UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period ended March 31, 2003
GREAT SOUTHERN BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
43-1524856
(IRS Employer Identification Number)
1451 E. BATTLEFIELD
SPRINGFIELD, MISSOURI
(Address of principal executive offices)
65804
(Zip Code)
(417) 887-4400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
The number of shares outstanding of each of the registrant's classes of common stock: 6,860,103 shares of common stock, par value $.01, outstanding at May 9, 2003.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except number of shares)
| March 31, 2003 |
December 31, 2002 | |
| (Unaudited) | ||
| Cash | $ 62,601 | $ 55,327 |
| Interest-bearing deposits in other financial institutions | 4,239 |
547 |
| Cash and cash equivalents | 66,840 | 55,874 |
| Available-for-sale securities | 217,142 | 236,269 |
| Held-to-maturity securities (fair value $49,900 - March 2003; | ||
| $55,900 - December 2002) | 47,148 | 52,587 |
| Mortgage loans held for sale | 4,869 | 2,636 |
| Loans receivable, net of allowance for loan losses of $20,108 - | ||
| March 2003; $21,288 - December 2002 | 1,008,356 | 995,011 |
| Interest receivable: | ||
| Loans | 5,082 | 5,076 |
| Investments | 1,387 | 1,490 |
| Prepaid expenses and other assets | 15,113 | 16,452 |
| Foreclosed assets held for sale, net | 12,167 | 4,328 |
| Premises and equipment, net | 16,343 | 16,963 |
| Investment in Federal Home Loan Bank stock | 14,962 | 14,962 |
| Refundable income taxes | -- |
990 |
| Total Assets | $1,409,409 |
$1,402,638 |
| LIABILITIES AND STOCKHOLDERS' EQUITY | Liabilities: | |
| Deposits | $ 1,048,149 | $ 1,021,957 |
| Federal Home Loan Bank advances | 180,919 | 206,226 |
| Short-term borrowings | 43,661 | 43,304 |
| Trust preferred securities | 18,917 | 18,964 |
| Accrued interest payable | 2,091 | 2,485 |
| Advances from borrowers for taxes and insurance | 501 | 229 |
| Accounts payable and accrued expenses | 3,737 | 3,697 |
| Income taxes payable | 2,098 | -- |
| Deferred income taxes | 541 |
1,067 |
| Total Liabilities | 1,300,614 |
1,297,929 |
| Stockholders' Equity: | ||
| Capital stock | ||
| Serial preferred stock, $.01 par value; | ||
| authorized 1,000,000 shares; none issued | -- | -- |
| Common stock, $.01 par value; authorized 20,000,000 shares; issued | ||
| 12,325,002 shares | 123 | 123 |
| Additional paid-in capital | 17,136 | 17,033 |
| Retained earnings | 150,360 | 145,931 |
| Accumulated other comprehensive income | 2,219 |
2,568 |
| 169,838 | 165,655 | |
| Less treasury common stock, at cost; March 2003 - 5,464,709 shares; | ||
| December 2002 - 5,467,881 shares | (61,043) |
(60,946) |
| Total Stockholders' Equity | 108,795 |
104,709 |
| Total Liabilities and Stockholders' Equity | $1,409,409 |
$1,402,638 |
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
| THREE MONTHS ENDED | ||
| MARCH 31, | ||
| 2003 |
2002 | |
| (Unaudited) | ||
| INTEREST INCOME | ||
| Loans | $15,321 | $15,673 |
| Investment securities and other | 3,256 |
4,107 |
| TOTAL INTEREST INCOME | 18,577 |
19,780 |
| INTEREST EXPENSE | ||
| Deposits | 4,511 | 5,921 |
| Federal Home Loan Bank advances | 1,451 | 1,862 |
| Short-term borrowings and trust preferred securities | 283 |
327 |
| TOTAL INTEREST EXPENSE | 6,245 |
8,110 |
| NET INTEREST INCOME | 12,332 | 11,670 |
| PROVISION FOR LOAN LOSSES | 1,200 |
1,350 |
| NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES | 11,132 |
10,320 |
| NON INTEREST INCOME | ||
| Commissions | 1,383 | 1,488 |
| Service charges and ATM fees | 2,437 | 1,846 |
| Net gains on loan sales | 552 | 438 |
| Net realized gains on sales of available-for-sale securities | 114 | 595 |
| Expense on foreclosed assets | (263) | (327) |
| Other income | 478 |
417 |
| TOTAL NON INTEREST INCOME | 4,701 |
4,457 |
| NON INTEREST EXPENSE | ||
| Salaries and employee benefits | 4,279 | 3,857 |
| Net occupancy and equipment expense | 1,450 | 1,159 |
| Postage | 421 | 329 |
| Insurance | 163 | 124 |
| Advertising | 155 | 110 |
| Office supplies and printing | 209 | 205 |
| Other operating expenses | 949 |
850 |
| TOTAL NON INTEREST EXPENSE | 7,626 |
6,634 |
| INCOME BEFORE INCOME TAXES | 8,207 | 8,143 |
| PROVISION FOR INCOME TAXES | 2,749 |
2,741 |
| NET INCOME | $ 5,458 |
$ 5,402 |
| BASIC EARNINGS PER COMMON SHARE | $.80 |
$.79 |
| DILUTED EARNINGS PER COMMON SHARE | $.79 |
$.78 |
| DIVIDENDS DECLARED PER COMMON SHARE | $.15 |
$.27 |
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| THREE MONTHS ENDED MARCH 31, | ||
| 2003 |
2002 | |
| (Unaudited) | ||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||
| Net income | $ 5,458 | $ 5,402 |
| Proceeds from sales of loans held for sale | 29,372 | 20,939 |
| Originations of loans held for sale | (24,842) | (14,704) |
| Items not requiring (providing) cash: | ||
| Depreciation | 599 | 576 |
| Amortization | 35 | 36 |
| Provision for loan losses | 1,200 | 1,350 |
| Provision for losses on foreclosed assets | -- | 204 |
| Net gains on loan sales | (552) | (438) |
| Net realized gains on sale of available-for-sale securities | (114) | (595) |
| Gain on sale of premises and equipment | (31) | (109) |
| Gain on sale of foreclosed assets | (189) | (24) |
| Amortization of deferred income, premiums and discounts | 559 | 19 |
| Deferred income taxes | (347) | (449) |
| Changes in: | ||
| Interest receivable | 97 | 401 |
| Prepaid expenses and other assets | 53 | (41) |
| Accounts payable and accrued expenses | (354) | (926) |
| Income taxes refundable/payable | 3,088 |
2,842 |
| Net cash provided by operating activities | 14,032 |
14,483 |
| CASH FLOWS FROM INVESTING ACTIVITIES | ||
| Net increase in loans | (15,231) | (5,710) |
| Purchase of loans | (21,323) | (5,100) |
| Proceeds from sale of student loans | 6,300 | 7,843 |
| Purchase of premises and equipment | (1,093) | (2,110) |
| Proceeds from sale of premises and equipment | 1,145 | 247 |
| Proceeds from sale of foreclosed assets | 2,130 | 1,542 |
| Capitalized costs on foreclosed assets | (60) | (48) |
| Proceeds from maturing held-to-maturity securities | 21,827 | 10,000 |
| Proceeds from called investment securities | 1,000 | 7,000 |
| Principal reductions on mortgage-backed securities | 29,366 | 7,713 |
| Purchase of held-to-maturity securities | (16,383) | (3,600) |
| Proceeds from sale of available-for-sale securities | 28,645 | 70,694 |
| Purchase of available-for-sale securities | (41,084) |
(110,148) |
| Net cash used in investing activities | (4,761) |
(21,677) |
| CASH FLOWS FROM FINANCING ACTIVITIES | ||
| Net increase (decrease) in certificates of deposit | (12,055) | 35,201 |
| Net increase in checking and savings deposits | 39,451 | 17,429 |
| Proceeds from Federal Home Loan Bank advances | 519,000 | 893,000 |
| Repayments of Federal Home Loan Bank advances | (544,307) | (937,633) |
| Net increase (decrease) in short-term borrowings | 357 | (3,551) |
| Advances from borrowers for taxes and insurance | 272 | 229 |
| Purchase of treasury stock | (187) | (251) |
| Dividends paid | (1,029) | (858) |
| Stock options exercised | 193 |
88 |
| Net cash provided by financing activities | 1,695 |
3,654 |
| INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 10,966 | (3,540) |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 55,874 |
35,120 |
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ 66,840 |
$ 31,580 |
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of Great Southern Bancorp, Inc. (the "Company" or "Great Southern") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The financial statements presented herein reflect all adjustments which are, in the opinion of management, necessary to fairly present the financial position, results of operations and cash flows of the Company for the periods presented. Those adjustments consist only of normal recurring adjustments. Operating results for the three months ended March 31, 2003 and 2002 are not necessarily indicative of the results that may be expected for the full year. The consolidated statement of financial condition of the Company as of December 31, 2002, has been derived from the audited consolidated statement of financial condition of the Company as of that date.
Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for 2002 filed with the Securities and Exchange Commission.
NOTE 2: OPERATING SEGMENTS
The Company's banking operation is its only reportable segment. The banking operation segment is principally engaged in the business of originating residential and commercial real estate loans, commercial business loans and consumer loans. These loans are funded through the attraction of deposits from the general public, brokered deposit originations, and borrowings from the Federal Home Loan Bank ("FHLBank") and others. The operating results of this segment are regularly reviewed by management to make decisions about resource allocations and to assess performance.
The following table provides information about segment profits and has been prepared using the same accounting policies as those described in Note 1. There are no material inter-segment revenues, thus no reconciliations to amounts reported in the consolidated financial statements are necessary. Revenue from segments below the reportable segment threshold is attributable to three operating segments of the Company. These segments include an insurance agency, a travel agency, and discount brokerage services.
| Three Months Ended March 31, 2003 |
Three Months Ended March 31, 2002 | |||||
| Banking
|
All Other
|
Totals
|
Banking
|
All Other
|
Totals
| |
| (In thousands) |
(In thousands) | |||||
| Interest income | $ 18,574 | $ 3 | $ 18,577 | $ 19,766 | $ 14 | $ 19,780 |
| Non-interest income | 3,317 | 1,384 | 4,701 | 2,951 | 1,506 | 4,457 |
| Segment profit | 5,342 | 116 | 5,458 | 5,250 | 152 | 5,402 |
NOTE 3: COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", requires the reporting of comprehensive income and its components. Comprehensive income is defined as the change in equity from transactions and other events and circumstances from non-owner sources, and excludes investments by and distributions to owners. Comprehensive income includes net income and other items of comprehensive income meeting the above criteria. The Company's only component of other comprehensive income is the unrealized gains and losses on available-for-sale securities.
| Three Months Ended March 31,
| |||
| 2003
|
2002
| ||
| Net income | $5,458 |
$5,402 | |
| Unrealized holding gains (losses), net of income taxes |
(275) | (621) | |
| Less: reclassification adjustment | |||
| for gains included in | |||
| net income, net of income taxes | 74 |
387 | |
| (349) |
(1,008) | ||
| Other comprehensive income | $5,109 |
$4,394 | |
NOTE 4: CHANGES IN ACCOUNTING PRINCIPLES
The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities." This Statement requires that a liability for costs associated with an exit or disposal activity be recognized when incurred rather than at the date of commitment to an exit or disposal plan. This Statement replaces EITF 94-3 and is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The adoption of this Statement did not have a material effect on the Company's financial statements.
The FASB recently adopted Statement of Financial Accounting Standards No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation - Transition and Disclosure," which amends SFAS 123, "Accounting for Stock-Based Compensation." SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS 148 requires disclosure of the pro forma effects of using the fair value based method of accounting for stock-based compensation and requires that these disclosures be included in interim as well as annual financial statements beginning with the quarter ended March 31, 2003. The disclosure provisions of SFAS 148 did not have a material impact on the Company's financial statements.
The FASB recently issued its Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor to recognize a liability for the fair value of the obligation undertaken in issuing a guarantee at its inception and prescribes disclosures regarding guarantees. The Interpretation applies only to guarantees issued or modified after December 31, 2002. Guarantees issued by the Company are principally in the form of letters of credit. Initial adoption of FIN 45 did not have a material effect on the Company's financial statements. The Company's application of the Interpretation to guarantees issued or modified after December 31, 2002, will, if material, result in recognition of a liability for such guarantees, as well as recognition of fee revenue from them over the period of time the guarantees are outstanding.
The FASB recently issued its Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities," which requires the consolidation of certain special purpose entities ("SPE's) by a company if it is determined to be the primary beneficiary of the SPE's operating activities. The adoption of FIN 46 had no effect on the Company's financial statements.
NOTE 5: STOCK OPTION PLAN
The Company has a stock-based employee compensation plan, which is described more fully in the Company's December 31, 2002 Annual Report on Form 10-K. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price at least equal to the market value of the underlying common stock on the grant date. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value provisions of SFAS 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation.
| Three Months Ended March 31,
| ||||
| 2003
|
2002
| |||
| Net income, as reported | $5,458 |
$5,402 | ||
Less: Total stock-based employee | ||||
| compensation cost determined under | ||||
| the fair value based method, net | ||||
| of income taxes | (83) |
(56) | ||
Pro forma net income |
$5,375 |
$5,346 | ||
| Earnings per share | ||||
| Basic - as reported | $ .80 |
$ .79 | ||
| Basic - pro forma | $ .78 |
$ .78 | ||
| Diluted - as reported | $ .79 |
$ .78 | ||
| Diluted - pro forma | $ .77 |
$ .77 | ||
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
When used in this Form 10-Q and in future filings by the Company with the Securities and Exchange Commission (the "SEC"), in the Company's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans and deposits 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 disclaims 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.
Critical Accounting Policies, Judgments and Estimates
The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States and general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
The Company considers the determination of the allowance for loan losses to involve a higher degree of judgment and complexity than its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining an allowance level believed by management to be sufficient to absorb estimated loan losses. Management's determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, loss given default, expected commitment usage, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses, and general amounts for historical loss experience. The process also considers economic conditions, uncertainties in estimating losses and inherent risks in the loan portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods.
General
The following should be read in conjunction with Management's Discussion and Analysis in the Company's December 31, 2002 Annual Report on Form 10-K.
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 the Bank earns on interest-earning assets, mainly its loans and investment portfolio, and the interest it pays on interest-bearing liabilities, which consists mainly of interest paid on deposits and borrowings. Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on these balances. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.
The Company's profitability is also affected by the level of its non-interest income and operating expenses. Non-interest income consists primarily of gains on sales of loans and available-for-sale investments, service charges and ATM fees, commissions earned by non-bank subsidiaries and other general operating income. Operating expenses consist primarily of salaries and employee benefits, occupancy-related expenses, postage, insurance, advertising, office 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.
Effect of Federal Laws and Regulations
Federal legislation and regulation significantly affect the banking operations of the Company and the Bank, and have increased competition among commercial banks, savings institutions, 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.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2003 AND DECEMBER 31, 2002
During the three months ended March 31, 2003, total assets increased by $6.8 million to $1.41 billion. Cash and interest-bearing deposits increased $11.0 million, mortgage loans held for sale increased $2.2 million, net loans receivable increased $13.3 million, and foreclosed assets increased $7.8 million, partially offset by a decrease in available-for-sale securities of $19.1 million, and a decrease in held-to-maturity securities of $5.4 million. In addition, other assets decreased $1.3 million, primarily as a result of recording the change in mark-to-market value of the Company's interest rate swaps. Based upon the terms of these swap agreements, in accordance with generally accepted accounting principles, the Company records changes in the market value of its interest rate swaps in the category "other assets," with a corresponding increase or decrease to the liability being hedged. The increase in net loans receivable was primarily related to increases in commercial real estate and commercial business loans, partially offset by a decrease in real estate construction loans. Foreclosed assets increased primarily as the result of the transfer of two significant unrelated loan relationships into foreclosed assets. The decrease in available-for-sale securities resulted primarily from significant prepayments in the Company's mortgaged-backed securities portfolio.
Total liabilities increased $2.7 million to $1.30 billion. Deposits increased $26.2 million, partially offset by a decrease in Federal Home Loan Bank ("FHLBank") advances of $25.3 million. FHLBank advances decreased due to their repayment when due utilizing funds from the additional deposit account balances. Interest-bearing checking balances accounted for $19.4 million of the increase in deposits. Non-interest-bearing checking balances increased $9.7 million. Checking and savings account balances totaled $341 million at March 31, 2003. Retail certificates of deposit totaled $363 million at March 31, 2003. Total brokered deposits were $335 million at March 31, 2003, down slightly from $340 million at December 31, 2002. The weighted average cost of these deposits was approximately 165 basis points higher than the retail certificate of deposit portfolio, excluding the effect of the Company's interest rate swaps on a portion of these brokered certificates of deposit. The interest rate swaps reduce the net weighted average cost of the brokered certificate of deposit portfolio to a rate that is approximately 140 basis points lower than the retail certificate of deposit portfolio. Management continues to feel that FHLBank advances and brokered deposits are viable alternatives to retail deposits when factoring in all the costs associated with the generation and maintenance of additional retail deposits.
Stockholders' equity increased $4.1 million, to $108.8 million, primarily as a result of net income of $5.5 million, partially offset by dividend declarations of $1.0 million, a decrease in accumulated other comprehensive income of $349,000, and net treasury stock repurchases of $6,000. The Company repurchased 4,895 shares of common stock at an average price of $38.12 per share during the three months ended March 31, 2003 and reissued 8,067 shares of treasury stock at an average price of $23.03 per share to cover stock option exercises.
RESULTS OF OPERATIONS AND COMPARISON FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
The increase in net income of $56,000, or 1.0%, for the three months ended March 31, 2003 compared to the same period in 2002, was primarily due to an increase in net interest income of $662,000, or 5.7%, an increase in noninterest income of $244,000, or 5.5%, and a decrease in provision for loan losses of $150,000, or 11.1%. These were partially offset by an increase in noninterest expense of $992,000, or 15.0%, during the three month period.
Total Interest Income
Total interest income decreased $1.2 million, or 6.1%, during the three months ended March 31, 2003, when compared to the three months ended March 31, 2002. The decrease was due to a $352,000, or 2.2%, decrease in interest income on loans and a $851,000, or 20.7%, decrease in interest income on investments and other interest-earning assets. Interest income for both loans and investment securities and other interest-earning assets decreased due to significantly lower average rates of interest, although interest income for both was positively impacted by higher average balances.
Interest Income - Loans
During the three months ended March 31, 2003, interest income on loans decreased from lower average interest rates, partially offset by higher average balances. Interest income decreased $1.0 million as the result of lower average interest rates. The average yield on loans decreased from 6.38% during the three months ended March 31, 2002, to 6.00% during the three months ended March 31, 2003, primarily due to lower market rates of interest. A large portion of the Bank's loan portfolio adjusts with changes to the "prime rate" of interest.
Interest income increased $691,000 as the result of an increase in average loan balances from $983 million during the three months ended March 31, 2002, to $1.02 billion during the three months ended March 31, 2003. The higher average balance resulted from the Bank's increases in commercial real estate and construction lending. The Bank's one- to four-family residential loan portfolio has decreased since December 31, 2000, due to the origination of a greater portion of fixed-rate rather than adjustable-rate loans. The Bank generally sells these fixed-rate loans in the secondary market.
Interest Income - Investments and Other Interest-earning Assets
Interest income on investment securities and other interest-earning assets decreased from lower average interest rates, partially offset by higher average balances during the three months ended March 31, 2003, when compared to the three months ended March 31, 2002. Interest income decreased $1.1 million as a result of lower average yields from 5.81% during the three months ended March 31, 2002, to 4.39% during the three months ended March 31, 2003, due to lower market rates of interest in 2003. Interest income increased $218,000 as a result of higher average balances from $283 million during the three months ended March 31, 2002 to $297 million during the three months ended March 31, 2003.
Total Interest Expense
Total interest expense decreased $1.9 million, or 23.0%, during the three months ended March 31, 2003 when compared with the same period in 2002. The decrease during the three month period was due to a $1.4 million, or 23.8%, decrease in interest expense on deposits, a $411,000, or 22.1%, decrease in interest expense on FHLBank advances, and a $44,000, or 13.5%, decrease in interest expense on short-term borrowings and trust preferred securities.
Interest Expense - Deposits
Interest expense on deposits decreased $1.7 million due to lower average interest rates on time deposits from 3.21% during the three months ended March 31, 2002, to 2.24% during the three months ended March 31, 2003 and increased $132,000 as a result of higher average balances of time deposits from $682 million during the three months ended March 31, 2002, to $698 million during the three months ended March 31, 2003. The average interest rates decreased due to lower overall market rates of interest and the effect of the Company's interest rate swaps. Interest on demand deposits increased $164,000 due to higher average balances from $160 million during the three months ended March 31, 2002, to $221 million during the three months ended March 31, 2003, and decreased $3,000 due to lower average rates from 1.09% during the three months ended March 31, 2002, to 1.08% during the three months ended March 31, 2003. Interest on savings deposits decreased a total of $2,000 due to lower average balances and lower average rates.
Interest Expense - FHLBank Advances, Short-term Borrowings and Trust Preferred Securities
Interest expense on FHLBank advances, short-term borrowings and trust preferred securities decreased $238,000 due to lower average rates of interest from 2.94% in the three months ended March 31, 2002 to 2.61% in the three months ended March 31, 2003. The Company's use of FHLBank advances, short-term borrowings and trust preferred securities which reprice daily, monthly, or quarterly contributed to the decrease in average rates of interest. In addition, interest expense decreased $217,000 due to lower average balances from $297 million during the three months ended March 31, 2002, to $266 million during the three months ended March 31, 2003.
Net Interest Income
The Company's overall interest rate spread increased 12 basis points, or 3.5%, from 3.41% during the three months ended March 31, 2002, to 3.53% during the three months ended March 31, 2003. The increase was due to a 73 basis point decrease in the weighted average rates paid on interest-bearing liabilities, partially offset by a 61 basis point decrease in the weighted average yields received on interest-earning assets. In comparing the two periods, the yield on loans decreased 38 basis points while the yield on investment securities decreased 142 basis points. The rates paid on deposits decreased 85 basis points while the rates paid on FHLBank advances and other borrowings decreased 33 basis points. The Company's overall net interest margin increased 5 basis points, or 1.4%, from 3.69% during the three months ended March 31, 2002, to 3.74% during the three months ended March 31, 2003.
The prime rate of interest averaged 4.75% during the three months ended March 31, 2002, compared to an average of 4.25% during the three months ended March 31, 2003. As a large percentage of the Bank's loans are tied to prime, this decrease was the primary reason for the decrease in the weighted average yields received on loans. The decrease in the weighted average yields received on investment securities primarily resulted from maturities of higher yielding securities with the proceeds being reinvested at lower market yields and the increased amortization of premiums paid on the Company's mortgage-backed securities portfolio due to higher levels of prepayments on the underlying mortgages.
Interest rates paid on certificates of deposit decreased significantly during the three months ended March 31, 2003, compared to the three months ended March 31, 2002. As certificates of deposit matured and were renewed or replaced, in most cases the new interest rate on these deposits was significantly lower than the previous rate. In addition, the Company continued to utilize interest rate swaps and FHLBank advances which repriced frequently to further reduce interest expense.
Provision for Loan Losses and Allowance for Loan Losses
The provision for loan losses decreased $150,000, or 11.1%, from $1.4 million during the three months ended March 31, 2002 to $1.2 million during the three months ended March 31, 2003. Net charge-offs during the three months ended March 31, 2003 were $2.4 million compared to net charge-offs of $287,000 during the three months ended March 31, 2002. The Company had established a loan loss allowance as of December 31, 2002 sufficient to cover the charge-offs taken during the three months ended March 31, 2003.
Management records a provision for loan losses in an amount it believes 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, 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.
The Bank's allowance for loan losses as a percentage of total loans was 1.96% and 2.09% at March 31, 2003, and December 31, 2002, respectively. Management considers the allowance for loan losses adequate to cover losses inherent in the Company's loan portfolio 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 provisions for losses would be required, thereby adversely affecting future results of operations and financial condition.
Non-performing Assets
Non-performing assets decreased $0.6 million during the three months ended March 31, 2003, from $18.8 million at December 31, 2002 to $18.2 million at March 31, 2003. Non-performing assets as a percentage of total assets were 1.29% at March 31, 2003. Non-performing loans decreased $8.5 million, or 58.6%, from $14.5 million at December 31, 2002 to $6.0 million at March 31, 2003. Foreclosed assets increased $7.8 million, or 181%, from $4.3 million at December 31, 2002 to $12.2 million at March 31, 2003.
Non-performing Loans. Non-performing loans decreased primarily as a result of the transfer to foreclosed assets of one relationship with a remaining loan balance at the time of transfer of $7.3 million. This relationship involves condominium buildings and lots, single-family residences and lots, a golf course, and other developed and undeveloped land. At the time of foreclosure during the quarter ended March 31, 2003, the balance was reduced to $6.7 million through a charge-off of approximately $600,000. This relationship was most recently described in the December 31, 2002, Annual Report on Form 10-K and was included in non-performing loans at that time. Three unrelated credit relationships, totaling $1.0 million, $886,000, and $712,000, respectively, account for a majority of the non-performing loan total at March 31, 2003. The $1.0 million relationship is secured by the real estate and business assets of a restaurant in Branson, Missouri. This relationship was most recently described in the December 31, 2002, Annual Report on Form 10-K and was included in non-performing loans at that time. The $886,000 relationship is comprised of ten loans, which are primarily secured by residential rental properties and condominiums in Branson, Missouri. This relationship was most recently described in the December 31, 2002, Annual Report on Form 10-K and was included in non-performing loans at that time. The $712,000 relationship is comprised of thirteen loans, which are primarily secured by the business assets, receivables and lease contracts of an office equipment business in Springfield, Missouri.
Foreclosed Assets. Of the total $12.2 million of foreclosed assets at March 31, 2003, foreclosed real estate totaled $10.9 million and repossessed automobiles totaled $1.3 million. Of the total real estate assets, three relationships account for $10.0 million. The first relationship has a remaining balance of $6.7 million and was discussed above in Non-performing Loans. The second relationship has a remaining balance of $2.8 million and involves a motel in Springfield, Missouri. This relationship, which originally totaled $3.6 million, was most recently described in the December 31, 2002, Annual Report on Form 10-K and was included in potential problem loans at that time. At the time of foreclosure during the quarter ended March 31, 2003, the balance was reduced to $2.8 million through a charge-off of approximately $900,000. The third relationship has a remaining balance of $511,000 and involves a golf course and condominium units in the Branson, Missouri area. This relationship was most recently described in the December 31, 2002, Annual Report on Form 10-K and was included in foreclosed assets at that time. Each of these foreclosed assets is currently being marketed for sale.
In the Company's earnings release dated April 14, 2003, the $2.8 million relationship discussed above was described as having a balance of $3.0 million. Subsequent to April 14, 2003, the Company completed a valuation of the asset, including obtaining an updated appraisal of the property, and concluded that the appropriate valuation was $2.8 million. This difference was recorded as an additional charge-off in the three months ended March 31, 2003, and did not impact the Company's net income or earnings per share as reported in the earnings release dated April 14, 2003.
Potential Problem Loans. Potential problem loans decreased $686,000 during the three months ended March 31, 2003 from $11.4 million at December 31, 2002 to $10.7 million at March 31, 2003. Potential problem loans 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. During the three months ended March 31, 2003, potential problem loans decreased $3.6 million as a result of the foreclosure of the motel in Springfield, Missouri, which is described above under Foreclosed Assets. This decrease was partially offset by the addition of two unrelated relationships totaling $2.0 million and $820,000, respectively. The $2.0 million relationship is secured by two motels, one in Springfield, Missouri, and one in Branson, Missouri. The $820,000 relationship is secured by developed and undeveloped land to be used as subdivisions and single-family homes under construction in Webb City, Missouri. In addition to these relationships, four other significant unrelated relationships represent the majority of the potential problem loan total. These relationships total $1.8 million, $1.3 million, $1.0 million, and $937,000, respectively. The $1.8 million relationship is secured by the floorplan of an automobile dealer in Springfield, Missouri. The $1.3 million relationship is secured by a motel in Branson, Missouri. The $1.0 million relationship is secured by five single-family homes under construction in Monett, Missouri. The $937,000 relationship is secured by a commercial retail shopping center in the Branson, Missouri area.
Noninterest Income
Total noninterest income increased $244,000, or 5.5%, in the three months ended March 31, 2003 when compared to the same period in 2002. The increase was primarily due to: (i) an increase in service charges and ATM fees of $591,000, or 32.0%; and (ii) an increase in net realized gains on sales of fixed-rate residential and student loans of $114,000, or 26.0%. The increase in service charge fees resulted from a larger number of accounts and higher levels of insufficient funds transactions by customers. The increase in ATM fees was related to an increase in overall usage by customers and non-customers and additional ATMs placed in service. During the three months ended March 31, 2003, the Bank sold more residential and student loans than in the same period during 2002. During both periods, lower interest rates were conducive to the generation of fixed-rate mortgages, which the Bank typically sells, rather than adjustable-rate mortgages, which the Bank typically retains in its portfolio. In addition, higher levels of refinancing activity continued in the three months ended March 31, 2003.
This increase was partially offset by a net decrease in commission revenues earned by the Company's travel, insurance and investment divisions in 2003 of $105,000, or 7.1%; and (ii) a decrease in net realized gains on sales of available-for-sale securities of $481,000. The investment division has experienced decreased sales activity as a result of general economic conditions prevailing in 2003 and continues to be adversely affected by declining activity by investors in the U. S. stock markets. The travel and insurance divisions have experienced commission income in 2003 equal to or greater than income they earned in the same period in 2002. The decrease in gain on sale of available-for-sale securities was due to the sale in 2002 of U. S. agency bonds with relatively high price volatility in the event of sharply rising interest rates. Management elected to sell these bonds at a premium and reinvest the proceeds.
Noninterest Expense
Total noninterest expense increased $992,000, or 15.0%, in the three months ended March 31, 2003, compared to the same period in 2002. The increase was primarily due to: (i) an increase of $422,000, or 10.9%, in salaries and employee benefits primarily due to normal merit increases for existing employees and the hiring of additional experienced personnel to fill key lending, supervisory and customer sales positions; (ii) an increase in net occupancy and equipment expense of $291,000, or 25.1%, primarily due to increases in depreciation and various maintenance projects on buildings and equipment; (iii) an increase in postage expense of $92,000, or 28.0%, primarily due to increases in postage rates and increased volume; and (iv) minor increases and decreases in other noninterest expense areas.
Provision for Income Taxes
Provision for income taxes as a percentage of pre-tax income decreased slightly from 33.7% in the three months ended March 31, 2002, to 33.5% in the three months ended March 31, 2003.
Average Balances, Interest Rates and Yields
The following tables present, for the periods indicated, the total dollar amount of interest income from average interest-earning assets and the 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 tables do not include non-interest-bearing demand deposits and do not reflect any effect of income taxes.
| Three Months Ended March 31, | ||||||
| 2003 |
2002 | |||||
| Average | Yield/ | Average | Yield/ | |||
| Balance |
Interest |
Rate |
Balance |
Interest |
Rate | |
| (Dollars in thousands) | ||||||
| Interest-earning assets: | ||||||
| Loans receivable | $1,021,501 | $15,321 | 6.00% | $ 982,710 | $15,673 | 6.38% |
| Investment securities and other interest-earning assets |
296,973 |
3,256 |
4.39 |
282,844 |
4,107 |
5.81 |
| Total interest-earning assets | $1,318,474 |
18,577 |
5.64 |
$1,265,554 |
19,780 |
6.25 |
| Interest-bearing liabilities: | ||||||
| Demand deposits | $ 221,149 | 596 | 1.08 | $ 160,169 | 435 | 1.09 |
| Savings deposits | 819 | 2 | .98 | 1,112 | 4 | 1.44 |
| Time deposits | 698,294 |
3,913 |
2.24 |
682,310 |
5,482 |
3.21 |
| Total deposits | 920,262 | 4,511 | 1.96 | 843,591 | 5,921 | 2.81 |
| FHLBank advances and other borrowings | 266,198 |
1,734 |
2.61 |
297,324 |
2,189 |
2.94 |
| Total interest-bearing liabilities | $1,186,460 |
6,245 |
2.11 |
$1,140,915 |
8,110 |
2.84 |
| Net interest income: | ||||||
| Interest rate spread | $12,332 |
3.53% |
$11,670 |
3.41% | ||
| Net interest margin(1) | 3.74% |
3.69% | ||||
| Average interest-earning assets to average interest-bearing liabilities |
111.13% |
110.92% | ||||
(1) Defined as the Company's net interest income divided by total interest-earning assets.
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 rate.
| Three Months Ended March 31, | |||
| 2003 vs. 2002 | |||
| Increase (Decrease) Due to |
|||
| Total Increase (Decrease) | |||
| Rate |
Volume | ||
| (Dollars in thousands) | |||
| Interest-earning assets: | |||
| Loans receivable | $(1,043) | $ 691 | $ (352) |
| Investment securities and | |||
| other interest-earning assets | (1,069) |
218 |
(851) |
| Total interest-earning assets | (2,112) |
909 |
(1,203) |
| Interest-bearing liabilities: | |||
| Demand deposits | (3) | 164 | 161 |
| Savings deposits | (1) | (1) | (2) |
| Time deposits | (1,701) |
132 |
(1,569) |
| Total deposits | (1,705) | 295 | (1,410) |
| FHLBank advances and other borrowings | (238) |
(217) |
(455) |
| Total interest-bearing liabilities | (1,943) |
78 |
(1,865) |
| Net interest income | $ (169) |
$ 831 |
$ 662 |
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 March 31, 2003, the Company had commitments of approximately $151 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 ensure compliance with minimum regulatory requirements, as well as exploring ways to increase capital either by retained earnings or other means.
The Company's stockholders' equity was $108.8 million, or 7.7% of total assets of $1.41 billion at March 31, 2003, compared to equity of $104.7 million, or 7.5%, of total assets of $1.40 billion at December 31, 2002.
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 require banks to have a minimum Tier 1 risk-based capital ratio, as defined, of 4.00%, a minimum total risk-based capital ratio of 8.00%, and a minimum 4.00% Tier 1 leverage ratio. To be considered "well capitalized," banks must have a minimum Tier 1 risk-based capital ratio, as defined, of 6.00%, a minimum total risk-based capital ratio of 10.00%, and a minimum 5.00% Tier 1 leverage ratio. On March 31, 2003, the Bank's Tier 1 risk-based capital ratio was 10.65%, total risk-based capital ratio was 11.91% and the Tier 1 leverage ratio was 8.62%. As of March 31, 2003, the Bank was "well capitalized" as defined by the Federal banking agencies' capital-related regulations. The Federal Reserve Bank has established capital regulations for bank holding companies that generally parallel the capital regulations for banks. On March 31, 2003, the Company's Tier 1 risk-based capital ratio was 11.02%, total risk-based capital ratio was 12.28% and the leverage ratio was 8.93%. As of March 31, 2003, the Company was "well capitalized" as defined by the Federal banking agencies' capital-related regulations.
At March 31, 2003, the held-to-maturity investment portfolio included no gross unrealized losses.
The Company's primary sources of funds are certificates of deposit, FHLBank advances, other borrowings, loan repayments, proceeds from sales of loans and available-for-sale securities and funds provided from operations. The Company utilizes particular sources of funds based on the comparative costs and availability at the time. The Company has from time to time chosen not to pay rates on deposits as high as the rates paid by certain of its competitors and, when believed to be appropriate, supplements deposits with less expensive alternative sources of funds.
Statements of Cash Flows. During the three months ended March 31, 2003, and 2002, respectively, 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 changes in accrued and deferred assets, credits and other liabilities, the provision for loan losses, depreciation, 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. Net income adjusted for non-cash and non-operating items and the origination and sale of loans held for sale were the primary source of cash flows from operating activities. Operating activities provided cash flows of $14.0 million during the three months ended March 31, 2003, and $14.5 million during the three months ended March 31, 2002.
During the three months ended March 31, 2003 and 2002, investing activities used cash of $4.8 million and $21.7 million, respectively, primarily due to the net increase of loans in each period and the net purchase of investment securities in the 2002 period.
Changes in cash flows from financing activities during the periods covered by the Statements of Cash Flows are due to changes in deposits after interest credited, changes in FHLBank advances and changes in short-term borrowings, as well as purchases of treasury stock and dividend payments to stockholders. Financing activities provided $1.7 million during the three months ended March 31, 2003 and $3.7 million during the three months ended March 31, 2002. Financing activities in the future are expected to primarily include changes in deposits, changes in FHLBank advances, changes in short-term borrowings, purchases of treasury stock and dividend payments to stockholders.
Dividends. During the three months ended March 31, 2003, the Company declared and paid dividends of $.15 per share, or 19% of net income per share, compared to dividends declared of $.265, or 34% of net income per share, and dividends paid of $.125, or 16% of net income per share, during the three months ended March 31, 2002. The Board of Directors meets regularly to consider the level and the timing of dividend payments.
Common Stock Repurchases. The Company has been in various buy-back programs since May 1990. During the three months ended March 31, 2003, the Company repurchased 4,895 shares of its common stock at an average price of $38.12 per share and reissued 8,067 shares of treasury stock at an average price of $23.03 per share to cover stock option exercises. During the three months ended March 31, 2002, the Company repurchased 8,695 shares of its common stock at an average price of $28.87 per share and reissued 14,959 shares of treasury stock at an average price of $15.00 per share to cover stock option exercises.
Management intends to continue its stock buy-back programs from time to time as long as repurchasing the stock contributes to the overall growth of shareholder value. The number of shares of stock that will be repurchased and the price that will be paid is the result of many factors, several of which are outside of the control of the Company. The primary factors, however, are the number of shares available in the market from sellers at any given time and the price of the stock within the market as determined by the market.
ITEM III. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 to maturity and the purchase of other shorter term interest-earning assets. Since the Company uses laddered brokered deposits and FHLBank advances to fund a portion of its loan growth, the Company's assets tend to reprice more quickly than its liabilities. However, the Company's interest rate swaps on certain brokered deposits have accelerated the repricing of these deposits to partially offset the effects of assets that reprice quickly.
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 the Risk To Us Associated with 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 regularly 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 March 31, 2003, Great Southern's internal interest rate risk models indicate a one-year interest rate sensitivity gap that is slightly positive.
Interest rate risk exposure estimates (the sensitivity gap) are not exact measures of an institution's actual interest rate risk. They are only indicators of interest rate risk exposure produced in a simplified modeling environment designed to allow management to gauge the Bank's sensitivity to changes in interest rates. They do not necessarily indicate the impact of general interest rate movements on the Bank's net interest income because the repricing of certain categories of assets and liabilities is subject to competitive and other factors beyond the Bank'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 cause a change, which potentially could be material, in the Bank's interest rate risk.
In order to minimize the potential for adverse effects of material and prolonged increases and decreases 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. Management recommends and the Board of Directors sets 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 Company's Chief Financial Officer 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 Chief Financial Officer 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, we may determine to increase our interest rate risk position somewhat in order to maintain our 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.
In 2000, the Company began using interest rate swap derivatives as one method to manage some of its interest rate risks from recorded financial liabilities. These derivatives are utilized when they can be demonstrated to effectively hedge a designated asset or liability and such asset or liability exposes the Company to interest rate risk.
Since 2001, interest rate swaps have been carried at fair value determined using quoted dealer prices and are recognized in the statement of financial condition in the prepaid expenses and other assets caption. Amounts to be paid or received under interest rate swaps are accounted for on the accrual basis and recognized as interest income or expense of the related liability. Gains and losses on early termination of these instruments are deferred and amortized as an adjustment to the yield on the related liability over the shorter of the remaining contract life or the maturity of the related asset or liability. If the related liability is sold or otherwise liquidated, the instrument is marked to market, with the resultant gains and losses recognized in noninterest income.
The Company has entered into interest rate swap agreements with the objective of hedging against the effects of changes in the fair value of its liabilities for fixed rate brokered certificates of deposit and trust preferred securities caused by changes in market interest rates. The swap agreements generally provide for the Company to pay a variable rate of interest based on a spread to the one-month or three-month London Interbank Offering Rate (LIBOR) and to receive a fixed rate of interest equal to that of the hedged instrument. Under the swap agreements the Company is to pay or receive interest monthly, quarterly, semiannually or at maturity.
In addition to the disclosures previously made by the Company in the December 31, 2002, Annual Report on Form 10-K, the following table summarizes interest rate sensitivity information for the Company's interest rate derivatives at March 31, 2003.
| Fixed to | Average | Average | |
| Variable | Pay Rate | Receive Rate | |
| Interest Rate Derivatives | (In Millions) | ||
| Interest Rate Swaps: | |||
| Expected Maturity Date | |||
| 2003 | $ 34.0 | 0.48% | 5.41% |
| 2004 | 7.0 | 1.12 | 6.57 |
| 2005 | 15.5 | 0.78 | 6.20 |
| 2006 | 10.0 | 1.31 | 5.30 |
| 2007 | 5.0 | 1.27 | 2.50 |
| 2008 | 32.6 | 1.20 | 3.74 |
| 2009 | 9.8 | 1.41 | 6.00 |
| 2010 | 20.0 | 1.28 | 3.13 |
| 2011 | 22.4 | 1.35 | 5.69 |
| 2012 | 10.0 | 1.30 | 5.50 |
| 2013 | 8.0 | 1.24 | 4.00 |
| 2015 | 10.0 | 1.26 | 4.25 |
| 2016 | 39.8 | 1.37 | 6.14 |
| 2017 | 40.0 | 1.27 | 4.03 |
| 2031 | 17.3 | 3.36 | 9.00 |
| Total Notional Amount | $ 281.4 | 1.29% | 5.16% |
| Fair Value | $ 290.8 | ||
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, the Company and its subsidiaries are involved as plaintiff or defendant in various legal actions arising in the normal course of their business. While the ultimate outcome of the various legal proceedings involving the Registrant and its subsidiaries cannot be predicted with certainty, it is the opinion of management, after consultation with legal counsel, that these legal actions currently are not material to the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Common Stockholders
None
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
See the attached Exhibit 11, Statement re computation of earnings per share.
b) Reports on Form 8-K
| 1. | Report filed on April 14, 2003, to disclose an arithmetic computational error in the
Registrant's Form 10-K Annual Report for the Year Ended December 31, 2002. This
error relates to the number of shares remaining available for future issuance under
existing equity compensation plans. | |
| 2. | Report filed on April 16, 2003, to disclose a press release announcing the Registrant's financial results for its first quarter ended March 31, 2003. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Great Southern Bancorp, Inc. | |
| Registrant | |
| Date: May 12, 2003 | /s/ Joseph W. Turner Joseph W. Turner President and Chief Executive Officer (Principal Executive Officer) |
| Date: May 12, 2003 | /s/ Rex A. Copeland
Rex A. Copeland Treasurer (Principal Financial and Accounting Officer) |
CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned hereby certifies in his capacity as an officer of GREAT SOUTHERN BANCORP, INC. (the "Company") that the Quarterly Report of the Company on Form 10-Q for the quarterly period ended March 31, 2003 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in such report.
| Date: May 12, 2003 | /s/ Joseph W. Turner Joseph W. Turner President and Chief Executive Officer (Principal Executive Officer) |
| Date: May 12, 2003 | /s/ Rex A. Copeland
Rex A. Copeland Treasurer (Principal Financial and Accounting Officer) |
CERTIFICATIONS
I, Joseph W. Turner, Principal Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Great Southern Bancorp, Inc. (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| Date: May 12, 2003 |
| /s/ Joseph W. Turner Joseph W. Turner President and Chief Executive Officer |
I, Rex A. Copeland, Principal Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Great Southern Bancorp, Inc. (the "Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the consolidated financial statements, and other financial information included in this quarterly report, fairly present in all material respects the consolidated financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and
6. The Registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
| Date: May 12, 2003 |
| /s/ Rex A. Copeland Rex A. Copeland Treasurer |
| Exhibit No. |
Description |
| 11 | Statement Re Computation of Earnings Per Share |