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THIS DOCUMENT IS A COPY OF THE FORM 10-K FILED ON APRIL 16, 1999 PURSUANT TO A
RULE 201 TEMPORARY HARDSHIP EXEMPTION
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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
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2
TABLE OF CONTENTS
Page
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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