<PAGE> 1
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UNITED STATES
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
/X/ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period ended March 31, 1998, or
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _________ to _________
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Commission File Number 0-18082
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GREAT SOUTHERN BANCORP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
43-1524856
(IRS Employer Identification Number)
1451 E. BATTLEFIELD
SPRINGFIELD, MISSOURI
(Address of principal executive offices)
65804
(Zip Code)
(417) 887-4400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
The number of shares outstanding of each of the registrant's classes
of common stock: 7,999,533 shares of common stock, par value $.01,
outstanding at May 7, 1998.
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<PAGE> 2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,844,311 $ 8,176,763
Interest-bearing deposits in other financial institutions. . . . . . . . . 56,528,582 24,308,337
----------- -----------
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . 68,372,893 32,485,100
Available for sale securities. . . . . . . . . . . . . . . . . . . . . . . 5,742,577 7,408,020
Held to maturity securities (fair value $49,923,000 - March 1998;
$49,859,000 - June 1997) . . . . . . . . . . . . . . . . . . . . . . . . 49,768,362 49,756,978
Loans receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 653,557,147 583,709,446
Foreclosed assets held for sale, net . . . . . . . . . . . . . . . . . . . 4,939,385 5,650,962
Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 8,731,035 7,433,073
Accrued interest receivable
Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,818,801 4,225,771
Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 695,010 767,541
Investment in FHLBank Stock. . . . . . . . . . . . . . . . . . . . . . . . 10,792,600 10,792,600
Prepaid expenses and other assets. . . . . . . . . . . . . . . . . . . . . 4,210,305 2,982,653
Excess cost over fair value of net assets acquired . . . . . . . . . . . . 504,726 0
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,722,600 2,629,140
------------ ------------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $814,855,441 $707,841,284
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $497,121,824 $459,235,746
Federal Home Loan Bank advances. . . . . . . . . . . . . . . . . . . . . . 211,557,404 151,881,100
Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . 35,625,711 28,744,191
Advances from borrowers for taxes and insurance. . . . . . . . . . . . . . 1,499,659 2,488,397
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . 2,250,613 1,873,824
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,829 3,269,659
------------ ------------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 748,058,040 647,492,917
------------ ------------
Capital stock
Serial preferred stock, $.01 par value; authorized 1,000,000 shares
Common stock, $.01 par value; authorized 20,000,000 shares; issued
12,325,002 shares. . . . . . . . . . . . . . . . . . . . . . . . . . . 123,250 123,250
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 17,093,505 17,058,326
Retained earnings (substantially restricted) . . . . . . . . . . . . . . . 82,236,730 73,980,259
Unrealized appreciation on available-for-sale securities, net of
income taxes of $760,193 - March 1998 and $870,860 - June 1997 . . . . . 1,189,020 1,362,116
Treasury stock, at cost; 4,288,581 shares - March 1998;
4,219,881 shares - June 1997 . . . . . . . . . . . . . . . . . . . . . . (33,845,104) (32,175,584)
------------ ------------
Total Stockholders' Equity. . . . . . . . . . . . . . . . . . . . . . . 66,797,401 60,348,367
------------ ------------
Total Liabilities and Stockholders' Equity . . . . . . . . . . . . . $814,855,441 $707,841,284
============ ============
<FN>
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 3
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
1998 1997 1998 1997
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $14,777,913 $12,949,649 $42,656,103 $38,265,046
Investment Securities 945,327 931,273 2,900,283 2,926,323
Other 134,760 60,549 342,640 193,222
---------- ---------- ---------- ----------
TOTAL INTEREST INCOME 15,858,000 13,941,471 45,899,026 41,384,591
---------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 5,100,206 4,820,305 15,494,809 13,062,173
FHLBank advances 2,693,792 2,317,515 7,369,636 7,871,619
Short-term borrowings 294,655 130,766 825,103 451,522
---------- ---------- ---------- ----------
TOTAL INTEREST EXPENSE 8,088,653 7,268,586 23,689,548 21,385,314
---------- ---------- ---------- ----------
NET INTEREST INCOME 7,769,347 6,672,885 22,209,478 19,999,277
PROVISION FOR LOAN LOSSES 414,425 427,615 1,266,807 1,287,100
---------- ----------- ---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 7,354,922 6,245,270 20,942,671 18,712,177
---------- ---------- ---------- ----------
NON-INTEREST INCOME
Commissions 1,446,395 1,103,300 4,032,028 3,684,975
Service charge fees 955,125 673,886 2,708,380 2,004,445
Net realized gains on sales of loans and
available-for-sale securities 703,478 181,370 2,036,472 578,487
Income (expense) on foreclosed assets (56,347) (23,517) 326,745 292,919
Other income 322,181 372,473 1,100,310 1,037,176
---------- ---------- ---------- ----------
TOTAL NON-INTEREST INCOME 3,370,832 2,307,512 10,203,935 7,598,002
---------- ---------- ---------- ----------
NON-INTEREST EXPENSE
Salaries and employee benefits 2,755,007 2,331,679 7,982,309 6,856,723
Net occupancy expense 783,596 589,509 2,132,831 1,696,091
Tax consulting fees -- -- 439,157 --
Postage 245,576 164,971 638,010 470,232
Insurance 145,317 119,290 496,943 3,262,927
Amortization of goodwill 32,149 0 32,149 1,106,961
Advertising 134,873 143,843 429,545 416,578
Office supplies and printing 174,849 151,344 497,836 388,000
Other operating expenses 953,092 526,483 2,458,783 1,599,228
---------- ---------- ---------- ----------
TOTAL NON-INTEREST EXPENSE 5,224,459 4,027,119 15,107,563 15,796,740
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 5,501,295 4,525,663 16,039,043 10,513,439
PROVISION FOR INCOME TAXES 2,137,700 1,616,413 5,195,400 4,203,157
---------- ---------- ---------- ----------
NET INCOME $ 3,363,595 $ 2,909,250 $10,843,643 $ 6,310,282
========== ========== ========== ==========
BASIC EARNINGS PER COMMON SHARE $.42 $.35 $1.34 $.74
=== === === ===
DILUTED EARNINGS PER COMMON SHARE $.41 $.35 $1.32 $.74
=== === === ===
<FN>
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 4
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED MARCH 31,
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 10,843,643 $ 6,310,282
Items not requiring (providing) cash:
Depreciation 892,160 682,166
Amortization 27,149 1,101,961
Provision for loan losses 1,266,807 1,287,100
Provision for losses on foreclosed assets 100,000 100,000
Net realized gains on sale of loans (742,577) (373,062)
Gain on sale of premises and equipment (78,049) (2,382)
Gain on sale of foreclosed assets (558,444) (511,420)
Amortization of deferred income,
premiums and discounts (539,839) (710,439)
Net realized gains on sale of available-for-sale securities (791,658) (205,426)
Deferred income taxes (481,817) (300,000)
Changes in:
Accrued interest receivable (520,499) 323,665
Prepaid expenses and other assets (1,227,652) (878,819)
Accounts payable and accrued expenses 376,789 (287,259)
Income taxes payable (3,244,251) 796,127
----------- -----------
Net cash provided by operating activities 5,321,762 7,332,494
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (69,592,295) (27,419,910)
Purchase of additional business units (531,875) --
Purchase of premises and equipment (2,323,081) (807,467)
Proceeds from sale of premises and equipment 211,008 5,791
Proceeds from sale of foreclosed assets 1,016,136 945,514
Capitalized costs on foreclosed assets (66,818) (194,660)
Proceeds from sale of available-for-sale securities 3,010,376 1,377,623
Proceeds from maturing held-to-maturity securities 11,750,000 31,398,775
Purchase of held-to-maturity securities (11,780,478) (31,185,375)
Purchase of available-for-sale securities (338,014) (1,659,384)
Purchase of FHLBank stock -- (769,800)
----------- -----------
Net cash used in investing activities (68,645,041) (28,308,893)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in certificates of deposit 18,667,738 72,506,020
Net increase (decrease) in checking and savings 19,218,340 (6,666,632)
Proceeds from FHLBank advances 646,406,675 363,210,755
Repayments of FHLBank advances (586,730,371) (410,274,400)
Net increase in short-term borrowings 6,881,520 (478,571)
Advances from borrowers for taxes and insurance (988,738) (924,062)
Purchase of treasury stock (1,699,484) (12,234,178)
Dividends paid (2,587,172) (2,435,244)
Stock options exercised 42,564 724,561
----------- -----------
Net cash provided by financing activities 99,211,072 3,428,249
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35,887,793 (17,548,150)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 32,485,100 29,615,027
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 68,372,893 $ 12,066,877
=========== ===========
<FN>
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 5
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial
statements of Great Southern Bancorp, Inc. (the "Company") have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The
financial statements presented herein reflect all adjustments, which
are in the opinion of management, necessary for a fair statement of
the results for the periods presented. Operating results for the
three months and nine months ended March 31, 1998 and 1997 are not
necessarily indicative of the results that may be expected for the
full year. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's
annual report on Form 10-K for the year ended June 30, 1997. When
necessary, reclassifications have been made to prior period balances
to conform to current period presentation. These reclassifications
had no effect on net income.
The Company completed a 2-for-1 stock split on October 21, 1996.
Prior period information included in this form 10-Q reflects this
stock split, when necessary.
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
The discussion set forth below, as well as other portions of this
Form 10-Q, may contain forward-looking comments. Such comments are
based upon the information currently available to management of the
Company and management's perception thereof as of the date of this
Form 10-Q. 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; change 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.
<PAGE> 6
General
Parts of management's discussion and analysis in the annual report
on Form 10-K are not included below. The following should be read in
conjunction with management's discussion and analysis in the Company's
June 30, 1997 Form 10-K.
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 various
types of 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 and primarily servicing released beginning in fiscal 1996.
EFFECT OF FEDERAL LAWS AND REGULATIONS
Federal legislation and regulation significantly affect the banking
operations of the Company and the Bank, and have increased competition
among savings institutions, commercial banks, mortgage banking
enterprises and other financial institutions. In particular, the
capital requirements and operations of regulated depository
institutions such as the Company and the Bank have been and will be
subject to changes in applicable statutes and regulations from time to
time, which changes could, under certain circumstances, adversely
affect the Company or the Bank.
<PAGE> 7
On September 30, 1996, the President of the United States signed
into law, legislation that impacted two major areas of the Bank. The
first major area was a one-time assessment of SAIF-insured
institutions of 65.7 basis points of March 31, 1995 SAIF-assessable
deposits. The Bank was assessed approximately $2.5 million ($1.6
million after income taxes) which was paid at the end of November
1996. The payment was expensed in the September 30, 1996 quarter and
had a significant impact on the Bank's earnings as of the time the
payment was accrued.
Along with this one-time SAIF assessment, the semi-annual SAIF
assessment was reduced, beginning January 1, 1997, from an annualized
23 basis points on SAIF-assessable deposits, to approximately 6.48
basis points annualized on SAIF-assessable deposits. This reduced the
monthly expense of the Bank, beginning January 1, 1997, by
approximately $55,000 ($35,000 after tax). As a result of this lower
assessment rate, the Bank significantly increased (approximately $80
million) the level of brokered deposits used to fund asset growth
beginning in the March 31, 1997 quarter. The rates paid on these
deposits, when compared to alternative sources and allowing for
deposit insurance costs, is comparable to FHLBank advances but do not
require the asset pledging the FHLBank requires.
The second major area of change is the repeal of 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 no longer creates recapture of the applicable excess
reserves accumulated prior to 1988 for thrifts at the time they
convert 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 these requirements for fiscal year
June 30, 1997. The amount of post 1987 recapture for the Bank is
estimated at $5 million which would create income taxes of
approximately $2 million, or $400,000 per year for each of the five
years remaining in the recapture period. The $2 million of tax has
been accrued and expensed by the Bank in previous periods and
accordingly, will not be reflected as a reduction in earnings or
capital when paid.
Beginning with the fiscal year ending June 30, 1997, the Bank is
required to follow the specific charge-off method which only allows a
bad debt deduction equal to actual charge-offs, net of recoveries,
experienced during the fiscal year of the deduction. In a year where
recoveries exceed charge-offs, the Bank will be required to include
the net recoveries in taxable income.
<PAGE> 8
YEAR 2000 COMPUTER PROGRAM PROBLEMS
A large amount of information has been distributed concerning the
potential computer and equipment crash that may occur in the year
2000. Many computers, computer programs and other technology items
that only distinguish the year by the last two digits instead of all
four digits are expected to read the year 2000 as the year 1900. This
is expected to potentially produce catastrophic errors. The Company,
like most other companies and financial institutions, relies on
timely, accurate, efficient data processing for every area of its
operations. Any problems which might occur due to the year 2000
concern could be detrimental to the operations and financial stability
of the Company.
The Board of Directors of the Bank adopted a Year 2000 Compliance
Policy which mandates to senior management and all employees, full
compliance with the time frames dictated by sound business practice
and the Federal Financial Institutions Examination Council. The
Bank's Year 2000 Compliance Project is an ongoing process and the Bank
expects to be in compliance by December 31, 1998.
The first stage of the Compliance process for the Bank was an
internal risk assessment performed by the Information Systems Steering
Committee along with major vendors and consultants. The Risk
Assessment revealed the need to replace the Bank's mainframe operating
system and to replace the majority of the online terminals, which are
desktop computers. The desktop systems have been purchased and
installed.
The Bank has experienced sizeable growth in recent years which,
independent of the year 2000 issue, has created the need to upgrade
the core mainframe hardware and software systems to handle the
increased growth. The Year 2000 Committee and management reviewed
various proposals and attended presentations of core mainframe
hardware and software systems. One of the main items included in each
proposal was written certification of compliance with the year 2000
issue. Subsequent to March 31, 1998, the Bank signed an agreement to
convert to the Jack Henry Silverlake system. The time table agreed to
by the Bank and Jack Henry is for the conversion to be completed
during the December 1998 quarter. The approximate cost to convert to
the new core mainframe system and to upgrade the desktop computers and
other equipment is estimated at $1.5 million. This amount will be
expensed over a 3 to 5 year period. Management does not feel it will
have a material impact on the financial condition of the Company.
The insurance, investment and travel subsidiaries operate on
separate computer systems from the Bank and each other. The Year 2000
Committee of the Bank will be assisting these companies in performing
a Risk Assessment of their systems and taking the steps necessary to
ensure compliance with all year 2000 issues before December 31, 1999.
<PAGE> 9
RECENT CHANGES IN ACCOUNTING PRINCIPLES
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. The Company adopted
SFAS 128 at December 31, 1997. The adoption of SFAS 128 did not have
a material effect on the financial statements of the Company.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS 132"). SFAS 132 revises disclosure
requirements for pension and other postretirement benefit plans but
does not change the measurement or recognition of those plans. SFAS
132 is effective for fiscal years beginning after December 15, 1997.
The Company will adopt SFAS 132 in its June 30, 1999 fiscal year. The
adoption of SFAS 132 is not expected to have a material effect on the
financial statements of the Company.
ASSET AND LIABILITY MANAGEMENT
During the nine months ended March 31, 1998, the Company increased
total assets by $107 million. The main areas of change were an
increase in net loans of $70 million and an increase in cash and
interest-bearing deposits of $36 million.
The following loan categories experienced net increases as noted:
Commercial real estate and construction loans $41 million
Commercial business loans 26 million
Consumer (primarily automobile and student) loans 14 million
The following loan categories experienced net decreases as noted:
Single-family and other residential loans $11 million
The increase in cash and interest-bearing deposits was primarily
due to large cash letters in the process of collection at the end of
the quarter and the timing of transfers of funds from cash letters.
<PAGE> 10
Total liabilities increased $100 million during the nine months
ended March 31, 1998, primarily from an increase in FHLBank advances
of $60 million and an increase in deposits of $38 million. The
deposit increase was primarily from brokered deposits. The increase
in FHLBank advances and deposits was to fund the brisk loan demand
during the nine month period. Management feels FHLBank advances and
brokered deposits are viable alternatives to retail deposits when
factoring all the costs associated with the generation and maintenance
of retail deposits.
Stockholders' equity increased $6.5 million primarily as a result
of net income of $10.8 million offset by dividend declarations and
payments of $2.6 million and net treasury stock purchases of $1.6
million. The Company repurchased 79,034 shares of common stock at an
average price of $21.53 per share during the nine months ended March
31, 1998 and issued 10,334 shares at an average price of $6.01 per
share for exercised stock options.
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 sensitivity 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 is discussed in more detail
under the headings "Results of Operations and Comparisons of the Nine
Months Ended March 31, 1998 and 1997" and in management's discussion
and analysis in the June 30, 1997 Form 10-K.
<PAGE> 11
The Company's one-year interest rate sensitivity gap, as a
percentage of total interest-earning assets was a positive $57
million, or 7.1%, at March 31, 1998, as compared to a positive $48
million, or 6.9%, at June 30, 1997. The increase of $9 million
resulted primarily from: (i) an $24 million increase in commercial
real estate commercial business and consumer loans; (ii) a $46 million
increase in investment securities and interest-earning deposits due to
a large temporary increase in interest-earning deposits at the end of
the March 31, 1998 quarter and the shifting of $15 million of
maturities from the 1 to 2 years category into the 1 year or less
category; (iii) a $23 million increase in FHLBank advances; (iv) a $25
million increase in time deposits, with the majority being brokered
deposits in the 1 year or less category; and (v) a $13 million and $9
million increase, respectively, in interest-bearing demand deposits
and other borrowings due to the Company's recent growth in these
customer accounts.
As a part of its asset and liability management strategy, the
Company has increased its investment in loans which are interest rate
sensitive by emphasizing the origination of adjustable-rate, one- to
four-family residential loans and adjustable-rate or relatively short-
term commercial business and consumer loans, and originating fixed-
rate, one- to four-family residential loans primarily for immediate
resale in the secondary market. Approximately 40% of total assets are
currently invested in commercial real estate and commercial business
loans. This part of the strategy was designed to improve asset yield
and fee income, and to shorten the average maturity and increase the
interest rate sensitivity of the loan portfolio. While efforts to
date have contributed to the changes in the one-year interest rate
sensitivity gap and increased net interest income, such lending,
commensurate with the increased risk levels, has also resulted in an
increase in the level of non-performing assets. Management
continually evaluates existing and potential commercial real estate
and commercial business loans, in order to try to reduce undesirable
risks including concentrations in a given geographic area or a
particular loan category.
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 achieve the desired growth of the loan portfolio and
assets in total, as well as to maintain the desired yield on the
Company's investments.
<PAGE> 12
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.
(Remainder of page intentionally left blank)
<PAGE> 13
The following table sets forth the Company's interest rate
sensitive assets and liabilities that mature or reprice within one
year as of the dates indicated and on the basis of the factors and
assumptions set forth at the end of the tables.
<TABLE>
<CAPTION>
March 31, June 30,
1998 1997
------------- ---------
<S> <C> <C>
(000'S OMITTED)
Residential real estate loans $247,331 262,123
Construction loans 28,662 5,908
Commercial real estate loans 202,797 206,020
Commercial business loans 47,488 25,557
Consumer loans 28,073 22,549
Investment securities and other 107,062 60,628
------- -------
Total interest rate sensitive assets
repricing within one year 661,413 582,785
------- -------
Interest-bearing demand deposits 127,980 115,299
Savings deposits 34,685 35,065
Time deposits 265,328 240,643
FHLBank advances 141,066 117,659
Other borrowings and liabilities 35,626 26,338
------- -------
Total interest rate sensitive liabilities
repricing within one year 604,685 535,004
------- -------
One year interest rate sensitivity gap (1) $56,728 $ 47,781
======= =======
Interest rate sensitive assets/interest rate
sensitive liabilities 109.4% 108.9%
===== =====
One year interest rate sensitivity gap as a
percent of interest-earning assets 7.1% 6.9%
=== ===
<FN>
___________________________________________
(1) Defined as the Company's interest-earning assets which mature or
reprice within one year minus its interest-bearing liabilities that
mature or reprice within one year.
</TABLE>
<PAGE> 14
The following table sets forth the interest rate sensitivity of the
Company's assets and liabilities at March 31, 1998, on the basis of
the factors and assumptions set forth below.
<TABLE>
<CAPTION>
Maturing or Repricing
---------------------------------------------------------------
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>
(Dollars in thousands)
Residential real estate loans $169,067 $ 78,264 $ 50,037 $ 4,087 $33,783 $335,238
Construction loans 28,662 -- -- -- -- 28,662
Commercial real estate loans 201,111 1,686 11,446 2,749 2,479 219,471
Commercial business loans 47,329 159 131 69 7 47,695
Consumer loans 25,065 3,008 9,027 3,867 330 41,297
Investment securities and other 85,306 21,756 15,770 -- -- 122,832
------- ------- ------- ------ ------ -------
Total interest-earning assets 556,540 104,873 86,411 10,772 36,599 795,195
------- ------- ------- ------ ------ -------
Interest-bearing demand deposits 127,980 -- -- -- -- 127,980
Savings deposits 34,685 -- -- -- -- 34,685
Time deposit 187,879 77,449 36,520 8,670 2,450 312,968
FHLBank advances 125,484 15,582 38,309 11,959 20,223 211,557
Other borrowings and liabilities 35,626 -- -- -- -- 35,626
------- ------- ------- ------ ------ -------
Total interest-bearing liabilities 511,654 93,031 74,829 20,629 22,673 722,816
------- ------- ------- ------ ------ -------
Interest-earning assets less
interest-bearing liabilities $ 44,886 $ 11,842 $ 11,582 $ (9,857) $13,926 $ 72,379
======= ======= ======= ====== ====== =======
Cumulative interest rate sensitivity gap $ 44,886 $ 56,728 $68,310 $ 58,453 $72,379
======= ======= ====== ====== ======
Cumulative interest rate sensitivity gap
as a percent of interest-earning
assets at March 31, 1998 5.6% 7.1% 8.6% 7.4% 9.1%
=== === === === ===
Cumulative interest rate sensitivity gap
as a percent of interest-earning
assets at June 30, 1997 0.1% 6.9% 10.1% 9.6% 10.5%
=== === ==== === ====
<FN>
The assumptions used in the above two tables are:
-- Prepayment rates are derived from market prepayment rates
observed on or about March 31, 1998.
-- 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 and funds from contractual amortization are not
reinvested.
</TABLE>
<PAGE> 15
RESULTS OF OPERATIONS AND COMPARISON OF THE THREE AND NINE MONTHS
ENDED MARCH 31, 1998 and 1997
The increase in earnings of $455,000, or 15.6%, for the three
months ended March 31, 1998 when compared to the same period in 1997,
was primarily due to an increase in non-interest income of $1.1
million, or 46.1%, and an increase in net interest income of $1.1
million, or 16.4%, offset by an increase in non-interest expense of
$1.2 million, or 29.7%, and an increase in provision for income taxes
of $522,000, or 32.3%, during the three month period.
The increase in earnings of $4.5 million, or 71.9%, for the nine
months ended March 31, 1998 when compared to the same period in 1997,
was primarily due to an increase in non-interest income of $2.6
million, or 34.3%, an increase in net interest income of $2.2 million,
or 11.1%, and a decrease in non-interest expense of $690,000, or 4.4%,
offset by an increase in provision for income taxes of $1 million, or
23.6%, during the nine month period.
Total Interest Income
Total interest income increased $1.9 million, or 13.8%, during the
three months ended March 31, 1998, when compared to the three months
ended March 31, 1997. The increase was primarily due to a $1.8
million, or 14.1%, increase in interest income on loans.
Total interest income increased $4.5 million, or 10.9%, during the
nine months ended March 31, 1998, when compared to the nine months
ended March 31, 1997. The increase was primarily due to a $4.4
million, or 11.5%, increase in interest income on loans.
Interest Income - Loans
During the three months ended March 31, 1998, interest income on
loans increased primarily from higher average balances. Interest
income increased $1.6 million as the result of higher average loan
balances from $567 million during the three months ended March 31,
1997 to $636 million during the three months ended March 31, 1998.
The average yield on loans increased from 9.13% during the three
months ended March 31 1997, to 9.29% during the three months ended
March 31, 1998.
<PAGE> 16
During the nine months ended March 31, 1998, interest income on
loans increased primarily from higher average balances. Interest
income increased $4 million as the result of higher average loan
balances from $556 million during the nine months ended March 31, 1997
to $614 million during the nine months ended March 31, 1998. Interest
income increased $270,000 during the nine months ended March 31, 1998
as the result of the receipt of interest on a commercial real estate
loan with a zero principal balance that is being accounted for on a
cash basis. The average yield on loans increased from 9.17% during
the nine months ended March 31 1997, to 9.27% during the nine months
ended March 31, 1998.
Interest Income - Investments and Other Interest-Earning Deposits
Since the Company derives the majority of its interest income from
loans, the net increase in interest income on investments and
interest-earning deposits during the three and nine months ended March
31, 1998 of $88,000 and $124,000, respectively, when compared to the
three and nine months ended March 31, 1997, was not material.
Total Interest Expense
Total interest expense increased $820,000, or 11.3%, during the
three months ended March 31, 1998 when compared with the same period
in 1997. The increase during the three month period was due to a
$540,000, or 22.0%, increase in interest expense on FHLBank advances
and other borrowings and a $280,000, or 5.8%, increase in interest
expense on deposits.
Total interest expense increased $2.3 million, or 10.8%, during the
nine months ended March 31, 1998 when compared with the same period in
1997. The increase during the nine month period was primarily due to
a $2.4 million, or 18.6%, increase in interest expense on deposits,
offset by a $128,000, or 1.5%, decrease in interest expense on FHLBank
advances and other borrowings.
Interest Expense - Deposits
Interest expense on deposits increased $280,000 as a result of
higher average balances of time deposits from $293 million during the
three months ended March 31, 1997, to $307 million during the three
months ended March 31, 1998 and due to higher average balances of
interest-bearing demand deposits from $105 million during the three
months ended March 31, 1997, to $118 million during the three months
ended March 31, 1997. The average balances increased as a result of
the Company's use of brokered deposits to fund loan growth . Time
deposits experienced small increases due to higher rates while
interest-bearing deposits experienced small decreases due to lower
rates. The other deposit category, savings, experienced only minor
increases due to slightly higher balances.
<PAGE> 17
Interest expense on deposits increased $2.2 million as a result of
higher average balances of time deposits from $252 million during the
nine months ended March 31, 1997, to $306 million during the nine
months ended March 31, 1998. The average balances increased as a
result of the Company's use of brokered deposits to fund loan growth .
Time deposits experienced small increases due to higher rates and the
other deposit areas also experienced small increases or decreases due
to rates and or balances.
Interest Expense - FHLBank Advances and Other Borrowings
Interest expense on FHLBank advances and other borrowings increased
$638,000 due to higher average balances from $167 million in the three
months ended March 31, 1997 to $212 million in the three months ended
March 31, 1998. Average rates were slightly lower during the three
months ended March 31, 1998 at 5.64% compared to 5.88% during the
three months ended March 31, 1997. The average balances increased as
a result of the Company's use of FHLBank advances to fund a portion of
the loan growth.
Interest expense on FHLBank advances and other borrowings decreased
$137,000 due to lower average rates from 5.91% in the nine months
ended March 31, 1997 to 5.81% in the nine months ended March 31, 1998.
Average balances during both nine month periods were $188 million.
Net Interest Income
The Company's overall interest rate spread increased 9 basis
points, or 2.4%, from 3.78% during the three months ended March 31,
1997, to 3.87% during the three months ended March 31, 1998. The
increase was due to a slight increase in the weighted average yields
received on interest-earning assets combined with a slight decrease in
the weighted average rates paid on interest-bearing liabilities.
The Company's overall interest rate spread decreased 1 basis point,
or .3%, from 3.82% during the nine months ended March 31, 1997, to
3.81% during the nine months ended March 31, 1998. The decrease was
due to a decrease in the weighted average yields received on interest-
earning assets.
Provision for Loan Losses
The provision for loan losses decreased slightly from $428,000
during the three months ended March 31, 1997 to $414,000 during the
three months ended March 31, 1998.
<PAGE> 18
The provision for loan losses decreased slightly from $1,287,000
during the nine months ended March 31, 1997 to $1,267,000 during the
nine months ended March 31, 1998.
In any accounting period, the provision for loan losses is affected
by many factors including, but not limited to, the change in the
composition of the loan portfolio, the increase or decrease in total
loans, the level of delinquencies and other non-performing loans and
the historical loss experience of the portfolio.
Non-performing assets decreased slightly during the nine months
ended March 31, 1998 from $13.9 million at June 30, 1997 to $12.4
million at March 31, 1998. Non-performing loans decreased $500,000,
or 6.3%, from $7.9 million at June 30, 1997 to $7.4 million at March
31, 1998, and foreclosed assets declined $1 million from $6 million at
June 30, 1997 to $5 million at March 31, 1998.
Potential problem loans increased $1.1 million during the nine
months ended March 31, 1998 from $7.1 million at June 30, 1997 to $8.2
million at March 31, 1998. These are loans which management has
identified through routine internal review procedures as having
possible credit problems which may cause the borrowers difficulty in
complying with current loan repayment terms. These loans are not
reflected in the non-performing loans
The allowance for loan losses at March 31, 1998 and June 30, 1997,
respectively, totaled $16 million and $15.5 million, representing 2.5%
and 2.7% of total loans, 216% and 197% of non-performing loans, and
102% and 103% of non-performing loans and potential problem loans in
total. The allowance for foreclosed asset losses totaled $69,000 at
March 31, 1998 and $319,000 at June 30, 1997, representing 1.4% and
5.3%, respectively, of total foreclosed assets. Although the Company
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 $1.1 million, or 46.1%, in the three
months ended March 31, 1998 when compared to the same period in 1997.
The increase was primarily due to: (i) an increase of $444,000 in
profits on sale of available-for-sale securities; (ii) an increase in
commission income from the travel, insurance and investment
subsidiaries of $343,000, or 31%; (iii) an increase in service charge
income of $281,000, or 42%, on transaction accounts and electronic
transactions from increased volumes; and (iv) various increases and
decreases in other non-interest income items.
<PAGE> 19
Non-interest income increased $2.6 million, or 34.3%, in the nine
months ended March 31, 1998 when compared to the same period in 1997.
The increase was primarily due to: (i) an increase of $1.1 million in
profits on sale of available-for-sale securities; (ii) an increase in
service charge income of $704,000, or 35%, on transaction accounts and
electronic transactions from increased volumes; (iii) an increase in
commission income from the travel, insurance and investment
subsidiaries; and (iv) various increases and decreases in other non-
interest income items.
Non-interest Expense
Non-interest expense increased $1.2 million, or 29.7%, in the three
months ended March 31, 1998 when compared to the same period in 1997.
The increase was primarily due to: (i) an increase of $423,000 in
salary and employee related costs due to increased staffing levels
resulting from asset and customer growth and an expanded consumer
lending department; (ii) an increase of $194,000 in occupancy and
equipment expense due to expansion of the Company's ATM network and
other technology related purchases; (iii) an increase of $130,000 from
robbery losses; and (iii) increases in the majority of other non-
interest expense items resulting from asset and earnings growth.
Non-interest expense decreased $689,000, or 4.4%, in the nine
months ended March 31, 1998 when compared to the same period in 1997.
The decrease was primarily due to: (i) a decrease in insurance of $2.8
million due to the accrual in the September 30, 1996 quarter of the
one-time SAIF assessment discussed previously; and (ii) a decrease in
goodwill amortization of $1.1 million due to the write-off in the
September 30, 1996 quarter of goodwill remaining from a 1982 failed
thrift purchase; offset by (iii) an increase of $440,000 in tax
consulting fees paid as the result of a recovery of $1.1 million of
state financial institution taxes; (iv) an increase of $1.1 million in
salaries and employee related costs due to increased staffing levels
resulting from asset and customer growth and expanded consumer lending
department; (v) an increase of $437,000 in occupancy and equipment
expense due to expansion of the Company's ATM network and other
technology related purchases; (vi) an increase of $225,000 in robbery
and bad check losses; (vii) an increase of $120,000 in internal and
external audit fees; (viii) an increase of $110,000 in package
transaction account benefit costs; and (ix) increases in the majority
of other non-interest expense items resulting from asset and earnings
growth.
<PAGE> 20
In conjunction with the Company's recent growth and the year 2000
issue discussed previously in this document, the Company will be
incurring additional operating costs associated with the evaluation,
purchase, implementation and operation of new mainframe hardware and
software as well as other replacement computer and equipment items.
In addition, it is probable that the insurance, investment and travel
subsidiaries will incur costs in the evaluation, purchase,
implementation and operation of their systems to bring them into
compliance to avoid potential year 2000 issues. While the exact
impact of the cost to correct or convert the various systems of the
Company is not known at this time, management does not feel it will be
material to the overall operations or financial condition of the
Company.
Provision for Income Taxes
Provision for income taxes as a percentage of pre-tax income
increased from 35.7% in the three months ended March 31, 1997 to 38.9%
in the three months ended March 31, 1998 due to fluctuations in tax
credits and other estimated items.
Provision for income taxes as a percentage of pre-tax income
decreased from 40.0% in the nine months ended March 31, 1997 to 32.4%
in the nine months ended March 31, 1998. The larger than normal
percentage in the March 31, 1997 period was due to the non-deductible
goodwill write-off in that period. The small percentage in the March
31, 1998 period was due to a refund of prior period state financial
institution taxes of $1.1 million. The refund was the result of a
review of the Bank's state financial institution tax returns by a
consulting firm. The refund resulted from the Bank's charter change
from a state charter to a federal savings bank charter in December
1994.
<PAGE> 21
Average Balances, Interest Rates and Yields
The following tables present for the periods indicated the total
dollar amount of interest income from average interest-earning assets
and the resultant yields, as well as the interest expense on average
interest-bearing liabilities, expressed both in dollars and rates, and
the net interest margin. The tables do not include non-interest-
bearing demand deposits and do not reflect any effect of income taxes.
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------------------------
1998 1997
--------------------------- --------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Loans receivable $636,495 $14,778 9.29% $567,456 $12,949 9.13%
Investment securities and other
interest-earning assets 93,510 1,080 4.62 77,887 992 5.09
------- ------ ---- ------- ------- ----
Total interest-earning assets $730,005 15,858 8.69 $645,343 13,941 8.64
======= ------ ---- ======= ------ ----
Interest-bearing liabilities:
Demand deposits $118,350 625 2.11 $104,598 578 2.21
Savings deposits 34,506 210 2.43 34,118 207 2.43
Time deposits 306,897 4,265 5.56 292,788 4,035 5.51
------- ----- ---- ------- ----- ----
Total deposits 459,753 5,100 4.49 431,504 4,820 4.47
FHLBank advances and other borrowings 212,122 2,989 5.64 166,507 2,448 5.88
------- ----- ---- ------- ----- ----
Total interest-bearing liabilities $671,875 8,089 4.82 $598,011 7,268 4.86
======= ----- ---- ======= ----- ----
Net interest income:
Interest rate spread $7,769 3.87% $6,673 3.78%
===== ==== ===== ====
Net interest margin(1) 4.26% 4.14%
==== ====
Average interest-earning assets to
average interest-bearing liabilities 108.7% 107.9%
===== =====
<FN>
(1) Defined as the Company's net interest income divided by total
interest-earning assets.
</TABLE>
<PAGE> 22
<TABLE>
<CAPTION>
Nine Months Ended March 31,
---------------------------------------------------------
1998 1997
--------------------------- --------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Interest-earning assets:
Loans receivable $613,569 $42,656 9.27% $556,183 $38,265 9.17%
Investment securities and other
interest-earning assets 90,822 3,243 4.76 78,106 3,119 5.32
------- ------ ---- ------- ------- ----
Total interest-earning assets $704,391 45,899 8.69 $634,289 41,384 8.70
======= ------ ---- ======= ------ ----
Interest-bearing liabilities:
Demand deposits $118,880 2,010 2.25 $108,228 1,942 2.39
Savings deposits 34,901 645 2.46 35,399 653 2.46
Time deposits 305,966 12,840 5.60 252,442 10,467 5.53
------- ------ ---- ------- ------ ----
Total deposits 459,747 15,495 4.49 396,069 13,062 4.40
FHLBank advances and other borrowings 188,078 8,195 5.81 187,875 8,323 5.91
------- ------ ---- ------- ------ ----
Total interest-bearing liabilities $647,825 23,690 4.88 $583,944 21,385 4.88
======= ------ ---- ======= ------ ----
Net interest income:
Interest rate spread $22,209 3.81% $19,999 3.82%
====== ==== ====== ====
Net interest margin(1) 4.20% 4.20%
==== ====
Average interest-earning assets to
average interest-bearing liabilities 108.7% 108.6%
===== =====
<FN>
(1) Defined as the Company's net interest income divided by total
interest-earning assets.
</TABLE>
<PAGE> 23
Rate/Volume Analysis
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-
earning assets and interest-bearing liabilities for the periods shown.
For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to (i)
changes in rate (i.e., changes in rate multiplied by old volume) and
(ii) changes in volume (i.e., changes in volume multiplied by old
rate). For purposes of this table, changes attributable to both rate
and volume which cannot be segregated have been allocated
proportionately to volume and to rate.
<TABLE>
<CAPTION>
Three Months Ended March 31, Nine Months Ended March 31,
1998 vs. 1997 1998 vs. 1997
-------------------------------- --------------------------------
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>
(Dollars in thousands) (Dollars in thousands)
Interest-earning assets:
Loans receivable $ 230 $1,599 $1,829 $ 405 $3,986 $4,391
Investment securities and
other interest-earning assets (76) 164 88 (230) 354 124
--- ----- ----- --- ----- -----
Total interest-earning assets 154 1,763 1,917 175 4,340 4,515
--- ----- ----- --- ----- -----
Interest-bearing liabilities:
Demand deposits (24) 71 47 (96) 164 68
Savings deposits 1 2 3 1 (9) (8)
Time deposits 34 196 230 128 2,245 2,373
--- ----- ----- --- ----- -----
Total deposits 11 269 280 33 2,400 2,433
FHLBank advances and other borrowings (97) 638 541 (137) 9 (128)
--- ----- ----- --- ----- -----
Total interest-bearing liabilities (86) 907 821 (104) 2,409 2,305
--- ----- ----- --- ----- -----
Net interest income $ 240 $ 856 $1,096 $ 279 $1,931 $2,210
=== ===== ===== === ===== =====
</TABLE>
<PAGE> 24
LIQUIDITY AND CAPITAL RESOURCES
General
The Company's capital position remained strong, with stockholders'
equity at $66.8 million, or 8.2% of total assets of $815 million at
March 31, 1998 compared to equity at $60.3 million, or 8.5%, of total
assets of $708 million at June 30, 1997. In addition, the Bank
exceeds each of the regulatory capital requirements. At March 31,
1998, the Bank's tier 1 capital ratio was 6.97% and total risk-based
capital ratio was 10.57%. Federal regulations at that date required
tier 1 capital of 3% and total risk-based capital of 8%.
The Bank is required by regulation to maintain liquidity ratios at
certain levels. 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 that required. As of
March 31, 1998, the Bank's liquidity ratio was 7.8%, compared to 7.4%
at June 30, 1997. 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 March 31, 1998,
the Company had commitments of approximately $92.5 million to fund
loan originations, issued lines of credit, outstanding letters of
credit and unadvanced loans.
At March 31, 1998, the investment securities held to maturity
included $170,000 of gross unrealized gains and $15,000 of gross
unrealized losses related to securities intended to be held until
maturity. 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
investment portfolio is foreseen.
The Company's primary sources of funds are savings deposits,
FHLBank advances, other borrowings, loan repayments, proceeds from
sales of loans and 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, supplement deposits with less expensive alternative sources
of funds.
<PAGE> 25
STATEMENT OF CASH FLOWS
During the nine months ended March 31, 1998 and March 31, 1997, the
Company experienced positive cash flows from operating activities and
financing activities, and negative cash flows from investing
activities.
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 $5.3 million and $7.3
million, respectively, during the nine months ended March 31, 1998 and
1997.
During the nine months ended March 31, 1998 and 1997, investing
activities used cash of $68.6 million and $28.3 million, respectively,
primarily due to the net increase of loans in both periods.
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
$99.2 million and $3.4 million, respectively, in cash during the nine
months ended March 31, 1998 and 1997. Financing activities in the
future are expected to primarily include changes in deposits, changes
in FHLBank advances, changes in short-term borrowings and changes in
treasury stock.
DIVIDENDS
During the nine months ended March 31, 1998 and 1997, respectively,
the Company declared and paid dividends of $0.33 and $0.30 per share.
The Board of Directors meets regularly to consider the level and the
timing of dividend payments.
<PAGE> 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Registrant and its subsidiaries are involved as plaintiff or
defendant in various legal actions arising in the normal course of
their business. While the ultimate outcome of the various legal
proceedings involving the Registrant and its subsidiaries cannot be
predicted with certainty, it is the opinion of management, after
consultation with legal counsel, that these legal actions currently
are not material to the Registrant.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Common Stockholders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
See the attached exhibit 11, Statement re computation of earnings
per share.
See the attached exhibit 27, Financial Data Schedule.
b) Reports on Form 8-K
On April 3, 1998, the Registrant filed a Form 8-K announcing a
stock repurchase program of up to 800,000 shares of its common stock.
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Great Southern Bancorp, Inc.
Registrant
Date: May 15, 1998 /s/ William V. Turner
--------------------------
William V. Turner
Chairman of the Board,
President and Chief
Executive Officer
Date: May 15, 1998 /s/ Don M. Gibson
--------------------------
Don M. Gibson,
Executive Vice President and
Chief Financial Officer
<PAGE> 28
Exhibit Index
-------------
Exhibit
No. Description
- ------- -----------
11 Statement Re Computation of Earnings Per Share
27 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only and not filed.
<PAGE> 29
<TABLE>
<CAPTION>
Exhibit 11- Statement Re Computation of Earnings Per Share
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic:
Average shares outstanding 8,049,032 8,312,650 8,071,169 8,476,188
========= ========= ========= =========
Net income $3,363,595 $2,909,249 $10,843,643 $6,310,281
========= ========= ========== =========
Per share amount $0.42 $0.35 $1.34 $0.74
==== ==== ==== ====
Diluted:
Average shares outstanding 8,049,032 8,312,650 8,071,169 8,476,188
Net effect of dilutive stock options -
based on the treasury stock method
using average market price 135,238 104,676 135,238 104,676
--------- --------- --------- ---------
Diluted shares 8,184,270 8,417,326 8,206,407 8,580,864
========= ========= ========= =========
Net income $3,363,595 $2,909,249 $10,843,643 $6,310,281
========= ========= ========== =========
Per share amount $0.41 $0.34 $1.32 $0.74
==== ==== ==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
the Consolidated Balance Sheet and the Consolidated Statement of
Income filed as part of the quarterly report on Form 10-Q and is
qualified in its entirety by reference to such quarterly report on
Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CAPTION>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 11,844
<INT-BEARING-DEPOSITS> 56,529
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,742
<INVESTMENTS-CARRYING> 49,768
<INVESTMENTS-MARKET> 49,923
<LOANS> 653,557
<ALLOWANCE> 16,010
<TOTAL-ASSETS> 814,855
<DEPOSITS> 497,122
<SHORT-TERM> 166,686
<LIABILITIES-OTHER> 3,752
<LONG-TERM> 80,497
0
0
<COMMON> 123
<OTHER-SE> 66,674
<TOTAL-LIABILITIES-AND-EQUITY> 814,855
<INTEREST-LOAN> 42,656
<INTEREST-INVEST> 2,900
<INTEREST-OTHER> 343
<INTEREST-TOTAL> 45,899
<INTEREST-DEPOSIT> 15,495
<INTEREST-EXPENSE> 23,690
<INTEREST-INCOME-NET> 22,209
<LOAN-LOSSES> 1,267
<SECURITIES-GAINS> 1,290
<EXPENSE-OTHER> 15,108
<INCOME-PRETAX> 16,039
<INCOME-PRE-EXTRAORDINARY> 16,039
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,844
<EPS-PRIMARY> 1.34
<EPS-DILUTED> 1.32
<YIELD-ACTUAL> 4.20
<LOANS-NON> 7,401
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 8,239
<ALLOWANCE-OPEN> 15,524
<CHARGE-OFFS> 909
<RECOVERIES> 128
<ALLOWANCE-CLOSE> 16,010
<ALLOWANCE-DOMESTIC> 16,010
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
