for sale 65,546 65,631 144,163 144,179
Loans receivable 1,867,511 1,869,980 1,667,363 1,695,490
Federal Home Loan Bank stock 34,816 34,816 21,917 21,917
Mortgage servicing rights 37,187 54,212 35,751 45,880
Liabilities:
Deposits 1,804,003 1,812,712 1,458,861 1,487,507
Borrowed funds 781,297 781,878 714,209 717,696
Off-balance sheet:
Commitments to extend credit $93,054 (3) 315 $ 76,028 (5) 324
Commitments to sell 93,168 87 (453) 178,762 175 98
</TABLE>
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1996 and 1995. Such amounts have not
been comprehensively revalued for purposes of financial statements since both
dates.
<PAGE>
17. SEGMENT INFORMATION
The Company's operations include two reportable segments: banking and
mortgage banking businesses. The banking segment is composed of those
operations involved in making loans held for investment, primarily on
single family residences; investing in government and government agencies'
securities and receiving deposits from customers. The mortgage banking
segment is made up of those operations involved in originating and
purchasing residential mortgage loans for resale in the secondary mortgage
market and in servicing and subservicing loans for others.
The Company's operations involved in purchasing delinquent FHA and VA
loans have previously been classified within the banking segment. Since
these loans are primarily purchased from GNMA pools the Company services
in its mortgage banking business and due to the unique servicing
requirements of these loans, the Company determined that these operations
are more properly classified within the mortgage banking segment and has
so classified the applicable assets, income and expense for the year ended
December 31, 1996, in the schedule which follows. The assets, income and
expense applicable to these operations for the years ended December 31,
1995 and 1994, have been reclassified to the mortgage banking segment in
the respective schedules which follow.
The banking segment's 1996 income before income taxes was affected by the
Deposit Insurance Fund Act of 1996. This legislation included provisions
to recapitalize the Savings Association Insurance Fund (SAIF) and required
all insured savings institutions to pay a special assessment of 65.7 cents
for every $100 (0.657%) of applicable deposits held as of March 31, 1995.
Non-interest expense includes a one-time charge of $9,699,000, for this
special assessment. As a result of the recapitalization of SAIF, insurance
rates were reduced by the FDIC effective January 1, 1997. This rate
reduction will favorably impact future earnings of the banking segment.
In 1996, 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 MSRs 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%. In 1995, intersegment interest income and expense represent (i)
interest on intersegment loans and advances from the banking segment to
the mortgage banking segment computed at prime, less a credit for
custodial balances of the mortgage banking segment on deposit with the
banking segment, and (ii) interest on advances from the Parent Company
to the banking segment computed at prime. The changes implemented by the
Company from 1995 to 1996 to price intersegment interest did not have a
material effect on income before income taxes of the reportable segments.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1996
------------------------------------------------------------------
Mortgage
(in thousands) Banking Banking Other Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Interest income:
Unaffiliated customers $ 174,364 $ 24,880 $ 11 $ 199,255
Intersegment 12,627 7,336 1,511 $ (21,474)
----------- --------- -------- ---------- ------------
Total interest income 186,991 32,216 1,522 (21,474) 199,255
----------- --------- -------- ---------- ------------
Interest expense:
Unaffiliated customers 115,866 7,551 123,417
Intersegment 8,847 12,626 1 (21,474)
----------- --------- -------- ---------- ------------
Total interest expense 124,713 20,177 1 (21,474) 123,417
----------- --------- -------- ---------- ------------
Net interest income 62,278 12,039 1,521 75,838
Provision for loan losses (2,586) (2,586)
Non-interest income 5,728 37,981 1,498 (9,369) 35,838
Non-interest expense (49,647) (35,446) (2,902) 9,369 (78,626)
----------- --------- -------- ---------- ------------
Income before income taxes $ 15,773 $ 14,574 $ 117 $ 30,464
=========== ========= ======== ========== ============
Identifiable assets $2,588,983 $368,264 $261,009 $(321,094) $2,897,162
=========== ========= ======== ========== ============
Depreciation and amortization of
property and equipment $ 2,149 $ 1,309 $ 26 $ 3,484
=========== ========= ======== ========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1995
------------------------------------------------------------------
Mortgage
(in thousands) Banking Banking Other Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Interest income:
Unaffiliated customers $ 139,626 $ 20,993 $ 13 $ 160,632
Intersegment 11,026 5,767 2,236 $ (19,029)
---------- -------- -------- ----------- -----------
Total interest income 150,652 26,760 2,249 (19,029) 160,632
---------- -------- -------- ----------- -----------
Interest expense:
Unaffiliated customers 92,152 5,936 98,088
Intersegment 8,003 11,026 (19,029)
---------- -------- -------- ----------- -----------
Total interest expense 100,155 16,962 (19,029) 98,088
---------- -------- -------- ----------- -----------
Net interest income 50,497 9,798 2,249 62,544
Provision for loan losses (1,880) (403) (2,283)
Non-interest income 4,801 32,749 421 (8,538) 29,433
Non-interest expense (33,789) (28,127) (2,415) 8,538 (55,793)
---------- -------- -------- ----------- -----------
Income before income taxes $ 19,629 $ 14,017 $ 255 $ $ 33,901
========== ======== ======== =========== ===========
Identifiable assets $2,058,829 $458,165 $258,847 $ (289,585) $2,486,256
========== ======== ======== =========== ===========
Depreciation and amortization of
property and equipment $ 1,715 $ 1,189 $ 2,904
========== ======== ======== =========== ===========
</TABLE>
<TABLE>
Year Ended December 31, 1994
------------------------------------------------------------------
Mortgage
(in thousands) Banking Banking Other Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Interest income:
Unaffiliated customers $ 100,451 $ 19,002 $ 13 $ 119,466
Intersegment 979 2,410 $ (3,389)
---------- -------- -------- ----------- -----------
Total interest income 101,430 19,002 2,423 (3,389) 119,466
---------- -------- -------- ----------- -----------
Interest expense:
Unaffiliated customers 55,921 5,199 61,120
Intersegment 2,201 1,186 2 (3,389)
---------- -------- -------- ----------- -----------
Total interest expense 58,122 6,385 2 (3,389) 61,120
---------- -------- -------- ----------- -----------
Net interest income 43,308 12,617 2,421 58,346
Provision for loan losses (750) (1,036) (1,786)
Non-interest income 2,467 31,647 656 (786) 33,984
Non-interest expense (29,143) (29,719) (973) 786 (59,049)
---------- -------- -------- ----------- -----------
Income before income taxes $ 15,882 $ 13,509 $ 2,104 $ $ 31,495
========== ======== ======== =========== ===========
Identifiable assets $1,715,318 $227,551 $285,179 $(315,551) $1,912,497
========== ======== ======== =========== ===========
Depreciation and amortization of
property and equipment $ 1,674 $ 1,167 $ 2,841
========== ======== ======== =========== ===========
</TABLE>
<PAGE>
18. QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended December 31, 1996
---------------------------------------------------------------
(in thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Total interest income $45,346 $48,240 $52,288 $53,381
Net interest income 17,878 18,942 19,524 19,494
Provision for loan losses 620 616 675 675
Net income (loss) 6,431 6,561 (387) 6,902
Earnings (loss) per share 0.44 0.46 (0.03) 0.49
Year Ended December 31, 1995
---------------------------------------------------------------
(in thousands, except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Total interest income $ 35,766 $ 38,211 $ 42,203 $ 44,452
Net interest income 15,145 14,706 16,152 16,541
Provision for loan losses 628 475 575 605
Net income 5,346 5,161 5,713 5,470
Earnings per share 0.34 0.35 0.39 0.37
</TABLE>
<PAGE>
19. GREAT FINANCIAL CORPORATION - PARENT COMPANY ONLY
The following condensed balance sheets as of December 31, 1996 and 1995, and the
condensed statements of income and cash flows for the years ended December 31,
1996, 1995 and for the period from March 30, 1994 (inception) to December 31,
1994, for Great Financial Corporation should be read in conjunction with the
consolidated financial statements and notes thereto.
<TABLE>
<CAPTION>
1996 1995
(in thousands)
Balance Sheets
<S> <C> <C>
Assets:
Cash $ 171 $ 565
Available-for-sale securities 367 1,022
Advances to subsidiaries 26,313 32,476
Investment in subsidiary 251,842 251,470
Other assets 1,836 1,633
----------- ----------
Total assets $280,529 $287,166
=========== ==========
Liabilities $ 75 $ 56
----------- ----------
Stockholders' equity:
Common stock 165 165
Additional paid-in-capital 162,279 159,786
Retained earnings 177,201 163,822
Treasury stock (48,845) (28,230)
Unearned ESOP shares (10,194) (11,296)
Unearned compensation - stock
compensation plans (3,058) (4,359)
Net unrealized gains on
available-for-sale securities 2,906 7,222
----------- ----------
Total stockholders' equity 280,454 287,110
----------- ----------
Total liabilities and stockholders'
equity $280,529 $287,166
=========== ==========
Period ended December 31,
-----------------------------------
1996 1995 1994
Statements of Income (in thousands)
<S> <C> <C> <C>
Dividends received from
subsidiary $20,000 $20,000
Distribution in excess of
earnings of subsidiary (555)
Equity in undistributed earnings
of subsidiary 1,559 $19,240
Interest income on advances to
subsidiaries 1,511 2,248 2,410
Gain on sale of investments 71
Other expenses (1,413) (2,092) (980)
Income tax expense (36) (96) (579)
-------- -------- --------
Net income $19,507 $21,690 $20,091
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
Statements of Cash Flows
<S> <C> <C> <C>
Operating activities:
Net income $19,507 $21,690 $ 20,091
Distributions in excess of earnings
of subsidiary 555
Equity in undistributed earnings
of subsidiary (1,559) (19,240)
Stock compensation 119 119
Gain on sale of securities (68)
Changes in other assets and liabilities:
Other assets 728 130 (436)
Liabilities (252) (219) 115
-------- -------- ---------
Net cash provided by operating
activities 20,657 20,093 530
-------- -------- ---------
Investing activities:
Proceeds from sale of securities 1,955 2,378
Purchase of securities (1,163) (1,015) (2,310)
Investment in subsidiary (520) (17,827) (93,766)
Cash advances to subsidiary (20,000) (20,000) (51,024)
Payments received on advances to
subsidiary 25,420 50,499
-------- -------- ---------
Net cash provided by (used in)
investing activities 5,692 14,035 (147,100)
-------- -------- ---------
Financing activities:
Net proceeds from issuance of
common stock 147,849
Exercise of stock options 100 27
Dividends paid (6,095) (5,376) (1,216)
Purchase of treasury stock (20,748) (28,277)
-------- --------- ---------
Net cash provided by (used in)
financing activities (26,743) (33,626) 146,633
-------- --------- ---------
Increase (decrease) in cash (394) 502 63
Cash at beginning of period 565 63
-------- --------- ---------
Cash at end of period $ 171 $ 565 $ 63
======== ========= =========
</TABLE>
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item, other than the information set forth
above under Part I, "Executive Officers of Registrant," is included in the
registrant's definitive proxy statement for the Annual Meeting of Stockholders
to be held April 23, 1997 (Proxy Statement) in "Election of Directors" on
pages 3-4 and "Section 16(a) Beneficial Ownership Reporting Compliance" on page
7 and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the Proxy Statement in
"Executive Compensation" on pages 7-13 and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included in the Proxy Statement in
"Principal Shareholders" on pages 2-3 and "Stock Ownership of Management" on
pages 5-7 and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the Proxy Statement in
"Transactions with Certain Related Persons" on page 13 and is incorporated
herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS FILED
The following documents are filed as part of this report in Part II,
Item 8:
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - Years ended December 31, 1996, 1995
and 1994
Consolidated Statements of Stockholders' Equity - Years ended December
31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended December 31, 1996,
1995 and 1994
Notes to Consolidated Financial Statements
(a)(2) FINANCIAL STATEMENT SCHEDULES FILED
All other schedules to the consolidated financial statements required
by Article 9 of Regulation S-X and all other schedules to the financial
statements of the Corporation required by Article 5 of Regulation S-X
are not required under the related instructions or are inapplicable
and therefore have been omitted.
(a)(3) LIST OF EXHIBITS
3(i) Articles of Incorporation*
3(ii) By-Laws of the Corporation ***
4 Specimen common stock certificate*
10.1 Great Financial Bank, F.S.B. Recognition and Retention Plan
and Trust for Officers and Employees (1)***
10.2 Great Financial Bank, F.S.B. Recognition and Retention Plan
and Trust for Outside Directors (1)***
10.3 Great Financial Corporation, 1994 Incentive Stock Option
Plan (1)*
10.4 Great Financial Corporation 1994 Stock Option Plan for
Outside Directors (1)*
10.5 Great Financial Bank, F.S.B. Employee Stock Ownership Plan
and Trust (1)*
10.6 Employment Agreements between Great Financial Corporation,
Great Financial Bank, F.S.B. and each of Paul M. Baker,
Arthur L. Harreld, Jack. H. Shipman, Richard M. Klapheke
and James F. Statler (1)
10.7 Great Financial Federal 401(k) Savings Plan ("Savings
Plan") (1)*
10.8 Great Financial Bank, F.S.B. Employee Stock Ownership Plan
and Trust Loan Documents ("ESOP Loan Documents") (1)*
10.9 ESOP Loan Documents--Amendment to Loan and Security Agreement
(1)**
10.11 Great Financial Bank, F.S.B. Supplemental Executive
Retirement Plan, including First Amendment (1)**
10.12 Savings Plan, Amendments Nos. 1 & 2 (1)**
10.13 Consulting Agreement with George L. Greenwell (1)
10.14 Great Financial Bank, F.S.B. Severance Compensation Plan
11 Statement regarding computation of per share earnings.
21 Subsidiaries of the Registrant
<PAGE>
(1) Management contract or compensatory plan or arrangement.
* Incorporated by reference from exhibits included with Registrant's
Form S-1 Registration Statement (No. 33-73238) previously filed
with the Commission.
** Incorporated by reference from exhibits included with
Registrant's 1994 Form 10-K previously filed with the Commission.
(b) REPORTS ON FORM 8-K FILED DURING THE LAST QUARTER OF 1996
There were no reports on Form 8-K required to be filed during the last
quarter of 1996.
(c) Exhibits
All exhibits to this report are attached or incorporated by reference as
stated above.
(d) Financial Statement Schedules
None.
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf the undersigned, thereunto duly authorized.
GREAT FINANCIAL CORPORATION
March 19, 1997 By: /S/ Paul M. Baker
________________________
Paul M. Baker, President
Signatures
Pursuant to the requirement of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Corporation and
in the capacities and on the date indicated.
March 19, 1997 Chairman of the Board /S/ JACK E. HARTZ
Jack E. Hartz
March 19, 1997 Vice Chairman of the /S/ PAUL M. BAKER
Board, President and Paul M. Baker
Chief Executive Officer
March 19, 1997 Treasurer and Secretary /S/ RICHARD M. KLAPHEKE
(Chief Financial and Richard M. Klapheke
Accounting Officer)
March 19, 1997 Director /S/ GEORGE L. GREENWELL
George L. Greenwell
March 19, 1997 Director /S/ PRENTICE E. BROWN, JR.
Prentice E. Brown, Jr.
March 19, 1997 Director /S/ HUGH DONALD WETZEL
Hugh Donald Wetzel
March 19, 1997 Director /S/ HUGH G. HINES, JR.
Hugh G. Hines, Jr.
March 19, 1997 Director /S/ RICHARD L. FELTNER
Richard L. Feltner
March 19, 1997 Director /S/ MADELINE M. ABRAMSON
Madeline M. Abramson
March 19, 1997 Director /S/ ISHMON F. BURKS
Ishmon F. Burks
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
10.6 Employment Agreements between Great
Financial Corporation, Great Financial
Bank, F.S.B. and each of Paul M. Baker,
Arthur L. Harreld, Jack. H. Shipman,
Richard M. Klapheke and James F. Statler
10.13 Consulting Agreement with George L. Greenwell
10.14 Great Financial Bank, F.S.B. Severance
Compensation Plan
11 Statement regarding computation of
per share earnings
21 Subsidiaries of the Registrant
<PAGE>
EXHIBIT 10.6 EMPLOYMENT AGREEMENTS BETWEEN GREAT FINANCIAL CORPORATION,
GREAT FINANCIAL BANK, F.S.B. AND EACH OF PAUL M. BAKER, ARTHUR
L. HARRELD, JACK H. SHIPMAN, RICHARD M. KLAPHEKE AND JAMES F.
STATLER
EMPLOYMENT AGREEMENT
This is an Employment Agreement (the "Agreement") dated as of January 1, 1997
(the "Effective Date"), between Great Financial Bank, FSB ("GFB"), Great
Financial Corporation ("Holding Company") and Paul M. Baker ("Employee").
RECITALS
A. GFB considers the establishment and maintenance of sound and vital senior
management to be essential to protecting and enhancing its best interests and
therefore GFB desires to enter into an agreement governing the terms and
conditions of Employee's employment.
B. GFB is a federally chartered Savings Bank and is subject to the Office of
Thrift Supervision Regulation Section 563.39, which requires any agreements
between GFB and its employees to be in writing and to contain certain
provisions.
C. The Board of Directors of GFB has considered and approved this Agreement with
respect to Employee's employment.
AGREEMENT
The parties agree as follows:
Section 1 - Definitions
1.1 A "Change in Control" of GFB shall mean an event of a nature that:
(a) during any period of three consecutive years, individuals who at the
beginning of such period constitute the Board cease for any reason to constitute
a majority thereof unless the election or nomination for election of each new
Director was approved by a vote of at least two-thirds of the Board members then
still in office who were Board members at the beginning of the period or who
were similarly nominated;
(b) the business of GFB or Holding Company for which Employee's services are
principally performed is disposed of by GFB or Holding Company pursuant to a
partial or complete liquidation of GFB or Holding Company, a sale of assets of
GFB or Holding Company, or otherwise;
(c) GFB or Holding Company consummates the transaction contemplated by an
agreement which results in the occurrence of a Change in Control of GFB or
Holding Company;
(d) the Board of GFB or Holding Company adopts a resolution to the effect that a
Change in Control of GFB or Holding Company for purposes of this Agreement has
occurred;
(e) an event of a nature that would be required to be reported in response to
item 1(a) of the current report on Form 8-K as in effect on the date of this
Agreement, pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 occurs;
(f) any "person" (as the term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934) is or becomes the "beneficial owner" (as the
term is defined in Rule 13d-3 of the Securities Exchange Act), directly or
indirectly, of securities of GFB or Holding Company representing 20 percent or
more of Holding Company's or GFB's outstanding securities except for any
securities of GFB purchased by Holding Company in connection with the conversion
of GFB to stock form and any securities purchased by GFB's or Lincoln Service
Mortgage Corporation's employee stock ownership plan and trust;
(g) a plan of reorganization, merger, consolidation, sale of all or
substantially all assets of GFB or Holding Company or a similar transaction
occurs in which GFB or Holding Company is not the resulting entity; or
(h) change of control shall have occurred as described in 12 CFR Section
574.4(a) or successor regulations.
<PAGE>
1.2 "Date of Termination" shall mean:
(a) If Employee's employment is automatically terminated under Section 7.1 of
this Agreement, the date on which the event which triggered that automatic
termination occurred;
(b) If Employee's employment is terminated for Good Reason under Section 7.3 of
this Agreement or by GFB under Section 7.2(a) of this Agreement, the date
specified in the Notice of Termination.
(c) If Employee's employment is terminated under Section 7.2(b), the date
specified in Section 7.2(b).
(d) If Employee's employment is terminated at the end of the Term of this
Agreement, the last day of such Term.
1.3 "Disability" shall mean Employee's inability, due to accident or physical or
mental illness, to adequately and fully perform the duties required by an
employee in Employee's profession; provided, however, that Disability for
purposes of this Agreement shall not include any Disability which results from
Employee's engaging in a criminal enterprise or from Employee's habitual
drunkenness, addiction to narcotics or intentionally inflicted injury. If at any
time during the Term the GFB Board makes a determination with respect to
Employee's Disability, that determination shall be final, conclusive, and
binding upon GFB, Employee, and their successors in interest, so long as that
determination has a reasonable basis.
1.4 "Good Reason" shall be deemed to exist if:
(a) within three years after a Change in Control of GFB or Holding Company,
without Employee's express written consent, Employee is assigned any duties
inconsistent with Employee's positions, duties, responsibilities and status with
GFB or Holding Company immediately prior to a Change of Control of GFB or
Holding Company; Employee's actual job responsibilities as in effect immediately
prior to a Change of Control of GFB or Holding Company are materially changed;
or Employee is removed from or is not re-elected to any of such positions,
except in connection with the termination of Employee's employment: (1) for
Cause; (2) on account of Retirement; (3) as a result of Employee's death; or (4)
by Employee other than for Good Reason; provided that the GFB Board's failure to
extend this Agreement for an additional year under Section 2.2 of this Agreement
shall not entitle Employee to terminate this Agreement for Good Reason;
(b) within three years of a Change in Control of GFB or Holding Company, GFB's
or Holding Company's principal executive offices are relocated to a location
more than 30 miles from its current location; or GFB or Holding Company requires
Employee to be based in any location which is more than 30 miles from Employee's
current base location, except for required travel on GFB's or Holding Company's
business to an extent substantially consistent with similarly situated
executives' business travel obligations;
(c) within three years after a Change of Control of GFB or Holding Company, GFB
fails to continue in effect any benefit or compensation plan, pension plan, life
insurance plan, health and accident plan or disability plan (including, but not
limited to, GFB's participation in the Financial Institutions Retirement Fund)
in which Employee is participating at the time of a Change of Control (or plans
providing Employee with substantially similar benefits), such that there occurs
a material reduction in benefits before termination, or GFB or Holding Company
takes any action which would adversely affect Employee's participation in or
materially reduce Employee's benefits under any benefit plan maintained by GFB
or Holding Company or deprive Employee of any material fringe benefits;
(d) GFB fails to obtain the assumption of all obligations under this Agreement
by any successor as contemplated in Section 8.7 of this Agreement; or
(e) Employee's employment is purported to be terminated in a manner which is not
pursuant to a Notice of Termination satisfying the requirements of Section 7.4
of this Agreement; and, for purposes of this Agreement, no such purported
termination shall be effective.
1.5 The "GFB Board" shall mean the Board of Directors of GFB.
1.6 "Notice of Termination" shall mean a notice, from GFB or from Employee,
which shall indicate the specific termination provision in this Agreement relied
upon, shall set forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of Employee's employment under the provision
so indicated, and shall state the effective date of the termination.
<PAGE>
1.7 "Permanent Disability" shall mean total disability arising from an
occupational or non-occupational medically determinable physical or mental
impairment which prevents the Employee from engaging in any substantial gainful
activity and which is determined on a reasonable basis by GFB to be permanent
and continuous for the remainder of the Employee's life.
1.8 "Retirement" shall mean termination of Employee's employment by reason of
Employee attaining age 65.
1.9 "Secret or Confidential Information" means secret or confidential
information of GFB (including secret or confidential information of GFB's
subsidiaries and affiliates), including but not limited to lists of customers;
identity of customers; identity of prospective customers; contract terms;
bidding information and strategies; pricing methods; computer software; computer
software methods and documentation; hardware; salary information with respect to
GFB employees; financial product design information; GFB's business plan;
methods of operation of GFB or its affiliates; the procedures, forms and
techniques used in servicing accounts; and other documents or information which
are required to be maintained in confidence for the continued success of GFB and
its business.
1.10 Termination for "Cause" by GFB of Employee's employment under this
Agreement shall have the same meaning as it does in 12 C.F.R. 563.39, and shall
include termination because of:
(a) The intentional and substantial failure by Employee to perform Employee's
duties with GFB (other than any such failure resulting from incapacity due to
physical or mental illness); or
(b) Employee's personal dishonesty, incompetence, willful misconduct, breach of
a fiduciary duty involving personal profit, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses) or
cease-and-desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, Employee shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to
Employee a copy of a resolution duly adopted by the GFB Board at a meeting of
the GFB Board called and held for that purpose, finding that in the good faith
opinion of the GFB Board, GFB has cause for terminating Employee and specifying
the particulars thereof in detail.
Section 2 - Employment and Term
2.1 Employment. GFB agrees to employ Employee and Employee agrees to serve as
Chief Executive Officer/Chairman of the Board of GFB. Employee agrees to accept
Employment on the terms and conditions set forth in this Agreement.
2.2 Term. Subject to extension in accordance with this Section 2 and unless
sooner terminated as provided in Section 7, the term of this Agreement (the
"Term") shall be the period beginning on January 1, 1997 (the "Effective Date")
and ending April 15, 1999, or such earlier time as provided by Section 7.1. On
or before December 31, 1997, December 31, 1998 and April 14, 1999 and each 12
month anniversary thereafter, the GFB Board shall review Employee's performance
under this Agreement to determine whether GFB desires that the then-remaining
Term be extended. If the GFB Board recommends and Employee consents to such
extensions, then the then-remaining Term shall be extended by no more than one
year.
Section 3 - Duties of Employee
3.1 Time Devoted; Duties. Employee shall devote his entire time, attention and
energies to the business of GFB and he shall render such administrative and
management services to GFB as are customarily performed by persons situated in a
similar executive capacity, including those services prescribed from time to
time by the GFB Board. Employee shall also promote, by entertainment or
otherwise, as and to the extent permitted by law, the business of GFB. Employee
shall perform his duties under this Agreement in accordance with such reasonable
standards expected of employees with comparable positions in comparable
organizations and as may be established from time to time by the GFB Board.
Employee shall also conduct his personal affairs, including his personal
financial affairs, in a manner appropriate for his position.
3.2 No Conflicting Activities. During the term of Employee's employment under
this Agreement, Employee shall not engage in any business or activity contrary
to the business affairs or interests of GFB. Nothing contained in this Section
3.2 shall be deemed to prevent or limit the right of Employee to invest in the
capital stock or other securities of any business.
<PAGE>
Section 4 - Compensation
4.1 Base Compensation. Employee shall receive for his services the following
Base Compensation:
(a) GFB shall pay Employee an annual salary of $257,500 payable in 26 equal
bi-weekly installments.
(b) Any increase in Employee's Base Compensation shall be left to the sole
discretion of the GFB Board. The Employee's Base Compensation shall not be
subject to reduction during the Term of this Agreement except as otherwise
provided in this Agreement.
4.2 Bonus Compensation. GFB shall pay Employee Bonus Compensation as determined
by the GFB Board in its discretion.
4.3 Additional Compensation. As further compensation (the "Additional
Compensation") GFB shall make available the benefits provided to Employee under
GFB's Recognition and Retention Plan for Officers and Employees effective March
30, 1994 and shall make available the stock options provided to Employee
pursuant to Holding Company's 1994 Incentive Stock Option Plan for Officers and
Employees effective March 30, 1994, as amended.
4.4 Source of Payments. All payments provided for in this Agreement shall be
timely paid by GFB. However, Holding Company unconditionally guarantees payment
and provision of all amounts and benefits due hereunder to Employee and, if such
amounts and benefits due from GFB are not timely paid or provided by GFB, such
amounts and benefits shall be paid or provided by Holding Company.
Section 5 - Employee Benefits
5.1 Vacations. During each calendar year during the Term, Employee shall be
entitled to a vacation of three weeks, during which Employee's compensation
shall be paid in full. At least one week must be taken in consecutive days.
Unused vacation for any year during the Term may not be carried forward for use
in the next following year. Upon any termination of Employee's employment
hereunder, Employee shall be entitled to pro rata compensation for unused
vacation time earned during the year of termination, based upon the number of
months Employee was employed during that year.
5.2 Business Expenses. GFB shall reimburse Employee for ordinary and necessary
business expenses incurred by Employee in performing his duties pursuant to this
Agreement, including but not limited to reasonable travel, entertainment and
similar expenses that Employee incurs in promoting GFB's business; provided that
GFB shall not reimburse any such expense which, prior to its being incurred, GFB
directed Employee not to incur. The reimbursement shall be made upon
presentation to GFB by Employee, from time to time, of an account of such
expenses in such form and in such detail as GFB may request.
5.3 Fringe Benefits. In addition to benefits specifically described herein;
Employee shall be entitled to receive from GFB the fringe benefits generally
available to full-time senior management employees of GFB, as those benefits may
be changed from time to time.
5.4 Disability Insurance. Throughout the Term of this Agreement, GFB shall
provide Employee with long term disability coverage of 60% of Employee's total
pay from the previous year, which benefit begins no later than 90 days after the
Disability occurs.
Section 6 - Confidentiality and
Covenant Not to Compete
6.1 Covenant Not to Compete. In consideration of the GFB's continued employment
of Employee pursuant to this Agreement, Employee covenants and agrees that
Employee shall not during the one-year period immediately following the
termination of his employment under this Agreement, if (1) GFB terminated the
employment and severance compensation is payable pursuant to Section 8.4 or 8.5,
or (2) Employee has retired, become disabled or voluntarily terminated:
(a) without the prior written consent of GFB, engage or become interested in any
capacity, directly or indirectly (whether as proprietor, stockholder, director,
partner, employee, trustee, beneficiary, or in any other capacity) in any
business selling, providing or developing products or services competitive with
products or services sold or maintained by GFB within a 50-mile radius of the
Louisville Metropolitan Area; or
(b) recruit or solicit for employment any current or future employee of GFB or
any of its respective successors or any entities related to it.
<PAGE>
6.2 Confidential Information. Employee acknowledges that all Secret or
Confidential Information is the exclusive property of GFB. Employee shall not
during the period of his employment by GFB or at any time thereafter, disclose
to any person, firm or corporation, or publish, or use for any purpose, any
Secret or Confidential Information except as properly required in the ordinary
course of business of GFB or as directed and authorized by GFB. Upon the
termination of his employment with GFB, for any reason whatsoever, Employee
shall return and deliver to GFB within 7 days any and all papers, books,
records, documents, memoranda and manuals, including all copies thereof,
belonging to GFB or relating to its business, in Employee's possession, whether
prepared by Employee or others. If at any time after the termination of
employment, Employee determines that he has any Secret or Confidential
Information in his possession or control, Employee shall immediately return all
such Secret or Confidential Information to GFB including all copies and portions
thereof.
6.3 Disclosure and Survival of Covenants. If Employee, in the future, seeks or
is offered employment by any other company, firm, or person, he shall provide a
copy of this Agreement to the prospective employer prior to accepting employment
with that prospective employer. The provisions of Sections 6.1 and 6.2 shall
survive any termination of this Agreement.
Section 7 - Termination
7.1 Automatic Termination. Employment under this Agreement shall terminate on
the death or Permanent Disability of Employee or by the Employee attaining age
65 during the Term of this Agreement.
7.2 Involuntary Termination.
(a) Termination by the Board. The GFB Board may terminate this Agreement at any
time.
(b) Termination or Suspension by the Office of Thrift Supervision.
(i) If Employee is suspended and/or temporarily prohibited from performing his
duties under this Agreement by a notice served under Section 8(e)(3) or (g)(1)
of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(1)), then
GFB's obligations under this Agreement shall be suspended as of the date of
service of such notice unless stayed by appropriate proceedings. If the charges
in the notice are dismissed, GFB may, in its discretion, (a) pay Employee all or
part of the compensation withheld while obligations under this Agreement were
suspended and (b) reinstate (in whole or in part) any of its obligations which
were suspended.
(ii) If Employee is removed and/or permanently prohibited from participating in
the conduct of GFB's affairs by an order issued under section 8(e)(4) or (g)(1)
of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of GFB under this Agreement shall terminate as of the effective date
of the order, but vested rights of Employee shall not be affected.
(iii) If GFB is in default (as defined in section 3(x)(1) of the Federal Deposit
Insurance Act), all obligations under this Agreement shall terminate as of the
date of default, but vested rights of Employee shall not be affected.
(iv) All obligations under this Agreement shall terminate, except to the extent
determined that continuation of the contract is necessary for the continued
operation of GFB (a) by action of the Director of the Office of Thrift
Supervision (the "Director") or his or her designee, at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of GFB under the authority
contained in section 13(c) of the Federal Deposit Insurance Act; or (b) by the
Director or his or her designee, at the time the Director or his or her designee
approves a supervisory merger to resolve problems related to operation of GFB or
when GFB is determined by the Director to be in an unsafe or unsound condition.
Any rights of Employee that have already vested, however, shall not be affected
by such action.
7.3 Voluntary Termination. Employee may terminate his employment for Good Reason
by giving Notice of Termination in accordance with Section 7.4 below.
7.4 Notice of Termination. Any termination by GFB or by Employee, pursuant to
this Agreement, shall be communicated by written Notice of Termination to the
other party hereto.
7.5 Conflicts with Federal Law. If any of the termination provisions contained
in this Agreement conflict with Office of Thrift Supervision regulation 12 CFR
563.39(b), or any successor regulation, the latter shall prevail.
<PAGE>
Section 8 - Compensation on Termination
8.1 Compensation Upon Death. If Employee's employment is terminated because of
the death of Employee, GFB shall pay Employee's executors or administrators: a)
within 30 days of death the unpaid balance of Employee's Base Compensation
through the end of the month in which Employee's death occurred, at the rate in
effect on the date of Employee's death and b) as soon as such Employee's bonus
is calculated, an amount equal to Employee's Bonus Compensation for the current
year (if any was paid) multiplied by the fractional portion of the year between
the first day of the year in which Employee died and the date of the Employee's
death; and shall have no further obligations under this Agreement.
8.2 Compensation Upon Disability. If Employee's active work ceases because of
Disability, GFB shall continue, as and when scheduled, to pay Employee
Employee's Base Compensation through the date he ceased work, plus three months'
additional Base Compensation, at 100% of the rate in effect on the date Employee
became Disabled, and thereafter GFB shall have no further obligation for cash
compensation unless and until Employee returns to work.
8.3 Compensation Upon Termination for Cause. If Employee's employment shall be
terminated by GFB for Cause, GFB shall pay Employee his Base Compensation
through the Date of Termination, and GFB shall not have any further obligations
to Employee under this Agreement.
8.4 Compensation Upon Termination by GFB Other Than For Cause. If Employee's
employment is terminated by GFB other than for Cause, then unless such
termination occurs simultaneous with or within two years following a Change in
Control of GFB or Holding Company, then Employee shall be entitled to the
compensation Employee would have been entitled to under this Agreement as and
when payable hereunder for the remainder of the Term, provided that Employee in
good faith actively seeks employment similar to employee's position with GFB,
and that any payments under this Section 8.4 shall be reduced by any
compensation Employee receives from other employment thereafter accepted.
8.5 Compensation Upon Termination For Good Reason or Following Change of
Control.
(a) If (1) Employee terminates employment under Section 7.3 for Good Reason or
(2) any of the events constituting a Change of Control of GFB or Holding Company
shall have occurred and Employee's employment is terminated by GFB within three
years thereafter other than by reason of (a) Employee's death or disability, or
(b) termination by GFB for Cause, then GFB shall pay to Employee as severance
compensation in a lump sum (discounted to present value using the interest rate
then applicable to newly issued fixed rate three-year certificates of deposit at
GFB, Louisville, Kentucky) on the 30th day following the Date of Termination:
(i) the unpaid balance of Employee's full Base Compensation through the Date of
Termination at the rate in effect at the time Notice of Termination is given;
plus
(ii) an amount equal to Employee's full Base Compensation for two years at the
rate in effect as of the Date of Termination; plus
(iii) Employer shall make available to Employee the Additional Compensation to
which Employee would be entitled during the Term; plus
(iv) an amount equal to Employee's Bonus Compensation for the previous year (if
any was paid), multiplied by two.
In addition to the severance benefits set forth in (i), (ii), (iii) and (iv)
above, GFB shall: (a) to the extent not prohibited by Office of Thrift
Supervision pronouncements pay all legal fees and expenses incurred by Employee
resulting from termination (including all such fees and expenses, if any,
incurred in contesting any such termination or in seeking to obtain or enforce
any right or benefit provided by this Agreement); and (b) maintain in full force
and effect, for the continued benefit of Employee for a two year period after
the Date of Termination, all employee benefit plans and programs or arrangements
in which Employee was entitled to participate immediately prior to Date of
Termination; provided, however, that Employee's continued participation is
possible under the general terms and provisions of such plans and programs. If
Employee's participation in any such plan or program is barred, GFB shall
arrange to provide Employee with benefits substantially similar or, if that is
not possible, of equal value to those which Employee is entitled to receive
under such plans and programs. At the end of the period of coverage, Employee
shall have the option to have assigned to him at no cost and with no
apportionment of prepaid premiums, any assignable insurance policies owned by
GFB relating specifically to Employee.
<PAGE>
Notwithstanding any of the foregoing, if Employee is within three years of age
65 on the Date of Termination, then (a) GFB shall reduce the amount payable to
Employee under paragraphs (ii) and (iii) above to reflect only the number of
months between the Date of Termination and the date Employee is or would
otherwise attain age 65, and (b) GFB shall have no obligations to Employee after
Employee attains age 65.
(b) Employee shall not be required to mitigate the amount of any payment
provided for in this Section 8.5 by seeking other employment or otherwise, nor
shall the amount of any payment provided for in this Section 8.5 be reduced by
any compensation earned by Employee as the result of employment by another
employer after the Date of Termination, or otherwise.
8.6 Compensation Upon Retirement. If Employee terminates employment in the month
of his 65th birthday, then Employee shall be paid within 30 days from the date
of his retirement the unpaid balance of Employee's Base Compensation through the
date of his retirement and shall be paid, as soon as such Employee's bonus is
calculated, an amount equal to Employee's Bonus Compensation for the current
year (if any was paid), multiplied by the fractional portion of the year between
the first day of the year in which Employee retired and the date of Employee's
retirement.
8.7 Successors of GFB. GFB will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of GFB, by agreement in form and
substance satisfactory to Employee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that GFB would be
required to perform it if no such succession had taken place. Failure of GFB to
obtain such agreement prior to the effectiveness of any such succession shall be
a breach of this Agreement and shall entitle Employee to terminate this
agreement for Good Reason under paragraph 7.3 of this Agreement. As used in this
Agreement, "GFB" shall mean GFB as hereinbefore defined and any successor to its
business and/or assets as aforesaid or which otherwise becomes bound by all the
terms and provisions of this Agreement by operation of law.
8.8 Reduction of Amounts Payable.
(a) In no event shall any amount payable under any provision of this Agreement
equal or exceed an amount which would (i) cause GFB to forfeit (as determined by
the Certified Public Accountants or legal counsel employed by GFB), pursuant to
Section 280G(a) of the Internal Revenue Code of 1986, as amended, its deduction
for any or all such amounts payable, or (ii) exceed maximum amounts determined
by the Office of Thrift Supervision to constitute a safe and sound practice.
Pursuant to this Section 8.8, the GFB Board has the power to reduce severance
benefits payable under this Agreement, if such benefits alone or in conjunction
with termination benefits provided under any other severance pay plan maintained
by GFB or any other plan or agreement between Employee and GFB, would cause GFB
to forfeit otherwise deductible payments or would exceed the Office of Thrift
Supervision maximums; provided, however that no benefits payable under this
Agreement shall be reduced pursuant to this Section 8.8 to less than $1.00 below
the amount of benefits (i) which GFB can properly deduct under Section 280G(a)
of the Internal Revenue Code of 1986, as amended, or (ii) which equal the amount
the Office of Thrift Supervision considers the maximum safely and soundly
payable.
(b) Any payments made to the Employee pursuant to this Agreement, or otherwise,
are subject to and conditioned upon their compliance with 12 U.S.C. 1828(k)
and any regulation promulgated thereunder.
Section 9 - Miscellaneous
9.1 Notice. Any notice or request required or permitted to be given under this
Agreement shall be in writing and shall be deemed sufficiently given for all
purposes if mailed by certified mail, postage prepaid and return receipt
requested, addressed to the intended recipient at the following address (or at
such other address as either party may designate in writing to the other party
by certified mail as described above):
If to GFB:
Great Financial Bank, FSB
One Financial Square
Louisville, Kentucky 40202
<PAGE>
All notices to GFB shall be directed to the attention of the President of GFB
with a copy to the Treasurer of GFB.
If to Employee:
Paul M. Baker
815 Rugby Place
Louisville, Kentucky 40222
9.2 Headings. The headings used in this Agreement have been included solely for
ease of reference and are not to be construed in any interpretation of this
Agreement.
9.3 Entire Agreement. This instrument contains the entire agreement between the
parties with respect to the subject matter hereof, and shall supersede all prior
understanding with respect to the subject matter hereof, except that the
Indemnity Agreement dated October 25, 1991 and the Supplemental Executive
Retirement Plan dated as of January 1, 1992 between Employee and GFB shall also
continue to be effective. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. No
modification or addition to this Agreement shall be enforceable unless in
writing and signed by the party against whom enforcement is sought.
9.4 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Kentucky.
9.5 Arbitration. Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a home office selected by Employee within
fifty (50) miles from the location of GFB, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Employee shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Employee's termination is resolved in favor of Employee, whether by judgment,
arbitration or settlement, Employee shall be entitled to the payment of all
back-pay, including salary, bonuses and any other cash compensation, fringe
benefits and any compensation and benefits due Employee under this Agreement.
9.6 Benefit. This Agreement shall inure to the benefit of and shall be binding
upon GFB, its successors and assigns, and this Agreement shall not be assignable
by Employee.
9.7 Remedies. Employee and GFB acknowledge that the services to be rendered
under this Agreement are special, unique and of extraordinary character. If
Employee breaches any covenants, terms and conditions of this Agreement to be
performed by him, GFB will suffer irreparable damage and it will be impossible
to estimate or determine GFB's damages. Therefore, GFB shall, upon proof of such
breach, be entitled as a matter of course to an injunction from any court of
competent jurisdiction restraining any further violation of such covenants by
Employee, his employers, employees, partners, agents or other associates, or any
of them, such right to an injunction to be cumulative and in addition to any
other remedies GFB may have, either in law or in equity. In any proceeding to
enforce any provision of this Agreement, Employee shall not assert any
contention that there is an adequate remedy at law for the breach or default
upon which such proceeding is based. Nothing in this paragraph shall be
construed to prevent such remedy in the courts, in the case of any breach of
this Agreement by Employee, as GFB may elect or invoke.
9.8 Severability. If any of the provisions of Section 6.1 of this Agreement are
held to be unenforceable because of the scope, duration or area of its
applicability, the court making such determination shall have the power to
modify such scope duration or area or all of them, and such provision shall then
be applicable in such modified form. If any provision of this Agreement is held
to be invalid, illegal or unenforceable in any respect, the validity, and
enforceability of all other applications of that provision and of all other
provisions and applications hereof shall not in any way be affected or impaired.
<PAGE>
9.9 Waiver. No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by Employee and such officer as may be specifically designated by the
Board of Directors of GFB. The failure of GFB or Employee at any time or times
to enforce its rights under the Agreement strictly in accordance with the same
shall not be construed as having created a custom in any way or manner contrary
to the specific provisions of this Agreement or as having in any way or manner
modified or waived the same. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or any
prior or subsequent time.
9.10 Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF the parties hereto have executed this Agreement, as of the
day and year first above written but actually on the dates set forth below.
GREAT FINANCIAL BANK, FSB
By:________________________________
Title:_____________________________
Date:______________________________
GREAT FINANCIAL CORPORATION
(GUARANTOR)
By:________________________________
Title:_____________________________
Date:______________________________
EMPLOYEE:__________________________
Date:______________________________
<PAGE>
EMPLOYMENT AGREEMENT
This is an Employment Agreement (the "Agreement") dated as of January 1, 1997
(the "Effective Date"), between Great Financial Bank, FSB ("GFB"), Great
Financial Corporation ("Holding Company") and Arthur L. Harreld ("Employee").
RECITALS
A. GFB considers the establishment and maintenance of sound and vital senior
management to be essential to protecting and enhancing its best interests and
therefore GFB desires to enter into an agreement governing the terms and
conditions of Employee's employment.
B. GFB is a federally chartered Savings Bank and is subject to the Office of
Thrift Supervision Regulation Section 563.39, which requires any agreements
between GFB and its employees to be in writing and to contain certain
provisions.
C. The Board of Directors of GFB has considered and approved this Agreement with
respect to Employee's employment.
AGREEMENT
The parties agree as follows:
Section 1 - Definitions
1.1 A "Change in Control" of GFB shall mean an event of a nature that:
(a) during any period of three consecutive years, individuals who at the
beginning of such period constitute the Board cease for any reason to constitute
a majority thereof unless the election or nomination for election of each new
Director was approved by a vote of at least two-thirds of the Board members then
still in office who were Board members at the beginning of the period or who
were similarly nominated;
(b) the business of GFB or Holding Company for which Employee's services are
principally performed is disposed of by GFB or Holding Company pursuant to a
partial or complete liquidation of GFB or Holding Company, a sale of assets of
GFB or Holding Company, or otherwise;
(c) GFB or Holding Company consummates the transaction contemplated by an
agreement which results in the occurrence of a Change in Control of GFB or
Holding Company;
(d) the Board of GFB or Holding Company adopts a resolution to the effect that a
Change in Control of GFB or Holding Company for purposes of this Agreement has
occurred;
(e) an event of a nature that would be required to be reported in response to
item 1(a) of the current report on Form 8-K as in effect on the date of this
Agreement, pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 occurs;
(f) any "person" (as the term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934) is or becomes the "beneficial owner" (as the
term is defined in Rule 13d-3 of the Securities Exchange Act), directly or
indirectly, of securities of GFB or Holding Company representing 20 percent or
more of Holding Company's or GFB's outstanding securities except for any
securities of GFB purchased by Holding Company in connection with the conversion
of GFB to stock form and any securities purchased by GFB's or Lincoln Service
Mortgage Corporation's employee stock ownership plan and trust;
(g) a plan of reorganization, merger, consolidation, sale of all or
substantially all assets of GFB or Holding Company or a similar transaction
occurs in which GFB or Holding Company is not the resulting entity; or
(h) change of control shall have occurred as described in 12 CFR Section
574.4(a) or successor regulations.
1.2 "Date of Termination" shall mean:
(a) If Employee's employment is automatically terminated under Section 7.1 of
this Agreement, the date on which the event which triggered that automatic
termination occurred;
(b) If Employee's employment is terminated for Good Reason under Section 7.3 of
this Agreement or by GFB under Section 7.2(a) of this Agreement, the date
specified in the Notice of Termination.
<PAGE>
(c) If Employee's employment is terminated under Section 7.2(b), the date
specified in Section 7.2(b).
(d) If Employee's employment is terminated at the end of the Term of this
Agreement, the last day of such Term.
1.3 "Disability" shall mean Employee's inability, due to accident or physical or
mental illness, to adequately and fully perform the duties required by an
employee in Employee's profession; provided, however, that Disability for
purposes of this Agreement shall not include any Disability which results from
Employee's engaging in a criminal enterprise or from Employee's habitual
drunkenness, addiction to narcotics or intentionally inflicted injury. If at any
time during the Term the GFB Board makes a determination with respect to
Employee's Disability, that determination shall be final, conclusive, and
binding upon GFB, Employee, and their successors in interest, so long as that
determination has a reasonable basis.
1.4 "Good Reason" shall be deemed to exist if:
(a) within three years after a Change in Control of GFB or Holding Company,
without Employee's express written consent, Employee is assigned any duties
inconsistent with Employee's positions, duties, responsibilities and status with
GFB or Holding Company immediately prior to a Change of Control of GFB or
Holding Company; Employee's actual job responsibilities as in effect immediately
prior to a Change of Control of GFB or Holding Company are materially changed;
or Employee is removed from or is not re-elected to any of such positions,
except in connection with the termination of Employee's employment: (1) for
Cause; (2) on account of Retirement; (3) as a result of Employee's death; or (4)
by Employee other than for Good Reason; provided that the GFB Board's failure to
extend this Agreement for an additional year under Section 2.2 of this Agreement
shall not entitle Employee to terminate this Agreement for Good Reason;
(b) within three years of a Change in Control of GFB or Holding Company, GFB's
or Holding Company's principal executive offices are relocated to a location
more than 30 miles from its current location; or GFB or Holding Company requires
Employee to be based in any location which is more than 30 miles from Employee's
current base location, except for required travel on GFB's or Holding Company's
business to an extent substantially consistent with similarly situated
executives' business travel obligations;
(c) within three years after a Change of Control of GFB or Holding Company, GFB
fails to continue in effect any benefit or compensation plan, pension plan, life
insurance plan, health and accident plan or disability plan (including, but not
limited to, GFB's participation in the Financial Institutions Retirement Fund)
in which Employee is participating at the time of a Change of Control (or plans
providing Employee with substantially similar benefits), such that there occurs
a material reduction in benefits before termination, or GFB or Holding Company
takes any action which would adversely affect Employee's participation in or
materially reduce Employee's benefits under any benefit plan maintained by GFB
or Holding Company or deprive Employee of any material fringe benefits;
(d) GFB fails to obtain the assumption of all obligations under this Agreement
by any successor as contemplated in Section 8.7 of this Agreement; or
(e) Employee's employment is purported to be terminated in a manner which is not
pursuant to a Notice of Termination satisfying the requirements of Section 7.4
of this Agreement; and, for purposes of this Agreement, no such purported
termination shall be effective.
1.5 The "GFB Board" shall mean the Board of Directors of GFB.
1.6 "Notice of Termination" shall mean a notice, from GFB or from Employee,
which shall indicate the specific termination provision in this Agreement relied
upon, shall set forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of Employee's employment under the provision
so indicated, and shall state the effective date of the termination.
1.7 "Permanent Disability" shall mean total disability arising from an
occupational or non-occupational medically determinable physical or mental
impairment which prevents the Employee from engaging in any substantial gainful
activity and which is determined on a reasonable basis by GFB to be permanent
and continuous for the remainder of the Employee's life.
1.8 "Retirement" shall mean termination of Employee's employment by reason of
Employee attaining age 65.
<PAGE>
1.9 "Secret or Confidential Information" means secret or confidential
information of GFB (including secret or confidential information of GFB's
subsidiaries and affiliates), including but not limited to lists of customers;
identity of customers; identity of prospective customers; contract terms;
bidding information and strategies; pricing methods; computer software; computer
software methods and documentation; hardware; salary information with respect to
GFB employees; financial product design information; GFB's business plan;
methods of operation of GFB or its affiliates; the procedures, forms and
techniques used in servicing accounts; and other documents or information which
are required to be maintained in confidence for the continued success of GFB and
its business.
1.10 Termination for "Cause" by GFB of Employee's employment under this
Agreement shall have the same meaning as it does in 12 C.F.R. 563.39, and shall
include termination because of:
(a) The intentional and substantial failure by Employee to perform Employee's
duties with GFB (other than any such failure resulting from incapacity due to
physical or mental illness); or
(b) Employee's personal dishonesty, incompetence, willful misconduct, breach of
a fiduciary duty involving personal profit, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses) or
cease-and-desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, Employee shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to
Employee a copy of a resolution duly adopted by the GFB Board at a meeting of
the GFB Board called and held for that purpose, finding that in the good faith
opinion of the GFB Board, GFB has cause for terminating Employee and specifying
the particulars thereof in detail.
Section 2 - Employment and Term
2.1 Employment. GFB agrees to employ Employee and Employee agrees to serve as
Executive Vice President-Residential Lending of GFB and President and Chief
Operating Officer of Great Financial Mortgage. Employee agrees to accept
Employment on the terms and conditions set forth in this Agreement.
2.2 Term. Subject to extension in accordance with this Section 2 and unless
sooner terminated as provided in Section 7, the term of this Agreement (the
"Term") shall be the period beginning on January 1, 1997 (the "Effective Date")
and ending April 15, 1999, or such earlier time as provided by Section 7.1. On
or before December 31, 1997, December 31, 1998 and April 14, 1999 and each 12
month anniversary thereafter, the GFB Board shall review Employee's performance
under this Agreement to determine whether GFB desires that the then-remaining
Term be extended. If the GFB Board recommends and Employee consents to such
extensions, then the then-remaining Term shall be extended by no more than one
year.
Section 3 - Duties of Employee
3.1 Time Devoted; Duties. Employee shall devote his entire time, attention and
energies to the business of GFB and he shall render such administrative and
management services to GFB as are customarily performed by persons situated in a
similar executive capacity, including those services prescribed from time to
time by the GFB Board. Employee shall also promote, by entertainment or
otherwise, as and to the extent permitted by law, the business of GFB. Employee
shall perform his duties under this Agreement in accordance with such reasonable
standards expected of employees with comparable positions in comparable
organizations and as may be established from time to time by the GFB Board.
Employee shall also conduct his personal affairs, including his personal
financial affairs, in a manner appropriate for his position.
3.2 No Conflicting Activities. During the term of Employee's employment under
this Agreement, Employee shall not engage in any business or activity contrary
to the business affairs or interests of GFB. Nothing contained in this Section
3.2 shall be deemed to prevent or limit the right of Employee to invest in the
capital stock or other securities of any business.
Section 4 - Compensation
4.1 Base Compensation. Employee shall receive for his services the following
Base Compensation:
(a) GFB shall pay Employee an annual salary of $220,500 payable in 26 equal
bi-weekly installments.
<PAGE>
(b) Any increase in Employee's Base Compensation shall be left to the sole
discretion of the GFB Board. The Employee's Base Compensation shall not be
subject to reduction during the Term of this Agreement except as otherwise
provided in this Agreement.
4.2 Bonus Compensation. GFB shall pay Employee Bonus Compensation as determined
by the GFB Board in its discretion.
4.3 Additional Compensation. As further compensation (the "Additional
Compensation") GFB shall make available the benefits provided to Employee under
GFB's Recognition and Retention Plan for Officers and Employees effective March
30, 1994 and shall make available the stock options provided to Employee
pursuant to Holding Company's 1994 Incentive Stock Option Plan for Officers and
Employees effective March 30, 1994, as amended.
4.4 Source of Payments. All payments provided for in this Agreement shall be
timely paid by GFB. However, Holding Company unconditionally guarantees payment
and provision of all amounts and benefits due hereunder to Employee and, if such
amounts and benefits due from GFB are not timely paid or provided by GFB, such
amounts and benefits shall be paid or provided by Holding Company.
Section 5 - Employee Benefits
5.1 Vacations. During each calendar year during the Term, Employee shall be
entitled to a vacation of three weeks, during which Employee's compensation
shall be paid in full. At least one week must be taken in consecutive days.
Unused vacation for any year during the Term may not be carried forward for use
in the next following year. Upon any termination of Employee's employment
hereunder, Employee shall be entitled to pro rata compensation for unused
vacation time earned during the year of termination, based upon the number of
months Employee was employed during that year.
5.2 Business Expenses. GFB shall reimburse Employee for ordinary and necessary
business expenses incurred by Employee in performing his duties pursuant to this
Agreement, including but not limited to reasonable travel, entertainment and
similar expenses that Employee incurs in promoting GFB's business; provided that
GFB shall not reimburse any such expense which, prior to its being incurred, GFB
directed Employee not to incur. The reimbursement shall be made upon
presentation to GFB by Employee, from time to time, of an account of such
expenses in such form and in such detail as GFB may request.
5.3 Fringe Benefits. In addition to benefits specifically described herein;
Employee shall be entitled to receive from GFB the fringe benefits generally
available to full-time senior management employees of GFB, as those benefits may
be changed from time to time.
5.4 Disability Insurance. Throughout the Term of this Agreement, GFB shall
provide Employee with long term disability coverage of 60% of Employee's total
pay from the previous year, which benefit begins no later than 90 days after the
Disability occurs.
Section 6 - Confidentiality and
Covenant Not to Compete
6.1 Covenant Not to Compete. In consideration of the GFB's continued employment
of Employee pursuant to this Agreement, Employee covenants and agrees that
Employee shall not during the one-year period immediately following the
termination of his employment under this Agreement, if (1) GFB terminated the
employment and severance compensation is payable pursuant to Section 8.4 or 8.5,
or (2) Employee has retired, become disabled or voluntarily terminated:
(a) without the prior written consent of GFB, engage or become interested in any
capacity, directly or indirectly (whether as proprietor, stockholder, director,
partner, employee, trustee, beneficiary, or in any other capacity) in any
business selling, providing or developing products or services competitive with
products or services sold or maintained by GFB within a 50-mile radius of the
Louisville Metropolitan Area; or
(b) recruit or solicit for employment any current or future employee of GFB or
any of its respective successors or any entities related to it.
<PAGE>
6.2 Confidential Information. Employee acknowledges that all Secret or
Confidential Information is the exclusive property of GFB. Employee shall not
during the period of his employment by GFB or at any time thereafter, disclose
to any person, firm or corporation, or publish, or use for any purpose, any
Secret or Confidential Information except as properly required in the ordinary
course of business of GFB or as directed and authorized by GFB. Upon the
termination of his employment with GFB, for any reason whatsoever, Employee
shall return and deliver to GFB within 7 days any and all papers, books,
records, documents, memoranda and manuals, including all copies thereof,
belonging to GFB or relating to its business, in Employee's possession, whether
prepared by Employee or others. If at any time after the termination of
employment, Employee determines that he has any Secret or Confidential
Information in his possession or control, Employee shall immediately return all
such Secret or Confidential Information to GFB including all copies and portions
thereof.
6.3 Disclosure and Survival of Covenants. If Employee, in the future, seeks or
is offered employment by any other company, firm, or person, he shall provide a
copy of this Agreement to the prospective employer prior to accepting employment
with that prospective employer. The provisions of Sections 6.1 and 6.2 shall
survive any termination of this Agreement.
Section 7 - Termination
7.1 Automatic Termination. Employment under this Agreement shall terminate on
the death or Permanent Disability of Employee or by the Employee attaining age
65 during the Term of this Agreement.
7.2 Involuntary Termination.
(a) Termination by the Board. The GFB Board may terminate this Agreement at any
time.
(b) Termination or Suspension by the Office of Thrift Supervision.
(i) If Employee is suspended and/or temporarily prohibited from performing his
duties under this Agreement by a notice served under Section 8(e)(3) or (g)(1)
of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(1)), then
GFB's obligations under this Agreement shall be suspended as of the date of
service of such notice unless stayed by appropriate proceedings. If the charges
in the notice are dismissed, GFB may, in its discretion, (a) pay Employee all or
part of the compensation withheld while obligations under this Agreement were
suspended and (b) reinstate (in whole or in part) any of its obligations which
were suspended.
(ii) If Employee is removed and/or permanently prohibited from participating in
the conduct of GFB's affairs by an order issued under section 8(e)(4) or (g)(1)
of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of GFB under this Agreement shall terminate as of the effective date
of the order, but vested rights of Employee shall not be affected.
(iii) If GFB is in default (as defined in section 3(x)(1) of the Federal Deposit
Insurance Act), all obligations under this Agreement shall terminate as of the
date of default, but vested rights of Employee shall not be affected.
(iv) All obligations under this Agreement shall terminate, except to the extent
determined that continuation of the contract is necessary for the continued
operation of GFB (a) by action of the Director of the Office of Thrift
Supervision (the "Director") or his or her designee, at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of GFB under the authority
contained in section 13(c) of the Federal Deposit Insurance Act; or (b) by the
Director or his or her designee, at the time the Director or his or her designee
approves a supervisory merger to resolve problems related to operation of GFB or
when GFB is determined by the Director to be in an unsafe or unsound condition.
Any rights of Employee that have already vested, however, shall not be affected
by such action.
7.3 Voluntary Termination. Employee may terminate his employment for Good Reason
by giving Notice of Termination in accordance with Section 7.4 below.
7.4 Notice of Termination. Any termination by GFB or by Employee, pursuant to
this Agreement, shall be communicated by written Notice of Termination to the
other party hereto.
7.5 Conflicts with Federal Law. If any of the termination provisions contained
in this Agreement conflict with Office of Thrift Supervision regulation 12 CFR
563.39(b), or any successor regulation, the latter shall prevail.
<PAGE>
Section 8 - Compensation on Termination
8.1 Compensation Upon Death. If Employee's employment is terminated because of
the death of Employee, GFB shall pay Employee's executors or administrators: a)
within 30 days of death the unpaid balance of Employee's Base Compensation
through the end of the month in which Employee's death occurred, at the rate in
effect on the date of Employee's death and b) as soon as such Employee's bonus
is calculated, an amount equal to Employee's Bonus Compensation for the current
year (if any was paid) multiplied by the fractional portion of the year between
the first day of the year in which Employee died and the date of the Employee's
death; and shall have no further obligations under this Agreement.
8.2 Compensation Upon Disability. If Employee's active work ceases because of
Disability, GFB shall continue, as and when scheduled, to pay Employee
Employee's Base Compensation through the date he ceased work, plus three months'
additional Base Compensation, at 100% of the rate in effect on the date Employee
became Disabled, and thereafter GFB shall have no further obligation for cash
compensation unless and until Employee returns to work.
8.3 Compensation Upon Termination for Cause. If Employee's employment shall be
terminated by GFB for Cause, GFB shall pay Employee his Base Compensation
through the Date of Termination, and GFB shall not have any further obligations
to Employee under this Agreement.
8.4 Compensation Upon Termination by GFB Other Than For Cause. If Employee's
employment is terminated by GFB other than for Cause, then unless such
termination occurs simultaneous with or within two years following a Change in
Control of GFB or Holding Company, then Employee shall be entitled to the
compensation Employee would have been entitled to under this Agreement as and
when payable hereunder for the remainder of the Term, provided that Employee in
good faith actively seeks employment similar to employee's position with GFB,
and that any payments under this Section 8.4 shall be reduced by any
compensation Employee receives from other employment thereafter accepted.
8.5 Compensation Upon Termination For Good Reason or Following Change of
Control.
(a) If (1) Employee terminates employment under Section 7.3 for Good Reason or
(2) any of the events constituting a Change of Control of GFB or Holding Company
shall have occurred and Employee's employment is terminated by GFB within three
years thereafter other than by reason of (a) Employee's death or disability, or
(b) termination by GFB for Cause, then GFB shall pay to Employee as severance
compensation in a lump sum (discounted to present value using the interest rate
then applicable to newly issued fixed rate three-year certificates of deposit at
GFB, Louisville, Kentucky) on the 30th day following the Date of Termination:
(i) the unpaid balance of Employee's full Base Compensation through the Date of
Termination at the rate in effect at the time Notice of Termination is given;
plus
(ii) an amount equal to Employee's full Base Compensation for two years at the
rate in effect as of the Date of Termination; plus
(iii) Employer shall make available to Employee the Additional Compensation to
which Employee would be entitled during the Term; plus
(iv) an amount equal to Employee's Bonus Compensation for the previous year (if
any was paid), multiplied by two.
In addition to the severance benefits set forth in (i), (ii), (iii) and (iv)
above, GFB shall: (a) to the extent not prohibited by Office of Thrift
Supervision pronouncements pay all legal fees and expenses incurred by Employee
resulting from termination (including all such fees and expenses, if any,
incurred in contesting any such termination or in seeking to obtain or enforce
any right or benefit provided by this Agreement); and (b) maintain in full force
and effect, for the continued benefit of Employee for a two year period after
the Date of Termination, all employee benefit plans and programs or arrangements
in which Employee was entitled to participate immediately prior to Date of
Termination; provided, however, that Employee's continued participation is
possible under the general terms and provisions of such plans and programs. If
Employee's participation in any such plan or program is barred, GFB shall
arrange to provide Employee with benefits substantially similar or, if that is
not possible, of equal value to those which Employee is entitled to receive
under such plans and programs. At the end of the period of coverage, Employee
shall have the option to have assigned to him at no cost and with no
apportionment of prepaid premiums, any assignable insurance policies owned by
GFB relating specifically to Employee.
<PAGE>
Notwithstanding any of the foregoing, if Employee is within three years of age
65 on the Date of Termination, then (a) GFB shall reduce the amount payable to
Employee under paragraphs (ii) and (iii) above to reflect only the number of
months between the Date of Termination and the date Employee is or would
otherwise attain age 65, and (b) GFB shall have no obligations to Employee after
Employee attains age 65.
(b) Employee shall not be required to mitigate the amount of any payment
provided for in this Section 8.5 by seeking other employment or otherwise, nor
shall the amount of any payment provided for in this Section 8.5 be reduced by
any compensation earned by Employee as the result of employment by another
employer after the Date of Termination, or otherwise.
8.6 Compensation Upon Retirement. If Employee terminates employment in the month
of his 65th birthday, then Employee shall be paid within 30 days from the date
of his retirement the unpaid balance of Employee's Base Compensation through the
date of his retirement and shall be paid, as soon as such Employee's bonus is
calculated, an amount equal to Employee's Bonus Compensation for the current
year (if any was paid), multiplied by the fractional portion of the year between
the first day of the year in which Employee retired and the date of Employee's
retirement.
8.7 Successors of GFB. GFB will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of GFB, by agreement in form and
substance satisfactory to Employee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that GFB would be
required to perform it if no such succession had taken place. Failure of GFB to
obtain such agreement prior to the effectiveness of any such succession shall be
a breach of this Agreement and shall entitle Employee to terminate this
agreement for Good Reason under paragraph 7.3 of this Agreement. As used in this
Agreement, "GFB" shall mean GFB as hereinbefore defined and any successor to its
business and/or assets as aforesaid or which otherwise becomes bound by all the
terms and provisions of this Agreement by operation of law.
8.8 Reduction of Amounts Payable.
(a) In no event shall any amount payable under any provision of this Agreement
equal or exceed an amount which would (i) cause GFB to forfeit (as determined by
the Certified Public Accountants or legal counsel employed by GFB), pursuant to
Section 280G(a) of the Internal Revenue Code of 1986, as amended, its deduction
for any or all such amounts payable, or (ii) exceed maximum amounts determined
by the Office of Thrift Supervision to constitute a safe and sound practice.
Pursuant to this Section 8.8, the GFB Board has the power to reduce severance
benefits payable under this Agreement, if such benefits alone or in conjunction
with termination benefits provided under any other severance pay plan maintained
by GFB or any other plan or agreement between Employee and GFB, would cause GFB
to forfeit otherwise deductible payments or would exceed the Office of Thrift
Supervision maximums; provided, however that no benefits payable under this
Agreement shall be reduced pursuant to this Section 8.8 to less than $1.00 below
the amount of benefits (i) which GFB can properly deduct under Section 280G(a)
of the Internal Revenue Code of 1986, as amended, or (ii) which equal the amount
the Office of Thrift Supervision considers the maximum safely and soundly
payable.
(b) Any payments made to the Employee pursuant to this Agreement, or otherwise,
are subject to and conditioned upon their compliance with 12 U.S.C. 1828(k)
and any regulation promulgated thereunder.
Section 9 - Miscellaneous
9.1 Notice. Any notice or request required or permitted to be given under this
Agreement shall be in writing and shall be deemed sufficiently given for all
purposes if mailed by certified mail, postage prepaid and return receipt
requested, addressed to the intended recipient at the following address (or at
such other address as either party may designate in writing to the other party
by certified mail as described above):
If to GFB:
Great Financial Bank, FSB
One Financial Square
Louisville, Kentucky 40202
<PAGE>
All notices to GFB shall be directed to the attention of the President of GFB
with a copy to the Treasurer of GFB.
If to Employee:
Arthur L. Harreld
4112 Hunting Creek Drive
Owensboro, KY 42301
9.2 Headings. The headings used in this Agreement have been included solely for
ease of reference and are not to be construed in any interpretation of this
Agreement.
9.3 Entire Agreement. This instrument contains the entire agreement between the
parties with respect to the subject matter hereof, and shall supersede all prior
understanding with respect to the subject matter hereof, except that the
Indemnity Agreement dated October 25, 1991 and the Supplemental Executive
Retirement Plan dated as of January 1, 1992 between Employee and GFB shall also
continue to be effective. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. No
modification or addition to this Agreement shall be enforceable unless in
writing and signed by the party against whom enforcement is sought.
9.4 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Kentucky.
9.5 Arbitration. Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a home office selected by Employee within
fifty (50) miles from the location of GFB, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Employee shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Employee's termination is resolved in favor of Employee, whether by judgment,
arbitration or settlement, Employee shall be entitled to the payment of all
back-pay, including salary, bonuses and any other cash compensation, fringe
benefits and any compensation and benefits due Employee under this Agreement.
9.6 Benefit. This Agreement shall inure to the benefit of and shall be binding
upon GFB, its successors and assigns, and this Agreement shall not be assignable
by Employee.
9.7 Remedies. Employee and GFB acknowledge that the services to be rendered
under this Agreement are special, unique and of extraordinary character. If
Employee breaches any covenants, terms and conditions of this Agreement to be
performed by him, GFB will suffer irreparable damage and it will be impossible
to estimate or determine GFB's damages. Therefore, GFB shall, upon proof of such
breach, be entitled as a matter of course to an injunction from any court of
competent jurisdiction restraining any further violation of such covenants by
Employee, his employers, employees, partners, agents or other associates, or any
of them, such right to an injunction to be cumulative and in addition to any
other remedies GFB may have, either in law or in equity. In any proceeding to
enforce any provision of this Agreement, Employee shall not assert any
contention that there is an adequate remedy at law for the breach or default
upon which such proceeding is based. Nothing in this paragraph shall be
construed to prevent such remedy in the courts, in the case of any breach of
this Agreement by Employee, as GFB may elect or invoke.
9.8 Severability. If any of the provisions of Section 6.1 of this Agreement are
held to be unenforceable because of the scope, duration or area of its
applicability, the court making such determination shall have the power to
modify such scope duration or area or all of them, and such provision shall then
be applicable in such modified form. If any provision of this Agreement is held
to be invalid, illegal or unenforceable in any respect, the validity, and
enforceability of all other applications of that provision and of all other
provisions and applications hereof shall not in any way be affected or impaired.
<PAGE>
9.9 Waiver. No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by Employee and such officer as may be specifically designated by the
Board of Directors of GFB. The failure of GFB or Employee at any time or times
to enforce its rights under the Agreement strictly in accordance with the same
shall not be construed as having created a custom in any way or manner contrary
to the specific provisions of this Agreement or as having in any way or manner
modified or waived the same. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or any
prior or subsequent time.
9.10 Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF the parties hereto have executed this Agreement, as of the
day and year first above written but actually on the dates set forth below.
GREAT FINANCIAL BANK, FSB
By:________________________________
Title:_____________________________
Date:______________________________
GREAT FINANCIAL CORPORATION
(GUARANTOR)
By:________________________________
Title:_____________________________
Date:______________________________
EMPLOYEE:__________________________
Date:______________________________
<PAGE>
EMPLOYMENT AGREEMENT
This is an Employment Agreement (the "Agreement") dated as of January 1, 1997
(the "Effective Date"), between Great Financial Bank, FSB ("GFB"), Great
Financial Corporation ("Holding Company") and Richard Klapheke ("Employee").
RECITALS
A. GFB considers the establishment and maintenance of sound and vital senior
management to be essential to protecting and enhancing its best interests and
therefore GFB desires to enter into an agreement governing the terms and
conditions of Employee's employment.
B. GFB is a federally chartered Savings Bank and is subject to the Office of
Thrift Supervision Regulation Section 563.39, which requires any agreements
between GFB and its employees to be in writing and to contain certain
provisions.
C. The Board of Directors of GFB has considered and approved this Agreement with
respect to Employee's employment.
AGREEMENT
The parties agree as follows:
Section 1 - Definitions
1.1 A "Change in Control" of GFB shall mean an event of a nature that:
(a) during any period of three consecutive years, individuals who at the
beginning of such period constitute the Board cease for any reason to constitute
a majority thereof unless the election or nomination for election of each new
Director was approved by a vote of at least two-thirds of the Board members then
still in office who were Board members at the beginning of the period or who
were similarly nominated;
(b) the business of GFB or Holding Company for which Employee's services are
principally performed is disposed of by GFB or Holding Company pursuant to a
partial or complete liquidation of GFB or Holding Company, a sale of assets of
GFB or Holding Company, or otherwise;
(c) GFB or Holding Company consummates the transaction contemplated by an
agreement which results in the occurrence of a Change in Control of GFB or
Holding Company;
(d) the Board of GFB or Holding Company adopts a resolution to the effect that a
Change in Control of GFB or Holding Company for purposes of this Agreement has
occurred;
(e) an event of a nature that would be required to be reported in response to
item 1(a) of the current report on Form 8-K as in effect on the date of this
Agreement, pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 occurs;
(f) any "person" (as the term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934) is or becomes the "beneficial owner" (as the
term is defined in Rule 13d-3 of the Securities Exchange Act), directly or
indirectly, of securities of GFB or Holding Company representing 20 percent or
more of Holding Company's or GFB's outstanding securities except for any
securities of GFB purchased by Holding Company in connection with the conversion
of GFB to stock form and any securities purchased by GFB's or Lincoln Service
Mortgage Corporation's employee stock ownership plan and trust;
(g) a plan of reorganization, merger, consolidation, sale of all or
substantially all assets of GFB or Holding Company or a similar transaction
occurs in which GFB or Holding Company is not the resulting entity; or
(h) change of control shall have occurred as described in 12 CFR Section
574.4(a) or successor regulations.
1.2 "Date of Termination" shall mean:
(a) If Employee's employment is automatically terminated under Section 7.1 of
this Agreement, the date on which the event which triggered that automatic
termination occurred;
<PAGE>
(b) If Employee's employment is terminated for Good Reason under Section 7.3 of
this Agreement or by GFB under Section 7.2(a) of this Agreement, the date
specified in the Notice of Termination.
(c) If Employee's employment is terminated under Section 7.2(b), the date
specified in Section 7.2(b).
(d) If Employee's employment is terminated at the end of the Term of this
Agreement, the last day of such Term.
1.3 "Disability" shall mean Employee's inability, due to accident or physical or
mental illness, to adequately and fully perform the duties required by an
employee in Employee's profession; provided, however, that Disability for
purposes of this Agreement shall not include any Disability which results from
Employee's engaging in a criminal enterprise or from Employee's habitual
drunkenness, addiction to narcotics or intentionally inflicted injury. If at any
time during the Term the GFB Board makes a determination with respect to
Employee's Disability, that determination shall be final, conclusive, and
binding upon GFB, Employee, and their successors in interest, so long as that
determination has a reasonable basis.
1.4 "Good Reason" shall be deemed to exist if:
(a) within three years after a Change in Control of GFB or Holding Company,
without Employee's express written consent, Employee is assigned any duties
inconsistent with Employee's positions, duties, responsibilities and status with
GFB or Holding Company immediately prior to a Change of Control of GFB or
Holding Company; Employee's actual job responsibilities as in effect immediately
prior to a Change of Control of GFB or Holding Company are materially changed;
or Employee is removed from or is not re-elected to any of such positions,
except in connection with the termination of Employee's employment: (1) for
Cause; (2) on account of Retirement; (3) as a result of Employee's death; or (4)
by Employee other than for Good Reason; provided that the GFB Board's failure to
extend this Agreement for an additional year under Section 2.2 of this Agreement
shall not entitle Employee to terminate this Agreement for Good Reason;
(b) within three years of a Change in Control of GFB or Holding Company, GFB's
or Holding Company's principal executive offices are relocated to a location
more than 30 miles from its current location; or GFB or Holding Company requires
Employee to be based in any location which is more than 30 miles from Employee's
current base location, except for required travel on GFB's or Holding Company's
business to an extent substantially consistent with similarly situated
executives' business travel obligations;
(c) within three years after a Change of Control of GFB or Holding Company, GFB
fails to continue in effect any benefit or compensation plan, pension plan, life
insurance plan, health and accident plan or disability plan (including, but not
limited to, GFB's participation in the Financial Institutions Retirement Fund)
in which Employee is participating at the time of a Change of Control (or plans
providing Employee with substantially similar benefits), such that there occurs
a material reduction in benefits before termination, or GFB or Holding Company
takes any action which would adversely affect Employee's participation in or
materially reduce Employee's benefits under any benefit plan maintained by GFB
or Holding Company or deprive Employee of any material fringe benefits;
(d) GFB fails to obtain the assumption of all obligations under this Agreement
by any successor as contemplated in Section 8.7 of this Agreement; or
(e) Employee's employment is purported to be terminated in a manner which is not
pursuant to a Notice of Termination satisfying the requirements of Section 7.4
of this Agreement; and, for purposes of this Agreement, no such purported
termination shall be effective.
1.5 The "GFB Board" shall mean the Board of Directors of GFB.
1.6 "Notice of Termination" shall mean a notice, from GFB or from Employee,
which shall indicate the specific termination provision in this Agreement relied
upon, shall set forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of Employee's employment under the provision
so indicated, and shall state the effective date of the termination.
1.7 "Permanent Disability" shall mean total disability arising from an
occupational or non-occupational medically determinable physical or mental
impairment which prevents the Employee from engaging in any substantial gainful
activity and which is determined on a reasonable basis by GFB to be permanent
and continuous for the remainder of the Employee's life.
<PAGE>
1.8 "Retirement" shall mean termination of Employee's employment by reason of
Employee attaining age 65.
1.9 "Secret or Confidential Information" means secret or confidential
information of GFB (including secret or confidential information of GFB's
subsidiaries and affiliates), including but not limited to lists of customers;
identity of customers; identity of prospective customers; contract terms;
bidding information and strategies; pricing methods; computer software; computer
software methods and documentation; hardware; salary information with respect to
GFB employees; financial product design information; GFB's business plan;
methods of operation of GFB or its affiliates; the procedures, forms and
techniques used in servicing accounts; and other documents or information which
are required to be maintained in confidence for the continued success of GFB and
its business.
1.10 Termination for "Cause" by GFB of Employee's employment under this
Agreement shall have the same meaning as it does in 12 C.F.R. 563.39, and shall
include termination because of:
(a) The intentional and substantial failure by Employee to perform Employee's
duties with GFB (other than any such failure resulting from incapacity due to
physical or mental illness); or
(b) Employee's personal dishonesty, incompetence, willful misconduct, breach of
a fiduciary duty involving personal profit, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses) or
cease-and-desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, Employee shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to
Employee a copy of a resolution duly adopted by the GFB Board at a meeting of
the GFB Board called and held for that purpose, finding that in the good faith
opinion of the GFB Board, GFB has cause for terminating Employee and specifying
the particulars thereof in detail.
Section 2 - Employment and Term
2.1 Employment. GFB agrees to employ Employee and Employee agrees to serve as
Executive Vice President-Chief Financial Officer of GFB. Employee agrees to
accept Employment on the terms and conditions set forth in this Agreement.
2.2 Term. Subject to extension in accordance with this Section 2 and unless
sooner terminated as provided in Section 7, the term of this Agreement (the
"Term") shall be the period beginning on January 1, 1997 (the "Effective Date")
and ending April 15, 1999, or such earlier time as provided by Section 7.1. On
or before December 31, 1997, December 31, 1998 and April 14, 1999 and each 12
month anniversary thereafter, the GFB Board shall review Employee's performance
under this Agreement to determine whether GFB desires that the then-remaining
Term be extended. If the GFB Board recommends and Employee consents to such
extensions, then the then-remaining Term shall be extended by no more than one
year.
Section 3 - Duties of Employee
3.1 Time Devoted; Duties. Employee shall devote his entire time, attention and
energies to the business of GFB and he shall render such administrative and
management services to GFB as are customarily performed by persons situated in a
similar executive capacity, including those services prescribed from time to
time by the GFB Board. Employee shall also promote, by entertainment or
otherwise, as and to the extent permitted by law, the business of GFB. Employee
shall perform his duties under this Agreement in accordance with such reasonable
standards expected of employees with comparable positions in comparable
organizations and as may be established from time to time by the GFB Board.
Employee shall also conduct his personal affairs, including his personal
financial affairs, in a manner appropriate for his position.
3.2 No Conflicting Activities. During the term of Employee's employment under
this Agreement, Employee shall not engage in any business or activity contrary
to the business affairs or interests of GFB. Nothing contained in this Section
3.2 shall be deemed to prevent or limit the right of Employee to invest in the
capital stock or other securities of any business.
<PAGE>
Section 4 - Compensation
4.1 Base Compensation. Employee shall receive for his services the following
Base Compensation:
(a) GFB shall pay Employee an annual salary of $161,250 payable in 26 equal
bi-weekly installments.
(b) Any increase in Employee's Base Compensation shall be left to the sole
discretion of the GFB Board. The Employee's Base Compensation shall not be
subject to reduction during the Term of this Agreement except as otherwise
provided in this Agreement.
4.2 Bonus Compensation. GFB shall pay Employee Bonus Compensation as determined
by the GFB Board in its discretion.
4.3 Additional Compensation. As further compensation (the "Additional
Compensation") GFB shall make available the benefits provided to Employee under
GFB's Recognition and Retention Plan for Officers and Employees effective March
30, 1994 and shall make available the stock options provided to Employee
pursuant to Holding Company's 1994 Incentive Stock Option Plan for Officers and
Employees effective March 30, 1994, as amended.
4.4 Source of Payments. All payments provided for in this Agreement shall be
timely paid by GFB. However, Holding Company unconditionally guarantees payment
and provision of all amounts and benefits due hereunder to Employee and, if such
amounts and benefits due from GFB are not timely paid or provided by GFB, such
amounts and benefits shall be paid or provided by Holding Company.
Section 5 - Employee Benefits
5.1 Vacations. During each calendar year during the Term, Employee shall be
entitled to a vacation of three weeks, during which Employee's compensation
shall be paid in full. At least one week must be taken in consecutive days.
Unused vacation for any year during the Term may not be carried forward for use
in the next following year. Upon any termination of Employee's employment
hereunder, Employee shall be entitled to pro rata compensation for unused
vacation time earned during the year of termination, based upon the number of
months Employee was employed during that year.
5.2 Business Expenses. GFB shall reimburse Employee for ordinary and necessary
business expenses incurred by Employee in performing his duties pursuant to this
Agreement, including but not limited to reasonable travel, entertainment and
similar expenses that Employee incurs in promoting GFB's business; provided that
GFB shall not reimburse any such expense which, prior to its being incurred, GFB
directed Employee not to incur. The reimbursement shall be made upon
presentation to GFB by Employee, from time to time, of an account of such
expenses in such form and in such detail as GFB may request.
5.3 Fringe Benefits. In addition to benefits specifically described herein;
Employee shall be entitled to receive from GFB the fringe benefits generally
available to full-time senior management employees of GFB, as those benefits may
be changed from time to time.
5.4 Disability Insurance. Throughout the Term of this Agreement, GFB shall
provide Employee with long term disability coverage of 60% of Employee's total
pay from the previous year, which benefit begins no later than 90 days after the
Disability occurs.
Section 6 - Confidentiality and
Covenant Not to Compete
6.1 Covenant Not to Compete. In consideration of the GFB's continued employment
of Employee pursuant to this Agreement, Employee covenants and agrees that
Employee shall not during the one-year period immediately following the
termination of his employment under this Agreement, if (1) GFB terminated the
employment and severance compensation is payable pursuant to Section 8.4 or 8.5,
or (2) Employee has retired, become disabled or voluntarily terminated:
(a) without the prior written consent of GFB, engage or become interested in any
capacity, directly or indirectly (whether as proprietor, stockholder, director,
partner, employee, trustee, beneficiary, or in any other capacity) in any
business selling, providing or developing products or services competitive with
products or services sold or maintained by GFB within a 50-mile radius of the
Louisville Metropolitan Area; or
(b) recruit or solicit for employment any current or future employee of GFB or
any of its respective successors or any entities related to it.
<PAGE>
6.2 Confidential Information. Employee acknowledges that all Secret or
Confidential Information is the exclusive property of GFB. Employee shall not
during the period of his employment by GFB or at any time thereafter, disclose
to any person, firm or corporation, or publish, or use for any purpose, any
Secret or Confidential Information except as properly required in the ordinary
course of business of GFB or as directed and authorized by GFB. Upon the
termination of his employment with GFB, for any reason whatsoever, Employee
shall return and deliver to GFB within 7 days any and all papers, books,
records, documents, memoranda and manuals, including all copies thereof,
belonging to GFB or relating to its business, in Employee's possession, whether
prepared by Employee or others. If at any time after the termination of
employment, Employee determines that he has any Secret or Confidential
Information in his possession or control, Employee shall immediately return all
such Secret or Confidential Information to GFB including all copies and portions
thereof.
6.3 Disclosure and Survival of Covenants. If Employee, in the future, seeks or
is offered employment by any other company, firm, or person, he shall provide a
copy of this Agreement to the prospective employer prior to accepting employment
with that prospective employer. The provisions of Sections 6.1 and 6.2 shall
survive any termination of this Agreement.
Section 7 - Termination
7.1 Automatic Termination. Employment under this Agreement shall terminate on
the death or Permanent Disability of Employee or by the Employee attaining age
65 during the Term of this Agreement.
7.2 Involuntary Termination.
(a) Termination by the Board. The GFB Board may terminate this Agreement at any
time.
(b) Termination or Suspension by the Office of Thrift Supervision.
(i) If Employee is suspended and/or temporarily prohibited from performing his
duties under this Agreement by a notice served under Section 8(e)(3) or (g)(1)
of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(1)), then
GFB's obligations under this Agreement shall be suspended as of the date of
service of such notice unless stayed by appropriate proceedings. If the charges
in the notice are dismissed, GFB may, in its discretion, (a) pay Employee all or
part of the compensation withheld while obligations under this Agreement were
suspended and (b) reinstate (in whole or in part) any of its obligations which
were suspended.
(ii) If Employee is removed and/or permanently prohibited from participating in
the conduct of GFB's affairs by an order issued under section 8(e)(4) or (g)(1)
of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of GFB under this Agreement shall terminate as of the effective date
of the order, but vested rights of Employee shall not be affected.
(iii) If GFB is in default (as defined in section 3(x)(1) of the Federal Deposit
Insurance Act), all obligations under this Agreement shall terminate as of the
date of default, but vested rights of Employee shall not be affected.
(iv) All obligations under this Agreement shall terminate, except to the extent
determined that continuation of the contract is necessary for the continued
operation of GFB (a) by action of the Director of the Office of Thrift
Supervision (the "Director") or his or her designee, at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of GFB under the authority
contained in section 13(c) of the Federal Deposit Insurance Act; or (b) by the
Director or his or her designee, at the time the Director or his or her designee
approves a supervisory merger to resolve problems related to operation of GFB or
when GFB is determined by the Director to be in an unsafe or unsound condition.
Any rights of Employee that have already vested, however, shall not be affected
by such action.
7.3 Voluntary Termination. Employee may terminate his employment for Good Reason
by giving Notice of Termination in accordance with Section 7.4 below.
7.4 Notice of Termination. Any termination by GFB or by Employee, pursuant to
this Agreement, shall be communicated by written Notice of Termination to the
other party hereto.
7.5 Conflicts with Federal Law. If any of the termination provisions contained
in this Agreement conflict with Office of Thrift Supervision regulation 12 CFR
563.39(b), or any successor regulation, the latter shall prevail.
<PAGE>
Section 8 - Compensation on Termination
8.1 Compensation Upon Death. If Employee's employment is terminated because of
the death of Employee, GFB shall pay Employee's executors or administrators: a)
within 30 days of death the unpaid balance of Employee's Base Compensation
through the end of the month in which Employee's death occurred, at the rate in
effect on the date of Employee's death and b) as soon as such Employee's bonus
is calculated, an amount equal to Employee's Bonus Compensation for the current
year (if any was paid) multiplied by the fractional portion of the year between
the first day of the year in which Employee died and the date of the Employee's
death; and shall have no further obligations under this Agreement.
8.2 Compensation Upon Disability. If Employee's active work ceases because of
Disability, GFB shall continue, as and when scheduled, to pay Employee
Employee's Base Compensation through the date he ceased work, plus three months'
additional Base Compensation, at 100% of the rate in effect on the date Employee
became Disabled, and thereafter GFB shall have no further obligation for cash
compensation unless and until Employee returns to work.
8.3 Compensation Upon Termination for Cause. If Employee's employment shall be
terminated by GFB for Cause, GFB shall pay Employee his Base Compensation
through the Date of Termination, and GFB shall not have any further obligations
to Employee under this Agreement.
8.4 Compensation Upon Termination by GFB Other Than For Cause. If Employee's
employment is terminated by GFB other than for Cause, then unless such
termination occurs simultaneous with or within two years following a Change in
Control of GFB or Holding Company, then Employee shall be entitled to the
compensation Employee would have been entitled to under this Agreement as and
when payable hereunder for the remainder of the Term, provided that Employee in
good faith actively seeks employment similar to employee's position with GFB,
and that any payments under this Section 8.4 shall be reduced by any
compensation Employee receives from other employment thereafter accepted.
8.5 Compensation Upon Termination For Good Reason or Following Change of
Control.
(a) If (1) Employee terminates employment under Section 7.3 for Good Reason or
(2) any of the events constituting a Change of Control of GFB or Holding Company
shall have occurred and Employee's employment is terminated by GFB within three
years thereafter other than by reason of (a) Employee's death or disability, or
(b) termination by GFB for Cause, then GFB shall pay to Employee as severance
compensation in a lump sum (discounted to present value using the interest rate
then applicable to newly issued fixed rate three-year certificates of deposit at
GFB, Louisville, Kentucky) on the 30th day following the Date of Termination:
(i) the unpaid balance of Employee's full Base Compensation through the Date of
Termination at the rate in effect at the time Notice of Termination is given;
plus
(ii) an amount equal to Employee's full Base Compensation for two years at the
rate in effect as of the Date of Termination; plus
(iii) Employer shall make available to Employee the Additional Compensation to
which Employee would be entitled during the Term; plus
(iv) an amount equal to Employee's Bonus Compensation for the previous year (if
any was paid), multiplied by two.
In addition to the severance benefits set forth in (i), (ii), (iii) and (iv)
above, GFB shall: (a) to the extent not prohibited by Office of Thrift
Supervision pronouncements pay all legal fees and expenses incurred by Employee
resulting from termination (including all such fees and expenses, if any,
incurred in contesting any such termination or in seeking to obtain or enforce
any right or benefit provided by this Agreement); and (b) maintain in full force
and effect, for the continued benefit of Employee for a two year period after
the Date of Termination, all employee benefit plans and programs or arrangements
in which Employee was entitled to participate immediately prior to Date of
Termination; provided, however, that Employee's continued participation is
possible under the general terms and provisions of such plans and programs. If
Employee's participation in any such plan or program is barred, GFB shall
arrange to provide Employee with benefits substantially similar or, if that is
not possible, of equal value to those which Employee is entitled to receive
under such plans and programs. At the end of the period of coverage, Employee
shall have the option to have assigned to him at no cost and with no
apportionment of prepaid premiums, any assignable insurance policies owned by
GFB relating specifically to Employee.
<PAGE>
Notwithstanding any of the foregoing, if Employee is within three years of age
65 on the Date of Termination, then (a) GFB shall reduce the amount payable to
Employee under paragraphs (ii) and (iii) above to reflect only the number of
months between the Date of Termination and the date Employee is or would
otherwise attain age 65, and (b) GFB shall have no obligations to Employee after
Employee attains age 65.
(b) Employee shall not be required to mitigate the amount of any payment
provided for in this Section 8.5 by seeking other employment or otherwise, nor
shall the amount of any payment provided for in this Section 8.5 be reduced by
any compensation earned by Employee as the result of employment by another
employer after the Date of Termination, or otherwise.
8.6 Compensation Upon Retirement. If Employee terminates employment in the month
of his 65th birthday, then Employee shall be paid within 30 days from the date
of his retirement the unpaid balance of Employee's Base Compensation through the
date of his retirement and shall be paid, as soon as such Employee's bonus is
calculated, an amount equal to Employee's Bonus Compensation for the current
year (if any was paid), multiplied by the fractional portion of the year between
the first day of the year in which Employee retired and the date of Employee's
retirement.
8.7 Successors of GFB. GFB will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of GFB, by agreement in form and
substance satisfactory to Employee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that GFB would be
required to perform it if no such succession had taken place. Failure of GFB to
obtain such agreement prior to the effectiveness of any such succession shall be
a breach of this Agreement and shall entitle Employee to terminate this
agreement for Good Reason under paragraph 7.3 of this Agreement. As used in this
Agreement, "GFB" shall mean GFB as hereinbefore defined and any successor to its
business and/or assets as aforesaid or which otherwise becomes bound by all the
terms and provisions of this Agreement by operation of law.
8.8 Reduction of Amounts Payable.
(a) In no event shall any amount payable under any provision of this Agreement
equal or exceed an amount which would (i) cause GFB to forfeit (as determined by
the Certified Public Accountants or legal counsel employed by GFB), pursuant to
Section 280G(a) of the Internal Revenue Code of 1986, as amended, its deduction
for any or all such amounts payable, or (ii) exceed maximum amounts determined
by the Office of Thrift Supervision to constitute a safe and sound practice.
Pursuant to this Section 8.8, the GFB Board has the power to reduce severance
benefits payable under this Agreement, if such benefits alone or in conjunction
with termination benefits provided under any other severance pay plan maintained
by GFB or any other plan or agreement between Employee and GFB, would cause GFB
to forfeit otherwise deductible payments or would exceed the Office of Thrift
Supervision maximums; provided, however that no benefits payable under this
Agreement shall be reduced pursuant to this Section 8.8 to less than $1.00 below
the amount of benefits (i) which GFB can properly deduct under Section 280G(a)
of the Internal Revenue Code of 1986, as amended, or (ii) which equal the amount
the Office of Thrift Supervision considers the maximum safely and soundly
payable.
(b) Any payments made to the Employee pursuant to this Agreement, or otherwise,
are subject to and conditioned upon their compliance with 12 U.S.C. 1828(k)
and any regulation promulgated thereunder.
Section 9 - Miscellaneous
9.1 Notice. Any notice or request required or permitted to be given under this
Agreement shall be in writing and shall be deemed sufficiently given for all
purposes if mailed by certified mail, postage prepaid and return receipt
requested, addressed to the intended recipient at the following address (or at
such other address as either party may designate in writing to the other party
by certified mail as described above):
If to GFB:
Great Financial Bank, FSB
One Financial Square
Louisville, Kentucky 40202
<PAGE>
All notices to GFB shall be directed to the attention of the President of GFB
with a copy to the Treasurer of GFB.
If to Employee:
Richard Klapheke
1215 Carpenter Drive
Crestwood, KY 40014
9.2 Headings. The headings used in this Agreement have been included solely for
ease of reference and are not to be construed in any interpretation of this
Agreement.
9.3 Entire Agreement. This instrument contains the entire agreement between the
parties with respect to the subject matter hereof, and shall supersede all prior
understanding with respect to the subject matter hereof, except that the
Indemnity Agreement dated October 25, 1991 and the Supplemental Executive
Retirement Plan dated as of January 1, 1992 between Employee and GFB shall also
continue to be effective. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. No
modification or addition to this Agreement shall be enforceable unless in
writing and signed by the party against whom enforcement is sought.
9.4 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Kentucky.
9.5 Arbitration. Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a home office selected by Employee within
fifty (50) miles from the location of GFB, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Employee shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Employee's termination is resolved in favor of Employee, whether by judgment,
arbitration or settlement, Employee shall be entitled to the payment of all
back-pay, including salary, bonuses and any other cash compensation, fringe
benefits and any compensation and benefits due Employee under this Agreement.
9.6 Benefit. This Agreement shall inure to the benefit of and shall be binding
upon GFB, its successors and assigns, and this Agreement shall not be assignable
by Employee.
9.7 Remedies. Employee and GFB acknowledge that the services to be rendered
under this Agreement are special, unique and of extraordinary character. If
Employee breaches any covenants, terms and conditions of this Agreement to be
performed by him, GFB will suffer irreparable damage and it will be impossible
to estimate or determine GFB's damages. Therefore, GFB shall, upon proof of such
breach, be entitled as a matter of course to an injunction from any court of
competent jurisdiction restraining any further violation of such covenants by
Employee, his employers, employees, partners, agents or other associates, or any
of them, such right to an injunction to be cumulative and in addition to any
other remedies GFB may have, either in law or in equity. In any proceeding to
enforce any provision of this Agreement, Employee shall not assert any
contention that there is an adequate remedy at law for the breach or default
upon which such proceeding is based. Nothing in this paragraph shall be
construed to prevent such remedy in the courts, in the case of any breach of
this Agreement by Employee, as GFB may elect or invoke.
9.8 Severability. If any of the provisions of Section 6.1 of this Agreement are
held to be unenforceable because of the scope, duration or area of its
applicability, the court making such determination shall have the power to
modify such scope duration or area or all of them, and such provision shall then
be applicable in such modified form. If any provision of this Agreement is held
to be invalid, illegal or unenforceable in any respect, the validity, and
enforceability of all other applications of that provision and of all other
provisions and applications hereof shall not in any way be affected or impaired.
<PAGE>
9.9 Waiver. No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by Employee and such officer as may be specifically designated by the
Board of Directors of GFB. The failure of GFB or Employee at any time or times
to enforce its rights under the Agreement strictly in accordance with the same
shall not be construed as having created a custom in any way or manner contrary
to the specific provisions of this Agreement or as having in any way or manner
modified or waived the same. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or any
prior or subsequent time.
9.10 Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF the parties hereto have executed this Agreement, as of the
day and year first above written but actually on the dates set forth below.
GREAT FINANCIAL BANK, FSB
By:________________________________
Title:_____________________________
Date:______________________________
GREAT FINANCIAL CORPORATION
(GUARANTOR)
By:________________________________
Title:_____________________________
Date:______________________________
EMPLOYEE:__________________________
Date:______________________________
<PAGE>
EMPLOYMENT AGREEMENT
This is an Employment Agreement (the "Agreement") dated as of January 1, 1997
(the "Effective Date"), between Great Financial Bank, FSB ("GFB"), Great
Financial Corporation ("Holding Company") and Jack H. Shipman ("Employee").
RECITALS
A. GFB considers the establishment and maintenance of sound and vital senior
management to be essential to protecting and enhancing its best interests and
therefore GFB desires to enter into an agreement governing the terms and
conditions of Employee's employment.
B. GFB is a federally chartered Savings Bank and is subject to the Office of
Thrift Supervision Regulation Section 563.39, which requires any agreements
between GFB and its employees to be in writing and to contain certain
provisions.
C. The Board of Directors of GFB has considered and approved this Agreement with
respect to Employee's employment.
AGREEMENT
The parties agree as follows:
Section 1 - Definitions
1.1 A "Change in Control" of GFB shall mean an event of a nature that:
(a) during any period of three consecutive years, individuals who at the
beginning of such period constitute the Board cease for any reason to constitute
a majority thereof unless the election or nomination for election of each new
Director was approved by a vote of at least two-thirds of the Board members then
still in office who were Board members at the beginning of the period or who
were similarly nominated;
(b) the business of GFB or Holding Company for which Employee's services are
principally performed is disposed of by GFB or Holding Company pursuant to a
partial or complete liquidation of GFB or Holding Company, a sale of assets of
GFB or Holding Company, or otherwise;
(c) GFB or Holding Company consummates the transaction contemplated by an
agreement which results in the occurrence of a Change in Control of GFB or
Holding Company;
(d) the Board of GFB or Holding Company adopts a resolution to the effect that a
Change in Control of GFB or Holding Company for purposes of this Agreement has
occurred;
(e) an event of a nature that would be required to be reported in response to
item 1(a) of the current report on Form 8-K as in effect on the date of this
Agreement, pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 occurs;
(f) any "person" (as the term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934) is or becomes the "beneficial owner" (as the
term is defined in Rule 13d-3 of the Securities Exchange Act), directly or
indirectly, of securities of GFB or Holding Company representing 20 percent or
more of Holding Company's or GFB's outstanding securities except for any
securities of GFB purchased by Holding Company in connection with the conversion
of GFB to stock form and any securities purchased by GFB's or Lincoln Service
Mortgage Corporation's employee stock ownership plan and trust;
(g) a plan of reorganization, merger, consolidation, sale of all or
substantially all assets of GFB or Holding Company or a similar transaction
occurs in which GFB or Holding Company is not the resulting entity; or
(h) change of control shall have occurred as described in 12 CFR Section
574.4(a) or successor regulations.
1.2 "Date of Termination" shall mean:
(a) If Employee's employment is automatically terminated under Section 7.1 of
this Agreement, the date on which the event which triggered that automatic
termination occurred;
<PAGE>
(b) If Employee's employment is terminated for Good Reason under Section 7.3 of
this Agreement or by GFB under Section 7.2(a) of this Agreement, the date
specified in the Notice of Termination.
(c) If Employee's employment is terminated under Section 7.2(b), the date
specified in Section 7.2(b).
(d) If Employee's employment is terminated at the end of the Term of this
Agreement, the last day of such Term.
1.3 "Disability" shall mean Employee's inability, due to accident or physical or
mental illness, to adequately and fully perform the duties required by an
employee in Employee's profession; provided, however, that Disability for
purposes of this Agreement shall not include any Disability which results from
Employee's engaging in a criminal enterprise or from Employee's habitual
drunkenness, addiction to narcotics or intentionally inflicted injury. If at any
time during the Term the GFB Board makes a determination with respect to
Employee's Disability, that determination shall be final, conclusive, and
binding upon GFB, Employee, and their successors in interest, so long as that
determination has a reasonable basis.
1.4 "Good Reason" shall be deemed to exist if:
(a) within three years after a Change in Control of GFB or Holding Company,
without Employee's express written consent, Employee is assigned any duties
inconsistent with Employee's positions, duties, responsibilities and status with
GFB or Holding Company immediately prior to a Change of Control of GFB or
Holding Company; Employee's actual job responsibilities as in effect immediately
prior to a Change of Control of GFB or Holding Company are materially changed;
or Employee is removed from or is not re-elected to any of such positions,
except in connection with the termination of Employee's employment: (1) for
Cause; (2) on account of Retirement; (3) as a result of Employee's death; or (4)
by Employee other than for Good Reason; provided that the GFB Board's failure to
extend this Agreement for an additional year under Section 2.2 of this Agreement
shall not entitle Employee to terminate this Agreement for Good Reason;
(b) within three years of a Change in Control of GFB or Holding Company, GFB's
or Holding Company's principal executive offices are relocated to a location
more than 30 miles from its current location; or GFB or Holding Company requires
Employee to be based in any location which is more than 30 miles from Employee's
current base location, except for required travel on GFB's or Holding Company's
business to an extent substantially consistent with similarly situated
executives' business travel obligations;
(c) within three years after a Change of Control of GFB or Holding Company, GFB
fails to continue in effect any benefit or compensation plan, pension plan, life
insurance plan, health and accident plan or disability plan (including, but not
limited to, GFB's participation in the Financial Institutions Retirement Fund)
in which Employee is participating at the time of a Change of Control (or plans
providing Employee with substantially similar benefits), such that there occurs
a material reduction in benefits before termination, or GFB or Holding Company
takes any action which would adversely affect Employee's participation in or
materially reduce Employee's benefits under any benefit plan maintained by GFB
or Holding Company or deprive Employee of any material fringe benefits;
(d) GFB fails to obtain the assumption of all obligations under this Agreement
by any successor as contemplated in Section 8.7 of this Agreement; or
(e) Employee's employment is purported to be terminated in a manner which is not
pursuant to a Notice of Termination satisfying the requirements of Section 7.4
of this Agreement; and, for purposes of this Agreement, no such purported
termination shall be effective.
1.5 The "GFB Board" shall mean the Board of Directors of GFB.
1.6 "Notice of Termination" shall mean a notice, from GFB or from Employee,
which shall indicate the specific termination provision in this Agreement relied
upon, shall set forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of Employee's employment under the provision
so indicated, and shall state the effective date of the termination.
1.7 "Permanent Disability" shall mean total disability arising from an
occupational or non-occupational medically determinable physical or mental
impairment which prevents the Employee from engaging in any substantial gainful
activity and which is determined on a reasonable basis by GFB to be permanent
and continuous for the remainder of the Employee's life.
<PAGE>
1.8 "Retirement" shall mean termination of Employee's employment by reason of
Employee attaining age 65.
1.9 "Secret or Confidential Information" means secret or confidential
information of GFB (including secret or confidential information of GFB's
subsidiaries and affiliates), including but not limited to lists of customers;
identity of customers; identity of prospective customers; contract terms;
bidding information and strategies; pricing methods; computer software; computer
software methods and documentation; hardware; salary information with respect to
GFB employees; financial product design information; GFB's business plan;
methods of operation of GFB or its affiliates; the procedures, forms and
techniques used in servicing accounts; and other documents or information which
are required to be maintained in confidence for the continued success of GFB and
its business.
1.10 Termination for "Cause" by GFB of Employee's employment under this
Agreement shall have the same meaning as it does in 12 C.F.R. 563.39, and shall
include termination because of:
(a) The intentional and substantial failure by Employee to perform Employee's
duties with GFB (other than any such failure resulting from incapacity due to
physical or mental illness); or
(b) Employee's personal dishonesty, incompetence, willful misconduct, breach of
a fiduciary duty involving personal profit, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses) or
cease-and-desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, Employee shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to
Employee a copy of a resolution duly adopted by the GFB Board at a meeting of
the GFB Board called and held for that purpose, finding that in the good faith
opinion of the GFB Board, GFB has cause for terminating Employee and specifying
the particulars thereof in detail.
Section 2 - Employment and Term
2.1 Employment. GFB agrees to employ Employee and Employee agrees to serve as
President and Chief Operating Officer of GFB. Employee agrees to accept
Employment on the terms and conditions set forth in this Agreement.
2.2 Term. Subject to extension in accordance with this Section 2 and unless
sooner terminated as provided in Section 7, the term of this Agreement (the
"Term") shall be the period beginning on January 1, 1997 (the "Effective Date")
and ending April 15, 1999, or such earlier time as provided by Section 7.1. On
or before December 31, 1997, December 31, 1998 and April 14, 1999 and each 12
month anniversary thereafter, the GFB Board shall review Employee's performance
under this Agreement to determine whether GFB desires that the then-remaining
Term be extended. If the GFB Board recommends and Employee consents to such
extensions, then the then-remaining Term shall be extended by no more than one
year.
Section 3 - Duties of Employee
3.1 Time Devoted; Duties. Employee shall devote his entire time, attention and
energies to the business of GFB and he shall render such administrative and
management services to GFB as are customarily performed by persons situated in a
similar executive capacity, including those services prescribed from time to
time by the GFB Board; provided, however, that Employee may engage in the
activities described in Exhibit A so long as they do not interfere or conflict
with his duties with GFB and Holding Company. Employee shall also promote, by
entertainment or otherwise, as and to the extent permitted by law, the business
of GFB. Employee shall perform his duties under this Agreement in accordance
with such reasonable standards expected of employees with comparable positions
in comparable organizations and as may be established from time to time by the
GFB Board. Employee shall also conduct his personal affairs, including his
personal financial affairs, in a manner appropriate for his position.
3.2 No Conflicting Activities. During the term of Employee's employment under
this Agreement, Employee shall not engage in any business or activity contrary
to the business affairs or interests of GFB. Nothing contained in this Section
3.2 shall be deemed to prevent or limit the right of Employee to invest in the
capital stock or other securities of any business.
<PAGE>
Section 4 - Compensation
4.1 Base Compensation. Employee shall receive for his services the following
Base Compensation:
(a) GFB shall pay Employee an annual salary of $235,000 payable in 26 equal
bi-weekly installments.
(b) Any increase in Employee's Base Compensation shall be left to the sole
discretion of the GFB Board. The Employee's Base Compensation shall not be
subject to reduction during the Term of this Agreement except as otherwise
provided in this Agreement.
4.2 Bonus Compensation. GFB shall pay Employee Bonus Compensation as determined
by the GFB Board in its discretion.
4.3 Additional Compensation. As further compensation (the "Additional
Compensation") GFB shall make available the benefits provided to Employee under
GFB's Recognition and Retention Plan for Officers and Employees effective March
30, 1994 and shall make available the stock options provided to Employee
pursuant to Holding Company's 1994 Incentive Stock Option Plan for Officers and
Employees effective March 30, 1994, as amended.
4.4 Source of Payments. All payments provided for in this Agreement shall be
timely paid by GFB. However, Holding Company unconditionally guarantees payment
and provision of all amounts and benefits due hereunder to Employee and, if such
amounts and benefits due from GFB are not timely paid or provided by GFB, such
amounts and benefits shall be paid or provided by Holding Company.
Section 5 - Employee Benefits
5.1 Vacations. During each calendar year during the Term, Employee shall be
entitled to a vacation of three weeks, during which Employee's compensation
shall be paid in full. At least one week must be taken in consecutive days.
Unused vacation for any year during the Term may not be carried forward for use
in the next following year. Upon any termination of Employee's employment
hereunder, Employee shall be entitled to pro rata compensation for unused
vacation time earned during the year of termination, based upon the number of
months Employee was employed during that year.
5.2 Business Expenses. GFB shall reimburse Employee for ordinary and necessary
business expenses incurred by Employee in performing his duties pursuant to this
Agreement, including but not limited to reasonable travel, entertainment and
similar expenses that Employee incurs in promoting GFB's business; provided that
GFB shall not reimburse any such expense which, prior to its being incurred, GFB
directed Employee not to incur. The reimbursement shall be made upon
presentation to GFB by Employee, from time to time, of an account of such
expenses in such form and in such detail as GFB may request.
5.3 Fringe Benefits. In addition to benefits specifically described herein;
Employee shall be entitled to receive from GFB the fringe benefits generally
available to full-time senior management employees of GFB, as those benefits may
be changed from time to time.
5.4 Disability Insurance. Throughout the Term of this Agreement, GFB shall
provide Employee with long term disability coverage of 60% of Employee's total
pay from the previous year, which benefit begins no later than 90 days after the
Disability occurs.
Section 6 - Confidentiality and
Covenant Not to Compete
6.1 Covenant Not to Compete. In consideration of the GFB's continued employment
of Employee pursuant to this Agreement, Employee covenants and agrees that
Employee shall not during the one-year period immediately following the
termination of his employment under this Agreement, if (1) GFB terminated the
employment and severance compensation is payable pursuant to Section 8.4 or 8.5,
or (2) Employee has retired, become disabled or voluntarily terminated:
(a) without the prior written consent of GFB, engage or become interested in any
capacity, directly or indirectly (whether as proprietor, stockholder, director,
partner, employee, trustee, beneficiary, or in any other capacity) in any
business selling, providing or developing products or services competitive with
products or services sold or maintained by GFB within a 50-mile radius of the
Louisville Metropolitan Area; or
(b) recruit or solicit for employment any current or future employee of GFB or
any of its respective successors or any entities related to it.
<PAGE>
6.2 Confidential Information. Employee acknowledges that all Secret or
Confidential Information is the exclusive property of GFB. Employee shall not
during the period of his employment by GFB or at any time thereafter, disclose
to any person, firm or corporation, or publish, or use for any purpose, any
Secret or Confidential Information except as properly required in the ordinary
course of business of GFB or as directed and authorized by GFB. Upon the
termination of his employment with GFB, for any reason whatsoever, Employee
shall return and deliver to GFB within 7 days any and all papers, books,
records, documents, memoranda and manuals, including all copies thereof,
belonging to GFB or relating to its business, in Employee's possession, whether
prepared by Employee or others. If at any time after the termination of
employment, Employee determines that he has any Secret or Confidential
Information in his possession or control, Employee shall immediately return all
such Secret or Confidential Information to GFB including all copies and portions
thereof.
6.3 Disclosure and Survival of Covenants. If Employee, in the future, seeks or
is offered employment by any other company, firm, or person, he shall provide a
copy of this Agreement to the prospective employer prior to accepting employment
with that prospective employer. The provisions of Sections 6.1 and 6.2 shall
survive any termination of this Agreement.
Section 7 - Termination
7.1 Automatic Termination. Employment under this Agreement shall terminate on
the death or Permanent Disability of Employee or by the Employee attaining age
65 during the Term of this Agreement.
7.2 Involuntary Termination.
(a) Termination by the Board. The GFB Board may terminate this Agreement at any
time.
(b) Termination or Suspension by the Office of Thrift Supervision.
(i) If Employee is suspended and/or temporarily prohibited from performing his
duties under this Agreement by a notice served under Section 8(e)(3) or (g)(1)
of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(1)), then
GFB's obligations under this Agreement shall be suspended as of the date of
service of such notice unless stayed by appropriate proceedings. If the charges
in the notice are dismissed, GFB may, in its discretion, (a) pay Employee all or
part of the compensation withheld while obligations under this Agreement were
suspended and (b) reinstate (in whole or in part) any of its obligations which
were suspended.
(ii) If Employee is removed and/or permanently prohibited from participating in
the conduct of GFB's affairs by an order issued under section 8(e)(4) or (g)(1)
of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of GFB under this Agreement shall terminate as of the effective date
of the order, but vested rights of Employee shall not be affected.
(iii) If GFB is in default (as defined in section 3(x)(1) of the Federal Deposit
Insurance Act), all obligations under this Agreement shall terminate as of the
date of default, but vested rights of Employee shall not be affected.
(iv) All obligations under this Agreement shall terminate, except to the extent
determined that continuation of the contract is necessary for the continued
operation of GFB (a) by action of the Director of the Office of Thrift
Supervision (the "Director") or his or her designee, at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of GFB under the authority
contained in section 13(c) of the Federal Deposit Insurance Act; or (b) by the
Director or his or her designee, at the time the Director or his or her designee
approves a supervisory merger to resolve problems related to operation of GFB or
when GFB is determined by the Director to be in an unsafe or unsound condition.
Any rights of Employee that have already vested, however, shall not be affected
by such action.
7.3 Voluntary Termination. Employee may terminate his employment for Good Reason
by giving Notice of Termination in accordance with Section 7.4 below.
7.4 Notice of Termination. Any termination by GFB or by Employee, pursuant to
this Agreement, shall be communicated by written Notice of Termination to the
other party hereto.
7.5 Conflicts with Federal Law. If any of the termination provisions contained
in this Agreement conflict with Office of Thrift Supervision regulation 12 CFR
563.39(b), or any successor regulation, the latter shall prevail.
<PAGE>
Section 8 - Compensation on Termination
8.1 Compensation Upon Death. If Employee's employment is terminated because of
the death of Employee, GFB shall pay Employee's executors or administrators: a)
within 30 days of death the unpaid balance of Employee's Base Compensation
through the end of the month in which Employee's death occurred, at the rate in
effect on the date of Employee's death and b) as soon as such Employee's bonus
is calculated, an amount equal to Employee's Bonus Compensation for the current
year (if any was paid) multiplied by the fractional portion of the year between
the first day of the year in which Employee died and the date of the Employee's
death; and shall have no further obligations under this Agreement.
8.2 Compensation Upon Disability. If Employee's active work ceases because of
Disability, GFB shall continue, as and when scheduled, to pay Employee
Employee's Base Compensation through the date he ceased work, plus three months'
additional Base Compensation, at 100% of the rate in effect on the date Employee
became Disabled, and thereafter GFB shall have no further obligation for cash
compensation unless and until Employee returns to work.
8.3 Compensation Upon Termination for Cause. If Employee's employment shall be
terminated by GFB for Cause, GFB shall pay Employee his Base Compensation
through the Date of Termination, and GFB shall not have any further obligations
to Employee under this Agreement.
8.4 Compensation Upon Termination by GFB Other Than For Cause. If Employee's
employment is terminated by GFB other than for Cause, then unless such
termination occurs simultaneous with or within two years following a Change in
Control of GFB or Holding Company, then Employee shall be entitled to the
compensation Employee would have been entitled to under this Agreement as and
when payable hereunder for the remainder of the Term, provided that Employee in
good faith actively seeks employment similar to employee's position with GFB,
and that any payments under this Section 8.4 shall be reduced by any
compensation Employee receives from other employment thereafter accepted.
8.5 Compensation Upon Termination For Good Reason or Following Change of
Control.
(a) If (1) Employee terminates employment under Section 7.3 for Good Reason or
(2) any of the events constituting a Change of Control of GFB or Holding Company
shall have occurred and Employee's employment is terminated by GFB within three
years thereafter other than by reason of (a) Employee's death or disability, or
(b) termination by GFB for Cause, then GFB shall pay to Employee as severance
compensation in a lump sum (discounted to present value using the interest rate
then applicable to newly issued fixed rate three-year certificates of deposit at
GFB, Louisville, Kentucky) on the 30th day following the Date of Termination:
(i) the unpaid balance of Employee's full Base Compensation through the Date of
Termination at the rate in effect at the time Notice of Termination is given;
plus
(ii) an amount equal to Employee's full Base Compensation for two years at the
rate in effect as of the Date of Termination; plus
(iii) Employer shall make available to Employee the Additional Compensation to
which Employee would be entitled during the Term; plus
(iv) an amount equal to Employee's Bonus Compensation for the previous year (if
any was paid), multiplied by two.
In addition to the severance benefits set forth in (i), (ii), (iii) and (iv)
above, GFB shall: (a) to the extent not prohibited by Office of Thrift
Supervision pronouncements pay all legal fees and expenses incurred by Employee
resulting from termination (including all such fees and expenses, if any,
incurred in contesting any such termination or in seeking to obtain or enforce
any right or benefit provided by this Agreement); and (b) maintain in full force
and effect, for the continued benefit of Employee for a two year period after
the Date of Termination, all employee benefit plans and programs or arrangements
in which Employee was entitled to participate immediately prior to Date of
Termination; provided, however, that Employee's continued participation is
possible under the general terms and provisions of such plans and programs. If
Employee's participation in any such plan or program is barred, GFB shall
arrange to provide Employee with benefits substantially similar or, if that is
not possible, of equal value to those which Employee is entitled to receive
under such plans and programs. At the end of the period of coverage, Employee
shall have the option to have assigned to him at no cost and with no
apportionment of prepaid premiums, any assignable insurance policies owned by
GFB relating specifically to Employee.
<PAGE>
Notwithstanding any of the foregoing, if Employee is within three years of age
65 on the Date of Termination, then (a) GFB shall reduce the amount payable to
Employee under paragraphs (ii) and (iii) above to reflect only the number of
months between the Date of Termination and the date Employee is or would
otherwise attain age 65, and (b) GFB shall have no obligations to Employee after
Employee attains age 65.
(b) Employee shall not be required to mitigate the amount of any payment
provided for in this Section 8.5 by seeking other employment or otherwise, nor
shall the amount of any payment provided for in this Section 8.5 be reduced by
any compensation earned by Employee as the result of employment by another
employer after the Date of Termination, or otherwise.
8.6 Compensation Upon Retirement. If Employee terminates employment in the month
of his 65th birthday, then Employee shall be paid within 30 days from the date
of his retirement the unpaid balance of Employee's Base Compensation through the
date of his retirement and shall be paid, as soon as such Employee's bonus is
calculated, an amount equal to Employee's Bonus Compensation for the current
year (if any was paid), multiplied by the fractional portion of the year between
the first day of the year in which Employee retired and the date of Employee's
retirement.
8.7 Successors of GFB. GFB will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of GFB, by agreement in form and
substance satisfactory to Employee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that GFB would be
required to perform it if no such succession had taken place. Failure of GFB to
obtain such agreement prior to the effectiveness of any such succession shall be
a breach of this Agreement and shall entitle Employee to terminate this
agreement for Good Reason under paragraph 7.3 of this Agreement. As used in this
Agreement, "GFB" shall mean GFB as hereinbefore defined and any successor to its
business and/or assets as aforesaid or which otherwise becomes bound by all the
terms and provisions of this Agreement by operation of law.
8.8 Reduction of Amounts Payable.
(a) In no event shall any amount payable under any provision of this Agreement
equal or exceed an amount which would (i) cause GFB to forfeit (as determined by
the Certified Public Accountants or legal counsel employed by GFB), pursuant to
Section 280G(a) of the Internal Revenue Code of 1986, as amended, its deduction
for any or all such amounts payable, or (ii) exceed maximum amounts determined
by the Office of Thrift Supervision to constitute a safe and sound practice.
Pursuant to this Section 8.8, the GFB Board has the power to reduce severance
benefits payable under this Agreement, if such benefits alone or in conjunction
with termination benefits provided under any other severance pay plan maintained
by GFB or any other plan or agreement between Employee and GFB, would cause GFB
to forfeit otherwise deductible payments or would exceed the Office of Thrift
Supervision maximums; provided, however that no benefits payable under this
Agreement shall be reduced pursuant to this Section 8.8 to less than $1.00 below
the amount of benefits (i) which GFB can properly deduct under Section 280G(a)
of the Internal Revenue Code of 1986, as amended, or (ii) which equal the amount
the Office of Thrift Supervision considers the maximum safely and soundly
payable.
(b) Any payments made to the Employee pursuant to this Agreement, or otherwise,
are subject to and conditioned upon their compliance with 12 U.S.C. 1828(k)
and any regulation promulgated thereunder.
Section 9 - Miscellaneous
9.1 Notice. Any notice or request required or permitted to be given under this
Agreement shall be in writing and shall be deemed sufficiently given for all
purposes if mailed by certified mail, postage prepaid and return receipt
requested, addressed to the intended recipient at the following address (or at
such other address as either party may designate in writing to the other party
by certified mail as described above):
If to GFB:
Great Financial Bank, FSB
One Financial Square
Louisville, Kentucky 40202
<PAGE>
All notices to GFB shall be directed to the attention of the Chief Executive
Officer of GFB with a copy to the Treasurer of GFB.
If to Employee:
Jack Shipman
8225 Highway 329
Crestwood, KY 40014
9.2 Headings. The headings used in this Agreement have been included solely for
ease of reference and are not to be construed in any interpretation of this
Agreement.
9.3 Entire Agreement. This instrument contains the entire agreement between the
parties with respect to the subject matter hereof, and shall supersede all prior
understanding with respect to the subject matter hereof, except that the
Indemnity Agreement dated October 25, 1991 and the Supplemental Executive
Retirement Plan dated as of January 1, 1992 between Employee and GFB shall also
continue to be effective. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. No
modification or addition to this Agreement shall be enforceable unless in
writing and signed by the party against whom enforcement is sought.
9.4 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Kentucky.
9.5 Arbitration. Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a home office selected by Employee within
fifty (50) miles from the location of GFB, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Employee shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Employee's termination is resolved in favor of Employee, whether by judgment,
arbitration or settlement, Employee shall be entitled to the payment of all
back-pay, including salary, bonuses and any other cash compensation, fringe
benefits and any compensation and benefits due Employee under this Agreement.
9.6 Benefit. This Agreement shall inure to the benefit of and shall be binding
upon GFB, its successors and assigns, and this Agreement shall not be assignable
by Employee.
9.7 Remedies. Employee and GFB acknowledge that the services to be rendered
under this Agreement are special, unique and of extraordinary character. If
Employee breaches any covenants, terms and conditions of this Agreement to be
performed by him, GFB will suffer irreparable damage and it will be impossible
to estimate or determine GFB's damages. Therefore, GFB shall, upon proof of such
breach, be entitled as a matter of course to an injunction from any court of
competent jurisdiction restraining any further violation of such covenants by
Employee, his employers, employees, partners, agents or other associates, or any
of them, such right to an injunction to be cumulative and in addition to any
other remedies GFB may have, either in law or in equity. In any proceeding to
enforce any provision of this Agreement, Employee shall not assert any
contention that there is an adequate remedy at law for the breach or default
upon which such proceeding is based. Nothing in this paragraph shall be
construed to prevent such remedy in the courts, in the case of any breach of
this Agreement by Employee, as GFB may elect or invoke.
9.8 Severability. If any of the provisions of Section 6.1 of this Agreement are
held to be unenforceable because of the scope, duration or area of its
applicability, the court making such determination shall have the power to
modify such scope duration or area or all of them, and such provision shall then
be applicable in such modified form. If any provision of this Agreement is held
to be invalid, illegal or unenforceable in any respect, the validity, and
enforceability of all other applications of that provision and of all other
provisions and applications hereof shall not in any way be affected or impaired.
<PAGE>
9.9 Waiver. No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by Employee and such officer as may be specifically designated by the
Board of Directors of GFB. The failure of GFB or Employee at any time or times
to enforce its rights under the Agreement strictly in accordance with the same
shall not be construed as having created a custom in any way or manner contrary
to the specific provisions of this Agreement or as having in any way or manner
modified or waived the same. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or any
prior or subsequent time.
9.10 Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF the parties hereto have executed this Agreement, as of the
day and year first above written but actually on the dates set forth below.
GREAT FINANCIAL BANK, FSB
By:________________________________
Title:_____________________________
Date:______________________________
GREAT FINANCIAL CORPORATION
(GUARANTOR)
By:________________________________
Title:_____________________________
Date:______________________________
EMPLOYEE:__________________________
Date:______________________________
<PAGE>
EXHIBIT A
Pursuant to paragraph 3.1 of the Employment Agreement, Employee may advise the
management and/or serve as a director of an automobile acceptance company to be
established by Sam Swope, as long as his duties in this regard do not interfere
with his duties with GFB and the Holding Company.
<PAGE>
EMPLOYMENT AGREEMENT
This is an Employment Agreement (the "Agreement") dated as of January 1, 1997
(the "Effective Date"), between Great Financial Bank, FSB ("GFB"), Great
Financial Corporation ("Holding Company") and James Statler ("Employee").
RECITALS
A. GFB considers the establishment and maintenance of sound and vital senior
management to be essential to protecting and enhancing its best interests and
therefore GFB desires to enter into an agreement governing the terms and
conditions of Employee's employment.
B. GFB is a federally chartered Savings Bank and is subject to the Office of
Thrift Supervision Regulation Section 563.39, which requires any agreements
between GFB and its employees to be in writing and to contain certain
provisions.
C. The Board of Directors of GFB has considered and approved this Agreement with
respect to Employee's employment.
AGREEMENT
The parties agree as follows:
Section 1 - Definitions
1.1 A "Change in Control" of GFB shall mean an event of a nature that:
(a) during any period of three consecutive years, individuals who at the
beginning of such period constitute the Board cease for any reason to constitute
a majority thereof unless the election or nomination for election of each new
Director was approved by a vote of at least two-thirds of the Board members then
still in office who were Board members at the beginning of the period or who
were similarly nominated;
(b) the business of GFB or Holding Company for which Employee's services are
principally performed is disposed of by GFB or Holding Company pursuant to a
partial or complete liquidation of GFB or Holding Company, a sale of assets of
GFB or Holding Company, or otherwise;
(c) GFB or Holding Company consummates the transaction contemplated by an
agreement which results in the occurrence of a Change in Control of GFB or
Holding Company;
(d) the Board of GFB or Holding Company adopts a resolution to the effect that a
Change in Control of GFB or Holding Company for purposes of this Agreement has
occurred;
(e) an event of a nature that would be required to be reported in response to
item 1(a) of the current report on Form 8-K as in effect on the date of this
Agreement, pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 occurs;
(f) any "person" (as the term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934) is or becomes the "beneficial owner" (as the
term is defined in Rule 13d-3 of the Securities Exchange Act), directly or
indirectly, of securities of GFB or Holding Company representing 20 percent or
more of Holding Company's or GFB's outstanding securities except for any
securities of GFB purchased by Holding Company in connection with the conversion
of GFB to stock form and any securities purchased by GFB's or Lincoln Service
Mortgage Corporation's employee stock ownership plan and trust;
(g) a plan of reorganization, merger, consolidation, sale of all or
substantially all assets of GFB or Holding Company or a similar transaction
occurs in which GFB or Holding Company is not the resulting entity; or
(h) change of control shall have occurred as described in 12 CFR Section
574.4(a) or successor regulations.
1.2 "Date of Termination" shall mean:
(a) If Employee's employment is automatically terminated under Section 7.1 of
this Agreement, the date on which the event which triggered that automatic
termination occurred;
<PAGE>
(b) If Employee's employment is terminated for Good Reason under Section 7.3 of
this Agreement or by GFB under Section 7.2(a) of this Agreement, the date
specified in the Notice of Termination.
(c) If Employee's employment is terminated under Section 7.2(b), the date
specified in Section 7.2(b).
(d) If Employee's employment is terminated at the end of the Term of this
Agreement, the last day of such Term.
1.3 "Disability" shall mean Employee's inability, due to accident or physical or
mental illness, to adequately and fully perform the duties required by an
employee in Employee's profession; provided, however, that Disability for
purposes of this Agreement shall not include any Disability which results from
Employee's engaging in a criminal enterprise or from Employee's habitual
drunkenness, addiction to narcotics or intentionally inflicted injury. If at any
time during the Term the GFB Board makes a determination with respect to
Employee's Disability, that determination shall be final, conclusive, and
binding upon GFB, Employee, and their successors in interest, so long as that
determination has a reasonable basis.
1.4 "Good Reason" shall be deemed to exist if:
(a) within three years after a Change in Control of GFB or Holding Company,
without Employee's express written consent, Employee is assigned any duties
inconsistent with Employee's positions, duties, responsibilities and status with
GFB or Holding Company immediately prior to a Change of Control of GFB or
Holding Company; Employee's actual job responsibilities as in effect immediately
prior to a Change of Control of GFB or Holding Company are materially changed;
or Employee is removed from or is not re-elected to any of such positions,
except in connection with the termination of Employee's employment: (1) for
Cause; (2) on account of Retirement; (3) as a result of Employee's death; or (4)
by Employee other than for Good Reason; provided that the GFB Board's failure to
extend this Agreement for an additional year under Section 2.2 of this Agreement
shall not entitle Employee to terminate this Agreement for Good Reason;
(b) within three years of a Change in Control of GFB or Holding Company, GFB's
or Holding Company's principal executive offices are relocated to a location
more than 30 miles from its current location; or GFB or Holding Company requires
Employee to be based in any location which is more than 30 miles from Employee's
current base location, except for required travel on GFB's or Holding Company's
business to an extent substantially consistent with similarly situated
executives' business travel obligations;
(c) within three years after a Change of Control of GFB or Holding Company, GFB
fails to continue in effect any benefit or compensation plan, pension plan, life
insurance plan, health and accident plan or disability plan (including, but not
limited to, GFB's participation in the Financial Institutions Retirement Fund)
in which Employee is participating at the time of a Change of Control (or plans
providing Employee with substantially similar benefits), such that there occurs
a material reduction in benefits before termination, or GFB or Holding Company
takes any action which would adversely affect Employee's participation in or
materially reduce Employee's benefits under any benefit plan maintained by GFB
or Holding Company or deprive Employee of any material fringe benefits;
(d) GFB fails to obtain the assumption of all obligations under this Agreement
by any successor as contemplated in Section 8.7 of this Agreement; or
(e) Employee's employment is purported to be terminated in a manner which is not
pursuant to a Notice of Termination satisfying the requirements of Section 7.4
of this Agreement; and, for purposes of this Agreement, no such purported
termination shall be effective.
1.5 The "GFB Board" shall mean the Board of Directors of GFB.
1.6 "Notice of Termination" shall mean a notice, from GFB or from Employee,
which shall indicate the specific termination provision in this Agreement relied
upon, shall set forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of Employee's employment under the provision
so indicated, and shall state the effective date of the termination.
1.7 "Permanent Disability" shall mean total disability arising from an
occupational or non-occupational medically determinable physical or mental
impairment which prevents the Employee from engaging in any substantial gainful
activity and which is determined on a reasonable basis by GFB to be permanent
and continuous for the remainder of the Employee's life.
<PAGE>
1.8 "Retirement" shall mean termination of Employee's employment by reason of
Employee attaining age 65.
1.9 "Secret or Confidential Information" means secret or confidential
information of GFB (including secret or confidential information of GFB's
subsidiaries and affiliates), including but not limited to lists of customers;
identity of customers; identity of prospective customers; contract terms;
bidding information and strategies; pricing methods; computer software; computer
software methods and documentation; hardware; salary information with respect to
GFB employees; financial product design information; GFB's business plan;
methods of operation of GFB or its affiliates; the procedures, forms and
techniques used in servicing accounts; and other documents or information which
are required to be maintained in confidence for the continued success of GFB and
its business.
1.10 Termination for "Cause" by GFB of Employee's employment under this
Agreement shall have the same meaning as it does in 12 C.F.R. 563.39, and shall
include termination because of:
(a) The intentional and substantial failure by Employee to perform Employee's
duties with GFB (other than any such failure resulting from incapacity due to
physical or mental illness); or
(b) Employee's personal dishonesty, incompetence, willful misconduct, breach of
a fiduciary duty involving personal profit, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses) or
cease-and-desist order, or material breach of any provision of this Agreement.
Notwithstanding the foregoing, Employee shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to
Employee a copy of a resolution duly adopted by the GFB Board at a meeting of
the GFB Board called and held for that purpose, finding that in the good faith
opinion of the GFB Board, GFB has cause for terminating Employee and specifying
the particulars thereof in detail.
Section 2 - Employment and Term
2.1 Employment. GFB agrees to employ Employee and Employee agrees to serve as
Executive Vice President-Chief Administrative Officer of GFB. Employee agrees to
accept Employment on the terms and conditions set forth in this Agreement.
2.2 Term. Subject to extension in accordance with this Section 2 and unless
sooner terminated as provided in Section 7, the term of this Agreement (the
"Term") shall be the period beginning on January 1, 1997 (the "Effective Date")
and ending April 15, 1999, or such earlier time as provided by Section 7.1. On
or before December 31, 1997, December 31, 1998 and April 14, 1999 and each 12
month anniversary thereafter, the GFB Board shall review Employee's performance
under this Agreement to determine whether GFB desires that the then-remaining
Term be extended. If the GFB Board recommends and Employee consents to such
extensions, then the then-remaining Term shall be extended by no more than one
year.
Section 3 - Duties of Employee
3.1 Time Devoted; Duties. Employee shall devote his entire time, attention and
energies to the business of GFB and he shall render such administrative and
management services to GFB as are customarily performed by persons situated in a
similar executive capacity, including those services prescribed from time to
time by the GFB Board. Employee shall also promote, by entertainment or
otherwise, as and to the extent permitted by law, the business of GFB. Employee
shall perform his duties under this Agreement in accordance with such reasonable
standards expected of employees with comparable positions in comparable
organizations and as may be established from time to time by the GFB Board.
Employee shall also conduct his personal affairs, including his personal
financial affairs, in a manner appropriate for his position.
3.2 No Conflicting Activities. During the term of Employee's employment under
this Agreement, Employee shall not engage in any business or activity contrary
to the business affairs or interests of GFB. Nothing contained in this Section
3.2 shall be deemed to prevent or limit the right of Employee to invest in the
capital stock or other securities of any business.
<PAGE>
Section 4 - Compensation
4.1 Base Compensation. Employee shall receive for his services the following
Base Compensation:
(a) GFB shall pay Employee an annual salary of $161,250 payable in 26 equal
bi-weekly installments.
(b) Any increase in Employee's Base Compensation shall be left to the sole
discretion of the GFB Board. The Employee's Base Compensation shall not be
subject to reduction during the Term of this Agreement except as otherwise
provided in this Agreement.
4.2 Bonus Compensation. GFB shall pay Employee Bonus Compensation as determined
by the GFB Board in its discretion.
4.3 Additional Compensation. As further compensation (the "Additional
Compensation") GFB shall make available the benefits provided to Employee under
GFB's Recognition and Retention Plan for Officers and Employees effective March
30, 1994 and shall make available the stock options provided to Employee
pursuant to Holding Company's 1994 Incentive Stock Option Plan for Officers and
Employees effective March 30, 1994, as amended.
4.4 Source of Payments. All payments provided for in this Agreement shall be
timely paid by GFB. However, Holding Company unconditionally guarantees payment
and provision of all amounts and benefits due hereunder to Employee and, if such
amounts and benefits due from GFB are not timely paid or provided by GFB, such
amounts and benefits shall be paid or provided by Holding Company.
Section 5 - Employee Benefits
5.1 Vacations. During each calendar year during the Term, Employee shall be
entitled to a vacation of three weeks, during which Employee's compensation
shall be paid in full. At least one week must be taken in consecutive days.
Unused vacation for any year during the Term may not be carried forward for use
in the next following year. Upon any termination of Employee's employment
hereunder, Employee shall be entitled to pro rata compensation for unused
vacation time earned during the year of termination, based upon the number of
months Employee was employed during that year.
5.2 Business Expenses. GFB shall reimburse Employee for ordinary and necessary
business expenses incurred by Employee in performing his duties pursuant to this
Agreement, including but not limited to reasonable travel, entertainment and
similar expenses that Employee incurs in promoting GFB's business; provided that
GFB shall not reimburse any such expense which, prior to its being incurred, GFB
directed Employee not to incur. The reimbursement shall be made upon
presentation to GFB by Employee, from time to time, of an account of such
expenses in such form and in such detail as GFB may request.
5.3 Fringe Benefits. In addition to benefits specifically described herein;
Employee shall be entitled to receive from GFB the fringe benefits generally
available to full-time senior management employees of GFB, as those benefits may
be changed from time to time.
5.4 Disability Insurance. Throughout the Term of this Agreement, GFB shall
provide Employee with long term disability coverage of 60% of Employee's total
pay from the previous year, which benefit begins no later than 90 days after the
Disability occurs.
Section 6 - Confidentiality and
Covenant Not to Compete
6.1 Covenant Not to Compete. In consideration of the GFB's continued employment
of Employee pursuant to this Agreement, Employee covenants and agrees that
Employee shall not during the one-year period immediately following the
termination of his employment under this Agreement, if (1) GFB terminated the
employment and severance compensation is payable pursuant to Section 8.4 or 8.5,
or (2) Employee has retired, become disabled or voluntarily terminated:
(a) without the prior written consent of GFB, engage or become interested in any
capacity, directly or indirectly (whether as proprietor, stockholder, director,
partner, employee, trustee, beneficiary, or in any other capacity) in any
business selling, providing or developing products or services competitive with
products or services sold or maintained by GFB within a 50-mile radius of the
Louisville Metropolitan Area; or
(b) recruit or solicit for employment any current or future employee of GFB or
any of its respective successors or any entities related to it.
<PAGE>
6.2 Confidential Information. Employee acknowledges that all Secret or
Confidential Information is the exclusive property of GFB. Employee shall not
during the period of his employment by GFB or at any time thereafter, disclose
to any person, firm or corporation, or publish, or use for any purpose, any
Secret or Confidential Information except as properly required in the ordinary
course of business of GFB or as directed and authorized by GFB. Upon the
termination of his employment with GFB, for any reason whatsoever, Employee
shall return and deliver to GFB within 7 days any and all papers, books,
records, documents, memoranda and manuals, including all copies thereof,
belonging to GFB or relating to its business, in Employee's possession, whether
prepared by Employee or others. If at any time after the termination of
employment, Employee determines that he has any Secret or Confidential
Information in his possession or control, Employee shall immediately return all
such Secret or Confidential Information to GFB including all copies and portions
thereof.
6.3 Disclosure and Survival of Covenants. If Employee, in the future, seeks or
is offered employment by any other company, firm, or person, he shall provide a
copy of this Agreement to the prospective employer prior to accepting employment
with that prospective employer. The provisions of Sections 6.1 and 6.2 shall
survive any termination of this Agreement.
Section 7 - Termination
7.1 Automatic Termination. Employment under this Agreement shall terminate on
the death or Permanent Disability of Employee or by the Employee attaining age
65 during the Term of this Agreement.
7.2 Involuntary Termination.
(a) Termination by the Board. The GFB Board may terminate this Agreement at any
time.
(b) Termination or Suspension by the Office of Thrift Supervision.
(i) If Employee is suspended and/or temporarily prohibited from performing his
duties under this Agreement by a notice served under Section 8(e)(3) or (g)(1)
of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(1)), then
GFB's obligations under this Agreement shall be suspended as of the date of
service of such notice unless stayed by appropriate proceedings. If the charges
in the notice are dismissed, GFB may, in its discretion, (a) pay Employee all or
part of the compensation withheld while obligations under this Agreement were
suspended and (b) reinstate (in whole or in part) any of its obligations which
were suspended.
(ii) If Employee is removed and/or permanently prohibited from participating in
the conduct of GFB's affairs by an order issued under section 8(e)(4) or (g)(1)
of the Federal Deposit Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of GFB under this Agreement shall terminate as of the effective date
of the order, but vested rights of Employee shall not be affected.
(iii) If GFB is in default (as defined in section 3(x)(1) of the Federal Deposit
Insurance Act), all obligations under this Agreement shall terminate as of the
date of default, but vested rights of Employee shall not be affected.
(iv) All obligations under this Agreement shall terminate, except to the extent
determined that continuation of the contract is necessary for the continued
operation of GFB (a) by action of the Director of the Office of Thrift
Supervision (the "Director") or his or her designee, at the time the Federal
Deposit Insurance Corporation or the Resolution Trust Corporation enters into an
agreement to provide assistance to or on behalf of GFB under the authority
contained in section 13(c) of the Federal Deposit Insurance Act; or (b) by the
Director or his or her designee, at the time the Director or his or her designee
approves a supervisory merger to resolve problems related to operation of GFB or
when GFB is determined by the Director to be in an unsafe or unsound condition.
Any rights of Employee that have already vested, however, shall not be affected
by such action.
7.3 Voluntary Termination. Employee may terminate his employment for Good Reason
by giving Notice of Termination in accordance with Section 7.4 below.
7.4 Notice of Termination. Any termination by GFB or by Employee, pursuant to
this Agreement, shall be communicated by written Notice of Termination to the
other party hereto.
7.5 Conflicts with Federal Law. If any of the termination provisions contained
in this Agreement conflict with Office of Thrift Supervision regulation 12 CF
563.39(b), or any successor regulation, the latter shall prevail.
<PAGE>
Section 8 - Compensation on Termination
8.1 Compensation Upon Death. If Employee's employment is terminated because of
the death of Employee, GFB shall pay Employee's executors or administrators: a)
within 30 days of death the unpaid balance of Employee's Base Compensation
through the end of the month in which Employee's death occurred, at the rate in
effect on the date of Employee's death and b) as soon as such Employee's bonus
is calculated, an amount equal to Employee's Bonus Compensation for the current
year (if any was paid) multiplied by the fractional portion of the year between
the first day of the year in which Employee died and the date of the Employee's
death; and shall have no further obligations under this Agreement.
8.2 Compensation Upon Disability. If Employee's active work ceases because of
Disability, GFB shall continue, as and when scheduled, to pay Employee
Employee's Base Compensation through the date he ceased work, plus three months'
additional Base Compensation, at 100% of the rate in effect on the date Employee
became Disabled, and thereafter GFB shall have no further obligation for cash
compensation unless and until Employee returns to work.
8.3 Compensation Upon Termination for Cause. If Employee's employment shall be
terminated by GFB for Cause, GFB shall pay Employee his Base Compensation
through the Date of Termination, and GFB shall not have any further obligations
to Employee under this Agreement.
8.4 Compensation Upon Termination by GFB Other Than For Cause. If Employee's
employment is terminated by GFB other than for Cause, then unless such
termination occurs simultaneous with or within two years following a Change in
Control of GFB or Holding Company, then Employee shall be entitled to the
compensation Employee would have been entitled to under this Agreement as and
when payable hereunder for the remainder of the Term, provided that Employee in
good faith actively seeks employment similar to employee's position with GFB,
and that any payments under this Section 8.4 shall be reduced by any
compensation Employee receives from other employment thereafter accepted.
8.5 Compensation Upon Termination For Good Reason or Following Change of
Control.
(a) If (1) Employee terminates employment under Section 7.3 for Good Reason or
(2) any of the events constituting a Change of Control of GFB or Holding Company
shall have occurred and Employee's employment is terminated by GFB within three
years thereafter other than by reason of (a) Employee's death or disability, or
(b) termination by GFB for Cause, then GFB shall pay to Employee as severance
compensation in a lump sum (discounted to present value using the interest rate
then applicable to newly issued fixed rate three-year certificates of deposit at
GFB, Louisville, Kentucky) on the 30th day following the Date of Termination:
(i) the unpaid balance of Employee's full Base Compensation through the Date of
Termination at the rate in effect at the time Notice of Termination is given;
plus
(ii) an amount equal to Employee's full Base Compensation for two years at the
rate in effect as of the Date of Termination; plus
(iii) Employer shall make available to Employee the Additional Compensation to
which Employee would be entitled during the Term; plus
(iv) an amount equal to Employee's Bonus Compensation for the previous year (if
any was paid), multiplied by two.
In addition to the severance benefits set forth in (i), (ii), (iii) and (iv)
above, GFB shall: (a) to the extent not prohibited by Office of Thrift
Supervision pronouncements pay all legal fees and expenses incurred by Employee
resulting from termination (including all such fees and expenses, if any,
incurred in contesting any such termination or in seeking to obtain or enforce
any right or benefit provided by this Agreement); and (b) maintain in full force
and effect, for the continued benefit of Employee for a two year period after
the Date of Termination, all employee benefit plans and programs or arrangements
in which Employee was entitled to participate immediately prior to Date of
Termination; provided, however, that Employee's continued participation is
possible under the general terms and provisions of such plans and programs. If
Employee's participation in any such plan or program is barred, GFB shall
arrange to provide Employee with benefits substantially similar or, if that is
not possible, of equal value to those which Employee is entitled to receive
under such plans and programs. At the end of the period of coverage, Employee
shall have the option to have assigned to him at no cost and with no
apportionment of prepaid premiums, any assignable insurance policies owned by
GFB relating specifically to Employee.
<PAGE>
Notwithstanding any of the foregoing, if Employee is within three years of age
65 on the Date of Termination, then (a) GFB shall reduce the amount payable to
Employee under paragraphs (ii) and (iii) above to reflect only the number of
months between the Date of Termination and the date Employee is or would
otherwise attain age 65, and (b) GFB shall have no obligations to Employee after
Employee attains age 65.
(b) Employee shall not be required to mitigate the amount of any payment
provided for in this Section 8.5 by seeking other employment or otherwise, nor
shall the amount of any payment provided for in this Section 8.5 be reduced by
any compensation earned by Employee as the result of employment by another
employer after the Date of Termination, or otherwise.
8.6 Compensation Upon Retirement. If Employee terminates employment in the month
of his 65th birthday, then Employee shall be paid within 30 days from the date
of his retirement the unpaid balance of Employee's Base Compensation through the
date of his retirement and shall be paid, as soon as such Employee's bonus is
calculated, an amount equal to Employee's Bonus Compensation for the current
year (if any was paid), multiplied by the fractional portion of the year between
the first day of the year in which Employee retired and the date of Employee's
retirement.
8.7 Successors of GFB. GFB will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of GFB, by agreement in form and
substance satisfactory to Employee, expressly to assume and agree to perform
this Agreement in the same manner and to the same extent that GFB would be
required to perform it if no such succession had taken place. Failure of GFB to
obtain such agreement prior to the effectiveness of any such succession shall be
a breach of this Agreement and shall entitle Employee to terminate this
agreement for Good Reason under paragraph 7.3 of this Agreement. As used in this
Agreement, "GFB" shall mean GFB as hereinbefore defined and any successor to its
business and/or assets as aforesaid or which otherwise becomes bound by all the
terms and provisions of this Agreement by operation of law.
8.8 Reduction of Amounts Payable.
(a) In no event shall any amount payable under any provision of this Agreement
equal or exceed an amount which would (i) cause GFB to forfeit (as determined by
the Certified Public Accountants or legal counsel employed by GFB), pursuant to
Section 280G(a) of the Internal Revenue Code of 1986, as amended, its deduction
for any or all such amounts payable, or (ii) exceed maximum amounts determined
by the Office of Thrift Supervision to constitute a safe and sound practice.
Pursuant to this Section 8.8, the GFB Board has the power to reduce severance
benefits payable under this Agreement, if such benefits alone or in conjunction
with termination benefits provided under any other severance pay plan maintained
by GFB or any other plan or agreement between Employee and GFB, would cause GFB
to forfeit otherwise deductible payments or would exceed the Office of Thrift
Supervision maximums; provided, however that no benefits payable under this
Agreement shall be reduced pursuant to this Section 8.8 to less than $1.00 below
the amount of benefits (i) which GFB can properly deduct under Section 280G(a)
of the Internal Revenue Code of 1986, as amended, or (ii) which equal the amount
the Office of Thrift Supervision considers the maximum safely and soundly
payable.
(b) Any payments made to the Employee pursuant to this Agreement, or otherwise,
are subject to and conditioned upon their compliance with 12 U.S.C. 1828(k)
and any regulation promulgated thereunder.
Section 9 - Miscellaneous
9.1 Notice. Any notice or request required or permitted to be given under this
Agreement shall be in writing and shall be deemed sufficiently given for all
purposes if mailed by certified mail, postage prepaid and return receipt
requested, addressed to the intended recipient at the following address (or at
such other address as either party may designate in writing to the other party
by certified mail as described above):
If to GFB:
Great Financial Bank, FSB
One Financial Square
Louisville, Kentucky 40202
<PAGE>
All notices to GFB shall be directed to the attention of the President of GFB
with a copy to the Treasurer of GFB.
If to Employee:
James Statler
17206 Ash Hill Rd.
Louisville, KY 40245
9.2 Headings. The headings used in this Agreement have been included solely for
ease of reference and are not to be construed in any interpretation of this
Agreement.
9.3 Entire Agreement. This instrument contains the entire agreement between the
parties with respect to the subject matter hereof, and shall supersede all prior
understanding with respect to the subject matter hereof, except that the
Indemnity Agreement dated October 25, 1991 and the Supplemental Executive
Retirement Plan dated as of January 1, 1992 between Employee and GFB shall also
continue to be effective. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement. No
modification or addition to this Agreement shall be enforceable unless in
writing and signed by the party against whom enforcement is sought.
9.4 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Kentucky.
9.5 Arbitration. Any dispute or controversy arising under or in connection with
this Agreement shall be settled exclusively by arbitration, conducted before a
panel of three arbitrators sitting in a home office selected by Employee within
fifty (50) miles from the location of GFB, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Employee shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection with
Employee's termination is resolved in favor of Employee, whether by judgment,
arbitration or settlement, Employee shall be entitled to the payment of all
back-pay, including salary, bonuses and any other cash compensation, fringe
benefits and any compensation and benefits due Employee under this Agreement.
9.6 Benefit. This Agreement shall inure to the benefit of and shall be binding
upon GFB, its successors and assigns, and this Agreement shall not be assignable
by Employee.
9.7 Remedies. Employee and GFB acknowledge that the services to be rendered
under this Agreement are special, unique and of extraordinary character. If
Employee breaches any covenants, terms and conditions of this Agreement to be
performed by him, GFB will suffer irreparable damage and it will be impossible
to estimate or determine GFB's damages. Therefore, GFB shall, upon proof of such
breach, be entitled as a matter of course to an injunction from any court of
competent jurisdiction restraining any further violation of such covenants by
Employee, his employers, employees, partners, agents or other associates, or any
of them, such right to an injunction to be cumulative and in addition to any
other remedies GFB may have, either in law or in equity. In any proceeding to
enforce any provision of this Agreement, Employee shall not assert any
contention that there is an adequate remedy at law for the breach or default
upon which such proceeding is based. Nothing in this paragraph shall be
construed to prevent such remedy in the courts, in the case of any breach of
this Agreement by Employee, as GFB may elect or invoke.
9.8 Severability. If any of the provisions of Section 6.1 of this Agreement are
held to be unenforceable because of the scope, duration or area of its
applicability, the court making such determination shall have the power to
modify such scope duration or area or all of them, and such provision shall then
be applicable in such modified form. If any provision of this Agreement is held
to be invalid, illegal or unenforceable in any respect, the validity, and
enforceability of all other applications of that provision and of all other
provisions and applications hereof shall not in any way be affected or impaired.
<PAGE>
9.9 Waiver. No provisions of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by Employee and such officer as may be specifically designated by the
Board of Directors of GFB. The failure of GFB or Employee at any time or times
to enforce its rights under the Agreement strictly in accordance with the same
shall not be construed as having created a custom in any way or manner contrary
to the specific provisions of this Agreement or as having in any way or manner
modified or waived the same. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or any
prior or subsequent time.
9.10 Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF the parties hereto have executed this Agreement, as of the
day and year first above written but actually on the dates set forth below.
GREAT FINANCIAL BANK, FSB
By:________________________________
Title:_____________________________
Date:______________________________
GREAT FINANCIAL CORPORATION
(GUARANTOR)
By:________________________________
Title:_____________________________
Date:______________________________
EMPLOYEE:__________________________
Date:______________________________
<PAGE>
10.13 CONSULTING AGREEMENT WITH GEORGE L. GREENWELL
CONSULTING AGREEMENT
This is a CONSULTING AGREEMENT (the "Agreement") entered into the 31 day
of January, 1997 but effective as of January 1, 1997, by and between GREAT
FINANCIAL CORPORATION ("GFC"), a Kentucky corporation, with an address at One
Financial Square, Louisville, Kentucky 40202, and GEORGE L. GREENWELL
("Greenwell"), an individual, with an address of 4001 North Ocean Boulevard,
Unit 1208-B, Boca Raton, Florida 33431.
RECITALS
WHEREAS, Greenwell and Lincoln Service Corporation ("Lincoln") entered
into that certain Consulting Agreement, dated as of September 1, 1992 (the "1992
Agreement") and as amended by that certain Amendment to Consulting Agreement,
executed on December 14, 1993 (the "First Amendment") and that certain Second
Amendment to Consulting Agreement executed on January 9, 1995 (the Second
Amendment, which together with the 1992 Agreement and the First Amendment may
hereinafter collectively be referred to as the "Original Agreement"); and
WHEREAS, GFC has determined that it is beneficial to enter into a
consulting agreement with Greenwell in order to continue to engage Greenwell as
a consultant to render certain limited advisory services to GFC and its
affiliates and subsidiaries on a stand-by basis; and
WHEREAS, Greenwell desires to aid and assist GFC and its affiliates
and subsidiaries by continuing to provide such services on a stand-by basis.
NOW THEREFORE, in consideration of the above-premises and the terms and
conditions of this Agreement, the parties hereto agree as follows:
1. ENGAGEMENT OF CONSULTANT. Subject and pursuant to the terms of this
Agreement:
(a) GFC appoints and engages Mr. Greenwell as its consultant and
advisor.
(b) Mr. Greenwell hereby accepts his appointment and engagement by
GFC as a consultant and advisor.
2. TERM. Subject to extension in accordance with this Section 2 and
unless sooner terminated as provided in Sections 9 and 10, the term of this
Agreement (the "Term") shall be the two-year period beginning on January 1, 1997
(the "Effective Date"), and ending on December 31, 1998. On or before December
31, 1997, the GFC Board shall review Greenwell's performance under this
Agreement to determine whether GFC desires that the then-remaining Term be
extended for an additional year. If the GFC Board recommends, and Greenwell
consents to such one-year extension, then the then-remaining Term shall be
extended by one year.
If Mr. Greenwell should die or become totally disabled during any of
the first three months of a contract year during the term of this Agreement, Mr.
Greenwell or his designated beneficiary, as the case may be, shall be entitled
to receive from GFC an amount equal to a monthly installment, as provided in
paragraph 4 hereof, times the fraction, the numerator of which shall be the
number of days in the month that have passed immediately prior to Mr.
Greenwell's death or total disability and the denominator shall be the total
number of days in such month; and, thereafter this Agreement shall terminate
without any further liability or obligation on the part of GFC to Mr. Greenwell.
If Mr. Greenwell shall die or become totally disabled at any time after the
first three months of a contract year during the term of this Agreement, then
the monthly installment provided in paragraph 4 of this Agreement shall continue
to Mr. Greenwell or his designated beneficiary, as the case may be, through
November 30 of such contract year; and, thereafter this Agreement shall
terminate without further liability or obligation on the part of GFC to Mr.
Greenwell or his designated beneficiary, as the case may be. For purposes of
this Agreement, the term "contract year" shall mean a twelve-month period
beginning December 1 of each year.
<PAGE>
3. DUTIES. During the term of this Agreement, Mr. Greenwell shall
undertake, at mutually convenient times, to advise GFC, its officers and
directors, by telephone or in person, with respect to: (i) The business of GFC
through Great Financial Mortgage ("GFM") as it exists on the date hereof, (ii)
past matters or transactions of GFC of which Mr. Greenwell has actual knowledge;
and, (iii) matters which he has special competence by reason of his former
employment with Lincoln. In order to facilitate the provision of advice under
this Agreement, GFC shall make suitable office space available to Mr. Greenwell
at GFC's Owensboro office location. Upon reasonable request and notice by GFC's
chief executive officer and/or directors, Mr. Greenwell shall attend
conventions, conferences and seminars, and, perform special analysis, projects
and tasks for GFC. Such special analysis, projects and tasks are expected to be
performed in a reasonable and timely manner.
4. COMPENSATION. Mr. Greenwell's entire and exclusive compensation
for the consulting services provided by Mr. Greenwell to GFC through GFM and for
Mr. Greenwell's covenants under this Agreement shall be a fee of $115,000 per
annum, payable in equal monthly installments, the first being due and payable on
February 1, 1997. GFC shall pay or promptly reimburse Mr. Greenwell for
reasonable travel, entertainment, telephone or other expenses paid or incurred
by Mr. Greenwell in connection with the performance of his duties under this
Agreement upon presentation by Mr. Greenwell to GFC through GFM of appropriately
itemized expenses statements, vouchers or other evidence of expense.
5. DIRECTION OF WORK. Under this Agreement, the services and hours
Mr. Greenwell is to perform and work on any given day shall be entirely within
Mr. Greenwell's discretion and control. Mr. Greenwell shall design, develop and
control the details of all such services. GFC relies upon Mr. Greenwell's
expertise and experience in exclusively controlling and directing the
performance of this obligations under this Agreement. GFC shall not exercise any
supervision of Mr. Greenwell in the performance of his consulting services, nor
will GFC require Mr. Greenwell's compliance with detailed orders or
instructions. The parties hereto agree that there will be no set work schedule
expected of Mr. Greenwell during the term of this Agreement nor will it be
necessary for Mr. Greenwell to obtain GFC's permission to be absent from work.
6. OTHER EMPLOYMENT. During the term of this Agreement, Mr. Greenwell
will not accept employment or consulting assignments from any person(s) or
organization(s) engaged in the business of originating, selling or servicing
mortgage loans, or which could be considered in competition with GFC without the
prior written approval of a three (3) person committee appointed by the Vice
Chairman of the Baord of Directors of GFC.
7. INDEPENDENT CONTRACTOR STATUS. This Agreement requires Mr.
Greenwell to perform the services of a consultant as an independent contractor
and the parties do not believe they are creating, nor do they intend to create
hereby, the relation of master and servant or employer and employee.
8. ASSIGNMENT AND SUCCESSORS. This Agreement shall inure to the
benefit of and be binding upon GFC and Mr. Greenwell and their legal
representatives, heirs, and successors, but shall not be assignable by either
party without the other's written consent.
9. FEDERAL REGULATIONS. Although this is a consulting agreement and
not an employment agreement, the parties hereto agree that the safety and
soundness issues related to consulting agreements are similar to those related
to employment agreements. Therefore, the parties hereby incorporate the
provisions of 12 C.F.R. 563.39(b) into this Agreement as if fully set forth
herein to be effective as if this were an employment agreement rather than a
consulting agreement.
10. TERMINATION OF AGREEMENT. This Agreement shall terminate upon the
occurrence of the earlier of the following events:
(a) December 31, 1998 (unless otherwise extended pursuant to the terms
of Paragraph 2 herein above);
(b) The date of Mr. Greenwell's death as provided in paragraph 2
hereof;
(c) The date of Mr. Greenwell's total disability as provided in
paragraph 2 hereof;
(d) Termination as provided in paragraph 9 hereof.
For purposes of this Agreement, the term "total disability" shall mean
sickness, accident, incapacity or disability that renders Mr. Greenwell
incapable of performing his duties hereunder, or fulfilling the purposes of,
this Agreement.
<PAGE>
11. NOTICES. All notices, requests, demands or other communications
hereunder must be given in writing and shall be deemed to have been duly given
if mailed by certified mail, return receipt requested, postage and certified
mail fees prepaid, and addressed as follows:
(a) If to GFC:
Great Financial Corporation
One Financial Square
Louisville, Kentucky 40202
(b) If to Mr. Greenwell:
4001 North Ocean Boulevard
Unit 1208-B
Boca Raton, Florida 33431
Addresses may be changed by notice in writing signed by the addressee.
12. TERMINATION OF ORIGINAL AGREEMENT. Upon the Effective Date, GFB
and Greenwell acknowledge and agree that the Original Agreement shall be
terminated and shall be of no further force and effect whatsoever.
13. MISCELLANEOUS. This Agreement represents the entire understanding
of the parties hereto, supersedes any prior agreements between the parties and
the terms and provisions of this Agreement may not be modified or amended,
except in writing. Any failure or delay on the part of either party in
exercising any power or right hereunder shall not operate as a waiver thereof,
nor shall any single or partial exercise thereof or the exercise of any other
right or power preclude any other or further exercise thereof or the exercise of
any other right or power hereunder. The headings in this Agreement are for
convenience or reference only and shall not be considered as part of this
Agreement nor limit or otherwise affect the meaning hereof. This Agreement has
been executed in Owensboro, Kentucky, and shall be governed and enforced in
accordance with and governed by the laws of the Commonwealth of Kentucky.
IN TESTIMONY WHEREOF, the parties hereto have entered into this
Agreement on the date first written above.
GREAT FINANCIAL CORPORATION
By: _____________________________
Its: _____________________________
_____________________________
George L. Greenwell
<PAGE>
EXHIBIT 10.14 GREAT FINANCIAL BANK, F.S.B. SEVERANCE COMPENSATION PLAN
PLAN PURPOSE
The purpose of the Great Financial Bank, FSB Severance Compensation Plan (the
"Plan") is to assure Great Financial Bank, FSB ("Savings Bank") of the services
of certain Officers of Savings Bank in the event of a Change in Control of Great
Financial Corporation ("Holding Company") or Savings Bank. The benefits
contemplated by the Plan recognize the value to Savings Bank of the services and
contributions of certain Officers of Savings Bank and the effect upon Savings
Bank resulting from the uncertainties of continued employment, reduced employee
benefits, management changes and relocations that may arise in the event of a
Change in Control of Savings Bank or Holding Company. Savings Bank's and Holding
Company's Boards of Directors believe that it is in the best interests of
Savings Bank and Holding Company to provide certain Officers of Savings Bank
with such benefits in order to defray the costs and changes in employee status
that could follow a Change in Control. The Boards of Directors believes that the
Plan will also aid Savings Bank in attracting and retaining highly qualified
individuals who are essential to its success and the Plan's assurance of fair
treatment of Savings Bank's Officers will reduce the distractions and other
adverse effects on Officers' performance in the event of a Change in Control.
ARTICLE I
DEFINITIONS AND
CONSTRUCTION
1.1 Definitions
Whenever used in the Plan, the following terms shall have the meanings set forth
below.
(a) "Annual Compensation" of a Participant means and includes all wages, salary,
bonus, and incentive compensation, if any, paid (including accrued amounts) by
an Employer as consideration for the Participant's service during the 12 months
ending the date as of which Annual Compensation is to be determined, which are
or would be includable in the gross income of the Participant receiving the same
for federal income tax purposes.
(b) "Change in Control" shall mean an event of a nature that:
(i) during any period of two consecutive years, individuals who at the beginning
of such period constitute the Board of Holding Company or Savings Bank cease for
any reason to constitute a majority thereof, unless the election or nomination
for election of each new Director was approved by a vote of at least two-thirds
of the Board members then still in office who were Board members at the
beginning of the period or who were similarly nominated;
(ii) the business of Holding Company or Savings Bank for which a Participant's
services are principally performed is disposed of by Holding Company or Savings
Bank pursuant to a partial or complete liquidation of Holding Company or Savings
Bank, a sale of assets of Holding Company or Savings Bank, or otherwise;
(iii) Holding Company or Savings Bank consummates the transaction contemplated
by an agreement which results in the occurrence of a Change in Control of
Holding Company or Savings Bank;
(iv) the Board adopts a resolution to the effect that a Change in Control of
Holding Company or Savings Bank for purposes of this Plan has occurred;
(v) such event would be required to be reported in response to item 1(a) of the
current report on Form 8-K as in effect on the date of this Agreement, pursuant
to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended
("Exchange Act") occurs;
(vi) any "person" (as the term is used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner") as the term is defined in
Rule 13d-3 of the Exchange Act), directly or indirectly, of securities of
Holding Company or Savings Bank representing 20 percent or more of Holding
Company's or Savings Bank's outstanding securities except for any securities of
Savings Bank purchased by Holding Company in connection with the conversion of
Savings Bank to stock form and any securities purchased by Savings Bank's and
Lincoln Service Mortgage Corporation's employee stock ownership plans and
trusts;
<PAGE>
(vii) a plan of reorganization, merger, consolidation, or sale, of all or
substantially all assets of Holding Company or Savings Bank or a similar
transaction, occurs in which Holding Company or Savings Bank is not the
resulting entity; or
(viii) a change of control shall have occurred as described in 12 CFR Section
574.4(a) or successor regulations.
(c) "Effective Date" means the date the Plan is approved by the Board of
Directors of Savings Bank, or such other date as the Board shall designate in
its resolution approving the Plan.
(d) "Expiration Date" means a date ten (10) years from the Effective Date unless
earlier terminated pursuant to Section 7.2 or extended pursuant to Section 7.1.
(e) "Employer" means Savings Bank, or Holding Company or a subsidiary of Savings
Bank which has adopted the Plan pursuant to Article VI hereof.
(f) "Just Cause" with respect to termination of employment means an act or acts
of personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses ) or final cease-and-desist order. In determining
incompetence, the acts or omissions shall be measured against standards
generally prevailing in the savings institution industry.
(g) "Officer" means an officer or employee employed by the Employer on a
full-time basis as determined by the Board of Directors provided, however, that
any officer or employee who is covered or hereinafter becomes covered by an
employment contract or a change in control agreement with the Employer shall not
be considered to be an Officer for purposes of this Plan.
(h) "Payment" means the payment of severance compensation as provided in Article
III hereof.
(i) "Participant" means an Officer who meets the eligibility requirements of
Article III.
(j) "Subsidiary" means any corporation in which Savings Bank, directly or
indirectly, holds a majority of the voting power of its outstanding shares of
capital stock.
1.2 Applicable Law
The laws of the Commonwealth of Kentucky shall be the controlling law in all
matters relating to the Plan, to the extent not preempted by Federal law.
1.3 Severability
If a provision of this Plan shall be held illegal or invalid, the illegality or
invalidity shall not affect the remaining parts of the Plan and the Plan shall
be construed and enforced as if the illegal or invalid provision had not been
included.
ARTICLE II
ESTABLISHMENT OF PLAN
2.1 Establishment of Plan
As of the Effective Date of the Plan, as defined herein, Savings Bank hereby
establishes this Plan, the purposes of which are as set forth above.
2.2 Applicability of Plan
The benefits provided by this Plan shall be available to all Officers of Holding
Company or Savings Bank, at the time of any termination pursuant to Section 3.2
herein, except for those Officers who have entered into, or who enter into in
the future, and continue to be subject to an employment or change in control
agreement with the Employer.
A Participant shall cease to be a Participant in the Plan when the Participant
ceases to be an Officer of the Employer, unless such Participant is entitled to
a Payment as provided in the Plan. A Participant entitled to receipt of a
Payment shall remain a Participant in this Plan until the full amount of such
Payment has been paid to the Participant.
<PAGE>
2.3 Contractual Right to Benefits
This Plan establishes and vests in each Participant a contractual right to the
benefits to which each Participant is entitled hereunder, enforceable by the
Participant against the Employer, Savings Bank, or both.
ARTICLE III
PAYMENTS
3.1 Right to Payment
A Participant shall be entitled to receive from its respective Employer a
Payment in the amount provided in Section 3.3 if there has been a Change in
Control of Savings Bank or Holding Company and if, within one (1) year
thereafter, the Participant's employment by an Employer shall terminate for any
reason specified in Section 3.2, whether the termination is voluntary or
involuntary.
3.2 Reasons for Termination
Following a Change in Control, a Participant shall be entitled to a Payment if
employment by Employer is terminated, voluntarily or involuntarily, for any one
or more of the following reasons:
(a) The Employer reduces the Participant's base salary or rate of compensation
as in effect immediately prior to the Change in Control, or as the same may have
been increased thereafter.
(b) The Employer materially changes Participant's function, duties or
responsibilities which would cause Participant's position to be one of lesser
responsibility, importance or scope with Employer than immediately prior to the
Change in Control.
(c) The Employer requires the Participant to change the location of the
Participant's job or office, so that such Participant will be based at a
location more than thirty (30) miles from the location of the Participant's job
or office immediately prior to the Change in Control provided that such new
location is not closer to Participant's home.
(d) The Employer materially reduces the benefits and perquisites available to
the Participant immediately prior to the Change in Control, provided, however,
that a material reduction in benefits and perquisites generally provided to all
employees of Savings Bank on a nondiscriminatory basis would not trigger a
payment pursuant to this Plan.
(e) A successor Employer fails or refuses to assume the Employer's obligations
under this Plan, as required by Article VI.
(f) The Employer or any successor company breaches any other provisions of this
Plan.
(g) The Employer terminates the employment of a Participant at or after a Change
in Control other than for Just Cause.
3.3 Amount of Payment
Each Participant entitled to a Payment under this Plan shall receive a lump sum
cash payment, in an amount determined as follows:
(a) Each Officer with the title of Vice President or above and five or more
years of service with the Employer shall receive a payment equal to one hundred
percent (100%) of such Officer's Annual Compensation paid during the twelve (12)
months ended on the date of termination pursuant to Section 3.2. Each Officer
with the title of Vice President or above and less than five years of service
with the Employer shall receive a payment equal to fifty percent (50%) of such
Officer's Annual Compensation paid during the twelve (12) months ended on the
date of termination pursuant to Section 3.2.
(b) Notwithstanding the provisions of (a) above, if a Payment to a Participant
who is a Disqualified Individual shall be in an amount which includes an Excess
Parachute Payment, the Payment hereunder to that Participant shall be reduced to
the maximum amount which does not include an Excess Parachute Payment. The terms
"Disqualified Individual" and "Excess Parachute Payment" shall have the same
meaning as defined in Section 280G of the Internal Revenue Code of 1986, as
amended, or any successor section of similar import.
<PAGE>
The Participant shall not be required to mitigate damages on the amount of the
Payment by seeking other employment or otherwise, nor shall the amount of such
Payment be reduced by any compensation earned by the Participant as a result of
employment after termination of employment hereunder.
3.4 Time of Payment
The Payment to which a Participant is entitled shall be paid to the Participant
by the Employer or the successor of the Employer, in cash and in full, not later
than fourteen (14) business days after the termination of the Participant's
employment. If any Participant should die after termination of the employment
but before all amounts have been paid, such unpaid amounts shall be paid to the
Participant's named beneficiary, if living, otherwise to the personal
representative on behalf of or for the benefit of the Participant's estate.
3.5 Suspension of Payment
Notwithstanding the foregoing, no Payments or portions thereof shall be made
under this Plan, if such Payment or portion would result in Savings Bank failing
to meet its minimum regulatory capital requirements as required by 12 C.F.R.
Section 567.2 of the Office of Thrift Supervision Regulations. Any Payments or
portions thereof not paid shall be suspended until such time as their payment
would not result in a failure to meet Savings Bank's minimum regulatory capital
requirements. Any portion of benefit payments which have not been suspended will
be paid on an equitable basis, pro rata based upon amounts due each Participant,
among all eligible Participants.
ARTICLE IV
OTHER RIGHTS AND
BENEFITS NOT AFFECTED
4.1 Other Benefits
Neither the provisions of this Plan nor the Payment provided for hereunder shall
reduce any amounts otherwise payable, or in any way diminish the Participant's
rights as an Officer of an Employer, whether existing now or hereafter, under
any benefit, incentive, retirement, stock option, stock bonus, stock ownership
or any employment agreement or other plan or arrangement.
4.2 Employment Status
This Plan does not constitute a contract of employment or impose on the
Participant or the Participant's Employer any obligation to retain the
Participant as an Officer, to change the status of the Participant's employment,
or to change the Employer's policies regarding termination of employment.
ARTICLE V
PARTICIPATING EMPLOYERS
5.1 Upon approval by the Board of Directors of Savings Bank, this Plan may be
adopted by any Subsidiary or Parent of Savings Bank. Upon such adoption, the
Subsidiary or Parent shall become an Employer hereunder and the provisions of
the Plan shall be fully applicable to the Officers of that Subsidiary or Parent.
ARTICLE VI
SUCCESSOR TO EMPLOYER
6.1 The Employer shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of Employer, expressly and
unconditionally to assume and agree to perform the Employer's obligations under
this plan, in the same manner and to the same extent that Employer would be
required to perform if no such succession or assignment had taken place.
ARTICLE VII
DURATION, AMENDMENT AND
TERMINATION
7.1 Duration
If a Change in Control has not occurred, this Plan shall expire as of the
Expiration Date, unless sooner terminated as provided in Section 7.2, or unless
extended for an additional period or periods by resolution adopted by the Board
of Directors of the Employer.
<PAGE>
Notwithstanding the foregoing, if a Change in Control occurs this Plan shall
continue in full force and effect, and shall not terminate or expire until such
date as all Participants who become entitled to Payments hereunder shall have
received such Payments in full.
7.2 Amendment and Termination
The Plan may be terminated or amended in any respect by resolution adopted by a
majority of the Board of Directors of the Employer, unless a Change in Control
has previously occurred. If a Change in Control occurs, the Plan no longer shall
be subject to amendment, change, substitution, deletion, revocation or
termination in any respect whatsoever.
7.3 Form of Amendment
The form of any proper amendment or termination of the Plan shall be a written
instrument signed by a duly authorized Officer or Officers of the Employer,
certifying that the amendment or termination has been approved by the Board of
Directors. Subject to Sections 7.1 and 7.2 above, proper amendment of the Plan
automatically shall effect a corresponding amendment to each Participant's
rights hereunder and a proper termination of the Plan automatically shall effect
a termination of all Participants' rights and benefits hereunder.
ARTICLE VIII
ARBITRATION
8.1 Any dispute or controversy arising under or in connection with the Plan
shall be settled exclusively by arbitration, conducted before a panel of three
arbitrators sitting in a location selected by the Participant within fifty (50)
miles from the location of the Employer, in accordance with rules of the
American Arbitration Association then in effect. Judgment may be entered on the
award of the arbitrator in any court having jurisdiction.
ARTICLE IX
LEGAL FEES AND EXPENSES
9.1 Subject to the notice provisions in Section 9.2 hereof, all reasonable legal
fees and other expenses paid or incurred by Participant pursuant to any dispute
or question of interpretation relating to this Plan shall be paid or reimbursed
by the Employer, if Participant is successful pursuant to a legal judgment,
arbitration or settlement.
9.2 A Participant must provide the Employer with ten (10) business days notice
of a complaint of entitlement under this Plan before the Employer shall be
liable for the payment of any legal fees or other expenses referred to in
Section 9.1 hereof.
ARTICLE X
REQUIRED PROVISIONS
10.1 The Employer may terminate an Officer's employment at any time, but any
termination by the Employer, other than termination for Just Cause, shall not
prejudice Officer's right to compensation or other benefits under this Plan.
Officer shall not have the right to receive compensation or other benefits for
any period after termination for Just Cause as defined in Section 1.1
hereinabove.
10.2 If an Officer is suspended and/or temporarily prohibited from participating
in the conduct of Savings Bank's affairs by a notice served under Section
8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Section
1818(e)(3) or (g)(1), Savings Bank's obligations under this Plan shall be
suspended as of the date of service of such notice unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, Savings Bank may, in
its discretion, (i) pay an Officer all or part of the compensation withheld
while their Plan obligations were suspended and (ii) reinstate (in whole or in
part) any of its obligations which were suspended.
10.3 If an Officer is removed and/or permanently prohibited from participating
in the conduct of Savings Bank's affairs by an order issued under Section
8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Section
1818(e)(4) or (g)(1), all obligations of Savings Bank under this Plan shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
<PAGE>
10.4 If Savings Bank is in default (as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act, 12 U.S.C. Section 1813(x)(1)), all obligations of Savings
Bank under this Plan shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
10.5 All obligations of Savings Bank under this Plan shall be terminated, except
to the extent determined that continuation of the Plan is necessary for the
continued operation of Savings Bank institution, (i) by the Director of the OTS
(or his designee), the Federal Deposit Insurance Corporation ("FDIC") or the
Resolution Trust Corporation ("RTC"), at the time FDIC enters into an agreement
to provide assistance to or on behalf of Savings Bank under the authority
contained in Section 13(c) of the Federal Deposit Insurance Act, 12 U.S.C.
Section 1823(c); or (ii) by the Director of the OTS (or his designee) at the
time the Director (or his designee) approves a supervisory merger to resolve
problems related to the operations of Savings Bank or when Savings Bank is
determined by the Director to be in an unsafe or unsound condition. Any rights
of the parties that have already vested, however, shall not be affected by such
action.
IN WITNESS WHEREOF, Great Financial Bank, FSB has established this Plan to be
executed by its duly authorized executive officer and the corporate seal to be
affixed and duly attested, effective as of the day 30th of March, 1994.
ATTEST: GREAT FINANCIAL BANK, FSB
__________________________ By:________________________________
Paul M. Baker
Secretary President and Chief
Executive Officer
<PAGE>
EXHIBIT 11 STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Net income $19,507 $21,690
======== ========
Weighted average number of common shares and
equivalents:
Shares issued 16,531 16,531
Shares in treasury (2,153) (1,194)
Shares held by the ESOPs which have not
been committed to be released (1,075) (1,185)
Shares issuable pursuant to stock option
plans less shares assumed repurchased
at the average market price 990 754
-------- --------
Number of shares for computation of primary
earnings per share 14,293 14,906
Net additional shares issuable pursuant to
stock option plans at period-end market price 64 162
-------- --------
Number of shares for computation of fully
diluted earnings per share 14,357 15,068
======== ========
Earnings per share:
Primary $1.36 $1.46
======== ========
Fully diluted $1.36 $1.44
======== ========
</TABLE>
<PAGE>
EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
The following is a listing of the Subsidiaries of the Registrant, or if
indented, subsidiaries of the subsidiary under which they are listed.
Jurisdiction of
Name Incorporation
Great Financial Bank, FSB United States
Great Financial Services, Inc. Kentucky
Great Financial Properties, Inc. Kentucky
Lanidrac Service Corp. Kentucky
First Appraisal Service, Inc. Kentucky
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1996 and the Consolidated Statement
of Income for the Twelve Months Ended December 31, 1996 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000916484
<NAME> GREAT FINANCIAL CORPORATION
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 27,702
<INT-BEARING-DEPOSITS> 1,315
<FED-FUNDS-SOLD> 97,306
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 667,542
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,990,949
<ALLOWANCE> 13,538
<TOTAL-ASSETS> 2,897,162
<DEPOSITS> 1,804,003
<SHORT-TERM> 297,253
<LIABILITIES-OTHER> 31,408
<LONG-TERM> 484,044
0
0
<COMMON> 165
<OTHER-SE> 280,289
<TOTAL-LIABILITIES-AND-EQUITY> 2,897,162
<INTEREST-LOAN> 157,893
<INTEREST-INVEST> 40,323
<INTEREST-OTHER> 1,039
<INTEREST-TOTAL> 199,255
<INTEREST-DEPOSIT> 81,981
<INTEREST-EXPENSE> 123,417
<INTEREST-INCOME-NET> 75,838
<LOAN-LOSSES> 2,586
<SECURITIES-GAINS> 848
<EXPENSE-OTHER> 78,626
<INCOME-PRETAX> 30,464
<INCOME-PRE-EXTRAORDINARY> 19,507
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,507
<EPS-PRIMARY> 1.36
<EPS-DILUTED> 1.36
<YIELD-ACTUAL> 3.03
<LOANS-NON> 7,185
<LOANS-PAST> 94,116 <F1>
<LOANS-TROUBLED> 1,992
<LOANS-PROBLEM> 648 <F2>
<ALLOWANCE-OPEN> 11,821
<CHARGE-OFFS> 1,548
<RECOVERIES> 179
<ALLOWANCE-CLOSE> 13,538
<ALLOWANCE-DOMESTIC> 13,538
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> ACCRUING LOANS 90 DAYS OR MORE PAST DUE TOTALING $94,116 INCLUDES FHA/VA
LOANS WITH LIMITED CREDIT RISK TOTALING $88,185. MOST OF GREAT FINANCIAL
CORPORATION'S INVESTMENT IN THESE LOANS IS RECOVERABLE THROUGH CLAIMS MADE
AGAINST THE FHA OR VA SUBJECT TO THE RISKS OF RECOVERY.
<F2> OTHER PROBLEM LOANS CONSIST OF THOSE LOANS CLASSIFIED AS SUBSTANDARD,
DOUBTFUL OR LOSS UNDER OFFICE OF THRIFT SUPERVISION REGULATIONS AND WHICH
ARE NOT REPORTED AS NONACCRUAL, ACCRUING 90 DAYS OR MORE PAST DUE, OR
RESTRUCTURED.
</FN>
</TABLE>
