-----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, Nr9L0UasRjIM7Q/wK9PGdnG2jzoMR+7Qp4clo18PNAe5LBU6OWZF2NbkDqjO/er/ mHSj2vd486bQO2CbSOSGCA== 0000854560-99-000006.txt : 19990423 0000854560-99-000006.hdr.sgml : 19990423 ACCESSION NUMBER: 0000854560-99-000006 CONFORMED SUBMISSION TYPE: 10-K CONFIRMING COPY: PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990422 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREAT SOUTHERN BANCORP INC CENTRAL INDEX KEY: 0000854560 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 431524856 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-18082 FILM NUMBER: 00000000 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-K 1 1 THIS DOCUMENT IS A COPY OF THE FORM 10-K FILED ON APRIL 16, 1999 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the six months ended December 31, 1998 Commission File Number 0-18082 GREAT SOUTHERN BANCORP, INC. (Exact name of registrant as specified in its charter) Delaware 43-1524856 (State incorporation) (IRS Employer Identification Number) 1451 E. Battlefield 65804 Springfield, Missouri (Zip Code) (Address of principal executive offices) (417) 887-4400 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $.01 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 / / 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 the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. / / The aggregate market value of the voting stock of the Registrant held by non-affiliates of the Registrant on March 29, 1999, computed by reference to the closing price of such shares, was $184,403,880. At March 29, 1999, 7,683,495 shares of Common Stock, par value $.01 per share, were outstanding. Index to Exhibits is page 67 =============================================================================== 2 TABLE OF CONTENTS Page ------ Part I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Primary Market Area . . . . . . . . . . . . . . . . . . . . . . 4 Lending Activities . . . . . . . . . . . . . . . . . . . . . . 5 Loan Portfolio Composition . . . . . . . . . . . . . . . . . . 7 Allowance for Losses on Loans and Foreclosed Assets . . . . . . 15 Loan Delinquencies and Defaults . . . . . . . . . . . . . . . . 17 Classified Assets . . . . . . . . . . . . . . . . . . . . . . . 18 Investment Activities . . . . . . . . . . . . . . . . . . . . . 20 Sources of Funds . . . . . . . . . . . . . . . . . . . . . . . 21 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 25 Competition . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Government Supervision and Regulation . . . . . . . . . . . . . 27 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 36 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 36 Item 4A. Executive Officers of the Registrant . . . . . . . . . . . . . 36 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . . . 37 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . 38 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . 40 Item 8. Financial Statements and Supplementary Data . . . . . . . . . 55 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures . . . . . . . . . . 55 Part III Item 10. Directors and Executive Officers of the Registrant . . .. . . 55 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . 57 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . 60 Item 13. Certain Relationship and Related Transactions . . . . . . . . 62 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 63 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . 67 3 PART I ITEM 1. BUSINESS. THE COMPANY Great Southern Bancorp, Inc. Great Southern Bancorp, Inc. ("Bancorp" or "Company") is a bank holding company which, as of December 31, 1998, owned directly all of the stock of Great Southern Bank ("Great Southern" or the "Bank") and other non-banking subsidiaries. Bancorp was incorporated under the laws of the State of Delaware in July 1989 as a unitary savings and loan holding company. After receiving the approval of the Federal Reserve Bank of St. Louis (the "Federal Reserve" or "FRB"), the Company became a one-bank holding company on June 30, 1998 upon the conversion on June 30, 1998, of Great Southern to a Missouri-chartered trust company. As a Delaware corporation, the Company is authorized to engage in any activity that is permitted by the Delaware General Corporation Law and is not prohibited by law or regulatory policy. The Company currently conducts its business as a bank holding company. Through the bank holding company structure, it is possible to expand the size and scope of the financial services offered by the Company beyond those offered by the Bank. The bank holding company structure provides the Company with greater flexibility than the Bank would have to diversify its business activities, through existing or newly formed subsidiaries, or through acquisitions or mergers of other financial institutions as well as other companies. At December 31, 1998, Bancorp's consolidated assets were $836 million, consolidated net loans were $698 million, consolidated deposits were $598 million and consolidated stockholders' equity was $68 million. The assets of the Company consist of the stock of Great Southern, the stock of other financial services companies, interest in a local trust company and cash. Through subsidiaries of the Bank, the Company offers insurance, appraisal, travel, discount brokerage and related services, which are discussed further below. The activities of the Company are funded by retained earnings and through dividends from Great Southern and borrowings from third parties. Activities of the Company may also be funded through sales of additional securities or through income generated by other activities of the Company. At this time, there are no plans regarding such activities. The executive offices of the Company are located at 1451 East Battlefield, Springfield, Missouri 65804, and its telephone number at that address is (417) 887-4400. Great Southern Bank Great Southern was incorporated as a Missouri-chartered mutual savings and loan association in 1923, and in 1989 was converted to a Missouri- chartered stock savings and loan association. In 1994, Great Southern changed to a federal savings bank charter and then on June 30, 1998, changed to a Missouri-chartered trust company (the equivalent of a commercial bank charter). Headquartered in Springfield, Missouri, Great Southern offers a broad range of banking services through its 27 branches located in southwestern and central Missouri. At December 31, 1998, the Bank had total assets of $829 million, deposits of $601 million and stockholders' equity of $62 million, or 7.5% of total assets. Its deposits are insured by the Savings Association Insurance Fund ("SAIF") to the maximum levels permitted by the Federal Deposit Insurance Corporation ("FDIC"). 4 Great Southern is principally engaged in the business of originating residential and commercial real estate loans, commercial business and consumer loans and funding these loans through attracting deposits from the general public, originating brokered deposits and borrowing from the Federal Home Loan Bank of Des Moines (the "FHLBank") and others. For many years, Great Southern has followed a strategy of emphasizing quality loan origination through residential, commercial and consumer lending activities in its local market area. The goal of this strategy has been to maintain its position as one of the leading providers of financial services in its market area, while simultaneously diversifying assets and reducing interest rate risk by originating and holding adjustable-rate loans in its portfolio and selling fixed-rate loans in the secondary market. The Bank continues to place primary emphasis on residential mortgage and other real estate lending while also expanding and increasing its originations of commercial business and consumer loans. The main office of the Bank is located at 1451 East Battlefield, Springfield, Missouri 65804 and its telephone number at that address is (417) 887-4400. Forward-Looking Statements When used in this Form 10-K 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. Primary Market Area Great Southern's primary market area encompasses 15 counties in southwestern and central Missouri. The Bank's branches and ATMs support deposit and lending activities throughout the region, serving such diversified markets as Springfield, Joplin, the resort areas of Branson and Lake of the Ozarks, and various smaller communities in the Bank's market area. Management believes that the Bank's share of the deposit and lending markets in its market area is less than 10% and its affiliates have an even smaller percent, with the exception of the travel agency, which may have a larger percent. 5 Great Southern's largest concentration of loans and deposits is in the Greater Springfield area. With a population of approximately 306,000, the Greater Springfield area is the third largest metropolitan area in Missouri. Employment in this area is diversified, including small and medium-sized manufacturing concerns, service industries, especially in the resort and leisure activities sectors, agriculture, the federal government, and a major state university. Springfield is also a regional health care center. The unemployment rate in this area is, and has consistently been, below the national average. The next largest concentration of loans is in the Branson area, which is located approximately 35 miles south of Springfield and is one of the fastest growing areas in Missouri. The region is a vacation and entertainment center attracting an estimated 6 million tourists annually to its theme parks, resorts, country music shows and other recreational facilities. As a result of the rapid growth of the Branson area, property values increased at unusually high rates in the early 1990s. This has also provided for increased loan demand and a more volatile lending market than has previously been present in the Branson area. Property values have experienced downward pressure during the past few years, partly as a result of this rapid increase. A significant portion of the Bank's loan originations have been secured by properties in the Branson area. Approximately $114 million, or 15%, of the total loan portfolio at December 31, 1998 was secured by commercial real estate, commercial construction, other residential properties, one- to four- family residential properties, and one- to four-family construction properties. Lending Activities-General From its beginnings in 1923 through the early 1980s, Great Southern primarily made long-term, fixed-rate residential real estate loans that it retained in its loan portfolio. Beginning in the early 1980s, Great Southern increased its efforts to originate short-term and adjustable-rate loans. Substantially all of the adjustable-rate mortgage loans originated by Great Southern are held for its own portfolio and substantially all of the long-term fixed-rate residential mortgage loans originated by Great Southern are sold immediately in the secondary market. Beginning in the mid-1990s, Great Southern increased its efforts to originate commercial real estate and other residential loans, primarily with adjustable rates or shorter-term fixed rates. During the past 24 months, some competitor banking organizations have merged with larger institutions and changed their business practices or moved operations away from the local area, and others have consolidated operations from the local area to larger cities. This has provided Great Southern expanded opportunity in these areas as well as in the origination of commercial business and consumer loans, primarily the indirect automobile area. In addition to origination of these loans, the Bank has expanded and enlarged its relationships with smaller banks to purchase participations (at par, with no servicing costs) in loans the smaller banks originate but are unable to retain in their portfolios due to capital limitations. The Bank uses the same underwriting guidelines in evaluating these participations as it does in its direct loan originations. 6 One of the principal historical lending activities of Great Southern is the origination of fixed and adjustable-rate conventional residential real estate loans to enable borrowers to purchase or refinance owner-occupied homes. Great Southern originates a variety of conventional, residential real estate mortgage loans, principally in compliance with Freddie Mac and Fannie Mae standards for resale in the secondary market. Great Southern promptly sells most of the fixed-rate residential mortgage loans that it originates. Depending on market conditions, the ongoing servicing of these loans is at times retained by Great Southern and at other times released to the purchaser of the loan. Great Southern retains substantially all of the adjustable-rate mortgage loans in its portfolio. Another principal lending activity of Great Southern, which has become more prevalent in recent years, is the origination of commercial real estate and construction loans. Since the early 1990s, this area of lending has been an increasing percentage of the loan portfolio and accounts for approximately 38% of the portfolio at December 31, 1998. In addition, Great Southern in recent years has increased its emphasis on the origination of commercial business loans, home equity loans, consumer loans and student loans, and is also an issuer of letters of credit. See "-- Commercial Business Lending," "- Classified Assets," and "- Loan Delinquencies and Defaults" below. Letters of credit are contingent obligations and are not included in the Bank's loan portfolio. Great Southern has a policy of obtaining collateral for substantially all real estate loans. The percentage of collateral value Great Southern will loan on real estate and other property varies based on factors including, but not limited to, the type of property and its location and the borrower's credit history. As a general rule, Great Southern will loan up to 80% of the appraised value on one- to four-family residential property and will loan up to an additional 15% with private mortgage insurance for the loan amount above the 80% level. For commercial real estate and other residential real property loans, Great Southern generally loans up to a maximum of 75% of the appraised value. The origination of loans secured by other property are considered and determined on an individual basis by management with the assistance of any industry guides and other information which may be available. Loan applications are approved at various levels of authority, depending on the type, amount and loan-to-value ratio of the loan. Loan commitments of more than $100,000 ($240,000 in the case of fixed-rate one-to four-family residential loans for resale) must be approved by Great Southern's loan committee. The loan committee is comprised of the CEO of the Bank, as chairman of the committee, and other senior officers of the Bank involved in lending activities. Although Great Southern is permitted under applicable regulations to originate or purchase loans and loan participations secured by real estate located in any part of the United States, the Bank has concentrated its lending efforts in Missouri and Northern Arkansas, with the largest concentration of its lending activity being in southwestern and central Missouri. 7 Loan Portfolio Composition The following table sets forth information concerning the composition of the Bank's loan portfolio in dollar amounts and in percentages (before deductions for loans in process, deferred fees and discounts and allowance for loan losses) as of the dates indicated. The table is based on information prepared in accordance with generally accepted accounting principles and is qualified by reference to financial statements and the notes thereto.
December 31, June 30, --------------- ----------------------------------------------------------------- 1998 1998 1997 1996 1995 --------------- --------------- --------------- --------------- --------------- Amount % Amount % Amount % Amount % Amount % -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ (Dollars in thousands) Real Estate Loans: Residential One- to four- family $218,477 29.3% $219,242 31.2% $244,767 39.5% $249,348 42.5% $243,771 43.5% Other residential 85,828 11.5 89,141 12.7 95,886 15.4 81,191 13.8 77,744 13.9 Commercial 261,201 35.0 244,017 34.7 191,556 30.8 172,478 29.4 133,244 23.8 Residential Construction: One- to four-family 33,292 4.4 16,032 2.3 9,529 1.5 13,455 2.3 13,319 2.4 Other residential 6,553 .9 5,993 .8 4,243 .7 13,533 2.3 23,804 4.2 Commercial construction 19,952 2.7 27,156 3.9 21,932 3.5 16,518 2.8 27,273 4.9 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total real estate loans 625,303 83.8 601,581 85.6 567,913 91.4 546,523 93.1 519,155 92.7 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Other Loans: Consumer loans: Guaranteed student loans 15,931 2.1 12,736 1.8 11,592 1.9 11,256 1.9 11,822 2.1 Automobile 37,152 5.0 23,120 3.3 6,006 .9 6,062 1.1 5,651 1.0 Home equity and improvement 9,292 1.3 5,849 .8 4,183 .7 3,688 0.6 3,518 0.6 Other 992 .1 4,862 .7 5,885 .9 5,921 1.0 5,272 1.0 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total Consumer loans 63,367 8.5 46,567 6.6 27,666 4.4 26,927 4.6 26,263 4.7 Commercial business loans 57,179 7.7 54,722 7.8 25,959 4.2 13,737 2.3 14,515 2.6 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total other loans 120,546 16.2 101,290 14.4 53,625 8.6 40,664 6.9 40,778 7.3 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total loans 745,849 100.0% 702,870 100.0% 621,538 100.0% 587,187 100.0% 559,933 100.0% ===== ===== ===== ===== ===== Less: Loans in process 28,823 28,497 18,812 22,383 22,316 Deferred fees and discounts 1,779 2,774 3,493 3,689 3,761 Allowance for loan losses 16,928 16,373 15,524 14,356 14,601 ------- ------- ------- ------- ------- Total loans receivable, net $698,319 $655,226 $583,709 $546,759 $519,255 ======= ======= ======= ======= =======
8 The following table shows the fixed- and adjustable-rate composition of the Bank's loan portfolio at the dates indicated. The table is based on information prepared in accordance with generally accepted accounting principles.
December 31, June 30, --------------- ------------------------------------------------------------------ 1998 1998 1997 1996 1995 --------------- --------------- --------------- --------------- --------------- Amount % Amount % Amount % Amount % Amount % -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ (Dollars in thousands) Fixed-Rate Loans: Real Estate Loans Residential One- to four- family $ 13,016 1.8 $ 12,799 1.8% $ 12,305 2.0% $ 13,212 2.2% $ 14,260 2.5% Other Residential 39,661 5.3 34,757 5.0 34,467 5.6 34,413 5.9 32,515 5.8 Commercial 60,757 8.2 28,004 4.0 5,865 .9 25,374 4.3 12,774 2.3 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total real estate loans 113,434 15.3 75,560 10.8 52,637 8.5 72,999 12.4 59,549 10.6 Consumer loans 37,080 4.9 27,319 3.9 10,769 1.7 12,844 2.2 11,706 2.1 Commercial business loans 11,956 1.6 1,645 .2 502 .1 415 0.1 994 0.2 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total fixed-rate loans 162,470 21.8 104,524 14.9 63,908 10.3 86,258 14.7 72,249 12.9 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Adjustable-Rate Loans: Real Estate Loans Residential One- to four- family 205,461 27.5 206,443 29.4 232,462 37.4 236,136 40.2 229,510 41.0 Other Residential 46,167 6.2 54,384 7.7 61,419 9.9 46,778 8.0 45,228 8.1 Commercial 200,444 26.9 216,013 30.7 185,691 29.9 147,104 25.0 120,470 21.5 Residential construction: One- to four-family 33,292 4.4 16,032 2.3 9,529 1.5 13,455 2.3 13,319 2.4 Other residential 6,553 .9 5,993 .9 4,243 .7 13,533 2.3 23,804 4.2 Commercial construction 19,952 2.7 27,156 3.9 21,932 3.5 16,518 2.8 27,273 4.9 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total real estate loans 511,869 68.6 526,021 74.9 515,276 82.9 473,524 80.6 459,604 82.1 Consumer loans 26,287 3.5 19,248 2.7 16,897 2.7 14,083 2.4 14,559 2.6 Commercial business loans 45,223 6.1 53,077 7.5 25,457 4.1 13,322 2.3 13,521 2.4 ------ ----- ------- ----- ------- ----- ------- ----- ------- ----- Total adjustable-rate loans 583,379 78.2 598,346 85.1 557,630 89.7 500,929 85.3 487,684 87.1 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total loans 745,849 100.0% 702,870 100.0% 621,538 100.0% 587,187 100.0% 559,933 100.0% ===== ===== ===== ===== ===== Less: Loans in process 28,823 28,497 18,812 22,383 22,316 Deferred fees and discounts 1,779 2,774 3,493 3,689 3,761 Allowance for loan losses 16,928 16,373 15,524 14,356 14,601 ------- ------- ------- ------- ------- Total loans receivable, net $698,319 $655,226 $583,709 $546,759 $519,255 ======= ======= ======= ======= =======
9 Lending Activities - Environmental Issues Loans secured with real property, whether commercial, residential or other, may have a material, negative effect on the financial position and results of operations of the lender if the collateral is environmentally contaminated. The result can be, but is not necessarily limited to, liability for the cost of cleaning up the contamination imposed on the lender by certain federal and state laws, a reduction in the borrower's ability to pay because of the liability imposed upon it for any clean up costs, a reduction in the value of the collateral because of the presence of contamination or a subordination of security interests in the collateral to a super priority lien securing the clean up costs by certain state laws. Management of the Bank is aware of the risk that the Bank may be negatively affected by environmentally contaminated collateral and attempts to control such risk through commercially reasonable methods, consistent with guidelines arising from applicable government or regulatory rules and regulations, and to a more limited extent publications of the lending industry. Management currently is unaware (without, in many circumstances specific inquiry or investigation of existing collateral, some of which was accepted as collateral before risk controlling measures were implemented) of any environmental contamination of real property securing loans in the Bank's portfolio that would subject the Bank to any material risk. No assurance can be made, however, that the Bank will not be adversely affected by environmental contamination. Lending Activities - Residential Real Estate Lending At December 31, 1998 and June 30, 1998, loans secured by residential real estate totaled $304 million and $308 million, respectively, and represented approximately 40.8% and 43.8%, respectively, of the Bank's total loan portfolio. Compared to historical rate levels, fixed rates were low and on the decline during fiscal year June 30, 1998 and the first quarter of the short fiscal year ended December 31, 1998. This caused a higher than normal level of refinancing of adjustable-rate loans into fixed-rate loans during the two periods, and accounted for the decline in the Bank's residential real estate loan portfolio during these two periods. The Bank currently is originating adjustable-rate residential mortgage loans primarily with one-year adjustment periods. Rate adjustments are based upon changes in prevailing rates for one-year U.S. Treasury securities, and are generally limited to 2% maximum annual adjustments as well as a maximum aggregate adjustment over the life of the loan. Accordingly, the interest rates on these loans typically may not be as rate sensitive as is the Bank's cost of funds. Generally, the Bank's adjustable-rate mortgage loans are not convertible into fixed-rate loans, do not permit negative amortization of principal and carry no prepayment penalty. The Bank's portfolio of adjustable-rate mortgage loans also includes a number of loans with different adjustment periods, without limitations on periodic rate increases and rate increases over the life of the loans or which are tied to other short-term market indices. These loans were originated prior to the industry standardization of adjustable-rate loans. Since adjustable- rate mortgage loans have not been subject to an interest rate environment which causes them to adjust to the maximum, such loans entail unquantifiable risks resulting from potential increased payment obligations on the borrower as a result of upward repricing. Further, the adjustable-rate mortgages offered by Great Southern, as well as by many other financial institutions, sometimes provide for initial rates of interest below the rates which would prevail were the index used for pricing applied initially. Compared to fixed-rate mortgage loans, these loans are subject to increased risk of delinquency or default as the higher, fully-indexed rate of interest subsequently comes into effect in replacement of the lower initial rate. The Bank has not experienced a significant increase in delinquencies in adjustable-rate mortgage loans due to a relatively low interest rate environment in recent years. 10 In underwriting one- to four-family residential real estate loans, Great Southern evaluates the borrower's ability to make monthly payments and the value of the property securing the loan. It is the policy of Great Southern that all loans in excess of 80% of the appraised value of the property be insured by a private mortgage insurance company approved by Great Southern for the amount of the loan in excess of 80% of the appraised value. In addition, Great Southern requires borrowers to obtain title and fire and casualty insurance in an amount not less than the amount of the loan. Real estate loans originated by the Bank generally contain a "due on sale" clause allowing the Bank to declare the unpaid principal balance due and payable upon the sale of the property securing the loan. In the case of fixed-rate loans, the Bank generally enforces these due on sale clauses to the extent permitted by law. Lending Activities - Commercial Real Estate and Construction Lending Commercial real estate lending has traditionally been a part of Great Southern's business activities. Beginning in fiscal 1986, Great Southern expanded its commercial real estate lending in order to increase the yield on, and the proportion of interest rate sensitive loans in, its portfolio. Starting early in fiscal 1988, Great Southern reduced its originations of commercial real estate loans due to the lower spreads available at that time and the Bank's increased levels of problem loans in this area. In addition, the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") further limited the Bank's commercial real estate lending, due to limits imposed on the amounts and types of loans the Bank would be permitted to originate. See "Regulation". Starting in fiscal 1992, Great Southern increased its origination of commercial real estate and commercial business loans and has accelerated the rate of increase in recent years. Great Southern expects to continue to maintain or increase the current percentage of commercial real estate loans in its total loan portfolio by originating loans secured by commercial real estate, subject to commercial real estate and other market conditions and to applicable regulatory restrictions. See "Regulation" below. At December 31, 1998 and June 30, 1998, loans secured by commercial real estate totaled $261 million and $244 million, respectively, or approximately 35.0% and 34.7%, respectively, of the Bank's total loan portfolio. At December 31, 1998 and June 30, 1998, construction loans secured by projects under construction and the land on which the projects are located aggregated $60 million and $49 million, respectively, or 8.0% and 7.0%, respectively, of the Bank's total loan portfolio. The majority of the Bank's commercial real estate loans have been originated with adjustable rates of interest, the majority of which are tied to the Bank's prime rate. At the date of origination, the amounts of the loan commitments with respect to substantially all of these loans did not exceed between 75% and 80% of the appraised value of the properties securing the loans. The Bank's construction loans generally have terms of one year or less. The construction loan agreements for one- to four-family and other residential projects generally provide that principal payments are required as individual condominium units or single-family houses are built and sold to a third party. This insures the remaining loan balance, as a proportion to the value of the remaining security, does not increase. Loan proceeds are disbursed in increments as construction progresses. Generally, the amount of each disbursement is based on the construction cost estimate of an independent architect, engineer or qualified fee inspector who inspects the project in connection with each disbursement request. Normally, Great Southern's construction loans are made either as the initial stage of a combination loan (i.e., with a commitment from the Bank to provide permanent financing upon completion of the project) or with a commitment from a third party to provide permanent financing. 11 The Bank's commercial real estate and construction loans generally involve larger principal balances than do its residential loans. Current law subjects state chartered banks to the same loans-to-one borrower restrictions that are applicable to national banks with limited provisions for exceptions. In general, the national bank standard restricts loans to a single borrower to no more than 15% of a bank's unimpaired capital and unimpaired surplus, plus an additional 10% if the loan is collateralized by certain readily marketable collateral. (Real estate is not included in the definition of "readily marketable collateral.") As computed on the basis of the Bank's unimpaired capital and surplus at December 31, 1998, this limit was approximately $11.9 million. See "Regulation". At December 31, 1998 the Bank was in compliance with the loans-to-one borrower limit. Commercial real estate and construction lending generally affords the Bank an opportunity to receive interest at rates higher than those obtainable from residential lending and to receive higher origination and other loan fees. In addition, commercial real estate and construction loans are generally made with adjustable rates of interest or, if made on a fixed-rate basis, for relatively short terms. Nevertheless, commercial real estate lending entails significant additional risks as compared with residential mortgage lending. Commercial real estate loans typically involve large loan balances to single borrowers or groups of related borrowers but generally involve lower loan-to-value ratios. In addition, the payment experience on loans secured by commercial properties is typically dependent on the successful operation of the related real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or in the economy generally. Construction loans also involve additional risks attributable to the fact that loan funds are advanced upon the security of the project under construction, which is of uncertain value prior to the completion of construction. Moreover, because of the uncertainties inherent in estimating construction costs, delays arising from labor problems, material shortages, and other unpredictable contingencies, it is relatively difficult to evaluate accurately the total loan funds required to complete a project, and the related loan-to-value ratios. See also the discussion under the headings "- Classified Assets" and "- Loan Delinquencies and Defaults" below. Lending Activities - Commercial Business Lending At December 31, 1998 and June 30, 1998, respectively, Great Southern had $57.2 million and $54.7 million in commercial business loans outstanding, or 7.7% and 7.8%, respectively, of the Bank's total loan portfolio. Great Southern's commercial business lending activities encompass loans with a variety of purposes and security, including loans to finance accounts receivable, inventory and equipment. Great Southern expects to continue to maintain or increase the current percentage of commercial business loans in its total loan portfolio by originating loans, subject to market conditions and to applicable regulatory restrictions. See "Supervision and Regulation" below. 12 The following table sets forth information regarding the number and amount of the Bank's commercial business loans as of December 31, 1998. The amounts shown do not reflect allowances for losses. See "- Classified Assets" and "- Loan Delinquencies and Defaults." The table is based on information prepared in accordance with generally accepted accounting principles.
Outstanding Number Principal of Loans Balance -------- ----------- (Dollars in thousands) Secured Loans: Accounts receivable, floor plans, inventory and equipment 170 $28,280 Stocks and bonds 32 17,357 Deposit accounts and promissory notes 48 6,581 Other 62 3,236 --- ------ Total secured loans 312 55,454 Unsecured Loans 34 1,725 --- ------ Total Commercial Business Loans 346 $57,179 === ======
Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. Commercial business loans are generally secured by business assets, such as accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. The Bank's management recognizes the generally increased risks associated with commercial business lending. Great Southern's commercial business lending policy emphasizes complete credit file documentation and analysis of the borrower's character, capacity to repay the loan, the adequacy of the borrower's capital and collateral as well as an evaluation of the industry conditions affecting the borrower. Analysis of the borrower's past, present and future cash flows is also an important aspect of Great Southern's credit analysis. The majority of Great Southern's commercial business loans have been to borrowers in southwestern and central Missouri. Great Southern intends to continue its commercial business lending in this geographic area. As part of its commercial business lending activities, Great Southern issues letters of credit and receives fees averaging approximately 1% of the amount of the letter of credit per year. At December 31, 1998, Great Southern had 54 letters of credit outstanding in the aggregate amount of $9.8 million. Approximately 83% of the aggregate amount of these letters of credit were secured, including one $8.2 million letter of credit, secured by real estate, which was issued to enhance the issuance of housing revenue refunding bonds. Lending Activities - Consumer Lending Great Southern management views consumer lending as an important component of its business strategy. Specifically, consumer loans generally have short terms to maturity, adjustable rates or both, thus reducing Great Southern's exposure to changes in interest rates, and carry higher rates of interest than do residential mortgage loans. In addition, Great Southern believes that the offering of consumer loan products helps to expand and create stronger ties to its existing customer base. 13 Great Southern offers a variety of secured consumer loans, including automobile loans, home equity loans and loans secured by savings deposits. In addition, Great Southern also offers home improvement loans, guaranteed student loans and unsecured consumer loans. Consumer loans totaled $63.4 million and $46.6 million at December 31, 1998 and June 30,1998, respectively, or 8.5% and 6.6%, respectively, of the Bank's total loan portfolio. 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 ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is of primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. Beginning in fiscal year June 30, 1998, the Bank implemented indirect lending relationships, primarily with automobile dealerships. Through these dealer relationships, the dealer completes the application with the consumer and then submits it to the Bank for credit approval. While the Bank's initial concentrated effort has been on automobiles, the program is available for use with most tangible products where financing of the product is provided through the seller. Student loans are underwritten in compliance with the regulations of the US Department of Education for the Federal Family Education Loan Programs ("FFELP"). The FFELP loans are administered and guaranteed by the Missouri Coordinating Board for Higher Education as long as the Bank complies with the regulations. The Bank has contracted with the Missouri Higher Education Loan Authority (the "MOHELA") to originate and service these loans and to purchase these loans during the grace period immediately prior to the loans beginning their repayment period. This repayment period is generally at the time the student graduates or does not maintain the required hours of enrollment. Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower's continuing financial strength, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state consumer bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Such loans may also give rise to claims and defenses by a consumer loan borrower against an assignee of such loan such as the Bank, and a borrower may be able to assert against such assignee claims and defenses which it has against the seller of the underlying collateral. Originations, Purchases, Sales and Servicing of Loans The Bank originates loans through internal loan production personnel located in the Bank's main bank and branch offices. Walk-in customers and referrals from real estate brokers and builders are also important sources of loan originations. Management does not expect the high growth of originations experienced during the past five years to continue. However, as long as the lower interest rate environment continues, there is a higher level of financing and refinancing expected than would exist in a higher rate environment. 14 Great Southern also purchases whole real estate loans and participation interests in real estate loans from Freddie Mac as well as private investors, such as other banks, thrift institutions and life insurance companies. Great Southern may limit its ability to control its credit risk when it purchases participations in such loans. The terms of participation agreements vary; however, generally Great Southern may not have direct access to the borrower or information about the borrower, and the institution administering the loan may have some discretion in the administration of performing loans and the collection of non-performing loans. Beginning in fiscal June 30, 1998, Great Southern increased the number and amount of commercial real estate and commercial business loan participations. Due to changes in the financial institutions market locally, there have been several experienced bank executives start up new banks. These banks do not have the capital to handle larger commercial credits. Great Southern subjects these loans to the normal underwriting standards used for originated loans and rejects any credits that do not meet those guidelines. The originating bank retains the servicing of these loans. The bank purchased $ 5.8 million of these loans in the six months ended December 31, 1998 and $ 13.0 million in fiscal June 30, 1998 During the short fiscal year ending December 31, 1998 and the four fiscal years ending June 30, 1998, there were no whole loan purchases by the Bank. At December 31, and June 30, 1998, approximately $7.5 million, or 1.0% and $10.6 million, or 1.5%, respectively, of the Bank's total loan portfolio consisted of purchased whole loans. Great Southern also sells whole real estate loans and participation interests in real estate loans to Freddie Mac as well as private investors, such as other banks, thrift institutions and life insurance companies. These loans and loan participations are generally sold without recourse and for cash in amounts equal to the unpaid principal amount of the loans or loan participations determined using present value yields to the buyer. The sale amounts generally produce gains to the Bank and allow a margin for servicing income on loans when the servicing is retained by the Bank. However, loan participations sold in recent years have primarily been with Great Southern releasing control of the servicing of the loan. The Bank sold one- to four-family whole real estate loans and loan participations in aggregate amounts of $26.1 million, $72.6 million and $26.6 million during the short fiscal year ended December 31, 1998 and the fiscal years ended June 30, 1998 and 1997, respectively. Sales of whole real estate loans and participations in real estate loans generally can be beneficial to the Bank since these sales generally generate income at the time of sale, produce future servicing income on loans where servicing is retained, provide funds for additional lending and other investments, and increase liquidity. Great Southern also sells guaranteed student loans to the MOHELA at the time the borrower is scheduled to begin making repayments on the loans. These loans are generally sold with limited recourse and for cash in amounts equal to the unpaid principal amount of the loans and a premium based on average borrower indebtedness. The premium is based on a sliding scale with a higher premium paid for a larger average borrower indebtedness and a lower premium paid for a smaller average borrower indebtedness. The Bank sold guaranteed student loans in aggregate amounts of $3.1 million, $9.7 million and $7.7 million during the short fiscal year ended December 31, 1998 and the fiscal years ended June 30, 1998 and 1997, respectively. Sales of guaranteed student loans generally can be beneficial to the Bank since these sales remove the burdensome servicing requirements of these types of loans once the borrower begins repayment. 15 Gains, losses and transfer fees on sales of loans and loan participations are recognized at the time of the sale. When real estate loans and loan participations sold have an average contractual interest rate that differs from the agreed upon yield to the purchaser (less the agreed upon servicing fee), resulting gains or losses are recognized in an amount equal to the present value of the differential over the estimated remaining life of the loans. Any resulting discount or premium is accreted or amortized over the same estimated life using a method approximating the level yield interest method. When real estate loans and loan participations are sold with servicing released, as the Bank primarily does, an additional fee is received for the servicing rights. Net gains and transfer fees on sales of loans for the short fiscal year ended December 31, 1998 and fiscal years ended June 30, 1998 and 1997 were $386,000 $1,125,000 and $521,000, respectively. Of these amounts, $31,000, $125,000 and $120,000, respectively, were gains from the sale of guaranteed student loans and $355,000, $1,000,000 and $400,000, respectively, was gains from the sale of fixed-rate residential loans. Prior to fiscal 1996, when whole real estate loans were sold, the Bank primarily retained the responsibility for servicing the loans. The Bank receives a servicing fee for performing these services. The Bank had the servicing rights for approximately $57 million, $60 million and $70 million at December 31, 1998 and June 30, 1998 and 1997, respectively, of loans owned by others. The servicing of these loans generated net servicing fees to the Bank for the short year ended December 31, 1998 and the fiscal years ended June 30, 1998 and 1997 of $189,000, $261,000 and $272,000, respectively. In addition to interest earned on loans and loan origination fees, the Bank receives fees for loan commitments, letters of credit, prepayments, modifications, late payments, transfers of loans due to changes of property ownership and other miscellaneous services. The fees vary from time to time, generally depending on the supply of funds and other competitive conditions in the market. Fees from prepayments, commitments, letters of credit and late payments totaled $301,000, $502,000 and $916,000 for the short year ended December 31, 1998 and the fiscal years ended June 30, 1998 and 1997, respectively. Loan origination fees, net of related costs, are accounted for in accordance with Statement of Financial Accounting Standards No. 91 "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized in interest income using the level-yield method over the contractual life of the loan. For further discussion of this issue see Note 1 of Notes to Consolidated Financial Statements. Allowance for Losses on Loans and Foreclosed Assets Management periodically reviews Great Southern's allowance for loan losses, considering numerous factors, including, but not necessarily limited to, general economic conditions, loan portfolio composition, prior loss experience, and independent appraisals. Further allowances are established when management determines that the value of the collateral is less than the amount of the unpaid principal of the related loan plus estimated costs of the acquisition and sale or when management determines a borrower of an unsecured loan will be unable to make full repayment. Allowances for estimated losses on foreclosed assets (real estate and other assets acquired through foreclosure) are charged to expense, when in the opinion of management, any significant and permanent decline in the market value of the underlying collateral reduces the market value to less than the carrying value of the asset. 16 The Bank has maintained a strong lending presence in the Branson area during recent years primarily due to the substantial growth in the area. While management believes the loans it has funded have been originated pursuant to sound underwriting standards, and individually have no unusual credit risk, the short period of time in which the Branson area has grown, the reduction in values of real estate and the lower than expected increase in tourists visiting the area during recent years, causes some concern as to the credit risk associated with the Branson area as a whole. Due to this concern and the overall growth of the loan portfolio, and more specifically the growth of the commercial business, consumer and commercial real estate loan portfolios, management provided increased levels of loan loss allowances over the past few years. The allowance for losses on loans and foreclosed assets are maintained at an amount management considers adequate to provide for potential losses. Although management believes that it uses the best information available to make such determinations, future adjustments to the allowance for losses on loans and foreclosed assets may be necessary, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the initial determinations. At December 31, and June 30, 1998, Great Southern had an allowance for losses on loans and foreclosed assets of $16.9 million and $16.4 million, respectively, of which $3.3 million and $3.1 million, respectively, had been allocated as an allowance for specific loans, $0 and $0, respectively, had been allocated for foreclosed assets and $0.7 million and $1.5 million, respectively, had been allocated for impaired loans. The allowances are discussed further in Notes 3 and 4 of the Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations.
The allowance for losses on loans at the date indicated is summarized as follows. The table is based on information prepared in accordance with generally accepted accounting principles. December 31, June 30, ---------------- ----------------------------------------------------------------------- 1998 1998 1997 1996 1995 ---------------- ---------------- ---------------- ----------------- ---------------- % of % of % of % of % of Loans to Loans to Loans to Loans to Loans to Total Total Total Total Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- (Dollars in thousands) One- to four-family residential and construction $ 931 33.4% $ 811 33.5% $ 1,039 41.0% $ 757 44.8% $ 670 45.9% Other residential and construction 613 12.4 615 13.5 35 16.1 503 16.1 480 8.1 Commercial real estate and construction and commercial business 7,147 45.7 11,348 46.4 9,699 38.5 7,875 34.5 7,596 31.3 Consumer 465 8.5 743 6.6 502 4.4 488 4.6 546 4.7 Unallocated 7,772 0.0 2,586 0.0 4,249 0.0 4,733 0.0 5,309 0.0 ------ ----- ------ ----- ------ ----- ----- ----- ----- ----- Total $16,928 100.0% $16,373 100.0% $15,524 100.0% $14,356 100.0% $14,601 100.0% ====== ===== ====== ===== ====== ===== ===== ===== ===== =====
17 The following table sets forth an analysis of the Bank's allowance for losses on loans showing the details of the allowance by types of loans and the allowance balance by loan type. The table is based on information prepared in accordance with generally accepted accounting principles.
Year Ended December 31, June 30, ------------ ---------------------------------------------- 1998 1998 1997 1996 1995 ------- ------- ------- ------- ------- (Dollars in thousands) Balance at beginning of period $16,373 $15,524 $14,356 $14,601 $13,636 ------ ------ ------ ------ ------ Charge-offs: One- to four-family residential 0 45 185 189 13 Other residential 187 67 34 1,072 474 Commercial real estate 185 529 364 509 227 Construction 0 82 14 0 0 Consumer 1,077 287 70 198 48 Commercial business 50 133 9 25 120 ------ ------ ------ ------ ------ Total charge-offs 1,499 1,143 676 1,993 882 ------ ------ ------ ------ ------ Recoveries: One- to four-family residential 147 22 0 33 0 Other residential 0 1 11 0 0 Commercial real estate 0 68 88 136 442 Consumer 552 10 9 48 22 Commercial business 64 38 30 80 64 ------ ------ ------ ------ ------ Total recoveries 763 139 138 297 528 ------ ------ ------ ------ ------ Net charge-offs (recoveries) 736 1,004 538 1,696 354 Provision for losses on loans (charged to expense) 1,291 1,853 1,706 1,451 1,319 ------ ------ ------ ------ ------ Balance at end of period $16,928 $16,373 $15,524 $14,356 $14,601 ====== ====== ====== ====== ====== Ratio of net charge-offs to average loans outstanding 0.23% 0.16% 0.09% 0.32% 0.07% ==== ==== ==== ==== ====
Loan Delinquencies and Defaults When a borrower fails to make a required payment on a loan, the Bank attempts to cause the delinquency to be cured by contacting the borrower. In the case of loans secured by residential real estate, a late notice is sent 15 days after the due date. If the delinquency is not cured by the 30th day, a delinquent notice is sent to the borrower. Additional written contacts are made with the borrower 45 and 60 days after the due date. If the delinquency continues for a period of 65 days, the Bank usually institutes appropriate action to foreclose on the collateral. The actual time it takes to foreclose on the collateral varies depending on the particular circumstances and the applicable governing law. If foreclosed, the property is sold at public auction and may be purchased by the Bank. Delinquent consumer loans are handled in a generally similar manner, except that initial contacts are made when the payment is five days past due and appropriate action may be taken to collect any loan payment that is delinquent for more than 15 days. The Bank's procedures for repossession and sale of consumer collateral are subject to various requirements under the applicable consumer protection laws as well as other applicable laws and the determination by the Bank that it would be beneficial from a cost basis. 18 Delinquent commercial business loans and loans secured by commercial real estate are initially handled by the loan officer in charge of the loan, who is responsible for contacting the borrower. The President and Senior Lending Officer also work with the commercial loan officers to see that necessary steps are taken to collect such delinquent loans. In addition, the Bank has a Problem Loan Committee which meets at least monthly and reviews all commercial loans 30 days or more delinquent as well as other loans not 30 days delinquent which management feels may present possible collection problems. If an acceptable workout of a delinquent commercial loan cannot be agreed upon, the Bank may initiate foreclosure on any collateral securing the loan. However, in all cases, whether a commercial or other loan, the prevailing circumstances may be such that management may determine it is in the best interest of the Bank not to foreclose on the collateral. The following table sets forth our loans delinquent 30 - 89 days by type, number, amount and percentage of type at December 31, 1998. Loans Delinquent for 30-89 Days ----------------------------------- Percent of Total Delinquent Number Amount Loans -------- ---------- --------------- (Dollars in Thousands) Real Estate: One- to four-family............... 344 $15,151 64% Other residential................. -- -- -- Commercial........................ 18 5,889 25 Construction or development....... 14 1,224 5 Consumer............................ 135 1,065 4 Commercial business................. 13 391 2 --- ------ --- Total.......................... 524 $23,720 100% === ====== === Classified Assets Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered to be of lesser quality as "substandard," "doubtful" or "loss" assets. The regulations require insured institutions to classify their own assets and to establish prudent general allowances for losses from assets classified "substandard" or "doubtful." For the portion of assets classified as "loss," an institution is required to either establish specific allowances of 100% of the amount classified or charge such amount off its books. Assets that do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess a potential weakness, are required to be designated "special mention" by management. In addition, a bank's regulators may require the establishment of a general allowance for losses based on assets classified as "substandard" and "doubtful" or based on the general quality of the asset portfolio of the bank. Following are the total classified assets per the Bank's internal asset classification list. There were no significant off- balance sheet items classified at December 31, 1998.
Total Allowance Asset Category Substandard Doubtful Loss Classified for Losses ----------------------- ----------- -------- ---- ---------- ---------- (Dollars in thousands) Loans $17,246 $ 12 $117 $17,375 $16,928 Foreclosed assets 2,620 -- -- 2,620 -- ------ ----- --- ------ ------ Total $19,866 $ 12 $117 $19,995 $16,928 ====== ===== === ====== ======
19 The table below sets forth the amounts and categories of non-performing assets (classified loans which are not performing under regulatory guidelines and all foreclosed assets, including assets acquired in settlement of loans) in the Bank's loan portfolio at the times indicated. Loans generally are placed on non-accrual status when the loan becomes 90 days delinquent or when the collection of principal, interest, or both, otherwise becomes doubtful. For all years presented, the Bank has not had any troubled debt restructurings, which involve forgiving a portion of interest or principal on any loans or making loans at a rate materially less than that of market rates. It has been the Bank's practice to sell its foreclosed assets to new borrowers and originate loans with higher loan-to-value ratios than those generally allowed for the Bank's one- to four-family residential loans. For such loans originated in fiscal 1993 or fiscal 1994, the Bank adopted a policy of presenting such loans in the non-performing assets category until sufficient payments of principal and interest are received or the loan has a 90% loan-to- value ratio. The majority of the loans presented in this category are performing and the Bank is accounting for the interest on these loans on the accrual method.
December 31, June 30, ------------ ------------------------------------------- 1998 1998 1997 1996 1995 ------- ------- ------- ------- ------- (Dollars in thousands) Non-accruing loans: One- to four-family residential $ 137 $ 522 $ 2,018 $ 1,195 $ 149 Other residential 2,554 4,535 3,826 934 -- Commercial real estate 2,496 1,687 316 1,407 2,004 One- to four-family construction 0 91 655 121 -- Consumer 33 147 219 202 260 Commercial business 1,061 80 600 744 652 Commercial construction 1,137 -- -- 851 -- ------ ------ ------ ------ ------ Total non-accruing loans 7,418 7,062 7,634 5,454 3,065 ------ ------ ------ ------ ------ Loans over 90 days delinquent still accruing interest: One- to four-family residential 2,243 -- -- -- -- Consumer 244 -- -- -- -- Commercial business 241 -- -- -- -- ------ ------ ------ ------ ------ Total over 90 days accruing loans 2,728 -- -- -- -- ------ ------ ------ ------ ------ Loans in connection with sales of foreclosed assets -- 145 246 453 775 ------ ------ ------ ------ ------ Total non-performing loans 10,146 7,207 7,880 5,907 3,840 ------ ------ ------ ------ ------ Foreclosed assets: One- to four-family residential 438 400 544 517 695 Other residential 1,075 175 1,150 7,121 3,359 Commercial real estate 1,297 4,176 4,276 3,309 4,878 ------ ------ ------ ------ ------ Total foreclosed assets 2,810 4,751 5,970 10,947 8,932 ------ ------ ------ ------ ------ Total non-performing assets $12,956 $11,958 $13,850 $16,854 $12,772 ====== ====== ====== ====== ====== Total non-performing assets as a percentage of average total assets 1.75% 1.60% 2.07% 2.45% 2.18% ==== ==== ==== ==== ====
Impaired loans totaled $10,146,000 at December 31, 1998 and $9,485,000 at June 30, 1998. 20 For the six months ended December 31, 1998, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $593,000. The amount that was included in interest income on such loans was $225,000 for the six months ended December 31, 1998. The level of non-performing assets is primarily attributable to the Bank's commercial real estate, other residential, construction and commercial business lending activities. These activities generally involve significantly greater credit risks than single-family residential lending. The level of non- performing assets increased at a rate greater than that of the Bank's commercial lending portfolio in fiscal June 30, 1996, and at a rate less than that of the Bank's commercial lending portfolio in the six months ended December 31, 1998 and in fiscal June 30, 1995, 1997 and 1998. For a discussion of the risks associated with these activities, see the discussions under the heading "- Commercial Real Estate and Construction Lending" and "- Commercial Business Lending" above. Investment Activities The Bank's investment securities portfolio at December 31, 1998 contained one security with an aggregate book value in excess of 10% of the Bank's retained earnings, excluding those issued by the United States Government, or its agencies. This security was issued by The Missouri Development Finance Board and has an aggregate book and market value of approximately $9,920,000 at December 31, 1998. The Bank's investment securities portfolio at June 30, 1998 contained no securities (tax exempt or of any issuer) with an aggregate book value in excess of 10% of the Bank's retained earnings, excluding those issued by the United States Government, or its agencies. As of December 31, 1998 and June 30, 1998, the Bank held approximately $59.0 million and $50.4 million, respectively, in principal amount of investment securities which the Bank intends to hold until maturity. As of such dates, these securities had market values of approximately $59.2 million and $50.5 million, respectively. In addition, as of December 31, 1998 and June 30, 1998, the Company held approximately $6.5 million and $6.4 million, respectively, in principal amount of investment securities which the Company classified as available-for-sale. This issue is discussed further in Notes 1 and 2 of Notes to Consolidated Financial Statements. The amortized cost and approximate fair values of, and gross unrealized gains and losses on, investment securities at the dates indicated are summarized as follows. The table is based on information prepared in accordance with generally accepted accounting principles. Yields on tax exempt obligations have not been computed on a tax equivalent basis.
December 31, 1998 -------------------------------------------------- Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----------- (Dollars in thousands) AVAILABLE-FOR-SALE SECURITIES: Equity securities $ 5,926 $550 $ 0 $ 6,476 ====== === === ===== HELD-TO-MATURITY SECURITIES: U.S. Treasury $ 602 $ 2 $ 0 $ 604 U.S. government agencies 46,966 177 10 47,133 States and political subdivisions 11,470 7 0 11,477 ------ --- --- ------ Total held-to-maturity securities $59,038 $186 $ 10 $59,214 ====== === === ======
21
June 30, 1998 -------------------------------------------------- Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----------- (Dollars in thousands) AVAILABLE-FOR-SALE SECURITIES: Equity securities $ 4,645 $1,718 $ 0 $ 6,363 ====== ===== === ===== HELD-TO-MATURITY SECURITIES: U.S. Treasury $ 2,103 $ 4 $ 0 $ 2,107 U.S. government agencies 48,260 174 0 48,434 ------ ----- --- ------ Total held-to-maturity securities $50,363 $ 178 $ 0 $50,541 ====== ===== === ====== June 30, 1997 -------------------------------------------------- Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----------- (Dollars in thousands) AVAILABLE-FOR-SALE SECURITIES: Equity securities $ 5,175 $2,233 $ 0 $ 7,408 ===== ===== === ====== HELD-TO-MATURITY SECURITIES: U.S. Treasury $ 7,057 $ 8 $ 4 $ 7,061 U.S. government agencies 42,700 110 12 42,798 ------ ----- --- ------ Total held-to-maturity securities $49,757 $ 118 $ 16 $49,859 ====== ===== === ======
The following table presents the contractual maturities and weighted average yields of held-to-maturity securities at December 31, 1998. The table is based on information prepared in accordance with generally accepted accounting principles. Amortized Approximate Cost Yield Fair Value ------- --------- ----------- (Dollars in thousands) In one year or less $18,150 6.19% $18,218 After one through five years 39,338 5.79% 39,439 After five through ten years 1,550 4.97% 1,557 ------ ------ Total $59,038 $59,214 ====== ====== Sources of Funds General. Deposit accounts have traditionally been the principal source of the Bank's funds for use in lending and for other general business purposes. In addition to deposits, the Bank obtains funds through advances from the Federal Home Loan Bank of Des Moines, Iowa ("FHLBank"), loan repayments, loan sales, and cash flows generated from operations. Scheduled loan payments are a relatively stable source of funds, while deposit inflows and outflows and the related costs of such funds have varied widely. Borrowings such as FHLBank advances may be used on a short-term basis to compensate for seasonal reductions in deposits or deposit inflows at less than projected levels and may be used on a longer-term basis to support expanded lending activities. The availability of funds from loan sales is influenced by general interest rates as well as the volume of originations. 22 Deposits. The Bank attracts both short-term and long-term deposits from the general public by offering a wide variety of accounts and rates. In recent years, the Bank has been required by market conditions to rely increasingly on short-term accounts and other deposit alternatives that are more responsive to market interest rates than the passbook accounts and regulated fixed-interest- rate, fixed-term certificates that were the Bank's primary source of deposits prior to 1978. The Bank offers regular passbook accounts, checking accounts, various money market accounts, fixed-interest-rate certificates with varying maturities, certificates of deposit in minimum amounts of $100,000 ("Jumbo" accounts), brokered certificates and individual retirement accounts. The composition of the Bank's deposits at the end of recent periods is set forth in Note 6 of Notes to Consolidated Financial Statements. Brokered deposits. After the reduction of deposit insurance premiums in the last calendar quarter of 1996, the brokered deposit market became a viable alternative source to fund the Bank's loan demand. Brokered deposits are marketed through national brokerage firms to their customers in $1,000 increments. The average investor is estimated to have a balance of less than $20,000. The Bank maintains only one account for the total deposit amount while the records of detailed owners are maintained by the Depository Trust Company under the name of CEDE & Co. The deposits are transferable just like a stock or bond investment and the customer can open the account with only a phone call, just like buying a stock or bond. This provides a large deposit for the Bank at a lower operating cost since the Bank only has one account to maintain versus several accounts with multiple interest and maturity checks. Unlike non-brokered deposits where the deposit amount can be withdrawn with a penalty for any reason, including increasing interest rates, a brokered deposit can only be withdrawn in the event of the death, or court declared mental incompetence of the depositor. This allows the Bank to better manage the maturity of its deposits The following table sets forth the dollar amount of deposits, by interest rate range, in the various types of deposit programs offered by the Company at the dates indicated. The table is based on information prepared in accordance with generally accepted accounting principles.
December 31, June 30, ------------------ ------------------------------------------ 1998 1998 1997 ------------------ ------------------ ------------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total -------- -------- -------- -------- --------- -------- (Dollars in thousands) Time deposits: 0.00% - 3.99% $ 435 .07 $ 62 .01 $ 724 .16% 4.00% - 4.99% 69,178 11.58 17,476 3.18 14,166 3.10 5.00% - 5.99% 259,844 43.48 257,704 46.87 212,238 46.51 6.00% - 6.99% 32,262 5.40 51,064 9.29 51,540 11.29 7.00% - 7.99% 3,845 .64 3,711 .68 12,326 2.70 8.00% - 10.25% 240 .04 251 .05 507 .11 ------- ------ ------- ------ ------- ------ Total Time deposits 365,804 61.21 330,268 60.08 291,501 63.87 Non-interest-bearing demand deposits 43,211 7.23 29,375 5.34 14,572 3.20 Savings deposits (2.50%-2.51%-2.51%) 32,190 5.39 34,644 6.30 35,065 7.68 Interest-bearing demand deposits (2.39%-2.36%-2.41%) 156,420 26.17 155,485 28.28 115,232 25.25 ------- ------ ------- ------ ------- ------ Total Deposits $597,625 100.00% $549,772 100.00% $456,370 100.00% ======= ====== ======= ====== ======= ======
23 A table showing rate and maturity information for the Bank's time deposits as of December 31, 1998 is presented in Note 6 of Notes to Consolidated Financial Statements. The following table sets forth the deposit flows of the Bank during the periods indicated. Net increase refers to the amount of deposits during a period less the amount of withdrawals during the period. Deposit flows at banks may also be influenced by external factors such as competitors' pricing, governmental credit policies and, particularly in recent periods, depositors' perceptions of the adequacy of federal insurance of accounts. The table is based on information prepared in accordance with generally accepted accounting principles.
Short Period Ended Year Ended June 30, December 31, ------------------------- 1998 1998 1997 ------------------ ---------- ---------- (Dollars in thousands) Opening balance $ 549,772 $ 456,370 $ 395,238 Deposits 1,976,345 2,716,544 2,143,074 Withdrawals 1,937,481 2,637,581 2,092,700 Interest credited 8,989 14,439 10,758 --------- --------- --------- Ending Balance $ 597,625 $ 549,772 $ 456,370 ========= ========= ========= Net increase $47,853 $93,402 $61,132 ====== ====== ====== Percent increase 8.70% 20.47% 15.47% ==== ===== =====
The variety of deposit accounts offered by the Bank has allowed it to be competitive in obtaining funds and has allowed it to respond with flexibility to changes in consumer demand. The Bank has become more susceptible to short- term fluctuations in deposit flows, as customers have become more interest rate conscious. The Bank manages the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, management believes that its passbook and certificate accounts are relatively stable sources of deposits, while its checking accounts have proven to be more volatile. However, the ability of the Bank to attract and maintain deposits, and the rates paid on these deposits, has been and will continue to be significantly affected by money market conditions.
The following table sets forth the time remaining until maturity of the Bank's time deposits as of December 31, 1998. The table is based on information prepared in accordance with generally accepted accounting principles. Maturity --------------------------------------------------------- 3 Over 3 Over Over Months Months to 6 to 12 12 or Less 6 Months Months Months Total -------- --------- -------- -------- -------- (Dollars in thousands) Time deposits: Less than $100,000 $ 52,273 $ 38,367 $25,720 $ 23,066 $139,426 $100,000 or more 27,389 13,740 16,597 15,616 73,342 Brokered 28,169 17,439 13,424 88,613 147,645 Public funds (1) 2,077 2,235 977 102 5,391 ------- ------- ------ ------- ------- Total $109,908 $ 71,781 $56,718 $127,397 $365,804 ======= ======= ====== ======= ======= (1) Deposits from governmental and other public entities.
24 Borrowings. Great Southern's other sources of funds include advances from the FHLBank, Qualified Loan Review arrangement and treasury tax & loan note option with the Federal Reserve Bank and, prior to converting to a state trust charter at June 30, 1998, included collateralized borrowings. As a member of the FHLBank, the Bank is required to own capital stock in the FHLBank and is authorized to apply for advances from the FHLBank. FIRREA requires that all long-term FHLBank advances be for the purpose of financing residential housing. Pursuant to FIRREA, the Federal Housing Finance Board has promulgated regulations that establish standards of community investment for FHLBank members to maintain continued access to long-term advances. Each FHLBank credit program has its own interest rate, which may be fixed or variable, and range of maturities. The FHLBank may prescribe the acceptable uses for these advances, as well as other risks on availability, limitations on the size of the advances and repayment provisions. The Bank has a $50 million revolving line of credit with the FHLBank, which provides for immediately available funds. At December 31, 1998, none of the revolving line was in use with $50 million remaining available. The Bank can draw these funds for lending or other liquidity needs with some limitations. The Federal Reserve Bank ("FRB") has a Qualified Loan Review ("QLR") program where the Bank can borrow on a temporary basis using commercial loans pledged to the FRB. Under the QLR program, the Bank can borrow any amount up to a calculated collateral value of the commercial loans pledged, for virtually any reason that creates a temporary cash need. Examples of this could be; (i) the need to disburse one or several loans but the permanent source of funds will not be available for a few days; (ii) a temporary spike in interest rates on other fund sources that are being used; or (iii) the need to purchase a security for collateral pledging purposes a few days prior to the funds becoming available on an existing security that is maturing. The Bank had commercial loans pledged to the FRB at December 31, 1998 that would have allowed approximately $210.5 million to be borrowed under the above arrangement. The Company has borrowing arrangements in place with the brokerage firms it conducts business with to borrow on margin against its available-for-sale securities. Theses borrowings are limited to a percent of the market value of the collateral, generally 50%, and are used by the Company for short-term cash needs including the purchase of available-for-sale securities and the purchase of the Company's stock. The Bank's borrowings previous to June 30, 1998 also include borrowings collateralized with whole mortgage loans from the Bank's portfolio and investment securities from the Bank's held-to-maturity portfolio. The following table sets forth the maximum month-end balances and average daily balances of FHLBank advances and collateralized borrowings during the periods indicated. The table is based on information prepared in accordance with generally accepted accounting principles. Short Period Ended Year Ended June 30, December 31, -------------------- 1998 1998 1997 ------------------ -------------------- (Dollars in thousands) Maximum Balance: FHLBank advances $169,593 $211,270 $207,576 Collateralized borrowings 2,387 41,176 28,744 Average Balances: FHLBank advances $147,839 $161,913 $166,023 Collateralized borrowings 770 32,234 18,894 25 The following table sets forth certain information as to the Company's FHLBank advances and collateralized borrowings at the dates indicated. The table is based on information prepared in accordance with generally accepted accounting principles. December 31, June 30, ------------ ------------------- 1998 1998 1997 -------- -------- ------- (Dollars in thousands) FHLBank advances $158,452 $169,509 $151,822 Collateralized borrowings -- -- 28,744 Other borrowings 798 -- -- ------- ------- ------- Total borrowings $159,250 $169,509 $180,566 ======= ======= ======= Weighted average interest rate of FHLBank advances 5.60% 6.00% 6.42% ==== ==== ==== Weighted average interest rate of collateralized and Other borrowings 7.20% n/a 3.24% ==== ==== ==== Subsidiaries Great Southern. As a Missouri-chartered trust company, Great Southern may invest up to 3% of its assets in service corporations. At December 31, 1998, the Bank's total investment in Great Southern Financial Corporation ("GSFC") was $1.3 million. GSFC is incorporated under the laws of the State of Missouri. This subsidiary is primarily engaged in the following activities: Appraisal Services. Appraisal Services, Inc., incorporated in 1976, is a wholly-owned subsidiary of GSFC and performs primarily residential real estate appraisals for a number of clients, the majority of which is for the Bank and its loan customers. Appraisal Services, Inc. had net income of $6,000 and $3,000 in the six months ended December 31, 1998 and 1997, respectively, and $13,000 in the fiscal year ended June 30, 1998. General Insurance Agency. Great Southern Insurance, a division of GSFC, was organized in 1974. It acts as a general property, casualty and life insurance agency for a number of clients, including the Bank. Great Southern Insurance had net income of $58,000 and $65,000 in the six months ended December 31, 1998 and 1997, respectively, and $145,000 in the fiscal year ended June 30, 1998. Travel Agency. Great Southern Travel, a division of GSFC, was organized in 1976. At December 31, 1998, it was the largest travel agency based in southwestern Missouri and estimated to be in the top 5% (based on gross revenue) of travel agencies nation-wide. Great Southern Travel operates from 26 full-time locations, including a facility at the Springfield-Branson Regional Airport, and additional part-time locations. It engages in personal, commercial and group travel services. Great Southern Travel had net income of $119,000 and $57,000 in the six months ended December 31, 1998 and 1997, respectively, and $122,000 in the fiscal year ended June 30, 1998. GSB One, L.L.C. At December 31, the Bank's total investment in GSB One, L.L.C. ("GSB One") and GSB Two, L.L.C. ("GSB Two") was $256 million. The capital contribution was made by transferring participations in loans to GSB Two. GSB One is a Missouri limited liability company that was incorporated in March of 1998. Currently the only activity of this company is the ownership of GSB Two. 26 GSB Two, L.L.C. This is a Missouri limited liability company that was incorporated in March of 1998. GSB Two is a Real Estate Investment Trust ("REIT"). It holds participations in real estate mortgages from the Bank. The Bank continues to service the loans in return for a management and servicing fee from GSB Two. GSB Two had net income of $8.2 million in the six months ended December 31, 1998 and no material net income or loss in the fiscal year ended June 30, 1998. Great Southern Capital Management, Inc. At December 31, 1998, the Bank's total investment in Great Southern Capital Management ("Capital Management") was $425,000. Capital Management was incorporated and organized in 1988 under the laws of the state of Missouri. Capital Management is a registered broker/dealer and a member of the National Association of Securities Dealers, Inc. ("NASD") and the Securities Investors Protection Corporation ("SIPC"). Capital Management offers a full line of financial consultation, investment counseling and discount brokerage services including execution of transactions involving stocks, bonds, options, mutual funds and other securities. In addition, Capital Management is registered as a municipal securities dealer. Capital Management operates through Great Southern's branch office network. Capital Management had net income of $36,000 and $153,000 in the six months ended December 31, 1998 and 1997, respectively, and $279,000 in the fiscal year ended June 30, 1998. Competition Great Southern faces strong competition both in originating real estate and other loans and in attracting deposits. Competition in originating real estate loans comes primarily from other commercial banks, savings institutions and mortgage bankers making loans secured by real estate located in the Bank's market area. Commercial banks and finance companies provide vigorous competition in consumer lending. The Bank competes for real estate and other loans principally on the basis of the interest rates and loan fees it charges, the types of loans it originates and the quality of services it provides to borrowers. The other lines of business of the Bank including loan servicing and loan sales, as well as the Bank and Company subsidiaries, face significant competition in their markets. The Bank faces substantial competition in attracting deposits from other commercial banks, savings institutions, money market and mutual funds, credit unions and other investment vehicles. The Bank attracts a significant amount of deposits through its branch offices primarily from the communities in which those branch offices are located; therefore, competition for those deposits is principally from other commercial banks and savings institutions located in the same communities. The Bank competes for these deposits by offering a variety of deposit accounts at competitive rates, convenient business hours, and convenient branch and ATM locations with inter-branch deposit and withdrawal privileges at each branch location. Employees At December 31, 1998, the Bank and its affiliates had a total of 597 employees, including 292 part-time employees. None of the Bank's employees is represented by any collective bargaining agreement. Management considers its employee relations to be good. 27 Supervision and Regulation General On June 30, 1998, the Bank converted from a federal savings bank to a Missouri-chartered trust company, with the approval of the Missouri Division of Finance ("MDF") and the FRB. By converting, the Bank was able to expand its consumer and commercial lending authority. Bancorp and its subsidiaries are subject to supervision and examination by applicable federal and state banking agencies. The earnings of the Bank's subsidiaries, and therefore the earnings of Bancorp, are affected by general economic conditions, management policies and the legislative and governmental actions of various regulatory authorities, including the FRB, the Federal Deposit Insurance Corporation ("FDIC") and the MDF. In addition, there are numerous governmental requirements and regulations that affect the activities of the Company and its subsidiaries. The following is a brief summary of certain aspects of the regulation of the Company and Great Southern and does not purport to fully discuss such regulation. Bank Holding Company Regulation As a result of the conversion, the Company became a bank holding company, subject to comprehensive regulation by the FRB under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and the regulations of the FRB. As a bank holding company, the Company is required to file reports with the FRB and such additional information as the FRB may require, and is subject to regular inspections by the FRB. The FRB also has extensive enforcement authority over bank holding companies, including, among others things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulation as well as unsafe or unsound practices. Under FRB policy, a bank holding company must serve as a source of strength for its subsidiary banks. Under this policy the FRB may require, and has required in the past, bank holding companies to contribute additional capital to undercapitalized subsidiary banks. Under the BHCA, a bank holding company must obtain FRB approval before, among other matters: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company The BHCA prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by FRB regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The list of activities permitted by the FRB includes, among other things, operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers' checks and United States Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and providing securities brokerage services for customers. The scope of permissible activities may be expanded from time to time by the FRB. Such activities may also be affected by federal legislation. 28 Interstate Banking and Branching In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") was enacted to ease restrictions on interstate banking. Effective September 29, 1995, the Riegle-Neal Act allows the FRB to approve an application of an adequately capitalized and adequately managed bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than such holding company's home state, without regard to whether the transaction is prohibited by the laws of any state. The FRB may not approve the acquisition of a bank that has not been in existence for the minimum time period (not exceeding five years) specified by the statutory law of the host state. The Riegle-Neal Act also prohibits the FRB from approving an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank's home state or in any state in which the target bank maintains a branch. The Riegle-Neal Act does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a bank or bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit contained in the Riegle-Neal Act. Additionally, the federal banking agencies are authorized to approve interstate merger transactions without regard to whether such transactions are prohibited by the law of any state, unless the home state of one of the banks opted out of the Riegle-Neal Act by adopting a law after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997 which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out- of-state banks. Texas and Montana have opted out. Interstate acquisitions of branches are permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions are also subject to the nationwide and statewide insured deposit concentration amounts described above. The Riegle-Neal Act authorizes the OCC and the FDIC to approve interstate branching de novo by national and state banks, respectively, only in states which specifically allow for such branching. As required by the Riegle-Neal Act, the OCC, FDIC and FRB have prescribed regulations which prohibit any out- of-state bank from using the interstate branching authority primarily for the purpose of deposit production, including guidelines to ensure that interstate branches operated by an out-of-state bank in a host state reasonably help to meet the credit needs of the communities which they serve. Certain Transactions with Affiliates and Other Persons Transactions involving a bank and its affiliates are subject to sections 23A and 23B of the Federal Reserve Act. Generally, these requirements and limits restrict certain of these transactions to a percentage of the Bank's capital and require all such transactions to be on terms at least as favorable to the Bank as are available in transactions with non-affiliates. In addition, a bank generally may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire shares of an affiliate. These provisions currently apply to transactions between the Bank and the Company or the Bank and the Holding Company's non-bank subsidiary. Affiliates of Great Southern include, without limitation, any company whose management is under a common controlling influence with the management of the Bank, any company controlled by controlling stockholders of the Bank, any company with a majority of interlocking directors with the Bank, and any company sponsored and advised on a contractual basis by the Bank or any of its affiliates. 29 Prior to the enactment of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") on August 9, 1989, Great Southern, like many financial institutions, followed a policy of granting loans to certain of its officers, directors and employees, generally for the financing of their personal residences at favorable interest rates. Generally, residential loans were granted at interest rates 1% above the Bank's cost of funds, subject to annual adjustments. These loans were made in the ordinary course of business, on substantially the same terms and collateral as those of comparable transactions prevailing at the time, and did not involve more than the normal risk of collectibility or present other unfavorable features. All loans by Great Southern to its directors and executive officers are subject to FRB regulations restricting loans and other transactions with affiliated persons of Great Southern. FIRREA required that all such transactions be on terms and conditions comparable to those for similar transactions with non-affiliates and also provided that the Company could have a policy allowing favorable rate loans to employees as long as it is an employee benefit available to a broad group of employees within guidelines defined by the policy. The Bank has such a policy in place that allows for loans to full-time employees with at least two years of service. The terms are the same as those used prior to FIRREA. Dividends The FRB has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the FRB's view that a bank holding company should pay cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the holding company's capital needs, asset quality and overall financial condition. The FRB also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the FRB, the FRB may prohibit a bank holding company from paying any dividends if the holding company's bank subsidiary is classified as "undercapitalized." Bank holding companies are required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, FRB order, or any condition imposed by, or written agreement with, the FRB. This notification requirement does not apply to any company that meets the well-capitalized standard for commercial banks, has a safety and soundness examination rating of at least a "2" and is not subject to any unresolved supervisory issues. Under Missouri law, the Bank may pay dividends from certain undivided profits and may not pay dividends if its capital is impaired. The Federal banking agencies have adopted capital-related regulations. Under those regulations, a bank will be well capitalized if it: (i) has a risk- based capital ratio of 10% or greater; (ii) has a ratio of Tier I capital to risk-adjusted assets of 6% or greater; (iii) has a ratio of Tier I capital to adjusted total assets of 5% or greater; and (iv) is not subject to an order, written agreement, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. A bank will be adequately capitalized if it is not "well capitalized" and: (i) has a risk-based capital ratio of 8% or greater; (ii) has a ratio of Tier I capital to risk-adjusted assets of 4% or greater; and (iii) has a ratio of Tier I capital to adjusted total assets of 4% or greater (except that certain associations rated "Composite 1" under the federal banking agencies' CAMEL rating system may be adequately capitalized if their ratios of core capital to adjusted total assets are 3% or greater). As of December 31, 1998, the Bank was "well capitalized." 30 Banking agencies have recently adopted final regulations that mandate that regulators take into consideration concentrations of credit risk and risks from non-traditional activities, as well as an institution's ability to manage those risks, when determining the adequacy of an institution's capital. This evaluation will be made as part of the institution's regular safety and soundness examination. Banking agencies also have recently adopted final regulations requiring regulators to consider interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in the evaluation of a bank's capital adequacy. Concurrently, banking agencies have proposed a methodology for evaluating interest rate risk. After gaining experience with the proposed measurement process, these banking agencies intend to propose further regulations to establish an explicit risk-based capital charge for interest rate risk. The FRB has established capital regulations for bank holding companies that generally parallel the capital regulations for banks. As of December 31, 1998, the Company was "well capitalized." Insurance of Accounts and Regulation by the FDIC The FDIC maintains two separate deposit insurance funds: the Bank Insurance Fund (the "BIF") and the Savings Association Insurance Fund (the "SAIF"). Great Southern's depositors are insured by the SAIF up to $100,000 per insured account (as defined by law and regulation). This insurance is backed by the full faith and credit of the United States Government. As insurer, the FDIC is authorized to conduct examinations of and to require reporting by SAIF-insured associations. It also may prohibit any FDIC- insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the SAIF. The FDIC also has the authority to take enforcement actions against banks and savings associations. Great Southern pays annual assessments for SAIF insurance. Under current FDIC regulations, the annual SAIF assessment rate is based, in part, on the degree of risk to the deposit insurance fund that, in the opinion of the FDIC, is presented by a particular depository institution compared to other depository institutions. The FDIC uses a matrix having as variables the level of capitalization of a particular institution and the level of supervision that its operations require; and the risk-based amendment rates determined in this fashion range from 0.00% of deposits for the least risky to 0.27% for the most risky. In establishing the SAIF assessment rate, the FDIC is required to consider the SAIF's expected operating expenses, case resolution expenditures and income and the effect of the assessment rate on SAIF members' earnings and capital. There is no cap on the amount the FDIC may increase the SAIF assessment rate. The Bank currently has a risk based assessment rate of 0.00%. In addition, the FDIC is authorized to raise the assessment rates in certain instances. Any increases in the assessments would negatively impact the earnings of Great Southern. The FDIC may terminate the deposit insurance of any insured depository institution if it determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed by or an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. 31 The FDIC collects assessments against BIF and SAIF assessable deposits to be paid to the Financing Corporation (the FICO") to service interest on FICO debt issued during the 1980's. Beginning January 1997, the FICO assessment rate was set at .0648% for SAIF insured deposits and .013% on BIF insured deposits. The Federal banking regulators are required to take prompt corrective action if an institution fails to satisfy certain minimum capital requirements. Under the law, capital requirements include a leverage limit, a risk-based capital requirement, and a core capital requirement. All institutions, regardless of their capital levels, will be restricted from making any capital distribution or paying any management fees that would cause the institution to fail to satisfy the minimum levels for any of its capital requirements. An institution that fails to meet the minimum level for any relevant capital measure (an "undercapitalized institution") will be: (i) subject to increased monitoring by the appropriate Federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of business. The FDIC has jurisdiction over the Bank for purposes of prompt corrective action. Insured depository institutions that are not well-capitalized are prohibited from accepting brokered deposits unless a waiver has been obtained from the FDIC; and it limits the rate of interest that institutions receiving such waivers may pay on brokered deposits. Federal Reserve System The Federal Reserve Board requires all depository institutions to maintain reserves against their transaction accounts (primarily NOW and Super NOW checking accounts) and non-personal time deposits. Reserves of 3% must be maintained against net transaction accounts of $47.0 million or less (subject to adjustment by the Federal Reserve Board) and a reserve of 10% (subject to adjustment by the Federal Reserve Board to a level between 8% and 14%) must be maintained against the portion of total transaction accounts in excess of such amount. In addition, a reserve of between 0% to 9% (subject to adjustment by the Federal Reserve Board) must be maintained on non-personal time deposits. Under current regulations, this reserve percentage is 0%. The Bank may elect not to maintain reserves against approximately $4.7 million in accounts subject to these reserve requirements. At December 31, 1998, the Bank was in compliance with these reserve requirements. Banks are authorized to borrow from the Federal Reserve Bank "discount window," but Federal Reserve Board regulations only allow this borrowing for short periods of time and generally require banks to exhaust other reasonable alternative sources of funds where practical, including FHLBank advances, before borrowing from the Federal Reserve Bank. See "Sources of Funds - Borrowings" above. Federal Home Loan Bank System The Bank is a member of the FHLBank of Des Moines, which is one of 12 regional FHLBanks that, prior to the enactment of FIRREA, were regulated by the FHLBB. FIRREA separated the home financing credit function of the FHLBanks from the regulation and insurance of accounts for savings associations by transferring oversight over the FHLBanks to a new federal agency, the Federal Home Financing Board (FHFB). As part of that separation, the savings association supervisory and examination function performed by the FHLBanks was transferred to the OTS. 32 As a member, Great Southern is required to purchase and maintain stock in the FHLBank of Des Moines in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year (if less than 30% of its assets were so invested, the calculation must be made as if 30% of its assets were so invested), or 5% (or such greater percentage as established by the FHLBank) of its outstanding FHLBank advances. At December 31, 1998, Great Southern had $9.5 million in FHLBank stock, which was in compliance with this requirement. In past years, the Bank has received substantial dividends on its FHLBank stock. Over the past five and one-half years, such dividends have averaged 7.25% and were 6.63% for the six months ended December 31, 1998. Certain provisions of FIRREA require all 12 FHLBanks to provide financial assistance for the resolution of troubled savings associations and to contribute to affordable housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions could cause rates on the FHLBank advances to increase and could affect adversely the level of FHLBank dividends paid and the value of FHLBank stock in the future. Each FHLBank serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLBank System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the FHLBank. These policies and procedures are subject to the regulation and oversight of the FHFB. There are collateral requirements for FHLBank advances. First, all advances must be fully secured by sufficient collateral as determined by the FHLBank. FIRREA prescribed eligible collateral as fully disbursed, whole first mortgage loans not more than 60 days delinquent or securities evidencing interests therein, securities (including mortgage-backed securities) issued, insured or guaranteed by the federal government or any agency thereof, FHLBank deposits and, to a limited extent, real estate with readily ascertainable value in which a perfected security interest may be obtained. All members' stock in the FHLBank also serves as collateral for indebtedness to the FHLBank. Other forms of collateral may be accepted as over collateralization or, under certain circumstances, to renew advances outstanding on the date of enactment of FIRREA. All long-term advances are required to be used to provide funds for residential home financing. The FHFB has established standards of community service that members must meet to maintain access to long-term advances. FIRREA authorizes the FHLBanks to make short-term liquidity advances to solvent associations in poor financial condition but with prospects of improving. In addition, pursuant to FHFB regulations, each FHLBank is required to establish programs for affordable housing that involve interest subsidies from the FHLBanks on advances to members engaged in lending at subsidized interest rates for low- and moderate-income, owner-occupied housing and affordable rental housing, and certain other community purposes. Legislative and Regulatory Proposals Any changes in the extensive regulatory scheme to which the Company or the Bank is and will be subject, whether by any of the Federal banking agencies or Congress, could have a material effect on the Company or the Bank, and they cannot predict what, if any, future actions may be taken by legislative or regulatory authorities or what impact such actions may have. 33 FEDERAL AND STATE TAXATION The following discussion contains a summary of certain federal and state income tax provisions applicable to the Company and the Bank. It is not a comprehensive description of the federal income tax laws that may affect the Company and the Bank. The following discussion is based upon current provisions of the Internal Revenue Code of 1986 (the "Code") and Treasury and judicial interpretations thereof. General The Company and its subsidiaries file a consolidated federal income tax return using the accrual method of accounting, with the exception of GSB Two who files a separate return as a REIT. All corporations joining in the consolidated federal income tax return are jointly and severally liable for taxes due and payable by the consolidated group. The following discussion primarily focuses upon the taxation of the Bank, since the federal income tax law contains certain special provisions with respect to banks. Financial institutions, such as the Bank, are subject, with certain exceptions, to the provisions of the Code generally applicable to corporations. Bad Debt Reserves Legislation passed by Congress and signed by the President repealed the bad debt reserve method of accounting for bad debts by large thrifts for taxable years beginning after 1995 (year ended June 30, 1997 for the Bank). The legislation requires applicable excess reserves accumulated after 1987 (year ended June 30, 1988 for the Bank) be recaptured and restored to income over a six year period with the first year beginning after 1995 (year ended June 30, 1997 for the Bank), and eliminates recapture of the applicable excess reserves accumulated prior to 1988 for thrifts converting to bank charters. The post 1987 recapture may be delayed for a one- or two-year period if certain residential loan origination requirements are met. The Bank met the residential loan origination requirements and delayed the recapture for two years. The amount of post 1987 recapture for the Bank is estimated at $5 million which would create tax of approximately $1.7 million, or $283,333 per year for each of the six years. The $1.7 million of tax has been accrued by the Bank in previous periods and would not be reflected in earnings when paid. Beginning with the year ending June 30, 1997, the Bank is required to follow the specific charge-off method which only allows a bad debt deduction equal to actual charge-offs, net of recoveries, experienced during the fiscal year of the deduction. In a year where recoveries exceed charge-offs, the Bank would be required to include the net recoveries in taxable income. Interest Deduction In the case of a financial institution, such as the Bank, no deduction is allowed for the pro rata portion of its interest expense which is allocable to tax-exempt interest on obligations acquired after August 7, 1986. A limited class of tax-exempt obligations acquired after August 7, 1986 will not be subject to this complete disallowance rule. For tax-exempt obligations acquired after December 31, 1982 and before August 8, 1986 and for obligations acquired after August 7, 1986 that are not subject to the complete disallowance rule, 80% of interest incurred to purchase or carry such obligations will be deductible. No portion of the interest expense allocable to tax-exempt obligations acquired by a financial institution before January 1, 1983, which is otherwise deductible, will be disallowed. The interest expense disallowance rules cited above do not significantly impact the Bank. 34 Alternative Minimum Tax Corporations generally are subject to a 20% corporate alternative minimum tax ("AMT"). A corporation must pay the AMT to the extent it exceeds that corporation's regular federal income tax liability The AMT is imposed on "alternative minimum taxable income," defined as taxable income with certain adjustments and tax preference items, less any available exemption. Such adjustments and items include, but are not limited to, (i) net interest received on certain tax-exempt bonds issued after August 7, 1986; and (ii) 75% of the difference between adjusted current earnings and alternative minimum taxable income, as otherwise determined with certain adjustments. Net operating loss carryovers may be utilized, subject to adjustment, to offset up to 90% of the alternative minimum taxable income, as otherwise determined. A portion of the AMT paid, if any, may be credited against future regular federal income tax liability. In addition, for taxable years beginning after 1986 and before 1996, corporations generally were also subject to an environmental tax equal to 0.12% of the excess of the alternative minimum taxable income (computed without regard to any net operating loss deduction) for a taxable year in excess of $2 million. Missouri Taxation Missouri based banks, such as the Bank, are subject to a franchise tax which is imposed on the larger of (i) the bank's net income at the rate of 7% of the net income (determined without regard for any net operating losses); or (ii) the banks assets at a rate of .05% of total assets less deposits and the investment in greater than 50% owned subsidiaries. Missouri based banks are entitled to a credit against the franchise tax for all other state or local taxes on banks, except taxes on real and tangible personal property owned by the Bank and held for lease or rental to others, contributions paid pursuant to the Missouri unemployment compensation law, social security taxes and sales and use taxes. The Company and all subsidiaries are subject to an income tax that is imposed on the corporation's net income at the rate of 6.25% for fiscal year 1998. The return is filed on a consolidated basis by all members of the consolidated group including the Bank, but excluding GSB Two. As a REIT, GSB Two files a separate Missouri income tax return. Delaware Taxation As a Delaware corporation, the Company is required to file annual returns with and pay annual fees to the State of Delaware. The Company is also subject to an annual franchise tax imposed by the State of Delaware based on the number of authorized shares of Company common stock. Examinations The Company and its consolidated subsidiaries have not been audited recently by the Internal Revenue Service with respect to consolidated federal income tax returns, and as such, these returns have been closed without audit through June 30, 1995. 35 Item 2. Properties. The following table sets forth certain information concerning the main office and each branch office of the Company at March 15, 1999. The aggregate net book value of the Company's premises and equipment was $10 million at December 31, 1998 and $9.5 million at June 30, 1998. See also Note 5 and Note 11 of the Notes to Consolidated Financial. Substantially all buildings owned are free of encumbrances or mortgages. In the opinion of Management, the facilities are adequate and suitable for the needs of the Company.
Owned Lease Expiration Year or (Including Any Location Opened Leased Renewal Option) - ----------------------------------------------------------- ------ ------- ----------------- CORPORATE HEADQUARTERS AND MAIN BANK: 1451 E. Battlefield Springfield, Missouri 1976 Owned N/A BRANCH BANKS: 430 South Avenue Springfield, Missouri 1983 Owned N/A Kearney at Kansas Springfield, Missouri 1976 Leased* 2000 2410 N. Glenstone Springfield, Missouri 1977 Leased* 2003 1955 S. Campbell Springfield, Missouri 1979 Leased* 2030 3961 S. Campbell Springfield, Missouri 1998 Leased 2028 2631 E. Sunshine Springfield, Missouri 1988 Leased* 2017 1580 W. Battlefield Springfield, Missouri 1985 Leased* 2018 723 N. Benton Springfield, Missouri 1985 Owned N/A Highway 14 Nixa, Missouri 1995 Leased* 2019 1505 S. Elliot Aurora, Missouri 1985 Leased 2003 Jefferson & Washington Ava, Missouri 1982 Owned N/A 110 W. Hensley Branson, Missouri 1982 Owned N/A 919 W. Dallas Buffalo, Missouri 1976 Owned N/A 527 Ozark Cabool, Missouri 1989 Leased 2004 400 S. Garrison Carthage, Missouri 1990 Owned N/A 1710 E. 32nd Street Joplin, Missouri 1989 Leased* 2031 1232 S. Rangeline Joplin, Missouri 1998 Leased* 2018 Highway 00 and 13 Kimberling City, Missouri 1984 Owned N/A 528 S. Jefferson Lebanon, Missouri 1978 Leased* 2018 714 S. Neosho Boulevard Neosho, Missouri 1991 Owned N/A Highway 54 Osage Beach, Missouri 1987 Owned N/A 1701 W. Jackson Ozark, Missouri 1997 Owned N/A 208 South Street Stockton, Missouri 1988 Leased 2005 323 E. Walnut Thayer, Missouri 1978 Leased* 2011 1210 Parkway Shopping Center West Plains, Missouri 1975 Owned N/A 1729 W. Highway 76 Branson, Missouri 1983 Owned N/A _____________________________ * Building owned with land leased. In addition, the travel division has offices in many of the above locations as well as several small offices in other locations including some of its larger corporate customer's headquarters.
The Bank maintains depositor and borrower customer files on an on-line basis, utilizing a telecommunications network, portions of which are leased. The book value of all data processing and computer equipment utilized by the Bank at December 31, 1998 was $2.4 million compared to $2 million at June 30, 1998. The increase is primarily in connection with the continued core system upgrade and Year 2000 discussion in "Management's Discussion and Analysis - Year 2000" in the Annual Report to Stockholders, which portions are incorporated herein by reference. Management has a disaster recovery plan in place with respect to the data processing system as well as the Bank's operations as a whole. 36 The Bank maintains a network of Automated Teller Machines ("ATMs"). The Bank utilizes an external service for operation of the ATMs that also allows access to the various national ATM networks. A total of 95 ATMs are located at various branches and primarily convenience stores located throughout southwest and central Missouri. The book value of all ATMs utilized by the Bank at December 31, 1998 was $1.1 million compared to $943,000 at June 30, 1998. The Bank will evaluate and relocate existing ATMs as needed, but has no plans in the near future to materially increase its investment in the ATM network. Item 3. Legal Proceedings. The Registrant and its subsidiaries are involved as plaintiff or defendant in various legal actions arising in the normal course of their businesses. 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 4. Submission of Matters to a Vote of Security Holders. 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 Executive Officers of the Registrant. Pursuant to General Instruction G(3) of Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K, the following list is included as an unnumbered item in Part I of this Form 10-K in lieu of being included in the Registrant's Definitive Proxy Statement. The following information as to the business experience during the past five years is supplied with respect to executive officers of the Company and its subsidiaries who are not directors of the Company and its subsidiaries. There are no arrangements or understandings between the persons named and any other person pursuant to which such officers were selected. The executive officers are elected annually and serve at the discretion of their respective Boards of Directors. Richard L. Wilson. Mr. Wilson, age 40, is Senior Vice President and Controller of the Bank. He joined the Bank in 1986 and is responsible for the internal and external financial reporting of the Company and its subsidiaries. Mr. Wilson is a Certified Public Accountant. Michael D. Lawson. Mr. Lawson, age 34, is First Vice President and Commercial Business Development Officer in the commercial lending area at the Bank. Mr. Lawson joined the Bank in November 1996. Prior to joining the Bank, Mr. Lawson was a lending officer and branch manager with a competing $1 billion bank. 37 Steven G. Mitchem. Mr. Mitchem, age 46, is First Vice President and Senior Lending Officer of the Bank. He joined the Bank in 1990 and is responsible for administration of commercial lending policies and banking regulatory matters. Prior to joining the Bank, Mr. Mitchem was a Senior Bank Examiner for the Federal Deposit Insurance Corporation. PART II Responses incorporated by reference into the items under Part II of this Form 10-K are done so pursuant to Rule 12b-23 and General Instruction G(2) for Form 10-K. Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Market Information. The Company's Common Stock is listed on The NASDAQ Stock Market under the symbol "GSBC. As of December 31, 1998, there were 7,802,679 total shares outstanding and approximately 900 shareholders of record High/Low Stock Price Six Months Ended Fiscal Year December 31, 1998 June 30, 1998 ------------------- ------------------ High Low High Low ------- ------- ------- ------- First Quarter 25 1/4 21 1/2 19 9/16 16 Second Quarter 26 21 3/4 25 7/8 19 1/8 Third Quarter n/a n/a 26 1/4 24 Fourth Quarter n/a n/a 26 3/8 25 The last inter-dealer bid for the Company's Common Stock on December 31, 1998 was $24 1/8. Dividend Declarations December 31, 1998 June 30, 1998 ----------------- ------------- First Quarter $.11 $.10 Second Quarter .125 .11 Third Quarter n/a .11 Fourth Quarter n/a .11 38 Item 6. Selected Financial Data. The following selected financial data should be read in conjunction with the Company's consolidated financial statements, the notes thereto and the accompanying independent accountant's opinion, and the following information is qualified by reference thereto.
Six Months Ended December 31, Year Ended June 30, ---------------- ----------------------------------------- 1998 1998 1997 1996 1995 -------- -------- -------- -------- -------- (Dollars in thousands, except per share data) Summary Statement of Condition Information: Year-end assets $836,498 $795,091 $707,841 $668,105 $622,380 Year-end loans receivable, net 698,319 655,226 583,709 546,759 519,255 Year-end allowance for loan losses 16,928 16,373 15,524 14,356 14,601 Year-end available-for-sale securities 6 476 6,363 7,408 4,656 3,091 Year-end held-to-maturity securities 59 038 50,363 49,757 49,182 46,970 Year-end foreclosed assets held for sale, net 2,810 4,751 5,651 9,862 7,999 Year-end allowance for foreclosed asset losses -- -- 319 1,086 933 Year-end intangibles 543 626 -- 1,102 1,187 Year-end deposits 597,625 549,773 456,370 395,238 382,643 Year-end total borrowings 159,250 169,509 180,566 197,057 168,067 Year-end stockholders' equity (retained earnings substantially restricted) 68,382 67,409 60,348 67,808 62,982 Average loans receivable, net 647,797 624,290 561,146 536,695 486,726 Average total assets 805,170 747,901 670,172 643,885 584,536 Average deposits 577,820 487,386 416,041 385,734 374,011 Average stockholders' equity 66,997 64,212 62,200 65,355 60,942 Year-end number of deposit accounts 74,375 74,070 69,762 60,649 59,461 Year-end number of full-service offices 27 27 25 25 25
Six Months Ended December 31, Year Ended June 30, ------------------- ------------------------------------- 1998 1997 1998 1997 1996 1995 -------- ------- ------- ------- ------- ------- (Unudited) (Dollars in thousands, except per share data) Summary Income Statement Information: Interest income $32,485 $30,041 $61,932 $55,540 $53,938 $47,110 Interest expense 16,530 15,601 31,992 28,822 28,132 23,411 Net interest income 15,955 14,440 29,940 26,718 25,806 23,699 Provision for loan losses 1,291 852 1,853 1,706 1,451 1,319 Net interest income after provision for loan losses 14,664 13,588 28,087 25,012 24,355 22,380 Service charge fees 2,390 1,753 3,841 2,785 2,382 2,273 Net realized gains on sales of available-for-sale securities 356 872 1,398 205 680 21 Net realized gains on sales of loans 385 461 1,125 522 540 92 Income (expense) on foreclosed assets 420 383 326 286 728 (243) Other non-interest income 4,307 3,364 7,109 6,721 5,994 5,771 Non-interest expenses 11,306 9,883 20,518 20,439 16,274 15,293 Income before income taxes 11,216 10,538 21,368 15,091 18,405 15,001 Provision for income taxes 3,858 3,058 6,924 5,751 7,111 5,513 Net income $ 7,358 $ 7,480 $14,444 $ 9,340 $11,294 $ 9,488 39 Six Months Ended Year Ended December 31, June 30, ------------------ -------------------------------------- 1998 1997 1998 1997 1996 1995 -------- -------- -------- -------- -------- -------- (Dollars in thousands, except per share data) Per Common Share Data: Basic earnings per common share: Net Income $ .93 $ .93 $ 1.79 $ 1.11 $ 1.27 $ 1.04 Diluted earnings per common share: Net Income .91 .91 1.76 1.10 1.23 1.00 Cash dividends declared .235 .21 .43 .3875 .35 .30 Book value 8.76 8.13 8.47 7.45 7.70 7.00 Average shares outstanding 7,897 8,082 8,052 8,394 8,926 9,162 Year-end actual shares outstanding 7,803 8,066 7,962 8,105 8,812 9,006 Year-end fully diluted shares outstanding 8,012 8,218 8,204 8,488 9,218 9,478 Earnings Performance Ratios: Return on average assets 1.83% 2.08% 1.93% 1.39% 1.75% 1.62% Return on average stockholders' equity 21.97 24.04 22.49 15.02 17.28 15.57 Non-interest expense to average total assets 2.81 2.75 2.74 3.04 2.53 2.62 Average interest rate spread 4.02 3.78 3.79 3.79 3.82 3.86 Year-end interest rate spread 3.62 3.75 3.81 3.90 3.72 3.79 Net interest margin (1) 4.31 4.18 4.18 4.17 4.21 4.25 Adjusted efficiency ratio (excl. foreclosed assets) 47.48 46.46 47.20 55.22 45.97 48.01 Average interest-earning assets as a percentage of average interest-bearing liabilities 106.6 108.8 108.6 108.5 108.4 109.3 Six Months Ended Year Ended December 31, June 30, ------------------ -------------------------------------- 1998 1997 1998 1997 1996 1995 -------- -------- -------- -------- -------- -------- (Dollars in thousands, except per share data) Asset Quality Ratios: Allowance for loan losses/year-end loans 2.42% 2.54% 2.50% 2.66% 2.63% 2.81% Non-performing assets/year-end loans and foreclosed assets 1.46 2.20 1.81 2.30 2.83 2.25 Allowance for loan losses/non-performing loans 228.20 155.26 227.18 197.01 243.03 380.23 Net charge-offs/average loans .23 .09 .16 .10 .32 .07 Non-performing assets/average total assets 1.27 1.91 1.60 2.02 2.45 2.18 Capital Ratios: Average stockholders' equity to average assets 8.32% 8.64% 8.59% 9.28% 10.15% 10.43% Year-end tangible stockholders' equity to assets 8.11 8.67 8.40 8.53 10.09 9.93 Common dividend pay-out ratio 27.2 24.4 24.0 35.2 28.6 30.0 (1) For further discussion, refer to Management's Discussion and Analysis of Financial Condition and Results of Operations-Average Balances, Interest Rates and Yields.
40 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. Forward-Looking Statements When used in this Annual Report to Stockholders 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. GENERAL 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 the interest it pays on interest-bearing liabilities, which consists mainly of interest paid on deposits and borrowings. 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 earned by non-bank subsidiaries. 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 deposits and borrowings 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. 41 EFFECT OF FEDERAL LAWS AND REDULATIONS Federal legislation and regulation significantly affect the banking operations of the Company 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. On June 30, 1998, the Bank became a state chartered trust company and the Company became a bank holding company. This change brought with it an additional set of regulations and new regulators for the Bank and Company. The new regulators may have different areas of emphasis when evaluating the operations of the Company or the Bank than the prior regulators. While this change may cause the Company or the Bank to make changes in the way they conduct business, these changes are not expected to be material to the overall operations or profitability of the Company. RECENT CHANGES IN ACCOUNTING PRINCIPLES 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 Company implemented SFAS No. 131 during the six months ended December 31, 1998 with no material impact on the Company's financial statements. 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 believes adopting SFAS No. 133 will not have a material impact on the Company's financial statements YEAR 2000 ISSUES The Year 2000 issue confronting the Company and its suppliers, customers and competitors, centers on the inability of computer systems to 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. With the impending new millennium, these programs and computers may recognize "00" as the year 1900 rather than the year 2000. Financial institution regulators have recently increased their focus upon year 2000 compliance issues and have issued 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 issue 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. 42 The Bank has experienced rapid growth in both the deposit and loan areas in recent years. Management of the Bank evaluated the need to upgrade the mission critical systems and determined conversion to a new hardware and software system was the best solution to meet the growth needs of the Bank as well as to resolve the year 2000 issues. During the six months ended December 31, 1998, the Bank completed the conversion to the Jack Henry Silverlake system for its core processing system and internal financial reporting system. The new system has been certified year 2000 compliant, was tested by the Bank for year 2000 compliance in early 1999 and is believed to be year 2000 compliant. As an integral part of upgrading the core system, the Company has also been in a program of replacing its personal computers and wide area networks with systems believed to be year 2000 compliant systems. This program was also completed during the six months ended December 31, 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 are expected to function as usual through the date of change. Third party vendors deemed appropriate will continue to be used and have indicated their products as compliant. Testing of these and certain other systems is scheduled for completion no later than June 30, 1999. A budget of $2.4 million was established to complete the necessary steps previously noted. Approximately $1.8 million has been spent to date, with approximately $250,000 of these costs being expensed in the six months ended December 31, 1998 and the remaining amount being capitalized and amortized over a 3 to 5 year period. Management feels these expenses will not have a material impact on the financial condition of the Company. 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 insurance, investment and travel subsidiaries operate on separate computer systems from the Bank and each other. The Year 2000 Committee of the Bank has been assisting these companies in performing a Risk Assessment of their systems and taking the steps believed necessary to achieve compliance with all year 2000 issues before December 31, 1999. While the Company believes that its systems and technology will be compliant on January 2000 and thereafter, it faces an unquantifiable risk that third parties such as customers will encounter year 2000 problems that cause them to reduce their use of bank services, default on loans, or reduce levels of future borrowings. There is also a risk that other financial organizations that the Company maintains relations with could experience Year 2000 issues that would adversely affect the Company. Finally, if other service providers, such as public utilities or telephone companies, are not Year 2000 compliant, the Company could experience service interruptions that would make the conduct of business difficult. The Company has developed a contingency plan to address some of these uncertainties. It may employ back-up generators as needed to provide electric power beginning January 1, 2000. It plans to have in place a cellular based modern communications system at key branches to maintain communication with its data service providers in the event that landline communications are disrupted. Immediately before the change of the century, electronic trial balances with extended information are to be downloaded for import into local database systems. A complete backup of all files will be performed before the century change, and critical information is expected to be printed in hard copy. The Company anticipates taking other steps to assure both liquidity and security. 43 The Company believes its has completed the majority of the actions necessary to achieve Year 2000 compliance for its core systems and the majority of the work necessary to achieve overall compliance. The Company expects that it will be Year 2000 compliant before the century date change. There remains, however, the possibility that problems encountered by third parties, including customers, financial organizations and other service providers, could adversely affect the Company. ASSET AND LIABILITY MANAGEMENT AND MARKET RISK 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. Our Risk When Interest Rates Change The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is Great Southern's most significant market risk. How We Measure Our Risk of Interest Rate Changes In an attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor Great Southern's interest rate risk. In monitoring interest rate risk we continually analyze and manage assets and liabilities based on their payment streams and interest rates, the timing of their maturities, and their sensitivity to actual or potential changes in market interest rates. The ability to maximize net interest income is largely dependent upon the achievement of a positive interest rate spread that can be sustained despite fluctuations in prevailing interest rates. Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of time. The difference, or the interest rate repricing "gap," provides an indication of the extent to which an institution's interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities repricing during the same period, and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets during the same period. Generally, during a period of rising interest rates, a negative gap within shorter repricing periods would adversely affect net interest income, while a positive gap within shorter repricing periods would result in an increase in net interest income. During a period of falling interest rates, the opposite would be true. As of December 31, 1998, the ratio of Great Southern's one- year gap to total assets was a positive 12.8% and its ratio of interest- earning assets to interest-bearing liabilities maturing or repricing within one year was 1.25. 44 In order to minimize the potential for adverse effects of material and prolonged increases in interest rates on Great Southern's results of operations, Great Southern has adopted asset and liability management policies to better match the maturities and repricing terms of Great Southern's interest-earning assets and interest-bearing liabilities. The board of directors sets and recommends the asset and liability policies of Great Southern which are implemented by the asset and liability committee. The asset and liability committee is chaired by the President and is comprised of members of Great Southern's senior management. The purpose of the asset and liability committee is to communicate, coordinate and control asset/liability management consistent with Great Southern's business plan and board approved policies. The asset and liability committee establishes and monitors the volume and mix of assets and funding sources taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk and profitability goals. The asset and liability committee meets on a monthly basis to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital positions, and anticipated changes in the volume and mix of assets and liabilities. At each meeting, the asset and liability committee recommends appropriate strategy changes based on this review. The President or his designee is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the board of directors, at their monthly meetings. In order to manage its assets and liabilities and achieve the desired liquidity, credit quality, interest rate risk, profitability and capital targets, Great Southern has focused its strategies on originating adjustable rate loans, and managing its deposits and borrowings to establish stable relationships with both retail customers and wholesale funding sources. At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, the asset and liability committee may determine to increase Great Southern's interest rate risk position somewhat in order to maintain its net interest margin. The asset and liability committee regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and market value of portfolio equity, which is defined as the net present value of an institution's existing assets, liabilities and off- balance sheet instruments, and evaluating such impacts against the maximum potential changes in net interest income and market value of portfolio equity that are authorized by the board of directors of Great Southern. Interest rate risk exposure estimates 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. 45 The following schedule illustrates the expected maturities of the Bank's financial instruments at December 31, 1998. This schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. The table is based on information prepared in accordance with generally accepted accounting principles.
December 31, 1999 ------------------------------------------------ Fair 1999 2000 2001 2002 2003 Thereafter Total Value -------- -------- -------- -------- -------- ---------- --------- ---------- (Dollars in thousands) Financial Assets: Interest bearing deposits $ 9,431 $ $ $ $ $ $ 9,431 $ 9,431 Weighted average rate 4.36% 4.36% Available-for-sale securities 6,476 6,476 6,476 Weighted average rate 2.83% 2.83% Held to maturity securities 18,150 39,337 1,550 59,038 59,214 Weighted average rate 6.19% 5.79% 4.97% 5.89% Adjustable rate loans 128,627 69,844 37,741 43,194 47,941 256,032 583,379 599,065 Weighted average rate 8.48% 8.47% 8.40% 8.43% 8.52% 8.06% 8.30% Fixed rate loans 33,972 25,640 36,616 16,011 23,676 26,555 162,470 161,770 Weighted average rate 9.25% 9.62% 9.31% 9.09% 8.71% 8.09% 8.85% Federal Home Loan Bank stock 9,454 9,454 9,454 Weighted average rate 6.25% 6.25% Financial Liabilities: Savings deposits 32,190 32,190 32,190 Weighted average rate 2.50% 2.50% Time deposits 238,405 46,298 19,662 21,891 23,688 15,859 365,804 369,185 Weighted average rate 5.26% 5.49% 5.58% 5.75% 5.54% 5.78% 5.35% Interest bearing liabilities 156,420 156,420 156,420 Weighted average rate 2.39% 2.39% Non-interest bearing demand 43,211 43,211 43,211 Weighted average rate 0.00% 0.00% Federal Home Loan Bank and Short-term borrowings 39,619 30,528 1,002 11,085 21,177 55,839 159,250 158,414 Weighted average rate 5.99% 5.82% 6.98% 5.65% 4.21% 5.70% 5.60%
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND JUNE 30, 1998 During the six months ended December 31, 1998, the Company increased total assets by $41 million. Substantially all the change was due to an increase in net loans of $43 million. The main loan areas experiencing increase were commercial real estate, residential construction and consumer. Total liabilities increased $40 million from June 30, 1998 to December 31, 1998, primarily from an increase in deposits of $48 million, offset by a decrease in Federal Home Loan Bank (FHLBank) advances of $11 million. The deposit increase was primarily from brokered deposits which were obtained to fund the increased loan levels and and also used to pay down FHLBank advances. Management feels 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. In addition, brokered deposits have become more attractive in recent years with the low level of FDIC deposit insurance. Also, brokered deposits do not require any collateral pledging while FHLBank advances require the pledging of collateral at levels greater than the funds being obtained. 46 Stockholders' equity increased $1 million primarily as a result of net income of $7.4 million offset by dividend declarations and payments of $1.9 million, net treasury stock purchases of $3.9 million and a reduction of $600,000 in accumulated other comprehensive income. The Company repurchased a net of 169,428 shares of common stock during the six month period. RESULTS OF OPERATIONS AND COMPARISON FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997 GENERAL The decrease in earnings of $122,000, or 1.6%, during the six months ended December 31, 1998 compared to December 31, 1997, was primarily due to an increase in non-interest expense of $1.4 million, or 14.4%, an increase in provision for income taxes of $800,000, or 26.2%, and an increase in provision for loan losses of $439,000, or 51.5%, offset by an increase in net interest income of $1.5 million, or 10.5%, and an increase in non-interest income of $1.0 million, or 15.0% during the six months ended December 31, 1998. TOTAL INTEREST INCOME Total interest income increased $2.4 million, or 8.0%, during the six months ended December 31, 1998 primarily due to a $2.5 million, or 9.0%, increase in interest income on loans. INTEREST INCOME - LOANS During the six months ended December 31, 1998 compared to December 31, 1997, interest income on loans increased primarily from higher average balances. Interest income increased $2.1 million as the result of higher average loan balances from $602 million during the six months ended December 31, 1997 to $648 million during the six months ended December 31, 1998. The higher average balance resulted from the Bank's increased lending in commercial real estate, commercial business lending and indirect dealer consumer lending. The average yield on loans increased from 9.26% during the six months ended December 31, 1997, to 9.36% during the six months ended December 31, 1998 as a result of the change in the mix of loan types to higher rate loans. INTEREST INCOME - INVESTMENTS AND OTHER INTEREST-EARNING DEPOSITS Interest income on investments and interest-earning deposits decreased $10,000, or .5%, during the six months ended December 31, 1998 when compared to the six months ended December 31, 1997. Interest income declined $68,000 as a result of lower average yields from 4.84% during the six months ended December 31, 1997, to 4.71% during the six months ended December 31, 1998 due to lower short term market rates. Interest income increased $58,000 as a result of higher average balances from $89.4 million during the six months ended December 31, 1997 to $91.5 million in the six months ended December 31, 1998. TOTAL INTEREST EXPENSE Total interest expense increased $929,000, or 6.0%, during the six months ended December 31, 1998 when compared with the six months ended December 31, 1997 primarily due to an increase in interest expense on deposits of $1.9 million, or 17.9%, offset by a decrease in interest expense on FHLBank advances and other borrowings of $932,000, or 17.9%. 47 INTEREST EXPENSE - DEPOSITS Interest expense on time deposits increased $1.45 million as a result of higher average balances from $306 million during the six months ended December 31, 1997, to $358 million during the six months ended December 31, 1998. The average balances of time deposits increased primarily as a result of the Company's use of brokered and other time deposits to fund loan growth. In recent years, brokered deposit rates have become competitive with rates on FHLBank advances and larger retail deposits. This increase was partially offset by a decrease in interest expense on time deposits of $95,000 as a result of lower average rates from 5.61% during the six months ended December 31, 1997 to 5.55% during the six months ended December 31, 1998. Interest expense on deposits increased $438,000 as a result of higher average balances of interest bearing demand deposits from $119 million during the six months ended December 31, 1997, to $154 million during the six months ended December 31, 1998, and increased $183,000 as a result of higher average rates on interest bearing demand deposits from 2.33% during the six months ended December 31, 1997, to 2.61% during the six months ended December 31, 1998. The increase in balances was the result of the growth of checking customers and the increase in rate was the result of a change in the mix of account types. This increase was partially offset by a $99,000 decrease in interest expense on savings accounts from slightly lower average rates from 2.48% in the six months ended December 31, 1997 to 1.90% during the six months ended December 31, 1998. INTEREST EXPENSE - FHLBANK ADVANCES AND OTHER BORROWINGS Interest expense on FHLBank advances and other borrowings decreased $931,000 principally due to lower average balances from $176 million during the six months ended December 31, 1997 to $149 million during the six months ended December 31, 1998. These lower average balances resulted from the increase in deposits noted above that were partially used to repay maturing FHLBank advances. Average rates were lower during the six months ended December 31, 1998 at 5.76% compared to 5.92% during the six months ended December 31, 1997. NET INTEREST INCOME The Company's overall interest rate spread increased from 3.78% during the six months ended December 31, 1997, to 4.02% during the six months ended December 31, 1998. PROVISION FOR LOAN LOSSES The provision for loan losses increased $439,000, or 51.5%, during the six months ended December 31, 1998 from $852,000 during the six months ended December 31, 1997 to $1.3 million during the six months ended December 31, 1998. Management records a provision for loan losses in an amount sufficient to result in an allowance for loan losses that will cover current net charge- offs as well as risks believed to be inherent in the loan portfolio of the Bank. The amount of provision charged against current income is based on several factors, including, but not limited to, past loss experience, current portfolio mix, actual and potential losses identified in the loan portfolio, economic conditions and regular reviews by internal staff and regulatory examinations. 48 Weak economic conditions, higher inflation or interest rates, or other factors may lead to increased losses in the portfolio. Management has established various controls in an attempt to limit future losses, such as a watch list of possible problem loans, documented loan administration policies and a loan review staff to review the quality and anticipated collectibility of the portfolio. Management determines which loans are potentially uncollectible, or represent a greater risk of loss and makes additional provisions to expense, if necessary, to maintain the allowance at a satisfactory level. Non-performing assets increased $1 million, or 8.3%, from $12 million at June 30, 1998 to $13.0 million at December 31, 1998. Non-performing loans increased $2.9 million, or 41.8%, from $7.2 million at June 30, 1998 to $10.1 million at December 31, 1998, and foreclosed assets declined $2.0 million, or 41.7%, from $4.8 million at June 30, 1998 to $2.8 million at December 31, 1998. Potential problem loans increased $3.2 million, or 35.6%, from $9 million at June 30, 1998 to $12.2 million at December 31, 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. Management considers the allowance for loan losses and the allowance for foreclosed asset losses adequate to cover losses inherent in the Company's assets at this time, based on current economic conditions. If economic conditions deteriorate significantly, it is possible that additional assets would be classified as non-performing, and accordingly, additional provision for losses would be required, thereby adversely affecting future results of operations and financial condition. NON-INTEREST INCOME Non-interest income increased $1 million, or 15%, during the six months ended December 31, 1998 compared to the six months ended December 31, 1997. The increase was primarily due to: (i) an increase in service charge income of $637,000, or 36.3%, on transaction accounts and electronic transactions due to increased volumes from ATM debit card usage; (ii) an increase of $550,000, or 21.3%, in commission income from the travel, insurance and investment subsidiaries from growth in these areas; offset by, (iii) a decrease of $516,000, or 59.2% in net realized gains on sales of available- for-sale securities; (iv) various increases or decreases in other non- interest income items. NON-INTEREST EXPENSE Non-interest expense increased $1.4 million, or 14.4% during the six months ended December 31, 1998 when compared to the six months ended December 31, 1997. The increase was primarily due to: (i) an increase of $516,000 in salaries and employee related costs due to increased staffing levels in most areas of the Company due to growth and the year 2000 issue; (ii) an increase of $423,000 in occupancy and equipment expense primarily due to computer system upgrades and other technology related purchases partially due to the year 2000 issue; (iii) an increase of $477,000 in transaction and bad check losses from a regulatory recommendation to charge-off these losses at 90 days; and (ix) various increases or decreases in other non-interest expense items. 49 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 29.0% in the six months ended December 31, 1997 to 34.4% in the six months ended December 31, 1998. The lower than normal percentage in the December 31, 1997 period was primarily due to a refund of prior period state financial institution taxes within that period. RESULTS OF OPERATIONS AND COMPARISON FOR THE YEARS ENDED JUNE 30, 1998 AND 1997 The increase in earnings of $5.1 million, or 54.6%, for the year ended June 30, 1998 when compared to June 30, 1997, was primarily due to an increase in non-interest income of $3.3 million, or 31.7%, and an increase in net interest income of $3.2 million, or 12.1%, offset by an increase in non- interest expense of $100,000, or 0.5%, and an increase in provision for income taxes of $1.2 million, or 20.4%, during fiscal 1998. TOTAL INTEREST INCOME Total interest income increased $6.4 million, or 11.5%, during fiscal 1998 primarily due to a $6.2 million, or 12.0%, increase in interest income on loans. INTEREST INCOME - LOANS During fiscal 1998, interest income on loans increased primarily from higher average balances. Interest income increased $5.8 million as the result of higher average loan balances from $561 million during fiscal 1997 to $624 million during fiscal 1998. The higher average balance resulted from the Bank's increased lending in commercial real estate and commercial business lending and entry into the indirect dealer consumer lending offset by a decline in single-family residential lending. The average yield on loans increased from 9.15% during fiscal 1997, to 9.22% during fiscal 1998 as a result of the change in the mix of loan types. INTEREST INCOME - INVESTMENTS AND OTHER INTEREST-EARNING DEPOSITS Interest income on investments and interest-earning deposits increased $220,000, or 5.3%, during fiscal 1998 when compared to fiscal 1997. Interest income increased $512,000 as a result of higher average balances from $80 million during fiscal 1997 to $92 million in fiscal 1998. This increase was primarily in interest-bearing deposits in FHLBank used to fund daily operations and lending. Interest income declined $292,000 as a result of lower average yields from 5.22% during fiscal 1997, to 4.76% during fiscal 1998 due to lower short term market rates. TOTAL INTEREST EXPENSE Total interest expense increased $3.2 million, or 11.0%, during fiscal 1998 when compared with fiscal 1997 primarily due to an increase in interest expense on deposits of $3.0 million, or 16.7%. 50 INTEREST EXPENSE - DEPOSITS Interest expense on time deposits increased $2.8 million as a result of higher average balances from $262 million during fiscal 1997, to $312 million during fiscal 1998. The average balances of time deposits increased primarily as a result of the Company's use of brokered and other time deposits to fund loan growth. In recent years, brokered deposit rates have become competitive with rates on FHLBank advances and larger retail deposits. Interest expense on deposits increased $250,000 as a result of higher average balances of interest bearing demand deposits from $109 million during fiscal 1997, to $121 million during fiscal 1998. This increase in balances was the result of the rapid growth of personal checking customers during the fiscal year. The Bank experienced this growth in large part due to acquisitions of competitors by larger banking institutions. This increase was partially offset by a $147,000 decrease in interest expense from slightly lower average rates from 2.36% in fiscal 1997 to 2.20% in fiscal 1998, due to the change of the deposit mix. INTEREST EXPENSE - FHLBANK ADVANCES AND OTHER BORROWINGS Interest expense on FHLBank advances and other borrowings increased $359,000 due to higher average balances from $185 million during fiscal 1997 to $191 million during fiscal 1998. These higher average balances resulted from the use of FHLBank advances for funding a portion of the loan growth previously mentioned. Average rates were slightly lower during fiscal 1998 at 5.77% compared to 5.88% during fiscal 1997. NET INTEREST INCOME The Company's overall interest rate spread remained constant at 3.79% during fiscal 1997 and fiscal 1998. PROVISION FOR LOAN LOSSES The provision for loan losses increased $150,000, or 8.6%, during fiscal 1998 from $1.7 million during fiscal 1997 to $1.9 million during fiscal 1998. Management records a provision for loan losses in an amount sufficient to result in an allowance for loan losses that will cover current net charge- offs as well as risks believed to be inherent in the loan portfolio of the Bank. The amount of provision charged against current income is based on several factors, including, but not limited to, past loss experience, current portfolio mix, actual and potential losses identified in the loan portfolio, economic conditions and regular reviews by internal staff and regulatory examinations. Weak economic conditions, higher inflation or interest rates, or other factors may lead to increased losses in the portfolio. Management has established various controls in an attempt to limit future losses, such as a watch list of possible problem loans, documented loan administration policies and a loan review staff to review the quality and anticipated collectibility of the portfolio. Management determines which loans are potentially uncollectible, or represent a greater risk of loss and makes additional provisions to expense, if necessary, to maintain the allowance at a satisfactory level. Non-performing assets decreased $1.9 million, or 13.7%, during fiscal 1998 from $13.9 million at June 30, 1997 to $12.0 million at June 30, 1998. Non-performing loans decreased $670,000, or 8.5%, from $7.9 million at June 30, 1997 to $7.2 million at June 30, 1998, and foreclosed assets declined $1.2 million, or 20.4%, from $6 million at June 30, 1997 to $4.8 million at June 30, 1998. 51 Potential problem loans increased $1.8 million, or 25.4%, during fiscal 1998 from $7.1 million at June 30, 1997 to $8.9 million at June 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 June 30, 1998 and June 30, 1997, respectively, totaled $16.4 million and $15.5 million, representing 2.5% and 2.7% of total loans, 227% and 197% of non-performing loans, and 101% and 103% of non-performing loans and potential problem loans in total. The allowance for foreclosed asset losses was $0 at June 30, 1998 and $319,000 at June 30, 1997, representing 0% and 5.3%, respectively, of total foreclosed assets. Management considers the allowance for loan losses and the allowance for foreclosed asset losses adequate to cover losses inherent in the Company's assets at this time, based on current economic conditions. If economic conditions deteriorate significantly, it is possible that additional assets would be classified as non-performing, and accordingly, additional provision for losses would be required, thereby adversely affecting future results of operations and financial condition. NON-INTEREST INCOME Non-interest income increased $3.3 million, or 31.7%, during fiscal 1998 compared to fiscal 1997. The increase was primarily due to: (i) an increase of $1.2 million in profits on sale of available-for-sale securities; (ii) an increase in service charge income of $1.1 million, or 37.9%, on transaction accounts and electronic transactions due to increased volumes from an expanded ATM network and special promotions on debit card usage; (iii) an increase of $683,000, or 13.7%, in commission income from the travel, insurance and investment subsidiaries from growth in these areas; (iv) an increase of $600,000 in profits on sale of loans from increased levels of fixed rate loan refinancing due to historically low rates; and (v) various increases and decreases in other non-interest income items. NON-INTEREST EXPENSE Non-interest expense increased only slightly during fiscal 1998 when compared to fiscal 1997, however, there were some major increases and decreases within non-interest expense items between the two fiscal periods. The changes were: (i) a decrease in insurance of $2.8 million due to the payment in fiscal 1997 of the one-time SAIF assessment of thrifts in September 1996; and (ii) a decrease in goodwill amortization of $1 million due to the write-off in fiscal 1997 of goodwill remaining from a 1982 failed thrift purchase; offset by (iii) an increase of $470,000 in tax consulting fees paid to achieve a one-time $1.5 million reduction of state financial institution taxes; (iv) an increase of $1.6 million in salaries and employee related costs due to increased staffing levels in transaction processing areas and expanded consumer and commercial lending, both resulting from substantial asset and customer growth; (v) an increase of $633,000 in occupancy and equipment expense primarily due to expansion of the Company's ATM network and other technology related purchases; (vi) an increase of $300,000 in robbery and bad check losses; (vii) an increase of $160,000 in audit, accounting and supervisory exam fees from increased time in these areas and a previous under accrual; (viii) an increase of $110,000 in package transaction account benefit costs due to the increased number of personal checking customers; and (ix) increases in the majority of other non-interest expense items resulting from asset and earnings growth. 52 PROVISION FOR INCOME TAXES Provision for income taxes as a percentage of pre-tax income decreased from 38.1% in fiscal 1997 to 32.4% in fiscal 1998. The 38.1% in fiscal 1997 would have been 35.5% without the non-deductible goodwill write-off that occurred during the period. A large portion of the lower than normal percentage in the June 30, 1998 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 charter to a federal savings bank charter in December 1994. An additional current year reduction of $500,000 resulted from the Bank's charter change at June 30, 1998 from a federal savings bank charter to a state trust company charter. AVERAGE BALANCES, INTEREST RATES AND YIELDS The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Average balances of loans receivable include the average balances of non-accrual loans for each period. Interest income on loans includes interest received on non-accrual loans on a cash basis. The table does not reflect any effect of income taxes. The interest income and interest expense amounts for the six months ended December 31, 1998 have been annualized (multiplied times 2) to arrive at a figure that is more comparable to the fiscal year ended June 30, 1998.
Years Ended June 30, Six Months Ended ------------------------------------------------- Dec. 31, December 31, 1998 1997 1996 1998 ----------------------- ----------------------- ----------------------- Yield Average Yield Average Yield Average Yield /Rate Balance Interest /Rate Balance Interest /Rate Balance Interest /Rate -------- -------- -------- ----- -------- -------- ----- -------- -------- ----- (Dollars in thousands) Interest-earning assets: Loans receivable 8.38% $647,797 $30,332 9.36% $624,290 $57,537 9.22% $561,146 $51,365 9.15% Investment securities And other interest- earning assets 4.70 91,514 2,153 4.71 92,251 4,395 4.76 79,942 4,175 5.22 ---- ------- ------ ---- ------- ------ ---- ------- ------ ---- Total interest-earning Assets 7.99 $739,311 32,485 8.79 $716,541 61,932 8.64 $641,088 55,540 8.66 ---- ======= ------ ---- ======= ------ ---- ======= ------ ---- Interest-bearing liabilities: Demand deposits 2.39 $153,777 2,007 2.61 $121,477 2,674 2.20 $108,750 2,571 2.36 Savings deposits 2.50 33,663 319 1.90 34,874 859 2.46 35,252 867 2.46 Time deposits 5.35 357,793 9,929 5.55 312,077 17,418 5.58 262,214 14,513 5.53 ---- ------- ------ ---- ------- ------ ---- ------- ------ ---- Total deposits 4.03 545,233 12,255 4.50 468,428 20,951 4.47 406,216 17,951 4.42 FHLBank advances and other borrowings 5.60 148,520 4,275 5.76 191,260 11,041 5.77 184,917 10,871 5.88 ---- ------- ------ ---- ------- ------ ---- ------- ------ ---- Total interest-bearing liabilities 4.37 $693,753 16,530 4.77 $659,688 31,992 4.85 $591,133 28,822 4.88 ---- ======= ------ ---- ======= ------ ---- ======= ------ --- Net interest income: Interest rate spread 3.62% $15,955 4.02% $29,940 3.79% $26,718 3.79% ==== ====== ==== ====== ==== ====== ==== Net interest margin* 4.32% 4.18% 4.17% ==== ==== ==== Average interest-earning assets to average interest-bearing liabilities 106.57% 108.6% 108.5% ===== ===== ===== *Defined as the Company's net interest income divided by total interest-earning assets.
53 Rate/Volume Analysis The following table 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.
December 31, 1998 vs June 30, 1998 vs December 31, 1997 June 30, 1997 ----------------------------- ---------------------------- Increase Increase (Decrease) (Decrease) Due to Total Due to Total ---------------- Increase ---------------- Increase Rate Volume (Decrease) Rate Volume (Decrease) ------ ------ ---------- ------ ------ ---------- (Dollars in thousands) Interest-earning assets: Loans receivable $ 318 $2,136 $2,454 $355 $5,817 $6,172 Investment securities and other interest-earning assets (68) 58 (10) (292) 512 220 ----- ----- ----- --- ----- ----- Total interest-earning assets 250 2,194 2,444 63 6,329 6,392 ----- ----- ----- --- ----- ----- Interest-bearing liabilities: Demand deposits 183 438 621 (147) 250 103 Savings deposits (99) (17) (116) 1 (9) (8) Time deposits (95) 1,450 1,355 123 2,782 2,905 ----- ----- ----- --- ----- --- Total deposits (11) 1,871 1,860 (23) 3,023 3,000 FHLBank advances and other borrowings (143) (788) (931) (189) 359 170 ----- ----- ----- --- ----- --- Total interest-bearing liabilities (154) 1,083 929 (212) 3,382 3,170 ----- ----- ----- --- ----- --- Net interest income $ 404 $1,111 $1,515 $275 $2,947 $3,222 ===== ===== ===== === ===== ===
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 December 31, 1998, the Company had commitments of approximately $96 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. 54 The Company's capital position remained strong, with stockholders' equity at $68.4 million, or 8.2%, of total assets of $836 million at December 31, 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 risk-based capital ratio, as defined, of 4.00% and a minimum Tier 2 total risk-based capital ratio of 8.00%, and a minimum 4.00% Tier 1 leverage capital ratio. On December 31, 1998, the Bank's Tier 1 risk-based capital ratio was 9.7% and Tier 2 total risk-based capital ratio was 10.9% and Tier 1 leverage ratio was 8.1%. At December 31, 1998, the held-to-maturity investment portfolio included $187,000 of gross unrealized gains and $10,000 of gross unrealized losses. The unrealized gains and losses 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 six months ended December 31, 1998 and the years ended June 30, 1998 and 1997, the Company had positive cash flows from operating activities and positive cash flows from financing activities. The Company experienced negative cash flows from investing activities during each of these same time periods. 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 $6.0 million, $10.3 million and $12.2 million in cash during the six months ended December 31, 1998 and the years ended June 30, 1998 and 1997, respectively. During the six months ended December 31, 1998 and the years ended June 30, 1998 and 1997, investing activities used cash of $51.3 million , $72.6 million and $36.6 million primarily due to the net increase of loans in each period except the December 31, 1998 period which was due to the net loans and purchases of investment securities. 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 $33.0 million, $75.7 million and $27.3 million in cash during the six months ended December 31, 1998 and the years ended June 30, 1998 and 1997, respectively. Financing activities in the future are expected to primarily include changes in deposits and changes in FHLBank advances. 55 Dividends. During the six months ended December 31, 1998, the Company declared and paid dividends of $.235 per share, or 25% of net income, compared to dividends declared and paid during the year ended June 30, 1998 of $.43 per share, or 24% 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 six months ended December 31, 1998, the Company repurchased 169,428 shares of its common stock at an average price of $23.29 per share and reissued 10,380 shares of treasury stock at an average price of $8.33 per share to cover stock option exercises. During the year ended June 30, 1998, the Company repurchased 156,888 shares of its common stock at an average price of $23.55 per share and reissued 13,494 shares of treasury stock at an average price of $6.57 per share to cover stock option exercises. Management intends to continue its stock buy-back programs as long as repurchasing the stock contributes to the overall increase 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. Item 8. Financial Statements and Supplementary Information. The financial statements and supplementary data required by this Item are set forth in the Annual Report to Stockholders, which portions are incorporated herein by reference. All financial statement schedules should be read in conjunction with the financial statements the notes thereto and the related report of the Company's independent accountants in the Annual Report and are qualified by reference thereto. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. (a) Directors of the Registrant Directors Serving a Three-Year Term Expiring at the 1999 Annual Meeting William E. Barclay, age 68 was elected a Director of Great Southern in 1975 and Bancorp in 1989. Mr. Barclay is the founder and Chairman of the Board of Auto-Magic Full Service Car Washes in Springfield, Missouri. Mr. Barclay also founded Barclay Love Oil Company in Springfield, Missouri in 1964 and founded a chain of Ye Ole Buggy Bath Self-Service Car Washes in Springfield, Missouri in 1978 and opened a franchise of Jiffy Lube in Springfield, Missouri in 1987. None of these entities are affiliated with Bancorp. 56 Larry D. Frazier, age 61, was elected a Director of Great Southern and Bancorp in May 1992. Mr. Frazier was elected a Director of Great Southern Financial Corporation (an affiliate of Bancorp) in 1976, where he served until his election as Director of Great Southern and Bancorp. Mr. Frazier is retired from White River Valley Electric Cooperative in Branson, Missouri where he served as President and Chief Executive Officer from 1975 to 1998. This entity is not affiliated with Bancorp. Directors Serving a Three-Year Term Expiring at the 2000 Annual Meeting William K. Powell, age 76, was elected a Director of Great Southern in 1965 and Bancorp in 1989. Mr. Powell is President of Herrman Lumber Company in Springfield, Missouri, where he has served since 1947. Mr. Powell is also President of United Mill Works, Inc. and Herrman Realty Company in Springfield, Missouri, both of which were founded by him in 1951. None of these entities are affiliated with Bancorp. Joseph W. Turner, age 34, joined Bancorp in 1995. He has been employed by Great Southern since 1991. He currently serves as Executive Vice President and General Counsel for Bancorp and President and General Counsel for Great Southern. Prior to joining Great Southern Mr. J. Turner was an attorney with the Kansas City, Missouri law firm of Stinson, Mag and Fizzell. Mr. J. Turner is the son of William V. Turner. Director Serving a Three-Year Term Expiring at the 2001 Annual Meeting William V. Turner, age 66, has served as the Chairman of the Board and Chief Executive Officer of Great Southern since 1974 and President of Great Southern from 1974 to 1997. Mr. W. Turner has served in similar capacities of Bancorp since incorporation in 1989. Mr. W. Turner has also served as Chairman of the Board and President of Great Southern Financial Corporation (an affiliate of Bancorp) since incorporation in 1974, Chairman of the Board and President of Appraisal Services, Inc. (an affiliate of Bancorp) since incorporation in 1976 and Chairman of the Board of Great Southern Capital Management, Inc. (an affiliate of Bancorp) since its formation in 1988. Mr. W. Turner is the father of Joseph W. Turner who is a director, and Executive Vice President and General Counsel of Bancorp and President and General Counsel for Great Southern. (b) Executive Officers of the Registrant Included under Part I of this Form 10-K. (c) Compliance with Section 16(a) of the Exchange Act Section 16(a) of the Exchange Act requires Bancorp's directors, certain of its officers and persons who own more than ten percent of the Common Stock, to file reports detailing their ownership and changes of ownership in the Common Stock with the SEC and to furnish Bancorp with copies of all such ownership reports. Based solely on Bancorp's review of the copies of such ownership reports furnished to Bancorp, and written representations relative to the filing of certain forms, Bancorp is aware of one late filing for Don M. Gibson for three transactions occurring in October 1998, one late filing by Steven G. Mitchem for one transaction occurring in October 1998, and one late filing by Richard L. Wilson for one transaction in October 1998. 57 Item 11. Executive Compensation. Summary Compensation Table The following table sets forth information concerning the compensation of the Chief Executive Officer and the other executive officers who served in such capacities during the Calendar Year 1998 with compensation of $100,000 or more.
Long-Term Compensation Annual Compensation Awards --------------------------------- --------- Options/ All Other Name and Salary Bonus SARs Compensation Principal Position Year ($) ($) (#)(1) ($)(2) - -------------------------------------------------------------------------------------------------------- William V. Turner Calendar 1998 285,922 215,000 5,000 34,114 Chairman of the Board Fiscal June 1998 289,593 191,732 7,500 5,290 President and Chief Fiscal June 1997 263,394 131,951 30,000 3,632 Executive Officer Fiscal June 1996 262,208 187,863 30,000 2,850 Don M. Gibson Calendar 1998 153,068 -- 5,000 10,424 Executive Vice President Fiscal June 1998 162,706 -- 5,000 5,150 Chief Operating Officer and Fiscal June 1997 138,321 -- 15,000 3,596 Chief Financial Officer Fiscal June 1996 129,835 -- 15,000 2,466 Joseph W. Turner Calendar 1998 133,303 -- 5,000 13,425 Executive Vice President Fiscal June 1998 145,000 -- 5,000 4,611 And General Counsel Fiscal June 1997 122,583 -- 15,000 3,130 Fiscal June 1996 105,000 -- 15,000 2,085 - ---------------------------------------- (1)Option numbers have been adjusted to reflect the October 21, 1996 2-for-1 stock split, where applicable. (2)Calendar 1998 includes (a) directors fees (Mr. W. Turner $31,200, Mr. Gibson $7,500 and Mr. J. Turner $10,500) paid by Bancorp and its subsidiaries; (b) company matching contributions to Bancorp's 401K Plan (Mr. W. Turner $2,374, Mr. Gibson $2,384 and Mr. J. Turner $2,385); and (c) term life insurance premiums paid by Great Southern for the benefit of Messrs. W. Turner, Gibson, and J. Turner of $540 each.
58 Option Grants During Calendar Year 1998 The following table sets forth options to acquire shares of Bancorp's Common Stock which were granted to the executive officers named in the Summary Compensation Table during the Calendar Year 1998.
OPTION GRANTS IN 1998 Individual Grants ------------------------------------------------------------------------------------------ Potential Realizable Number of % of Value at Assumed Securities Total Options Annual Rate of Underlying Granted to Exercise or Stock Price Options Granted All Employees Base Price Expiration Appreciation for Name (number of shares)(1) in 1998 ($ per share) Date Option Term - ---------------- --------------------- --------------- ------------- ----------- --------------------- 5% 10% --------- --------- William V. Turner 5,000 7.8% $24.3375 9-16-2003 $76,529 $193,939 Don M. Gibson 5,000 7.8 21.1250 9-16-2008 66,427 168,339 Joseph W. Turner 5,000 7.8 24.3375 9-16-2003 76,529 193,939 (1) Shares for William V. Turner and Joseph W. Turner vest 25% per year after a one year holding period beginning on the date of the grant (September 16, 1998). Shares for Don M. Gibson vest 25% per year after a two year holding period beginning on the date of the grant (September 16, 1998).
Option Exercises and Calendar Year-End Values The following table sets forth all stock options exercised by the named executives during Calendar Year 1998 and the number and value of unexercised options held by such executive officers at the calendar year-end.
Number of Securities Value of Unexercised Underlying Unexercised in-the-money Shares Options at Calendar Year-End Options at Caledndar Year-End (2) Acquired on Value ---------------------------- -------------------------------- Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable ----------- ----------- ------------ ------------- ----------- -------------- William V. Turner 6,640 $ 154,380 60,027 40,625 $ 947,021 $329,363 Don M. Gibson 7,500 $ 70,545 3,750 28,750 $ 49,451 $254,996 Joseph W. Turner 1,160 $ 26,100 22,810 23,750 $ 292,036 $169,236 (1) Value realized is calculated based on the difference between the option exercise price and the closing market price of Bancorp's Common Stock on the date of exercise multiplied by the number of shares to which the exercise relates. (2) The value of unexercised options was calculated at a per share price of $24.125 less the exercise price per share. The closing price of Bancorp's Common Stock as reported on the NASDAQ National Market System on December 31, 1998 was $24.125 per share.
59 Employment Agreements William V. Turner, Don M. Gibson and Joseph W. Turner (the "Employees") have entered into employment agreements with Great Southern (the "Employment Agreements"). The Employment Agreements provide that Great Southern may terminate the employment of any of the Employees for "cause," as defined in the Employment Agreements, at any time. The Employment Agreements also provide that in the event Great Southern chooses to terminate the employment of any of the Employees for reasons other than for cause, or in the event any of the Employees resigns from Great Southern upon the failure of the Great Southern Board of Directors to reelect any of the Employees to his current office or upon a material lessening of his functions, duties or responsibilities, such employee would be entitled to the payments owed for the remaining term of the agreement. If the employment of any of the Employees is terminated in connection with or within 12 months of a "change in control" of Great Southern or Bancorp, each of the Employees would be entitled to (i) a lump sum payment equal to 299% of the employee's base amount of compensation as defined in Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and (ii) continued payment of his salary under the applicable Employment Agreement for the term of the agreement. If Messrs. W. Turner, Gibson and J. Turner had been entitled to the lump sum payments described in clause (i) of the preceding sentence as of December 31, 1998, such payments would have amounted to $1,294,654, $404,075 and $334,579, respectively. Benefits Pension Plan. Great Southern's employees are included in the Pentegra Retirement Fund, a multiple employer comprehensive pension plan. This noncontributory defined benefit retirement plan covers all employees who have met minimum service requirements. The following table illustrates annual pension benefits payable upon retirement, subject to limits established by Federal law, based on various levels of compensation and years of service and assuming payment in the form of a straight-life annuity. Covered compensation includes all regular and overtime pay excluding bonuses and commissions. At December 31, 1998, Messrs. W. Turner, Gibson and J. Turner had 23, 22 and 6 years, respectively, of credited service under the pension plan. Since the pension plan is fully funded, there were no contributions during the six months ended December 31, 1998 for Messrs. W. Turner, Gibson and J. Turner. Average Annual Covered Compensation Years of Service -------------------- ----------------------------------------------- 10 20 30 40 ------- ----------- ------------- ----------- $ 50,000 $10,000 $ 20,000 $ 30,000 $ 40,000 100,000 20,000 40,000 60,000 80,000 150,000 30,000 60,000 90,000 120,000 200,000 40,000 80,000 120,000 130,000(1) 250,000 50,000 100,000 130,000(1) 130,000(1) 300,000 60,000 120,000 130,000(1) 130,000(1) 350,000 70,000 130,000(1) 130,000(1) 130,000(1) - ------------------ (1)The maximum retirement benefit currently permitted by federal law is $130,000 per year for this type of plan. 60 Item 12. Security Ownership of Certain Beneficial Owners and Management. The following table sets forth certain information as of March 20, 1999 as to those persons believed by management of Bancorp to be beneficial owners of more than five percent of Bancorp's outstanding shares of Common Stock. Persons, legal or natural, and groups beneficially owning in excess of five percent of Bancorp's Common Stock are required to file certain reports regarding such ownership with Bancorp and with the United States Securities and Exchange Commission (the "SEC") in accordance with the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Where appropriate, historical information set forth below is based on the most recent Schedule 13D or 13G filed on behalf of such person with Bancorp. Other than those persons listed below, management is not aware of any person or group that owns more than five percent of Bancorp's Common Stock as of March 20, 1999. The holders have sole voting and dispositive power, unless otherwise noted. Name and Address Amount and Percent of of Beneficial Owner Nature of Beneficial Ownership(1)(4) Class(2) - -------------------- ------------------------------------ ---------- William V. Turner 1,044,371(3) 13.48% Ann S. Turner Turner Family Limited Partnership 925 St. Andrews Circle Springfield, MO 65809 Robert M. Mahoney 486,184 6.32 Joyce B. Mahoney Tri-States Service Company 909 E. Trafficway Springfield, MO 65802 Earl A. Steinert, Jr. 460,500 5.99 1736 E. Sunshine Springfield, MO 65804 - ------------------ (1) Under Rule 13d-3 under the Exchange Act, share amounts shown for Bancorp's officers and directors include shares that they may acquire upon the exercise of options that are exercisable at the reported date or will become exercisable within 60 days of such date. The holders may disclaim beneficial ownership of the included shares that are owned by or with family members, trusts or other entities. (2) The percentage ownership is based on the number of shares outstanding as of March 20, 1999. (3) This figure includes 67,527 shares that may be acquired through option exercises by William V. Turner. This figure also includes 33,617 shares held in various capacities by Ann S. Turner, Mr. W. Turner's wife, which Mr. W. Turner may be deemed to beneficially own, 24,826 shares held by the Turner Family Foundation which Mr. and Mrs. Turner may be deemed to beneficially own and 783,012 shares held by the Turner Family Limited Partnership which Mr. and Mrs. W. Turner may be deemed to beneficially own. Mr. W. Turner disclaims beneficial ownership as to shares beneficially owned by Ann S. Turner and the Turner Family Foundation. This figure also includes 142,890 shares held in various capacities by William V. Turner, Mrs. Turner's husband, which Mrs. Turner may be deemed to beneficially own. Mrs. Turner disclaims beneficial ownership as to shares beneficially owned by William V. Turner and the Turner Family Foundation. (4) Due to the rules for determining beneficial ownership, the same securities may be attributed as being beneficially owned by more than one person. These disclosures are based on: (i) a 13D filing dated October 20, 1994 by William V. Turner, Ann S. Turner and the Turner Family Limited Partnership; (ii) a 13D filing dated November 11, 1994 by Earl A. Steinert, Jr.; and (iii) a 13D filing dated April 22, 1997 by Robert M. Mahoney, Joyce B. Mahoney and Tri- States Service Company. 61 Stock Ownership of Management The following table sets forth information as to shares of Common Stock beneficially owned by the directors and the executive officers named in the Summary Compensation Table above and the directors and all executive officers of Bancorp as a group. Each beneficial owner listed has sole voting and dispositive power with respect to the shares of Common Stock reported, except as otherwise indicated. Amount and Percent of Name Nature of Beneficial Ownership(1) Class - -------------- ------------------------ -------- William V. Turner 1,044,371(2) 13.48% William E. Barclay 55,596(3) .72 Larry D. Frazier 62,500 .81 William K. Powell 194,940 2.54 Albert F. Turner 46,122(4) .60 Don M. Gibson 305,786(5) 3.97 Joseph W. Turner 44,606(6) .58 Directors and Executive Officers as a Group (9 persons) 1,860,470(7) 23.89 - ----------------- (1) Under Rule 13d-3 under the Exchange Act, share amounts shown for Bancorp's officers and directors include shares that they may acquire upon the exercise of options that are exercisable at Mach 20, 1999 or will become exercisable within 60 days of such date. The holders may disclaim beneficial ownership of the included shares that are owned by or with family members, trusts or other entities. (2) For a detailed discussion of the nature of Mr. W. Turner's ownership, see Footnote 1 to the table of beneficial owners set out above. (3) Mr. Barclay shares voting and dispositive power with his spouse with respect to all shares. (4) Mr. Albert Turner shares voting and dispositive power with his spouse with respect to all shares. (5) The figure includes 3,750 shares that may be acquired through option exercises. (6) This figure includes 22,810 shares that may be acquired through option exercises. (7) The figure includes 98,087 shares that may be acquired through option exercises by all directors and executive officers as a group. General Voting Rules. Each stockholder of the Common Stock is entitled to cast one vote for each share of Common Stock held on the Record Date on all matters including the election of directors except that any stockholder that beneficially owns in excess of 10 percent (the "Limit") of the then outstanding shares of Common Stock is not entitled to vote shares in excess of the Limit. In order for any proposals to be approved by Bancorp's stockholders, the holders of a majority of the shares of Bancorp Common Stock entitled to vote must constitute a quorum by being present at the meeting, either in person or through a proxy, regardless of whether such stockholders vote their shares. However, shares in excess of the Limit are not considered present for purposes of determining a quorum. With respect to proposals other than the election of directors, a majority of shares voted must be for approval. The directors must be elected by a plurality of the shares voted. 62 In determining the percentage of shares that have been affirmatively voted for a particular proposal, the affirmative votes are measured against the votes for and against the proposal plus the abstentions from voting on the proposal. A stockholder may abstain from voting on any proposal other than the election of the directors, and shares for which the holders abstain from voting are not considered to be votes affirmatively cast. Thus, abstaining will have the effect of a vote against a proposal. A director is elected by an affirmative vote of the plurality of the quorum of shares of Common Stock entitled to vote on the election of the director. With regard to the election of the director, votes may be cast in favor or withheld. Votes that are withheld will be excluded entirely from the vote and will have no effect. Shares Held Through a Broker. Bancorp Common Stock is listed for trading on the Nasdaq Stock Market. Under the rules of the National Association of Securities Dealers (the "NASD"), member brokers who hold shares of Common Stock in the broker's name for customers are required to forward, along with certain other information, signed proxy cards to the customers for them to complete and send to Bancorp, and such brokers may only vote shares of Common Stock if the brokers are the beneficial owners or hold them in a fiduciary capacity with the power to vote. Notwithstanding the restrictions on voting of the NASD rules, if a NASD member broker is also a member of a national securities exchange, then the broker can vote the shares of Common Stock held for customers in accordance with the rules of that exchange. Under the rules of the New York Stock Exchange, Inc. ("NYSE"), for example, NYSE member brokers who have not received direction on voting from their customers can vote shares of Common Stock held for a customer on certain routine matters (as specified by the NYSE). When a broker does not vote shares held for customers, it is referred to as a "broker non-vote" (customer directed abstentions are directions to the broker and therefore do not cause broker non-votes). Broker non-votes generally do not affect the determination of whether a quorum is present at the Annual Meeting because typically some of the shares held in the broker's name have usually been voted on at least some proposals, and therefore, all of the shares held by the broker are considered present at the Annual Meeting. Under applicable Delaware law, a broker non-vote will have no effect on any proposal presented at the Annual Meeting, including the election of directors. Item 13. Certain Relationships and Related Transactions. Great Southern, like many financial institutions, has from time to time extended loans to its officers, directors and employees, generally for the financing of their personal residences, at favorable interest rates. Generally, residential loans have been granted at interest rates 1% above Great Southern's cost of funds, subject to annual adjustments. These loans have been made in the ordinary course of business, on substantially the same terms and collateral as those of comparable transactions prevailing at the time, and, in the opinion of management, do not involve more than the normal risk of collectibility or present other unfavorable features. All loans by Great Southern to its directors and executive officers are subject to OTS regulations restricting loans and other transactions with affiliated persons of Great Southern. From August, 1989 to August 1996, all such transactions were made on terms and conditions, including interest rates, comparable to those for similar transactions with non-affiliates. Great Southern may also grant loans to officers, directors and employees, their related interest and their immediate family members in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those rates prevailing at the time for comparable transactions with other persons which, in the opinion of management, did not involve more than the normal risk of collectibility or present other unfavorable features. 63 No directors, executive officers or their affiliates, had aggregate indebtedness to Great Southern on such below market rate loans exceeding $60,000 at any time since July 1, 1998 except as noted below.
Largest Amount Outstanding Interest Date of Since Balance as Rate at Name Position Loan 7/1/98 of 12/31/98 12/31/98 Type - ----------------- ------------------------------ -------- ----------- -------------- -------- --------- William V. Turner Chairman, President and CEO 08/30/95 $324,949 $323,169 5.73% Home Mortgage Don M. Gibson Executive Vice President, COO, 12/30/97 218,836 $217,204 5.73 Home Mortgage CFO and Secretary 10/20/98 23,398 23,398 7.75 Home Equity Joseph W. Turner Executive Vice President and 10/08/97 254,177 -- n/a Home Mortgage General Counsel 09/21/98 300,000 299,357 5.63 Home Mortgage 05/29/98 120,000 1 -- n/a Home Equity Loan Richard L. Wilson Senior Vice President and 02/06/98 411,343 407,295 5.38 Home Mortgage Controller of Great 07/31/96 99,070 1 -- n/a Home Mortgage Southern Bank 10/31/89 47,477 47,477 7.75 Home Equity Steven G. Mitchem First Vice President and Senior 06/30/98 265,000 168,524 5.63 Home Mortgage Lending Officer of Great 08/12/98 15,000 -- n/a Consumer Southern Bank
PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) List of Documents Filed as Part of This Report (1) Financial Statements The Consolidated Financial Statements and Independent Accountants' Report is attached hereto as Exhibit 1. (2) Financial Statement Schedules Inapplicable. (3) List of Exhibits Exhibits incorporated by reference below are incorporated by reference pursuant to Rule 12b-32. (2) Plan of acquisition, reorganization, arrangement, liquidation, or succession Inapplicable. (3) Articles of incorporation and Bylaws (i) The Registrant's Certificate of Incorporation previously filed with the Commission (File no. 33- 30597) as Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 dated August 18,1989, is incorporated herein by reference as Exhibit 3.1. (ii) The Registrant's Certificate of Amendment of Certificate of Incorporation is attached hereto as Exhibit 3.2. 64 (iii) The Registrant's Bylaws, as amended, previously filed with the Commission (File no. 33-30597) as Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for fiscal year ended June 30, 1990, is incorporated herein by reference as Exhibit 3.3. (4) Instruments defining the rights of security holders, including indentures Inapplicable. (9) Voting trust agreement Inapplicable. (10) Material contracts The Registrant's 1989 Stock Option and Incentive Plan previously filed with the Commission (File no. 33- 30597) as Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1990, is incorporated herein by reference as Exhibit 10.1. An Employment Agreement dated February 1, 1990 between the Registrant and William V. Turner previously filed with the Commission (File no. 33-30597) as Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 dated August 18, 1989, is incorporated herein by reference as Exhibit 10.2. An Employment Agreement dated February 1, 1990 between the Registrant and Don M. Gibson previously filed with the Commission (File no. 33-30597) as Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 dated August 18, 1989, is incorporated herein by reference as Exhibit 10.3. An Employment Agreement dated July 1, 1993 between the Registrant and Joseph W. Turner previously filed with the Commission (File no. 33-30597) as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 1994, is incorporated herein by reference as Exhibit 10.4. The Registrant's 1997 Stock Option and Incentive Plan previously filed with the Commission (File no. 33-30597) as Annex A to the Registrant's Definitive Proxy Statement for the fiscal year ended June 30, 1997, is incorporated herein by reference as Exhibit 10.5. (11) Statement re computation of per share earnings The Statement re computation of per share earnings is included in Note 1 of the Consolidated financial statements under Item 1 above. (12) Statements re computation of ratios Inapplicable. (13) Annual report to security holders, Form 10-Q or quarterly report to security holders Inapplicable. 65 (16) Letter re change in certifying accountant Inapplicable. (18) Letter re change in accounting principles Inapplicable. (21) Subsidiaries of the registrant A listing of the Registrant's subsidiaries is attached hereto as Exhibit 21. (22) Published report regarding matters submitted to vote of security holders Inapplicable. (23) Consents of experts and counsel The consent of Baird, Kurtz & Dobson to the incorporation by reference into the Form S-8 previously filed on December 16, 1992 with the Commission (File no. 33-55832) of their report on the financial statements included in this Form 10-K, is attached hereto as Exhibit 23. (24) Power of attorney Inapplicable. (27) Financial Data Schedule Information is attached hereto as exhibit 27. (28) Information from reports furnished to state insurance regulatory authorities Inapplicable. (99) Additional Exhibits Inapplicable. (b) Reports on Form 8-K None. 66 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 by the undersigned thereunto duly authorized. GREAT SOUTHERN BANCORP, INC. (Registrant) Date: April 14, 1999 By: /s/ William V. Turner ------------------------------------ William V. Turner Chairman of the Board, President, Chief Executive Officer and Director (Principal Executive Officer) POWER OF ATTORNEY We, the undersigned officers and directors of Great Southern Bancorp, Inc., hereby severally and individually constitute and appoint William V. Turner and Don M. Gibson, and each of them, the true and lawful attorneys and agents of each of us to execute in the name, place and stead of each of us (individually and in any capacity stated below) any and all amendments to this Annual Report on Form 10-K and all instruments necessary or advisable in connection therewith and to file the same with the Securities and Exchange Commission, each of said attorneys and agents to have the power to act with or without the others and to have full power and authority to do and perform in the name and on behalf of each of the undersigned every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as any of the undersigned might or could do in person, and we hereby ratify and confirm our signatures as they may be signed by our said attorneys and agents or each of them to any and all such amendments and instruments. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. Signature Capacity in which signed Date - ---------------------- ----------------------------- ------------------ /s/ William V. Turner President, Chairman of April 14, 1999 - ---------------------- the Board and Director (William V. Turner) (Principal Executive Officer) /s/ Don M. Gibson Executive Vice President, April 14, 1999 - ---------------------- Secretary and Treasurer (Don M. Gibson) (Principal Financial Officer and Principal Accounting Officer) /s/ William E. Barclay Director April 14, 1999 - ------------------------ (William E. Barclay) /s/ Larry D. Frazier Director April 14, 1999 - ------------------------- (Larry D. Frazier) /s/ William K. Powell Director April 14, 1999 - ------------------------- (William K. Powell) /s/ Joseph W. Turner Director April 14, 1999 - ------------------------- (Joseph W. Turner) 67 Great Southern Bancorp, Inc. Index to Exhibits Exhibit No. Document - --------- ------------------------------------------------- 21 Subsidiaries of the Registrant 23 Consent of Baird, Kurtz & Dobson, Certified Public Accountants 27 Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only and not filed 99 Consolidated Financial Statements and Audit Report 68
Exhibit 21 ---------- SUBSIDIARIES OF THE REGISTRANT State of Percentage Incorporation of or Parent Subsidiary Ownership Organization - ------------------------------------ --------------------------------------- ---------- ------------- Great Southern Bancorp, Inc. Great Southern Bank 100% Missouri Great Southern Bank Great Southern Capital Management, Inc. 100% Missouri Great Southern Bank Great Southern Financial Corporation 100% Missouri Great Southern Bank GSB One, L.L.C. 100% Missouri GSB One, L.L.C. GSB Two, L.L.C. 100% Missouri Great Southern Financial Corporation Appraisal Services, Inc. 100% Missouri
69 Exhibit 23 ---------- We consent to the incorporation by reference in Registration Statement No. 33-55832 on Form S-8 dated December 16, 1992, of our report dated March 18, 1999, on the consolidated financial statements and schedules included in the Annual Report on Form 10-K of GREAT SOUTHERN BANCORP, INC. for the six months ended December 31, 1998. /s/ Baird, Kurtz & Dobson April 15, 1999 Springfield, Missouri 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 annual report on Form 10-K and is qualified in its entirety by reference to such annual report on Form 10-K. 1,000 6-MOS DEC-31-1998 DEC-31-1998 24,115 9,431 0 0 6,476 59,038 59,214 698,319 16,928 836,498 597,625 39,619 11,245 119,632 0 0 123 68,259 836,498 30,332 2,153 0 32,485 12,255 16,530 15,955 1,291 356 11,306 11,216 11,216 0 0 7,358 .93 .91 4.32 7,418 2,728 0 0 16,373 1,499 763 16,928 16,928 0 7,772
EX-99 3 CONSOLIDATED FINANCIAL STATEMENTS AND AUDIT REPORT Great Southern Bancorp, Inc. Accountants' Report and Consolidated Financial Statements December 31, 1998 and June 30, 1998 and 1997 72 Independent Accountants' Report Board of Directors Great Southern Bancorp, Inc. Springfield, Missouri We have audited the consolidated statements of financial condition of GREAT SOUTHERN BANCORP, INC. as of December 31, 1998 and June 30, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the six-month period ended December 31, 1998, and each of the three years in the period ended June 30, 1998. 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GREAT SOUTHERN BANCORP, INC. as of December 31, 1998 and June 30, 1998 and 1997, and the results of its operations and its cash flows for the six-month period ended December 31, 1998, and each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. /s/ Baird, Kurtz & Dobson Springfield, Missouri March 18, 1999 73
GREAT SOUTHERN BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1998 AND JUNE 30, 1998 AND 1997 ASSETS June 30, December 31, ----------------------------- 1998 1998 1997 ------------ ------------ ------------ Cash $ 24,115,015 $ 12,199,490 $ 8,176,763 Interest-bearing deposits in other financial institutions 9,431,407 33,631,748 24,308,337 ----------- ----------- ----------- Cash and cash equivalents 33,546,422 45,831,238 32,485,100 Available-for-sale securities 6,475,897 6,362,700 7,408,020 Held-to-maturity securities 59,037,532 50,362,963 49,756,978 Loans receivable, net 698,318,863 655,226,070 583,709,446 Interest receivable: Loans 4,854,247 5,159,425 4,225,771 Investments 651,993 738,382 767,541 Refundable income taxes -- 240,623 -- Prepaid expenses and other assets 6,571,841 3,960,573 2,982,653 Foreclosed assets held for sale, net 2,810,201 4,750,910 5,650,962 Premises and equipment, net 10,012,125 9,457,015 7,433,073 Investment in Federal Home Loan Bank stock 9,454,100 9,454,100 10,792,600 Excess of cost over fair value of net assets acquired, at amortized cost 543,278 626,465 -- Deferred income taxes 4,221,203 2,920,665 2,629,140 ----------- ----------- ----------- Total Assets $836,497,702 $795,091,129 $707,841,284 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits $597,624,994 $549,772,712 $456,370,108 Federal Home Loan Bank advances 158,452,407 169,508,852 151,822,319 Short-term borrowings 798,247 -- 28,744,191 Accrued interest payable 5,356,558 3,646,952 2,924,419 Advances from borrowers for taxes and insurance 1,582,298 2,176,662 2,488,397 Accounts payable and accrued expenses 2,442,368 2,577,058 1,873,824 Income taxes payable 1,858,343 -- 3,269,659 ----------- ----------- ----------- Total Liabilities 768,115,215 727,682,236 647,492,917 ----------- ----------- ----------- STOCKHOLDERS' EQUITY Capital stock Serial preferred stock, $.01 par value; authorized 1,000,000 shares -- -- -- Common stock, $.01 par value; authorized 20,000,000 shares, issued 12,325,002 shares 123,250 123,250 123,250 Additional paid-in capital 17,224,451 17,110,496 17,058,326 Retained earnings 90,459,992 84,955,740 73,980,259 Accumulated other comprehensive income: Unrealized appreciation on available-for-sale securities, net of income taxes of $214,410 at December 31, 1998; $669,921 and $870,860 at June 30, 1998 and 1997, respectively 335,359 1,047,824 1,362,116 ----------- ----------- ----------- 108,143,052 103,237,310 92,523,951 Less treasury common stock, at cost; December 31, 1998 - 4,522,323 shares; June 30, 1998 and 1997 - 4,363,275 and 4,219,881 shares 39,760,565 35,828,417 32,175,584 ----------- ----------- ----------- Total Stockholders' Equity 68,382,487 67,408,893 60,348,367 ----------- ----------- ----------- Total Liabilities and Stockholders' Equity $836,497,702 $795,091,129 $707,841,284 =========== =========== =========== See Notes to Consolidated Financial Statements
74
CONSOLIDATED STATEMENTS OF INCOME SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED) AND YEARS ENDED JUNE 30, 1998, 1997 AND 1996 Six Months Ended December 31, Year Ended June 30, -------------------------- ---------------------------------------- 1998 1997 1998 1997 1996 ------------ ------------ ------------ ------------ ------------ (Unaudited) INTEREST INCOME Loans $ 30,332,255 $ 27,878,190 $ 57,536,900 $ 51,365,481 $ 49,884,135 Investment securities and other 2,152,517 2,162,836 4,394,785 4,174,966 4,054,230 ----------- ----------- ----------- ----------- ----------- 32,484,772 30,041,026 61,931,685 55,540,447 53,938,365 ----------- ----------- ----------- ----------- ----------- INTEREST EXPENSE Deposits 12,255,041 10,394,603 20,950,665 17,950,677 17,002,724 Federal Home Loan Bank advances 4,236,600 4,675,844 9,904,520 10,229,111 10,585,178 Short-term borrowings 38,180 530,448 1,136,493 642,356 544,509 ----------- ----------- ----------- ----------- ----------- 16,529,821 15,600,895 31,991,678 28,822,144 28,132,411 ----------- ----------- ----------- ----------- ----------- NET INTEREST INCOME 15,954,951 14,440,131 29,940,007 26,718,303 25,805,954 PROVISION FOR LOAN LOSSES 1,290,712 852,382 1,852,597 1,706,142 1,450,754 ----------- ----------- ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 14,664,239 13,587,749 28,087,410 25,012,161 24,355,200 ----------- ----------- ----------- ----------- ----------- NONINTEREST INCOME Commissions 3,135,936 2,585,633 5,652,388 4,968,695 4,412,600 Service charge fees 2,389,892 1,753,255 3,840,564 2,784,719 2,381,455 Net realized gains on sales of loans 385,563 461,228 1,125,153 521,165 539,979 Net realized gains on sales of available- for-sale securities 355,501 871,766 1,397,828 205,425 680,357 Income on foreclosed assets 420,104 383,092 326,197 285,543 727,995 Other income 1,170,728 778,129 1,456,437 1,751,861 1,581,553 ----------- ----------- ----------- ----------- ----------- 7,857,724 6,833,103 13,798,567 10,517,408 10,323,939 ----------- ----------- ----------- ----------- ----------- NONINTEREST EXPENSE Salaries and employee benefits 5,743,429 5,227,302 10,828,683 9,233,943 8,381,708 Net occupancy expense 1,771,624 1,349,235 3,033,707 2,400,570 2,220,131 Postage 447,493 392,434 857,127 625,745 634,465 Insurance 291,897 351,626 637,339 3,428,428 1,267,765 Amortization of excess of cost over fair value of net assets acquired 83,188 -- 65,410 1,106,961 192,845 Advertising 275,799 294,672 586,367 675,456 533,336 Office supplies and printing 395,995 322,987 665,878 562,668 435,427 Other operating expenses 2,296,644 1,944,848 3,843,717 2,404,733 2,608,707 ----------- ----------- ----------- ----------- ----------- 11,306,069 9,883,104 20,518,228 20,438,504 16,274,384 ----------- ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 11,215,894 10,537,748 21,367,749 15,091,065 18,404,755 PROVISION FOR INCOME TAXES 3,858,300 3,057,700 6,923,700 5,751,200 7,110,800 ----------- ----------- ----------- ----------- ----------- NET INCOME $ 7,357,594 $ 7,480,048 $14,444,049 $ 9,339,865 $11,293,955 =========== =========== =========== =========== =========== EARNINGS PER COMMON SHARE BASIC $ .93 $ .93 $ 1.79 $ 1.11 $ 1.27 =========== =========== =========== =========== =========== DILUTED $ .91 $ .91 $ 1.76 $ 1.10 $ 1.23 =========== =========== =========== =========== =========== See Notes to Consolidated Financial Statements
75
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED DECEMBER 31, 1998 AND YEARS ENDED JUNE 30, 1998, 1997 AND 1996 Additional Comprehensive Common Paid-in Income Stock Capital ------------- ---------- ----------- BALANCE, JULY 1, 1995 $ -- $ 61,625 $16,692,966 Net income 11,293,955 -- -- Stock issued under Stock Option Plan -- -- 141,541 Dividends declared, $.35 per share -- -- -- Change in unrealized appreciation on available-for-sale securities, net of income taxes of $169,696 (265,422) -- -- Treasury stock purchased -- -- -- ---------- -------- --------- Comprehensive Income $11,028,533 ========== BALANCE, JUNE 30, 1996 $ -- 61,625 16,834,507 Net income 9,339,865 -- -- Stock issued under Stock Option Plan -- -- 285,444 Dividends declared, $.3875 per share -- -- -- Two-for-one stock split -- 61,625 (61,625) Change in unrealized appreciation on available-for-sale securities, net of income taxes of $809,400 1,265,987 -- -- Treasury stock purchased -- -- -- ---------- -------- --------- Comprehensive Income $10,605,852 ========== BALANCE, JUNE 30, 1997 $ -- 123,250 17,058,326 Net income 14,444,049 -- -- Stock issued under Stock Option Plan -- -- 52,170 Dividends declared, $.43 per share -- -- -- Change in unrealized appreciation on available- for-sale securities, net of income taxes of $200,939 (314,292) -- -- Treasury stock purchased -- -- -- ---------- -------- --------- Comprehensive Income $14,129,757 ========== BALANCE, JUNE 30, 1998 $ -- 123,250 17,110,496 Net income 7,357,594 -- -- Stock issued under Stock Option Plan -- -- 113,955 Dividends declared, $.235 per share -- -- -- Change in unrealized appreciation on available- for-sale securities, net of income taxes of $455,511 (712,465) -- -- Treasury stock purchased -- -- -- ---------- -------- --------- Comprehensive Income $ 6,645,129 ========== BALANCE, DECEMBER 31, 1998 $123,250 $17,224,451 ======= ========== See Notes to Consolidated Financial Statements
76
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED DECEMBER 31, 1998 AND YEARS ENDED JUNE 30, 1998, 1997 AND 1996 Accumulated Other Comprehensive Income -------------- Unrealized Appreciation on Available- Retained for-Sale Treasury Earnings Securities, Net Stock Total ------------- --------------- ------------- ----------- BALANCE, JULY 1, 1995 $59,755,968 $ 361,551 $(13,889,923) $62,982,187 Net income 11,293,955 -- -- 11,293,955 Stock issued under Stock Option Plan -- -- 137,731 279,272 Dividends declared, $.35 per share (3,132,035) -- -- (3,132,035) Change in unrealized appreciation on available-for-sale securities, net of income taxes of $169,696 -- (265,422) -- (265,422) Treasury stock purchased -- -- (3,350,388) (3,350,388) ---------- -------- ----------- ---------- BALANCE, JUNE 30, 1996 67,917,888 96,129 (17,102,580) 67,807,569 Net income 9,339,865 -- -- 9,339,865 Stock issued under Stock Option Plan -- -- 511,669 797,113 Dividends declared, $.3875 per share (3,277,494) -- -- (3,277,494) Two-for-one stock split -- -- -- -- Change in unrealized appreciation on available-for-sale securities, net of income taxes of $809,400 -- 1,265,987 -- 1,265,987 Treasury stock purchased -- -- (15,584,673) (15,584,673) ---------- -------- ----------- ---------- BALANCE, JUNE 30, 1997 73,980,259 1,362,116 (32,175,584) 60,348,367 Net income 14,444,049 -- -- 14,444,049 Stock issued under Stock Option Plan -- -- 41,948 94,118 Dividends declared, $.43 per share (3,468,568) -- -- (3,468,568) Change in unrealized appreciation on available-for-sale securities, net of income taxes of $200,939 -- (314,292) -- (314,292) Treasury stock purchased -- -- (3,694,781) (3,694,781) ---------- -------- ----------- ---------- BALANCE, JUNE 30, 1998 84,955,740 1,047,824 (35,828,417) 67,408,893 Net income 7,357,594 -- -- 7,357,594 Stock issued under Stock Option Plan -- -- 13,480 127,435 Dividends declared, $.235 per share (1,853,342) -- -- (1,853,342) Change in unrealized appreciation on available-for-sale securities, net of income taxes of $455,511 -- (712,465) -- (712,465) Treasury stock purchased -- -- (3,945,628) (3,945,628) ---------- -------- ----------- ---------- BALANCE, DECEMBER 31, 1998 $90,459,992 $ 335,359 $(39,760,565) $68,382,487 ========== ======== ============ ========== See Notes to Consolidated Financial Statements
77
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED DECEMBER 31, 1998 AND YEARS ENDED JUNE 30, 1998, 1997 AND 1996 Year Ended June 30, Six Months Ended ------------------------------------- December 31, 1998 1998 1997 1996 ------------------ ----------- ------------- ----------- RECLASSIFICATION DISCLOSURE: Unrealized appreciation (depreciation) on available-for-sale securities net of income taxes of $(317,783) for December 31, 1998; $344,214 for June 30, 1998; $899,438 for June 30, 1997; and $95,643 for June 30, 1996 $(497,044) $ 538,383 $ 1,391,174 $ 149,596 Less: Reclassification adjustment for appreciation included in net income, net of income taxes of $(137,728) for December 31, 1998; $(545,153) for June 30, 1998; $80,038 for June 30, 1997; and $(265,339) for June 30, 1996 (215,421) (852,675) (125,187) (415,018) ------- ------- --------- ------- Change in unrealized appreciation (depreciation) on available-for-sale securities, net of income taxes $(712,465) $(314,292) $ 1,265,987 $(265,422) ======= ======= ========= ======= See Notes to Consolidated Financial Statements
78
CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED) AND YEARS ENDED JUNE 30, 1998, 1997 AND 1996 Six Months Ended December 31, Year Ended June 30, --------------------------- ----------------------------------------- 1998 1997 1998 1997 1996 ------------- ------------ ------------ ------------- ------------ (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 7,357,594 $ 7,480,048 $ 14,444,049 $ 9,339,865 $11,293,955 Items not requiring (providing) cash: Depreciation 880,746 550,001 1,333,423 1,003,243 980,290 Amortization 83,187 -- 55,410 1,101,961 192,845 Provision for loan losses 1,290,712 852,382 1,852,597 1,706,142 1,450,754 Provision for losses on foreclosed assets -- -- 100,000 100,000 275,000 Gain on sale of loans (385,563) (456,800) (1,125,153) (521,165) (539,979) Proceeds from sales of loans held for sale 26,486,196 32,664,500 73,678,174 27,121,165 37,139,979 Originations of loans held for sale (30,668,718) (32,207,700) (72,553,021) (26,600,000) (36,600,000) Federal Home Loan Bank stock dividends received -- -- -- -- (176,400) Net realized gains on available- for-sale securities (355,501) (872,920) (1,397,828) (205,425) (680,357) (Gain) loss on sale of premises and equipment (600) (80,272) (65,417) (9,585) 2,171 Gain on sale of foreclosed assets (894,459) (529,338) (576,783) (559,902) (1,316,887) Amortization of deferred income, premiums and discounts (855,072) (348,297) (704,900) (894,292) (680,395) Deferred income taxes (1,246,911) 50,000 (90,586) (350,000) 604,000 Changes in: Accrued interest receivable 391,567 73,690 (904,495) 363,110 (470,643) Prepaid expenses and other assets 1,569,791 (289,834) (977,920) (1,208,214) 924,293 Accounts payable and accrued Expenses (134,690) 983,683 703,234 (557,683) 80,325 Income taxes refundable/payable 2,500,850 (3,414,636) (3,510,282) 2,382,241 (336,363) ---------- ---------- ---------- ---------- ---------- Net cash provided by operating activities 6,019,129 4,454,507 10,260,502 12,211,461 12,142,588 ---------- ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Net increase in loans (41,855,375) (37,688,999) (72,070,913) (33,724,744) (30,701,061) Purchase of additional business units -- (546,875) (681,875) -- -- Purchase of premises and equipment (1,436,201) (1,627,421) (3,505,798) (1,771,232) (955,690) Proceeds from sale of premises and equipment 945 201,008 213,850 31,455 2,875 Proceeds from sale of foreclosed assets 1,685,600 702,636 1,099,476 1,017,514 2,044,721 Capitalized costs on foreclosed assets (140,750) (34,977) (302,040) (198,090) (206,107) Proceeds from maturing held-to- maturity securities 21,375,000 4,250,000 19,500,000 39,398,775 9,526,632 Purchase of held-to-maturity Securities (30,046,746) (2,767,108) (20,119,994) (40,159,443) (11,971,929) Proceeds from sale of available- for-sale securities 1,365,670 2,380,482 3,359,677 1,377,623 2,942,647 Purchase of available-for-sale securities (2,289,879) -- (1,431,760) (1,849,015) (4,262,442) (Purchase) redemption of Federal Home Loan Bank stock -- -- 1,338,500 (769,800) (1,360,400) ---------- ---------- ---------- ---------- ---------- Net cash used in investing activities (51,341,736) (35,131,254) (72,600,877) (36,646,957) (34,940,754) ---------- ---------- ---------- ---------- ---------- See Notes to Consolidated Financial Statements
79
CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997 (UNAUDITED) AND YEARS ENDED JUNE 30, 1998, 1997 AND 1996 Six Months Ended December 31, Year Ended June 30, --------------------------- ----------------------------------------- 1998 1997 1998 1997 1996 ------------- ------------ ------------ ------------- ------------ (Unaudited) CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in certificates of deposit $ 32,006,537 $ (6,018,484) $ 39,497,048 $ 55,356,409 $ 4,484,912 Net increase in checking and savings accounts 17,602,644 11,212,606 54,632,670 6,824,821 8,242,392 Proceeds from Federal Home Loan Bank advances 217,565,407 445,426,866 895,823,200 539,345,121 425,700,856 Repayments of Federal Home Loan Bank advances (228,669,145) (410,944,660) (878,141,248) (568,261,064)(399,226,851) Net increase (decrease) in short-term borrowings 798,247 1,686,743 (28,744,191) 12,276,366 2,520,881 Advances to borrowers for taxes and insurance (594,364) (1,560,771) (311,735) (171,030) (565,797) Purchase of treasury stock (3,945,628) (755,058) (3,694,781) (15,584,673) (3,350,388) Dividends paid (1,853,342) (1,699,187) (3,468,568) (3,277,494) (3,132,035) Stock options exercised 127,435 2,476 94,118 797,113 279,272 ---------- ---------- ---------- ---------- ---------- Net cash provided by financing activities 33,037,791 37,350,531 75,686,513 27,305,569 34,953,242 ---------- ---------- ---------- ---------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12,284,816) 6,673,784 13,346,138 2,870,073 12,155,076 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 45,831,238 32,485,100 32,485,100 29,615,027 17,459,951 ---------- ---------- ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 33,546,422 $ 39,158,884 $ 45,831,238 $ 32,485,100 $ 29,615,027 ======== ======== ======== ======== ======== See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND JUNE 30, 1998, 1997 AND 1996 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Great Southern Bancorp, Inc. ("GSBC" or the "Company") operates as a one- bank holding company. GSBC's business primarily consists of the business of Great Southern Bank (the "Bank"), which provides a full range of financial services; as well as travel, insurance, investment services, loan closings and appraisals through the Company's and the Bank's other wholly owned subsidiaries; to customers primarily in southwest and central Missouri. The Company and the Bank are subject to the regulation of certain federal and state agencies and undergo periodic examinations by those regulatory agencies. In June 1998, the Bank converted to a state-chartered trust company and the Company became a one-bank holding company. Until that time the Bank was a stock savings bank and the Company was a savings bank holding company. 80 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the valuation of foreclosed assets held for sale, management obtains independent appraisals for significant properties. Management believes that the allowances for losses on loans and the valuation of foreclosed assets held for sale are adequate. While management uses available information to recognize losses on loans and foreclosed assets held for sale, changes in economic conditions may necessitate revision of these estimates in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowances for losses on loans and valuation of foreclosed assets held for sale. Such agencies may require the Bank to recognize additional losses based on their judgments of information available to them at the time of their examination. Fiscal Year Change In 1998, the Company changed its fiscal year ended June 30 to a fiscal year ended December 31. The six-month period ended December 31, 1998, transitions between the Company's old and new fiscal year ends. Principles of Consolidation The consolidated financial statements include the accounts of Great Southern Bancorp, Inc., its wholly owned subsidiary, Great Southern Bank, and the Bank's wholly owned subsidiaries, Great Southern Capital Management, GSB One LLC and its wholly owned subsidiary, GSB Two LLC and Great Southern Financial Corporation, and its wholly owned subsidiary, Appraisal Services, Inc. Significant intercompany accounts and transactions have been eliminated in consolidation. Reclassifications Certain prior periods amounts have been reclassified to conform to the December 31, 1998, financial statements presentation. These reclassifications had no effect on net income. Cash and Investment Securities The Bank is a member of the Federal Home Loan Bank system. As a member of this system, it is required to maintain an investment in capital stock of the Federal Home Loan Bank (FHLB) in an amount equal to the greater of 1% of its outstanding home loans, 0.3% of its total assets, or one-twentieth of its outstanding advances from the FHLB. 81 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Investments in Debt and Equity Securities Available-for-sale securities, which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Realized gains and losses, based on specifically identified amortized cost of the specific security, are included in other income. Unrealized gains and losses are recorded, net of related income tax effects, in stockholders' equity. Premiums and discounts are amortized and accreted, respectively, to interest income using the level-yield method over the period to maturity. Held-to-maturity securities, which include any security for which the Company has the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized and accreted, respectively, to interest income using the level-yield method over the period to maturity. Interest and dividends on investments in debt and equity securities are included in income when earned. Excess of Cost Over Fair Value of Net Assets Acquired Unamortized costs in excess of the fair value of underlying net assets acquired were $543,278, $626,465 and $0 at December 31, 1998 and June 30, 1998 and 1997, respectively. These costs are amortized on a straight-line basis for a period of five years. As a result of a revision of the estimated future benefit, all unamortized costs in excess of the fair value of underlying net tangible assets at June 30, 1996, were fully expensed during 1997. Mortgage Loans Held for Sale Mortgage loans held for sale are carried at the lower of cost or fair value, determined using an aggregate basis. Write-downs to fair value are recognized as a charge to earnings at the time the decline in value occurs. Forward commitments to sell mortgage loans are acquired to reduce market risk on mortgage loans in the process of origination and mortgage loans held for sale. Amounts paid to investors to obtain forward commitments are deferred until such time as the related loans are sold. The fair values of the forward commitments are not recognized in the financial statements. Gains and losses resulting from sales of mortgage loans are recognized when the respective loans are sold to investors. Gains and losses are determined by the difference between the selling price and the carrying amount of the loans sold, net of discounts collected or paid and commitment fees paid and considering a normal servicing rate. Fees received from borrowers to guarantee the funding of mortgage loans held for sale and fees paid to investors to ensure the ultimate sale of such mortgage loans are recognized as income or expense when the loans are sold or when it becomes evident that the commitment will not be used. There were no material loans held for sale at December 31, 1998 and June 30, 1998 and 1997. Loans Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Discounts and premiums on purchased loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. 82 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Allowance for Loan Losses The allowance for loan losses is increased by provisions charged to expense and reduced by loans charged off, net of recoveries. The allowance is maintained at a level considered adequate to provide for potential loan losses, based on management's evaluation of the loan portfolio, as well as on prevailing and anticipated economic conditions and historical losses by loan category. General allowances have been established, based upon the aforementioned factors and allocated to the individual loan categories. Allowances are accrued on specific loans evaluated for impairment for which the basis of each loan, including accrued interest, exceeds the discounted amount of expected future collections of interest and principal or, alternatively, the fair value of loan collateral. A loan is considered impaired when it is probable that the Bank will not receive all amounts due according to the contractual terms of the loan. This includes loans that are delinquent 90 days or more (nonaccrual loans) and certain other loans identified by management. Accrual of interest is discontinued and interest accrued and unpaid is removed at the time such amounts are delinquent 90 days. Interest is recognized for nonaccrual loans only upon receipt, and only after all principal amounts are current according to the terms of the contract. Foreclosed Assets Held for Sale Assets acquired by foreclosure or in settlement of debt and held for sale are valued at estimated fair value as of the date of foreclosure, and a related valuation allowance is provided for estimated costs to sell the assets. Management evaluates the value of foreclosed assets held for sale periodically and increases the valuation allowance for any subsequent declines in fair value. Changes in the valuation allowance are charged or credited to noninterest expense. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line and accelerated methods over the estimated useful lives of the assets. Leasehold improvements are capitalized and amortized using the straight-line and accelerated methods over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. Fee Income Loan servicing income represents fees earned for servicing real estate mortgage loans owned by various investors. The fees are generally calculated on the outstanding principal balances of the loans serviced and are recorded as income when earned. Loan origination fees, net of direct loan origination costs, are recognized as income using the level-yield method over the contractual life of the loan. Earnings Per Share Basic earnings per share is computed based on the weighted-average number of shares outstanding during each year. Diluted earnings per share is computed using the weighted-average common shares and all potential dilutive common shares outstanding during the period. All computations have been adjusted for the stock split of October 21, 1996 (see Note 15). 83 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) The computation of earnings per share is as follows:
Six Months Ended December 31, Year Ended June 30, -------------------------- ------------------------------------------ 1998 1997 1998 1997 1996 ------------ ------------ ------------- ------------ ------------- (Unaudited) Net income $ 7,357,594 $ 7,480,048 $ 14,444,049 $ 9,339,865 $ 11,293,955 ========== ========== ========== ========== =========== Average common shares outstanding 7,896,771 8,081,996 8,052,413 8,394,080 8,926,192 Average common share stock options outstanding 163,382 143,082 151,162 93,682 269,412 ---------- ---------- --------- ---------- ---------- Average diluted common shares 8,060,153 8,225,078 8,203,575 8,487,762 9,195,604 ========== ========= ========= ========= =========== Earnings per common share - basic $ .93 $ .93 $ 1.79 $ 1.11 $ 1.27 ========== ========== ========== ========== =========== Earnings per common share - diluted $ .91 $ .91 $ 1.76 $ 1.10 $ 1.23 ========== ========== ========== ========== =========== Options to purchase 43,250 and 19,250 shares of common stock were outstanding during the periods ended December 31, 1998 and June 30, 1998, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. The options, which expire in 2008, were still outstanding at the end of each period. Cash Equivalents The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 1998 and June 30, 1998 and 1997, cash equivalents consisted of interest bearing deposits in other financial institutions. Income Taxes Deferred tax liabilities and assets are recognized for the tax effect of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized. Impact of Recent Accounting Pronouncements The Financial Accounting Standard Board (FASB) recently adopted Statement of Financial Accounting Standards (SFAS) 133, Accounting for Derivative Financial Instruments and Hedging Activities. This Statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, may be adopted early for periods beginning after issuance of the Statement and may not be applied retroactively. Management believes the adoption of SFAS 133 will not have a material impact on the Company's financial statements. 84 NOTE 2: INVESTMENTS IN DEBT AND EQUITY SECURITIES The amortized cost and approximate fair value of available-for-sale securities are as follows: December 31, 1998 ------------------------------------------------ Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ----------- Equity securities $5,926,128 $ 549,769 $ -- $ 6,475,897 ========= ======== ======== ========== June 30, 1998 ------------------------------------------------ Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ----------- Equity securities $4,644,955 $1,717,745 $ -- $ 6,362,700 ========= ======== ======== ========== June 30, 1997 ------------------------------------------------ Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ----------- Equity securities $5,175,044 $2,232,976 $ -- $ 7,408,020 ========= ======== ======== ========== The amortized cost and approximate fair value of held-to-maturity securities are as follows: December 31, 1998 ------------------------------------------------ Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ----------- U.S. Treasury $ 601,594 $ 2,706 $ -- $ 604,300 U.S. government agencies 46,966,338 177,072 (10,410) 47,133,000 States and local political subdivisions 11,469,600 6,800 -- 11,476,400 ---------- ---------- ---------- ----------- $59,037,532 $ 186,578 $ (10,410) $59,213,700 ========== ========= ========= ========== June 30, 1998 ------------------------------------------------ Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ----------- U.S. Treasury $ 2,103,414 $ 3,586 $ -- $ 2,107,000 U.S. government agencies 48,259,549 174,451 -- 48,434,000 ---------- ---------- ---------- ----------- $50,362,963 $ 178,037 $ 0 $50,541,000 ========== ========= ========= ========== 85 NOTE 2: INVESTMENTS IN DEBT AND EQUITY SECURITIES (Continued) June 30, 1997 ------------------------------------------------ Gross Gross Approximate Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---------- ---------- ---------- ----------- U.S. Treasury $ 7,057,218 $ 7,651 $ 3,869 $ 7,061,000 U.S. government agencies 42,699,760 110,527 12,287 42,798,000 ---------- ---------- ---------- ----------- $49,756,978 $ 118,178 $ 16,156 $49,859,000 ========== ========= ========= ========== Maturities of held-to-maturity securities at December 31, 1998, are: Approximate Amortized Fair Cost Value ----------- ----------- One year or less $18,150,232 $18,218,100 After one through five years 39,337,300 39,438,800 After five through 10 years 1,550,000 1,556,800 ---------- ---------- $59,037,532 $59,213,700 ========== ========== Proceeds of $1,350,712, $3,359,677, $1,377,623 and $2,942,647 with resultant gross gains of $355,501, $1,397,828, $205,425 and $680,357, were realized from the sale of available-for-sale securities for the six months ended December 31, 1998, and for the years ended June 30, 1998, 1997 and 1996, respectively. There were no sales resulting in losses for any of the periods presented. The carrying value of securities pledged as collateral to secure public deposits amounted to approximately $18,823,500, $10,195,000 and $9,677,000 at December 31, 1998 and June 30, 1998 and 1997, respectively, with approximate fair values of $18,887,800, $10,231,000 and $9,695,000. The carrying value of securities pledged as collateral to secure collateralized borrowing accounts amounted to approximately $13,772,000 at June 30, 1997, with approximate fair value of $13,805,000. There were no securities pledged as collateral to secure collateralized borrowings at December 31, 1998 and June 30, 1998. The carrying value of securities pledged as collateral to secure Federal Home Loan Bank advances amounted to approximately $22,171,000, $22,683,000 and $26,308,000 at December 31, 1998 and June 30, 1998 and 1997, respectively, with approximate fair values of $22,243,900, $22,760,000 and $26,360,000. 86 NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES Categories of loans at December 31, 1998 and June 30, 1998 and 1997, include: June 30, December 31, ------------------------- 1998 1998 1997 ------------ ------------ ------------ One to four family residential mortgage loans $217,119,697 $217,688,415 $243,006,249 Other residential mortgage loans 85,828,254 89,140,632 95,885,537 Commercial real estate loans 261,200,938 244,016,514 191,555,823 Other commercial loans 57,178,749 54,722,556 25,958,963 Construction loans 59,797,292 49,180,948 35,703,850 Mortgage-backed securities 1,357,311 1,553,901 1,761,122 Installment and education loans 63,366,049 46,566,627 27,665,964 Discounts on loans purchased (704,779) (1,031,702) (1,150,880) Undisbursed portion of loans in process(28,822,880) (28,496,979) (18,812,126) Allowance for loan losses (16,927,575) (16,372,700) (15,523,541) Deferred loan fees and gains, net (1,074,193) (1,742,142) (2,341,515) ----------- ----------- ----------- $698,318,863 $655,226,070 $583,709,446 =========== =========== =========== Transactions in the allowance for loan losses were as follows: Six Months Ended Year Ended June 30, December 31,----------------------------------- 1998 1998 1997 1996 ----------- ----------- ----------- ----------- Balance, beginning of period $16,372,700 $15,523,541 $14,356,147 $14,600,870 Provision charged to expense 1,290,712 1,852,597 1,706,142 1,450,754 Loans charged off (1,498,525) (1,142,584) (676,714) (1,992,578) Recoveries 762,688 139,146 137,966 297,101 ---------- --------- ---------- ---------- Balance, end of period $16,927,575 $16,372,700 $15,523,541 $14,356,147 ========== ========== ========== ========== The weighted-average interest rate on loans receivable at December 31, 1998 and June 30, 1998 and 1997, was 8.38%, 8.96% and 8.99%, respectively. The Bank serviced whole mortgage loans and participations in mortgage loans for others amounting to $56,670,000, $60,047,000 and $69,837,000 at December 31, 1998 and June 30, 1998 and 1997, respectively. Impaired loans totaled approximately $10,146,000, $9,485,000, $10,163,000 and $5,455,000 at December 31, 1998 and June 30, 1998, 1997 and 1996, respectively. An allowance for loan losses of $689,000, $1,501,000, $1,622,000 and $832,000 relates to these impaired loans at December 31, 1998 and June 30, 1998, 1997 and 1996, respectively. There were no impaired loans at December 31, 1998 and June 30, 1998, 1997 and 1996, without a related allowance for loan loss assigned. Interest of approximately $225,000, $1,009,000, $487,000 and $923,000 was recognized on average impaired loans of $9,819,000, $12,009,000, $9,362,000 and $9,210,000 for the six months ended December 31, 1998, and the years ended June 30, 1998, 1997 and 1996, respectively. Interest recognized on impaired loans on a cash basis during these periods was not materially different. 87 NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued) Certain of the Bank's real estate loans are pledged as collateral for borrowings as set forth in Notes 7 and 8. Certain directors and executive officers of the Company and the Bank were customers of and had transactions with the Bank in the ordinary course of business. In the opinion of management, all loans included in such transactions were made on substantially the same terms as those prevailing at the time for comparable transactions with unrelated parties. At December 31, 1998 and June 30, 1998 and 1997, loans outstanding to these directors and executive officers are summarized as follows: June 30, December 31, ----------------------- 1998 1998 1997 ------------ ----------- ----------- Balance, beginning of year $ 6,145,000 $ 5,494,000 $ 1,382,000 New loans 587,000 1,048,000 4,353,000 Payments (941,000) (397,000) (241,000) ---------- ---------- ---------- Balance, end of year $ 5,791,000 $ 6,145,000 $ 5,494,000 ========== ========== ========== NOTE 4: FORECLOSED ASSETS HELD FOR SALE June 30, December 31, ----------------------- 1998 1998 1997 ------------ ----------- ----------- Foreclosed assets $ 2,810,201 $ 4,750,910 $ 5,970,352 Valuation allowance -- -- (319,390) ---------- ---------- ---------- $ 2,810,201 $ 4,750,910 $ 5,650,962 ========== ========== ========== Transactions in the valuation allowance on foreclosed assets were as follows: Six Months Ended Year Ended June 30, December 31, -------------------------------- 1998 1998 1997 1996 ------------ --------- ----------- ---------- Balance, beginning of period $ -- $ 319,390 $ 1,085,602 $ 932,547 Provision charged to expense -- 100,000 100,000 275,000 Charge-offs, net of recoveries -- (419,390) (866,212) (121,945) ------ -------- ---------- --------- Balance, end of period $ 0 $ 0 $ 319,390 $1,085,602 ====== ======== ========== ========= 88 NOTE 5: PREMISES AND EQUIPMENT Major classifications of premises and equipment stated at cost at December 31, 1998 and June 30, 1998 and 1997, are as follows: June 30, December 31, ----------------------- 1998 1998 1997 ------------ ----------- ----------- Land $ 1,565,780 $ 1,565,780 $ 1,628,981 Buildings and improvements 8,730,367 8,357,100 8,071,448 Furniture, fixtures and equipment 10,069,717 9,038,608 6,204,196 ---------- ---------- ---------- 20,365,864 18,961,488 15,904,625 Less accumulated depreciation 10,353,739 9,504,473 8,471,552 ---------- ---------- ---------- $10,012,125 $ 9,457,015 $ 7,433,073 ========== ========== ========== Depreciation expense was $880,746, $1,333,423, $1,003,243 and $980,290 for the six months ended December 31, 1998, and the years ended June 30, 1998, 1997 and 1996, respectively. NOTE 6: DEPOSITS Deposits at December 31, 1998 and June 30, 1998 and 1997, are summarized as follows:
June 30, Weighted-average December 31, ----------------------------- Interest Rate 1998 1998 1997 --------------------- ------------- ------------- ------------- Noninterest-bearing accounts -- $ 43,211,233 $ 29,374,778 $ 14,571,834 Interest-bearing checking 2.39% - 2.25% - 2.36% 156,419,923 155,485,084 115,231,966 Savings accounts 2.50% - 2.51% - 2.51% 32,189,870 34,644,369 35,064,843 ----------- ----------- ----------- 231,821,026 219,504,231 164,868,643 ----------- ----------- ----------- Certificate accounts 0% - 3.99% 435,732 61,879 724,646 4% - 4.99% 69,178,221 17,476,479 14,165,816 5% - 5.99% 259,843,966 257,704,093 212,238,314 6% - 6.99% 32,261,682 51,064,400 51,540,038 7% - 7.99% 3,844,602 3,710,659 12,326,032 8% - 10.25% 239,765 250,971 506,619 ----------- ----------- ----------- 365,803,968 330,268,481 291,501,465 ----------- ----------- ----------- $ 597,624,994 $ 549,772,712 $ 456,370,108 =========== =========== ===========
The weighted-average interest rate on certificates of deposit was 5.35%, 5.50% and 5.53% at December 31, 1998 and June 30, 1998 and 1997, respectively. The aggregate amount of certificates of deposit in denominations of $100,000 or more was approximately $65,407,000, $48,675,000 and $44,489,000 at December 31, 1998 and June 30, 1998 and 1997, respectively. From time to time the Bank purchases brokered deposits. The aggregate amount of brokered deposits was approximately $146,697,000, $118,977,000 and $77,387,000 at December 31, 1998 and June 30, 1998 and 1997, respectively. 89 NOTE 6: DEPOSITS (Continued) At December 31, 1998, scheduled maturities of certificates of deposit are as follows:
1999 2000 2001 2002 Thereafter ------------- ------------ ------------ ------------ ------------ 0% to 3.99% $ 386,477 $ -- $ -- $ 49,255 $ -- 4% to 4.99% 63,332,234 5,561,043 236,653 13,632 34,659 5% to 5.99% 157,023,423 32,095,393 17,548,407 17,578,902 35,597,841 6% to 6.99% 17,044,646 8,160,652 1,529,244 2,154,753 3,372,387 7% to 7.99% 583,274 481,895 347,461 2,094,340 337,632 8% to 10.25% 35,190 -- -- -- 204,575 ----------- ---------- ---------- ---------- ---------- $ 238,405,244 $ 46,298,983 $ 19,661,765 $ 21,890,882 $ 39,547,094 =========== ========== ========== ========== ==========
A summary of interest expense on deposits is as follows:
Six Months Ended Year Ended June 30, December 31, ------------------------------------------- 1998 1998 1997 1996 ------------- ------------- ------------- ------------- Checking accounts $ 2,007,149 $ 2,673,921 $ 2,570,966 $ 2,494,566 Savings accounts 318,651 858,880 866,810 914,310 Certificate accounts 9,960,599 17,485,313 14,579,734 13,667,688 Early withdrawal penalties (31,358) (67,449) (66,833) (73,840) ---------- ---------- ---------- ---------- $ 12,255,041 $ 20,950,665 $ 17,950,677 $ 17,002,724 ========== ========== ========== ==========
NOTE 7: ADVANCES FROM FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank consist of the following: June 30, December 31, 1998 1998 1997 -------------------- ------------------------------------------ Weighted- Weighted- Weighted- Average Average Average Interest Interest Interest Due In Amount Rate Amount Rate Amount Rate - ------------ ------------ ----- ------------ ----- ------------ ----- 1998 $ -- --% $ -- --% $117,602,967 6.18% 1999 38,820,282 5.97 69,220,415 6.04 4,890,593 6.14 2000 30,527,518 5.82 24,876,968 6.66 7,683,759 8.43 2001 1,002,110 6.98 13,453,605 5.75 3,248,520 6.33 2002 11,085,961 5.65 958,976 7.10 741,285 7.41 2003 21,177,370 4.21 11,041,651 5.66 810,579 7.42 2004 and thereafter 55,839,166 5.70 49,957,237 5.75 16,844,616 7.16 ----------- ---- ----------- ---- ----------- ---- $158,452,407 5.60% $169,508,852 6.00% $151,822,319 6.42% =========== ==== =========== ==== =========== ==== 90 NOTE 7: ADVANCES FROM FEDERAL HOME LOAN BANK (Continued) In addition to the above advances, the Bank had available a line of credit amounting to $50,000,000, $22,800,000 and $44,250,000 with the FHLB at December 31, 1998 and June 30, 1998 and 1997, respectively. The FHLB requires the Bank to maintain FHLB stock, investment securities and first mortgage loans free of pledges, liens and encumbrances in an amount equal to at least 105% of outstanding advances as collateral for such borrowings. Investment securities with carrying values of $22,171,000, $22,683,000 and $26,308,000, respectively, were specifically pledged as collateral for advances at December 31, 1998 and June 30, 1998 and 1997. NOTE 8 SHORT-TERM BORROWINGS Short-term borrowings at December 31, 1998 and June 30, 1998 and 1997, are summarized as follows: June 30, December 31, --------------------- 1998 1998 1997 ------------ ------- ----------- United States government securities sold under reverse repurchase agreements $ - $ - $10,342,523 Other 798,247 - 18,401,668 -------- ------ ---------- $ 798,247 $ 0 $28,744,191 ======== ====== ========== Prior to its conversion to a state trust charter, the Bank entered into sales of securities under agreements to repurchase (reverse repurchase agreements). Reverse repurchase agreements were treated as financings, and the obligations to repurchase securities sold were reflected as a liability in the statement of financial condition. The dollar amount of securities underlying the agreements remained in the asset accounts. At June 30, 1998, all short-term borrowings were reclassified to deposits. Other short-term borrowings consisted of agreements with corporate entities which are secured by a pledge of residential mortgage loans, and margin loans with brokerage firms. Securities sold under reverse repurchase agreements had a carrying value including accrued interest of $14,012,000 and a fair value of $13,805,000 at June 30, 1997. Mortgage loans securing other short-term borrowings had a carrying value of $11,695,000 at June 30, 1997. Short-term borrowings had weighted-average interest rates of 7.20% at December 31, 1998, and 3.24% at June 30, 1997. Securities and mortgage loans underlying the agreements were being held by the Bank during the agreement period. All agreements were written on a one month or less term. Short-term borrowings averaged $770,000 for the six months ended December 31, 1998, and $32,234,000, $18,894,000 and $17,344,000 for the years ended June 30, 1998, 1997 and 1996, respectively. The maximum amounts outstanding at any month end were $2,386,670, $41,176,000, $28,744,000 and $20,132,000 during the six months ended December 31, 1998, and the years ended June 30, 1998, 1997 and 1996, respectively. The Bank had a potentially available $210,535,000 line of credit under a borrowing arrangement with the Federal Reserve Bank at December 31, 1998. The line is secured primarily by commercial loans and was not drawn upon at December 31, 1998. 91 NOTE 9: INCOME TAXES The Company files a consolidated federal income tax return. Historically, thrifts were allowed a percentage of otherwise taxable income as a statutory bad debt deduction, subject to limitations based on aggregate loans and savings balances. This percentage was most recently 8%. In August 1996 this statutory bad debt deduction was repealed and is no longer available for thrifts. In addition, bad debt allowances accumulated after 1988, which are presently included as a component of the net deferred tax asset, must be recaptured over a six-year period beginning with the period ended December 31, 1998. The amount of the deferred tax liability which must be recaptured is $1,681,000 at December 31, 1998. As of December 31, 1998 and June 30, 1998 and 1997, retained earnings includes approximately $17,500,000 for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad- debt deductions for tax purposes only for tax years prior to 1988. If the Bank were to liquidate, the entire amount would have to be recaptured and would create income for tax purposes only, which would be subject to the then- current corporate income tax rate. The unrecorded deferred income tax liability on the above amount was approximately $6,475,000 at December 31, 1998 and June 30, 1998 and 1997. The provision for income taxes consists of: Six Months Ended Year Ended June 30, December 31, --------------------------------- 1998 1998 1997 1996 ------------ ---------- ---------- ---------- Taxes currently payable $4,703,327 $7,014,286 $6,101,200 $6,506,800 Deferred income taxes (845,027) (90,586) (350,000) 604,000 --------- --------- --------- --------- $3,858,300 $6,923,700 $5,751,200 $7,110,800 ========= ========= ========= ========= The tax effects of temporary differences related to deferred taxes shown on the December 31, 1998 and June 30, 1998 and 1997, statements of financial condition were: June 30, December 31, ----------------------- 1998 1998 1997 ------------ ----------- ----------- Deferred tax assets: Allowance for loan and foreclosed asset losses $ 6,114,740 $ 5,746,586 $ 5,884,000 Accrued expenses 182,000 163,000 159,000 Partnership tax credits 59,000 46,000 24,000 Excess of cost over fair value of net assets required 36,000 16,000 -- --------- --------- --------- 6,391,740 5,971,586 6,067,000 --------- --------- --------- Deferred tax liabilities: Tax bad debt allowance in excess of base year allowance (1,261,000) (1,722,000) (1,922,000) FHLB stock dividends (641,000) (641,000) (641,000) Unrealized appreciation on available-for-sale securities (214,410) (669,921) (870,860) Other (54,127) (18,000) (4,000) --------- --------- --------- (2,170,537) (3,050,921) (3,437,860) --------- --------- --------- Net deferred tax asset $ 4,221,203 $ 2,920,665 $ 2,629,140 ========= ========= ========= 92 NOTE 9: INCOME TAXES (Continued) Reconciliations of the Company's provision for income taxes to the statutory corporate tax rates are as follows: Six Months Ended Year Ended June 30, December 31, ----------------------------- 1998 1998 1997 1996 ------------ -------- -------- --------- Tax at statutory rate 35.0% 35.0% 35.0% 35.0% State income taxes .1 (3.1) 2.5 2.1 Other (.7) .5 .6 1.5 ---- ---- ---- ---- 34.4% 32.4% 38.1% 38.6% ==== ==== ==== ==== The income and other tax returns of the Company and its consolidated subsidiaries are subject to but have not been audited recently by the Internal Revenue Service and state taxing authorities. These returns have been closed without audit through June 30, 1995. State legislation provided that savings banks were taxed based on an annual privilege tax of 7% of net income. The 1997 and 1996 state tax included in the provision for income tax amounted to $652,000 and $552,000, respectively. Because the Bank converted to a state chartered trust company in June 1998, the Bank was not subject to the privilege tax for June 30, 1998, or December 31, 1998, but was instead subject to a similar bank franchise tax. During the year ended June 30, 1998, the Bank received $1.1 million in state tax refunds of previously paid taxes. Also during 1998 the Company formed a Real Estate Investment Trust (REIT) to hold certain of the Bank's loan portfolio. This tax strategy reduces the Company's liabilities for state income and franchise taxes. NOTE 10: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and Cash Equivalents For these short-term instruments, the carrying amount approximates fair value. Available-For-Sale Securities Fair values for available-for-sale securities, which also are the amounts recognized in the statements of financial condition, equal quoted market prices, if available. If quoted market prices are not available, fair values are estimated based on quoted market prices of similar securities. Held-To-Maturity Securities Fair values for held-to-maturity securities equal quoted market prices, if available. If quoted market prices are not available, fair values are estimated based on quoted market prices of similar securities. Federal Home Loan Bank Stock The carrying amount approximates fair value. 93 NOTE 10: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Loans The fair value of loans 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. Loans with similar characteristics are aggregated for purposes of the calculations. The carrying amount of accrued interest receivable approximates its fair value. Deposits The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date, i.e., their carrying amounts. The fair value of fixed-maturity certificates of deposit is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value. Federal Home Loan Bank Advances Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing advances. Short-Term Borrowings The carrying amounts reported in the statements of financial condition for short-term borrowings approximate those liabilities' fair value. Commitments to Extend Credit, Letters of Credit and Lines of Credit The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The following table presents estimated fair values of the Company's financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which method involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate. 94
June 30, --------------------------------------------------- December 31, 1998 1998 1997 ------------------------- ------------------------- ------------------------- Carrying Carrying Carrying Amount Fair Value Amount Fair Value Amount Fair Value ------------ ------------ ------------ ------------ ------------ ------------ Financial assets: Cash and cash equivalents $ 33,546,422 $ 33,546,422 $ 45,831,238 $ 45,831,238 $ 32,485,100 $ 32,485,100 Available-for-sale securities 6,475,897 6,475,897 6,362,700 6,362,700 7,408,020 7,408,020 Held-to-maturity securities 59,037,532 59,213,700 50,362,963 50,541,000 49,756,978 49,859,000 Investment in FHLB stock 9,454,100 9,454,100 9,454,100 9,454,100 10,792,600 10,792,600 Loans, net of allowance for loan losses 698,318,863 713,314,000 655,226,090 660,187,000 583,709,446 591,041,000 Accrued interest receivable 5,506,240 5,506,240 5,897,807 5,897,807 4,993,312 4,993,312 Financial liabilities: Deposits $602,974,645 $605,482,000 $553,365,464 $552,400,000 $459,235,746 $460,673,000 FHLB advances 158,452,407 157,616,000 169,563,052 169,637,000 151,881,100 153,764,000 Short-term borrowings 798,247 798,247 -- -- 28,744,191 28,744,191 Unrecognized financial instruments (net of contractual value): Commitments to extend credit -- -- -- -- -- -- Standby letters of credit -- -- -- -- -- -- Unused lines of credit -- -- -- -- -- --
NOTE 11: LEASES The Bank has entered into various operating leases at several of its branch locations. Some of the leases have renewal options. At December 31, 1998, future minimum lease payments are as follows: 1999 $ 240,804 2000 203,827 2001 189,877 2002 165,777 2003 123,277 Later Years 588,800 --------- $1,512,362 ========= Rental expense was $136,360, $222,429, $203,675 and $188,188 for the six months ended December 31, 1998, and the years ended June 30, 1998, 1997 and 1996, respectively. NOTE 12: COMMITMENTS AND CREDIT RISK Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a significant portion of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, commercial real estate and residential real estate. 95 NOTE 12: COMMITMENTS AND CREDIT RISK (Continued) At December 31, 1998 and June 30, 1998 and 1997, the Bank had outstanding commitments to originate loans and fund commercial construction aggregating approximately $60,990,161, $63,174,000 and $59,987,000 including $28,823,000, $28,497,000 and $18,812,000, respectively, of undisbursed loans in process. The commitments extend over varying periods of time with the majority being disbursed within a 30- to 180-day period. Loan commitments at fixed rates of interest amounted to $3,286,000, $7,075,000 and $479,000 with the remainder at floating market rates at December 31, 1998 and June 30, 1998 and 1997, respectively. Letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank had total outstanding letters of credit amounting to approximately $9,832,000, $10,365,000 and $9,206,000 at December 31, 1998 and June 30, 1998 and 1997, respectively, with $1,585,000, $2,118,000 and $959,000 of the letters of credit having terms ranging from seven months to four years at December 31, 1998 and June 30, 1998 and 1997, respectively. The remaining $8,247,000 at December 31, 1998 and June 30, 1998 and 1997, consisted of an outstanding letter of credit to guarantee the payment of principal and interest on a Multifamily Housing Refunding Revenue Bond issue. The Federal Home Loan Bank has issued a letter of credit backing the Bank's letter of credit. Lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines of credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counter party. Collateral held varies but may include accounts receivable, inventory, property and equipment, commercial real estate and residential real estate. The Bank uses the same credit policies in granting lines of credit as it does for on-balance-sheet instruments. At December 31, 1998, the Bank had granted unused lines of credit to borrowers aggregating approximately $25,523,000 and $7,161,000 for commercial lines and open-end consumer lines, respectively. At June 30, 1998, the Bank had granted unused lines of credit to borrowers aggregating approximately $30,385,000 and $5,313,000 for commercial lines and open-end consumer lines, respectively. At June 30, 1997, the Bank had granted unused lines of credit to borrowers aggregating approximately $7,517,000 and $3,731,000 for commercial lines and open-end consumer lines, respectively. The Bank grants collateralized commercial, real estate and consumer loans primarily to customers in the southwest and central portions of Missouri. Although the Bank has a diversified portfolio, loans (including loans in process) aggregating approximately $114,342,000, $122,900,000 and $121,900,000 at December 31, 1998 and June 30, 1998 and 1997, respectively, are secured by motels, restaurants, recreational facilities, other commercial properties and residential mortgages in the Branson, Missouri, area. 96 NOTE 13: LITIGATION GSBC and its subsidiaries are defendants in certain lawsuits arising in the ordinary course of business. Management, after review with its legal counsel, is of the opinion that the resolution of these legal matters will not have a material adverse effect on the Company's financial position. NOTE 14: ADDITIONAL CASH FLOW INFORMATION
Six Months Ended Year Ended June 30, December 31, -------------------------------------- 1998 1998 1997 1996 ------------ ---------- ---------- ---------- Noncash Investing and Financing Activities Conversion of loans to foreclosed assets $2,165,000 $4,068,122 $2,272,465 $7,014,308 Conversion of foreclosed assets to loans $2,727,000 $4,647,521 $6,255,412 $4,288,066 Additional Cash Payment Information Interest paid $14,820,215 $31,323,755 $27,922,486 $27,791,991 Income taxes paid $2,600,000 $8,640,000 $3,943,814 $6,045,000
NOTE 15: STOCKHOLDERS' EQUITY On October 1, 1996, the Board of Directors of GSBC declared a stock split effected in the form of a dividend on the outstanding common stock for shareholders of record on October 11, 1996. Each shareholder received one additional share for each share owned on the record date. Historical per share disclosures have been updated where applicable to account for the stock split. NOTE 16: EMPLOYEE BENEFIT PLANS The Company participates in a multi-employer defined benefit plan covering all employees who have met minimum service requirements. The Company's policy is to fund pension cost accrued. No contribution was required for the six months ended December 31, 1998, or the three years ended June 30, 1998. As a member of a multi-employer pension plan, disclosures of plan assets and liabilities for individual employers are not required or practicable. Prior to 1998, the Company had an Employee Stock Ownership Plan (ESOP) for full-time employees age 21 years or older who had at least one year of credited service. During fiscal 1996 the Company terminated the ESOP. The assets of the ESOP were distributed during fiscal 1997. There was no ESOP contribution expense for either of the years ended June 30, 1997 or 1996, respectively. Dividends declared on ESOP shares were $184,610 and $334,210 for the years ended June 30, 1997 and 1996, respectively. The Company has a defined contribution pension plan covering substantially all employees. The Company matches 50% of the employee's contribution on the first 6% of the employee's compensation. Employer contributions charged to expense for the six months ended December 31, 1998, and the years ended June 30, 1998, 1997 and 1996, were $54,379, $82,575, $69,691 and $134,674, respectively. 97 NOTE 17: STOCK OPTION PLAN The Company established the 1989 Stock Option and Incentive Plan for employees and directors of the Company and its subsidiaries. Under the plan, stock options or awards may be granted with respect to 1,232,496 shares of common stock. In addition, the Board of Directors of the Company established the 1997 Stock Option and Incentive Plan for employees and directors of the Company and its subsidiaries. Under the plan, stock options or awards may be granted with respect to 800,000 shares of common stock. No options had been awarded under this plan at December 31, 1998. Stock options may be either incentive stock options or nonqualified stock options, and the option price must be at least equal to the fair value of the Company's common stock on the date of grant. Options are granted for a ten- year term and become exercisable in four cumulative annual installments of 25% commencing two years from the date of grant. The Stock Option Committee may accelerate a participant's right to purchase shares under the plan. Stock awards may be granted to key officers and employees upon terms and conditions determined solely at the discretion of the Stock Option Committee. The table below summarizes transactions under the Company's stock option plans: Shares ---------------------------------- Weighted- Average Available Exercise to Grant Under Option Price --------- ------------ --------- Balance, July 1, 1995 149,723 191,009 $ 1.684 Granted (68,000) 68,000 10.955 Exercised -- (43,888) (1.581) Forfeited 4,463 (4,463) 7.695 ------- -------- ------- Balance, June 30, 1996 86,186 210,658 4.571 Granted (37,500) 37,500 15.635 Exercised -- (2,595) (3.439) Forfeited 2,090 (2,090) (10.938) Effect of 2-for-1 Stock Split 50,776 243,473 6.232 Granted (16,600) 16,600 17.267 Exercised -- (249,796) (1.973) Forfeited 5,766 (5,766) 12.531 ------- -------- ------- Balance, June 30, 1997 90,718 247,984 11.114 Granted (51,600) 51,600 21.950 Exercised -- (12,714) (5.375) Forfeited 5,979 (5,979) (13.547) ------- -------- ------- Balance, June 30, 1998 45,097 280,891 13.488 Granted (45,700) 45,700 23.729 Exercised -- (10,230) (12.297) Forfeited 6,725 (6,725) (19.622) ------- -------- ------- Balance, December 31, 1998 6,122 309,636 12.564 ======= ======== ======= 98 NOTE 17: STOCK OPTION PLAN (Continued) The fair value of each option granted is estimated on the date of the grant using the Black Scholes pricing model with the following weighted- average assumptions: June 30, December 31, ------------------- 1998 1998 1997 ------- ------- ------- Dividends Per Share $0.44 $0.42 $0.36 Risk-Free Interest Rate 4.99% 5.85% 6.04% Expected Life of Options 4 Years 4 Years 4 Years Weighted-Average Fair Value of Options Granted During Year $8.71 $8.11 $5.76 The following table further summarizes information about stock options outstanding at December 31, 1998: Options Outstanding ----------------------------------- Options exercisable Weighted- ---------------------- Average Weighted- Weighted- Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price - ------------------- ----------- ----------- --------- ----------- --------- $1.271 to $5.021 38,987 1.54 Years $2.21 38,987 $2.21 $10.938 to $16.625 168,049 4.49 Years $13.39 68,161 $13.34 $17.00 to $18.70 31,500 6.45 Years $17.79 6,250 $18.64 $21.825 to $25.9375 71,100 8.76 Years -- -- -- The Company applies Accounting Principles Board Opinion 25 and related Interpretations in accounting for its plans, and no compensation cost has been recognized for the Plan. Had compensation cost been determined based on the fair value at the grant dates using Statement of Financial Accounting Standards No. 123, the Company's net income would have decreased by $119,500, $154,900 and $90,800 and earnings per share would have decreased by $.01, $.02 and $.01 for the six months ended December 31, 1998, and the years ended June 30, 1998 and 1997, respectively. The effects of applying this Statement for either recognizing compensation cost or providing pro forma disclosures are not likely to be representative of the effects on reported net income for future years because options vest over several years and additional awards generally are made each year. NOTE 18: SIGNIFICANT ESTIMATES AND CONCENTRATIONS Generally accepted accounting principles require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Estimates related to the allowance for loan losses are reflected in the footnote regarding loans. Current vulnerabilities due to certain concentrations of credit risk are discussed in the footnote on deposits and in the footnote on commitments and credit risk. 99 NOTE 19: REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory-and possibly additional discretionary--actions by regulators that, if undertaken, could have a direct and material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I Capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I Capital (as defined) to adjusted tangible assets (as defined). Management believes, as of December 31, 1998, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1998, the most recent notification from the Bank's regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Company's and the Bank's actual capital amounts and ratios are presented in the table. No amount was deducted from capital for interest-rate risk. The tangible capital ratio shown at June 30, 1997, is specific to thrift institutions.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions --------------- ------------------ ------------------- Amount Ratio Amount Ratio Amount Ratio ------- ----- --------- ------ --------- ------- (In Thousands) As of December 31, 1998 Total Risk-Based Capital Great Southern Bancorp, Inc. $76,660 11.7% >=$52,279 >=8.0% N/A N/A Great Southern Bank $70,403 10.9% >=$51,546 >=8.0% >=$64,432 >=10.0% Tier I Risk-Based Capital Great Southern Bancorp. Inc. $68,383 10.5% >=$26,140 >=4.0% N/A N/A Great Southern Bank $62,239 9.7% >=$25,773 >=4.0% >=$38,659 >=6.0% Core Capital Great Southern Bancorp, Inc. $68,383 8.2% >=$33,369 >=4.0% N/A N/A Great Southern Bank $62,239 8.1% >=$30,556 >=4.0% >=$38,195 >=5.0% As of June 30, 1998 Total Risk-Based Capital Great Southern Bancorp, Inc. $74,065 12.2% >=$48,616 >=8.0% N/A N/A Great Southern Bank $67,254 11.2% >=$48,203 >=8.0% >=$60,770 >=10.0% Tier I Risk-Based Capital Great Southern Bancorp. Inc. $66,361 10.9% >=$24,308 >=4.0% N/A N/A Great Southern Bank $59,487 9.4% >=$25,269 >=4.0% >=$37,904 >=6.0% Core Capital Great Southern Bancorp, Inc. $66,361 8.3% >=$31,862 >=4.0% N/A N/A Great Southern Bank $59,487 7.5% >=$31,629 >=4.0% >=$39,537 >=5.0% 100 NOTE 19: REGULATORY MATTERS (Continued) To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions --------------- ------------------ ------------------- Amount Ratio Amount Ratio Amount Ratio ------- ----- --------- ------ --------- ------- (In Thousands) As of June 30, 1997 Total Risk-Based Capital (Great Southern Bank) $60,430 11.6% >=$41,511 >=8.0% >=$51,889 >=10.0% Tier I Risk-Based Capital (Great Southern Bank) $53,832 10.4% >=$20,756 >=4.0% >=$31,134 >=6.0% Core Capital (Great Southern Bank) $53,832 7.7% >=$21,001 >=3.0% >=$35,001 >=5.0% Tangible Capital (Great Southern Bank) $53,832 7.7% >=$10,500 >=1.5% N/A N/A The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 1998 and June 30, 1998 and 1997, the Bank exceeded its minimum capital requirements. The Bank may not pay dividends which would reduce capital below the minimum requirements shown above. NOTE 20: SAVINGS ASSOCIATION INSURANCE FUND ASSESSMENT On September 30, 1996, federal legislation to recapitalize the Savings Association Insurance Fund (SAIF) was passed requiring savings institutions such as the Bank to pay a one-time assessment to the SAIF of 65.7 basis points, based on deposits as reported at March 31, 1995. The assessment totaled $2,500,000 and has been included in noninterest expense for the year ended June 30, 1997. This one-time assessment, net of income taxes, reduced consolidated net income for the year ended June 30, 1997, by approximately $1,525,000. NOTE 21: SUMMARY OF UNAUDITED QUARTERLY OPERATING RESULTS Following is a summary of unaudited quarterly operating results for six months ended December 31, 1998, and the years ended June 30, 1998 and 1997:
December 31, 1998 ---------------------------- Three Months Ended ---------------------------- September 30 December 31 ------------- ------------ Interest income $ 16,681,007 $ 15,803,765 Interest expense 8,378,787 8,151,034 Provision for loan losses 806,846 483,866 Net realized gains on available- for-sale securities 268,257 87,244 Net income 3,778,572 3,579,022 Earnings per common share - diluted $.47 $.45 101 NOTE 21: SUMMARY OF UNAUDITED QUARTERLY OPERATING RESULTS (Continued) June 30, 1998 -------------------------------------------------------- Three Months Ended --------------------------------------------------------- September 30 December 31 March 31 June 30 ------------ ----------- ----------- ----------- Interest income $14,933,696 $15,107,330 $15,858,000 $16,032,659 Interest expense 7,714,388 7,886,507 8,088,653 8,302,130 Provision for loan losses 416,628 435,754 414,425 585,790 Net realized gains on available- for-sale securities 420,572 451,194 417,761 108,301 Net income 3,860,275 3,619,773 3,363,595 3,600,406 Earnings per common share - diluted $.47 $.44 $.41 $.44 June 30, 1997 -------------------------------------------------------- Three Months Ended --------------------------------------------------------- September 30 December 31 March 31 June 30 ------------ ----------- ----------- ----------- Interest income $13,705,391 $13,737,729 $13,941,471 $14,155,856 Interest expense 7,011,195 7,105,533 7,268,586 7,436,830 Provision for loan losses 410,593 448,892 427,615 419,042 Net realized gains on available- for-sale securities 143,768 -- 61,658 -- Net income 493,297 2,907,735 2,909,250 3,029,583 Earnings per common share - diluted $.05 $.34 $.35 $.37 NOTE 22: OPERATING SEGMENTS The Company' banking operation is its only reportable segment. The banking operation segment is principally engaged in the business of originating residential and commercial real estate loans, commercial business and consumer loans and funding these loans through the attraction of deposits from the general public, originating brokered deposits and borrowing from the Federal Home Loan Bank and others. The operating results of this segment are regularly reviewed by management to make decisions about resource allocations and to assess performance. The following table provides information about segment profits and segment assets and has been prepared using the same accounting policies as those described in the summary of significant accounting policies in Note 1. There are no material intersegment revenues, thus no reconciliations to amounts reported in the consolidated financial statements are necessary. Revenue from segments below the reportable segment threshold is attributable to four operating segments of the Company. These segments include an insurance agency, a travel agency, discount brokerage services and real estate appraisal services. Six Months Ended December 31, 1998 ------------------------------------- Banking All Other Totals ------------ ------------ ----------- Interest income $32,405,769 $79,003 $32,484,772 Interest expense $16,518,815 $11,006 $16,529,821 Depreciation and amortization $838,495 $125,438 $963,933 Provision for income taxes $821,750 3,036,550 $3,858,300 Segment profit $7,077,022 $280,572 $7,357,594 Segment assets $829,674,056 $6,823,646 $836,497,702 Expenditures for segment assets $1,360,336 $79,945 $1,435,281 102 NOTE 22: OPERATING SEGMENTS (Continued) Year Ended June 30, 1998 ------------------------------------- Banking All Other Totals ------------ ------------ ----------- Interest income $61,704,485 $227,200 $61,931,685 Interest expense $31,966,393 $25,285 $31,991,678 Depreciation and amortization $1,254,209 $134,624 $1,388,833 Provision for income taxes $6,165,092 $758,608 $6,923,700 Segment profit $12,963,921 $1,480,128 $14,444,049 Segment assets $790,429,922 $4,661,207 $795,091,129 Expenditures for segment assets $3,379,898 $125,900 $3,505,798 Year Ended June 30, 1997 ------------------------------------- Banking All Other Totals ------------ ------------ ----------- Interest income $55,323,087 $217,360 $55,540,447 Interest expense $28,783,078 $39,066 $28,822,144 Depreciation and amortization $2,035,545 $69,659 $2,105,204 Provision for income taxes $5,532,275 $218,925 $5,751,200 Segment profit $8,674,280 $665,585 $9,339,865 Segment assets $700,802,725 $7,038,559 $707,841,284 Expenditures for segment assets $1,708,170 $63,062 $1,771,232 Year Ended June 30, 1996 ------------------------------------- Banking All Other Totals ------------ ------------ ----------- Interest income $53,601,243 $337,122 $53,938,365 Interest expense $28,132,411 -- $28,132,411 Depreciation and amortization $996,226 $176,909 $1,173,135 Provision for income taxes $6,624,000 $486,800 $7,110,800 Segment profit $10,121,509 $1,172,446 $11,293,955 Segment assets $662,825,590 $5,279,715 $668,105,305 Expenditures for segment assets $900,694 $54,996 $955,690 NOTE 23: CONDENSED PARENT COMPANY STATEMENTS The condensed balance sheets at December 31, 1998 and June 30, 1998 and 1997, and statements of income and cash flows for the six months ended December 31, 1998, and the years ended June 30, 1998, 1997 and 1996, for the parent company, Great Southern Bancorp, Inc., are as follows:
June 30, December 31, ---------------------------- 1998 1998 1997 ------------ ------------ ------------ BALANCE SHEETS Assets Cash $ 457,954 $ 1,555,186 $ 51,526 Available-for-sale securities 6,471,865 6,347,526 7,397,168 Investment in subsidiary bank 62,239,234 59,487,798 53,831,963 Investment in other subsidiaries -- 473,351 1,564,573 Loans receivable 585,000 585,000 -- Dividends receivable 19,743 -- 3,000 Income taxes receivable -- -- 283,072 Other 50,000 50,000 494,348 ---------- ---------- ---------- $ 69,823,796 $ 68,498,861 $ 63,625,650 ========== ========== ==========
103 NOTE 23: CONDENSED PARENT COMPANY STATEMENTS (Continued)
June 30, December 31, ---------------------------- 1998 1998 1997 ------------ ------------ ------------ Liabilities and Stockholders' Equity Accounts payable $ 10,000 $ -- $ -- Income taxes payable 492,850 420,047 -- Short-term borrowings 724,050 -- 2,406,423 Deferred income taxes 214,410 669,921 870,860 Common stock 123,250 123,250 123,250 Additional paid-in capital 17,224,451 17,110,496 17,058,326 Retained earnings 90,459,992 84,955,740 73,980,259 Unrealized appreciation on available-for-sale securities, net 335,359 1,047,824 1,362,116 Treasury stock, at cost (39,760,566) (35,828,417) (32,175,584) ---------- ---------- ---------- $69,823,796 $68,498,861 $63,625,650 ========== ========== ==========
Six Months Ended Year Ended June 30, December 31, ----------------------------------------- 1998 1998 1997 1996 ------------ ------------ ------------ ------------- STATEMENTS OF INCOME Income Dividends from subsidiary bank $ 4,755,806 $ 8,916,733 $ 11,952,241 $ 3,335,250 Dividends from other subsidiaries 51,281 469,109 274,913 1,227,210 Income (loss) on foreclosed assets -- -- (24,077) 94,848 Interest and dividend income 101,172 227,200 217,360 337,122 Net realized gains on sales of available-for-sale securities 353,149 1,397,828 205,225 680,357 Other income (loss) 275 (69,266) 47,472 (11,655) --------- ---------- ---------- --------- Total income 5,261,683 10,941,604 12,673,134 5,663,132 --------- ---------- ---------- --------- Expense Operating expenses 103,668 199,972 197,677 204,967 Interest expense 11,006 25,285 39,066 -- --------- ---------- ---------- --------- Total expense 114,674 225,257 236,743 204,967 --------- ---------- ---------- --------- Income before income tax and equity in undistributed earnings of subsidiaries 5,147,009 10,716,347 12,436,391 5,458,165 Provision (credit) for income taxes 59,350 415,223 (40,848) 205,444 --------- ---------- ---------- --------- Income before equity in earnings of subsidiaries 5,087,659 10,301,124 12,477,239 5,252,721 Equity in undistributed earnings of subsidiaries 2,269,935 4,142,925 (3,137,374) 6,041,234 --------- ---------- ---------- ---------- Net Income $ 7,357,594 $ 14,444,049 $ 9,339,865 $11,293,955 ========== ========== ========== ==========
104 NOTE 23: CONDENSED PARENT COMPANY STATEMENTS (Continued)
Six Months Ended Year Ended June 30, December 31, -------------------------------------------- 1998 1998 1997 1996 ------------ ------------- ------------- -------------- STATEMENTS OF CASH FLOWS Cash Flows From Operating Activities Net income $ 7,357,594 $ 14,444,049 $ 9,339,865 $ 11,293,955 Items not requiring (providing) cash: Loss on low income housing partnership -- 12,093 10,356 11,665 Equity in undistributed earnings of subsidiaries (2,278,085) (4,144,925) 3,137,376 (6,041,234) Gain on sale of foreclosed assets -- -- -- (30,415) Net realized gains on sales of available-for-sale securities (353,149) (1,397,828) (205,225) (680,357) Changes in: Dividends receivable (19,744) 3,000 (3,000) 3,090 Other assets -- 57,505 (57,505) -- Accounts payable 10,000 -- -- -- Income taxes 72,803 703,119 (340,577) (18,071) ---------- ---------- ---------- ---------- Net cash provided by operating activities 4,789,419 9,677,013 11,881,290 4,538,633 ---------- ---------- ---------- ---------- Cash Flows From Investing Activities Net loans originated -- (585,000) -- -- Proceeds from sale of foreclosed assets -- -- 324,900 138,799 Purchase of available-for-sale securities (2,289,879) (1,427,438) (1,845,970) (4,262,729) Proceeds from sale of available-for-sale securities 1,350,713 3,359,677 1,376,123 2,942,647 Capitalized costs on foreclosed assets -- -- -- (1,151) Investment in trust company -- (50,000) -- -- Partnership distribution -- 5,062 3,542 5,332 ---------- ---------- ---------- ---------- Net cash provided by (used in) investing activities (939,166) 1,302,301 (141,405) (1,177,102) ---------- ---------- ---------- ---------- Cash Flows From Financing Activities Net increase (decrease) in short-term borrowings 724,050 (2,406,423) 2,406,423 -- Dividends paid (1,853,342) (3,468,568) (3,277,494) (3,132,035) Stock options exercised 127,435 94,118 797,113 279,272 Treasury stock purchased (3,945,628) (3,694,781) (15,584,673) (3,350,388) ---------- ---------- ---------- ---------- Net cash used in financing activities (4,947,485) (9,475,654) (15,658,631) (6,203,151) ---------- ---------- ---------- ---------- Increase (Decrease) in Cash (1,097,232) 1,503,660 (3,918,746) (2,841,620) Cash, Beginning of Year 1,555,186 51,526 3,970,272 6,811,892 ---------- ---------- ---------- ---------- Cash, End of Year $ 457,954 $ 1,555,186 $ 51,526 $ 3,970,272 ========== ========== ========== ========== Additional Cash Payment Information Income taxes paid -- -- $61,241 $127,570
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