-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U3zACxIJM0sZJKpryYwZM7f4UREZbVnf49g0djYIIVs46Xq9eIIqBqS/phLPUfMw J1gC+yysbhujD9UXW8C/wA== 0000854560-98-000043.txt : 19981123 0000854560-98-000043.hdr.sgml : 19981123 ACCESSION NUMBER: 0000854560-98-000043 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREAT SOUTHERN BANCORP INC CENTRAL INDEX KEY: 0000854560 STANDARD INDUSTRIAL CLASSIFICATION: 6036 IRS NUMBER: 431524856 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18082 FILM NUMBER: 98753123 BUSINESS ADDRESS: STREET 1: 1451 E BATTLEFIELD CITY: SPRINGFIELD STATE: MO ZIP: 65804 BUSINESS PHONE: 4178874400 MAIL ADDRESS: STREET 2: P O BOX 9009 CITY: SPRINGFIELD STATE: MO ZIP: 65808-9009 10-Q 1 1 - - ------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------ UNITED STATES SECURITIES & EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM 10-Q /X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period ended September 30, 1998 -------------------------- Commission File Number 0-18082 -------------------------- GREAT SOUTHERN BANCORP, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 43-1524856 (IRS Employer Identification Number) 1451 E. BATTLEFIELD SPRINGFIELD, MISSOURI (Address of principal executive offices) 65804 (Zip Code) (417) 887-4400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / The number of shares outstanding of each of the registrant's classes of common stock: 7,857,461 shares of common stock, par value $.01, outstanding at November 9, 1998. - - ------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------ 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
September 30, June 30, 1998 1998 ------------- ------------ ASSETS Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,196,800 $ 12,199,490 Interest-bearing deposits in other financial institutions. . . . . . . . . 28,460,720 33,631,748 ----------- ----------- Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . 39,657,520 45,831,238 Available for sale securities. . . . . . . . . . . . . . . . . . . . . . . 6,931,992 6,362,700 Held to maturity securities (fair value $49,280,000 - September 1998; $50,541,000 - June 1998) . . . . . . . . . . . . . . . . . . . . . . . . 49,062,209 50,362,963 Loans receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 665,674,542 655,226,070 Foreclosed assets held for sale, net . . . . . . . . . . . . . . . . . . . 6,536,468 4,750,910 Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 9,663,458 9,457,015 Income taxes receivable. . . . . . . . . . . . . . . . . . . . . . . . . . 0 240,623 Accrued interest receivable Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,913,495 5,159,425 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 741,297 738,382 Investment in FHLBank Stock. . . . . . . . . . . . . . . . . . . . . . . . 9,454,100 9,454,100 Prepaid expenses and other assets. . . . . . . . . . . . . . . . . . . . . 1,069,761 3,960,573 Excess of cost over fair value of net assets acquired . . . . . . . . . . . 583,761 626,465 Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,556,786 2,920,665 ------------ ------------ Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $797,845,389 $795,091,129 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $582,088,136 $553,365,464 Federal Home Loan Bank advances. . . . . . . . . . . . . . . . . . . . . . 142,174,401 169,563,052 Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . 567,631 0 Advances from borrowers for taxes and insurance. . . . . . . . . . . . . . 2,772,450 2,176,662 Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . 4,376 2,577,058 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,995,031 0 ------------ ------------ Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 729,602,025 727,682,236 ------------ ------------ Capital stock Serial preferred stock, $.01 par value; authorized and issued 1,000,000 shares Common stock, $.01 par value; authorized 20,000,000 shares; issued 12,325,002 shares. . . . . . . . . . . . . . . . . . . . . . . . . . . 123,250 123,250 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 17,110,496 17,110,496 Retained earnings (substantially restricted) . . . . . . . . . . . . . . . 87,916,352 84,955,740 Accumulated other comprehensive income Unrealized appreciation on available-for-sale securities, net of income taxes of $268,813 - September 1998 and $669,921 - June 1998 . . 420,452 1,047,824 Treasury stock, at cost; 4,429,330 shares - September 1998; 4,363,275 shares - June 1998 . . . . . . . . . . . . . . . . . . . . . . (37,327,186) (35,828,417) ------------ ------------ Total Stockholders' Equity. . . . . . . . . . . . . . . . . . . . . . . 68,243,364 67,408,893 ------------ ------------ Total Liabilities and Stockholders' Equity . . . . . . . . . . . . . $797,845,389 $795,091,129 ============ ============ See Notes to Consolidated Financial Statements
3 GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
THREE MONTHS ENDED September 30, 1998 1997 ----------- ----------- INTEREST INCOME Loans $15,528,539 $13,886,549 Investment securities 938,142 987,835 Other 214,326 59,312 ---------- ---------- TOTAL INTEREST INCOME 16,681,007 14,933,696 ---------- ---------- INTEREST EXPENSE Deposits 6,122,240 5,180,123 FHLBank advances 2,256,372 2,285,491 Short-term borrowings 175 248,774 ---------- ---------- TOTAL INTEREST EXPENSE 8,378,787 7,714,388 ---------- ---------- NET INTEREST INCOME 8,302,220 7,219,308 PROVISION FOR LOAN LOSSES 806,846 416,628 ---------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,495,374 6,802,680 ---------- ---------- NON-INTEREST INCOME Commissions 1,430,891 1,198,214 Service charge fees 1,183,571 840,903 Net realized gains on sales of loans and available-for-sale securities 531,208 657,240 Income on foreclosed assets 77,409 84,344 Other income 416,423 256,106 ---------- ---------- TOTAL NON-INTEREST INCOME 3,639,502 3,036,807 ---------- ---------- NON-INTEREST EXPENSE Salaries and employee benefits 2,897,283 2,591,922 Net occupancy expense 873,322 650,551 Tax consulting fees 47,150 439,157 Postage 237,954 186,289 Insurance 151,314 178,001 Amortization of goodwill 37,705 0 Advertising 85,329 71,905 Office supplies and printing 187,132 157,329 Other operating expenses 848,784 722,558 ---------- ---------- TOTAL NON-INTEREST EXPENSE 5,365,973 4,997,712 ---------- ---------- INCOME BEFORE INCOME TAXES 5,768,903 4,841,775 PROVISION FOR INCOME TAXES 1,990,331 981,500 ---------- ---------- NET INCOME $ 3,778,572 $ 3,860,275 ---------- ---------- See Notes to Consolidated Financial Statements
4 GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
THREE MONTHS ENDED September 30, 1998 1997 ----------- ----------- OTHER COMPREHENSIVE INCOME Unrealized appreciation (depreciation) on Available-for-sale securities, net of income taxes of $296,799 for 1998 and $136,613 for 1997 (464,224) 213,676 Less: reclassification adjustment for appreciation (depreciation)included in net income, net of income taxes of $101,395 for 1998 and $158,591 for 1997 (158,591) (256,548) ---------- ---------- (627,372) (42,873) ---------- ---------- COMPREHENSIVE INCOME $ 3,151,200 $ 3,817,403 ========== ========== BASIC EARNINGS PER COMMON SHARE $.48 $.48 === === DILUTED EARNINGS PER COMMON SHARE $.47 $.47 === === See Notes to Consolidated Financial Statements
5 GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 3,778,572 $ 3,860,275 Items not requiring (providing) cash: Depreciation 404,813 252,408 Amortization 42,704 -- Provision for loan losses 806,846 416,628 Net realized gains on sale of loans (262,951) (236,668) Gain on sale of premises and equipment -- (9,728) Gain on sale of foreclosed assets (189,149) (175,991) Amortization of deferred income, premiums and discounts (427,058) (174,000) Net realized gains on sale of available-for-sale securities (268,257) (421,148) Deferred income taxes (636,121) (50,000) Changes in: Accrued interest receivable 243,015 492,177 Prepaid expenses and other assets 2,890,812 (739,234) Accounts payable and accrued expenses (2,572,682) 3,077,198 Income taxes payable 2,637,538 833,681 ----------- ----------- Net cash provided by operating activities 6,448,082 4,984,047 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Net increase in loans (12,241,251) (1,278,872) Purchase of premises and equipment (611,256) (120,669) Proceeds from sale of foreclosed assets 109,500 215,044 Capitalized costs on foreclosed assets (29,189) (13,462) Proceeds from sale of available-for-sale securities 851,629 1,002,406 Proceeds from maturing held-to-maturity securities 5,500,000 8,801,992 Purchase of held-to-maturity securities (4,200,024) (8,906,328) Purchase of available-for-sale securities (2,181,920) (819,217) Purchase of FHLBank stock -- (769,800) ----------- ----------- Net cash used in investing activities (12,802,511) (1,119,106) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in certificates of deposit 32,315,448 (8,588,710) Net increase (decrease) in checking and savings (3,592,776) (6,006,929) Proceeds from FHLBank advances 83,807,973 71,195,556 Repayments of FHLBank advances (111,196,624) (73,394,849) Net increase in short-term borrowings 567,631 2,953,572 Advances from borrowers for taxes and insurance 595,788 739,085 Purchase of treasury stock (1,498,769) (1,215,973) Dividends paid (817,960) (744,547) Stock options exercised -- 17,275 ----------- ----------- Net cash provided by (used in) financing activities 180,711 (15,045,820) ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,173,698) 2,870,073 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 45,831,238 29,615,027 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 39,657,520 $ 32,485,100 =========== =========== See Notes to Consolidated Financial Statements
6 GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements of Great Southern Bancorp, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements presented herein reflect all adjustments, which are in the opinion of management, necessary for a fair statement of the results for the periods presented. Operating results for the three months months ended September 30, 1998 and 1997 are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 1998. When necessary, reclassifications have been made to prior period balances to conform to current period presentation. These reclassifications had no effect on net income. During the quarter ended September 30, 1998, the Company adopted the provisions of SFAS No. 130, by the reclassification of all prior periods presented. ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Forward-Looking Statements When used in this Form 10-Q and in future filings by the Company with the Securities and Exchange Commission (the "SEC"), in the Company's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result" "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake-and specifically declines any obligation- to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. 7 General Parts of management's discussion and analysis in the annual report on Form 10-K are not included below. The following should be read in conjunction with management's discussion and analysis in the Company's June 30, 1998 Form 10-K. The Company will be changing to a calendar year-end beginning with the period January 1, 1999 to December 31, 1999. In order to make this transiton, a short fiscal year for the period July 1, 1998 to December 31, 1998 will be necessary. The profitability of the Company, and more specifically, the profitability of its primary subsidiary Great Southern Bank (the "Bank"), depends primarily on its net interest income. Net interest income is the difference between the interest income it earns on its loans and investment portfolio, and its cost of funds, which consists mainly of interest paid on deposits and borrowings. Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on these balances. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. The Company's profitability is also affected by the level of its non- interest income and operating expenses. Non-interest income consists primarily of gains on sales of loans and available-for-sale investments, service charge fees and commissions. Operating expenses consist primarily of salaries and employee benefits, occupancy-related expenses, equipment and technology-related expenses and other general operating expenses. The operations of the Bank, and banking institutions in general, are significantly influenced by general economic conditions and related monetary and fiscal policies of regulatory agencies. Deposit flows and the cost of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing real estate and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting loan demand and the availability of funds. Effect of Federal Laws and Regulations Federal legislation and regulation significantly affect the banking operations of the Company and the Bank, and have increased competition among savings institutions, commercial banks, mortgage banking enterprises and other financial institutions. In particular, the capital requirements and operations of regulated depository institutions such as the Company and the Bank have been and will be subject to changes in applicable statutes and regulations from time to time, which changes could, under certain circumstances, adversely affect the Company or the Bank. 8 Recent Changes in Accounting Principles The FASB recently adopted SFAS No. 130, "Reporting Comprehensive Income." This Statement establishes standards for reporting and display of comprehensive income and its components in a full set of financial statements. It does not address issues of recognition or measurement. The Company's most significant component of other comprehensive income is the unrealized gains and losses on available-for-sale securities. The Company adopted the provisions of SFAS No. 130, by the reclassification of all prior periods presented. The FASB recently adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This Statement establishes standards for reporting operating segments and requires certain other disclosures about products and services, geographic areas and major customers. The disclosure requirements are effective for fiscal years beginning after December 15, 1997. The adoption of SFAS 131 is not expected to have a material impact on the Company's financial statements. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises disclosure requirements for pension and other postretirement benefit plans but does not change the measurement or recognition of those plans. The Company adopted SFAS 132 in the current short fiscal year. The adoption of SFAS 132 did not have a material effect on the financial statements of the Company. Potential Impact of Accounting Principles to be Implemented in the Future The FASB recently adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999, and may be implemented as of the beginning of any fiscal quarter after issuance. SFAS No. 133 may not be applied retroactively. Management does not believe adopting SFAS No. 133 will have a material impact on the Company's financial statements YEAR 2000 COMPUTER PROGRAM PROBLEMS The "Year 2000 Problem" centers on the inability of computer systems to precisely recognize the year 2000. Many existing computer programs and systems were originally programmed with six digit dates that provided only two digits to identify the calendar year in the date field, without considering the upcoming change in the century. With the impending millennium, these programs and computers may recognize "00" as the year 1900 rather than the year 2000. If computer systems are not adequately changed to identify the year 2000, many computer applications could fail or create erroneous results. As a result, many calculations which rely on the date/field information, such as interest, payment or due dates and other operating functions, will generate results which could be significantly misstated, and the Bank could experience a temporary inability to process transactions, send invoices or engage in similar normal business activities. In addition, under certain circumstances, failure to adequately address the Year 2000 Problem could adversely affect the viability of the Bank's suppliers and creditors and the creditworthiness of its borrowers. Thus, if not adequately addressed, the Year 2000 Problem could result in a significant adverse impact on the Bank's products, services and competitive condition. 9 Financial institution regulators have recently increased their focus upon year 2000 issues, issuing guidance concerning the responsibilities of senior management and directors. The FDIC and the other federal banking regulators have issued safety and soundness guidelines to be followed by insured depository institutions, such as the Bank, to assure resolution of any year 2000 problems. The federal banking agencies have asserted that year 2000 testing and certification is a key safety and soundness issue in conjunction with regulatory exams, and thus an institution's failure to address appropriately the Year 2000 Problem could result in supervisory action, including such enforcement actions as the reduction of the institution's supervisory ratings, the denial of applications for approval of a merger or acquisition, or the imposition of civil money penalties. The Bank has been experiencing rapid growth in both the deposit and loan areas. The hardware and core software systems are approaching their capacity. Due to this growth and the year 2000 issue, the Bank evaluated both upgrading the current systems as well as looking into a potential replacement system. Management of the Bank determined conversion to a new hardware and software system was the best solution to meet the growth needs of the Bank as well as resolve the year 2000 issues. Subsequent to September 30, 1998, the Bank completed the conversion to the Jack Henry Silverlake system for all its core processing system and internal financial reporting system. The new system has been certified year 2000 compliant and will be tested in early 1999. In addition to replacing the core system, the Company has been in a program of replacing the personal computers and wide area networks with year 2000 compliant systems. This program was substantially completed subsequent to September 30, 1998. A complete inventory of non-mission critical hardware and software was completed in December 1997. Non-compliant software systems are scheduled for replacement or will be discontinued. Security systems, elevators, heating and air conditioning and like items have been tested and will function as usual through the date of change. All third party vendors, whose products will continue to be used, have certified their products as compliant. Testing of these and all other systems is scheduled for completion no later than June 30, 1999. A contingency plan, utilizing the current core software, has been formulated. The supplier of the current system has released a year 2000 compliant system which can be installed on a larger hardware system that can be obtained by the Bank. This would be for temporary, emergency use only, to allow time to complete the conversion that is in progress. Should there be a failure of utilities or telephone communications, both of which the Bank is dependent on, a plan is being formulated to ensure the ability to operate enough strategic branch locations to serve our customers. A budget of $2.4 million has been established to complete the necessary steps previously noted. Approximately $1.2 million has been spent to date, with an additional $800,000 budgeted for 1998 and $400,000 budgeted for 1999. While a portion of these costs will be expensed as incurred, the majority of these costs will be capitalized and expensed over a 3 to 5 year period. Management does not feel it will have a material impact on the financial condition of the Company. 10 An outside consultant has been utilized throughout the process to provide an independent review of all areas. The Company's estimate of year 2000 project costs and completion dates are based on management's best estimates that have been derived utilizing numerous assumptions about future events. These estimates and actual results may differ materially. The first stage of the compliance process for the Bank was an internal risk assessment performed by the Information Systems Steering Committee along with major vendors and consultants. The Risk Assessment revealed the need to replace the Bank's mainframe operating system and to replace the majority of the online terminals, which are desktop computers. The desktop systems have been purchased and installed. The insurance, investment and travel subsidiaries operate on separate computer systems from the Bank and each other. The Year 2000 Committee of the Bank will be assisting these companies in performing a Risk Assessment of their systems and taking the steps necessary to ensure compliance with all year 2000 issues before December 31, 1999. Asset and Liability Management During the three months ended September 30, 1998, the Company maintained total assets at approximately $800 million, with some shifting of amounts between asset types. Loans increased $10 million while foreclosed assets declined $1.8 million and cash and cash equivalents declined $9.2 million. The following loan categories experienced net increases as noted: Commercial real estate and construction loans $13 million Consumer (primarily automobile and student) loans 10 million The following loan categories experienced net decreases as noted: Single-family and other residential loans $13 million Total liabilities also remained level at approximately $730 million again with some shifting of balances between liability categories. The primary changes were an increase in deposits of $29 million offset by a decrease in Federal Home Loan Bank ("FHLBank") advances of $27 million. The deposit increase was primarily from brokered deposits. The decrease in FHLBank advances was due to repayment of these from the brokered deposits. Management continues to feel that FHLBank advances and brokered deposits are viable alternatives to retail deposits when factoring all the costs associated with the generation and maintenance of retail deposits. Stockholders' equity increased $800,000 primarily as a result of net income of $3.8 million offset by dividend declarations and payments of $900,000, net treasury stock purchases of $1.5 million and a reduction in unrealized gains on available-for-sale securities of $600,000.. The Company repurchased 65,255 shares of common stock at an average price of $23.24 per share during the three months ended September 30, 1998. There were no shares issued for exercised stock options during the quarter. 11 Interest Rate Sensitivity A principal operating objective of the Company is to produce stable earnings by achieving a favorable interest rate spread that can be sustained during fluctuations in prevailing interest rates. The Company has sought to reduce its exposure to adverse changes in interest rates by attempting to achieve a closer match between the periods in which its interest-bearing liabilities and interest-earning assets can be expected to reprice through the origination of adjustable-rate mortgages and loans with shorter terms and the purchase of other shorter term interest-earning assets. The term "interest rate sensitivity" refers to those assets and liabilities that mature and reprice periodically in response to fluctuations in market rates and yields. As noted above, one of the principal goals of the Company's asset/liability program is to maintain and match the interest rate sensitivity characteristics of the asset and liability portfolios. In order to properly manage interest rate risk, the Bank's Board of Directors has established an Asset/Liability Management Committee ("ALCO") made up of members of management to monitor the difference between the Bank's maturing and repricing assets and liabilities and to develop and implement strategies to decrease the "gap" between the two. The primary responsibilities of the committee are to assess the Bank's asset/liability mix, recommend strategies to the Board that will enhance income while managing the Bank's vulnerability to changes in interest rates and report to the Board the results of the strategies used. The Company's experience with interest rates are discussed in more detail under the headings "Results of Operations and Comparisons of the Three Months Ended September 30, 1998 and 1997." An important element of both earnings performance and liquidity is management of interest rate sensitivity. Interest rate sensitivity reflects the potential effect on net interest income of a movement in interest rates. The difference between the Company's interest-sensitive assets and interest- sensitive liabilities for a specified time frame is referred to as "gap." A financial institution is considered to be asset-sensitive, or having a positive gap, when the amount of its earning assets maturing or repricing within a given time period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. Conversely, a financial institution is considered to be liability-sensitive, or have a negative gap, when the amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of earning assets also maturing or repricing within that time period. During a period of rising interest rates, a positive gap would tend to increase net interest income, while a negative gap would tend to have an adverse effect on net interest income. During a period of falling interest rates, a positive gap would tend to have an adverse effect on net interest income, while a negative gap would tend to increase net interest income. 12 The Company evaluates interest sensitivity risk and then formulates guidelines regarding asset generation, funding sources and the pricing of each, and off-balance sheet commitments in order to decrease sensitivity risk. These guidelines are based upon management's outlook regarding future interest rate movements, the state of the regional and national economy and other financial and business risk factors. The Bank uses a static gap model and a computer simulation to measure the effect on net interest income of various interest rate scenarios over selected time periods. The Company's gap can be managed by repricing assets or liabilities, selling available-for-sale investments, replacing an asset or liability prior to maturity or adjusting the interest rate during the life of an asset or liability. Matching the amount of assets and liabilities repricing during the same time interval helps to reduce the risk and minimize the impact on net interest income in periods of rising or falling interest rates. As a part of its asset and liability management strategy, the Company has increased its investment in loans which are interest rate sensitive by emphasizing the origination of adjustable-rate, one- to four-family residential loans and adjustable-rate or relatively short-term commercial business and consumer loans, and originating fixed-rate, one- to four-family residential loans primarily for immediate resale in the secondary market. Approximately one-third of total assets are currently invested in commercial real estate and commercial business loans. This part of the strategy was designed to improve asset yield and fee income, and to shorten the average maturity and increase the interest rate sensitivity of the loan portfolio. While efforts to date have contributed to the changes in the one-year interest rate sensitivity gap and increased net interest income, such lending, commensurate with the increased risk levels, has also resulted in an increase in the level of non-performing assets. Management continually evaluates existing and potential commercial real estate and commercial business loans, in order to try to reduce undesirable risks including concentrations in a given geographic area or a particular loan category. Interest rate risk exposure estimates (the sensitivity gap) are not exact measures of an institution's actual interest rate risk. They are only indicators of interest rate risk exposure produced in a simplified modeling environment designed to allow management to gauge the Company's sensitivity to changes in interest rates. They do not necessarily indicate the impact of general interest rate movements on the Company's net interest income because the repricing of certain categories of assets and liabilities is subject to competitive and other factors beyond the Company's control. As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated period may in fact mature or reprice at different times and in different amounts and would therefore cause a change (which potentially could be material) in the Company's interest rate risk. 13 RESULTS OF OPERATIONS AND COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1998 and 1997 The decrease in earnings of $82,000, or 2.1%, for the three months ended September 30, 1998 when compared to the same period in 1997, was primarily due to an increase in net interest income of $1.1 million, or 15.0%, and an increase in non-interest income of $603,000, or 19.9%, offset by an increase in non-interest expense of $368,000, or 7.4%, and an increase in provision for income taxes of $1 million, or 102.6%, during the three month period. Total Interest Income Total interest income increased $1.7 million, or 11.7%, during the three months ended September 30, 1998, when compared to the three months ended September 30, 1997. The increase was primarily due to a $1.6 million, or 11.8%, increase in interest income on loans. Interest Income - Loans During the three months ended September 30, 1998, interest income on loans increased primarily from higher average balances. Interest income increased $1.6 million as the result of higher average loan balances from $593 million during the three months ended September 30, 1997 to $660 million during the three months ended September 30, 1998. The higher average balance resulted from the Bank's increased lending in commercial real estate and commercial business lending and the indirect dealer consumer lending offset by a decline in single-family residential lending. . The average yield on loans increased from 9.36% during the three months ended September 30 1997, to 9.41% during the three months ended September 30, 1998. Interest Income - Investments and Other Interest-Earning Deposits Interest income on investments and interest-earning deposits increased $105,000, or 10.0%, during the three months ended September 30, 1998 when compared to the three months ended September 30, 1997. Interest income increased $137,000 as a result of higher average balances from $86 million during the three months ended September 30, 1997 to $98 million during the three months ended September 30, 1998. This increase was primarily in interest-bearing deposits in FHLBank used to fund daily operations and lending. Interest income declined $31,000 as a result of lower average yields from 4.86% during the three months ended September 30, 1997, to 4.71% during the three months ended September 30, 1998 due to lower short term market rates. Total Interest Expense Total interest expense increased $665,000, or 8.6%, during the three months ended September 30, 1998 when compared with the same period in 1997. The increase during the three month period was primarily due to a $942,000, or 18.2%, increase in interest expense on deposits. 14 Interest Expense - Deposits Interest expense on deposits increased $942,000 as a result of higher average balances of time deposits from $304 million during the three months ended September 30, 1997, to $354 million during the three months ended September 30, 1998 and due to higher average balances of interest-bearing demand deposits from $116 million during the three months ended September 30, 1997, to $157 million during the three months ended September 30, 1998. The average balances on time deposits increased as a result of the Company's use of brokered deposits and the average balances on interest-bearing demand deposits increased as a result other borrowings being reclassed to this category beginning June 30, 1998. Time deposits experienced small decreases due to lower rates while interest-bearing demand deposits experienced small increases due to higher rates. The other deposit category, savings, experienced only minor increases due to slightly higher balances. Interest Expense - FHLBank Advances and Other Borrowings Interest expense on FHLBank advances and other borrowings decreased $278,000 due to lower average balances from $170 million in the three months ended September 30, 1997 to $150 million in the three months ended September 30, 1998. Average rates were slightly higher during the three months ended September 30, 1998 at 6.01% compared to 5.95% during the three months ended September 30, 1997. The average balances decreased primarily as a result of the Company's reclass of short-term borrowings to interest-bearing demand deposits as noted above. Net Interest Income The Company's overall interest rate spread increased 12 basis points, or 3.1%, from 3.86% during the three months ended September 30, 1997, to 3.98% during the three months ended September 30, 1998. The increase was due to a slight increase in the weighted average yields received on interest-earning assets combined with a decrease in the weighted average rates paid on interest-bearing liabilities. Provision for Loan Losses The provision for loan losses increased from $417,000 during the three months ended September 30, 1997 to $807,000 during the three months ended September 30, 1998. In any accounting period, the provision for loan losses is affected by many factors including, but not limited to, the change in the composition of the loan portfolio, the increase or decrease in total loans, the level of delinquencies and other non-performing loans and the historical loss experience of the portfolio. One additional factor which changed effective with the Bank's charter conversion on June 30, 1998, was the policy on consumer loan charge-offs. Beginning June 30, 1998, the Bank is charging off the entire balance of any consumer loan at the time it becomes 120 days past due and any subsequent recovery from the sale of collateral is recorded as a recovery at the time of the sale. Prior to the charter change, consumer loans were kept on the books at the estimated recovery value of the collateral. 15 Non-performing assets increased $3.4 million during the three months ended September 30, 1998 from $11.9 million at June 30, 1998 to $15.3 million at September 30, 1998. Non-performing loans increased $1.6 million, or 22.0%, from $7.2 million at June 30, 1998 to $8.8 million at September 30, 1998, and foreclosed assets increased $1.8 million, or 37.6%, from $4.8 million at June 30, 1998 to $6.5 million at September 30, 1998. Potential problem loans decreased $1.9 million during the three months ended September 30, 1998 from $8.9 million at June 30, 1998 to $7 million at September 30, 1998. These are loans which management has identified through routine internal review procedures as having possible credit problems which may cause the borrowers difficulty in complying with current loan repayment terms. These loans are not reflected in the non-performing loans The allowance for loan losses at September 30, 1998 and June 30, 1998, respectively, totaled $16.6 million and $16 million, representing 2.5% and 2.5% of total loans, 189% and 227% of non-performing loans, and 105% and 101% of non-performing loans and potential problem loans in total. The allowance for foreclosed asset losses was $0 at both September 30, and June 30, 1998. Although the Company maintains the allowance for loan losses and the allowance for foreclosed asset losses at levels which management considers to be adequate to provide for potential losses and selling expenses, there can be no assurance that such losses will not exceed the estimated amounts, thereby adversely affecting future results of operations. Non-interest Income Non-interest income increased $603,000, or 19.9%, in the three months ended September 30, 1998 when compared to the same period in 1997. The increase was primarily due to: (i) an increase of $343,000, or 41%, in service fees on deposits accounts primarily from increased ATM and debit card fees along with increased insufficient check fees; and (ii) an increase in commission income of $233,000, or 19%, from increased sales in the travel, insurance and investment subsidiaries; offset by (iii) a decrease of $154,000, or 24%, in profits on sale of available-for-sale securities; and (iv) various increases and decreases in other non-interest income items. Non-interest Expense Non-interest expense increased $368,000, or 7.4%, in the three months ended September 30, 1998 when compared to the same period in 1997. The increase was primarily due to: (i) an increase of $305,000, or 11.8%, in salary and employee related costs due to increased staffing levels resulting from asset and customer growth; (ii) an increase of $222,000, or 34.1%, in occupancy and equipment expense due to expansion of the Company's ATM network and computer conversion and other technology related purchases; offset by (iii) a decrease of $392,000, in tax consulting fees expended to obtain the special one-time state refund noted below; and (iii) increases or decreases in other non-interest expense items. 16 In conjunction with the Company's recent growth and the year 2000 issue discussed previously in this document, the Company will be incurring additional operating costs associated with the evaluation, purchase, implementation and operation of new mainframe hardware and software as well as other replacement computer and equipment items. In addition, it is probable that the insurance, investment and travel subsidiaries will incur costs in the evaluation, purchase, implementation and operation of their systems to bring them into compliance to avoid potential year 2000 issues. While the exact impact of the cost to correct or convert the various systems of the Company is not known at this time, management does not feel it will be material to the overall operations or financial condition of the Company. Provision for Income Taxes Provision for income taxes as a percentage of pre-tax income increased from 20.3% in the three months ended September 30, 1997 to 34.5% in the three months ended September 30, 1998. The smaller than normal percentage in the September 30, 1997 period was due to a refund of prior period state financial institution taxes of $1.1 million. The refund was the result of a review of the Bank's state financial institution tax returns by a consulting firm. The refund resulted from the Bank's charter change from a state savings and loan charter to a federal savings bank charter in December 1994. Average Balances, Interest Rates and Yields The following tables present for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. The tables do not include non-interest-bearing demand deposits and do not reflect any effect of income taxes. 17
Three Months Ended September 30, --------------------------------------------------------- 1998 1997 --------------------------- -------------------------- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate -------- -------- ------ -------- -------- ------ (Dollars in thousands) Interest-earning assets: Loans receivable $659,965 $15,529 9.41% $593,259 $13,887 9.36% Investment securities and other interest-earning assets 97,762 1,152 4.71 86,006 1,046 4.86 ------- ------ ---- ------- ------- ---- Total interest-earning assets $757,727 16,681 8.81 $679,265 14,933 8.79 ======= ------ ---- ======= ------ ---- Interest-bearing liabilities: Demand deposits $156,758 968 2.47 $116,307 689 2.37 Savings deposits 34,255 213 2.49 35,115 217 2.47 Time deposits 353,644 4,942 5.59 303,983 4,274 5.62 ------- ----- ---- ------- ----- ---- Total deposits 544,657 6,123 4.50 455,405 5,180 4.55 FHLBank advances and other borrowings 150,273 2,256 6.01 170,306 2,534 5.95 ------- ----- ---- ------- ----- ---- Total interest-bearing liabilities $694,930 8,379 4.83 $625,711 7,714 4.93 ======= ----- ---- ======= ----- ---- Net interest income: Interest rate spread $8,302 3.98% $7,219 3.86% ===== ==== ===== ==== Net interest margin(1) 4.38% 4.25% ==== ==== Average interest-earning assets to average interest-bearing liabilities 109.0% 108.6% ===== ===== (1) Defined as the Company's net interest income divided by total interest- earning assets.
18 Rate/Volume Analysis The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities for the periods shown. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in rate (i.e., changes in rate multiplied by old volume) and (ii) changes in volume (i.e., changes in volume multiplied by old rate). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to volume and to rate.
Three Months Ended September 30, 1998 vs. 1997 -------------------------------- Increase (Decrease) Due to Total -------------- Increase Rate Volume (Decrease) ---- ------ ---------- (Dollars in thousands) Interest-earning assets: Loans receivable $ 73 $1,569 $1,642 Investment securities and other interest-earning assets (31) 137 106 --- ----- ----- Total interest-earning assets 42 1,706 1,748 --- ----- ----- Interest-bearing liabilities: Demand deposits 30 249 279 Savings deposits 1 (5) (4) Time deposits (26) 694 668 --- ----- ----- Total deposits 5 938 943 FHLBank advances and other borrowings 23 (301) (278) --- ----- ----- Total interest-bearing liabilities 28 637 665 --- ----- ----- Net interest income $ 14 $1,069 $1,083 === ===== =====
19 Liquidity and Capital Resources Liquidity is a measure of the Company's ability to generate sufficient cash to meet present and future financial obligations in a timely manner through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. These obligations include the credit needs of customers, funding deposit withdrawals, and the day-to-day operations of the Company. Liquid assets include cash, interest-bearing deposits with financial institutions and certain investment securities and loans. As a result of the Company's management of the ability to generate liquidity primarily through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its customers' credit needs. At September 30, 1998, the Company had commitments of approximately $117 million to fund loan originations, issued lines of credit, outstanding letters of credit and unadvanced loans. Management continuously reviews the capital position of the Company and the Bank to insure compliance with minimum regulatory requirements, as well as exploring ways to increase capital either by retained earnings or other means. The Company's capital position remained strong, with stockholders' equity at $68.2 million, or 8.5% of total assets of $798 million at September 30, 1998 compared to equity at $67.4 million, or 8.5%, of total assets of $795 million at June 30, 1998. Banks are required to maintain minimum risk-based capital ratios. These ratios compare capital, as defined by the risk-based regulations, to assets adjusted for their relative risk as defined by the regulations. Guidelines required banks to have a minimum Tier 1 capital ratio, as defined, of 4.00% and a minimum Tier 2 capital ratio of 8.00%, and a minimum 4.00% leverage capital ratio. On September 30, 1998, the Bank's Tier 1 capital ratio was 10.1%, Tier 2 capital ratio was 11.3% and leverage ratio was 7.8%. At September 30, 1998, the held-to-maturity investment portfolio included $218,000 of gross unrealized gains and no gross unrealized losses. The unrealized gains are not expected to have a material effect on future earnings beyond the usual amortization of acquisition premium or accretion of discount because no sale of the held-to-maturity investment portfolio is foreseen. The Company's primary sources of funds are savings deposits, FHLBank advances, other borrowings, loan repayments, proceeds from sales of loans and securities and funds provided from operations. The Company utilizes particular sources of funds based on the comparative costs and availability at the time. The Company has from time to time chosen not to pay rates on deposits as high as the rates paid by certain of its competitors and, when believed to be appropriate, supplements deposits with less expensive alternative sources of funds. Statements of Cash Flows. During the three months ended September 30, 1998 and 1997, the Company had positive cash flows from operating activities and negative cash flows from investment activities. During the three months ended September 30, 1998, the Company had positive cash flows from financing activities. The Company experienced negative cash flows from financing activities during the three months ended September 30, 1997. 20 Cash flows from operating activities for the periods covered by the Statements of Cash Flows have been primarily related to adjustments in deferred assets, credits and other liabilities, the provision for loan losses and losses on foreclosed assets, depreciation, sale of foreclosed assets and the amortization of deferred loan origination fees and discounts (premiums) on loans and investments, all of which are non-cash or non-operating adjustments to operating cash flows. As a result, net income adjusted for non-cash and non-operating items was the primary source of cash flows from operating activities. Operating activities provided cash flows of $6.4 million and $5.0 million in cash during the three months ended September 30, 1998 and 1997, respectively. During the three months ended September 30, 1998 and 1997, investing activities used cash of $12.8 million and $1.1 million, respectively, primarily due to the net increase of loans in each period. Changes in cash flows from financing activities during the periods covered by the Statements of Cash Flows are due to changes in deposits after interest credited, changes in FHLBank advances and changes in short-term borrowings as well as purchases of treasury stock and dividend payments to stockholders. Financing activities provided $180,000 in cash during the three months ended September 30, 1998 and used $15.0 million in cash during the three months ended September 30, 1997. Financing activities in the future are expected to primarily include changes in deposits and changes in FHLBank advances. Dividends. During the three months ended September 30, 1998, the Company declared and paid dividends of $.11 per share, or 23% of net income, compared to dividends declared and paid during the three months ended September 30, 1997 of $.10 per share, or 21% of net income. The Board of Directors meets regularly to consider the level and the timing of dividend payments. Common Stock Repurchases. The Company has been in various buy-back programs since May 1990. During the three months ended September 30, 1998, the Company repurchased 65,255 shares of its common stock at an average price of $22.97 per share. During the three months ended September 30, 1997, the Company repurchased 24,709 shares of its common stock at an average price of $16.81 per share. No shares were reissued during the three months ended September 30, 1998 or 1997 as there were no stock option exercises. Management intends to continue its stock buy-back programs as long as repurchasing the stock contributes to the overall growth of shareholder value. The number of shares of stock that will be repurchased and the price that will be paid is the result of many factors, several of which are outside of the control of the Company. The primary factors, however, are the number of shares available in the market from sellers at any given time and the price of the stock within the market as determined by the market. 21 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Registrant and its subsidiaries are involved as plaintiff or defendant in various legal actions arising in the normal course of their business. While the ultimate outcome of the various legal proceedings involving the Registrant and its subsidiaries cannot be predicted with certainty, it is the opinion of management, after consultation with legal counsel, that these legal actions currently are not material to the Registrant. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to Vote of Common Stockholders At the Company's annual meeting of stockholders held on October 21, 1998, the results of the matters voted upon were as follows: (a) The following nominee for election as director was elected. Affirmative Votes Director Votes Withheld ------------------ ----------- --------- William V. Turner 7,451,243 9,132 (b) An affirmative vote in excess of the majority of the shares available to vote was obtained to approve the appointment of Baird, Kurtz & Dobson as auditors for the current fiscal year. Affirmative Negative Abstentions ----------- -------- ----------- 7,445,648 6,863 7,864 Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K a) Exhibits See the attached exhibit 11, Statement re computation of earnings per share. See the attached exhibit 27, Financial Data Schedule. b) Reports on Form 8-K None. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Great Southern Bancorp, Inc. Registrant Date: November 16, 1998 /s/ William V. Turner -------------------------- William V. Turner Chairman of the Board, President and Chief Executive Officer Date: November 16, 1998 /s/ Don M. Gibson -------------------------- Don M. Gibson, Executive Vice President and Chief Financial Officer 23 Exhibit Index ------------- Exhibit No. Description - - ------- ----------- 11 Statement Re Computation of Earnings Per Share 27 Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only and not filed. 24
Exhibit 11- Statement Re Computation of Earnings Per Share Three Months Ended September 30, ------------------------ 1998 1997 ---------- ---------- Basic: Average shares outstanding 7,940,341 8,091,509 ========= ========= Net income $3,778,572 $3,860,275 ========= ========= Per share amount $0.48 $0.48 ==== ==== Diluted: Average shares outstanding 7,940,341 8,091,509 Net effect of dilutive stock options - based on the treasury stock method using average market price 157,422 101,097 --------- --------- Diluted shares 8,097,763 8,192,606 ========= ========= Net income $3,778,572 $3,860,275 ========= ========= Per share amount $0.47 $0.47 ==== ====
EX-27 2 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the Consolidated Balance Sheet and the Consolidated Statement of Income filed as part of the quarterly report on Form 10-Q and is qualified in its entirety by reference to such quarterly report on Form 10-Q. 1,000
3-MOS DEC-31-1998 SEP-30-1998 11,197 28,461 0 0 6,932 49,062 49,280 665,675 16,650 797,845 582,088 36,648 4,772 106,094 0 0 123 68,120 797,845 15,529 938 214 16,681 6,122 8,378 8,302 807 267 5,366 5,769 3,779 0 0 3,779 .48 .47 4.38 8,796 0 0 7,042 16,373 718 188 16,650 16,650 0 0
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