75 YEARS IN THE OZARKS
COMMEMORATIVE ANNIVERSARY ISSUE
1997 ANNUAL REPORT TO OUR STOCKHOLDERS
Born of the Ozarks
(This is the front cover of the report. It is a colored picture of a
large oak tree. The picture is taken starting at the base, looking up
into the tree along the trunk, with leaves and acorns on the ground next
to the tree.)
<PAGE>
(This is the inside of the front cover. It has an Ariel picture of
Chateau on the Lake next to the Annual Meeting notice. The high/low stock
information was in a chart box.)
Annual Meeting
The 8th Annual Meeting of Shareholders will be held 10 A.M. Wednesday,
October 15, 1997, at Chateau on the Lake, Highway 265, Branson, Missouri.
Corporate Profile
Great Southern Bancorp, Inc. ("GSBC" or the "Company") is the holding
company for Great Southern Bank FSB (the "Bank"), which converted from a
mutual to a stock savings and loan in December 1989. In December 1994, the
Bank converted from a state charter to a federal savings bank charter.
Great Southern was founded in 1923 with a $5,000 investment, 4 employees
and 936 members, and has grown to over $700 million in assets, with more
than 370 employees and 70,000 + customers.
The Bank is headquartered in Springfield, Missouri and operates 25
branches in 15 counties throughout the Ozarks; eight in Springfield.
A community-oriented company, GSBC and its subsidiaries offer a full range
of banking, lending, investment, insurance and travel services.
The Bank is the 3rd largest thrift in the state of Missouri, and of the
top three, enjoys the strongest capital ratio, expressed as equity/assets.
Corporate Mission
A publicly held financial services organization, the Company is dedicated
to increasing stockholders' equity through profitable operations and sound
management. In order of priority, emphasis is on customer service, cost
control and product offerings.
The Bank's broad mission is to promote savings and provide the financial
means for home ownership to families throughout the Ozarks and southern
Missouri. In addition the Bank provides a broad base of family and
commercial financial products and services, emphasizing convenience,
personal attention, and competitive terms.
The other wholly owned subsidiary corporations of Great Southern Bancorp,
Inc. market related services, including investment counseling, discount
brokerage, insurance, travel and appraisal services.
<PAGE> Inside front cover (continued)
Stock Information
The stock of GSBC is traded on the over-the-counter market and quoted on
the NASDAQ National Market System under the symbol "GSBC."
As of June 30,1997, there were 8,105,121 total shares outstanding and
approximately 1,800 shareholders. The Company declared four dividends
during the year, making 29 consecutive dividends since conversion in
December 1989.
High/Low Stock Price (by Quarter)
Fiscal 1997 High Low
------------------ ------- -------
First Quarter 15 1/2 13 1/8
Second Quarter 18 14 1/2
Third Quarter 18 1/4 17
Fourth Quarter 18 16 1/8
General Information
CORPORATE HEADQUARTERS
1451 E. Battlefield
Springfield, MO 65804
1 (800) 749-7113
MAILING ADDRESS
P.O. Box 9009, Springfield, MO 65808
DIVIDEND REINVESTMENT
For details on the automatic reinvestment of dividends in common stock of
the corporation call:
1 (800) 725-6651 or write:
Great Southern Bancorp, Inc.
Shareholder Relations
P.O. Box 9009
Springfield, MO 65808
<PAGE> Inside front cover (cotinued)
FORM 10-K
The form 10-K report filed with the Securities and Exchange Commission may
be obtained without charge by request to:
Richard Wilson
Senior Vice President, Controller
Great Southern Bank
P.O. Box 9009, Springfield, MO 65808
INVESTOR RELATIONS
Teresa Chasteen
Vice President, Director of Marketing
Great Southern Bank
P.O. Box 9009, Springfield, MO 65808
AUDITORS
Baird, Kurtz & Dobson
Hammons Tower
P.O. Box 1190
Springfield, MO 65801
LEGAL COUNSEL
Carnahan, Evans, Cantwell & Brown
1949 E. Sunshine
P.O. Box 10009
Springfield, MO 65808
TRANSFER AGENT AND REGISTRAR
Registrar & Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
<PAGE> 1
(This is the table of contents page. It includes a small color picture
identical to the picture on the front cover. There are also three other
pictures in the Contents section that are identical to the pictures on the
pages referenced.)
About our cover:
Born of the Ozarks
Given the recent winds of change in our local financial services industry,
Great Southern is especially proud to begin its 75th season stronger than
ever and growing stronger every year.
Like the mighty oaks, born of the Ozarks, our deep roots bring the promise
of continued strong and steady growth as we share with our customers the
dream of a better life, right here at home.
Contents
2. Message from the Chairman. Entering the year of our 75th Anniversary,
the Great Southern family of customers has grown more rapidly than at any
time in our history.
3. 5 Years at a Glance. Selected Financial Data '93 - '97
4. Sharing the Vision. Staying in touch with our customers brings
continued product and service development on all fronts.
8. Sharing the Dream. Great Southern leads the industry in making home
ownership a reality for low-to moderate-income families and rural
residents.
10. Sharing the Struggle. Community-based projects evidence the depth of
our commitment to quality of life in the Ozarks.
12. Our Partners in the Dream. Great Southern subsidiaries complement the
bank's leadership in providing personal, consumer-oriented services.
15. Management's Discussion and Analysis
Financials
25. Consolidated Statement of Financial Condition.
26. Consolidated Statements of Income.
27. Consolidated Statements of Changes in Stockholders' Equity.
28. Consolidated Statements of Cash Flows.
29. Notes to Consolidated Financial Statements.
39. Accountant's Report
40. The Team Profile. Great Southern Bancorp, Inc. and Great Southern
Bank Officers.
<PAGE> 2
(Along the bottom of pages 2 and 3 are five bar graphs. They are for
stock price (in dollars), core earnings (in millions), total assets (in
millions), total deposits (in millions) and total loans (in millions).
The years presented by the graphs are 1993 through 1997. The page also
included a color photo of our Chairman, William V. Turner.)
Message From the Chairman
In 1998, Great Southern will join an elite group of U.S. businesses who
have been in existence for 75 years or longer. With nearly three-quarters
of the nation's nine million companies no more than 25 years old, the
homegrown "hardy perennials," such as our Company, now account for only
2.5% of all this country's businesses.
Given the changes which have taken place in our industry in the last two
decades, and more recently in our local financial services marketplace,
one realizes the extent and significance of this accomplishment of
longevity, especially when we have survived and flourished despite the
erosion of time and change. Therefore, we are especially proud to begin
our 75th year stronger than ever and growing stronger each year.
We have been fortunate to be able to draw on the rich heritage of strength
in the Ozarks: Our employees and customers come from "sturdy stock" and
the economy is healthy and less volatile than in many regions of the
country.
In the Ozarks, people still work hard, and do the job right to earn a
better life. They want to "sleep... feeling secure and wake up...trusting
the future." In this year's annual report, we salute our partnership in
the American dream, right here at home, in the Ozarks.
Fiscal 1997 was our fourth consecutive "best year ever." Core net income
was $1.34 per share ($11.4 million) up 21% over last year's $1.11 per
share ($10.2 million). In addition, the company posted growth in all of
the following areas: total assets surpassed the $700 million plateau ($708
million) for the first time; net loans receivable were $584 million (up
7%); and total deposits were $459 million (up 16%).
Non-performing assets were $13.9 million, down $3 million from a year ago
(June 1996).
The Company's capital position remained strong with stockholders' equity
at 8.5% of total assets. Great Southern Bank is the strongest of
Missouri's largest, having the highest equity/assets ratio of thrifts with
over $500 million in assets.
GSBC stock closed the year (June 97) at $16.125, which represented a 17.3%
increase over the $13.75 closing price of a year ago.
In addition to financial accomplishments, progress was made in name
awareness, growing our customer base, personnel enhancements and
product/service offerings.
<PAGE> 2 (continued) & 3
Our family of business and personal banking customers has grown more
rapidly in the last few months than at any time in our history, and our
name awareness is at an all-time high as a result of the strategies we
implemented to capitalize on opportunities presented with the "selling
out" of a regional bank competitor who had the number one market share
position.
We introduced a new checking product, "Cash Back Checking," the absolutely
free checking account that pays customers for usage of their debit card.
In the first 90 days, nearly 4,000 of these accounts were opened.
The Cash Back additions coupled with other checking account growth will
boost total checking accounts to over 40,000 during the 1st quarter of
fiscal 1998.
Key personnel have been added in the areas of branch, consumer and
commercial lending. These additions have allowed us to provide a higher
level of expertise in the branches, add new lines of business in consumer
lending and field a business development team for commercial loan
business.
Finally, we continue to expand and enhance our electronic transaction and
other technology segments. By the end of calendar '97, we will have the
largest number of ATMs owned by a single bank in southern Missouri - quite
an achievement considering we've just been in the business a couple of
years. Debit cards continue to be embraced by our customers as evidenced
by the 250% increase in usage from a year ago (June '96), shortly after
introduction. We will soon begin offering "check imaging," the latest
check record and safekeeping convenience. The agenda for fiscal '98
includes several facility enhancements: the relocation of our Ozark
branch; additional drive-thru lanes for Kansas & Kearney; an expansion at
West Plains; and a new branch in south Springfield in the vicinity of
South Campbell and James River Freeway.
Please be assured, we haven't become complacent, nor are we resting on our
laurels; we're as challenged as always by the opportunities that lie
ahead. Not only are we driven by external sources, we are motivated by the
desire to better this year's record performance. We continue to assess
who our customers are and what their needs are. We know we must work hard
every day to win new customers while continuing to give our existing
customers the service they expect and deserve.
We're proud to have been "Born of the Ozarks." We're also proud to have
built our business over the last 75 years with a simple mission, good
people, and loyal patrons "in the Ozarks"... we may be a bit biased ...
but we can't think of a better place than right here at home to partner in
the American Dream and celebrate our next milestone.
/s/ William V. Turner
William V. Turner, CHAIRMAN
<PAGE> 3 (continued)
<TABLE>
<CAPTION>
Selected 5-year Financial Data
- ----------------------------------------------------------------------------------------------------------
June 30
For the Year: 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Interest Income After
Provision for Loan Losses
(in thousands) $ 25,012 $ 24,355 $ 22,380 $ 18,532 $ 15,675
Income Before Change in
Accounting Principle 9,340 11,294 9,488 8,341 4,736
Return on Average Assets 1.39% 1.75% 1.62% 1.58% .99%
Interest Rate Spread 3.79% 3.82% 3.86% 4.05% 4.20%
Return on Average
Stockholders' Equity 15.02% 17.28% 15.57% 14.44% 9.37%
Non-interest Expense to
Average Assets 3.04% 2.53% 2.62% 2.78% 2.77%
- ----------------------------------------------------------------------------------------------------------
Core Operations***:
Net Income (in thousands) $ 11,444 $ 10,197 $ 9,614** $ 7,646 $ 4,736
Net Income Per Share 1.34 1.11 1.01 .76 .46
Return on Average Assets 1.71% 1.58% 1.64% 1.45% .99%
Return on Average
Stockholders' Equity 18.40% 15.60% 15.78% 13.24% 9.36%
- ----------------------------------------------------------------------------------------------------------
Per Common Share*:
Earnings Before Change in
Accounting Principle $ 1.10 $ 1.23 $ 1.00** $ .83 $ .46
Cash Dividends Declared .39 .35 .30 .15 .06
Book Value (year end) 7.45 7.70 7.00 6.42 5.41
Market price (year end) 16.125 13.75 9.625 7.459 4.604
- ----------------------------------------------------------------------------------------------------------
At Year End: (in thousands)
Total Assets $707,841 $ 668,105 $ 622,380 $ 534,740 $ 515,293
Loans Receivable, Net 583,709 546,759 519,255 443,750 419,527
Savings Deposits 459,236 397,055 384,327 358,987 326,611
Total Borrowings 180,625 197,265 168,270 108,587 130,253
Stockholders' Equity 60,348 68,535 62,982 61,462 51,723
Non-performing Assets 13,850 16,854 12,772 14,963 14,574
- ----------------------------------------------------------------------------------------------------------
<FN>
* All per share amounts have been adjusted to reflect the July 25, 1994 3-for-1 stock split, and the
October 21, 1996 2-for-1 stock split.
** These numbers do not reflect a change in accounting principle.
*** These numbers exclude the one-time Savings Association Insurance Fund assessment, one-time goodwill
write-off, available-for-sale security gains and foreclosed asset gains.
</TABLE>
<PAGE> 4, 5, 6 & 7
(Pages 4 through 13 include various color photos of Great Southern ATMs,
office settings, billboards, customers, employees, community events and
fund raising events.
On page 4 there is a picture of a family using a Great Southern ATM in a
major shopping mall and a picture of a Gimmie Five sign posted next to a
drive-up ATM.
On page 5 is a picture of local radio and music celebrities doing a radio
show, a picture of the grand opening party at the Aurora branch and a
picture of a mother and son strapping on bicycle helmets, promoting our ID
Network Safety Service.
On page 6 there is a picture of our message sign and free checking banner
at our main facility, a picture of a free checking and cash back billboard
and spots from a television campaign promoting the cash back checking.
On page 7 is a picture promoting our "How my best friend, William, became
a $20 Bill" campaign, a picture of construction progress at our new Ozark
facility, a picture of an employee with check imaging imposed over the
picture and a picture of our customer service/telemarketing area.
Also on these pages along the bottom are old tinted photos of different
events, buildings and people.)
Sharing the Vision
In the last few years, "relationship marketing" has become a trendy
approach to retaining customers. But it's nothing new at Great Southern:
Proactively developing products to match our customers' needs and
following through with the exemplary service they deserve has been at the
forefront of the Great Southern philosophy for 75 years. It's how we give
meaning to our slogan, "We give you more for your money."
Research showing that many customers weren't aware of all the banking
services available to them prompted a unique telemarketing program during
the year that's also designed to improve two-way communication. Far from
a hard-sell approach, Great Southern telemarketers share product
information in easy to understand terms, and provide an opportunity for
customers to tell us how we're doing.
An apparent late-comer in automated teller machines, Great Southern
introduced its first ATM just three years ago. Until then, our extensive
branch network - combined with the longest banking hours in the region -
gave competing bank ATMs little advantage over our full-service live
tellers. However as off-premise locations in convenience stores and other
high-traffic venues developed, along with our growing base of new
customers already familiar with other-bank ATMs, Great Southern moved
swiftly to bring this 24-hour convenience home to its customers. We now
operate one of the largest ATM networks in southern Missouri, with more
than 68 machines throughout the Ozarks, including 24 in Springfield.
<PAGE> 4, 5, 6 & 7 (continued)
In other product development, consumer benefits were enhanced on our The
Works! and Summit checking packages with the addition of a complimentary
regional discount book, providing account holders with one-time-use
coupons to area merchants. Works II members also now enjoy membership in
ID Network Safety Service, which produces current photo IDs for children
that can be instantly accessed and sent to authorities in the event of an
emergency.
As a special premium to encourage and develop Check Card usage, all
checking account holders were rewarded for using their Great Access Check
Cards in lieu of checks. Titled "Gimme Five," the incentive pays customers
five cents each time they use their Check Cards to pay for purchases -
"easy money" since the card is free, accepted worldwide and is faster than
writing a check. A big hit with customers, Gimme Five has paid out over
$17,900 in bonuses for more than 359,000 check card transactions since its
introduction in May.
As our customer base continues to grow, branch facilities are continually
undergoing upgrades to keep both satisfaction and efficiency levels high.
Remodeling plans are under way at Springfield's Kansas at Kearney
location. In addition to a larger customer service area, the number of
drive-thru lanes will increase from three to five, with the new lanes
located on the west side of the building.
The Aurora branch celebrated a Grand Re-Opening in June at a new, larger
facility located at 1302 South Elliott with special product incentives, a
live radio broadcast and an old-fashioned community cookout. Late in
September, the Ozark branch will move from its current small, downtown
location to a newly-remodeled 2,000-square-foot facility. The new
building will include on-site insurance, investment and travel offices,
and is located next to the highly-visible main interchange leading into
Ozark.
(This page included a chart of checking account growth by year from June
1993 through June 1997 and a chart of check card transaction growth by
quarter from June 1996 through June 1997.
The Great Southern family of business and personal banking customers
increased exponentially in the past year, shattering all previous records.
By fiscal year end, the Bank had realized a net increase of more than
4,600 new households.
Many of these new customers came to us via our present customers. A
winter referral program, "How My Best Friend, William, Became a $20 Bill,"
offered cash incentives for referring friends and acquaintances to Great
Southern. When the person referred opened a checking account, both
parties received ten dollars cash. Almost $17,000 was awarded for the 846
accounts opened during this six-month program.
<PAGE> 4, 5, 6, & 7 (continued)
Several major bank mergers affecting southern Missouri in the last twelve
months created a volatile marketplace, which Great Southern capitalized on
with a year-long marketing strategy aimed at positioning the Bank as
southern Missouri's Largest Home-Owned Bank. Offering consumers the "best
of both worlds," including the familiarity and commitment of a community-
based bank combined with the convenience and services of a large financial
institution, Great Southern became the all-inclusive answer for many new
families in the questioning marketplace.
The year's most popular consumer product, Cash Back Checking, ushered in a
new era of competitive checking account benefits. Timed to coincide with
the withdrawal of free checking at other banks, Cash Back not only offers
absolutely free checking, but actually tops that with a genuine "Cash
Back" incentive for debit card usage. Each time a customer pays for a
purchase with their Check Card instead of writing a check, their account
is automatically credited five cents. While some folks initially found it
hard to believe a bank would actually pay them to use their checking
account, the logic is mutually beneficial: it costs more to process a
check than it does to record an electronic transfer.
Television, radio and outdoor exposure reinforced a direct mail campaign,
and helped generate nearly 4000 new accounts in the first 90 days. And
contrary to common industry belief, free checking has brought in viable
customers: the average account balance is over $600, even though no
minimum balance is required.
(This page included a chart of monthly transactions at Great Southern ATMs
semi-annually from June 1995 through June 1997.)
<PAGE> 8 & 9
(These pages include a color picture of First VP Vicki Bilyeu working with
a customer, a picture of a mortgage loan employee originating a mortgage
at a customer's kitchen table with a laptop computer, a picture of a
consumer loan employee reviewing inventory with a local car dealer and a
picture of the chef that prepares breakfast at realtor officers for the
Bank.)
Sharing the Dream
In the Ozarks, there is a dream: Be a good neighbor. Work hard. Do the
job right. And earn a better life. This is the heritage of Great
Southern. Where personal attention to each customer's needs has long
fostered our reputation as "the Ozarks Lending Authority." In local deeds
of trust filed, Great Southern consistently ranks among the top three
residential lenders throughout the Ozarks.
It is a responsibility we welcome, for being involved is not only a
corporate culture, but the very foundation of our strength and opportunity
for growth in today's lending market as well.
Recognition of the fact that many homebuyers lack access to the large
amount of cash usually required at closing prompted the Bank to become
involved in two highly successful efforts targeted to first-time
homeowners. The state-funded first-time homebuyers bond money program
provides cash assistance of four percent of the loan amount. The money is
applied to the down payment and closing costs, potentially saving the
homebuyer thousands of dollars in out-of-pocket expenses.
Great Southern also embraced the new Federal Rural America Loan program,
offering up to 100% fixed-rate financing on non-metropolitan properties
for low- to moderate- income families who may not qualify for home loans
elsewhere. Significantly, Great Southern is the only lender providing
such assistance in most of the rural communities we serve, and over
$500,000 in loans have been closed since April.
Our team of lenders continued to forge strong working relationships with
area Realtors, our number one source of referrals. In July, Great
Southern joined the Springfield Board of Realtors to co-sponsor continuing
education classes aimed at keeping real estate professionals abreast of
current happenings and future trends. The classes were attended by over
250 area Realtors and the participation of our mortgage lending team
underlined the bank's posture as the local leader in lending.
Capitalizing on continued strong demand in both the consumer and
commercial loan arenas, the Bank added key personnel and fielded business
development teams to enhance service and increase volume on both fronts.
<PAGE> 8 & 9
An indirect lending department has been established in a concerted effort
to expand dealer paper business. More than a dozen participatory
relationships with new and used car dealers have been secured, and these
alliances are already generating loans. In addition, a 72-month term has
been added to our new car loan portfolio.
Our restructured commercial lending team, led by President Joe Turner and
First Vice Presidents Mike Lawson and Steve Mitchem, achieved a fourth
straight year of stellar growth, with year-end totals up $42 million to
$324 million - fifteen percent growth for the year. The team continues to
focus on quality, high-profile projects throughout the region, including:
Primrose Office Building, Richmond on Primrose Office Building and HBO &
Company (formerly Management Software, Inc.) headquartered in Springfield;
Jiffy Lube/Auto Magic automatic car wash in Springfield; Rio Bravo Cantina
and James River Grill restaurants in Springfield; First Baptist Church in
Nevada; Days Inn in Springfield; Fairfield Inn in Joplin; Hampton Inn in
Lebanon and Olathe, Kansas; Comfort Inn in Mt. Vernon and Joplin;
Jefferson Street Apartments and Scenic Ridge Apartments in Springfield,
Mountain Boulevard Apartments in Ozark, Park Place condominiums in Osage
Beach; the Fairways condos in Branson, and subdivisions in Springfield,
Ozark and Republic.
<PAGE> 10 & 11
(These pages include color photos of events or services that are provided
to the community and supported by Great Southern. Included are the MDA
telethon tote board, the Missouri Hall of Fame golf tournament, the
Children's Miracle Network C.A.R.E. Mobile, a local newscast and a college
halftime contest.)
Sharing the Struggle
As we celebrate our bank's Diamond Anniversary "at home in the Ozarks,"
along with the simultaneous appreciation that we have indeed, over the
past year, become southern Missouri's largest home-owned bank, we are
proud to recall the fond saying of founder J. Wyman Hogg, "Mighty oaks
from little acorns grow." It is an especially appropriate thought, for
one of our biggest competitive advantages today is that we enjoy deep and
strong roots, long nurtured and vested in our community's quality of life.
<PAGE> 10 & 11 (continued)
A favorite Great Southern cause, the community-based Children's Miracle
Network realized a $2,760 bonus contribution in May as the Bank celebrated
the milestone of its 50th ATM under the banner "50 Miracle Makers,"
offering five cent donations with each ATM cash withdrawal. Other on-
going fund-raising efforts on behalf of CMN include the popular "Cash for
Kids" SavingsPlus Card, earmarking consumer-earned merchant discounts for
critically ill children, and full-time sponsorships of the Branson
Celebrity Golf Tournament, the Children's Village project at Cox Medical
Center, and the CMN C.A.R.E. Mobile - a self-contained immunization clinic
that travels to remote areas across the Ozarks, and accepts children
regardless of insurance status or ability to pay.
Our Springfield Adopt-A-School, McGregor Elementary, continued its award-
winning school bank and store program. Students are rewarded for
excelling in class and being good citizens with "Scholar Dollars,"
redeemable for highly-prized items in the school store. In addition to
collecting school supplies for disadvantaged students, Great Southern
employees also regularly chip in to donate school clothes for those who
needed them.
Helping others doesn't have to be hard work - sometimes it can be a lot of
fun, too. Like Great Southern's Halftime Games at area colleges. Taking
place at both football and basketball venues, these games offer a good
time and big prizes to fans in addition to raising funds for Coaches
Against Cancer. The games have continued to increase in popularity since
their introduction in the mid-'80s, and have now spread to three campuses,
including two Southwest Missouri State University campuses and Missouri
Southern State College. And fans of both colleges were involved in a
sports-related certificate of deposit program in which interest rates are
tied to the winning records of the men's and women's basketball teams. It
was a win-win situation as interest rates continued to climb throughout
the season on the 7-month SMSU Bear and Boomer CDs and MSSC Lions and Lady
Lions CDs, with final earnings bonuses of .50% to 1.25%.
Other community-based projects this year included raising funds for the
American Cancer Society, Easter Seals, St. Jude's Research Hospital, March
of Dimes, Muscular Dystrophy Association, and Meals on Wheels; and
individual community events such as Ava Poke Salat Days, Buffalo's
Christmas Parade, Cabool's Farm Fest; Nixa's Sucker Days; Springfield's
Christmas Parade. Involvement in these events, along with countless other
local projects, all serve to underline Great Southern's genuine commitment
to the people of the Ozarks.
<PAGE> 12 & 13
(These pages include a picture of a travel show poster, a picture of an
insurance department party and a picture of the Great Southern sponsored
stock quotes on the nightly news.)
Our Partners in the Dream
Complementing the bank's status as a leader in providing full-spectrum
financial services are three specialized Great Southern Bancorp
subsidiaries, each of whom in turn has become a leader in its respective
field as well.
Great Southern Travel, the largest travel agency in southern Missouri,
expanded on its leadership role in bringing group and individual travel to
Branson, combining personal agent-to-agent/client service with highly-
competitive discount and added-value packaging. The subsidiary's group
travel division, Great Group Getaways, continued to expand on a remarkable
four-fold increase in sales volume last year, up another 23% for the year.
The agency also operates Branson's in-bound travel and ticketing service,
Branson Box Office, headquartered adjacent to the concierge's desk in the
lobby of the Crown Plaza. Branson Box Office has recently been selected
to package individual tours to Branson for TWA Getaways' United Kingdom
division, and will be featured in the fall issue of TWA's Essentially
America.
An aggressive marketer of both inbound and outbound travel, the agency has
earned preferred status with a number of its suppliers and is frequently
able to negotiate exclusive discounts and added travel value for its
clients. 1996 supplier accolades, each based primarily on performance,
included membership in Funjet Vacations 500 Club, recipient of Apple
Vacations' Golden Apple Award, recipient of Carnival Cruise Lines' Winners
Circle Award for the second year in a row, and status as a Premium
Preferred Plus Account with Holland America Lines Cruises. Both cruise
designations were exclusive to Great Southern among all outstate Missouri
travel agencies. The subsidiary has also accepted an invitation to join
Giants Select, a respected national coop offering a special package of
benefits to our preferred business and leisure travelers. Gross sales for
the year were up 18.6%, with increases across the board in corporate,
leisure and group sales.
Great Southern Insurance, representing a "Who's Who" list of major
underwriters, received national recognition as a High Performance Agency
for CNA for the third consecutive year, and garnered the coveted
President's Award from Cameron Mutual for the second year in a row.
The subsidiary writes all lines of insurance and employs a staff of 18,
including Certified Insurance Counselors Gene Summers and Nancy Mason, and
six Certified Insurance Service Representatives, along with Manager Byron
Robison, who remains an active member of the legislative committee for the
Missouri Association of Insurance Agents.
<PAGE> 12 & 13 (continued) & 14
With competitive rates and exemplary service, Great Southern Insurance has
been able to successfully cross-sell bank customers, who are often
surprised to learn that the agency handles more than simply homeowners and
automobile insurance. A July bank statement stuffer promoting full-line
service in everything from individual medical insurance to corporate
insurance generated a phenomenal 33% inquiry rate, and more than 300
direct requests for quotes. In fact, the agency writes more in business
insurance than in personal insurance, and recorded total premiums in
excess of $8 million for the year, improving pretax profits to a record
$217,147 D up nearly 50% over last year's $145,163.
Great Southern Investments, a subsidiary specializing in asset management
and retirement stock planning utilizing tax-advantaged investments,
annuities, mutual funds and discount stock brokerage, again achieved
record gross revenues for the fiscal year - up 13.9% over last year's
stellar performance D but saw margins diminish. In a long year of
conversion, the subsidiary has consolidated its clearing relationships
into one with BHC Securities, Inc., member NYSE/NASD/SIPC, permitting
instant access to mutual fund account and stock market information. This
new clearing relationship will allow the subsidiary to enjoy cost and
speed efficiencies which rival any Wall Street firm. Customer service
capabilities have also been enhanced which should grow customer loyalty
over time. While the costs to the organization are initially higher to
make a conversion of this type, the firm should enjoy greater cost
efficiencies going forward while continuing to increase profits.
(This is a color page listing the page of the Management's Discussion and
Analysis, Consolidated Financial Statements and Notes to the Consolidated
Financial Statements. The picture on this page is the same as the front
cover with an old picture inserted that is of the First Annual Convention
of Great Southern in 1925.)
<PAGE> 15
Management's Discussion and Analysis
The discussion set forth below, as well as other portions of this
document, may contain forward-looking comments. Such comments are based
upon the information currently available to management of Great Southern
Bancorp, Inc. (the "Company") and management's perception thereof as of
the date of this document. Actual results of the Company's operations
could materially differ from those forward-looking comments. The
differences could be caused by a number of factors or combination of
factors including, but not limited to, changes in the availability and/or
cost of capital; changes in demand for banking services; changes in the
portfolio composition; changes in the interest rate yield on the Company's
investments; changes in management strategy; increased competition from
both bank and non-bank companies; changes in the economic, political or
regulatory environments in the United States; litigation involving the
Company and/or its subsidiaries; and changes in the availability of
qualified labor. Readers should take these factors into account in
evaluating any such forward-looking comments.
GENERAL
The consolidated net income of the Company and more specifically, the net
income of its primary subsidiary, Great Southern Bank, FSB (the "Bank"),
is primarily dependent upon the difference or spread between the average
yield earned on loans and investments and the average rate paid on
deposits and borrowings, as well as the relative amounts of such assets
and liabilities. The interest rate spread is affected by regulatory,
economic and competitive factors that influence interest rates, loan
demand and deposit flows. The Bank, like other financial institutions, is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different times, or on a different basis
than its interest-earning assets. The Company's consolidated net income
is also affected by, among other things, gains on sales of loans and
available-for-sale investments, provisions for loan losses, service charge
fees and commissions, operating expenses and income taxes.
Management of the Company has developed and implemented an asset/liability
management strategy to match the repricing and/or maturity of its
interest-earning assets and its interest-bearing liabilities and to
achieve improved and sustained operating income without adversely
affecting asset quality. In implementing this strategy, the Company has
sought, subject to market conditions, to increase its origination of
adjustable-rate loans secured by one- to four-family residential real
estate in order to increase its investment in loans that are interest rate
sensitive. The Company has also sold substantially all of the fixed-rate,
one- to four-family residential loans originated since fiscal 1986, with
servicing retained through fiscal 1995. Beginning in fiscal 1996, the
Company started primarily selling these loans with the servicing released
to the purchaser of the loans. Beginning in fiscal 1992, the Company's
lending returned to origination of adjustable-rate commercial real estate
and commercial business loans.
<PAGE> 15 (continued)
By doing so, the Company is attempting to increase significantly its loan
fees, increase its investment in loans that are interest rate sensitive
and improve the yield on its loan portfolio. The Company intends to
continue prudently to evaluate the origination of commercial real estate
loans in its total loan portfolio subject to commercial real estate and
other market conditions and to applicable regulatory restrictions and may
increase the percent of the commercial real estate loans to the overall
portfolio. In addition, in fiscal 1998, the Company intends to increase
the origination of consumer loans by setting up 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 Company for credit approval or rejection. While
automobile dealers will be the Company's initial concentrated effort, the
program is available for use with most tangible products where financing
of the product is provided through the seller.
Effect of Federal Laws and Regulations
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.
Legislation enacted during the fiscal year ended June 30, 1997 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 this origination
requirement in fiscal 1997. The amount of post 1987 recapture for the
Bank is approximately $5 million which will create tax of approximately $2
million, or $400,000 per year for each of the remaining five years of the
recapture period. The $2 million of tax has been accrued by the Bank in
previous periods and will not be reflected in earnings when paid.
Beginning in the current fiscal year ended June 30, 1997, the Bank is
required to follow the specific charge-off method for bad debts which only
allows a bad debt deduction equal to the 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.
<PAGE> 15 (continued)& 16
Legislation was also enacted during the fiscal year 1997 that
recapitalized the Savings Association Insurance Fund ("SAIF") and reduced
the semi-annual SAIF assessments for the Bank. A one-time assessment of
$2.5 million ($1.6 million after income taxes), 65.7 basis points of March
31, 1995 SAIF-assessable deposits, was expensed by the Bank in September
1996 and paid in November 1996.
Along with the one-time SAIF assessment, the semi-annual SAIF assessment
was reduced, beginning January 1997, from an annualized 23 basis points on
SAIF-assessable deposits, to 6.48 basis points annualized on SAIF-
assessable deposits. This reduction was approximately $55,000 ($35,000
after income tax) per month. As a result of this lower assessment rate,
the Bank significantly increased the level of brokered deposits used to
fund asset growth. The rates on these deposits, when compared to
alternative sources and allowing for deposit insurance costs, is
comparable to Federal Home Loan Bank ("FHLBank") advances but do not
require the asset pledging the FHLBank requires.
Recent Changes in Accounting Principles
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of" ("SFAS 121"). This statement applies to
assets to be held and used as well as assets to be disposed of. SFAS 121
requires an entity to evaluate long-lived assets, certain identifiable
intangibles, and related goodwill for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The Company adopted SFAS 121 during the current
fiscal year ending June 30, 1997. The adoption of SFAS 121 has not had a
material effect on the financial condition or net income of the Company.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS
122 requires that mortgage banking enterprises recognize as separate
assets, rights to service mortgage loans for others, however those
servicing rights are acquired. The Company adopted SFAS 122 during the
current fiscal year ending June 30, 1997. The adoption of SFAS 122 has
not had a material effect on the financial condition or net income of the
Company.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
SFAS 123 establishes a fair value based method of accounting for stock-
based compensation plans. It encourages entities to adopt that method in
place of the provisions of APB Opinion No. 25, "Accounting for Stock
Issued to Employees", for all arrangements under which employees receive
shares of stock or other equity instruments of the employer or the
employer incurs liabilities to employees in amounts based on the price of
its stock. This statement applies to financial statements for fiscal
1997. Management is continuing to account for stock-based compensation in
accordance with the provisions of APB No. 25. Therefore, SFAS 123 has not
had a significant impact on the Company's consolidated financial
statements.
<PAGE> 16 (continued) & 17
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" ("SFAS 125"). SFAS 125 extends the rules
in SFAS 122 from servicing of mortgage loans to all loan servicing as well
as setting guidelines to be used to account for loan participations as
either a sale or a borrowing transaction. The Company adopted SFAS 125
during the current fiscal year ending June 30, 1997. The adoption of SFAS
125 has not had a material effect on the financial condition or net income
of the Company.
Potential Impact of Accounting Principles to be Implemented in the Future
In March 1997, the FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaces the
presentation of primary earnings per share with a presentation of basic
earnings per share. It requires dual presentation of basic and diluted
earnings per share by entities with complex capital structures and
requires a reconciliation of the numerators and denominators between the
two calculations. SFAS 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods.
Management believes the adoption of SFAS 128 will not have a material
effect on the financial statements of the Company.
Asset and Liability Management
Management believes that a key component of successful asset/ liability
management is the monitoring and management of interest rate sensitivity,
which encompasses the repricing and maturity of interest-earning assets
and interest-bearing liabilities. During any period in which a financial
institution has a positive interest rate sensitivity gap, the amount of
its interest-earning assets maturing or otherwise repricing within such
period exceeds the amount of the interest-bearing liabilities maturing or
otherwise repricing within the same period. Accordingly, in a rising
interest rate environment, financial institutions with positive interest
rate sensitivity gaps generally will experience greater increases in yield
on their assets than in the cost of their liabilities. Conversely, in a
falling interest rate environment, the cost of funds of financial
institutions with positive interest rate gaps generally will decrease less
than the yield on their assets. Changes in interest rates generally will
have the opposite effect on financial institutions with negative interest
rate sensitivity gaps. In a rising interest rate environment financial
institutions with negative gaps have more liabilities than assets mature
or reprice during the relevant period, causing the increase in the cost of
liabilities to exceed the increase in the yield on assets. Conversely, in
a falling interest rate environment, the cost of funds of financial
institutions with negative interest rate sensitivity gaps generally will
decrease more than the yield on their assets. The Company's experience
with interest rates are discussed in more detail under the headings
"Results of Operations and Comparisons of the Years Ended June 30, 1997
and 1996" and "Results of Operations and Comparisons of the Years Ended
June 30, 1996 and 1995."
<PAGE> 17 (continued)
The Company's one-year interest rate sensitivity gap, stated as a dollar
amount and as a percentage of total interest-earning assets, was a
positive $48 million, or 6.9%, at June 30, 1997, as compared to a positive
$89 million, or 13.6%, at June 30, 1996 and a positive $75 million, or
12.3% at June 30, 1995.
The change in the Company's one-year gap position from 1996 to 1997
resulted primarily from (i) a $30 million, or 6%, increase in various loan
types, the majority of which were at adjustable rates with adjustment
periods of one year or less; (ii) a $16 million, or 21%, decrease in
investment securities and other interest-earning assets due to maturities
extending into the 1 to 3 year category; (iii) a $10 million, or 60%,
increase in Other borrowings and liabilities; and (iv) a $48 million, or
25%, increase in time deposits in the one year or less category primarily
from the Company's increased use of brokered deposits substantially all of
which have maturities of six months or less.
The change in the Company's one-year gap position from 1995 to 1996
resulted primarily from (i) a $43 million, or 126%, increase in investment
securities and other interest-earning assets from an overall increase of
$15 million due to the end of the quarter falling on a weekend which
increases cash items in the process of collection from other financial
institutions combined with maturities of $28 million shortening into the
one year or less category; (ii) an $18 million, or 4%, increase in
residential, commercial real estate and construction loans, the majority
of which were at adjustable rates with adjustment periods of one year or
less; (iii) a $24 million, or 25%, increase in FHLBank advances with short
maturities to match the increase in adjustable rate loans; (iv) a $17
million, or 10%, increase in time deposits primarily from a shift of $13
million to the one year or less category from the categories over one
year; and (v) a $9 million, or 9%, increase in demand deposits due to the
end of the quarter falling on a weekend as noted under (i) above, which
are in the one year or less category.
As a part of its asset and liability management strategy, the Company has
increased its investment in loans which are interest rate sensitive by
emphasizing the origination of adjustable-rate, one- to four-family
residential loans and adjustable-rate or relatively short-term commercial
real estate, commercial business and consumer loans, and originating
fixed-rate, one- to four-family residential loans primarily for immediate
resale in the secondary market. Approximately 30% of total assets are
currently invested in commercial real estate and commercial business
loans. This part of the strategy was designed to improve asset yield and
fee income, and to shorten the average maturity and increase the interest
rate sensitivity of the loan portfolio. While efforts to date have
contributed to the changes in the one-year interest rate sensitivity gap
and increasing net interest income, such lending, commensurate with the
increased risk levels, has also resulted in an increase in the level of
non-performing assets. Management continually evaluates existing and
potential commercial real estate and commercial business loans, in order
to try to reduce undesirable risks including concentrations in a given
geographic area or a particular loan category.
<PAGE> 17 (continued) & 18
While from a credit risk standpoint the Company would prefer higher levels
of one- to four-family and other residential loan originations rather than
commercial real estate and commercial business loan originations, the
Company has adapted to the changing lending environment and originates
commercial real estate and commercial business loans to help maintain the
desired size of the loan portfolio and assets in total, as well as to
maintain the desired yield on the Company's investments.
Interest rate risk exposure estimates (the sensitivity gap) are not exact
measures of an institution's actual interest rate risk. They are only
indicators of interest rate risk exposure produced in a simplified
modeling environment designed to allow management to gauge the Company's
sensitivity to changes in interest rates. They do not necessarily
indicate the impact of general interest rate movements on the Company's
net interest income because the repricing of certain categories of assets
and liabilities is subject to competitive and other factors beyond the
Company's control. As a result, certain assets and liabilities indicated
as maturing or otherwise repricing within a stated period may in fact
mature or reprice at different times and in different amounts and would
therefore cause a change (which potentially could be material) in the
Company's interest rate risk.
Tables I & II set forth the Company's interest rate sensitive assets and
liabilities. Table I sets forth the Company's interest rate sensitive
assets and liabilities that mature or reprice within one year as of the
dates indicated, while table II sets forth the interest rate sensitivity
of the Company's June 30, 1997 assets and liabilities for all maturity or
repricing periods. Both tables were prepared on the basis of the factors
and assumptions following:
- --Prepayment rates are derived from overall market prepayment rates
observed on or about June 30, 1997.
- --Fixed-rate loans, net of loans in process, deferred fees and discounts
are shown on the basis of contractual amortization and the prepayment
assumptions noted above.
- --Adjustable-rate loans are assumed to reprice at the earlier of maturity
or the next contractual repricing date.
- --Zero growth and constant percentage composition of assets and
liabilities are assumed. Funds from contractual amortization are
reinvested at estimated market rates.
<PAGE> 18 (continued)
<TABLE>
<CAPTION>
TABLE I
June 30, 1997 1996 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Residential, commercial real estate and
construction loans $474,051 $463,559 $445,745
Commercial business loans 25,557 12,349 9,606
Consumer loans 22,549 16,202 14,068
Investment securities and other 60,628 76,343 33,710
------- ------- -------
Total interest rate sensitive assets repricing
within one year 582,785 568,453 503,129
------- ------- -------
Demand deposits 115,299 112,289 103,401
Savings deposits 35,065 37,009 38,285
Time deposits 240,643 192,909 175,728
FHLBank advances 117,659 120,849 96,831
Other borrowings and liabilities 26,338 16,468 13,947
------- ------- -------
Total interest rate sensitive liabilities repricing
within one year 535,004 479,524 428,192
------- ------- -------
One year interest rate sensitivity gap (1) $ 47,781 $ 88,929 $ 74,937
======= ======= =======
Interest rate sensitive assets/interest rate sensitive
liabilities 108.9% 118.5% 117.5%
===== ===== =====
One year interest rate sensitivity gap as a percent of
interest-earning assets 6.9% 13.6% 12.3%
=== ==== ====
______________________
<FN>
(1) Defined as the Company's interest-earning assets which mature or reprice within one year minus its interest-
bearing liabilities which mature or reprice within one year.
</TABLE>
<PAGE> 18 (continued)
<TABLE>
<CAPTION>
TABLE II Maturing or Repricing (Dollars in thousands)
Over 6
6 Months Months Over 1-3 Over 3-5 Over
or Less to 1 Year Years Years 5 Years Total
-------- --------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Residential, commercial real estate
and construction loans $368,392 $105,659 $41,741 $ 6,320 $28,086 $550,198
Commercial business loans 25,477 80 158 244 25,959
Consumer loans 20,495 2,054 4,120 993 4 27,666
Investment securities and other 44,588 16,040 31,713 0 0 92,341
------- ------- ------ ------ ------ -------
Total interest-earning assets 458,952 123,833 77,732 7,557 28,090 696,164
------- ------- ------ ------ ------ -------
Demand deposits 115,299 115,299
Savings deposits 35,065 35,065
Time deposits 181,002 59,641 42,740 7,075 3,842 294,300
FHLBank advances 100,693 16,966 12,578 3,990 17,654 151,881
Other borrowings and liabilities 26,338 0 0 0 0 26,338
------- ------- ------ ------ ------ -------
Total interest-bearing liabilities 458,397 76,607 55,318 11,065 21,496 622,883
------- ------- ------ ------ ------ -------
Interest-earning assets less
interest-bearing liabilities $ 555 $ 47,226 $22,414 $(3,508) $ 6,594 $73,281
======= ======= ====== ===== ====== ======
Cumulative interest rate
sensitivity gap $ 555 $ 47,781 $70,195 $66,687 $73,281
======= ======= ====== ====== ======
Cumulative interest rate
sensitivity gap as a percent of
interest-earning assets at June 30, 1997 .1% 6.9% 10.1% 9.6% 10.5%
Cumulative interest rate
sensitivity gap as a percent of
interest- earning assets at June 30, 1996 (0.4)% 13.6% 8.9% 8.3% 10.2%
</TABLE>
<PAGE> 19
RESULTS OF OPERATIONS AND COMPARISON FOR THE YEARS ENDED JUNE 30, 1997 AND
1996
EARNINGS
The Company's earnings decreased in fiscal year ended June 30, 1997 by $2
million, or 17.3%, from the earnings reported for the fiscal year ended
June 30, 1996. This decrease in earnings was primarily due to an increase
in the non-interest expense of $4.1 million and an increase in provision
for loan losses of $255,000. The decrease in earnings was offset by an
increase in net interest income of $.9 million and a decrease in provision
for income taxes of $1.4 million during fiscal 1997.
<PAGE> 19 (continued)
INTEREST INCOME
Total interest income increased $1.6 million, or 3.0%, from fiscal 1996
primarily due to a $1.5 million, or 3.0%, increase in interest income on
loans combined with a $120,000, or 3.0%, increase in interest income on
investment securities and other interest-earning assets.
The increase in interest income on loans was the result of higher average
balances from $537 million in fiscal 1996 to $561 million in fiscal 1997
as a result of loan growth. This increase was offset by a decrease in
average yield from 9.29% in fiscal 1996 to 9.15% in fiscal 1997 as a
result of slightly lower interest rates during the fiscal year 1997.
The increase in interest income on investment securities and other
interest-bearing assets was the result of higher average balances from $76
million in fiscal 1996 to $80 million in fiscal 1997 as a result of
available-for-sale securities acquired by the Company. The increase in
interest income was offset by a decrease in average yields from 5.34% in
fiscal 1996 to 5.22% in fiscal 1997 as a result of lower market rates on
replacement investments.
The Company believes interest income will continue to increase in fiscal
year 1998 as current loan balances are above the average balances in
fiscal 1997 and market rates are expected to be comparable to fiscal 1997.
INTEREST EXPENSE
Total interest expense increased $690,000, or 2.5%, from fiscal 1996
primarily due to a $950,000, or 5.6%, increase in interest expense on
deposits paid by the Bank to its depositors. This increase in interest
expense was offset by a $260,000, or 2.3%, decrease in interest expense
paid by the Bank on FHLBank advances and other borrowings.
Interest expense on deposits increased primarily due to an increase in
higher average balances of time deposits from $239 million in fiscal 1996
to $262 million in fiscal 1997 as a result of increased brokered deposits,
offset by lower average rates on time deposits from 5.69% in fiscal 1996
to 5.53% in fiscal 1997 as a result of lower market rates on the average
for such deposits.
Interest expense on FHLBank advances and other borrowings decreased
primarily due to lower average rates from 5.97% in fiscal 1996 to 5.88% in
fiscal 1997 and slightly lower average balances from $187 million in
fiscal 1996 to $185 million in fiscal 1997. The Company evaluates various
funding sources and generally uses the source that produces the lowest
overall cost in the current market environment. The main sources
evaluated are FHLBank advances, brokered CDs and retail deposits.
<PAGE> 19 (continued) & 20
The Company believes interest expense will continue to increase in fiscal
1998 as average balances are expected to increase to fund higher average
loan balances and market rates are expected to be comparable to fiscal
1997.
NET INTEREST INCOME
The Company's overall net interest margin (net income divided by total
interest-earning assets) decreased 4 basis points, or 1%, from 4.21% in
fiscal 1996 to 4.17% in fiscal 1997. The decrease is due to an overall
decrease in the weighted average yield (the sum of the annualized earnings
of each interest-earning asset divided by total interest-earning assets)
received on interest-earning assets which was slightly greater than the
overall decrease in the weighted average rates paid on interest-bearing
liabilities.
The Company believes the net interest margin will remain stable or decline
slightly in fiscal 1998.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $255,000, or 18%, in fiscal 1997
from fiscal 1996. In any accounting period, the provision for loan losses
is affected by many factors including, but not limited to, the change in
the composition of the loan portfolio, the increase or decrease in total
loans, the level of delinquencies, the historical loss experience of the
portfolio and non-performing loan levels.
Non-performing assets, which include non-performing loans and foreclosed
assets, decreased $3 million, or 17.8%, in fiscal 1997 from $16.9 million
at June 30, 1996 to $13.9 million at June 30, 1997. Non-performing loans
increased $2 million, or 33.4%, from $5.9 million at June 30, 1996 to $7.9
million at June 30,1997, and foreclosed assets decreased $5.0 million, or
45.5%, from $10.9 million at June 30, 1996 to $6.0 million at June 30,
1997. Non-performing loans at June 30, 1996 and 1997, respectively,
included $500,000 and $285,000 of single-family residential loans in
connection with the sale of foreclosed assets. The majority of these loans
are currently performing according to their loan terms.
The increase in non-performing loans was primarily the result of (i) the
addition of a net loan for $3.8 million (net of deferred gain and actual
payments received) as a result of 100% financing of the sale of a
condominium development in Branson, Missouri; (ii) the addition of loans
totaling $1.2 million on nine condominium units in one development in
Branson, Missouri; (iii) the addition of a single-family residential
development and five single-family mortgage loans totaling $576,000;
partially offset by (iv) the foreclosure of a residential single-family
development located in Taney County, Missouri securing a $1.3 million
loan; (v) the receipt of all scheduled payments currently due on loans
totaling $984,000 on a restaurant located in Branson, Missouri; (vi) the
payoff of a loan for $934,000 which was secured by a residential
development at Lake Ozark, Missouri; and (vii) the foreclosure and sale of
a $250,000 restaurant loan (net of charge-offs of $110,000).
<PAGE> 20 (continued)
The loan of $3.8 million on the sale of the foreclosed assets is net of a
deferred gain of $427,000. If the buyer is able to liquidate the project
as planned, this gain will be recognized at a future time when the loan
has paid down to an adequate level.
The residential development located in Taney County, against which the
Bank has loaned $1.3 million, includes 63 developed residential lots with
all utilities (electric, sewer, water and natural gas), six single-family
homes constructed by the original borrower and 166 acres of undeveloped
land. The loan was charged down by $300,000 and recorded in foreclosed
assets at $1 million. Subsequent to June 30, 1997, the Company sold the
single-family homes for a total of $439,000 with normal long-term
financing.
The borrower on the $934,000 loan had been delinquent for an extended
period, but was in bankruptcy so the Company had been unable to obtain
possession of the property. The property securing this loan was auctioned
at a bankruptcy court sponsored sale during the fiscal year and purchased
by independent third parties for approximately $1.1 million, a substantial
portion of which has been received by the Company.
The borrower on the $1 million restaurant loans had been slow in paying
but began showing improvement towards the latter part of their 1995 season
and experienced increased advance reservations for the 1996 season. These
advance reservations materialized in the 1996 season and the borrower made
all loan payments according to the agreed payment schedule and brought the
loans current.
The $5 million decline in foreclosed assets during fiscal year 1997 was
primarily due to: (i) the sale of the $4.3 million property noted in the
non-performing loan section above ($3.8 million net loan balance); (ii)
the sale for $550,000 of a truck terminal and office building in
Springfield, Missouri with 28% cash down and normal long-term financing
for the balance; (iii) the sale of condominium units carried at an
aggregate of $350,000 and single-family homes carried at an aggregate of
$150,000; (iv) charge downs totaling $630,000 on an apartment project in
Branson, Missouri and a motel located in Branson, Missouri; and (v) a
$237,000 charge-down of a campground located near Branson, Missouri which
was sold subsequent to June 30, 1997 at its carrying value of $850,000
with 100% financing; offset by (vi) the foreclosure of the $1.3 million
property (charged down to $1 million at foreclosure) noted in the non-
performing loan section above; (vii) the foreclosure of single-family
properties totaling approximately $500,000; and (viii) various other
activity of smaller properties in the account.
Potential problem loans increased $2.4 million during fiscal 1997 from
$4.7 million at June 30, 1996 to $7.1 million at June 30, 1997. 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.
<PAGE> 20 (continued)& 21
These loans are not reflected in the non-performing loans. The main
reason for the increase in potential problem loans is: (i) the continued
credit deterioration of the borrower on a $985,000 loan secured by
commercial lots located in Branson, Missouri; (ii) an increase of $950,000
from the improved credit quality and upgrade from non-performing status of
the Branson, Missouri restaurant project disclosed in the non-performing
loan section above; (iii) an increase of $170,000 in a condominium project
in Branson, Missouri due to additional advances from increased collateral
positions; (iv) the deterioration of credit quality of a $250,000
commercial real estate loan secured by a building in Springfield,
Missouri; and (v) the deterioration of the credit quality of various
projects, partially offset by the improvement of other projects.
The allowance for loan losses at June 30, 1997 and 1996, respectively,
totaled $15.5 million and $14.4 million, representing 2.7% and 2.6% of
total loans, 197% and 243% of non-performing loans, and 103% and 135% of
non-performing loans and potential problem loans in total. The allowance
for foreclosed asset losses totaled $300,000 and $1.1 million at June 30,
1997 and 1996, respectively, representing 5.4% and 9.9% of total
foreclosed assets. Although Management maintains the allowance for loan
losses and the allowance for foreclosed asset losses at levels which it
considers to be adequate to provide for potential losses and selling
expenses, there can be no assurance that such losses will not exceed the
estimated amounts, thereby adversely affecting future results of
operations.
NON-INTEREST INCOME
Non-interest income increased $118,000, or 1.1%, in fiscal 1997. The main
changes in this area were: (i) an increase in commission income of
$555,000 from increased sales in the travel and investment subsidiaries;
(ii) an increase of $400,000 in service fees on deposit accounts primarily
from increased ATM and debit card fees along with increased insufficient
check fees; (iii) a decrease in income on foreclosed assets of $442,000
primarily due to larger recoveries in fiscal 1996 versus fiscal 1997 of
previously recorded losses; (iv) a decrease in profit on sale of loans and
available-for-sale securities of $493,000 due to reductions in gains on
sale of available-for-sale securities in fiscal 1997; and (v) modest
increases or decreases in other non-interest income items.
<PAGE> 21 (continued)
NON-INTEREST EXPENSE
Non-interest expense increased $4.1 million, or 25.1%, in fiscal 1997.
The increase was due primarily to: (i) a one-time deposit insurance
assessment of $2.5 million partially offset by a decrease in the ongoing
semi-annual deposit insurance assessment of $350,000; (ii) an increase in
goodwill amortization of $915,000 as a result of the write-off of goodwill
remaining from a 1982 failed thrift purchase; (iii) an increase in
employee expense of $850,000 primarily due to asset and earnings growth in
the Bank and increased sales volume in the travel and investment
subsidiaries; (iv) an increase of $190,000 in supplies and printing
partially due to ordering machine readable forms in additional areas to
streamline transaction processing and efficiency; (v) an increase of
$180,000 in net occupancy expense primarily from expansion and upgrade in
technology related items such as ATMs; and (vi) various smaller increases
and decreases in the other non-interest expense categories.
PROVISION FOR INCOME TAXES
Provision for income taxes as a percentage of pre-tax income decreased
from 38.6% in fiscal 1996 to 38.1% in fiscal 1997 due to changes in
accrual estimates.
RESULTS OF OPERATIONS AND COMPARISON FOR THE YEARS ENDED JUNE 30, 1996 AND
1995
The increase in earnings for the year ended June 30, 1996 compared to June
30, 1995 of $1.8 million, or 19%, was primarily due to an increase in the
net interest income of $2.1 million and an increase in non-interest income
of $2.4 million, offset by an increase in non-interest expense of $1
million and an increase in provision for income taxes of $1.6 million
during fiscal 1996.
INTEREST INCOME
Total interest income increased $6.8 million, or 14.5%, from fiscal 1995
primarily due to a $6.2 million, or 14.2%, increase in interest income on
loans combined with a $.6 million, or 18.4%, increase in interest income
on investment securities and other interest-earning assets. The increase
in interest income on loans was the result of higher average balances from
$487 million in fiscal 1995 to $537 million in fiscal 1996 as a result of
strong loan growth, combined with an increase in average yield from 8.98%
in fiscal 1995 to 9.29% in fiscal 1996 as a result of higher market rates
during the fiscal year. The increase in interest income on investment
securities and other interest-bearing assets was the result of higher
average annual yields from 4.85% in fiscal 1995 to 5.34% in fiscal 1996 as
a result of higher market rates, combined with an increase in average
balances from $71 million in fiscal 1995 to $76 million in fiscal 1996 as
a result of available-for-sale securities acquired by the Company.
<PAGE> 21 (continued)
INTEREST EXPENSE
Total interest expense increased $4.7 million, or 20.2%, from fiscal 1995
primarily due to a $2.1 million, or 14.2%, increase in interest expense on
deposits and a $2.6 million, or 30.5%, increase in interest expense on
FHLBank advances and other borrowings. Interest expense on deposits
increased primarily due to an increase in average annual rates on time
deposits from 5.14% in fiscal 1995 to 5.69% in fiscal 1996 as a result of
higher market rates on the average for such deposits and higher average
balances from $222 million in fiscal 1995 to $239 million in fiscal 1996.
Interest expense on FHLBank advances and other borrowings increased
primarily due to higher average balances from $143 million in fiscal 1995
to $187 million in fiscal 1996 as a result of the Company's decision to
use FHLBank advances to fund increased loan volumes. The Company
evaluates various funding sources and generally uses the source which
produces the lowest overall cost in the current market environment. The
main sources evaluated are FHLBank advances, brokered CDs and retail
deposits.
NET INTEREST INCOME
The Company's overall net interest margin decreased 4 basis points, or
.9%, from 4.25% in fiscal 1995 to 4.21% in fiscal 1996. The decrease is
due to an overall increase in the weighted average rates paid on interest-
bearing liabilities which was slightly greater than the overall increase
in the weighted average yield received on interest-earning assets.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $132,000, or 10%, in fiscal 1996
from fiscal 1995. In any accounting period, the provision for loan losses
is affected by many factors including, but not limited to, the change in
the composition of the loan portfolio, the increase or decrease in total
loans, the level of delinquencies, the historical loss experience of the
portfolio and non-performing loan levels.
Non-performing assets increased $4.1 million, or 32%, in fiscal 1996 from
$12.8 million at June 30, 1995 to $16.9 million at June 30, 1996. Non-
performing loans increased $2.1 million, or 53.8%, from $3.8 million at
June 30, 1995 to $5.9 million at June 30,1996, and foreclosed assets
increased $2 million, or 22.6%, from $8.9 million at June 30, 1995 to
$10.9 million at June 30, 1996. Non-performing loans at June 30, 1995 and
1996, respectively, included $800,000 and $500,000 of loans in connection
with the sale of foreclosed assets. Substantially all of these loans are
currently performing according to their loan terms.
<PAGE> 21 (continued) & 22
The increase in non-performing loans was primarily the result of (i) the
addition of loans totaling $1.3 million on a residential development in
Taney County, Missouri; (ii) the transfer from foreclosed assets to loans,
due to the implementation of SFAS 114, of one loan for $934,000 which had
been recorded as an in-substance foreclosure in fiscal 1995; (iii) the
addition of loans totaling $1 million on a restaurant located in Branson,
Missouri; and (iv) the addition of six unrelated single-family mortgage
loans totaling $.5 million; partially offset by (v) the foreclosure of a
79-unit motel in Branson, Missouri securing a $1.6 million loan.
For current information concerning these loans, please see the section
"Provision for Loan Losses" under the heading "Results of Operations and
Comparison for the Years Ended June 30, 1997 and 1996."
The increase in foreclosed assets in fiscal 1996 was primarily due to (i)
the addition of a $4.3 million condominium project located in Branson,
Missouri (this is net of a $1.4 million charge-down prior to foreclosure);
(ii) the addition of a $1 million residential development in Branson,
Missouri; (iii) the addition of the $1.6 million motel noted above; offset
by (iv) the sale of a $2.8 million 18 hole Arnold Palmer designed golf
course located at the Lake of the Ozarks, near Osage Beach, Missouri. The
sale was for a total of $4 million with $1 million cash at closing and
normal long-term financing for the balance; (v) the $934,000 property
transferred back to loans as noted above; (vi) the sale of nine
condominium units carried at an aggregate of $424,000; (vii) three
residential lots carried at an aggregate of $47,000 and 22.3 undeveloped
acres carried at $120,000 located on the Lake of the Ozarks; (viii) the
sale of a $400,000 Joplin car wash; (ix) a $125,000 charge-down on two
existing properties; and (x) various other activity of smaller properties
in the account.
Potential problem loans decreased $.9 million from $5.6 million at June
30, 1995 to $4.7 million at June 30, 1996. These are loans which
management 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 main reason for the decrease
in potential problem loans was the reduction of (i) $2.2 million in a
condominium project in Branson, Missouri due to collateral sales; and (ii)
the $1 million Branson, Missouri restaurant loans which moved to non-
performing loans at June 30, 1996; offset by (iii) deterioration of the
credit quality of a commercial business located in Springfield, Missouri
of $2.3 million.
The allowance for loan losses at June 30, 1996 and 1995, respectively,
totaled $14.4 million and $14.6 million, representing 2.6% and 2.8% of
total loans, 243% and 380% of non-performing loans, and 139% and 154% of
non-performing loans and potential problem loans in total. The allowance
for foreclosed asset losses totaled $1.1 million and $.9 million at June
30, 1996 and 1995, respectively, representing 9.9% and 10.4% of total
foreclosed assets.
<PAGE> 22 (continued) & 23
NON-INTEREST INCOME
Non-interest income increased $2.4 million, or 30.4%, in fiscal 1996 as
compared to fiscal 1995. The main areas generating the net increase were:
(i) an increase in income on foreclosed assets of $971,000 primarily due
to recovery in fiscal 1996 of previously recorded losses; (ii) an increase
in profit on sale of loans and available-for-sale securities of $1.1
million due to gains on sale of available-for-sale securities of $680,000
in fiscal 1996, and an increase in sales of fixed-rate one- to four-family
loan originations in fiscal 1996; and (iii) modest increases or decreases
in other non-interest income items.
NON-INTEREST EXPENSE
Non-interest expense increased $1 million, or 6.4%, in fiscal 1996 from
fiscal 1995. The increase was due primarily to: (i) an increase in
employee expense of $790,000, or 10.4%, primarily due to increases in the
Bank for salaries, commissions, retirement plan contributions and health
insurance premiums; and (ii) an increase of $340,000, or 17.9%, in net
occupancy expense primarily from expansion and upgrade in technology
related items such as computers and ATMs; offset by (iii) a decrease of
$130,000, or 23.3%, in supplies and printing from an overall reduction in
pricing on purchases; and (iv) various smaller increases and decreases in
the other non-interest expense categories.
PROVISION FOR INCOME TAXES
Provision for income taxes as a percentage of pre-tax income increased
from 36.8% in fiscal 1995 to 38.6% in fiscal 1996 due to changes in
accrual estimates.
AVERAGE BALANCES, INTEREST RATES AND YIELDS
Table III 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 includes 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.
<PAGE> 22 (continued)
<TABLE>
<CAPTION>
TABLE III Years Ended June 30,
(Dollars in thousands) --------------------------------------------------------------------------
June 30, 1997 1996 1995
1997 ------------------------ ----------------------- ------------------------
Yield Average Yield Average Yield Average Yield
/Rate Balance Interest /Rate Balance Interest /Rate Balance Interest /Rate
------ -------- -------- ------ -------- -------- ----- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable 8.99% $561,146 $51,365 9.15% $536,695 $49,884 9.29% $486,726 $43,686 8.98%
Investment securities and
other interest-earning assets 6.24 79,942 4,175 5.22 75,963 4,054 5.34 70,663 3,425 4.85
---- ------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-earning assets 8.74 $641,088 55,540 8.66 $612,658 53,938 8.80 $557,389 47,111 8.45
---- ------- ------ ---- ------- ------ ---- ------- ------ ----
Interest-bearing liabilities:
Demand deposits 2.36 $108,750 2,571 2.36 $102,920 2,495 2.42 $104,027 2,481 2.38
Savings deposits 2.51 35,252 867 2.46 36,901 914 2.48 40,887 1,002 2.45
Time deposits 5.53 262,214 14,513 5.53 238,791 13,594 5.69 221,825 11,402 5.14
---- ------- ------ ---- ------- ------ ---- ------- ------ ----
Total deposits 4.47 406,216 17,951 4.42 378,612 17,003 4.49 366,739 14,885 4.06
FHLBank advances and
other borrowings 5.76 184,917 10,871 5.88 186,522 11,129 5.97 143,281 8,526 5.95
---- ------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-bearing liab. 4.84 $591,133 28,822 4.87 $565,134 28,132 4.98 $510,020 23,411 4.59
---- ======= ------ ---- ======= ------ ---- ======= ------ ----
Net interest income:
Interest rate spread 3.90% $26,718 3.79% $25,806 3.82% $23,700 3.86%
==== ====== ==== ====== ==== ====== ====
Net interest margin (1) 4.17% 4.21% 4.25%
==== ==== ====
Average interest-earning assets to
average interest-bearing liab. 108.5% 108.4% 109.3%
===== ===== =====
<FN>
(1) Defined as the Company's net interest income divided by total
interest-earning assets.
</TABLE>
<PAGE> 23 (continued)
RATE/VOLUME ANANLYSI
Table IV 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.
<TABLE>
<CAPTION>
TABLE IV Years Ended June 30,
---------------------------------------------------------------
(Dollars in thousands) 1996 vs. 1997 1995 vs. 1996
---------------------------- ----------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
---------------- Increase ---------------- Increase
Rate Volume (Decrease) Rate Volume (Decrease)
------ ------ ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $(740) $2,221 $1,481 $1,595 $4,603 $6,198
Investment securities and
other interest-earning assets (84) 205 121 361 268 629
----- ----- ----- ----- ----- -----
Total interest-earning assets (824) 2,426 1,602 1,956 4,871 6,827
----- ----- ----- ----- ----- -----
Interest-bearing liabilities:
Demand deposits (59) 135 76 40 (26) 14
Savings deposits (6) (41) (47) 11 (99) (88)
Time deposits (363) 1,282 919 1,281 911 2,192
----- ----- ----- ----- ----- -----
Total deposits (428) 1,376 948 1,332 786 2,118
FHLBank advances
and other borrowings (163) (95) (258) 23 2,580 2,603
----- ----- ----- ----- ----- -----
Total interest-bearing liabilities (591) 1,281 690 1,355 3,366 4,721
----- ----- ----- ----- ----- -----
Net interest income $ (233) $1,145 $ 912 $ 601 $1,505 $2,106
===== ===== ===== ===== ===== =====
</TABLE>
<PAGE> 23 (continued) & 24
LIQUIDITY AND CAPITAL RESOURCES
General. The Company's capital position remained strong, with
stockholders' equity at $60 million, or 8.5% of total assets of $708
million at June 30, 1997 compared to equity at $68 million, or 10.1%, of
total assets of $668 million at June 30, 1996. In addition, the Bank
exceeds each of the regulatory capital requirements. At June 30, 1997,
the Bank had ratios of tangible capital to assets of 7.9%, core capital of
7.9% and risk-based capital of 11.7%. At June 30, 1996, the Bank had
ratios of tangible capital to assets of 8.5%, core capital of 8.5% and
risk-based capital of 13.0%. Federal regulations at each of those dates
required tangible, core and risk-based capital ratios of 1.5%, 3% and 8%,
respectively.
The Bank is required by regulation to maintain certain liquidity ratios.
Currently, a minimum of 5% of the combined total of deposits and short-
term borrowings must be maintained in the form of cash and eligible
investments. The Bank has historically maintained its liquidity ratio at
a level in excess of what is required. As of June 30, 1997, the Bank's
liquidity ratio was 7.4%, compared to 7.3% at June 30, 1996. Management
believes that the Company has sufficient cash flows and borrowing capacity
available to meet its commitments and other foreseeable cash needs for
operations. At June 30, 1997, the Company had commitments of
approximately $80 million to fund loan originations, issued lines of
credit, outstanding letters of credit and unadvanced loans.
At June 30, 1997, the held-to-maturity investment portfolio included
$115,000 of gross unrealized gains and $15,000 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 sale 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 necessary, supplements deposits with less
expensive alternative sources of funds.
Statements of Cash Flows. During the years ended June 30, 1997, 1996 and
1995, 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 the years ended June
30, 1997, 1996 and 1995.
<PAGE> 24 (continued)
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 $11.7 million, $11.6 million and $8.4 million in
cash during the years ended June 30, 1997, 1996 and 1995, respectively.
During the years ended June 30, 1997, 1996 and 1995, investing activities
used cash of $36.1 million, $34.4 million and $82.7 million primarily due
to the net increase of loans in each period.
Changes in cash flows from financing activities of 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 $27.3 million, $35.0 million
and $77.1 million in cash during the years ended June 30, 1997, 1996 and
1995. Financing activities in the future are expected to primarily
include changes in deposits and changes in FHLBank advances, and changes
in short-term borrowings.
Dividends. During the year ended June 30, 1997, the Company declared and
paid dividends of $.3875 per share compared to dividends declared and paid
during the year ended June 30, 1996 of $.35 per share. 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 year ended June 30, 1997, the Company
repurchased 961,967 shares of its common stock at an average price of
$16.20 per share and reissued 254,992 shares of treasury stock at an
average price of $2.01 per share for stock option exercises. During the
year ended June 30, 1996, the Company repurchased 281,196 shares of its
common stock at an average price of $11.92 per share and reissued 87,776
shares of treasury stock at an average price of $1.58 per share for stock
option exercises.
Management intends to continue its stock buy-back programs as long as
repurchasing the stock contributes to the overall growth of shareholder
value. The number of shares of stock that will be repurchased and the
price that will be paid is the result of many factors, several of which
are outside the control of the Company. The primary factors 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.
<PAGE> 25
<TABLE>
<CAPTION>
GREAT SOTUHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1997 AND 1996 1997 1996
---- ----
ASSETS
<S> <C> <C>
Cash $ 8,176,763 $ 6,661,290
Interest bearing deposits in other
financial institutions 24,308,337 22,953,737
----------- -----------
Cash and cash equivalents 32,485,100 29,615,027
Available-for-sale securities 7,408,020 4,655,816
Held-to-maturity securities 49756,978 49,182,323
Loans receivable, net 583,709,446 546,759,467
Foreclosed assets held for sale, net 5,650,962 9,861,556
Premises and equipment 7,433,073 6,686,954
Accrued interest receivable
Loans 4,225,771 4,289,192
Investments 767,541 1,067,230
Investment in FHLB stock 10,792,600 10,022,800
Prepaid expenses and other assets 2,982,653 1,774,439
Excess of cost over fair value of net assets
acquired, at amortized cost -- 1,101,961
Deferred income taxes 2,629,140 3,088,540
----------- -----------
Total Assets $707,841,284 $668,105,305
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $459,235,746 $397,054,516
Federal Home Loan Bank advances 151,881,100 180,797,043
Short-term borrowings 28,744,191 16,467,825
Advances from borrowers for taxes and insurance 2,488,397 2,659,427
Accounts payable and accrued expenses 1,873,824 2,431,507
Income taxes payable 3,269,659 887,418
----------- -----------
Total Liabilities 647,492,917 600,297,736
----------- -----------
STOCKHOLDERS' EQUITY
Capital stock
Serial preferred stock, $.01 par value;
authorized 1,000,000 shares
Common stock, $.01 par value;
authorized 10,000,000 shares,
issued 6,162,501 shares 123,250 61,625
Additional paid-in capital 17,058,326 16,834,507
Retained earnings - substantially restricted 73,980,259 67,917,888
Unrealized appreciation on available-for-sale
securities, net of income taxes of $870,860
and $61,460 in 1997 and 1996, respectively 1,362,116 96,129
Treasury stock, at cost; 1997 - 4,219,881 shares;
1996 - 1,756,453 shares (32,175,584) (17,102,580)
----------- -----------
Total Stockholders' Equity 60,348,367 67,807,569
----------- -----------
Total Liabilities and
Stockholders' Equity $707,841,284 $668,105,305
=========== ===========
</TABLE>
<PAGE> 26
<TABLE>
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED JUNE 30, 1997
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans $51,365,481 $ 49,884,135 $ 43,686,297
Investment securities 3,892,077 3,849,815 3,278,520
Other 282,889 204,415 145,770
---------- ---------- ----------
55,540,447 53,938,365 47,110,587
---------- ---------- ----------
INTEREST EXPENSE
Deposits 17,950,677 17,002,724 14,884,740
FHLB advances 10,229,111 10,585,178 8,090,774
Short-term borrowings 642,356 544,509 435,548
---------- ---------- ----------
28,822,144 28,132,411 23,411,062
---------- ---------- ----------
NET INTEREST INCOME 26,718,303 25,805,954 23,699,525
PROVISION FOR LOAN LOSSES 1,706,142 1,450,754 1,319,266
---------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 25,012,161 24,355,200 22,380,259
---------- ---------- ----------
NONINTEREST INCOME
Commissions 4,968,695 4,412,600 4,375,438
Service charge fees 2,784 719 2,381,455 2,272,899
Net realized gains on sales of loans
and available-for-sale securities 726,590 1,220,336 112,590
Income (expense) on foreclosed assets 285,543 727,995 (242,535)
Other income 1,676,510 1,581,553 1,395,912
---------- ---------- ----------
10,442,057 10,323,939 7,914,304
---------- ---------- ----------
NONINTEREST EXPENSE
Salaries and employee benefits 9,233,943 8,381,708 7,592,305
Net occupancy expense 2,400,570 2,220,131 1,883,382
Postage 625,745 634,465 592,407
Insurance 3,428,428 1,267,765 1,250,336
Amortization of goodwill 1,106,961 192,845 214,637
Advertising 675,456 533,336 570,218
Office supplies and printing 562,668 435,427 567,484
Other operating expenses 2,329,382 2,608,707 2,622,664
---------- ---------- ----------
20,363,153 16,274,384 15,293,433
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 15,091,065 18,404,755 15,001,130
PROVISION FOR INCOME TAXES 5,751,200 7,110,800 5,513,200
---------- ---------- ----------
NET INCOME $ 9,339,865 $ 11,293,955 $ 9,487,930
========== ========== ==========
EARNINGS PER COMMON SHARE:
Net income $ 1.10 $ 1.23 $ 1.00
==== ==== ====
<PAGE> 27
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED JUNE 30, 1997
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Appreciation
Additional on Available-
Common Paid-in Retained for-Sale Treasury
Stock Capital Earnings Securities, Net Stock Total
-------- ----------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30, 1994 $ 20,542 $16,600,611 $53,035,027 $ 0 $(8,194,301) $61,461,879
Net income 9,487,930 9,487,930
Stock issued under Stock
Option Plan 133,438 189,804 323,242
Dividends declared, $.30
per share (2,766,989) (2,766,989)
Three-for-one stock split 41,083 (41,083)
Change in unrealized
appreciation available-for-
sale securities, net of
income taxes of $231,156 361,551 361,551
Treasury stock purchased (5,885,426) (5,885,426)
------- ---------- ---------- ------- --------- ----------
BALANCE, JUNE 30, 1995 61,625 16,692,966 59,755,968 361,551 (13,889,923) 62,982,187
Net income 11,293,955 11,293,955
Stock issued under Stock
Option Plan 141,541 137,731 279,272
Dividends declared, $.35
per share (3,132,035) (3,132,035)
Change in unrealized
appreciation on available-for-
sale securities, net of
income taxes of $169,696 (265,422) (265,422)
Treasury stock purchased (3,350,388) (3,350,388)
------- ---------- --------- -------- ---------- ---------
BALANCE, JUNE 30, 1996 $ 61,625 $16,834,507 $67,917,888 $ 96,129 $(17,102,580) 67,807,569
Net income 9,339,865 9,339,865
Stock issued under Stock
Option Plan 285,444 511,669 797,113
Dividends declared, $.3875
per share (3,277,494) (3,277,494)
Two-for-one stock split 61,625 (61,625)
Change in unrealized
appreciation on available-for-
sale securities, net of
income taxes of $169,696 1,265,987 1,265,987
Treasury stock purchased (15,584,673) (15,584,673)
------- ---------- ---------- --------- ---------- ----------
BALANCE, JUNE 30, 1997 $123,250 $17,058,326 $73,980,259 $1,362,116 $(32,175,584) 60,348,367
======= ========== ========== ========= ========== ==========
</TABLE>
<PAGE> 28
<TABLE>
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED JUNE 30, 1997
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,339,865 $ 11,293,955 $ 9,487,930
Items not requiring (providing) cash
Depreciation 1,003,243 980,290 745,305
Amortization 1,101,961 192,845 214,637
Provision for loan losses 1,706,142 1,450,754 1,319,266
Provision for losses on foreclosed assets 100,000 275,000 400,000
Gain on sale of loans (521,165) (539,979) (91,340)
FHLB stock dividends received (176,400)
Net realized gains on available-for-sale securities (205,425) (680,357) (21,250)
(Gain) loss on sale of premises and equipment (9,585) 2,171 6,325
Gain on sale of foreclosed assets (559,902) (1,316,887) (184,339)
Amortization of deferred income, premiums and discounts (894,292) (680,395) (1,210,560)
Deferred income taxes (350,000) 604,000 (254,000)
Changes in:
Accrued interest receivable 363,110 (470,643) (1,531,793)
Prepaid expenses and other assets (1,208,214) 924,293 (1,203,856)
Accounts payable and accrued expenses (557,683) 80,325 112,744
Income taxes payable 2,382,241 (336,363) 597,170
----------- ----------- -----------
Net cash provided by operating activities 11,690,296 11,602,609 8,386,239
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (33,203,579) (30,161,082) (78,739,654)
Purchase of premises and equipment (1,771,232) (955,690) (1,374,772)
Proceeds from sale of premises and equipment 31,455 2,875 126
Proceeds from sale of foreclosed assets 1,017,514 2,044,721 1,125,608
Capitalized costs on foreclosed assets (198,090) (206,107)
Proceeds from maturing held-to-maturity securities 39,398,775 9,526,632 48,656,890
Purchase of held-to-maturity securities (40,159,443) (11,971,929) (47,468,442)
Proceeds from sale of available-for-sale securities 1,377,623 2,942,647 78,125
Purchase of available-for-sale securities (1,849,015) (4,262,442) (2,549,119)
Purchase of FHLB stock (769,800) (1,360,400) (2,421,300)
----------- ----------- -----------
Net cash used in investing activities (36,125,792) (34,400,775) (82,692,538)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in certificates of deposit 55,356,409 4,484,912 33,390,147
Net increase (decrease) in checking and savings accounts 6,824,821 8,242,392 (8,050,268)
Proceeds from FHLB advances 539,345,121 425,700,856 393,585,443
Repayments of FHLB advances (568,261,064) (399,226,851) (332,349,201)
Net increase (decrease) in short-term borrowings 12,276,366 2,520,881 (1,552,859)
Advances (to) from borrowers for taxes and insurance (171,030) (565,797) 386,161
Purchase of treasury stock (15,584,673) (3,350,388) (5,885,426)
Dividends paid (3,277,494) (3,132,035) (2,766,989)
Stock options exercised 797,113 279,272 323,242
----------- ----------- -----------
Net cash provided by financing activities 27,305,569 34,953,242 77,080,250
----------- ----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 2,870,073 12,155,076 2,773,951
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 29,615,027 17,459,951 14,686,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 32,485,100 $ 29,615,027 $ 17,459,951
=========== =========== ===========
</TABLE>
<PAGE> 29
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1997, 1996, and 1995
NOTE 1:
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Great Southern Bancorp, Inc. ("GSBC" or the "Company") operates as a one
savings bank holding company. GSBC's business primarily consists of the
business of Great Southern Bank (the "Bank"), which provides a full range
of financial services, as well as travel, insurance, investment services,
loan closings and appraisals through GSBC's other wholly-owned subsidiaries
to customers primarily in southwest and central Missouri. The Company and
the Bank are subject to the regulation of certain federal agencies and
undergo periodic examinations by those regulatory agencies.
In December 1989, GSBC completed the issuance of 2,054,167 shares of common
stock in connection with the conversion of the Bank from a mutual savings
and loan association to a stock savings bank (the "Conversion").
Concurrent with the Conversion, GSBC acquired all of the capital stock of
the Bank and became a savings bank holding company (see Note 15).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the
allowance for loan losses and the valuation of foreclosed assets held for
sale, management obtains independent appraisals for significant properties.
Management believes that the allowances for losses on loans and the
valuation of foreclosed assets held for sale are adequate. While
management uses available information to recognize losses on loans and
foreclosed assets held for sale, changes in economic conditions may
necessitate revision of these estimates in future years. In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowances for losses on loans and
valuation of foreclosed assets held for sale. Such agencies may require the
Bank to recognize additional losses based on their judgments of information
available to them at the time of their examination.
<PAGE> 29 (continued)
Principles of Consolidation
The consolidated financial statements include the accounts of Great
Southern Bancorp, Inc. and its wholly-owned subsidiaries, Great Southern
Bank, Great Southern Capital Management, Great Southern Financial
Corporation and its wholly-owned subsidiary, Appraisal Services, Inc.
Significant intercompany accounts and transactions have been eliminated in
consolidation.
Reclassifications
Certain 1996 and 1995 amounts have been reclassified to conform to the 1997
financial statements presentation. These reclassifications had no effect
on net income.
Cash and Investment Securities
Regulations require the Bank to maintain an amount in cash and U.S.
government and other approved securities equal to 5.0% of savings deposits
(net of loans on savings deposits) plus short-term borrowings.
The Bank is a member of the Federal Home Loan Bank system. As a member of
this system, it is required to maintain an investment in capital stock of
the Federal Home Loan Bank in an amount equal to the greater of 1% of its
outstanding home loans, 0.3% of its total assets, or one-twentieth of its
outstanding advances from the Federal Home Loan Bank (FHLB).
Investments in Debt and Equity Securities
During the year ended June 30, 1995, the Company adopted the provisions of
the Financial Accounting Standards Board Statement No. 115 (SFAS 115)
regarding investments in debt and equity securities. Management determines
the appropriate classification of securities at the time of purchase.
Available-for-sale securities, which include any security for which the
Company has no immediate plan to sell but which may be sold in the future,
are carried at fair value. Realized gains and losses, based on specifically
identified amortized cost of the specific security, are included in other
income. Unrealized gains and losses are recorded, net of related income
tax effects, in stockholders' equity. Premiums and discounts are amortized
and accreted, respectively, to interest income using the level-yield method
over the period to maturity.
Held-to-maturity securities, which include any security for which the
Company has the positive intent and ability to hold until maturity, are
carried at historical cost adjusted for amortization of premiums and
accretion of discounts. Premiums and discounts are amortized and accreted,
respectively, to interest income using the level-yield method over the
period to maturity.
Interest and dividends on investments in debt and equity securities are
included in income when earned.
<PAGE> 29 (continued) & 30
Excess of Cost Over Fair Value of Net Assets Acquired
Unamortized costs in excess of the fair value of underlying net tangible
assets acquired were $-0- and $1,101,961 at June 30, 1997 and 1996,
respectively. As a result of a revision of the estimated future benefit,
all unamortized costs in excess of the fair value of underlying net
tangible assets were fully expensed during 1997.
Mortgage Loans Held for Sale
Mortgage loans held for sale are carried at the lower of cost or fair
value, determined using an aggregate basis. Write-downs to fair value are
recognized as a charge to earnings at the time the decline in value occurs.
Forward commitments to sell mortgage loans are acquired to reduce market
risk on mortgage loans in the process of origination and mortgage loans
held for sale. Amounts paid to investors to obtain forward commitments are
deferred until such time as the related loans are sold. The fair values of
the forward commitments are not recognized in the financial statements.
Gains and losses resulting from sales of mortgage loans are recognized when
the respective loans are sold to investors. Gains and losses are
determined by the difference between the selling price and the carrying
amount of the loans sold, net of discounts collected or paid, commitment
fees paid and considering a normal servicing rate. Fees received from
borrowers to guarantee the funding of mortgage loans held for sale and fees
paid to investors to ensure the ultimate sale of such mortgage loans are
recognized as income or expense when the loans are sold or when it becomes
evident that the commitment will not be used. There were no material loans
held for sale at June 30, 1997 and 1996.
Loans
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for loan
losses, and any deferred fees or costs on originated loans and unamortized
premiums or discounts on purchased loans.
Discounts and premiums on purchased residential and commercial real estate
loans are amortized to income using the interest method over the remaining
period to contractual maturity, adjusted for anticipated prepayments.
Allowance for Loan Losses
The allowance for loan losses is increased by provisions charged to expense
and reduced by loans charged off, net of recoveries. The allowance is
maintained at a level considered adequate to provide for potential loan
losses, based on management's evaluation of the loan portfolio, as well as
on prevailing and anticipated economic conditions and historical losses by
loan category. General allowances have been established, based upon the
aforementioned factors and allocated to the individual loan categories.
Allowances are accrued on specific loans evaluated for impairment for which
the basis of each loan, including accrued interest, exceeds the discounted
amount of expected future collections of interest and principal or,
alternatively, the fair value of loan collateral.
<PAGE> 30 (continued)
A loan is considered impaired when it is probable that the Bank will not
receive all amounts due according to the contractual terms of the loan.
This includes loans that are delinquent 90 days or more (nonaccrual loans)
and certain other loans identified by management. Accrual of interest is
discontinued and interest accrued and unpaid is removed at the time such
amounts are delinquent 90 days. Interest is recognized for nonaccrual
loans only upon receipt, and only after all principal amounts are current
according to the terms of the contract.
Foreclosed Assets Held for Sale
Assets acquired by foreclosure or in settlement of debt and held for sale
are valued at estimated fair value as of the date of foreclosure, and a
related valuation allowance is provided for estimated costs to sell the
assets. Management evaluates the value of foreclosed assets held for sale
periodically and increases the valuation allowance for any subsequent
declines in fair value. Changes in the valuation allowance are charged or
credited to noninterest expense.
Premises and Equipment
Depreciable assets are stated at cost less accumulated depreciation.
Depreciation is charged to expense using straight-line and accelerated
methods over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized using straight-line and
accelerated methods over the terms of the respective leases or the
estimated useful lives of the improvements, whichever is shorter.
Fee Income
Loan servicing income represents fees earned for servicing real estate
mortgage loans owned by various investors. The fees are generally
calculated on the outstanding principal balances of the loans serviced and
are recorded as income when earned. Loan origination fees, net of direct
loan origination costs, are recognized as income using the level-yield
method over the contractual life of the loan.
Regulatory Matters
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain off-
balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings
and other factors.
<PAGE> 30 (continued)
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier I capital (as defined) to
adjusted tangible assets (as defined). Management believes, as of June 30,
1997, that the Bank meets all capital adequacy requirements to which it is
subject.
As of June 30, 1997, the most recent notification from the Office of Thrift
Supervision categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-
based and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table. No amount was deducted from capital for interest-rate risk.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997
Total Risk-Based Capital
(to Risk Weighted Assets) $60,430 11.6% $41,511 8.0% $51,889 10.0%
Tier I Risk-Based Capital
(to Risk Weighted Assets) $53,832 10.4% $20,756 4.0% $31,134 6.0%
Core Capital
(to Adjusted Tangible Assets) $53,832 7.7% $21,001 3.0% $35,001 5.0%
Tangible Capital
(to Adjusted Tangible Assets) $53,832 7.7% $10,500 1.5% N/A N/A
As of June 30, 1996
Total Risk-Based Capital
(to Risk Weighted Assets) $61,947 13.0% $38,049 8.0% $47,561 10.0%
Tier I Risk-Based Capital
(to Risk Weighted Assets) $55,992 11.8% $19,024 4.0% $28,536 6.0%
Core Capital
(to Adjusted Tangible Assets) $55,992 8.5% $19,837 3.0% $33,062 5.0%
Tangible Capital
(to Adjusted Tangible Assets) $55,992 8.5% $9,919 1.5% N/A N/A
</TABLE>
<PAGE> 31
The amount of dividends that the Bank may pay is subject to various
regulatory limitations. At June 30, 1997, approximately $13,362,000 was
available from the Bank's retained earnings, without regulatory approval,
for distribution as dividends to GSBC. The Bank's internal capital
policies provide for greater restrictions than regulatory guidelines and,
under internal policies, approximately $2,682,000 was available for
distribution as dividends to GSBC.
Earnings Per Share
For each of the three years ended June 30, 1997, 1996 and 1995, earnings
per common share are based on the weighted average number of common and
common equivalent shares outstanding during the year less the weighted
average number of shares of treasury stock after adjusting for the stock
splits of July 25, 1994 and October 21, 1996 (see Note 15).
Such average shares include the weighted average number of common shares
considered outstanding, plus the shares issuable upon exercise of stock
options after the assumed repurchase of common shares with the related
proceeds as follows:
Weighted Average
Number of Shares
Common Shares Issuable
---------------- --------
1997 8,394,080 93,682
1996 8,926,192 269,412
1995 9,162,292 315,174
Cash Equivalents
The Bank considers all liquid investments with original maturities of three
months or less to be cash equivalents. At June 30, 1997 and 1996, cash
equivalents consisted of interest-bearing deposits in other financial
institutions.
Advertising
The Company expenses advertising costs as they are incurred.
Income Taxes
Deferred tax liabilities and assets are recognized for the tax effect of
differences between the financial statement and tax bases of assets and
liabilities. A valuation allowance is established to reduce deferred tax
assets if it is more likely than not that a deferred tax asset will not be
realized.
<PAGE> 31 (continued)
Impact of Future Accounting Pronouncements
The FASB recently adopted SFAS 128, "Earnings Per Share." This statement
replaces the presentation of primary earnings per share with a presentation
of basic earnings per share. The statement also requires dual presentation
of basic and diluted earnings per share by entities with complex capital
structures and requires a reconciliation of the numerators and denominators
between the two calculations. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods. Management believes the adoption of SFAS 128 will not
have a material effect on the financial statements of the Company.
NOTE 2: INVESTMENTS IN DEBT AND EQUITY SECURITIES
The amortized cost and approximate fair value of available-for-sale
securities are as follows:
June 30, 1997
---------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ------------
Equity securities $ 5,175,044 $ 2,232,976 $ 7,408,020
========= ========= =========
June 30, 1996
----------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ------------
Equity securities $ 4,498,227 $ 259,403 $ 101,814 $ 4,655,816
========= ======= ======= =========
The amortized cost and approximate fair value of held-to-maturity
securities are as follows:
June 30, 1997
-------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ------------
U.S. Treasury $ 7,057,218 $ 7,651 $ 3,869 $ 7,061,000
U.S. Government agencies 42,699,760 110,527 12,287 42,798,000
---------- ------- ------ ----------
$49,756,978 $118,178 $ 16,156 $49,859,000
========== ======= ====== ==========
<PAGE> 31 (continued)
June 30, 1996
-------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ------------
U.S. Treasury $ 6,901,931 $ 6,939 $ 21,871 $ 6,887,000
U.S. Government agencies 41,831,616 158,457 35,072 41,955,000
State and political
subdivisions 448,776 224 449,000
---------- ------- ------ ----------
$49,182,323 $165,620 $ 56,943 $49,291,000
========== ======= ====== ==========
Maturities of held-to-maturity securities at June 30, 1997:
Approximate AmortizedFair
Cost Value
One year or less $ 18,046,855 $ 18,072,805
After one through
five years 31,710,123 31,786,486
---------- ----------
$ 49,756,978 $ 49,291,000
========== ==========
Proceeds of $1,377,623, $2,942,647 and $78,125 with resultant gross gains
of $205,426, $680,357 and $21,250, were realized from the sale of
available-for-sale securities in 1997, 1996 and 1995, respectively.
The book value of securities pledged as collateral to secure public
deposits amounted to $9,677,000 and $10,930,000 at June 30, 1997 and 1996,
respectively, with approximate fair values $9,695,000 and $10,985,000. The
book value of securities pledged as collateral to secure collateralized
borrowing accounts amounted to $13,772,000 and $8,830,000 at June 30, 1997
and 1996, respectively, with approximate fair values of $13,805,000 and
$8,845,000. The book value of securities pledged as collateral to secure
Federal Home Loan Bank advances amounted to $26,308,000 and $25,725,000 at
June 30, 1997 and 1996, respectively, with approximate fair values of
$26,360,000 and $25,750,000.
<PAGE> 32
NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at June 30, 1997 and 1996, include:
1997 1996
------------- -------------
One to four family residential loans $ 243,006,249 $ 247,293,223
Other residential mortgage loans 95,885,537 81,190,755
Commercial real estate loans 191,555,823 172,478,056
Other commercial loans 25,958,963 13,736,938
One to four family construction loans 9,528,872 13,454,894
Other residential construction loans 4,243,283 13,533,296
Commercial construction loans 21,931,695 16,518,373
Mortgage-backed securities 1,761,122 2,054,554
Installment and education loans 27,665,964 26,926,707
Discounts on loans purchased (1,150,880) (1,254,361)
Undisbursed portion of loans in process (18,812,126) (22,382,663)
Allowance for loan losses (15,523,541) (14,356,147)
Deferred loan fees and gains, net (2,341,515) (2,434,158)
----------- -----------
$ 583,709,446 $ 546,759,467
=========== ===========
Transactions in the allowance for loan losses were as follows:
Years Ended June 30,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Balance, beginning of year $ 14,356,147 $ 14,600,870 $ 13,635,733
Provision charged to expense 1,706,142 1,450,754 1,319,266
Loans charged off (676,714) (1,992,578) (881,731)
Recoveries 137,966 297,101 527,602
---------- ---------- ----------
Balance, end of year $ 15,523,541 $ 14,356,147 $ 14,600,870
========== ========== ==========
The weighted average interest rate on loans receivable at June 30, 1997 and
1996, was 8.99% and 8.80%, respectively.
The Bank serviced whole mortgage loans and participations in mortgage loans
for others amounting to $69,837,000, $79,985,000 and $88,279,000 at June
30, 1997, 1996 and 1995, respectively.
Impaired loans totaled $10,163,000 and $5,455,000 at June 30, 1997 and
1996, respectively. An allowance for loan losses of $1,622,000 and $832,000
relates to these impaired loans at June 30, 1997 and 1996, respectively.
There were no impaired loans at June 30, 1997 and 1996, without a related
allowance for loan loss assigned.
<PAGE> 32 (continued)
Interest of $487,000 and $923,000 was recognized on average impaired loans
of $9,362,000 and $9,210,000 for 1997 and 1996. Interest recognized on
impaired loans on a cash basis during 1997 and 1996 was not materially
different.
Loans on which the accrual of interest has been discontinued amounted to
$3,065,000 at June 30, 1995. If interest on these loans had been accrued,
such interest income would have approximated $735,000 for the year ended
June 30, 1995.
Certain of the Bank's real estate loans are pledged as collateral for
borrowings as set forth in Notes 7 and 8.
Certain directors and executive officers of the Company and the Bank were
customers of and had transactions with the Bank in the ordinary course of
business. In the opinion of management, all loans included in such
transactions were made on substantially the same terms as those prevailing
at the time for comparable transactions with unrelated parties. At June 30,
1997 and 1996, loans outstanding to these directors and executive officers
are summarized as follows:
June 30,
---------------------------
1997 1996
----------- -----------
Balance, beginning of year $ 1,382,000 $ 1,865,000
New loans 4,353,000 336,200
Payments (241,000) (819,200)
----------- -----------
Balance, end of year $ 5,494,000 $ 1,382,000
=========== ===========
NOTE 4: FORECLOSED ASSETS HELD FOR SALE
June 30,
----------------------------
1997 1996
------------ ------------
Foreclosed assets $ 5,970,352 $ 9,860,074
Real estate sold under contract for
deed and other arrangements 1,087,084
---------- ---------
5,970,352 10,947,158
Valuation allowance (319,390) (1,085,602)
---------- ---------
$ 5,650,962 $ 9,861,556
========== =========
<PAGE> 32 (continued)
Transactions in the valuation allowance on foreclosed assets were as follows:
Years Ended June 30,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Balance, beginning of year $ 1,085,602 $ 932,547 $ 1,549,472
Provision charged to expense 100,000 275,000 400,000
Charge-offs, net of recoveries (866,212) (121,945) (1,016,925)
--------- --------- ---------
Balance, end of year $ 319,390 $ 1,085,602 $ 932,547
========= ========= =========
As of July 1, 1995, the Bank implemented Statement of Financial Accounting
Standard No. 114. While implementation had no material effect on net
income, in accordance with the new pronouncement, loans totaling $1,684,000
which were previously classified as in-substance foreclosures and reported
as part of foreclosed assets held-for-sale were reclassified to loans.
NOTE 5: PREMISES AND EQUIPMENT
Major classifications of premises and equipment stated at cost at June 30,
1997 and 1996, are as follows:
1997 1996
----------- -----------
Land $ 1,628,981 $ 1,341,480
Buildings and improvements 8,071,448 7,801,708
Furniture, fixtures and equipment 6,204,196 5,334,431
---------- ----------
15,904,625 14,477,619
Less accumulated depreciation 8,471,552 7,790,665
---------- ----------
$7,433,073 $ 6,686,954
========== ==========
Depreciation expense was $1,003,243, $980,290 and $745,305 for 1997, 1996
and 1995, respectively.
<PAGE> 33
NOTE 6: DEPOSITS
Deposits at June 30, 1997 and 1996, are summarized as follows:
Weighted Average
Interest Rate 1997 1996
---------------- ------------- -------------
Noninterest-bearing accounts $ 14,571,834 $ 8,886,036
Interest-bearing checking 2.36% - 2.41% 115,231,966 112,224,164
Savings accounts 2.51% - 2.50% 35,064,843 37,009,432
----------- -----------
164,868,643 158,119,632
----------- -----------
Certificate accounts 0% - 3.99% 724,646 2,376,245
4% - 4.99% 14,165,816 14,471,473
5% - 5.99% 212,238,314 169,904,888
6% - 6.99% 51,540,038 32,595,982
7% - 7.99% 12,326,032 17,123,007
8% - 10.25% 506,619 646,084
----------- -----------
291,501,465 237,117,679
----------- -----------
Accrued interest on deposits 2,865,638 1,817,205
----------- -----------
$ 459,235,746 $ 397,054,516
=========== ===========
The weighted average interest rate on certificates of deposit at June 30,
1997 and 1996, was 5.53% and 5.56%, respectively.
The aggregate amount of jumbo certificates of deposit in denominations of
$100,000 or more was approximately $44,489,000 and $35,193,000 at June 30,
1997 and 1996, respectively. From time to time the Bank purchases brokered
deposits. The aggregate amount of brokered deposits was approximately
$77,387,000 and $26,447,000 at June 30, 1997 and 1996, respectively.
At June 30, 1997, scheduled maturities of certificates of deposit are as
follows:
<TABLE>
1998 1999 2000 2001 Thereafter
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
0% to 3.99% $ 674,659 $ 2,890 $ $ $ 47,097
4% to 4.99% 14,113,201 43,965 7,618 1,032
5% to 5.99% 193,206,457 14,282,364 2,119,000 1,116,175 1,514,318
6% to 6.99% 21,037,969 21,676,529 3,532,078 1,894,533 3,398,929
7% to 7.99% 8,549,650 281,320 751,025 63,184 2,680,853
8% to 10.25% 261,568 43,469 201,582
----------- ----------- ----------- ----------- -----------
$ 237,843,504 $ 36,330,537 $ 6,409,721 $ 3,074,924 $ 7,842,779
=========== =========== =========== =========== ===========
</TABLE>
<PAGE> 33 (continued)
A summary of interest expense on deposits is as follows:
Years Ended June 30,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Checking accounts $ 2,570,966 $ 2,494,566 $ 2,481,359
Savings accounts 866,810 914,310 1,001,875
Certificate accounts 14,579,734 13,667,688 11,583,311
Early withdrawal penalties (66,833) (73,840) (181,805)
---------- ---------- ----------
$ 17,950,677 $ 17,002,724 $ 14,884,740
========== ========== ==========
NOTE 7: ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consist of the following:
June 30,
--------------------------------------------------------------
1997 1996
------------------------------ ------------------------------
Weighted Average Weighted Average
Amount Interest Rate Amount Interest Rate
------------ ---------------- ------------ ----------------
1997 $ % $ 120,640,939 5.76
1998 117,602,967 6.18 27,325,324 5.95
1999 27,325,324 6.14 4,861,091 6.14
2000 4,861,091 8.43 7,652,273 8.44
2001 7,652,273 6.33 3,214,917 7.26
2002 3,214,917 7.41
2003 and
thereafter 17,655,195 7.17 16,894,943 7.23
----------- ---- ----------- ----
151,822,319 6.42 180,589,487 6.06
Accrued interest
on advances 58,781 207,556
----------- ---- ----------- ----
$151,881,100 6.42% $180,797,043 6.06%
=========== ==== =========== ====
In addition to the above advances, the Bank had available a line of credit
amounting to $44,250,000 and $11,600,000 with the FHLB at June 30, 1997 and
1996, respectively.
<PAGE> 33 (continued) & 34
The FHLB requires the Bank to maintain FHLB stock, investment securities
and first mortgage loans free of pledges, liens and encumbrances in an
amount equal to at least 150% of outstanding advances as collateral for
such borrowings. Investment securities with book values of $26,308,000 and
$25,725,000, respectively, were specifically pledged as collateral for
advances at June 30, 1997 and 1996.
NOTE 8: SHORT-TERM BORROWINGS
Short-term borrowings at June 30, 1997 and 1996, are summarized as follows:
1997 1996
----------- -----------
United States government securities sold
under reverse repurchase agreements $10,342,523 $ 8,207,489
Other borrowed money 18,401,668 8,260,336
---------- ----------
$28,744,191 $16,467,825
========== ==========
The Bank enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Reverse repurchase agreements are treated
as financings, and the obligations to repurchase securities sold are
reflected as a liability in the statement of financial condition. The
dollar amount of securities underlying the agreements remains in the asset
accounts.
Other borrowed money consists of agreements with corporate entities which
are secured by a pledge of residential mortgage loans, and margin loans
with brokerage firms.
Securities sold under reverse repurchase agreements had book values
including accrued interest of $14,012,000 and $9,115,000 and fair values of
$13,805,000 and $8,845,000 at June 30, 1997 and 1996, respectively.
Mortgage loans securing other borrowed money accounts had carrying values
of $11,695,000 and $14,928,000 at June 30, 1997 and 1996, respectively.
Short-term borrowings had weighted average interest rates of 3.24% and
2.63% at June 30, 1997 and 1996, respectively. Securities and mortgage
loans underlying the agreements were being held by the Bank during the
agreement period. All agreements are written on a one month or less term.
Short-term borrowings averaged $18,894,000, $17,344,000 and $15,607,000 for
the years ended June 30, 1997, 1996 and 1995, respectively. The maximum
amounts outstanding at any month end were $28,744,000, $20,132,000 and
$18,695,000 during the years ended June 30, 1997, 1996 and 1995,
respectively.
<PAGE> 34 (continued)
NOTE 9: INCOME TAXES
The Company files a consolidated federal income tax return. Historically,
thrifts such as the Bank were allowed a percentage of otherwise taxable
income as a statutory bad debt deduction, subject to limitations based on
aggregate loans and savings balances. This percentage was most recently 8%.
In August 1996 this statutory bad debt deduction was repealed and is no
longer available for thrifts. In addition, bad debt reserves accumulated
after 1988, which are presently included as a component of the net deferred
tax liability, must be recaptured over a six-year period. The amount of
the deferred tax liability which must be recaptured is $1,922,000 at June
30, 1997.
As of June 30, 1997 and 1996, retained earnings includes approximately
$17,500,000 for which no deferred income tax liability has been recognized.
This amount represents an allocation of income to bad-debt deductions for
tax purposes only for tax years prior to 1988. If the Bank were to
liquidate, the entire amount would have to be recaptured and would create
income for tax purposes only, which would be subject to the then-current
corporate income tax rate. The unrecorded deferred income tax liability on
the above amount was approximately $6,475,000 at June 30, 1997 and 1996.
The provision for income taxes consists of:
Years Ended June 30,
----------------------------------------------
1997 1996 1995
----------- ----------- -----------
Taxes currently payable $ 6,101,200 $ 6,506,800 $ 5,767,200
Deferred income taxes (350,000) 604,000 (254,000)
--------- --------- ---------
$ 5,751,200 $ 7,110,800 $ 5,513,200
========= ========= =========
The tax effects of temporary differences related to deferred taxes shown on the
June 30, 1997 and 1996, statements of financial condition were:
1997 1996
----------- -----------
Deferred tax assets:
Allowance for loan and
foreclosed asset losses $ 5,884,000 $ 5,559,000
Accrued compensated absences 62,000 62,000
Deferred compensation liability 67,000 65,000
Accrued bonuses 30,000 37,000
Other 24,000
--------- ---------
6,067,000 5,723,000
--------- ---------
<PAGE> 34 (continued)
Deferred tax liabilities:
Tax loss reserve in excess
of base year (1,922,000) (1,922,000)
FHLB stock dividends (641,000) (641,000)
Unrealized appreciation on available-for-
sale securities (870,860) (61,460)
Other (4,000) (10,000)
--------- ---------
(3,437,860) (2,634,460)
--------- ---------
Net deferred tax asset $ 2,629,140 $ 3,088,540
========= =========
Reconciliations of the Company's provision for income taxes to the statutory
corporate tax rates are as follows:
Years Ended June 30,
-------------------------------
1997 1996 1995
---- ---- ----
Tax at statutory rate 35.0% 35.0% 35.0%
State income taxes 2.5 2.1 2.9
Other .6 1.5 (1.1)
---- ---- ----
38.1% 38.6% 36.8%
==== ==== ====
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, 1993.
State legislation provides that savings banks will be taxed based on an
annual privilege tax of 7% of net income. The 1997, 1996 and 1995 state
tax included in the provision for income tax amounts to $652,000, $552,000
and $674,000, respectively.
Deferred income taxes related to the change in unrealized appreciation
(depreciation) on available-for-sale securities, shown in stockholders'
equity, were $809,400, ($169,696) and $231,156 for 1997, 1996 and 1995,
respectively.
NOTE 10: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and Cash Equivalents
For these short-term instruments, the carrying amount approximates fair
value.
<PAGE> 34 (continued) & 35
Available-For-Sale Securities
Fair values for available-for-sale securities, which also are the amounts
recognized in the statements of financial condition, equal quoted market
prices, if available. If quoted market prices are not available, fair
values are estimated based on quoted market prices of similar securities.
Held-To-Maturity Securities
Fair values for held-to-maturity securities equal quoted market prices, if
available. If quoted market prices are not available, fair values are
estimated based on quoted market prices of similar securities.
Loans
The fair value of loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities. Loans
with similar characteristics are aggregated for purposes of the
calculations. The carrying amount of accrued interest receivable
approximates its fair value.
Deposits
The fair value of demand deposits and savings accounts is the amount
payable on demand at the reporting date (i.e., their carrying amounts).
The fair value of fixed-maturity certificates of deposit is estimated using
a discounted cash flow calculation that applies the rates currently offered
for deposits of similar remaining maturities. The carrying amount of
accrued interest payable approximates its fair value.
Federal Home Loan Bank Advances
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing advances.
Short-Term Borrowings
The carrying amounts reported in the statements of financial condition for
short-term borrowings approximate those liabilities' fair value.
Commitments to Extend Credit, Letters of Credit and Lines of Credit
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms
of the agreements and the present credit worthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates. The fair
value of letters of credit is based on fees currently charged for similar
agreements or on the estimated cost to terminate them or otherwise settle
the obligations with the counterparties at the reporting date.
<PAGE> 35 (continued)
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments were
calculated by discounting expected cash flows, which method involves
significant judgments by management and uncertainties. Fair value is the
estimated amount at which financial assets or liabilities could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. Because no market exists for certain of these
financial instruments and because management does not intend to sell these
financial instruments, the Company does not know whether the fair values
shown below represent values at which the respective financial instruments
could be sold individually or in the aggregate.
1997
-------------------------------
Carrying Amount Fair Value
--------------- -----------
Financial assets:
Cash and cash equivalents $32,485,100 $32,485,100
Available-for-sale securities 7,408,020 7,408,020
Held-to-maturity securities 49,756,978 49,859,000
Loans, net of allowance
for loan losses 583,709,446 591,041,000
Accrued interest receivable 4,993,312 4,993,312
Financial liabilities:
Deposits 459,235,746 460,673,000
FHLB advances 151,881,100 153,764,000
Short-term borrowings 28,744,191 28,744,191
Unrecognized financial instruments
(net of contractual value):
Commitments to extend credit -0- -0-
Standby letters of credit -0- -0-
Unused lines of credit -0- -0-
1996
-------------------------------
Carrying Amount Fair Value
--------------- -----------
Financial assets:
Cash and cash equivalents $29,615,027 $29,615,027
Available-for-sale securities 4,655,816 4,655,816
Held-to-maturity securities 49,182,323 49,291,000
Loans, net of allowance for loan losses 546,759,467 549,779,000
Accrued interest receivable 5,356,422 5,356,422
Financial liabilities:
Deposits 397,054,516 397,432,000
FHLB advances 180,797,043 180,577,000
Short-term borrowings 16,467,825 16,467,825
Unrecognized financial instruments
(net of contractual value):
Commitments to extend credit -0- -0-
Standby letters of credit -0- -0-
Unused lines of credit -0- -0-
<PAGE> 35 (continued)
NOTE 11: LEASES
The Bank has entered into various operating leases at several of its branch
locations. Some of the leases have renewal options. At June 30, 1997,
future minimum lease payments are as follows:
1998 $ 175,169
1999 131,733
2000 118,160
2001 96,966
2002 93,516
Later Years 255,172
---------
$ 870,716
=========
Rental expense was $203,675, $188,188 and $170,294 the years ended June 30,
1997, 1996 and 1995, respectively.
NOTE 12: COMMITMENTS AND CREDIT RISK
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since a significant portion of
the commitments may expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
counter party. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, commercial real estate and
residential real estate.
At June 30, 1997 and 1996, the Bank had outstanding commitments to
originate loans and fund commercial construction aggregating approximately
$59,987,000 and $48,590,000 including $18,812,000 and $18,881,000,
respectively, of undisbursed loans in process. The commitments extend over
varying periods of time with the majority being disbursed within a 30- to
180-day period. Loan commitments at fixed rates of interest amounted to
$479,000 and $3,025,000 with the remainder at floating market rates at June
30, 1997 and 1996, respectively.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including commercial paper, bond financing and similar transactions. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loans to customers.
<PAGE> 35 (continued) & 36
The Bank had total outstanding letters of credit amounting to $9,206,000
and $8,911,000 at June 30, 1997 and 1996, respectively, with $959,000 and
$664,000 of the letters of credit having terms ranging from seven months to
three years at June 30, 1997 and 1996, respectively. The remaining
$8,247,000 at June 30, 1997 and 1996, consisted of an outstanding letter of
credit to guarantee the payment of principal and interest on a Multifamily
Housing Refunding Revenue Bond issue. The Federal Home Loan Bank has
issued a letter of credit backing the Bank's letter of credit.
Lines of credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Lines of credit
generally have fixed expiration dates. Since a portion of the line may
expire without being drawn upon, the total unused lines do not necessarily
represent future cash requirements. The Bank evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation of the counter party. Collateral
held varies but may include accounts receivable, inventory, property, plant
and equipment, commercial real estate and residential real estate. The
Bank uses the same credit policies in granting lines of credit as it does
for on-balance sheet instruments.
At June 30, 1997, the Bank had granted unused lines of credit to borrowers
aggregating approximately $7,517,000 and $3,731,000 for commercial lines
and open-end consumer lines, respectively. At June 30, 1996, the Bank had
granted unused lines of credit to borrowers aggregating approximately
$6,034,000 and $2,963,000 for commercial lines and open-end consumer lines,
respectively.
The Bank grants collateralized commercial, real estate and consumer loans
primarily to customers in the southwest and central portions of Missouri.
Although the Bank has a diversified portfolio, loans (including loans in
process) aggregating $56.9 million and $59.6 million at June 30, 1997 and
1996, respectively, are secured by motels, restaurants, recreational
facilities and other commercial properties in the Branson, Missouri, area.
Residential mortgage and consumer loans in the Branson, Missouri, area
aggregated $66.3 million and $68.5 million at June 30, 1997 and 1996,
respectively.
Loans aggregating $97.6 million or 16.7% of the loan portfolio at June 30,
1997, are secured by multi-family real estate.
NOTE 13: LITIGATION
GSBC and its subsidiaries are defendants in certain lawsuits arising in the
ordinary course of business. Management, after review with its legal
counsel, is of the opinion that the resolution of these legal matters will
not have a material adverse effect on the Company's financial position.
<PAGE> 36 (continued)
NOTE 14: ADDITIONAL CASH FLOW INFORMATION
Years Ended June 30,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
Noncash Investing and
Financing Activities
Conversion of loans to
foreclosed assets $ 2,272,465 $ 7,014,308 $ 5,029,750
Conversion of foreclosed
assets to loans $ 6,255,412 $ 4,288,066 $ 1,606,463
Additional Cash
Payment Information
Interest paid $ 27,922,486 $ 27,791,991 $ 22,733,483
Income taxes paid $ 3,943,814 $ 6,045,000 $ 4,730,490
NOTE 15: STOCKHOLDERS' EQUITY
In connection with the conversion in December 1989, GSBC completed the sale
of 2,054,167 shares of its common stock (par value $.01) at an initial
public offering price of $9 per share. In the event of a future
liquidation of the Bank (and only in such event), eligible depositors who
continue to maintain accounts shall be entitled to receive a distribution
from the liquidation account.
On October 1, 1996, the Board of Directors of GSBC declared a stock split
effected in the form of a dividend on the outstanding common stock for
shareholders of record on October 11, 1996. Each shareholder received one
additional share for each share owned on the record date. On July 1, 1994,
the Board of Directors of GSBC declared a stock split effected in the form
of a dividend on the outstanding common stock for shareholders of record on
July 15, 1994. Each stockholder received two additional shares for each
share owned on the record date. Historical per share disclosures have been
updated where applicable to account for the stock splits.
NOTE 16: EMPLOYEE BENEFIT PLANS
The Company participates in a multi-employer defined benefit plan covering
all employees who have met minimum service requirements. The Company's
policy is to fund pension cost accrued. No contribution was required for
the three years ended June 30, 1997. As a member of a multi-employer
pension plan, disclosures of plan assets and liabilities for individual
employers are not required or practicable.
Effective upon the conversion, GSBC established an Employee Stock Ownership
Plan (ESOP) for full-time employees age 21 years or older who have at least
one year of credited service.
<PAGE> 36 (continued) & 37
Contribution expense was $-0-, $-0- and $2,500 for the years ended June 30,
1997, 1996 and 1995, respectively. The amounts contributed to the ESOP for
the years ended June 30, 1997, 1996 and 1995, were the same as contribution
expense for the same periods. Dividends declared on ESOP shares were
$184,610, $334,210 and $314,313 for the years ended June 30, 1997, 1996 and
1995, respectively.
During fiscal 1996 the Company voted to terminate the ESOP. The Company
filed for, and received, approval of the termination from the IRS. On July
1, 1995, all participant shares became fully vested. The Company
distributed the assets of the Plan during fiscal 1997.
In connection with management's decision to terminate the ESOP in July
1995, the Company adopted a defined contribution pension plan covering
substantially all employees. Employees may contribute up to 15% of their
compensation. Company matching contributions are discretionary, with a
maximum match of 50% of the employee's contribution on the first 6% of the
employee's compensation. Employer contributions charged to expense for
1997 and 1996 were $69,691 and $134,674, respectively.
NOTE 17: STOCK OPTION PLAN
Effective upon the conversion, the Board of Directors of the Company
established the 1989 Stock Option and Incentive Plan for employees and
directors of the Company and its subsidiaries. Under the plan, stock
options or awards may be granted with respect to 1,232,496 shares of common
stock.
Stock options may be either incentive stock options or nonqualified stock
options, and the option price must be at least equal to the fair value of
the Company's common stock on the date of grant. Options are granted for a
ten-year term and become exercisable in four cumulative annual installments
of 25% commencing two years from the date of grant. The Stock Option
Committee may accelerate a participant's right to purchase shares under the
plan.
Stock awards may be granted to key officers and employees upon terms and
conditions determined solely at the discretion of the Stock Option
Committee.
<PAGE> 37 (continued)
The table below summarizes transactions under the Company's stock option
plan:
Shares
--------------------------------
Available to Grant Under Option
------------------ ------------
Balance, July 1, 1994
($7.625 - $30.125 per share) 48,429 87,435
Exercised ($7.625 - $21 per share) (350)
Forfeited ($7.625 per share) 474 (474)
Effect of 3-for-1 Stock Split 96,585 173,222
Exercised ($2.542 - $7 per share) (64,589)
Forfeited ($2.542 per share) 4,235 (4,235)
------- -------
Balance, June 30, 1995
($2.542 - $10.042 per share) 149,723 191,009
Granted ($21.875 - $26.375 per share) (68,000) 68,000
Exercised ($2.542 - $7 per share) (43,888)
Forfeited ($2.542 - $21.875 per share) 4,463 (4,463)
------- -------
Balance, June 30, 1996
($2.542 - $26.375 per share) 86,186 210,658
Granted ($9.50 - $32.45 per share) (37,500) 37,500
Exercised ($2.542 - $10.042 per share) (2,595)
Forfeited ($21.875 per share) 2,090 (2,090)
Effect of 2-for-1 Stock Split 50,776 243,473
Granted ($16.625 - $17.75 per share) (14,600) 14,600
Exercised ($1.50 - $10.938 per share) (249,796)
Forfeited ($10.938 - $17.50 per share) 5,766 (5,766)
------- -------
Balance, June 30, 1997
($1.271 - $17.75 per share) 92,718 245,984
======= =======
Options exercisable at June 30, 1997 43,862
The following table further summarizes information about stock options
under the plan outstanding at June 30, 1997:
Options Outstanding
------------------------------------------------
Weighted- Weighted-
Average Average
Range of Number Remaining Exercise
Exercise Prices Outstanding Contractual Life Price
------------------- ---------------- ------------------ ----------
$ 1.271 to $ 5.021 46,862 7.11 years $ 2.14
$10.938 to $14.75 155,922 8.61 years $12.30
$16.22 to $17.75 43,200 9.34 years $16.55
<PAGE> 37 (continued)
Options Exercisable
--------------------------------------------
Weighted-
Range of Number Average
Exercise Prices Exercisable Exercise Price
------------------- ----------- --------------
$ 1.271 to $ 5.021 43,862 $ 1.94
In 1996, The Financial Accounting Standards Board adopted Financial
Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based
Compensation." This statement establishes an alternative fair value-based
method of accounting for stock-based compensation plans. The Company
applies APB Opinion 25 and related Interpretations in accounting for the
plan, and no compensation cost has been recognized. No fair value
disclosures with respect to stock options are presented because in the
opinion of management such values do not have a material effect.
NOTE 18: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of certain
significant estimates and current vulnerabilities due to certain
concentrations. Estimates related to the allowance for loan losses are
reflected in the footnote regarding loans. Current vulnerabilities due to
certain concentrations of credit risk are discussed in the footnote on
deposits and in the footnote on commitments and credit risk.
NOTE 19: SAVINGS ASSOCIATION INSURANCE FUND ASSESSMENT
On September 30, 1996, federal legislation to recapitalize the Savings
Association Insurance Fund (SAIF) was passed requiring savings institutions
such as the Bank to pay a one-time assessment to the SAIF of 65.7 basis
points, based on deposits as reported at March 31, 1995. The assessment
totaled $2,500,000 and has been included in noninterest expense on the
Company's consolidated financial statements for the year ended June 30,
1997. This one-time assessment, net of income taxes, reduced consolidated
net income for the year ended June 30, 1997, by approximately $1,525,000.
<PAGE> 37 (continued)
NOTE 20: SUMMARY OF UNAUDITED QUARTERLY OPERATING RESULTS
Following is a summary of unaudited quarterly operating results for the
years ended June 30, 1997 and 1996:
1997
------------------------------------------------------
Three Months Ended
------------------------------------------------------
September 30 December 31 March 31 June 30
------------ ------------ ------------ ------------
Interest income $ 13,705,391 $ 13,737,729 $ 13,941,471 $ 14,155,856
Interest expense 7,011,195 7,105,533 7,268,586 7,436,830
Provision for
loan losses 410,593 448,892 427,615 419,042
Net realized gains on
available-for-sale
securities 143,768 -0- 61,658 -0-
Net income 493,297 2,907,735 2,909,250 3,029,583
Earnings per
common share $.05 $.34 $.35 $.37
1996
------------------------------------------------------
Three Months Ended
------------------------------------------------------
September 30 December 31 March 31 June 30
------------ ------------ ------------ ------------
Interest income $ 13,218,646 $ 13,401,522 $ 13,493,209 $ 13,824,988
Interest expense 6,928,140 7,022,660 7,131,607 7,050,004
Provision for
loan losses 324,080 323,325 350,016 453,333
Net realized gains on
available-for-sale
securities 607,589 -0- -0- 72,768
Net income 2,884,588 2,478,028 3,220,414 2,710,925
Earnings per
common share $.31 $.27 $.35 $.30
<PAGE> 37 (continued)
NOTE 21: CONDENSED PARENT COMPANY STATEMENTS
The condensed balance sheets at June 30, 1997 and 1996, and statements of
income and cash flows for the years ended June 30, 1997, 1996 and 1995 for
the parent company, Great Southern Bancorp, Inc., are as follows:
1997 1996
-------- --------
BALANCE SHEETS
Assets
Cash $ 51,526 $ 3,970,272
Available-for-sale securities 7,397,168 4,646,709
Investment in subsidiary bank 53,831,963 57,109,923
Investment in other subsidiaries 1,564,573 1,423,989
Foreclosed assets held for sale, net 324,900
Dividends receivable 3,000
Income taxes receivable 283,072
Other 494,348 450,741
----------- -----------
$ 63,625,650 $ 67,926,534
=========== ===========
Liabilities and Stockholders' Equity
Income taxes payable $ $ 57,505
Short-term borrowings 2,406,423
Deferred income taxes 870,860 61,460
Common stock 123,250 61,625
Additional paid-in capital 17,058,326 16,834,507
Retained earnings 73,980,259 67,917,888
Unrealized appreciation on
available-for-sale
securities, net 1,362,116 96,129
Treasury stock, at cost (32,175,584) (17,102,580)
----------- -----------
$ 63,625,650 $ 67,926,534
=========== ===========
1997 1996 1995
----------- ------------ ------------
STATEMENTS OF INCOME
Income
Dividends from subsidiary bank $ 11,952,241 $ 3,335,250 $ 13,373,110
Dividends from other subsidiaries 274,913 1,227,210 404,042
Income (loss) on foreclosed assets (24,077) 94,848 67,248
Interest and dividend income 217,360 337,122 399,405
Net realized gains on sales of
available-for-sale securities 205,225 680,357 21,250
Other income (loss) 47,472 (11,655) (11,121)
---------- ---------- ----------
Total income 12,673,134 5,663,132 14,253,934
---------- ---------- ----------
<PAGE> 37 (continued)
Expense
Operating expenses 197,677 204,967 238,559
Interest expense 39,066
---------- ---------- ----------
Total expense 236,743 204,967 238,559
---------- ---------- ----------
Income before income tax and
equity in undistributed earnings
of subsidiaries 12,436,391 5,458,165 14,015,375
Provision (credit) for income taxes (40,848) 205,444 (15,765)
---------- ---------- ----------
Income before equity in
earnings of subsidiaries 12,477,239 5,252,721 14,031,140
Equity in undistributed earnings
of subsidiaries (3,137,374) 6,041,234 (4,543,210)
---------- ---------- ----------
Net Income $ 9,339,865 $ 11,293,955 $ 9,487,930
========== ========== ==========
1997 1996 1995
------------ ----------- ------------
STATEMENTS OF CASH FLOWS
Cash Flows From Operating
Activities
Net income $ 9,339,865 $ 11,293,955 $ 9,487,930
Items not requiring (providing)
cash:
Loss on low income housing
partnership 10,356 11,665 11,121
Equity in undistributed earnings
of subsidiaries 3,137,376 (6,041,234) 3,990,519
Gain on sale of foreclosed
assets (30,415) (25,070)
Net realized gains on sales of
available-for-sale securities (205,225) (680,357) (21,250)
Changes in:
Dividends receivable (3,000) 3,090 (3,090)
Other assets (57,505)
Dividends, accounts payable
and income taxes (340,577) (18,071) 182,950
---------- ---------- ----------
Net cash provided by
operating activities 11,881,290 4,538,633 13,623,110
---------- ---------- ----------
<PAGE> 38 (continued)
Cash Flows From Investing Activities
Net loans repaid 53,655
Proceeds from sale of foreclosed
assets 324,900 138,799 143,629
Purchase of available-for-sale
securities (1,845,970) (4,262,729) (2,545,556)
Proceeds from sale of available-
for-sale securities 1,376,123 2,942,647 78,125
Capitalized costs on
foreclosed assets (1,151) 1,998
Investment in low income housing
partnership (231,358)
Partnership distribution 3,542 5,332
---------- ---------- ----------
Net cash used in investing
activities (141,405) (1,177,102) (2,499,507)
---------- ---------- ----------
Cash Flows From Financing Activities
Net increase in short-term
borrowings 2,406,423
Dividends paid (3,277,494) (3,132,035) (2,766,989)
Stock options exercised 797,113 279,272 323,242
Treasury stock purchased (15,584,673) (3,350,388) (5,885,426)
---------- ---------- ----------
Net cash used in
financing activities (15,658,631) (6,203,151) (8,329,173)
---------- ---------- ----------
Increase (Decrease) in Cash (3,918,746) (2,841,620) 2,794,430
Cash, Beginning of Year 3,970,272 6,811,892 4,017,462
---------- ---------- ----------
Cash, End of Year $ 51,526 $ 3,970,272 $ 6,811,892
========== ========== ==========
Additional Cash Payment Information
Income taxes paid (refunded) $ 61,241 $ 127,570 $ (289,285)
<PAGE> 39
Independent Accountants' Report
-------------------------------
Board of Directors
Great Southern Bancorp, Inc.
Springfield, Missouri
We have audited the consolidated statements of financial condition of GREAT
SOUTHERN BANCORP, INC. AND SUBSIDIARIES as of June 30, 1997 and 1996, and
the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the three years in the period ended June
30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GREAT
SOUTHERN BANCORP, INC. AND SUBSIDIARIES as of June 30, 1997 and 1996, and
the results of its operations and its cash flows for each of the three
years in the period ended June 30, 1997, in conformity with generally
accepted accounting principles.
As discussed in Note 1, in 1995 the Company changed its method of
accounting for investments in debt and equity securities. This change was
made in response to new accounting pronouncements.
/s/ Baird, Kurtz & Dobson
August 8, 1997
Springfield, Missouri
<PAGE> 40
Directors of Great Southern Bancorp, Inc.
(There is an individual photo of each director.)
William V. Turner
CHAIRMAN OF THE BOARD, PRESIDENT, and CHIEF EXECUTIVE OFFICER
William E. Barclay
PRESIDENT, AUTO MAGIC / JIFFY LUBE
SPRINGFIELD, MO
William K. Powell
PRESIDENT, HERRMAN LUMBER COMPANY
SPRINGFIELD, MO
Larry D. Frazier
GENERAL MANAGER, WHITE RIVER VALLEY
ELECTRIC COOPERATIVE, HOLLISTER, MO
Al F. Turner
VICE CHAIRMAN OF THE BOARD (RETIRING OCTOBER 1997)
MOUNTAIN GROVE, MO
Joseph W. Turner
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
(NOMINEE FOR DIRECTOR TO REPLACE AL TURNER)
Officers of Great Southern Bancorp, Inc.
(There was a group pictures of these officers.)
left to right:
Don M. Gibson
EXECUTIVE VICE PRESIDENT
CHIEF OPERATING OFFICER AND
SECRETARY
Joseph W. Turner
EXECUTIVE VICE PRESIDENT AND
GENERAL COUNSEL
William V. Turner
CHAIRMAN OF THE BOARD,PRESIDENT,
AND CHIEF EXECUTIVE OFFICER
<PAGE> 41
Officers of Great Southern Bank
(There is an individual photo of each officer.)
William V. Turner
CHAIRMAN OF THE BOARD,
AND CHIEF EXECUTIVE OFFICER
A NATIVE OF MANSFIELD, MO
Don M. Gibson
VICE CHAIRMAN, CHIEF FINANCIAL OFFICER,
CHIEF OPERATING OFFICER & SECRETARY
A NATIVE OF SPRINGFIELD, MO
Joseph W. Turner
PRESIDENT
A NATIVE OF SPRINGFIELD, MO
Richard Wilson
SENIOR VICE PRESIDENT
AND CONTROLLER
A NATIVE OF AURORA, MO
Vicki Bilyeu
FIRST VICE PRESIDENT AND
RESIDENTIAL LENDING MANAGER
A NATIVE OF SPRINGFIELD, MO
Mike Lawson
FIRST VICE PRESIDENT AND
COMMERCIAL LOAN OFFICER
A NATIVE OF MONETT, MO
Steve Mitchem
FIRST VICE PRESIDENT AND
COMMERCIAL LOAN OFFICER
A NATIVE OF CABOOL, MO
Darrin Newbold
PRESIDENT, AURORA BANK
A NATIVE OF AURORA, MO
Bret Aegerter
VICE PRESIDENT
BRANCH ADMINISTRATION
A NATIVE OF NEBRASKA
Mary Allison
VICE PRESIDENT, CONSUMER LOANS
A NATIVE OF NORTHERN ILLINOIS
<PAGE> 41 (continued)
Teresa Chasteen
VICE PRESIDENT AND
DIRECTOR OF MARKETING
A NATIVE OF MOUNTIAN GROVE, MO
Doug Marrs
VICE PRESIDENT, OPERATIONS
A NATIVE OF CANYON CITY, CO
Bob Ogden
VICE PRESIDENT AND
COMMERCIAL LOAN OFFICER
A NATIVE OF LICKING, MO
Eric Piel
VICE PRESIDENT AND
COMMERCIAL LOAN OFFICER
A NATIVE OF ST. LOUIS, MO
Paul Potthoff
VICE PRESIDENT AND
COMMERCIAL LOAN OFFICER
A NATIVE OF DEXTER, MO
Matt Snyder
VICE PRESIDENT AND
DIRECTOR OF HUMAN RESOUCES
A NATIVE OF SPRINGFIELD, MO
<PAGE>
(This is the back cover which was a smaller picture of the same picture that
was on the front cover. The majority of the page is a solid maroon.)
