<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the fiscal year ended June 30, 1998 Commission File Number 0-18082
GREAT SOUTHERN BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1524856
(State incorporation) (IRS Employer
Identification Number)
1451 E. Battlefield 65804
Springfield, Missouri (Zip Code)
(Address of principal executive offices)
(417) 887-4400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. / /
The aggregate market value of the voting stock of the Registrant held by
non-affiliates of the Registrant on September 17, 1998, computed by reference
to the closing price of such shares, was $175,205,043. At September 18, 1998,
7,918,872 shares of Common Stock, par value $.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Security Holders for the
fiscal year ended June 30, 1998 (the "Annual Report"), which was
electronically filed on September 22, 1998, are incorporated by reference into
Parts I, II and IV. With the exception of the information explicitly
incorporated by reference in this Form 10-K, the 1998 Annual Report to Security
Holders is not to be deemed filed as part of this Form 10-K.
Portions of the Registrant's Definitive Proxy Statement prepared in
connection with the 1998 annual meeting of stockholders (the "Definitive Proxy
Statement"), which was electronically filed on September 22, 1998, are
incorporated by reference into Part III.
Index to Exhibits is page 49
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<PAGE> 2
TABLE OF CONTENTS
Page
------
Part I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Primary Market Area . . . . . . . . . . . . . . . . . . . . . . 4
Lending Activities . . . . . . . . . . . . . . . . . . . . . . 5
Loan Portfolio Composition . . . . . . . . . . . . . . . . . . 7
Allowance for Losses on Loans and Foreclosed Assets . . . . . . 16
Loan Delinquencies and Defaults . . . . . . . . . . . . . . . . 19
Classified Assets . . . . . . . . . . . . . . . . . . . . . . . 21
Investment Activities . . . . . . . . . . . . . . . . . . . . . 23
Sources of Funds . . . . . . . . . . . . . . . . . . . . . . . 24
Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 28
Competition . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Government Supervision and Regulation . . . . . . . . . . . . . 29
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 40
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 40
Item 4A. Executive Officers of the Registrant . . . . . . . . . . . . . 40
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . 41
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . 42
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 43
Item 8. Financial Statements and Supplementary Data . . . . . . . . . 43
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures . . . . . . . . . . 43
Part III
Item 10. Directors and Executive Officers of the Registrant . . .. . . 44
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . 44
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . 44
Item 13. Certain Relationship and Related Transactions . . . . . . . . 44
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 45
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . 49
<PAGE> 3
PART I
ITEM 1. BUSINESS.
THE COMPANY
Great Southern Bancorp, Inc.
Great Southern Bancorp, Inc. ("Bancorp" or "Company") is a bank holding
company which, as of June 30, 1998, owned directly all of the stock of Great
Southern Bank ("Great Southern" or the "Bank") and other non-banking
subsidiaries. Bancorp was incorporated under the laws of the State of Delaware
in July 1989 as a unitary savings and loan holding company. After receiving
the approval of the Federal Reserve Bank of St. Louis (the "Federal Reserve" or
"FRB"), the Company became a one bank holding company on June 30, 1998 upon the
conversion on June 30, 1998, of Great Southern to a Missouri-chartered trust
company.
As a Delaware corporation, the Company is authorized to engage in any
activity that is permitted by the Delaware General Corporation Law and is not
prohibited by law or regulatory policy. The Company currently conducts its
business as a bank holding company. Through the bank holding company
structure, it is possible to expand the size and scope of the financial
services offered by the Company beyond those offered by the Bank. The bank
holding company structure provides the Company with greater flexibility than
the Bank would have to diversify its business activities, through existing or
newly formed subsidiaries, or through acquisitions or mergers of other
financial institutions as well as other companies. At June 30, 1998, Bancorp's
consolidated assets were $795 million, consolidated loans were $655 million,
consolidated deposits were $553 million and consolidated stockholders' equity
was $67 million. The assets of the Company consist of the stock of Great
Southern, the stock of other financial services companies (less than 5% of
each), interest in a local trust company and cash.
Through subsidiaries of the Bank, the Company offers insurance, appraisal,
travel, discount brokerage and related services, which are discussed further
below. The activities of the Company are funded by retained earnings and
through dividends from Great Southern and borrowings from third parties.
Activities of the Company may also be funded through sales of additional
securities or through income generated by other activities of the Company. At
this time, there are no plans regarding such activities.
The executive offices of the Company are located at 1451 East Battlefield,
Springfield, Missouri 65804, and its telephone number at that address is (417)
887-4400.
Great Southern Bank
Great Southern was incorporated as a Missouri-chartered mutual savings
and loan association in 1923, and in 1989 was converted to a Missouri-
chartered stock savings and loan association. In 1994, Great Southern changed
to a charter as a federal savings bank and then on June 30, 1998, changed to a
Missouri-chartered trust company (the equivalent of a commercial bank
charter). Headquartered in Springfield, Missouri, Great Southern offers a
broad range of banking services through its 27 branches located in
southwestern and central Missouri. At June 30, 1998, the Bank had total
assets of $790 million, deposits of $557 million and stockholders' equity of
$59 million, or 7.5% of total assets. Its deposits are insured by the Savings
Association Insurance Fund ("SAIF") to the maximum levels permitted by the
Federal Deposit Insurance Corporation ("FDIC").
<PAGE> 4
Great Southern is principally engaged in the business of originating
residential and commercial real estate loans, commercial business and consumer
loans and funding these loans through attracting deposits from the general
public, originating brokered deposits and borrowing from the Federal Home Loan
Bank (the "FHLBank") and others.
For many years, Great Southern has followed a strategy of emphasizing
quality loan origination through residential, commercial and consumer lending
activities in its local market area. The goal of this strategy has been to
maintain its position as one of the leading providers of financial services in
its market area, while simultaneously diversifying assets and reducing interest
rate risk by originating and holding adjustable-rate loans in its portfolio and
selling fixed-rate loans in the secondary market. The Bank continues to place
primary emphasis on residential mortgage and other real estate lending while
also expanding and increasing its originations of commercial business and
consumer loans.
The main office of the Bank is located at 1451 East Battlefield,
Springfield, Missouri 65804 and its telephone number at that address is (417)
887-4400.
Forward-Looking Statements
When used in this Form 10-K and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases
or other public or shareholder communications, and in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result" "are expected to," "will continue," "is anticipated,"
"estimate," "project" or similar expressions are intended to identify "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such statements are subject to certain risks and
uncertainties, including, among other things, changes in economic conditions in
the Company's market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in the Company's market area
and competition, that could cause actual results to differ materially from
historical earnings and those presently anticipated or projected. The Company
wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results
for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements.
The Company does not undertake-and specifically declines any obligation-
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Primary Market Area
Great Southern's primary market area encompasses 15 counties in
southwestern and central Missouri. The Bank's branches and ATMs support
deposit and lending activities throughout the region, serving such diversified
markets as Springfield, Joplin, the resort areas of Branson and Lake of the
Ozarks, and various smaller communities in the Bank's market area. The
management of the Bank believes that its share of the savings and lending
markets in its market area is less than 10% and their affiliates an even
smaller percent, with the exception of the travel agency, which may have a
larger percent.
<PAGE> 5
Great Southern's largest concentration of loans and deposits is in the
Greater Springfield area. With a population of approximately 306,000, the
Greater Springfield area is the third largest metropolitan area in Missouri.
Employment in this area is diversified, including small and medium-sized
manufacturing concerns, service industries, especially in the resort and
leisure activities sectors, agriculture, the federal government, and a major
state university. Springfield is also a regional health care center. The
unemployment rate in this area is, and has consistently been, below the
national average.
The next largest concentration of loans is in the Branson area which is
located approximately 35 miles south of Springfield and is one of the fastest
growing areas in Missouri. The region is a vacation and entertainment center
attracting an estimated 6 million tourists annually to its theme parks,
resorts, country music shows and other recreational facilities. As a result of
the rapid growth of the Branson area, property values increased at unusually
high rates in the early 1990s. This has also provided for increased loan
demand and a more volatile lending market than has previously been present in
the Branson area. Property values have experienced downward pressure during
the past few years, partly as a result of this rapid increase.
A significant portion of the Bank's loan originations have been secured by
properties in the Branson area. Approximately $124 million, or 20%, of the
total loan portfolio at June 30, 1998 was secured by properties in this area.
Of this amount, $61 million are loans secured by commercial real estate,
commercial construction and other residential properties and $63 million are
loans secured by one- to four-family residential properties, one- to four-
family construction properties and consumer loans. See "- Commercial Real
Estate and Construction Lending", "- Commercial Business Lending", "-
Classified Assets" and "- Loan Delinquencies and Defaults".
Lending Activities-General
From its beginnings in 1923 through the early 1980s, Great Southern
primarily made long-term, fixed-rate residential real estate loans that it
retained in its loan portfolio. Beginning in the early 1980's, Great Southern
increased its efforts to originate short-term and adjustable-rate loans.
Substantially all of the adjustable-rate mortgage loans originated by Great
Southern are held for its own portfolio and substantially all of the long-term
fixed-rate residential mortgage loans originated by Great Southern are sold
immediately in the secondary market.
Beginning in the mid-1990s, Great Southern increased its efforts to
originate commercial real estate and other residential loans, primarily with
adjustable rates or shorter-term fixed rates. During the past 18 months,
changes in competitor banking organizations provided Great Southern expanded
opportunity in these areas as well as in the origination of commercial business
and consumer loans, primarily the indirect automobile area. In addition to
direct origination of these loans, the Bank has expanded and enlarged its
relationships with smaller banks to purchase participations (at par, with no
servicing costs) in loans the smaller banks originate but are unable to retain
in their portfolios due to capital limitations. The Bank uses the same
underwriting guidelines in evaluating these participations as it does in its
direct loan originations.
<PAGE> 6
One of the principal historical lending activities of Great Southern is
the origination of fixed and adjustable-rate conventional residential real
estate loans to enable borrowers to purchase or refinance owner-occupied homes.
Great Southern originates a variety of conventional, residential real estate
mortgage loans, principally in compliance with Federal Home Loan Mortgage
Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA")
standards for resale in the secondary market. Great Southern promptly sells
most of the fixed-rate residential mortgage loans that it originates.
Depending on the market conditions, the ongoing servicing of these loans is at
times retained by Great Southern and at other times released to the purchaser
of the loan. Great Southern retains substantially all of the adjustable-rate
mortgage loans in its portfolio.
Another principal lending activity of Great Southern, which has become
more prevalent in recent years, is the origination of commercial real estate
and construction loans. Since the early 1990s, this area of lending has been
an increasing percentage of the loan portfolio and currently accounts for
approximately 42% of the portfolio.
In addition, Great Southern in recent years has increased the emphasis on
the origination of commercial business loans, home equity loans, consumer loans
and student loans and is also an issuer of letters of credit. See "--
Commercial Business Lending," "- Classified Assets," and "- Loan Delinquencies
and Defaults" below and Note 12 of Notes to Consolidated Financial Statements
in the Annual Report to Stockholders, which portions are incorporated herein by
reference. Letters of credit are contingent obligations and are not included
in the Bank's loan portfolio.
Great Southern has a policy of obtaining collateral for substantially all real
estate loans. The percentage of collateral value Great Southern will loan on
real estate and other property varies based on factors including, but not
limited to, the type of property and its location and the borrower's credit
history. As a general rule, Great Southern will loan up to 80% of the
appraised value on one- to four-family residential property and will loan up to
an additional 15% with private mortgage insurance for the loan amount above the
80% level. For commercial real estate and other residential real property
loans, Great Southern generally loans up to a maximum of 75% of the appraised
value. The origination of loans secured by other property are considered and
determined on an individual basis by management with the assistance of any
industry guides and other information which may be available.
Loan applications are approved at various levels of authority, depending
on the type, amount and loan-to-value ratio of the loan. Loan commitments of
more than $100,000 ($203,450 in the case of fixed-rate one-to four-family
residential loans for resale) must be approved by Great Southern's loan
committee. The loan committee is comprised of the CEO of the Bank, as chairman
of the committee, and other senior officers of the Bank involved in lending
activities.
Although Great Southern is permitted under applicable regulations to
originate or purchase loans and loan participations secured by real estate
located in any part of the United States, the Bank has concentrated its lending
efforts in Missouri and Northern Arkansas, with the largest concentration of
its lending activity being in southwestern and central Missouri.
<PAGE> 7
Loan Portfolio Composition
The following table sets forth information concerning the composition of
the Bank's loan portfolio in dollar amounts and in percentages (before
deductions for loans in process, deferred fees and discounts and allowance for
loan losses) as of the dates indicated. The table is based on information
prepared in accordance with generally accepted accounting principles and is
qualified by reference to financial statements and the notes thereto.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- --------------- --------------- --------------- ---------------
Amount % Amount % Amount % Amount % Amount %
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
Residential
One- to four- family $219,242 31.2% $244,767 39.5% $249,348 42.5% $243,771 43.5% $203,157 40.9%
Other Residential 89,141 12.7 95,886 15.4 81,191 13.8 77,744 13.9 65,906 13.2
Commercial 244,017 34.7 191,556 30.8 172,478 29.4 133,244 23.8 105,977 21.3
Residential Construction:
One- to four-family 16,032 2.3 9,529 1.5 13,455 2.3 13,319 2.4 18,338 3.7
Other residential 5,993 .8 4,243 .7 13,533 2.3 23,804 4.2 37,588 7.6
Commercial construction 27,156 3.9 21,932 3.5 16,518 2.8 27,273 4.9 30,894 6.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans 601,581 85.6 567,913 91.4 546,523 93.1 519,155 92.7 461,860 92.9
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Other Loans:
Consumer loans:
Guaranteed student loans 12,736 1.8 11,592 1.9 11,256 1.9 11,822 2.1 9,445 1.9
Automobile 23,120 3.3 6,006 .9 6,062 1.1 5,651 1.0 4,814 1.0
Home equity and improvement 5,849 .8 4,183 .7 3,688 0.6 3,518 0.6 2,618 0.5
Other 4,862 .7 5,885 .9 5,921 1.0 5,272 1.0 4,513 0.9
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total Consumer loans 46,567 6.6 27,666 4.4 26,927 4.6 26,263 4.7 21,390 4.3
Commercial business loans 54,722 7.8 25,959 4.2 13,737 2.3 14,515 2.6 13,907 2.8
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total other loans 101,290 14.4 53,625 8.6 40,664 6.9 40,778 7.3 35,297 7.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans 702,870 100.0% 621,538 100.0% 587,187 100.0% 559,933 100.0% 497,157 100.0%
===== ===== ===== ===== =====
Less:
Loans in process 28,497 18,812 22,383 22,316 35,739
Deferred fees and discounts 2,774 3,493 3,689 3,761 4,032
Allowance for loan losses 16,373 15,524 14,356 14,601 13,636
------- ------- ------- ------- -------
Total loans receivable, net $655,226 $583,709 $546,759 $519,255 $443,750
======= ======= ======= ======= =======
</TABLE>
<PAGE> 8
The following table shows the fixed- and adjustable-rate composition of
the Bank's loan portfolio at the dates indicated. The table is based on
information prepared in accordance with generally accepted accounting
principles.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------- --------------- --------------- --------------- ---------------
Amount % Amount % Amount % Amount % Amount %
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real Estate Loans
Residential
One- to four- family $ 12,799 1.8% $ 12,305 2.0% $ 13,212 2.2% $ 14,260 2.5% $ 15,488 3.1%
Other Residential 34,757 5.0 34,467 5.6 34,413 5.9 32,515 5.8 30,250 6.1
Commercial 28,004 4.0 5,865 .9 25,374 4.3 12,774 2.3 14,438 2.9
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans 75,560 10.8 52,637 8.5 72,999 12.4 59,549 10.6 60,176 12.1
Consumer loans 27,319 3.9 10,769 1.7 12,844 2.2 11,706 2.1 9,282 1.8
Commercial business loans 1,645 .2 502 .1 415 0.1 994 0.2 864 0.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total fixed-rate loans 104,524 14.9 63,908 10.3 86,258 14.7 72,249 12.9 70,322 14.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Adjustable-Rate Loans:
Real Estate Loans
Residential
One- to four- family 206,443 29.4 232,462 37.4 236,136 40.2 229,510 41.0 187,670 37.7
Other Residential 54,384 7.7 61,419 9.9 46,778 8.0 45,228 8.1 37,675 7.6
Commercial 216,013 30.7 185,691 29.9 147,104 25.0 120,470 21.5 91,689 18.4
Residential construction:
One- to four-family 16,032 2.3 9,529 1.5 13,455 2.3 13,319 2.4 18,338 3.7
Other residential 5,993 .9 4,243 .7 13,533 2.3 23,804 4.2 35,568 7.2
Commercial construction 27,156 3.9 21,932 3.5 16,518 2.8 27,273 4.9 30,744 6.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans 526,021 74.9 515,276 82.9 473,524 80.6 459,604 82.1 401,684 80.8
Consumer loans 19,248 2.7 16,897 2.7 14,083 2.4 14,559 2.6 12,108 2.5
Commercial business loans 53,077 7.5 25,457 4.1 13,322 2.3 13,521 2.4 13,043 2.6
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Total adjustable-rate loans 598,346 85.1 557,630 89.7 500,929 85.3 487,684 87.1 426,835 85.9
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans 702,870 100.0% 621,538 100.0% 587,187 100.0% 559,933 100.0% 497,157 100.0%
===== ===== ===== ===== =====
Less:
Loans in process 28,497 18,812 22,383 22,316 35,739
Deferred fees and discounts 2,774 3,493 3,689 3,761 4,032
Allowance for loan losses 16,373 15,524 14,356 14,601 13,636
------- ------- ------- ------- -------
Total loans receivable, net $655,226 $583,709 $546,759 $519,255 $443,750
======= ======= ======= ======= =======
</TABLE>
<PAGE> 9
The following schedule illustrates the contractual maturities of the
Bank's loan portfolio at June 30, 1997. Loans which have adjustable interest
rates are shown as maturing in the period during which the loan is
contractually due. This schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses. The table is based on
information prepared in accordance with generally accepted accounting
principles.
<TABLE>
<CAPTION>
Other Residential
One- to Four-Family and Other Commercial and
Residential Real Residential Commercial One- to Four-Family
Estate Loans Construction Construction Construction
-------------------- ------------------- ------------------ --------------------
Due During Weighted Weighted Weighted Weighted
Years Ended Average Average Average Average
June 30, Amount Rate Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999(1) $ 6,877 8.28% $ 14,638 8.72% $ 47,765 9.37% $16,032 9.38%
2000 6,818 8.38 19,960 9.03 61,301 9.39 -- 0.00
2001 8,405 8.28 10,474 8.85 49,364 9.32 -- 0.00
2002 and 2003 13,755 8.15 19,684 8.66 59,188 9.33 -- 0.00
2004 to 2008 36,700 8.10 14,215 9.20 22,305 9.49 -- 0.00
2009 to 2013 40,186 8.08 14,486 9.03 31,250 9.41 -- 0.00
2014 to 2024 40,672 8.02 1,355 8.24 -- 0.00 -- 0.00
2025 and following 65,829 8.01 322 8.24 -- 0.00 -- 0.00
------- ------- ------- ------
$219,242 $ 95,134 $271,173 $ 16,032
======= ======= ======= ======
Commercial
Consumer Business Total (2)
-------------------- ---------------------- --------------------
Due During Weighted Weighted Weighted
Years Ended Average Average Average
June 30, Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
1999 (1) $ 9,571 10.56% $ 4,838 8.85% $ 99,721 9.29%
2000 1,722 10.76 10,235 8.85 106,221 9.31
2001 19,043 8.66 12,191 8.84 99,477 9.00
2002 and 2003 6,758 10.40 3,312 8.83 102,697 9.10
2004 to 2008 3,100 10.27 4,310 8.78 80,630 8.80
2009 to 2013 184 9.59 19,688 8.84 105,794 8.75
2014 to 2024 -- 0.00 114 8.84 42,141 8.03
2025 and following 4 7.00 35 8.84 66,190 8.01
------ ------ -------
$46,567 $54,723 $702,871
====== ====== =======
- ----------------------
<FN>
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
(2) Of the $603 million of loans due after June 30, 1999, $87 million, or
14%, have fixed rates of interest and $516 million, or 86%, have adjustable
rates of interest.
</TABLE>
Lending Activities - Environmental Issues
Loans secured with real property, whether commercial, residential or
other, may have a material, negative effect on the financial position and
results of operations of the lender if the collateral is environmentally
contaminated. The result can be, but is not necessarily limited to, liability
for the cost of cleaning up the contamination imposed on the lender by certain
federal and state laws, a reduction in the borrower's ability to pay because of
the liability imposed upon it for any clean up costs, a reduction in the value
of the collateral because of the presence of contamination or a subordination
of security interests in the collateral to a super priority lien securing the
clean up costs by certain state laws.
<PAGE> 10
Management of the Bank is aware of the risk that the Bank may be
negatively affected by environmentally contaminated collateral and attempts to
control such risk through commercially reasonable methods, consistent with
guidelines arising from applicable government or regulatory rules and
regulations, and to a more limited extent publications of the lending industry.
Management currently is unaware (without, in many circumstances specific
inquiry or investigation of existing collateral, some of which was accepted as
collateral before risk controlling measures were implemented) of any
environmental contamination of real property securing loans in the Bank's
portfolio that would subject the Bank to any material risk. No assurance can
be made, however, that the Bank will not be adversely affected by environmental
contamination.
Lending Activities - Residential Real Estate Lending
At June 30, 1998 and 1997, loans secured by residential real estate
totaled $308 million and $341 million, respectively, and represented
approximately 43.9% and 54.9%, respectively, of the Bank's total loan
portfolio. Compared to historical rate levels, fixed rates were low and on the
decline during fiscal year 1998. This caused a higher than normal level of
refinancing of adjustable-rate loans into fixed-rate loans during the year, and
accounted for the decline in the Bank's residential real estate loan portfolio.
The Bank currently is originating adjustable-rate residential mortgage
loans primarily with one-year adjustment periods. Rate adjustments are based
upon changes in prevailing rates for one-year U.S. Treasury securities, and are
generally limited to 2% maximum annual adjustments as well as a maximum
aggregate adjustment over the life of the loan. Accordingly, the interest
rates on these loans typically may not be as rate sensitive as is the Bank's
cost of funds. Generally, the Bank's adjustable-rate mortgage loans are not
convertible into fixed-rate loans, do not permit negative amortization of
principal and carry no prepayment penalty.
The Bank's portfolio of adjustable-rate mortgage loans also includes a
number of loans with different adjustment periods, without limitations on
periodic rate increases and rate increases over the life of the loans or which
are tied to other short-term market indices. These loans were originated prior
to the industry standardization of adjustable-rate loans. Since adjustable-
rate mortgage loans have not been subject to an interest rate environment which
causes them to adjust to the maximum, such loans entail unquantifiable risks
resulting from potential increased payment obligations on the borrower as a
result of upward repricing. Further, the adjustable-rate mortgages offered by
Great Southern, as well as by many other financial institutions, sometimes
provide for initial rates of interest below the rates which would prevail were
the index used for pricing applied initially. Compared to fixed-rate mortgage
loans, these loans are subject to increased risk of delinquency or default as
the higher, fully-indexed rate of interest subsequently comes into effect in
replacement of the lower initial rate. The Bank has not experienced an
increase in delinquencies in adjustable-rate mortgage loans due to a relatively
low interest rate environment in recent years.
In underwriting one- to four-family residential real estate loans, Great
Southern evaluates both the borrower's ability to make monthly payments and the
value of the property securing the loan. It is the policy of Great Southern
that all loans in excess of 80% of the appraised value of the property be
insured by a private mortgage insurance company approved by Great Southern for
the amount of the loan in excess of 80% of the appraised value. In addition,
Great Southern requires borrowers to obtain title and fire and casualty
insurance in an amount not less than the amount of the loan. Real estate loans
originated by the Bank generally contain a "due on sale" clause allowing the
Bank to declare the unpaid principal balance due and payable upon the sale of
the property securing the loan. In the case of fixed-rate loans, the Bank
generally enforces these due on sale clauses to the extent permitted by law.
<PAGE> 11
Lending Activities-Commercial Real Estate and Construction Lending
Commercial real estate lending has traditionally been a part of Great
Southern's business activities. Beginning in fiscal 1986, Great Southern
expanded its commercial real estate lending in order to increase the yield on,
and the proportion of interest rate sensitive loans in, its portfolio.
Starting early in fiscal 1988, Great Southern reduced its originations of
commercial real estate loans due to the lower spreads available at that time
and the Bank's increased levels of problem loans in this area. In addition,
the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") further limited the Bank's commercial real estate lending, due to
limits imposed on the amounts and types of loans the Bank would be permitted to
originate. See "Regulation". Starting in fiscal 1992, Great Southern
increased its origination of commercial real estate and commercial business
loans and has accelerated the rate of increase in recent years.
Great Southern expects to continue to maintain or increase the current
percentage of commercial real estate loans in its total loan portfolio by
originating loans secured by commercial real estate, subject to commercial real
estate and other market conditions and to applicable regulatory restrictions.
See "Regulation" below.
At June 30, 1998 and 1997, loans secured by commercial real estate totaled
$244 million and $192 million, respectively, or approximately 34.7% and 30.8%,
respectively, of the Bank's total loan portfolio. At June 30, 1998 and 1997,
construction loans secured by projects under construction and the land on which
the projects are located aggregated $49 million and $36 million, respectively,
or 7.0% and 5.7%, respectively, of the Bank's total loan portfolio. The
majority of the Bank's commercial real estate loans have been originated with
adjustable rates of interest, the majority of which are tied to the Bank's
prime rate. At the date of origination, the amounts of the loan commitments
with respect to substantially all of these loans did not exceed between 75% and
80% of the appraised value of the properties securing the loans.
The Bank's construction loans generally have terms of one year or less.
The construction loan agreements for one- to four-family and other residential
projects generally provide that principal payments are required as individual
condominium units or single-family houses are built and sold to a third party.
This insures the remaining loan balance as a proportion to the value of the
remaining security does not increase. Loan proceeds are disbursed in
increments as construction progresses. Generally, the amount of each
disbursement is based on the construction cost estimate of an independent
architect, engineer or qualified fee inspector who inspects the project in
connection with each disbursement request. Normally, Great Southern's
construction loans are made either as the initial stage of a combination loan
(i.e., with a commitment from the Bank to provide permanent financing upon
completion of the project) or with a commitment from a third party to provide
permanent financing.
The Bank's commercial real estate and construction loans generally involve
larger principal balances than do its residential loans. Current law subjects
state chartered banks to the same loans-to-one borrower restrictions that are
applicable to national banks with limited provisions for exceptions. In
general, the national bank standard restricts loans to a single borrower to no
more than 15% of a bank's unimpaired capital and unimpaired surplus, plus an
additional 10% if the loan is collateralized by certain readily marketable
collateral. (Real estate is not included in the definition of "readily
marketable collateral.") As computed on the basis of the Bank's unimpaired
capital and surplus at June 30, 1998, this limit was approximately $11.4
million. See "Regulation". At June 30, 1998 the Bank was in compliance with
the loans to one borrower limit.
<PAGE> 12
The table below sets forth, by type of security property, the number and
amount of Great Southern's commercial real estate and construction loans at
June 30, 1998. The amounts shown do not reflect allowances for losses. See "-
Classified Assets" and "- Loan Delinquencies and Defaults" for a discussion of
the Bank's largest non-performing assets and items of concern. The table is
based on information prepared in accordance with generally accepted accounting
principles.
<TABLE>
<CAPTION>
Number Original Outstanding Amount
of Loan Principal Undisbursed Non-
Loans Commitment Balance Amount Performing
----- ---------- ----------- ------------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial Real Estate Loans
Hotels/Motels 53 $ 69,038 $ 57,746 $ 163 $ 746
Commercial land development 135 50,442 31,481 516 --
Shopping centers 87 35,023 31,065 535 155
Medical and long term care 43 31,043 29,396 509 --
Office buildings 59 30,929 27,029 1,508 --
Golf courses and recreational 38 29,232 25,600 476 786
Industrial real estate 55 20,577 17,860 91 --
Restaurants 35 17,597 15,935 -- --
Universities and churches 19 6,055 4,607 10 --
Other 49 5,746 3,298 2,265 --
--- ------- ------- ----- -----
Total commercial real estate loans 573 295,682 244,017 6,073 1,687
--- ------- ------- ----- -----
Construction Loans
One- to four-family residential 152 16,298 9,679 6,353 91
Other residential 3 5,993 2,742 3,251 --
Commercial real estate:
Golf courses and recreational 2 6,149 2,679 3,471 --
Universities and churches 2 5,473 2,355 3,118 --
Office buildings 5 4,203 2,825 1,378 --
Commercial land development 9 3,405 2,829 839 --
Medical and long term care 1 3,153 3,069 84 --
Hotels/Motels 1 2,500 635 1,865 --
Other 4 2,010 1,583 426 --
--- ------- ------- ------ -----
Total construction loans 179 49,184 28,396 20,785 91
--- ------- ------- ------ -----
Total 752 $344,866 $272,413 $26,858 $1,778
=== ======= ======= ====== =====
</TABLE>
Commercial real estate and construction lending generally affords the Bank
an opportunity to receive interest at rates higher than those obtainable from
residential lending and to receive higher origination and other loan fees. In
addition, commercial real estate and construction loans are generally made with
adjustable rates of interest or, if made on a fixed-rate basis, for relatively
short terms. Nevertheless, commercial real estate lending entails significant
additional risks as compared with residential mortgage lending. Commercial
real estate loans typically involve large loan balances to single borrowers or
groups of related borrowers but generally involve lower loan-to-value ratios.
In addition, the payment experience on loans secured by commercial properties
is typically dependent on the successful operation of the related real estate
project and thus may be subject, to a greater extent, to adverse conditions in
the real estate market or in the economy generally.
Construction loans also involve additional risks attributable to the fact
that loan funds are advanced upon the security of the project under
construction, which is of uncertain value prior to the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, delays arising from labor problems, material shortages, and
other unpredictable contingencies, it is relatively difficult to evaluate
accurately the total loan funds required to complete a project, and the related
loan-to-value ratios. See also the discussion under the headings "- Classified
Assets" and "- Loan Delinquencies and Defaults" below.
<PAGE> 13
Lending Activities - Commercial Business Lending
At June 30, 1998 and 1997, respectively, Great Southern had $54.7 million
and $26.0 million in commercial business loans outstanding, or 7.8% and 4.2%,
respectively, of the Bank's total loan portfolio. Great Southern's commercial
business lending activities encompass loans with a variety of purposes and
security, including loans to finance accounts receivable, inventory and
equipment.
Great Southern expects to continue to maintain or increase the current
percentage of commercial business loans in its total loan portfolio by
originating loans, subject to market conditions and to applicable regulatory
restrictions. See "Supervision and Regulation" below.
The following table sets forth information regarding the number and amount
of the Bank's commercial business loans as of June 30, 1998. The amounts shown
do not reflect allowances for losses. See "- Classified Assets" and "- Loan
Delinquencies and Defaults." The table is based on information prepared in
accordance with generally accepted accounting principles.
<TABLE>
<CAPTION>
Outstanding Amount
Number Principal Non-
of Loans Balance Performing
-------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Secured Loans:
Accounts receivable, floor plans, inventory and equipment 165 $29,771 $ 40
Stocks and bonds 31 15,733 --
Deposit accounts and promissory notes 40 5,948 --
Other 23 1,626 40
--- ------ ---
Total secured loans 259 53,078 80
Unsecured Loans 57 1,645 --
--- ------ ---
Total Commercial Business Loans 316 $54,723 $ 80
=== ====== ===
</TABLE>
Unlike residential mortgage loans, which generally are made on the basis
of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be
more easily ascertainable, commercial business loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment
from the cash flow of the borrower's business. Commercial business loans are
generally secured by business assets, such as accounts receivable, equipment
and inventory. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself. Further, the collateral securing the loans may depreciate
over time, may be difficult to appraise and may fluctuate in value based on the
success of the business.
The Bank's management recognizes the generally increased risks associated
with commercial business lending. Great Southern's commercial business lending
policy emphasizes complete credit file documentation and analysis of the
borrower's character, capacity to repay the loan, the adequacy of the
borrower's capital and collateral as well as an evaluation of the industry
conditions affecting the borrower. Analysis of the borrower's past, present
and future cash flows is also an important aspect of Great Southern's credit
analysis. The majority of Great Southern's commercial business loans have been
to borrowers in southwestern and central Missouri. Great Southern intends to
continue its commercial business lending in this geographic area.
<PAGE> 14
As part of its commercial business lending activities, Great Southern
issues letters of credit and receives fees averaging approximately 1% of the
amount of the letter of credit per year. At June 30, 1998, Great Southern had
60 letters of credit outstanding in the aggregate amount of $10.4 million.
Approximately 96% of the aggregate amount of these letters of credit were
secured, including one $8.2 million letter of credit, secured by real estate,
which was issued to enhance the issuance of housing revenue refunding bonds.
Lending Activities - Consumer Lending
Great Southern management views consumer lending as an important component
of its business strategy. Specifically, consumer loans generally have short
terms to maturity, adjustable rates or both, thus reducing Great Southern's
exposure to changes in interest rates, and carry higher rates of interest than
do residential mortgage loans. In addition, Great Southern believes that the
offering of consumer loan products helps to expand and create stronger ties to
its existing customer base.
Great Southern offers a variety of secured consumer loans, including
automobile loans, home equity loans and loans secured by savings deposits. In
addition, Great Southern also offers home improvement loans, guaranteed student
loans and unsecured consumer loans. Consumer loans totaled $46.6 million and
$27.7 million at June 30, 1998 and 1997, respectively, or 6.6% and 4.4%,
respectively, of the Bank's total loan portfolio.
The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is of primary consideration,
the underwriting process also includes a comparison of the value of the
security, if any, in relation to the proposed loan amount.
Beginning in fiscal 1998, the Bank implemented indirect lending
relationships, primarily with automobile dealerships. Through these dealer
relationships, the dealer completes the application with the consumer and then
submits it to the Bank for credit approval. While automobile dealers have been
the Bank's initial concentrated effort, the program is available for use with
most tangible products where financing of the product is provided through the
seller.
Student loans are underwritten in compliance with the regulations of the
US Department of Education for the Federal Family Education Loan Programs
("FFELP"). The FFELP loans are administered and guaranteed by the Missouri
Coordinating Board for Higher Education as long as the Bank complies with the
regulations. The Bank has contracted with the Missouri Higher Education Loan
Authority (the "MOHELA") to originate and service these loans and to purchase
these loans during the grace period immediately prior to the loans beginning
their repayment period. This repayment period is generally at the time the
student graduates or does not maintain the required hours of enrollment.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial strength, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state consumer bankruptcy
and insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by a consumer loan
borrower against an assignee of such loan such as the Bank, and a borrower may
be able to assert against such assignee claims and defenses which it has
against the seller of the underlying collateral.
<PAGE> 15
Originations, Purchases, Sales and Servicing of Loans
The Bank originates loans through internal loan production personnel
located in the Bank's main bank and branch offices. Walk-in customers and
referrals from real estate brokers and builders are also important sources of
loan originations.
Management does not expect the high growth of originations experienced
during the past five years to continue. However, as long as the lower interest
rate environment continues, there is a higher level of financing and
refinancing expected than would exist in a higher rate environment.
Great Southern also purchases whole real estate loans and participation
interests in real estate loans from the FHLMC as well as private investors,
such as other banks, thrift institutions and life insurance companies. Great
Southern may limit its ability to control its credit risk when it purchases
participations in such loans. The terms of participation agreements vary;
however, generally Great Southern may not have direct access to the borrower or
information about the borrower, and the institution administering the loan may
have some discretion in the administration of performing loans and the
collection of non-performing loans.
Beginning in fiscal 1998, Great Southern increased the number and amount
of commercial real estate and commercial business loan participations. Due to
changes in the financial institutions market locally, there have been several
experienced bank executives start up new banks. These banks do not have the
capital to handle larger commercial credits. Great Southern subjects these
loans to the normal underwriting standards used for originated loans and
rejects any credits that do not meet those guidelines. The originating bank
retains the servicing of these loans.
During the five fiscal years ending June 30, 1998, there were no loan
whole purchases by the Bank. At June 30, 1998 and 1997, approximately $10.6
million, or 1.5% and $11.6 million, or 1.9%, respectively, of the Bank's total
loan portfolio consisted of purchased whole loans.
Great Southern also sells whole real estate loans and participation
interests in real estate loans to the FHLMC as well as private investors, such
as other banks, thrift institutions and life insurance companies. These loans
and loan participations are generally sold without recourse and for cash in
amounts equal to the unpaid principal amount of the loans or loan
participations determined using present value yields to the buyer. The sale
amounts generally produce gains to the Bank and allow a margin for servicing
income on loans when the servicing is retained by the Bank. Loan
participations are generally sold with Great Southern retaining control of the
servicing of the loan.
The Bank sold whole real estate loans and loan participations in aggregate
amounts of $73.7 million, $26.6 million and $36.6 million during the years
ended June 30, 1998, 1997 and 1996, respectively. Sales of whole real estate
loans and participations in real estate loans generally can be beneficial to
the Bank since these sales generally generate income at the time of sale,
produce future servicing income on loans where servicing is retained, provide
funds for additional lending and other investments, and increase liquidity.
Great Southern also sells guaranteed student loans to the MOHELA at the
time the borrower is scheduled to begin making repayments on the loans. Prior
to July 1995, these loans were generally sold with limited recourse and for
cash in amounts equal to the unpaid principal amount of the loans. Beginning
in July 1995, Great Southern re-negotiated its agreement with the MOHELA and
these loans are generally sold with limited recourse and for cash in amounts
equal to the unpaid principal amount of the loans and a transfer fee based on
average borrower indebtedness. The fee is based on a sliding scale with a
higher fee paid for a larger average borrower indebtedness and a lower fee paid
for a smaller average borrower indebtedness.
<PAGE> 16
The Bank sold guaranteed student loans in aggregate amounts of $9.7
million, $7.7 million and $8.6 million during the years ended June 30, 1998,
1997 and 1996, respectively. Sales of guaranteed student loans generally can
be beneficial to the Bank since these sales remove the burdensome servicing
requirements of these types of loans once the borrower begins repayment.
Gains, losses and transfer fees on sales of loans and loan participations
are recognized at the time of the sale. When real estate loans and loan
participations sold have an average contractual interest rate that differs from
the agreed upon yield to the purchaser (less the agreed upon servicing fee),
resulting gains or losses are recognized in an amount equal to the present
value of the differential over the estimated remaining life of the loans. Any
resulting discount or premium is accreted or amortized over the same estimated
life using a method approximating the level yield interest method. When real
estate loans and loan participations are sold with servicing released, as the
Bank primarily did beginning in fiscal 1996, an additional fee is received for
the servicing rights. Net gains and transfer fees on sales of loans for the
years ended June 30, 1998, 1997 and 1996 were $1,120,000 $530,000 and $540,000,
respectively. Of these amounts, $120,000, $130,000 and $125,000, respectively,
were gains from the sale of guaranteed student loans and $1,000,000, $400,000
and $415,000, respectively, were gains from the sale of fixed-rate residential
loans.
Prior to fiscal 1996, when whole real estate loans were sold, the Bank
typically retained the responsibility for servicing the loans. The Bank
receives a servicing fee for performing these services. The Bank had the
servicing rights for approximately $60 million, $70 million and $80 million at
June 30, 1998, 1997 and 1996, respectively, of loans owned by others. The
servicing of these loans generated net servicing fees to the Bank for the years
ended June 30, 1998, 1997 and 1996 of $261,000, $272,000 and $316,000,
respectively. When guaranteed student loans are sold, the Bank typically
releases the responsibility for servicing the loans to the MOHELA.
In addition to interest earned on loans and loan origination fees, the
Bank receives fees for loan commitments, letters of credit, prepayments,
modifications, late payments, transfers of loans due to changes of property
ownership and other miscellaneous services. The fees vary from time to time,
generally depending on the supply of funds and other competitive conditions in
the market. Fees from prepayments, commitments, letters of credit and late
payments totaled $502,000, $916,000 and $487,000 for the years ended June 30,
1998, 1997 and 1996, respectively. Loan origination fees, net of related
costs, are accounted for in accordance with Statement of Financial Accounting
Standards No. 91 "Accounting for Nonrefundable Fees and Costs Associated With
Originating or Acquiring Loans and Initial Direct Costs of Leases." Loan fees
and certain direct loan origination costs are deferred, and the net fee or cost
is recognized in interest income using the level-yield method over the
contractual life of the loan. For further discussion of this issue see Note 1
of Notes to Consolidated Financial Statements in the Annual Report to
Stockholders, which portions are incorporated herein by reference.
Allowance for Losses on Loans and Foreclosed Assets
Management periodically reviews Great Southern's allowance for loan losses,
considering numerous factors, including, but not necessarily limited to,
general economic conditions, loan portfolio composition, prior loss experience,
and independent appraisals. Further allowances are established when management
determines that the value of the collateral is less than the amount of the
unpaid principal of the related loan plus estimated costs of the acquisition
and sale or when management determines a borrower of an unsecured loan will be
unable to make full repayment. Allowances for estimated losses on foreclosed
assets (real estate and other assets acquired through foreclosure) are charged
to expense, when in the opinion of management, any significant and permanent
decline in the market value of the underlying collateral reduces the market
value to less than the carrying value of the asset.
<PAGE> 17
The Bank has increased its lending in the Branson area during recent years
primarily due to the substantial growth in the area. While management believes
the loans it has funded have been originated pursuant to sound underwriting
standards, and individually have no unusual credit risk, the short period of
time in which the Branson area has grown, and the lower than expected increase
in tourists visiting the area during recent years, causes some concern as to
the credit risk associated with the Branson area as a whole. Due to this
concern and the overall growth of the loan portfolio, and more specifically the
growth of the commercial business, consumer and commercial real estate loan
portfolios, management provided increased levels of loan loss allowances over
the past few years.
The allowance for losses on loans and foreclosed assets are maintained at
an amount management considers adequate to provide for potential losses.
Although management believes that it uses the best information available to
make such determinations, future adjustments to the allowance for losses on
loans and foreclosed assets may be necessary, and net income could be
significantly affected, if circumstances differ substantially from the
assumptions used in making the initial determinations.
At June 30, 1998 and 1997, Great Southern had an allowance for losses on
loans and foreclosed assets of $16.4 million and $15.8 million, respectively,
of which $3.1 million and $3.4 million, respectively, had been allocated as an
allowance for specific loans, $0 and $319,000, respectively, had been allocated
for foreclosed assets and $1.5 million and $1.6 million, respectively, had been
allocated for impaired loans. The allowances are discussed further in Notes 3
and 4 of the Notes to Consolidated Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Annual Report to Stockholders, which portions are incorporated herein by
reference.
<PAGE> 18
The following table sets forth an analysis of the Bank's allowance for
losses on loans showing the details of the allowance by types of loans and the
allowance balance by loan type. The table is based on information prepared in
accordance with generally accepted accounting principles.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $15,524 $14,356 $14,601 $13,636 $10,590
------ ------ ------ ------ ------
Charge-offs:
One- to four-family residential 45 185 189 13 85
Other residential 67 34 1,072 474 101
Commercial real estate 529 364 509 227 33
Construction 82 14 0 0 0
Consumer 287 70 198 48 33
Commercial business 133 9 25 120 32
------ ------ ------ ------ ------
Total charge-offs 1,143 676 1,993 882 284
------ ------ ------ ------ ------
Recoveries:
One- to four-family residential 22 0 33 0 8
Other residential 1 11 0 0 0
Commercial real estate 68 88 136 442 181
Consumer 10 9 48 22 59
Commercial business 38 30 80 64 57
------ ------ ------ ------ ------
Total recoveries 139 138 297 528 307
------ ------ ------ ------ ------
Net charge-offs (recoveries) 1,004 538 1,696 354 (23)
Provision for losses on loans
(charged to expense) 1,853 1,706 1,451 1,319 3,023
------ ------ ------ ------ ------
Balance at end of period $16,373 $15,524 $14,356 $14,601 $13,636
====== ====== ====== ====== ======
Ratio of net charge-offs to
average loans outstanding .16% 0.09% 0.32% 0.07% (0.01%)
==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
The allowance for losses on loans at the date indicated is summarized as follows. The table is based on
information prepared in accordance with generally accepted accounting principles.
June 30,
-----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------- ---------------- ---------------- ----------------- ----------------
% of % of % of % of % of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family
residential and
construction $ 811 33.5% $ 1,039 41.0% $ 757 44.8% $ 670 45.9% $ 363 44.6%
Other residential
and construction 615 13.5 35 16.1 503 16.1 480 8.1 668 20.8
Commercial real estate
and construction
and commercial
business 11,348 46.4 9,699 38.5 7,875 34.5 7,596 31.3 7,394 30.3
Consumer 743 6.6 502 4.4 488 4.6 546 4.7 414 4.3
Unallocated 2,586 0.0 4,249 0.0 4,733 0.0 5,309 0.0 4,797 0.0
------ ----- ------ ----- ------ ----- ----- ----- ----- -----
Total $16,373 100.0% $15,524 100.0% $14,356 100.0% $14,601 100.0% $13,636 100.0%
====== ===== ====== ===== ====== ===== ===== ===== ===== =====
</TABLE>
<PAGE> 19
Loan Delinquencies and Defaults
When a borrower fails to make a required payment on a loan, the Bank
attempts to cause the delinquency to be cured by contacting the borrower. In
the case of loans secured by residential real estate, a late notice is sent 15
days after the due date. If the delinquency is not cured by the 30th day, a
delinquent notice is sent to the borrower. Additional written contacts are
made with the borrower 45 and 60 days after the due date. If the delinquency
continues for a period of 65 days, the Bank usually institutes appropriate
action to foreclose on the collateral. The actual time it takes to foreclose
on the collateral varies depending on the particular circumstances and the
applicable governing law. If foreclosed, the property is sold at public
auction and may be purchased by the Bank. Delinquent consumer loans are
handled in a generally similar manner, except that initial contacts are made
when the payment is five days past due and appropriate action may be taken to
collect any loan payment that is delinquent for more than 15 days. The Bank's
procedures for repossession and sale of consumer collateral are subject to
various requirements under the applicable consumer protection laws as well as
other applicable laws and the determination by the Bank that it would be
beneficial from a cost basis.
Delinquent commercial business loans and loans secured by commercial real
estate are initially handled by the loan officer in charge of the loan, who is
responsible for contacting the borrower. The President and Senior Lending
Officer also work with the commercial loan officers to see that necessary steps
are taken to collect such delinquent loans. In addition, the Bank has a
Problem Loan Committee which meets at least monthly and reviews all commercial
loans 30 days or more delinquent as well as other loans not 30 days delinquent
which management feels may present possible collection problems. If an
acceptable work out of a delinquent commercial loan cannot be agreed upon, the
Bank may initiate foreclosure on any collateral securing the loan. However, in
all cases, whether a commercial or other loan, the prevailing circumstances may
be such that management may determine it is in the best interest of the Bank
not to foreclose on the collateral.
Delinquent loans at June 30, 1998 were $13.1 million compared to $14.5
million at June 30, 1997. This decrease is mainly attributable to a decrease
in the 60-89 days and the 90 days and over delinquent categories partially
offset by an increase in the 30-59 days category. The decrease in total
delinquencies mainly occurred in the one- to four-family residential real
estate and the other residential real estate partially offset by an increase in
the commercial real estate category. For loans that Great Southern is
servicing, the owners generally prescribe the collection procedures. Great
Southern may act on the owners' behalf in the collection process.
The table below sets forth information concerning delinquent mortgage and
other loans held in the Bank's portfolio at June 30, 1998, as well as
comparative information for June 30, 1997, in dollar amount and as a percentage
of the Bank's total loan portfolio. The amounts presented represent the total
outstanding principal balances of the related loans rather than the actual
payment amounts that are overdue. For related information, see the discussion
under the heading "- Allowance for Losses on Loans and Foreclosed Assets"
above. The table is based on information prepared in accordance with generally
accepted accounting principles.
<PAGE> 20
<TABLE>
<CAPTION>
Loans Delinquent for
---------------------------------------
90 Days Total
30-59 60-89 and Delinquent
Days Days Over Loans
------- ------- ------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One- to four-family
residential real estate:
Number of loans 9 8 15 32
Amount $ 458 $ 689 $ 667 $ 1,814
Percent 0.08% 0.10% 0.09% 0.26%
Other residential:
Number of loans 1 0 6 7
Amount $ 217 $ 0 $4,535 $ 4,752
Percent 0.03% 0.00% 0.65% 0.68%
Commercial real estate:
Number of loans 0 7 4 11
Amount $ 0 $3,266 $1,687 $ 4,953
Percent 0.00% 0.46% 0.24% 0.70%
Construction:
Number of loans 3 1 2 6
Amount $ 301 $ 165 $ 91 $ 557
Percent 0.04% 0.02% 0.02% 0.08%
Consumer:
Number of loans 65 23 21 109
Amount $ 436 $ 109 $ 147 $ 692
Percent 0.06% 0.02% 0.02% 0.10%
Commercial business:
Number of loans 2 4 6 12
Amount $ 145 $ 154 $ 80 $ 379
Percent 0.02% 0.02% 0.01% 0.05%
Total June 30, 1998:
Number of loans 80 43 54 177
Amount $1,557 $4,383 $7,207 $13,147
Percent 0.22% 0.62% 1.03% 1.87%
Total June 30, 1997:
Number of loans 90 40 99 229
Amount $4,938 $1,521 $8,062 $14,521
Percent 0.79% 0.24% 1.30% 2.34%
</TABLE>
<PAGE> 21
Classified Assets
Federal regulations provide for the classification of loans and other
assets such as debt and equity securities considered to be of lesser quality as
"substandard," "doubtful" or "loss" assets. The regulations require insured
institutions to classify their own assets and to establish prudent general
allowances for losses from assets classified "substandard" or "doubtful." For
the portion of assets classified as "loss," an institution is required to
either establish specific allowances of 100% of the amount classified or charge
such amount off its books. Assets that do not currently expose the insured
institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess a potential weakness, are required to be
designated "special mention" by management. In addition, a bank's regulators
may require the establishment of a general allowance for losses based on assets
classified as "substandard" and "doubtful" or based on the general quality of
the asset portfolio of the bank. Following are the total classified assets per
the Bank's internal asset classification list. There were no significant off-
balance sheet items classified at June 30, 1998.
<TABLE>
<CAPTION>
Total Allowance
Asset Category Substandard Doubtful Loss Classified for Losses
----------------------- ----------- -------- ---- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans $15,605 $ 16 $ 57 $15,678 $16,373
Foreclosed assets 4,525 0 0 4,525 --
------ ----- --- ------ ------
Total $20,130 $ 16 $ 57 $20,203 $16,373
====== ===== === ====== ======
</TABLE>
<PAGE> 22
The table below sets forth the amounts and categories of non-performing
assets (classified loans which are not performing under regulatory guidelines
and all foreclosed assets, including assets acquired in settlement of loans) in
the Bank's loan portfolio at the times indicated. Loans are placed on non-
accrual status when the loan becomes 90 days delinquent or when the collection
of principal, interest, or both, otherwise becomes doubtful. For all years
presented, the Bank has not had any (i) accruing loans delinquent more than 90
days or (ii) troubled debt restructurings, which involve forgiving a portion of
interest or principal on any loans or making loans at a rate materially less
than that of market rates. It has been the Bank's practice to sell its
foreclosed assets to new borrowers and originate loans with higher loan-to-
value ratios than those generally required for the Bank's one- to four-family
residential loans. For such loans originated in fiscal 1993 or fiscal 1994,
the Bank adopted a policy of presenting such loans in the non-performing assets
category until sufficient payments of principal and interest are received or
the loan has a 90% loan-to-value ratio. The majority of the loans presented in
this category are performing and the Bank is accounting for the interest on
these loans on the accrual method.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family residential $ 522 $ 2,018 $ 1,195 $ 149 $ 341
Other residential 4,535 3,826 934 -- 200
Commercial real estate 1,687 316 1,407 2,004 4,500
One- to four-family construction 91 655 121 -- --
Consumer 147 219 202 260 195
Commercial business 80 600 744 652 786
Commercial construction -- -- 851 -- --
------ ------ ------ ------ ------
Total non-accruing loans 7,062 7,634 5,454 3,065 6,022
Loans in connection with sales of
foreclosed assets 145 246 453 775 1,321
------ ------ ------ ------ ------
Total non-performing loans 7,207 7,880 5,907 3,840 7,343
------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family residential 400 544 517 695 1,440
Other residential 175 1,150 7,121 3,359 1,709
Commercial real estate 4,176 4,276 3,309 4,878 6,180
------ ------ ------ ------ ------
Total foreclosed assets 4,751 5,970 10,947 8,932 7,620
------ ------ ------ ------ ------
Total non-performing assets $11,958 $13,850 $16,854 $12,772 $14,963
====== ====== ====== ====== ======
Total non-performing assets as a
percentage of average total assets 1.60% 2.07% 2.45% 2.18% 2.83%
==== ==== ==== ==== ====
</TABLE>
Impaired loans totaled $9,485,000 and $10,163,000 at June 30, 1998 and
1997, respectively.
Interest of $1,009,000 and $487,000 was recognized on average impaired
loans of $12,009,000 and $9,362,000 for 1998 and 1997. Interest recognized on
impaired loans on a cash basis during 1998 and 1997 was not materially
different.
<PAGE> 23
The level of non-performing assets are primarily attributable to the
Bank's commercial real estate, other residential, construction and commercial
business lending activities. These activities generally involve significantly
greater credit risks than single-family residential lending. The level of non-
performing assets increased at a rate greater than that of the Bank's
commercial lending portfolio in fiscal 1996, and at a rate less than that of
the Bank's commercial lending portfolio in fiscal 1994, 1995, 1997 and 1998.
For a discussion of the risks associated with these activities, see the
discussions under the heading "- Commercial Real Estate and Construction
Lending" and "- Commercial Business Lending" above.
The Bank encounters certain environmental risks in its lending and related
activities. Under federal and state environmental laws, lenders may become
liable for the costs of cleaning up hazardous materials found on property held
as collateral as well as property acquired at foreclosure on defaulted loans.
This issue is discussed in more detail under the heading "Lending Activities-
Environmental Issues" above.
Investment Activities
The Bank's investment securities portfolio at June 30, 1998 and 1997
contained no securities (tax exempt or of any issuer) with an aggregate book
value in excess of 10% of the Bank's retained earnings, excluding those issued
by the United States Government, or its agencies.
As of June 30, 1998 and 1997, the Bank held approximately $50.4 million
and $49.8 million, respectively, in principal amount of investment securities
which the Bank intends to hold until maturity. As of such dates, these
securities had market values of approximately $50.5 million and $49.9 million,
respectively. In addition, as of June 30, 1998 and 1997, the Company held
approximately $6.4 million and $7.4 million, respectively, in principal amount
of investment securities which the Company classified as available-for-sale.
This issue is discussed further in Notes 1 and 2 of Notes to Consolidated
Financial Statements in the Annual Report to Stockholders, which portions are
incorporated herein by reference.
The amortized cost and approximate fair values of, and gross unrealized
gains and losses on, investment securities at the dates indicated are
summarized as follows. The table is based on information prepared in
accordance with generally accepted accounting principles.
<TABLE>
<CAPTION>
June 30, 1998
--------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
Equity securities $ 4,645 $1,718 $ 0 $ 6,363
====== ===== === =====
HELD-TO-MATURITY SECURITIES:
U.S. Treasury $ 2,103 $ 4 $ 0 $ 2,107
U.S. government agencies 48,260 174 0 48,434
------ ----- --- ------
Total held-to-maturity securities $50,363 $ 178 $ 0 $50,541
====== ===== === ======
- ------------------------------------
<PAGE> 24
June 30, 1997
--------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
Equity securities $ 5,175 $2,233 $ 0 $ 7,408
===== ===== === ======
HELD-TO-MATURITY SECURITIES:
U.S. Treasury $ 7,057 $ 8 $ 4 $ 7,061
U.S. government agencies 42,700 110 12 42,798
------ ----- --- ------
Total held-to-maturity securities $49,757 $ 118 $ 16 $49,859
====== ===== === ======
June 30, 1996
--------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES:
Equity securities $4,498 $259 $102 $ 4,656
===== === === ======
HELD-TO-MATURITY SECURITIES:
U.S. Treasury $ 6,902 $ 7 $ 22 $ 6,887
U.S. government agencies 41,831 159 35 41,955
States and political subdivisions 449 0 0 449
------ --- --- ------
Total held-to-maturity securities $49,182 $166 $ 57 $49,291
====== === === ======
</TABLE>
The following table presents the contractual maturities and weighted
average yields of held-to-maturity securities at June 30, 1998. The table is
based on information prepared in accordance with generally accepted accounting
principles.
Amortized Approximate
Cost Yield Fair Value
------- --------- -----------
(Dollars in thousands)
In one year or less $31,762 6.05% $31,894
After one through five years 18,601 5.75% 18,647
------ ------
Total $50,363 $50,541
====== ======
Sources of Funds
General. Deposit accounts have traditionally been the principal source of
the Bank's funds for use in lending and for other general business purposes.
In addition to deposits, the Bank obtains funds through advances from the
Federal Home Loan Bank of Des Moines, Iowa ("FHLBank"), loan repayments, loan
sales, and cash flows generated from operations. Scheduled loan payments are a
relatively stable source of funds, while deposit inflows and outflows and the
related costs of such funds have varied widely. Borrowings such as FHLBank
advances may be used on a short-term basis to compensate for seasonal
reductions in deposits or deposit inflows at less than projected levels and may
be used on a longer term basis to support expanded lending activities. The
availability of funds from loan sales is influenced by general interest rates
as well as the volume of originations.
<PAGE> 25
Deposits. The Bank attracts both short-term and long-term deposits from
the general public by offering a wide variety of accounts and rates. In recent
years, the Bank has been required by market conditions to rely increasingly on
short-term accounts and other deposit alternatives that are more responsive to
market interest rates than the passbook accounts and regulated fixed-interest-
rate, fixed-term certificates that were the Bank's primary source of deposits
prior to 1978. The Bank offers regular passbook accounts, checking accounts,
various money market accounts, fixed-interest-rate certificates with varying
maturities, certificates of deposit in minimum amounts of $100,000 ("Jumbo"
accounts), brokered certificates and individual retirement accounts. The
composition of the Company's deposits at the end of recent periods is set forth
in Note 6 of Notes to Consolidated Financial Statements included in the Annual
Report to Stockholders, which portions are incorporated herein by reference.
The following table sets forth the dollar amount of deposits, by interest
rate range, in the various types of deposit programs offered by the Company at
the dates indicated. The table is based on information prepared in accordance
with generally accepted accounting principles.
<TABLE>
<CAPTION>
June 30,
-----------------------------------------------------------------
1998 1997 1996
------------------ ------------------- ------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- --------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Time deposits:
0.00% - 3.99% $ 62 .01 $ 724 .16% $ 2,376 0.60%
4.00% - 4.99% 17,476 3.16 14,166 3.08 14,472 3.65
5.00% - 5.99% 257,704 46.57 212,238 46.22 169,905 42.79
6.00% - 6.99% 51,064 9.23 51,540 11.22 32,596 8.21
7.00% - 7.99% 3,711 .67 12,326 2.69 17,123 4.31
8.00% - 10.25% 251 .04 507 .11 646 0.16
------- ------ ------- ------ ------- ------
Total Time deposits 330,268 59.68 291,501 63.48 237,118 59.72
Non-interest-bearing demand deposits 29,375 5.31 14,572 3.17 8,886 2.24
Savings deposits (2.51%-2.51%-2.50%) 34,644 6.26 35,065 7.64 37,010 9.32
Interest-bearing demand
deposits (2.36%-2.41%-2.51%) 155,485 28.10 115,232 25.09 112,224 28.26
Accrued Interest 3,593 .65 2,866 .62 1,817 .46
------- ------ ------- ------ ------- ------
Total Deposits $553,365 100.00% 459,236 100.00% $397,055 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
A table showing rate and maturity information for the Bank's time deposits
as of June 30, 1998 is presented in Note 6 of Notes to Consolidated Financial
Statements in the Annual Report to Stockholders, which portions are
incorporated herein by reference.
<PAGE> 26
The following table sets forth the deposit flows of the Company during the
periods indicated. Net increase refers to the amount of deposits during a
period less the amount of withdrawals during the period. Deposit flows at
banks may also be influenced by external factors such as competitors' pricing,
governmental credit policies and, particularly in recent periods, depositors'
perceptions of the adequacy of federal insurance of accounts. The table is
based on information prepared in accordance with generally accepted accounting
principles.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Opening balance $ 459,236 $ 397,055 $ 384,327
Deposits 2,716,544 2,143,074 1,731,347
Withdrawals 2,637,581 2,092,700 1,730,268
Interest credited 15,166 11,807 11,649
--------- --------- ---------
Ending Balance $ 553,365 $ 459,236 $ 397,055
========= ========= =========
Net increase $94,129 $62,181 $12,728
====== ====== ======
Percent increase 20.5% 15.66% 3.31%
==== ==== ====
</TABLE>
The variety of deposit accounts offered by the Bank has allowed it to be
competitive in obtaining funds and has allowed it to respond with flexibility
to changes in consumer demand. The Bank has become more susceptible to short-
term fluctuations in deposit flows, as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, management believes that its passbook and certificate accounts are
relatively stable sources of deposits, while its checking accounts have proven
to be more volatile. However, the ability of the Bank to attract and maintain
deposits, and the rates paid on these deposits, has been and will continue to
be significantly affected by money market conditions.
<TABLE>
<CAPTION>
The following table sets forth the time remaining until maturity of the Bank's time deposits as of June 30,
1998. The table is based on information prepared in accordance with generally accepted accounting principles.
Maturity
---------------------------------------------------------
Over 30 Over Over
30 Days Days to 6 to 12 12
or Less 6 Months Months Months Total
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Time deposits:
Less than $100,000 $ 27,385 $ 57,477 $41,603 $36,151 $162,616
$100,000 or more 14,455 13,139 12,571 7,035 47,200
Brokered 37,598 47,079 30,925 3,375 118,977
Public funds (1) -- 1,034 441 -- 1,475
------ ------- ------ ------ -------
Total $ 79,438 $118,729 $85,540 $46,561 $330,268
====== ======= ====== ====== =======
<FN>
(1) Deposits from governmental and other public entities.
</TABLE>
<PAGE> 27
Borrowings. Great Southern's other sources of funds include advances from
the FHLBank and, prior to converting to a state trust charter at June 30, 1998,
included collateralized borrowings. As a member of the FHLBank, the Bank is
required to own capital stock in the FHLBank and is authorized to apply for
advances from the FHLBank. FIRREA requires that all long-term FHLBank advances
be for the purpose of financing residential housing. Pursuant to FIRREA, the
Federal Housing Finance Board has promulgated regulations that establish
standards of community investment for FHLBank members to maintain continued
access to long-term advances. Each FHLBank credit program has its own interest
rate, which may be fixed or variable, and range of maturities. The FHLBank may
prescribe the acceptable uses for these advances, as well as other risks on
availability, limitations on the size of the advances and repayment provisions.
The Bank has a $50 million revolving line of credit with the FHLBank which
provides for immediately available funds. At June 30, 1998, $27.2 million of
the revolving line was in use with $22.8 million remaining available. These
funds can be drawn by the Bank for lending or other liquidity needs with some
limitations.
The Bank's borrowings previous to June 30, 1998 also include borrowings
collateralized with whole mortgage loans from the Bank's portfolio and
investment securities from the Bank's held-to-maturity portfolio. These
borrowings are also discussed in Note 8 of "Notes to Consolidated Financial
Statements included in the Annual Report to Stockholders", which portions are
incorporated herein by reference.
The following table sets forth the maximum month-end balances and average
daily balances of FHLBank advances and collateralized borrowings during the
periods indicated. The table is based on information prepared in accordance
with generally accepted accounting principles.
Year Ended June 30,
------------------------------
1998 1997 1996
------------------------------
(Dollars in thousands)
Maximum Balance:
FHLBank advances $211,270 $207,576 $188,450
Collateralized borrowings 41,176 28,744 20,132
Average Balances:
FHLBank advances $161,913 $166,023 $169,468
Collateralized borrowings 32,234 18,894 17,344
The following table sets forth certain information as to the Company's FHLBank
advances and collateralized borrowings at the dates indicated. The table is
based on information prepared in accordance with generally accepted accounting
principles.
June 30,
-------------------------------
1998 1997 1996
-------- ------- --------
(Dollars in thousands)
FHLBank advances $169,563 $151,881 $180,797
Collateralized borrowings -- 28,744 16,468
------- ------- -------
Total borrowings $169,563 $180,625 $197,265
======= ======= =======
Weighted average interest rate
of FHLBank advances 6.00 6.42% 6.06%
==== ==== ====
Weighted average interest rate
of collateralized borrowings n/a 3.24% 2.63%
==== ==== ====
<PAGE> 28
Subsidiaries
Great Southern. As a Missouri-chartered trust company, Great Southern may
invest up to 3% of its assets in service corporations. At June 30, 1998, the
Bank's total investment in Great Southern Financial Corporation ("GSFC") was
$1.1 million. GSFC is incorporated under the laws of the state of Missouri.
This subsidiary is primarily engaged in the following activities:
Appraisal Services. Appraisal Services, Inc., incorporated in 1976, is a
wholly-owned subsidiary of GSFC and performs primarily residential real estate
appraisals for a number of clients, the majority of which is for the Bank and
its loan customers. Appraisal Services, Inc. had net income of $13,000 and a
net loss of $2,000 in fiscal 1998 and 1997, respectively.
General Insurance Agency. Great Southern Insurance, a division of GSFC,
was organized in 1974. It acts as a general property, casualty and life
insurance agency for a number of clients, including the Bank. Great Southern
Insurance had net income of $145,000 and $133,000 in fiscal 1998 and 1997,
respectively.
Travel Agency. Great Southern Travel, a division of GSFC, was organized
in 1976. At June 30, 1998, it was the largest travel agency based in
southwestern Missouri and estimated to be in the top 5% (based on gross
revenue) of travel agencies nation-wide. Great Southern Travel operates from
26 full-time locations, including a facility at the Springfield-Branson
Regional Airport, and additional part-time locations. It engages in personal,
commercial and group travel services. Great Southern Travel had net income of
$122,000 and $46,000 in fiscal 1998 and 1997, respectively.
GSB One, L.L.C. This is a Missouri limited liability company that was
incorporated in March of 1998 and had not become active except for some minor
expense payments for organizing.
GSB Two, L.L.C. This is a Missouri limited liability company that was
incorporated in March of 1998 and had not become active except for some minor
expense payments for organizing.
At June 30, 1998, the Company's total investment in Great Southern Capital
Management ("Capital Management") was $473,000. Capital Management was
incorporated and organized in 1988 under the laws of the state of Missouri.
Capital Management is a registered broker/dealer and a member of the National
Association of Securities Dealers, Inc. ("NASD") and the Securities Investors
Protection Corporation ("SIPC"). Capital Management offers a full line of
financial consultation, investment counseling and discount brokerage services
including execution of transactions involving stocks, bonds, options, mutual
funds and other securities. In addition, Capital Management is registered as a
municipal securities dealer. Capital Management operates through Great
Southern's branch office network. Capital Management had net income of
$279,000 and $243,000 in fiscal 1998 and 1997, respectively.
Competition
Great Southern faces strong competition both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other commercial banks, savings institutions
and mortgage bankers making loans secured by real estate located in the Bank's
market area. Commercial banks and finance companies provide vigorous
competition in consumer lending. The Bank competes for real estate and other
loans principally on the basis of the interest rates and loan fees it charges,
the types of loans it originates and the quality of services it provides to
borrowers. The other lines of business of the Bank including loan servicing
and loan sales, as well as the Bank and Company subsidiaries, face significant
competition in their markets.
<PAGE> 29
The Bank faces substantial competition in attracting deposits from other
commercial banks, savings institutions, money market and mutual funds, credit
unions and other investment vehicles. The Bank attracts a significant amount
of deposits through its branch offices primarily from the communities in which
those branch offices are located; therefore, competition for those deposits is
principally from other commercial banks and savings institutions located in the
same communities. The Bank competes for these deposits by offering a variety
of deposit accounts at competitive rates, convenient business hours, and
convenient branch and ATM locations with inter-branch deposit and withdrawal
privileges at each branch location.
Employees
At June 30, 1998, the Bank and its affiliates had a total of 529
employees, including 246 part-time employees. None of the Bank's employees is
represented by any collective bargaining agreement. Management considers its
employee relations to be good.
Supervision and Regulation
General
On June 30, 1998, the Bank converted from a federal savings bank to a
Missouri-chartered trust company, with the approval of the Missouri Division of
Finance ("MDF") and the FRB. By converting, the Bank was able to expand its
consumer and commercial lending authority.
Bancorp and its subsidiaries are subject to supervision and examination by
applicable federal and state banking agencies. The earnings of the Bank's
subsidiaries, and therefore the earnings of Bancorp, are affected by general
economic conditions, management policies and the legislative and governmental
actions of various regulatory authorities, including the FRB, the Federal
Deposit Insurance Corporation ("FDIC") and the MDF. In addition, there are
numerous governmental requirements and regulations that affect the activities
of the Company and its subsidiaries. The following is a brief summary of
certain aspects of the regulation of the Company and Great Southern and does
not purport to fully discuss such regulation.
Bank Holding Company Regulation
As a result of the conversion, the Company became a bank holding company,
subject to comprehensive regulation by the FRB under the Bank Holding Company
Act of 1956, as amended (the "BHCA"), and the regulations of the FRB. As a
bank holding company, the Company is required to file reports with the FRB and
such additional information as the FRB may require, and is subject to regular
inspections by the FRB. The FRB also has extensive enforcement authority over
bank holding companies, including, among others things, the ability to assess
civil money penalties, to issue cease and desist or removal orders and to
require that a holding company divest subsidiaries (including its bank
subsidiaries). In general, enforcement actions may be initiated for violations
of law and regulation as well as unsafe or unsound practices.
Under FRB policy, a bank holding company must serve as a source of
strength for its subsidiary banks. Under this policy the FRB may require, and
has required in the past, bank holding companies to contribute additional
capital to undercapitalized subsidiary banks. Under the BHCA, a bank holding
company must obtain FRB approval before, among other matters: (i) acquiring,
directly or indirectly, ownership or control of any voting shares of another
bank or bank holding company if, after such acquisition, it would own or
control more than 5% of such shares (unless it already owns or controls the
majority of such shares); (ii) acquiring all or substantially all of the assets
of another bank or bank holding company; or (iii) merging or consolidating with
another bank holding company
<PAGE> 30
The BHCA prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by FRB regulation or order, have been
identified as activities closely related to the business of banking or
managing or controlling banks. The list of activities permitted by the FRB
includes, among other things, operating a savings institution, mortgage
company, finance company, credit card company or factoring company; performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings
Bonds; real estate and personal property appraising; providing tax planning
and preparation services; and providing securities brokerage services for
customers. The scope of permissible activities may be expanded from time to
time by the FRB. Such activities may also be affected by federal legislation.
Interstate Banking and Branching
In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act") was enacted to ease restrictions on interstate
banking. Effective September 29, 1995, the Riegle-Neal Act allows the FRB to
approve an application of an adequately capitalized and adequately managed
bank holding company to acquire control of, or acquire all or substantially
all of the assets of, a bank located in a state other than such holding
company's home state, without regard to whether the transaction is prohibited
by the laws of any state. The FRB may not approve the acquisition of a bank
that has not been in existence for the minimum time period (not exceeding five
years) specified by the statutory law of the host state. The Riegle-Neal Act
also prohibits the FRB from approving an application if the applicant (and its
depository institution affiliates) controls or would control more than 10% of
the insured deposits in the United States or 30% or more of the deposits in
the target bank's home state or in any state in which the target bank
maintains a branch. The Riegle-Neal Act does not affect the authority of
states to limit the percentage of total insured deposits in the state which
may be held or controlled by a bank or bank holding company to the extent such
limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% state-wide concentration
limit contained in the Riegle-Neal Act.
Additionally, the federal banking agencies are authorized to approve
interstate merger transactions without regard to whether such transactions are
prohibited by the law of any state, unless the home state of one of the banks
opted out of the Riegle-Neal Act by adopting a law after the date of enactment
of the Riegle-Neal Act and prior to June 1, 1997 which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving out-
of-state banks. Texas and Montana have opted out. Interstate acquisitions of
branches are permitted only if the law of the state in which the branch is
located permits such acquisitions. Interstate mergers and branch acquisitions
are also subject to the nationwide and statewide insured deposit concentration
amounts described above.
The Riegle-Neal Act authorizes the OCC and the FDIC to approve interstate
branching de novo by national and state banks, respectively, only in states
which specifically allow for such branching. As required by the Riegle-Neal
Act, the OCC, FDIC and FRB have prescribed regulations which prohibit any out-
of-state bank from using the interstate branching authority primarily for the
purpose of deposit production, including guidelines to ensure that interstate
branches operated by an out-of-state bank in a host state reasonably help to
meet the credit needs of the communities which they serve.
<PAGE> 31
Certain Transactions with Affiliates and Other Persons
Transactions involving a bank and its affiliates are subject to sections
23A and 23B of the Federal Reserve Act. Generally, these requirements and
limits restrict certain of these transactions to a percentage of the Bank's
capital and require all such transactions to be on terms at least as favorable
to the Bank as are available in transactions with non-affiliates. In addition,
a bank generally may not lend to any affiliate engaged in activities not
permissible for a bank holding company or acquire shares of an affiliate.
These provisions currently apply to transactions between the Bank and the
Company or the Bank and the Holding Company's non-bank subsidiary. Affiliates
of Great Southern include, without limitation, any company whose management is
under a common controlling influence with the management of the Bank, any
company controlled by controlling stockholders of the Bank, any company with a
majority of interlocking directors with the Bank, and any company sponsored and
advised on a contractual basis by the Bank or any of its affiliates.
Prior to the enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") on August 9, 1989, Great Southern, like many
financial institutions, followed a policy of granting loans to certain of its
officers, directors and employees, generally for the financing of their
personal residences at favorable interest rates. Generally, residential loans
were granted at interest rates 1% above the Bank's cost of funds, subject to
annual adjustments. These loans were made in the ordinary course of business,
on substantially the same terms and collateral as those of comparable
transactions prevailing at the time, and did not involve more than the normal
risk of collectibility or present other unfavorable features. All loans by
Great Southern to its directors and executive officers are subject to FRB
regulations restricting loans and other transactions with affiliated persons of
Great Southern. FIRREA required that all such transactions be on terms and
conditions comparable to those for similar transactions with non-affiliates and
also provided that the Company could have a policy allowing favorable rate
loans to employees as long as it is an employee benefit available to a broad
group of employees within guidelines defined by the policy. The Bank has such
a policy in place that allows for loans to full-time employees with at least
two years of service. The terms are the same as those used prior to FIRREA.
Dividends
The FRB has issued a policy statement on the payment of cash dividends by
bank holding companies, which expresses the FRB's view that a bank holding
company should pay cash dividends only to the extent that its net income for
the past year is sufficient to cover both the cash dividends and a rate of
earning retention that is consistent with the holding company's capital needs,
asset quality and overall financial condition. The FRB also indicated that it
would be inappropriate for a company experiencing serious financial problems
to borrow funds to pay dividends. Furthermore, under the prompt corrective
action regulations adopted by the FRB, the FRB may prohibit a bank holding
company from paying any dividends if the holding company's bank subsidiary is
classified as "undercapitalized."
Bank holding companies are required to give the FRB prior written notice
of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding
12 months, is equal to 10% or more of their consolidated net worth. The FRB
may disapprove such a purchase or redemption if it determines that the
proposal would constitute an unsafe or unsound practice or would violate any
law, regulation, FRB order, or any condition imposed by, or written agreement
with, the FRB. This notification requirement does not apply to any company
that meets the well-capitalized standard for commercial banks, has a safety
and soundness examination rating of at least a "2" and is not subject to any
unresolved supervisory issues. Under Missouri law, the Bank may pay dividends
from certain undivided profits and may not pay dividends if its capital is
impaired.
<PAGE> 32
The Federal banking agencies have adopted capital-related regulations.
Under those regulations, a bank will be well capitalized if it: (i) has a risk-
based capital ratio of 10% or greater; (ii) has a ratio of Tier I capital to
risk-adjusted assets of 6% or greater; (iii) has a ratio of Tier I capital to
adjusted total assets of 5% or greater; and (iv) is not subject to an order,
written agreement, capital directive or prompt corrective action directive to
meet and maintain a specific capital level for any capital measure. A bank
will be adequately capitalized if it is not "well capitalized" and: (i) has a
risk-based capital ratio of 8% or greater; (ii) has a ratio of Tier I capital
to risk-adjusted assets of 4% or greater; and (iii) has a ratio of Tier I
capital to adjusted total assets of 4% or greater (except that certain
associations rated "Composite 1" under the federal banking agencies' CAMEL
rating system may be adequately capitalized if their ratios of core capital to
adjusted total assets are 3% or greater). As of June 30, 1998, the Bank was
"well capitalized."
Banking agencies have recently adopted final regulations that mandate that
regulators take into consideration concentrations of credit risk and risks from
non-traditional activities, as well as an institution's ability to manage those
risks, when determining the adequacy of an institution's capital. This
evaluation will be made as part of the institution's regular safety and
soundness examination. Banking agencies also have recently adopted final
regulations requiring regulators to consider interest rate risk (when the
interest rate sensitivity of an institution's assets does not match the
sensitivity of its liabilities or its off-balance-sheet position) in the
evaluation of a bank's capital adequacy. Concurrently, banking agencies have
proposed a methodology for evaluating interest rate risk. After gaining
experience with the proposed measurement process, these banking agencies intend
to propose further regulations to establish an explicit risk-based capital
charge for interest rate risk.
The FRB has established capital regulations for bank holding companies
that generally parallel the capital regulations for banks. As of June 30,
1998, the Company was "well capitalized."
Insurance of Accounts and Regulation by the FDIC
The FDIC maintains two separate deposit insurance funds: the Bank
Insurance Fund (the "BIF") and the Savings Association Insurance Fund (the
"SAIF"). Great Southern's depositors are insured by the SAIF up to $100,000
per insured account (as defined by law and regulation). This insurance is
backed by the full faith and credit of the United States Government.
As insurer, the FDIC is authorized to conduct examinations of and to
require reporting by SAIF-insured associations. It also may prohibit any FDIC-
insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious threat to the SAIF. The FDIC also has
the authority to take enforcement actions against banks and savings
associations.
Great Southern pays annual assessments for SAIF insurance. Under current
FDIC regulations, the annual SAIF assessment rate is based, in part, on the
degree of risk to the deposit insurance fund that, in the opinion of the FDIC,
is presented by a particular depository institution compared to other
depository institutions. The FDIC uses a matrix having as variables the level
of capitalization of a particular institution and the level of supervision that
its operations require; and the risk-based amendment rates determined in this
fashion range from 0.00% of deposits for the least risky to 0.27% for the most
risky. In establishing the SAIF assessment rate, the FDIC is required to
consider the SAIF's expected operating expenses, case resolution expenditures
and income and the effect of the assessment rate on SAIF members' earnings and
capital. There is no cap on the amount the FDIC may increase the SAIF
assessment rate. The Bank currently has a risk based assessment rate of 0.00%.
In addition, the FDIC is authorized to raise the assessment rates in certain
instances. Any increases in the assessments would negatively impact the
earnings of Great Southern.
<PAGE> 33
The FDIC may terminate the deposit insurance of any insured depository
institution if it determines, after a hearing, that the institution has engaged
or is engaging in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law,
regulation, order or any condition imposed by or an agreement with the FDIC.
It also may suspend deposit insurance temporarily during the hearing process
for the permanent termination of insurance, if the institution has no tangible
capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined
by the FDIC.
The FDIC collects assessments against BIF and SAIF assessable deposits to
be paid to the Financing Coporation (the FICO") to service interest on FICO
debt issued during the 1980's. Beginning January 1997, the FICO assessment
rate was set at .0648% for SAIF insured deposits and .013% on BIF insured
deposits.
The BIF and SAIF are to be merged by 1999, if there are no savings
associations in existence at that time. A merger of the deposit insurance
funds could potentially occur prior to 1999 if certain conditions are met.
The Federal banking regulators are required to take prompt corrective
action if an institution fails to satisfy certain minimum capital requirements.
Under the law, capital requirements include a leverage limit, a risk-based
capital requirement, and a core capital requirement. All institutions,
regardless of their capital levels, will be restricted from making any capital
distribution or paying any management fees that would cause the institution to
fail to satisfy the minimum levels for any of its capital requirements. An
institution that fails to meet the minimum level for any relevant capital
measure (an "undercapitalized institution") will be: (i) subject to increased
monitoring by the appropriate Federal banking regulator; (ii) required to
submit an acceptable capital restoration plan within 45 days; (iii) subject to
asset growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of business. The FDIC has jurisdiction
over the Bank for purposes of prompt corrective action.
Insured depository institutions that are not well-capitalized are
prohibited from accepting brokered deposits unless a waiver has been obtained
from the FDIC; and it limits the rate of interest that institutions receiving
such waivers may pay on brokered
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
reserves against their transaction accounts (primarily NOW and Super NOW
checking accounts) and non-personal time deposits. Reserves of 3% must be
maintained against net transaction accounts of $43.1 million or less (subject
to adjustment by the Federal Reserve Board) and a reserve of 10% (subject to
adjustment by the Federal Reserve Board to a level between 8% and 14%) must be
maintained against the portion of total transaction accounts in excess of such
amount. In addition, a reserve of between 0% to 9% (subject to adjustment by
the Federal Reserve Board) must be maintained on non-personal time deposits.
Under current regulations, this reserve percentage is 0%. The Bank may elect
not to maintain reserves against approximately $4.7 million in accounts subject
to these reserve requirements. At June 30, 1998, the Bank was in compliance
with these reserve requirements.
Banks are authorized to borrow from the Federal Reserve Bank "discount
window," but Federal Reserve Board regulations only allow this borrowing for
short periods of time and generally require banks to exhaust other reasonable
alternative sources of funds where practical, including FHLBank advances,
before borrowing from the Federal Reserve Bank.
<PAGE> 34
Federal Home Loan Bank System
The Bank is a member of the FHLBank of Des Moines, which is one of 12
regional FHLBanks that, prior to the enactment of FIRREA, were regulated by the
FHLBB. FIRREA separated the home financing credit function of the FHLBanks
from the regulation and insurance of accounts for savings associations by
transferring oversight over the FHLBanks to a new federal agency, the Federal
Home Financing Board (FHFB). As part of that separation, the savings
association supervisory and examination function performed by the FHLBanks was
transferred to the OTS.
As a member, Great Southern is required to purchase and maintain stock in
the FHLBank of Des Moines in an amount equal to the greater of 1% of its
aggregate unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year (if less than 30% of its assets were
so invested, the calculation must be made as if 30% of its assets were so
invested), or 5% (or such greater percentage as established by the FHLBank) of
its outstanding FHLBank advances. At June 30, 1998, Great Southern had $9.5
million in FHLBank stock, which was in compliance with this requirement. In
past years, the Bank has received substantial dividends on its FHLBank stock.
Over the past five years, such dividends have averaged 7.4% and were 6.8% for
fiscal year 1998. Certain provisions of FIRREA require all 12 FHLBanks to
provide financial assistance for the resolution of troubled savings
associations and to contribute to affordable housing programs through direct
loans or interest subsidies on advances targeted for community investment and
low- and moderate-income housing projects.
These contributions could cause rates on the FHLBank advances to increase
and could affect adversely the level of FHLBank dividends paid and the value of
FHLBank stock in the future.
Each FHLBank serves as a reserve or central bank for its members within
its assigned region. It is funded primarily from proceeds derived from the
sale of consolidated obligations of the FHLBank System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLBank. These policies and procedures are
subject to the regulation and oversight of the FHFB.
There are collateral requirements for FHLBank advances. First, all
advances must be fully secured by sufficient collateral as determined by the
FHLBank. FIRREA prescribed eligible collateral as fully disbursed, whole first
mortgage loans not more than 90 days delinquent or securities evidencing
interests therein, securities (including mortgage-backed securities) issued,
insured or guaranteed by the federal government or any agency thereof, FHLBank
deposits and, to a limited extent, real estate with readily ascertainable value
in which a perfected security interest may be obtained. All members' stock in
the FHLBank also serves as collateral for indebtedness to the FHLBank. Other
forms of collateral may be accepted as over collateralization or, under certain
circumstances, to renew advances outstanding on the date of enactment of
FIRREA. All long-term advances are required to be used to provide funds for
residential home financing. The FHFB has established standards of community
service that members must meet to maintain access to long-term advances.
FIRREA authorizes the FHLBanks to make short-term liquidity advances to solvent
associations in poor financial condition but with prospects of improving. In
addition, pursuant to FHFB regulations, each FHLBank is required to establish
programs for affordable housing that involve interest subsidies from the
FHLBanks on advances to members engaged in lending at subsidized interest rates
for low- and moderate-income, owner-occupied housing and affordable rental
housing, and certain other community purposes.
<PAGE> 35
Legislative and Regulatory Proposals
Any changes in the extensive regulatory scheme to which Charter One is
and will be subject, whether by any of the Federal banking agencies or
Congress, could have a material effect on Charter One, and Charter One cannot
predict what, if any, future actions may be taken by legislative or regulatory
authorities or what impact such actions may have.
The Clinton Administration and Congressional leaders have been
considering measures to restructure the regulation of banks and savings
associations. Legislation pending in the Senate, which passed the House of
Representatives as H.R. 10, would, if ultimately enacted into law, provide for
sweeping financial modernization of the banking system. The stated purposes
of H.R. 10 are to enhance consumer choice in the financial services
marketplace, level the playing field among providers of financial services and
increase competition. H.R. 10 would remove certain restrictions contained in
the Glass-Steagall Act of 1933 and the BHCA, thereby allowing qualified
financial holding companies to control banks, securities firms, insurance
companies and other financial firms. Conversely, securities firms, insurance
companies and other financial firms would be allowed to own or affiliate with
commercial banks. Under the new framework, the FRB would serve as an umbrella
regulator to oversee the new financial holding company structure. Securities
affiliates would be required to comply with all applicable federal securities
laws, including registration and other requirements applicable to broker-
dealers. H.R. 10 would also provide that insurance affiliates of banks be
subject to applicable state insurance regulations and supervision. With
respect to the thrift industry, H.R. 10 would, among other things, restrict
the interstate branching authority of federal savings associations to that
applicable to banks, but permit institutions to keep existing branches. In
addition, the bill would merge the OTS and the OCC, and would also merge the
SAIF and the Bank Insurance Fund after a waiting period. There can be no
assurance of when or if the legislation described will be enacted, or if
enacted, what form such legislation will ultimately take.
FEDERAL AND STATE TAXATION
The following discussion contains a summary of certain federal and state
income tax provisions applicable to the Company and the Bank. It is not a
comprehensive description of the federal income tax laws that may affect the
Company and the Bank. The following discussion is based upon current
provisions of the Internal Revenue Code of 1986 (the "Code") and Treasury and
judicial interpretations thereof.
General
The Company and its subsidiaries file a consolidated federal income tax
return using the accrual method of accounting for the taxable year ending June
30. All corporations joining in the consolidated federal income tax return are
jointly and severally liable for taxes due and payable by the consolidated
group. The following discussion primarily focuses upon the taxation of the
Bank, since the federal income tax law contains certain special provisions with
respect to banks.
Financial institutions, such as the Bank, are subject, with certain
exceptions, to the provisions of the Code generally applicable to corporations.
<PAGE> 36
Bad Debt Reserve - Fiscal 1996 and prior
A thrift association was permitted to establish a reserve for bad debts
and to deduct each year a reasonable addition to that reserve in computing its
taxable income. Thrift associations that met certain tests relating to the
nature of their regulatory supervision, business operations, income and assets
("qualifying thrifts") were allowed to calculate their allowable bad debt
deduction under the special rules of section 593 of the Code. In order to be a
qualifying thrift, at least 60% of the thrift's assets in any year had to be
qualifying assets (including United States government securities, loans secured
by an interest in residential real property or deposits, cash and certain other
assets). The Bank had been a qualifying thrift.
The Code provided different methods for computing the additions to the bad
debt reserve for qualifying real property loans and nonqualifying loans.
Generally, a qualifying real property loan included any loan secured by an
interest in improved real property or real property to be improved out of the
proceeds of the loan and a regular or residual interest in certain real estate
mortgage investment conduits. A nonqualifying loan was any loan which was not
a qualifying real property loan. A qualifying thrift could elect annually to
compute its addition to its reserve for qualifying real property loans under
the more favorable of (i) a method based on the thrift's actual loss experience
(the "experience method") or (ii) a method based on a specified percentage of
the thrift's taxable income, as adjusted (the "percentage of taxable income"
method). The addition to the reserve for nonqualifying loans was computed
under the experience method.
Under the experience method, the deductible annual addition was the amount
necessary to increase the balance of the reserve at the close of the taxable
year to the greater of (i) the amount which bore the same ratio to loans
outstanding at the close of the taxable year as the total net bad debts
sustained during that year and the five preceding taxable years bore to the sum
of the loans outstanding at the close of those six years or (ii) the balance in
the reserve account at the close of the last taxable year beginning before 1988
(the "base year"), subject to further limitations in the event total loans
outstanding were less than the total amount outstanding at the close of the
base year.
Under the percentage of taxable income method, a qualifying thrift
generally was allowed to deduct as an addition to its bad debt reserve an
amount equal to 8% of such thrift's taxable income determined without regard to
such deduction and with certain adjustments. The amount thus computed was
reduced by the amount permitted as a deduction for nonqualifying loans under
the experience method. The maximum effective federal income tax rate
(exclusive of the corporate minimum tax) payable by a thrift using the
percentage of taxable income method was approximately 31.3% compared to a
maximum rate of 34% for other corporations.
Although the Bank filed a consolidated federal income tax return with the
Company, the Bank generally was permitted to take only its separate taxable
income (as adjusted for this purpose) into account when computing its allowable
bad debt reserve deduction under the percentage of taxable income method. If,
however, the Company or another member of the consolidated group incurred tax
losses in activities "functionally related" to the Bank's business, those
losses would reduce the Bank's taxable income for purposes of the bad debt
reserve computation. In addition, taxable income was reduced by net operating
loss carryforwards of the Bank.
<PAGE> 37
The amount of the addition to the reserve for losses on qualifying real
property loans under the percentage of taxable income method could not exceed
the amount necessary to increase the balance of the reserve for losses on
qualifying real property loans at the close of the taxable year to 6% of the
balance of the qualifying real property loans outstanding at that time. In
addition, the thrift's aggregate addition to its reserve for losses on
qualifying real property loans could not exceed the greater of (i) the amount
which, when added to the addition to the reserve for losses on nonqualifying
loans, equaled the amount by which 12% of the total deposits and withdrawable
accounts of depositors of the thrift at the close of the taxable year exceeded
the sum of the thrift's surplus, undivided profits and reserves at the
beginning of such year or (ii) the amount determined under the experience
method.
To the extent that a qualifying thrift's reserve for losses on qualifying
real property loans exceeded the amount that would have been allowed under the
experience method (the "excess bad debt reserve"), and if the thrift made
distributions to stockholders that were considered to result in withdrawals
from that excess bad debt reserve, the amounts withdrawn were included in such
thrift's gross income in the year of withdrawal. A dividend distribution was
treated as first out of the thrift's current or accumulated earnings and
profits, as calculated for federal income tax purposes. Dividend distributions
in excess of such thrift's current or accumulated earnings and profits were
considered to be from the thrift's excess bad debt reserve, to the extent of
the excess bad debt reserve, and thus included in the thrift's taxable income.
The amount considered to be withdrawn by such a distribution was the amount of
the distribution that was deemed to have been made from the bad debt reserve
plus the amount necessary to pay tax with respect to the withdrawal, so the
total amount included in gross income, when reduced by the income tax
attributable to the inclusion of such amount in gross income, was equal to the
amount of the distribution that was deemed to have been made from the bad debt
reserve. Distributions in redemption of stock and distributions in partial or
complete liquidation of a thrift were considered to be first out of such
thrift's excess bad debt reserve and then out of the thrift's current or
accumulated earnings and profits.
Bad Debt Reserves - Beginning Fiscal Year 1997
Legislation passed by Congress and signed by the President repealed the
bad debt reserve method of accounting for bad debts by large thrifts for
taxable years beginning after 1995 (year ended June 30, 1997 for the Bank).
The legislation requires applicable excess reserves accumulated after 1987
(year ended June 30, 1988 for the Bank) be recaptured and restored to income
over a six year period with the first year beginning after 1995 (year ended
June 30, 1997 for the Bank), and eliminates recapture of the applicable excess
reserves accumulated prior to 1988 for thrifts converting to bank charters.
The post 1987 recapture may be delayed for a one- or two-year period if certain
residential loan origination requirements are met. The Bank met the
residential loan origination requirements and delayed the recapture for two
years. The amount of post 1987 recapture for the Bank is estimated at $5
million which would create tax of approximately $2 million, or $500,000 per
year for each of the remaining four years. The $2 million of tax has been
accrued by the Bank in previous periods and would not be reflected in earnings
when paid.
Beginning with the year ending June 30, 1997, the Bank is required to
follow the specific charge-off method which only allows a bad debt deduction
equal to actual charge-offs, net of recoveries, experienced during the fiscal
year of the deduction. In a year where recoveries exceed charge-offs, the Bank
would be required to include the net recoveries in taxable income.
<PAGE> 38
Interest Deduction
In the case of a financial institution, such as the Bank, no deduction is
allowed for the pro rata portion of its interest expense which is allocable to
tax-exempt interest on obligations acquired after August 7, 1986. A limited
class of tax-exempt obligations acquired after August 7, 1986 will not be
subject to this complete disallowance rule. For tax-exempt obligations
acquired after December 31, 1982 and before August 8, 1986 and for obligations
acquired after August 7, 1986 that are not subject to the complete disallowance
rule, 80% of interest incurred to purchase or carry such obligations will be
deductible. No portion of the interest expense allocable to tax-exempt
obligations acquired by a financial institution before January 1, 1983 which is
otherwise deductible will be disallowed. The interest expense disallowance
rules cited above do not significantly impact the Bank.
Alternative Minimum Tax
Corporations generally are subject to a 20% corporate alternative minimum
tax ("AMT"). The AMT must be paid by a corporation to the extent it exceeds
that corporation's regular federal income tax liability. The AMT is imposed on
"alternative minimum taxable income," defined as taxable income with certain
adjustments and tax preference items, less any available exemption. Such
adjustments and items include, but are not limited to, (i) net interest
received on certain tax-exempt bonds issued after August 7, 1986; and (ii) 75%
of the difference between adjusted current earnings and alternative minimum
taxable income, as otherwise determined with certain adjustments. Net
operating loss carryovers may be utilized, subject to adjustment, to offset up
to 90% of the alternative minimum taxable income, as otherwise determined. A
portion of the AMT paid, if any, may be credited against future regular federal
income tax liability. In addition, for taxable years beginning after 1986 and
before 1996, corporations generally were also subject to an environmental tax
equal to 0.12% of the excess of the alternative minimum taxable income
(computed without regard to any net operating loss deduction) for a taxable
year in excess of $2 million.
Missouri Taxation
Missouri based banks, such as the Bank, are subject to a franchise tax
which is imposed on the larger of (i) the bank's net income at the rate of 7%
of the net income (determined without regard for any net operating losses); or
(ii) the banks assets at a rate of .05% of total assets less deposits and the
investment in greater than 50% owned subsidiaries. Missouri based banks are
entitled to a credit against the franchise tax for all other state or local
taxes on banks, except taxes on real and tangible personal property owned by
the Bank and held for lease or rental to others, contributions paid pursuant to
the Missouri unemployment compensation law, social security taxes and sales and
use taxes.
The Company and all subsidiaries are subject to an income tax which is
imposed on the corporation's net income at the rate of 6.25% for fiscal year
1998. The return is filed on a consolidated basis by all members of the
consolidated group including the Bank.
Delaware Taxation
As a Delaware corporation, the Company is required to file annual returns
with and pay annual fees to the State of Delaware. The Company is also subject
to an annual franchise tax imposed by the State of Delaware based on the number
of authorized shares of Company common stock.
<PAGE> 39
Examinations
The Company and its consolidated subsidiaries have not been audited
recently by the Internal Revenue Service with respect to consolidated federal
income tax returns, and as such, these returns have been closed without audit
through June 30, 1994.
Item 2. Properties.
The following table sets forth certain information concerning the main
office and each branch office of the Company at September 15, 1998. The
aggregate net book value of the Company's premises and equipment was $9.5
million and $7.4 million, respectively, at June 30, 1998 and 1997. See also
Note 5 and Note 11 of the Notes to Consolidated Financial Statements included
in the Annual Report to Stockholders, which portions are incorporated herein by
reference. Substantially all buildings owned are free of encumbrances or
mortgages. In the opinion of Management, the facilities are adequate and
suitable for the needs of the Company.
<TABLE>
<CAPTION>
Owned Lease Expiration
Year or (Including Any
Location Opened Leased Renewal Option)
- ----------------------------------------------------------- ------ ------- -----------------
<S> <C> <C> <C> <C>
CORPORATE HEADQUARTERS AND MAIN BANK:
1451 E. Battlefield Springfield, Missouri 1976 Owned N/A
BRANCH BANKS:
430 South Avenue Springfield, Missouri 1983 Owned N/A
Kearney at Kansas Springfield, Missouri 1976 Leased* 2000
2410 N. Glenstone Springfield, Missouri 1977 Leased* 2003
1955 S. Campbell Springfield, Missouri 1979 Leased* 2030
3961 S. Campbell Springfield, Missouri 1998 Leased 2028
2631 E. Sunshine Springfield, Missouri 1988 Leased* 2017
1580 W. Battlefield Springfield, Missouri 1985 Leased* 2018
723 N. Benton Springfield, Missouri 1985 Owned N/A
Highway 14 Nixa, Missouri 1995 Leased* 2019
1505 S. Elliot Aurora, Missouri 1985 Leased 2003
Jefferson & Washington Ava, Missouri 1982 Owned N/A
110 W. Hensley Branson, Missouri 1982 Owned N/A
919 W. Dallas Buffalo, Missouri 1976 Owned N/A
527 Ozark Cabool, Missouri 1989 Leased 2004
400 S. Garrison Carthage, Missouri 1990 Owned N/A
1710 E. 32nd Street Joplin, Missouri 1989 Leased* 2031
1232 S. Rangeline Joplin, Missouri 1998 Leased* 2018
Highway 00 and 13 Kimberling City, Missouri 1984 Owned N/A
528 S. Jefferson Lebanon, Missouri 1978 Leased* 2018
714 S. Neosho Boulevard Neosho, Missouri 1991 Owned N/A
Highway 54 Osage Beach, Missouri 1987 Owned N/A
1701 W. Jackson Ozark, Missouri 1997 Owned N/A
208 South Street Stockton, Missouri 1988 Leased 2005
323 E. Walnut Thayer, Missouri 1978 Leased* 2011
1210 Parkway Shopping Center West Plains, Missouri 1975 Owned N/A
1729 W. Highway 76 Branson, Missouri 1983 Owned N/A
_____________________________
* Building owned with land leased.
** Lease has unlimited successive 5 year renewals after the first 5 year term.
In addition, the travel division has offices in many of the above locations as well as several small
offices in other locations including some of its larger corporate customer's headquarters.
</TABLE>
<PAGE> 40
The Bank maintains depositor and borrower customer files on an on-line
basis, utilizing a telecommunications network, portions of which are leased.
The book value of all data processing and computer equipment utilized by the
Bank at June 30, 1998 was $2 million compared to $597,000 at June 30, 1997.
The increase is primarily in connection with the core system upgrade and Year
2000 discussion in "Management's Discussion and Analysis - Year 2000" in the
Annual Report to Stockholders, which portions are incorporated herein by
reference. Management has a disaster recovery plan in place with respect to
the data processing system as well as the Banks operations as a whole.
The Bank maintains a network of Automated Teller Machines ("ATMs"). The
Bank utilizes an external service for operation of the ATMs that also allows
access to the various national ATM networks. A total of 95 ATMs are located at
various branches and primarily convenience stores located throughout southwest
and central Missouri. The book value of all ATMs utilized by the Bank at June
30, 1998 was $943,000 compared to $689,000 at June 30, 1997. The Bank will
evaluate and relocate existing ATMs as needed, but has no plans in the near
future to materially increase its investment in the ATM network.
Item 3. Legal Proceedings.
The Registrant and its subsidiaries are involved as plaintiff or defendant in
various legal actions arising in the normal course of their businesses. While
the ultimate outcome of the various legal proceedings involving the Registrant
and its subsidiaries cannot be predicted with certainty, it is the opinion of
management, after consultation with legal counsel, that these legal actions
currently are not material to the Registrant.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the quarter
ended June 30, 1998.
Executive Officers of the Registrant.
Pursuant to General Instruction G(3) of Form 10-K and Instruction 3 to Item
401(b) of Regulation S-K, the following list is included as an unnumbered item
in Part I of this Form 10-K in lieu of being included in the Registrant's
Definitive Proxy Statement, which was filed on September 22, 1998.
The following information as to the business experience during the past five
years is supplied with respect to executive officers of the Company and its
subsidiaries who are not directors of the Company and its subsidiaries. There
are no arrangements or understandings between the persons named and any other
person pursuant to which such officers were selected. The executive officers
are elected annually and serve at the discretion of their respective Boards of
Directors.
Richard L. Wilson. Mr. Wilson, age 40, is Senior Vice President and
Controller of the Bank. He joined the Bank in 1986 and is responsible for the
internal and external financial reporting of the Company and its subsidiaries.
Mr. Wilson is a Certified Public Accountant.
Michael D. Lawson. Mr. Lawson, age 34, is First Vice President and Commercial
Business Development Officer in the commercial lending area at the Bank. Mr.
Lawson joined the Bank in November 1996. Prior to joining the Bank, Mr. Lawson
was a lending officer and branch manager with a competing $1 billion bank.
Steven G. Mitchem. Mr. Mitchem, age 46, is First Vice President and Senior
Lending Officer of the Bank. He joined the Bank in 1990 and is responsible for
administration of commercial lending policies and banking regulatory matters.
Prior to joining the Bank, Mr. Mitchem was a Senior Bank Examiner for the
Federal Deposit Insurance Corporation.
<PAGE> 41
PART II
Responses incorporated by reference into the items under Part II of this Form
10-K are done so pursuant to Rule 12b-23 and General Instruction G(2) for Form
10-K.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information. The Company's Common Stock is listed on the National
Market System of the National Association of Securities Dealers Automated
Quotations ("NASDAQ") System under the symbol "GSBC." For the table setting
forth the range of high and low bid prices of the Company's Common Stock during
each fiscal quarter for fiscal years 1998 and 1997, as reported by the NASD,
see the table under the heading "Stock Information", which such portions are
incorporated herein by reference.
Dividend
Declarations
Fiscal Year 1998 First Quarter $.10
Second Quarter .11
Third Quarter .11
Fourth Quarter .11
Fiscal Year 1997 First Quarter $.0875
Second Quarter .10
Third Quarter .10
Fourth Quarter .10
The last inter-dealer bid for the Company's Common Stock on June 30, 1998 was
$25 3/8.
Holders. For a discussion of the holders of the Registrant's Common
Stock and dividends on such stock, see the discussion under the headings
"Corporate Profile" and "Stock Information" of the Annual Report to
Stockholders, which portions are incorporated herein by reference.
<PAGE> 42
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with
the Company's consolidated financial statements, the notes thereto and the
accompanying independent accountant's opinion included in the Company's Annual
Report to Stockholders, which portions are incorporated herein by reference,
and the following information is qualified by reference thereto.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------
1998 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Summary Statement of Condition Information:
Year-end assets $795,091 707,841 $668,105 $622,380 $534,740 $515,293
Year-end loans receivable, net 655,226 583,709 546,759 519,255 443,750 419,527
Year-end allowance for loan losses 16,373 15,524 14,356 14,601 13,636 10,590
Year-end available-for-sale securities 6,363 7,408 4,656 3,091 -- --
Year-end held-to-maturity securities 50,363 49,757 49,182 46,970 48,217 51,218
Year-end foreclosed assets held for sale, net 4,751 5,651 9,862 7,999 6,070 8,909
Year-end allowance for foreclosed asset losses -- 319 1,086 933 1,549 1,192
Year-end intangibles 626 -- 1,102 1,187 1,272 1,356
Year-end deposits 553,365 459,236 397,055 384,327 358,987 326,611
Year-end total borrowings 169,563 180,625 197,265 168,270 108,587 130,253
Year-end stockholders' equity (retained
earnings substantially restricted) 67,409 60,348 67,808 62,982 61,462 51,723
Average loans receivable, net 624,290 561,146 536,695 486,726 433,638 376,620
Average total assets 747,901 670,172 643,885 584,536 527,842 479,261
Average deposits 487,386 416,041 385,734 374,011 340,933 327,647
Average stockholders' equity 64,212 62,200 65,355 60,942 57,758 50,618
Year-end number of deposit accounts 74,070 69,762 60,649 59,461 58,054 53,960
Year-end number of full-service offices 25 25 25 25 25 25
Summary Income Statement Information:
Interest income $61,932 $55,540 $53,938 $47,110 $ 38,988 $ 37,162
Interest expense 31,992 28,822 28,132 23,411 17,433 16,810
Net interest income 29,940 26,718 25,806 23,699 21,555 20,352
Provision for loan losses 1,853 1,706 1,451 1,319 3,023 4,677
Net interest income after provision for loan losses 28,087 25,012 24,355 22,380 18,532 15,675
Service charge fees 3,841 2,785 2,382 2,273 2,131 1,762
Net realized gains on sales of
available-for-sale securities 1,398 205 680 21 -- --
Net realized gains on sales of loans 1,125 522 540 92 565 387
Income (expense) on foreclosed assets 326 286 728 (243) 588 352
Other non-interest income 7,060 6,645 5,994 5,771 5,565 4,692
Non-interest expenses 20,469 20,363 16,274 15,293 14,661 13,599
Income before income taxes 21,368 15,091 18,405 15,001 12,720 9,269
Provision for income taxes 6,924 5,751 7,111 5,513 4,379 4,533
Income before change in accounting principle 14,444 9,340 11,294 9,488 8,341 4,736
Change in accounting principle -- -- -- -- 3,375 --
Net income $14,444 $ 9,340 $11,294 $ 9,488 $ 11,716 $ 4,736
<PAGE> 43
Year Ended June 30,
---------------------------------------------------------
1998 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- -------
Per Common Share Data:
Basic earnings per common share:
Income before change in accounting principle $1.79 $1.11 $1.27 $1.04 $ .86 $.48
Change in accounting principle -- -- -- -- .35 --
Net Income 1.79 1.11 1.27 1.04 1.21 .48
Diluted earnings per common share:
Income before change in accounting principle 1.76 1.10 1.23 1.00 .83 .46
Change in accounting principle -- -- -- -- .67 --
Net Income 1.76 1.10 1.23 1.00 1.17 .46
Cash dividends declared .43 .39 .35 .30 .15 .07
Book value 8.47 7.45 7.70 7.00 6.42 5.41
Average shares outstanding 8,052 8,394 8,926 9,162 9,648 9,798
Year-end actual shares outstanding 7,962 8,105 8,812 9,006 9,570 9,558
Year-end fully diluted shares outstanding 8,204 8,488 9,218 9,478 10,056 10,254
Earnings Performance Ratios:
Return on average assets 1.93% 1.39% 1.75% 1.62% 1.58% 0.99%
Return on average stockholders' equity 22.49 15.02 17.28 15.57 14.44 9.37
Non-interest expense to average total assets 2.74 3.04 2.53 2.62 2.78 2.77
Average interest rate spread 3.79 3.79 3.82 3.86 4.05 4.20
Year-end interest rate spread 3.81 3.90 3.72 3.79 3.87 3.71
Net interest margin (1) 4.18 4.17 4.21 4.25 4.31 4.51
Adjusted efficiency ratio (excl. foreclosed assets) 47.20 55.22 45.97 48.01 49.17 50.01
Average interest-earning assets as a percentage
of average interest-bearing liabilities 108.6 108.5 108.4 109.3 107.4 108.3
Year Ended June 30,
---------------------------------------------------------
1998 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- -------
Asset Quality Ratios:
Allowance for loan losses/year-end loans 2.50% 2.66% 2.63% 2.81% 3.08% 2.52%
Non-performing assets/year-end
loans and foreclosed assets 1.81 2.30 2.83 2.25 3.33 3.40
Allowance for loan losses/non-performing loans 227.18 197.01 243.03 380.23 186.04 237.50
Net charge-offs/average loans .16 .10 .32 .07 (0.01) 0.03
Non-performing assets/average total assets 1.60 2.02 2.45 2.18 2.83 3.04
Capital Ratios:
Average stockholders' equity to average assets 8.59% 9.28% 10.15% 10.43% 10.94% 10.56%
Year-end tangible stockholders' equity to assets 8.40 8.53 10.09 9.93 11.26 9.77
Common dividend pay-out ratio 24.0 35.2 28.6 30.0 13.9 13.0
<FN>
(1) For further discussion, refer to Management's Discussion and Analysis of Financial Condition and Results of
Operations-Average Balances, Interest Rates and Yields in the Annual Report to Stockholders, which portions are
incorporated herein by reference.
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operation" in the Annual Report to Stockholders, which portions are
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Information.
The financial statements and supplementary data required by this Item are set
forth in the Annual Report to Stockholders, which portions are incorporated
herein by reference. All financial statement schedules should be read in
conjunction with the financial statements the notes thereto and the related
report of the Company's independent accountants in the Annual Report and are
qualified by reference thereto.
<PAGE> 44
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Responses incorporated by reference into the items under Part III of this Form
10-K are done so pursuant to Rule 12b-23 and General Instruction G(3) to Form
10-K. The Registrant's Definitive Proxy Statement was electronically filed on
September 22, 1998.
Item 10. Directors and Executive Officers of the Registrant.
(a) Directors of the Registrant
See "Election of Directors" in the Registrant's Definitive
Proxy Statement for fiscal year 1998, which portion is
incorporated herein by reference.
(b) Executive Officers of the Registrant
Included under Part I of this Form 10-K.
(c) Compliance with Section 16(a) of the Exchange Act
See "Beneficial Ownership Reports of Management" in the
Registrant's Definitive Proxy Statement for the fiscal year
1998, which portion is incorporated herein by reference.
Item 11. Executive Compensation.
See "Executive Compensation" in the Registrant's Definitive Proxy Statement,
which portion is incorporated herein by reference except for the "Report on
Executive Compensation" and the "Stock Performance Graph."
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a) See "Voting" in the Registrant's Definitive Proxy Statement, which portion
is incorporated herein by reference.
(b) See "Stock Ownership of Management" in the Registrant's
Definitive Proxy Statement, which portion is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions.
See "Indebtedness of Management and Transactions with Certain Related Persons"
in the Registrant's Definitive Proxy Statement, which portion is incorporated
herein by reference.
<PAGE> 45
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) List of Documents Filed as Part of This Report
(1) Financial Statements
The financial statements and related notes, together with the
report of Baird, Kurtz and Dobson dated August 19, 1998, which
appears on pages 25 through 39 of the Registrant's Annual
Report to Stockholders, which portion is incorporated herein by
reference.
(2) Financial Statement Schedules
The financial statement schedules are included in the
Annual Report to Stockholders, which portions are incorporated
herein by reference into Item 8 of Part II of this Form 10-K.
All financial statement schedules should be read in conjunction
with the financial statements the notes thereto and the related
report of the Company's independent accountants in the Annual
Report to Stockholders and are qualified by reference thereto.
Schedules and exhibits for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission not included with these financial statement
schedules have been omitted because they were not applicable,
significant or the required information is shown in the
financial statements or note thereto.
(3) List of Exhibits
Exhibits incorporated by reference below are incorporated by
reference pursuant to Rule 12b-32.
(2) Plan of acquisition, reorganization, arrangement,
liquidation, or succession
Inapplicable.
(3) Articles of incorporation and Bylaws
(i) The Registrant's Certificate of Incorporation
previously filed with the Commission (File no. 33-
30597) as Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 dated August 18,1989, is
incorporated herein by reference as Exhibit 3.1.
(ii) The Registrant's Certificate of Amendment of
Certificate of Incorporation is attached hereto as
Exhibit 3.2.
(iii) The Registrant's Bylaws, as amended, previously
filed with the Commission (File no. 33-30597) as
Exhibit 3.2 to the Registrant's Annual Report on Form
10-K for fiscal year ended June 30, 1990, is
incorporated herein by reference as Exhibit 3.3.
(4) Instruments defining the rights of security holders,
including indentures
Inapplicable.
<PAGE> 46
(9) Voting trust agreement
Inapplicable.
(10) Material contracts
The Registrant's 1989 Stock Option and Incentive Plan
previously filed with the Commission (File no. 33-
30597) as Exhibit 10.2 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30,
1990, is incorporated herein by reference as Exhibit
10.1.
An Employment Agreement dated February 1, 1990 between
the Registrant and William V. Turner previously filed
with the Commission (File no. 33-30597) as Exhibit 10.3
to the Registrant's Registration Statement on Form S-1
dated August 18, 1989, is incorporated herein by
reference as Exhibit 10.2.
An Employment Agreement dated February 1, 1990 between
the Registrant and Don M. Gibson previously filed with
the Commission (File no. 33-30597) as Exhibit 10.3 to
the Registrant's Registration Statement on Form S-1
dated August 18, 1989, is incorporated herein by
reference as Exhibit 10.3.
An Employment Agreement dated July 1, 1993 between the
Registrant and Joseph W. Turner previously filed with
the Commission (File no. 33-30597) as Exhibit 10.4 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994, is incorporated herein
by reference as Exhibit 10.4.
The Registrant's 1997 Stock Option and Incentive Plan
previously filed with the Commission (File no. 33-
30597) as Annex A to the Registrant's Definitive Proxy
Statement for the fiscal year ended June 30, 1997, is
incorporated herein by reference as Exhibit 10.5.
(11) Statement re computation of per share earnings
The Statement re computation of per share earnings is
attached hereto as exhibit 11.
(12) Statements re computation of ratios
Inapplicable.
(13) Annual report to security holders, Form 10-Q or quarterly
report to security holders
The Registrant's Annual Report to Stockholders for the fiscal year
ended June 30, 1998 is attached hereto as exhibit 13.
(16) Letter re change in certifying accountant
Inapplicable.
(18) Letter re change in accounting principles
Inapplicable.
<PAGE> 47
(21) Subsidiaries of the registrant
A listing of the Registrant's subsidiaries is attached
hereto as Exhibit 21.
(22) Published report regarding matters submitted to vote of
security holders
Inapplicable.
(23) Consents of experts and counsel
The consent of Baird, Kurtz & Dobson to the
incorporation by reference into the Form S-8 previously
filed on December 16, 1992 with the Commission (File
no. 33-55832) of their report on the financial
statements included in this Form 10-K, is attached
hereto as Exhibit 23.
(24) Power of attorney
Inapplicable.
(27) Financial Data Schedule
Inapplicable.
(28) Information from reports furnished to state insurance
regulatory authorities
Inapplicable.
(99) Additional Exhibits
Inapplicable.
(b) Reports on Form 8-K
On June 8, 1998, the Registrant filed a Form 8-K disclosing,
under Item 5, that its 100% owned subsidiary, Great Southern
Travel, issued a press release announcing the acquisition of a
travel agency located in Monett, Missouri. The disclosure
indicated the acquisition would not have a material impact on the
asset size, capital or earnings of the Registrant.
On July 2, 1998, the Registrant filed a Form 8-K disclosing,
under Item 5, the issuance of a press release announcing the
conversion of its subsidiary thrift, Great Southern Bank, to a
Missouri chartered trust company effective June 30, 1998.
<PAGE> 48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
GREAT SOUTHERN BANCORP, INC.
(Registrant)
Daate: September 16, 1998 By: /s/ William V. Turner
------------------------------------
William V. Turner
Chairman of the Board, President,
Chief Executive Officer and Director
(Principal Executive Officer)
POWER OF ATTORNEY
We, the undersigned officers and directors of Great Southern Bancorp,
Inc., hereby severally and individually constitute and appoint William V.
Turner and Don M. Gibson, and each of them, the true and lawful attorneys and
agents of each of us to execute in the name, place and stead of each of us
(individually and in any capacity stated below) any and all amendments to this
Annual Report on Form 10-K and all instruments necessary or advisable in
connection therewith and to file the same with the Securities and Exchange
Commission, each of said attorneys and agents to have the power to act with or
without the others and to have full power and authority to do and perform in
the name and on behalf of each of the undersigned every act whatsoever
necessary or advisable to be done in the premises as fully and to all intents
and purposes as any of the undersigned might or could do in person, and we
hereby ratify and confirm our signatures as they may be signed by our said
attorneys and agents or each of them to any and all such amendments and
instruments.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Capacity in which signed Date
- ---------------------- ----------------------------- ------------------
/s/ William V. Turner President, Chairman of September 16, 1998
- ---------------------- the Board and Director
(William V. Turner) (Principal Executive
Officer)
/s/ Don M. Gibson Executive Vice President, September 16, 1998
- ---------------------- Secretary and Treasurer
(Don M. Gibson) (Principal Financial
Officer and Principal
Accounting Officer)
/s/ William E. Barclay Director September 16, 1998
- ------------------------
(William E. Barclay)
/s/ Larry D. Frazier Director September 16, 1998
- -------------------------
(Larry D. Frazier)
Director September 16, 1998
- -------------------------
(William K. Powell)
/s/ Joseph W. Turner Director September 16, 1998
- -------------------------
(Joseph W. Turner)
<PAGE> 49
Great Southern Bancorp, Inc.
Index to Exhibits
Exhibit
No. Document Page No.
- --------- -------------------------------------------- ----------
11 Statement Re Computation of Earnings Per Share . . 50
21 Subsidiaries of the Registrant . . . . . . . . . . 51
23 Consent of Baird, Kurtz & Dobson,
Certified Public Accountants . . . . . . . . . . 52
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed. . 53
<PAGE> 50
Exhibit 11
----------
Statement Re Computation of Earnings Per Share
Year Ended June 30,
-----------------------
1998 1997
---------- ----------
Basic:
Average shares outstanding 8,052,413 8,394,080
========== =========
Net income $14,444,049 $9,339,865
========== =========
Per share amount $1.79 $1.11
==== ====
Diluted:
Average shares outstanding 8,052,413 8,394,080
Net effect of dilutive stock options -
based on the treasury stock method
using the higher of average market
price or period end market price 151,162 93,682
---------- ---------
Diluted shares 8,203,575 8,487,762
========== =========
Net income $14,444,049 $ 9,339,865
========== =========
Per share amount $1.76 $1.10
==== ====
<PAGE> 51
<TABLE>
<CAPTION>
Exhibit 21
----------
SUBSIDIARIES OF THE REGISTRANT
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
- ------------------------------------ --------------------------------------- ---------- -------------
<S> <C> <C> <C>
Great Southern Bancorp, Inc. Great Southern Bank 100% Missouri
Great Southern Bancorp, Inc. Great Southern Capital Management, Inc. 100% Missouri
Great Southern Bank Great Southern Financial Corporation 100% Missouri
Great Southern Bank GSB One, L.L.C. 100% Missouri
Great Southern Bank GSB Two, L.L.C. 100% Missouri
Great Southern Financial Corporation Appraisal Services, Inc. 100% Missouri
</TABLE>
<PAGE> 52
Exhibit 27
----------
We consent to the incorporation by reference in Registration Statement No.
33-55832 on Form S-8 dated December 16, 1992, of our report on the consolidated
financial statements and schedules included in the Annual Report on Form 10-K
of GREAT SOUTHERN BANCORP, INC. for the year ended June 30, 1998.
/s/ Baird, Kurtz & Dobson
September 24, 1998
Springfield, Missouri
<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 annual report on Form 10-K and is qualified in its entirety by
reference to such annual report on Form 10-K.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 12,199
<INT-BEARING-DEPOSITS> 33,632
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,363
<INVESTMENTS-CARRYING> 50,363
<INVESTMENTS-MARKET> 50,541
<LOANS> 655,226
<ALLOWANCE> 16,373
<TOTAL-ASSETS> 795,091
<DEPOSITS> 553,365
<SHORT-TERM> 69,274
<LIABILITIES-OTHER> 4,754
<LONG-TERM> 100,289
0
0
<COMMON> 123
<OTHER-SE> 67,286
<TOTAL-LIABILITIES-AND-EQUITY> 795,091
<INTEREST-LOAN> 57,537
<INTEREST-INVEST> 3,839
<INTEREST-OTHER> 556
<INTEREST-TOTAL> 61,932
<INTEREST-DEPOSIT> 20,951
<INTEREST-EXPENSE> 31,992
<INTEREST-INCOME-NET> 29,940
<LOAN-LOSSES> 1,853
<SECURITIES-GAINS> 1,398
<EXPENSE-OTHER> 20,469
<INCOME-PRETAX> 21,368
<INCOME-PRE-EXTRAORDINARY> 21,368
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,444
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.76
<YIELD-ACTUAL> 4.18
<LOANS-NON> 7,207
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 8,961
<ALLOWANCE-OPEN> 15,524
<CHARGE-OFFS> 1,143
<RECOVERIES> 139
<ALLOWANCE-CLOSE> 16,373
<ALLOWANCE-DOMESTIC> 16,373
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,856
</TABLE>
Front Cover
1998 ANNUAL REPORT FOR OUR SHAREHOLDERS
Native Sun in the Ozarks.
(The cover is a picture of two men who represent a loan officer and
a bank customer. The setting is the customers farm with the
customer on a lawn tractor.)
Inside Front Cover
(This is the inside of the front cover. The two years of high/low
stock information is in a chart box and there is a picture of the
Missouri Sports Hall of Fame where the 1998 Annual Meeting will be
held.)
Annual Meeting
The 9th Annual Meeting of Shareholders will be held 10 A.M.
Wednesday, October 21, 1998, at the Missouri Sports Hall of Fame,
Springfield, Missouri.
Corporate Profile
Great Southern Bancorp, Inc. ("GSBC" or the "Company") is the
holding company for Great Southern Bank (the "Bank"), which
converted from a mutual to a stock company in December 1989. In
June 1998, the Bank converted from a federal savings bank charter
to a Missouri chartered trust company.
Great Southern was founded in 1923 with a $5,000 investment, 4
employees and 936 members, and has grown to over $795 million in
assets, with more than 370 employees and 70,000 + customers.
<PAGE> Inside Cover continued
The Bank is headquartered in Springfield, Missouri and operates 27
branches in 15 counties throughout the Ozarks; nine in Springfield.
A community-oriented company, GSBC and its subsidiaries offer a
full range of banking, lending, investment, insurance and travel
services.
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. and the Bank market related services, including
investment counseling, discount brokerage, insurance, travel and
appraisal services.
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, 1998, there were 7,961,727 total shares outstanding
and approximately 917 shareholders of record. The Company declared
four dividends during the year, making 33 consecutive dividends
since conversion in December 1989.
High/Low Stock Price Fiscal 1998 Fiscal 1997
------------------- ------------------
High Low High Low
------- ------- ------- -------
First Quarter 19 9/16 16 15 1/2 13 1/8
Second Quarter 25 7/8 19 1/8 18 14 1/2
Third Quarter 26 1/4 24 18 1/4 17
Fourth Quarter 26 3/8 25 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
<PAGE> Inside Cover continued
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
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 a
portion of the each picture on the pages referenced.)
Our Cover
A sunrise in the James River Valley finds Great Southern with a
neighbor in his own backyard. Living and working in the Ozarks for
76 years has enabled us to provide our customers with full-strength
banking and full-service convenience ... all served with sound,
native Ozarks' savvy.
Contents
2 Chairman's Message
The changing times find the Great Southern sun where it's always
been: Out front. Leading the way.
4 Competing on Home Turf
Aggressively marketed, and user-friendly, the Great Southern
product enjoys a high profile in the Ozarks.
6 The Wisdom of the Hills
Anticipating our customers' need leads us to new products. They
tell us what they need. We listen.
8 Home-Grown Loans
"The Ozarks Lending Authority" has many faces. All highly visible
and influential in a thriving Ozarks economy.
10 It's Our Neighborhood
The quality-of-life projects we sponsor anchor our role in the
community. Great Southern cares.
12 Everything Under the Sun
Great Southern's resourceful subsidiaries complement the Bank's
leadership in consumer-oriented service.
15 Management's Discussion And Analysis
Financials
25 Consolidated Statements 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 Accountants' report
40 The Team Profile
Great Southern Bancorp, Inc. and Great Southern Bank Officers
<PAGE> 2 and 3
(Along the bottom of pages 2 and 3 are eight bar graphs. They are
for stock price (in dollars), earnings (in millions), total assets
(in millions), total deposits (in millions), total loans (in
millions), checking account growth (in thousands), monthly check
card transactions (in thousands) and monthly transactions at Great
Southern ATMs (in thousands). The years presented by the graphs
are 1994 through 1998. The page also included a color photo of our
Chairman, William V. Turner.)
Message From The Chairman
In the past 24 months, southwest Missouri has witnessed nearly a
dozen name changes and additions among its principal banking
providers.
The most visible signs of the changing times are the number of bank
logos that have changed or cropped up recently in our communities.
That is, with one, particularly notable exception: Great Southern.
Having just celebrated our 75th anniversary and completed our fifth
consecutive record year, in such an environment, it could be argued
that "Southwest Missouri's largest home-owned bank" was simply the
incidental beneficiary of turmoil in the local financial services
marketplace.
But such an assessment greatly underestimates the new competition;
overstates the "turmoil;" ignores the company's preparation and
execution of a strategic business development plan; and overlooks
the fact that Great Southern's current run of "best years ever"
began before the recent mergers, acquisitions and start-ups.
Indeed, we are pleased to report fiscal 1998 was another banner
year. Net income was $1.76 per share ($14.4 million) up 60% over
last year's $1.10 per share ($9.3 million). In addition, the
company posted growth in all of the following areas: total assets
approached $800 million ($795 million-up 12%); net loans receivable
were $655 million (up 12%); and total deposits were $553 million
(up 20%).
Non-performing assets were $12 million, down $1.9 million from a
year ago (June 1997).
The company continued to maintain a healthy capital position with
stockholders' equity at 8.5% of total assets.
GSBC stock closed the year (June 98) at $25.375, which represented
a 57% increase over the $16.125 closing price of a year ago.
In addition to financial accomplishments, significant decisions
were made this past year to better position the company for the
future:
(1) Effective June 30, 1998, our thrift subsidiary converted to a
Missouri chartered trust company. As a result of the conversion,
the corporation will have full commercial banking powers which will
enable us to meet the ever-increasing demand for commercial real
estate loans and non-residential lending programs.
<PAGE> 2 and 3 continued
(2) Our bank subsidiary made a major investment to purchase a new
computer system from Jack Henry & Associates (Monett, Missouri).
Complementary teller and new account systems were also acquired.
These systems will allow us to accommodate significant retail
growth and enhance service levels and efficiency for customers.
(3) The bank also added two new branches to its network of service
centers bringing the total to 27. A second location in Joplin,
Missouri, on Rangeline - convenient for north Joplin, Webb City and
Missouri Southern State College, will enable us to expand our
business in that market. The other new office is our ninth in
Springfield. It is strategically located on perhaps the fastest
growing corridor in the city - Campbell and James River
Expressway.
(4) Great Southern Travel, GSBC's travel subsidiary, acquired two
International Tour and Cruise franchises in Joplin and Monett,
Missouri. The addition of International Tours' sales volume will
put Great Southern in the top 5% of all U.S. travel agencies.
Advancements were also made in checking account growth; electronic
transaction usage; commercial deposit services; the consumer credit
product line; intracompany referrals; and cooperative advertising
alliances.
In 1998, we continued to focus on growing retail checking accounts
- - the core product of a household's banking relationship. "Cash
Back Checking (free)" and "The Works ($100 minimum package
account)" were promoted throughout the year with a heavy emphasis
on our unique, differentiating feature - earning five cents every
time payment is made with our debit card instead of writing a
check. As a result, total checking accounts were up 25% from a
year ago, and monthly debit card transactions were up 115%.
Another factor fueling our phenomenal retail growth is the
continued expansion of what is already the "largest single bank ATM
network in southwest Missouri." With more than 100 machines
throughout the Ozarks, monthly transactions at Great Southern ATMs
are now approaching 110,000.
Technology has made it possible for us to begin offering commercial
deposit customers their bank statements on CD-ROM and the
capability of banking "on-line" will follow once we go live with
our new computer system.
Our consumer credit product line (another staple for retail
business) was the focus of an internal campaign - "Borrow Where You
Bank" - geared toward existing customers. Modifications were made
to our home equity product to make it more competitive and we
continued to grow our floor planning and indirect lines of dealer
business.
Finally, our leadership position, coupled with community roots and
vast delivery channels, has made us the "partner of choice" this
past year for a number of entities (from Silver Dollar City to the
Nike Ozarks Open) looking for cooperative advertising alliances.
<PAGE> 2 and 3 continued
As a community bank we have to be innovative to compete, stay
profitable, and earn loyal customers and employees. As Ralph Waldo
Emerson once said, "What lies behind us (a rich heritage) and what
lies before us (a promising future) are tiny matters compared to
what lies within us." People ... not a structure are what make a
bank and Great Southern is no exception. Our employee's attitudes,
vision and practical advice ... their leadership and management
skills ... the way they personally go that extra mile to take care
of customers - resolving issues before the sun goes down ... these
are the things that make us who we are. A bank by any other
name...just wouldn't be the Ozarks' native sun.
William V. Turner
CHAIRMAN
<TABLE>
<CAPTION>
Selected 5-year Financial Data
June 30
-----------------------------------------------------
For the Year: 1998 1997 1996 1995 1994
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net Interest Income After
Provision for Loan Losses
(in thousands) $28,087 $25,012 $24,355 $22,380 $18,532
Income Before Change in
Accounting Principle 14,444 9,340 11,294 9,488 8,341**
Return on Average Assets 1.93% 1.39% 1.75% 1.62% 1.58%
Interest Rate Spread 3.79% 3.79% 3.82% 3.86% 4.05%
Return on Average
Stockholders' Equity 22.49% 15.02% 17.28% 15.57% 14.44%
Non-interest Expense to
Average Assets 2.74% 3.04% 2.53% 2.62% 2.78%
Per Common Share*:
Earnings Before Change in
Accounting Principle $1.76 $1.10 $1.23 $1.00 $.83**
Cash Dividends Declared .43 .39 .35 .30 .15
Book Value (year end) 8.47 7.45 7.70 7.00 6.42
Market price (year end) 25.375 16.125 13.75 9.625 7.459
At Year End: (in thousands)
Total Assets $795,091 $707,841 $668,105 $622,380 $534,740
Loans Receivable, Net 655,226 583,709 546,759 519,255 443,750
Savings Deposits 553,365 459,236 397,055 384,327 358,987
Total Borrowings 169,563 180,625 197,265 168,270 108,587
Stockholders' Equity 67,409 60,348 68,535 62,982 61,462
Non-performing Assets 11,958 13,850 16,854 12,772 14,963
<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.
</TABLE>
<PAGE> 4 and 5
(Pages 4 through 13 include various color photos of Great Southern
ATMs, office settings, billboards, customers, employees, community
events and fund raising events.
Competing on Home Turf
- ----------------------
To native southern Missourians, the recent signs of the changing
times have been bank signs changing. Big out-market banks,
promising economies of scale and implied benefits of sheer size,
have taken over smaller banks, and smaller-yet community banks,
seeking to capitalize on the resulting losses of local familiarity
and autonomy, have sprung up in their wakes.
Given the recent competitive influx of new consumer products,
services and special grand opening offers aimed at retention and
new-bank identity, that Great Southern holds its own is remarkable
enough. For if there's a national trend "when the big banks come
to town," it has been quite the opposite.
Today, celebrating our 76th year in the Ozarks - with offices and
ATMs across more than 30 local communities - the Great Southern sun
logo is undeniably one of the more recognizable area trademarks,
and especially as other banks' signs have been changing, there is
little doubt that Great Southern has benefitted from its constant,
familiar identity.
But to the consumer, "familiarity" and "preference" are not
necessarily one-and-the-same. We're all willing to try something
new, including a new bank. Especially if the old familiar bank,
resting on its laurels, isn't keeping up.
A generation or two ago, when Great Southern itself was the
newcomer on the block in so many communities, we succeeded by
becoming involved. Living and working side-by-side with our
customers - knowing our friends and neighbors in each community we
serve - has given us a powerful competitive edge in the development
of the specific new products and services they're needing, and as
involved citizens and community leaders ourselves, our hearts are
in the right place too. Like them, we're natives.
Today, as we open new branches in new neighborhoods, we succeed the
same way. In fact our corporate culture for community involvement
has become so second nature, we sometimes fail to appreciate its
underlying importance as a competitive marketing tool. We just do
it.
As a result, while other banks jockey for logo visibility in on-
premise branch fronts, billboards and signs, the Great Southern sun
permeates a much deeper public consciousness off-premise. It
welcomes the eager audience at Missouri's first annual Route 66
Country Music Festival, where a bright yellow 30-foot Great
Southern tent, complete with Cash Cube and credit applications
desks, is practically expected. And right at home.
<PAGE> 4 and 5 continued
It crosses the TV screen at home, almost incidentally, in KOLR,
Silver Dollar City and Showboat Branson Belle advertising, as the
exclusive ATM discount ticket outlet for their summer-long Family
Fun Combo. Also home-owned, the station and the attractions found
a willing bank partner for local affinity marketing on their very
first choice. They want us back, at Christmas time, for the Radio
City Music Hall Rockettes.
When local organizers created the Ozarks Event Card - with package
savings on tickets to Springfield Lasers' World Team Tennis
matches, the Nike Ozarks Open, the Missouri Sports Hall of Fame,
the Ozarks Empire Fair and Dickerson Park Zoo - they intentionally
left a place on the front of the card for the Great Southern sun.
Not that we're a soft touch. We're simply the natural; we're
already involved in them all.
At every SMSU football and basketball home game in Springfield, the
Great Southern sun shines down from the scoreboards over our own
"Halftime Games," a traditional sponsorship we began more than a
decade ago that, by popular demand, has since expanded to include
home games at Missouri Southern State College in Joplin, and the
SMSU Grizzlies in West Plains.
Like them, we enjoy a distinct competitive advantage, and it's not
just the visibility of our colors. It's our home turf. We're
playing to a home crowd. And we're playing to win.
(On page 4 there is a picture of the Showboat Branson Belle and a
tent card of the special joint promotion by Silver Dollar City,
KOLR 10, the News Leader and Great Southern. On page 5 is a
picture of the tent used by Great Southern at the Route 66 Country
Music Festival, a Route 66 participant in the Great Southern Cash
Cube, and a picture of the new Joplin Great Southern branch.)
Cutlines for photos
a) Local exposure of the Great Southern logo on TV was dramatically
increased when we partnered our ATMs with the marketing budgets of
the area's top family attractions. Delighted Silver Dollar City
officials reported children's tickets were up by more than 20% over
the previous summer.
b) The bank took in more than 500 credit card applications daily at
the Route 66 Country Music Festival, a 3-day concert that featured
several of the nation's top country performers, including LeAnn
Rimes, George Jones, Charlie Daniels, Tim McGraw and Faith Hill.
c) Among the top attractions at the Festival was the Great Southern
"Cash Cube," in which participants get to keep any cash they can
grab. The only trick is there's a time limit, and the money is
blowing around like crazy!
d) Branch expansions included a new facility on Joplin's primary
north-south artery, Rangeline, near Missouri Southern State College
and the regionally-popular North Park Mall. Our southern location
on 32nd Street celebrates it's 10th Anniversary next Spring.
<PAGE> 6 and 7
The Wisdom of the Hills
- -----------------------
One of the more enlightening anecdotes in rural southern Missouri
tells of the "big city" politician who has come into the hills to
stump for votes. Lost and late for his engagement, the politician
spots a farmer and directs his driver to stop for directions. The
farmer points down the lane, "Turn right at the first cattle guard,
it's a short piece down on your left from there." Thanking him,
the politician moves on, then stops and backs up to beg one more
question: "Sorry to trouble you again, but is that cattle guard
wearing a uniform?"
As we look to the future of banking in the Ozarks, it is with the
sober appreciation that our customers, and not our competitors,
guide us. As we prepare for "banking-on-the-Internet" and as
others posture to offer it first, we know that, here in the Ozarks,
our own customers are at least as concerned about the impact of the
year 2000 in computers.
There is comfort in insight. But also challenge. Preparing to
meet the competition head-on - and on an equal playing field -
Great Southern Bank converted to a Missouri chartered trust company
in June, providing it with the full commercial banking powers some
of its major new competitors wield.
As the competition gets bigger, other volume-oriented services like
consumer credit cards can also become a marketing issue - as
evidenced frequently by "loss-leader-style" teasers in advertising
- - designed to build the bank around the card. The concept of
relationship banking is not, of course, a new one. In fact it has
been one of Great Southern's own marketing strengths for at least
the last decade - which is why we moved our VISA (R)/ MasterCard(R)
product this year to First USA, and now offer a no-annual-fee Great
Southern credit card at just prime plus 1.49%. Our old card wasn't
bad. Many of our customers will still carry it. But our new card
steals the competition's thunder, levels the playing field, and
lets us move on into the more important aspects of relationship
banking.
Obviously, building multiple ties to customers is smart, and most
banks today consider cross-selling to be one of their more
promising marketing frontiers. But to characterize relationship
banking at Great Southern as simply a 'marketing strategy,' or even
a 'new frontier,' is misleading.
Many of the products, benefits and conveniences we offer have come
from direct customer input, and many of our new customers open
multiple accounts with us on their very first visit. It's often
more a matter of 'service' than 'strategy.'
What's more, relationship-banking was a big marketing issue around
here a couple of decades ago, about the time Great Southern opened
specialized subsidiaries for insurance, investments and travel, and
became the area's first "banking supermarket." If it's a new
frontier, it's nevertheless familiar turf.
<PAGE> 6 and 7 continued
Great Southern new account staffers find it quite natural to
introduce checking applicants to co-working specialists in consumer
and mortgage lending. And lending officers regularly "return the
favor," helping loan applicants open new checking accounts - for
the simple convenience of automatic payment drafts. The emphasis
is always on service and one-stop problem solving, rather than
sales, and it happens between our subsidiaries just as naturally.
Happy checking customers expect the same level of service when they
move their auto coverage to Great Southern Insurance ... who can
often package it with a new homeowner's plan for additional savings
... which can be accumulated in a tax-advantaged college savings
plan at the Bank ... or in an equally attractive annuity at Great
Southern Investments ... who can also quote you today's best cruise
value to the Caymans ... while you're still deciding between
annuities and mutual funds ... or more Great Southern stock.
Great Southern is completing the full integration of new teller-,
new account- and new mainframe computer systems, representing a
significant investment in the future. The new systems let us take
full-service banking to unprecedented levels. Comprehensive
customer relationship information will be available on-the-spot,
on-screen, at every Great Southern customer service and teller
station anywhere in the Ozarks. Certainly, our new system puts us
on a level playing field with the biggest of our new competitors.
But that wasn't the reason. We merely maxed our old system with
new business this year. We needed it anyway.
(On page 6 there is a picture of a family using a Great Southern
ATM in Branson.)
(On page 7 is a picture of a new drive-up ATM, a computer and CD
ROM disk representing a commercial checking option and a picture of
the new Great Southern credit card stock and Great Southerns CU-
pons promotional material.)
Cutlines for photos
a) Great Southern customers enjoy the largest single-bank ATM
network in southern Missouri, now more than 100 units strong, and
growing. This one, opposite Shoji Tabuchi's Theater in Branson,
sports corporate colors, while others (above) pick up a
development's overall color scheme purely for aesthetics.
b) On request, commercial checking account customers can opt to
receive their monthly reconciliations on CD ROM.
C) We're well-known in the Ozarks, but the region's rapidly-growing
population of business and retiree newcomers deserves special
attention. The bank cooperates with local Chambers of Commerce in
area newcomers guides, and in a particularly targeted offer,
sponsors "CU-pons" in City Utilities information kits that
accompany hookup requests.
<PAGE> 8 and 9
The Home-Grown Loan
- -------------------
Since the mid-seventies, Great Southern has competed strategically
as a "low-cost provider" in basic consumer financial services -
attracting business by coupling highly competitive terms with the
extra time-and-money-savings conveniences of multiple locations and
longer banking hours.
It is a strategy that has worked, one that has helped make us "the
largest home-owned bank around," and one that continues to work, as
evidenced by last year's stellar growth in new checking business on
the promotional strength of our debit card-oriented "Cash Back"
account.
As bank marketing has gotten more sophisticated, a conventional
wisdom has been to reduce customer service costs and increase
profits by targeting only the bigger, better customers, and
discouraging the high-maintenance smaller ones who are choking the
drive-thru lanes.
The strategy makes sense, and perhaps best characterizes Great
Southern's competitive environment in the lending arena this year:
Everyone's targeting the Ozark's growing small business and big
commercial business accounts.
In spite of the new wisdom, or in the face if it, Great Southern's
long investment in building customer relationships from the bottom
up is paying off. Many of those growing businesses today are owned
by some of the same 'low-profit' drive-thru customers of yesterday,
some of whom now feel they "couldn't have done it without us."
Others come to Great Southern on their referrals, and still others
simply on the basis of our reputation.
Having such a heritage is great. But the reason Great Southern's
works so well is that it hasn't stopped. We're still building our
heritage. And as "The Ozarks' Lending Authority," we're still
'targeting' everything from student loans to multi-million-dollar
commercial projects.
It's a heritage of involvement - as witnessed in continuing
education classes at the Springfield Area Board of Realtors", where
loan solicitor Vicki Bilyeu is a favorite keynote speaker. -Or on
home-turf at individual realtors' offices, where Great Southern
regularly warms the morning's sales meeting attendance with
"Breakfast on the House."
It's also a heritage of leadership, as evidenced by our continued
emphasis on product development to attract new business and to
serve our customers better. New products this year included a
modified "PrimeLine" home equity loan, featuring a revolving line
of credit, a floating prime rate, and no closing costs or
application fees. Simultaneously, we introduced the "Great Home
Improvement Loan," an unsecured product offering borrowers up to
$15,000 without refinancing or tying up home equity. Customers
using at least 77% of their loan for home improvements enjoy a
fixed rate and fixed monthly payments for up to ten years.
<PAGE> 8 and 9 continued
And, despite our growing influence and size, the Great Southern
heritage continues to be one of personal service, as well. Not
just the 'lip-service' kind, and much more than the 'loan-
decisions-made-quickly' kind: The one-on-one kind. Some of our new
big-bank competitors are mailing slick color brochures, featuring
small-business-oriented services, to those targeted lists of most
promising prospects. We see them on our own prospects' desks -
when our loan solicitor comes by - to listen, to see, to understand
and shake hands - leaving behind a nice Great Southern piece
featuring a face, a name, and a direct-line local phone number.
(On page 8 is a picture of a Great Southern mortgage loan officer
officiating a high school football game. On page 9 is a picture of
a Great Southern mortgage loan officer at a realtors officer, a
consumer loan officer at a dealership that participates in the
indirect consumer loan program, and some promotional material used
by the commercial loan department.)
Cutlines for photos
a) Residential Lending department head Gene Barnes (tossing coin)
is a well-known figure in area mortgage lending, having held key
positions in the lending departments at three other financial
institutions before joining Great Southern. He's equally well-
known on the area's playing fields, having refereed more than 1,000
high school and collegiate football and basketball games.
b) -Or on home-turf at individual realtors' offices, where Great
Southern regularly warms the morning's sales meeting attendance
with "Breakfast on the House."
c) Competitive terms and responsive on-site service have helped the
bank develop a strong indirect-loan market working with area auto
dealers like Mike May, shown here with Consumer Lending Vice
President Mary Allison.
<PAGE> 10 and 11
It's Our Neighborhood
- ---------------------
In 1991, our annual report recalled basic tenets of doing business
that had been established more than half-a-century before,
including "That community involvement be commensurate with company
growth and success." Today, we couldn't say it better ourselves.
Our commitment to the communities we serve goes beyond lending
money. We have a long history of lending a helping hand as well.
And like the Great Southern sign, our community involvement is
visible everywhere.
Our sun graces the sides of the CMN C.A.R.E. Mobile, a mobile
clinic serving children in remote areas across the Ozarks - and
regardless of ability to pay. Great Southern has been a major
corporate sponsor of the Children's Miracle Network Telethon and
the Children's Hospital Services at Cox Health System since 1986,
and has helped raise nearly $6 1/2 million for CMN activities, all
of which has stayed in the area to provide family care grants,
outreach programs and life enhancing equipment and services for
children with various medical needs.
On the first Monday of every October, Great Southern presents the
Annual Boys & Girls Town Benefit Golf Tournament, funding state-
accredited treatment programs for children ages 6-17 who are
recovering from substance and sexual abuse, stress and other family
and social behavioral problems. Last year, the tournament netted
over $49,000, which is now also helping to build a new campus for
the kids at Fort and Grand in Springfield. Boys and Girls Town of
Missouri projects this year's total to reach $80,000.
Great Southern's other major golf tournament is equally popular,
and actually sold-out this year. Sports stars including Leon
Spinks, Roger Wehrli and Freddie Patek joined Great Southern's
annual Missouri Sports Hall of Fame Golf Classic this year in
netting $76,000 for the continued operations of the facility.
At Christmas time, Great Southern teamed up with KOLR TV and CBS to
help popular talk show host Oprah Winfrey create the world's
largest piggy bank. Viewers were asked to drop their spare change
in a special piggy bank at Battlefield Mall. Local donations
totalled $3,625 in short order, and added up to more than $3 1/2
million nationally. The money provides college scholarships for
underprivileged kids across the country.
<PAGE> 10 and 11 continued
Other worthy annual causes sporting the Great Southern sun of
sponsorship include the March of Dimes, the Muscular Dystrophy
Association, Easter Seals, the American Cancer Society, Meals on
Wheels and St. Jude's Research Hospital. And in addition to our
special causes and involvements, Great Southern stays involved
year-round in a number of other quality-of-life participations,
like helping kids make the grade in school. After we adopted
McGregor Elementary in Springfield we began looking for ways to
help students build the skills they'll need in the future. Our
"McGregor Bucks" program fits the bill as kids earn "Scholar
Dollars" for doing the right thing: attending classes, paying
attention, excelling and being good citizens. In other words, they
worked hard for their money, redeemable at our in-school store for
school supplies and other goodies.
Because we're more than just a bank, the Great Southern sun shines
at Nixa's Sucker Days, Cabool's Farm Fest, at Poke Salat Days in
Ava, and at big and small town Christmas parades across southern
Missouri. The Ozarks is our neighborhood, and each community is
our home.
(On page 10 is a picture of some students in front of the new Boys
and Girls town facilities. On page 11 is a picture of the Great
Southern chuck wagon on the Boys and Girls Town annual trail ride,
an infant in the CMN ward at Cox Hospital, some participants in a
Great Southern sponsored charity golf tournament and participants
in the annual March of Dimes Walk America.)
Cutlines for photos
a) Students pose on the construction site in eager anticipation of
the opening of their new Boys and Girls Town campus in Springfield.
Each year, Boys and Girls Town of Missouri loads up 250
participants on horses and mules for the great Wagon Train (above
right), a popular event among the kids that also builds self-
confidence, pride of accomplishment, personal esteem and many new
friendships.
b) A new project for CMN this year, "Books for Babies," helps
parents connect even while their babies are still confined to
incubators in Neonatal Intensive Care. Reading to newborns
encourages bonding, hastens recovery, relieves stress and even
promotes family literacy. The program has been an unqualified
success, boasting 100% participation from parents.
c) Our employees enjoy turning out in big numbers at the annual
March of Dimes WalkAmerica, which this year generated over $77,000
in the Springfield area alone. Great Southern has been a principal
corporate sponsor for the last 4 years.
<PAGE> 12 and 13
Everything Under The Sun
- ------------------------
Our oldest subsidiary, established in 1952 largely on the coattails
of the original Savings & Loan Association's mortgage loan
business, has long since found its own niche in the highly
competitive insurance industry, and today employs a diverse staff
of 19 specialists - including three Certified Insurance Counselors
and six Certified Insurance Service Representatives - writing all
lines of insurance and representing several of the nation's top
underwriters. For the 4th consecutive year, the agency received
national recognition by CAN as a High Performance Agency.
Complementing the bank's 'bottom-up' new client development
philosophy - but with a reverse twist - Great Southern Insurance
spread its name last year by focusing marketing efforts on
commercial business development, and has increased writings so
significantly that 60% of its total property casualty business is
now commercial. Including trickle-down personal business from
business owners, managers and employees, the subsidiary reported
written premium increases across the board, along with a healthy 8%
increase in net income before taxes for the fiscal year.
Other notable accomplishments for the year included the
establishment of a new branch office in Nixa, and a computer system
expansion assuring both year 2000 compliance and state-of-the-art
transmission capabilities with our national insurance company
underwriters.
When record after record is broken, we come to expect it. But when
long-standing records fall, like Roger Maris' single-season home-
run record to Mark McGwire, we all take notice.
In 1932, a reporter for the New York Times asked Babe Ruth, "Do you
realize you made more money this year than President Hoover?" Ruth
replied, "I had a better year than Hoover."
Great Southern Investments had that kind of year, with gross
revenues passing $1.4 million. We doubled the number of new
customer accounts opened versus fiscal 1997. We more than doubled
our mutual fund and equity trading volume. And tripled the
balances in our money market accounts. We may not be in the same
league as Ruth or McGwire. But 'we came to play.'
A key product development has been our MoneyWorks Cash Management
Account, giving investors the ability to consolidate all their
stock, bond and mutual fund activities into one no-fee account -
along with simplified, easy-to-read statements of all their
investment holdings.
Airline commission cuts, consumer-direct ticket sales and even
travel shopping on the Internet have forced a number of agencies
out of the travel business - and most of the others to re-think
methods of compensation for the services they provide. At the same
time, Great Southern Travel was posting an overall sales increase
of 27% for the year, and now ranks among the top 5% of all
independent travel agencies in the U.S.
The subsidiary's strategic business plan focuses on group and tour
sales - up 35%, on cruises - up 26%, and on the development of
other more profitable packages and services that fall outside the
industry's common commission woes.
Great Southern Travel's Branson Box Office became the preferred
supplier for Branson travel with International Tours Inc. this
year, a travel group encompassing more than 1,100 retail travel
agencies across the country. Branson Group operations, formerly
divided between Branson offices and our South Street location in
Springfield, have been consolidated in Branson, where they are now
directed by General Manager Lenni Neimeyer.
On the way to the top, Great Southern Travel brought home a
boatload of prestigious souvenirs, including Carnival Cruise Lines'
Winner's Circle Award, Holland America Lines' Premium Preferred
account status, membership in Funjet Vacations' exclusive 500 Club,
and Apple Vacations' Golden Apple Award - all recognizing customer
service and sales performance excellence.
And to cap off a great year, we acquired something even more
prestigious than awards: Joplin's largest travel agency,
International Tours and Cruises, and brought on board Mark Norton
as Executive Vice President and Managing Director. Great Southern
Travel also acquired International Tours of Monett in June.
(On page 12 is a picture of two Great Southern insurance agents ( a
father and son). On page 13 is a picture of Great Southerns new
Joplin travel agency and its employees, an investment councilor
presenting a radio talk show and a poster representing some of the
numerous travel awards received by Great Southern Travel.)
Cutlines for photos
a) In Insurance, like everything else we do, it's all about people.
New agent Wes Summers, 25, won accreditation as a Certified
Insurance Counselor during the year. But top-performing Great
Southern Insurance veteran Gene Summers, alias 'dad', is the one
beaming with pride.
b) Great Southern's native sun became a whole lot more visible in
Missouri's 4th largest market this year, with the addition of
another bank branch on Rangeline, and the simultaneous acquisitions
of Mark Norton and his International Tours and Cruises, the four-
state corners' largest travel agency.
c) You can reach Great Southern Investments counselor Mike Bennitt
most anytime at 888-4440. But if you're not sure what questions to
ask, tune into his radio talk show Wednesday mornings at 8am on
radio station KLFJ and listen to what the experts are discussing.
<PAGE> 14 and 15
(On page 14 is a half page picture identical to the front cover
photo.)
Management's Discussion and Analysis 15
Consolidated Financial Statements 25
Notes to Consolidated Financial Statements 29
Great Southern Bancorp, Inc. and subsidiaries
Management's Discussion and Analysis
The discussion set forth below, as well as other portions of this
document, may contain forward-looking statements within the meaning
of the federal securities laws. Such statements are subject to
certain risks and uncertainties, and 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 and/or abroad; 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 profitability of the Company, and more specifically, the
profitability of its primary subsidiary Great Southern Bank (the
"Bank"), depends primarily on its net interest income. Net
interest income is the difference between the interest income it
earns on its loans and investment portfolio, and its cost of funds,
which consists mainly of interest paid on deposits and borrowings.
Net interest income is affected by the relative amounts of
interest-earning assets and interest-bearing liabilities and the
interest rates earned or paid on these balances. When interest-
earning assets approximate or exceed interest-bearing liabilities,
any positive interest rate spread will generate net interest
income.
The Company's profitability is also affected by the level of its
non-interest income and operating expenses. Non-interest income
consists primarily of gains on sales of loans and available-for-
sale investments, service charge fees and commissions of non-bank
subsidiaries. Operating expenses consist primarily of salaries and
employee benefits, occupancy-related expenses, equipment and
technology-related expenses and other general operating expenses.
<PAGE> 15 continued
The operations of the Bank, and banking institutions in general,
are significantly influenced by general economic conditions and
related monetary and fiscal policies of regulatory agencies.
Deposit flows and the cost of funds are influenced by interest
rates on competing investments and general market rates of
interest. Lending activities are affected by the demand for
financing real estate and other types of loans, which in turn are
affected by the interest rates at which such financing may be
offered and other factors affecting loan demand and the
availability of funds.
EFFECT OF FEDERAL LAWS AND REDULATIONS
Federal legislation and regulation significantly affect the banking
operations of the Company and have increased competition among
savings institutions, commercial banks, mortgage banking
enterprises and other financial institutions. In particular, the
capital requirements and operations of regulated depository
institutions such as the Company and the Bank have been and will be
subject to changes in applicable statutes and regulations from time
to time, which changes could, under certain circumstances,
adversely affect the Company or the Bank.
On June 30, 1998, the Bank became a state chartered trust company
and the Company became a bank holding company. This change brought
with it an additional set of regulations and new regulators for the
Bank and Company. The new regulators may have different areas of
emphasis when evaluating the operations of the Company or the Bank
than their prior regulators. While this change may cause the
Company or the Bank to make changes in the way they conduct
business, these changes are not expected to be material to the
overall operations or profitability of the Company.
RECENT CHANGES IN ACCOUNTING PRINCIPLES
In March 1997, the Financial Accounting Standards Board (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 adoption of SFAS 128 did
not have a material effect on the financial statements of the
Company.
<PAGE> 15 continued and 16
POTENTIAL IMPACT OF ACCOUNTING PRINCIPLES TO BE IMPLEMENTED IN THE
FUTURE
The FASB recently adopted SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and
display of comprehensive income and its components in a full set of
financial statements. It does not address issues of recognition or
measurement. The Company's most significant component of other
comprehensive income is the unrealized gains and losses on
available-for-sale securities. The disclosure requirements are
effective for fiscal years beginning after December 15, 1997. The
adoption of SFAS 130 is not expected to have a material impact on
the Company's financial statements.
The FASB recently adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This Statement
establishes standards for reporting operating segments and requires
certain other disclosures about products and services, geographic
areas and major customers. The disclosure requirements are
effective for fiscal years beginning after December 15, 1997. The
Statement requires selected information about operating segments in
the Company's interim financial reports for the fiscal year
beginning July 1, 1998. Management is in the process of evaluating
the impact of the adoption of SFAS 131 on the Company's financial
statements.
The FASB recently adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective
for fiscal years beginning after June 15, 1999, and may be
implemented as of the beginning of any fiscal quarter after
issuance. SFAS No. 133 may not be applied retroactively.
Management does not believe adopting SFAS No. 133 will have a
material impact on the Company's financial statements
YEAR 2000
The "Year 2000 Problem" centers on the inability of computer
systems to precisely recognize the year 2000. Many existing
computer programs and systems were originally programmed with six
digit dates that provided only two digits to identify the calendar
year in the date field, without considering the upcoming change in
the century. With the impending millennium, these programs and
computers will recognize "00" as the year 1900 rather than the year
2000. If computer systems are not adequately changed to identify
the year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations which rely on
the date/field information, such as interest, payment or due dates
and other operating functions, will generate results which could be
significantly misstated, and the Bank could experience a temporary
inability to process transactions, send invoices or engage in
similar normal business activities. In addition, under certain
circumstances, failure to adequately address the Year 2000 Problem
could adversely affect the viability of the Bank's suppliers and
creditors and the creditworthiness of its borrowers. Thus, if not
adequately addressed,
<PAGE> 16 continued and 17
the Year 2000 Problem could result in a significant adverse impact
on the Bank's products, services and competitive condition.
Financial institution regulators have recently increased their
focus upon year 2000 issues, issuing guidance concerning the
responsibilities of senior management and directors. The FDIC and
the other federal banking regulators have issued safety and
soundness guidelines to be followed by insured depository
institutions, such as the Bank, to assure resolution of any year
2000 problems. The federal banking agencies have asserted that
year 2000 testing and certification is a key safety and soundness
issue in conjunction with regulatory exams, and thus an
institution's failure to address appropriately the Year 2000
Problem could result in supervisory action, including such
enforcement actions as the reduction of the institution's
supervisory ratings, the denial of applications for approval of a
merger or acquisition, or the imposition of civil money penalties.
The Bank has been experiencing rapid growth in both the deposit and
loan areas. The hardware and core software systems are approaching
their capacity. Due to this growth and the year 2000 issue, the
Bank evaluated both upgrading the current systems as well as
looking into a potential replacement system. Management of the
Bank determined conversion to a new hardware and software system
was the best solution to meet the growth needs of the Bank as well
as resolve the year 2000 issues.
The new system has been certified year 2000 compliant.
Installation of the new system has been completed and training and
testing is underway. Conversion to the new system is scheduled to
be completed by early November 1998.
In addition to replacing the core system, the personal computers
and wide area network are being completely replaced with year 2000
compliant systems. This process is 80% complete with final
completion scheduled for October 1998.
A complete inventory of non-mission critical hardware and software
was completed in December 1997. Non-compliant software systems are
scheduled for replacement or will be discontinued. Security
systems, elevators, heating and air conditioning and like items
have been tested and are expected to function as usual through the
date of change. All third party vendors have certified their
products as compliant. Testing of these and all other systems is
scheduled for completion no later than June 30, 1999.
A contingency plan, utilizing the current core software, has been
formulated. The supplier of the current system has released a year
2000 compliant system which can be installed on a larger hardware
system that can be obtained by the Bank. This would be for
temporary, emergency use only, to allow time to complete the
conversion that is in progress. Should there be a failure of
utilities or telephone communications, both of which the Bank is
dependent on, a plan is being formulated to ensure the ability to
operate enough strategic branch locations to serve our customers.
<PAGE> 17 continued
A budget of $2.4 million has been established to complete the
necessary steps previously noted. Approximately $800,000 has been
spent to date, with an additional $1.2 million budgeted for 1998
and $400,000 budgeted for 1999. The majority of these costs are
capital items that will be depreciated or amortized over a period
of 3 to 5 years.
An outside consultant has been utilized throughout the process to
provide an independent review of all areas. The Company's estimate
of year 2000 project costs and completion dates are based on
management's best estimates that have been derived utilizing
numerous assumptions about future events. These estimates and
actual results may differ materially.
ASSET/LIABILITY MANAGEMENT
During fiscal year 1998, the Company increased total assets by $87
million. The main areas of change were an increase in net loans of
$71 million and an increase in cash and interest-bearing deposits
of $13 million.
The following loan categories experienced net increases as noted:
commercial real estate and construction loans, $57 million;
commercial business loans, $29 million; consumer (primarily
automobile and student) loans, $19 million.
The following loan categories experienced net decreases as noted:
Single-family and other residential loans, $32 million.
The increase in cash and interest-bearing deposits was primarily
due to larger cash letters in the process of collection at any
point in time and the timing of transfers of funds from cash
letters, and increased cash funds needed to supply the expanded
number of ATM machines.
Total liabilities increased $81 million during fiscal 1998,
primarily from an increase in deposits of $94 million and an
increase in Federal Home Loan Bank (FHLBank) advances of $18
million. The deposit increase was primarily from brokered deposits
and the reclassification as deposits of accounts that previously
were short-term borrowings. The increase in FHLBank advances and
deposits was to fund the brisk loan demand during the fiscal year.
Management feels FHLBank advances and brokered deposits are viable
alternatives to retail deposits when factoring all the costs
associated with the generation and maintenance of retail deposits.
In addition, brokered deposits have become more attractive in
recent years with the low level of FDIC deposit insurance. Also,
brokered deposits do not require any collateral pledging while
FHLBank advances require the pledging of collateral at levels
greater than the funds being obtained.
<PAGE> 17 continued
Stockholders' equity increased $7.1 million primarily as a result
of net income of $14.4 million offset by dividend declarations and
payments of $3.5 million and net treasury stock purchases of $3.6
million. The Company repurchased a net of 143,394 shares of common
stock during the fiscal year.
A principal operating objective of the Company is to produce stable
earnings by achieving a favorable interest rate spread that can be
sustained during fluctuations in prevailing interest rates. The
Company has sought to reduce its exposure to adverse changes in
interest rates by attempting to achieve a closer match between the
periods in which its interest-bearing liabilities and interest-
earning assets can be expected to reprice through the origination
of adjustable-rate mortgages and loans with shorter terms and the
purchase of other shorter term interest-earning assets.
The term "interest rate sensitivity" refers to those assets and
liabilities that mature and reprice periodically in response to
fluctuations in market rates and yields. As noted above, one of
the principal goals of the Company's asset/liability program is to
maintain and match the interest rate sensitivity characteristics of
the asset and liability portfolios.
In order to properly manage interest rate risk, the Bank's Board of
Directors has established an Asset/Liability Management Committee
("ALCO") made up of members of management to monitor the difference
between the Bank's maturing and repricing assets and liabilities
and to develop and implement strategies to decrease the "gap"
between the two. The primary responsibilities of the committee are
to assess the Bank's asset/liability mix, recommend strategies to
the Board that will enhance income while managing the Bank's
vulnerability to changes in interest rates and report to the Board
the results of the strategies used. 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,
1998 and 1997" and "Results of Operations and Comparisons of the
Years Ended June 30, 1997 and 1996."
Interest Rate Sensitivity
An important element of both earnings performance and liquidity is
management of interest rate sensitivity. Interest rate sensitivity
reflects the potential effect on net interest income of a movement
in interest rates. The difference between the Company's interest-
sensitive assets and interest-sensitive liabilities for a specified
time frame is referred to as "gap." A financial institution is
considered to be asset-sensitive, or having a positive gap, when
the amount of its earning assets maturing or repricing within a
given time period exceeds the amount of its interest-bearing
liabilities also maturing or repricing within that time period.
<PAGE> 18
Conversely, a financial institution is considered to be liability-
sensitive, or have a negative gap, when the amount of its interest-
bearing liabilities maturing or repricing within a given period
exceeds the amount of earning assets also maturing or repricing
within that time period. During a period of rising interest rates,
a positive gap would tend to increase net interest income, while a
negative gap would tend to have an adverse effect on net interest
income. During a period of falling interest rates, a positive gap
would tend to have an adverse effect on net interest income, while
a negative gap would tend to increase net interest income.
The Company evaluates interest sensitivity risk and then formulates
guidelines regarding asset generation, funding sources and the
pricing of each, and off-balance sheet commitments in order to
decrease sensitivity risk. These guidelines are based upon
management's outlook regarding future interest rate movements, the
state of the regional and national economy and other financial and
business risk factors. The Bank uses a static gap model and a
computer simulation to measure the effect on net interest income of
various interest rate scenarios over selected time periods. The
Company's gap can be managed by repricing assets or liabilities,
selling available-for-sale investments, replacing an asset or
liability prior to maturity or adjusting the interest rate during
the life of an asset or liability. Matching the amount of assets
and liabilities repricing during the same time interval helps to
reduce the risk and minimize the impact on net interest income in
periods of rising or falling interest rates.
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 $79 million, or 10.2%, at June 30, 1998, as compared
to a positive $48 million, or 6.9%, at June 30, 1997 and a positive
$89 million, or 13.6% at June 30, 1996.
The change in the Company's one-year gap position from 1997 to 1998
resulted primarily from (i) a $22 million, or 36%, increase in
investment securities and other interest-earning assets due to
maturities shifting back from the 1 to 3 year category; (ii) a $17
million, or 3%, net increase in various loan types; (iii) a $49
million decrease in FHLBank advances from a shifting of advances
into callable advances that have longer maturities with call
provisions of 6 months to 2 years; and (iv) a $26 million decrease
in other borrowings and liabilities which were reclassified into
interest-bearing demand deposits; offset by (v) a $43 million, or
18%, increase in time deposits in the one year or less category
primarily from the Company's continued increased use of brokered
deposits substantially all of which had maturities of one year or
less; and (vi) a $40 million, or 35%, increase in interest-bearing
demand deposits, primarily from $26 million of other borrowings
reclassified to this category and from growth in accounts.
<PAGE> 18 continued
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.
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 34% 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 this strategy has
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.
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.
<PAGE> 19
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, 1998 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, 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 are assumed. Funds from contractual amortization are
reinvested at estimated market rates.
<TABLE>
<CAPTION>
Table I June 30, 1998 1997 1996
-------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Residential, commercial real estate and
construction loans $458,449 $474,051 $463,559
Commercial business loans 53,605 25,557 12,349
Consumer loans 27,542 22,549 16,202
Investment securities and other 82,460 60,628 76,343
------- ------- -------
Total interest rate sensitive assets repricing
within one year 622,056 582,785 568,453
------- ------- -------
Interest-bearing demand deposits 155,485 115,299 112,289
Savings deposits 34,644 35,065 37,009
Time deposits 283,707 240,643 192,909
FHLBank advances 69,228 117,659 120,849
Other borrowings and liabilities 0 26,338 16,468
------- ------- -------
Total interest rate sensitive
liabilities repricing within one year 543,064 535,004 479,524
------- ------- -------
One year interest rate sensitivity gap* $ 78,992 $ 47,781 $ 88,929
======= ======= =======
Interest rate sensitive assets/interest
rate sensitive liabilities 114.5% 108.9% 118.5%
===== ===== =====
One year interest rate sensitivity gap
as a percent of interest-earning assets 10.2% 6.9% 13.6%
==== === ====
<FN>
*Defined as the Company's interest-earning assets that mature or reprice within one year minus its
interest-bearing liabilities which mature or reprice within one year.
</TABLE>
<PAGE> 19 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 real estate loans $164,460 $ 55,346 $ 59,602 $ 9,593 $ 19,382 $308,383
Construction loans 48,913 0 88 0 180 49,181
Commercial real estate loans 189,015 715 15,459 7,057 3,274 215,520
Commercial business loans 53,486 119 514 388 216 54,723
Consumer loans 23,466 4,076 12,556 5,696 773 46,567
Investment securities and other 65,075 17,385 17,352 0 0 99,812
------- ------ ------- ------- ------ -------
Total interest-earning assets 544,415 77,641 105,571 22,734 23,825 774,186
------- ------ ------- ------- ------ -------
Interest-bearing demand deposits 155,485 155,485
Savings deposits 34,644 34,644
Time deposits 198,167 85,540 34,024 9,303 3,23 330,268
FHLBank advances 61,910 7,318 38,326 11,999 49,955 169,508
------- ------ ------- ------- ------ -------
Total interest-bearing liabilities 450,206 92,858 72,350 21,302 53,189 689,905
------- ------ ------- ------- ------ -------
Interest-earning assets less
interest-bearing liabilities $ 94,209 $(15,217) $ 33,221 $ 1,432 $(29,364) $ 84,281
======= ====== ======= ====== ====== =======
Cumulative interest rate
sensitivity gap $ 94,209 $ 78,992 $112,213 $113,645 $ 84,281
======= ====== ======= ======= ======
Cumulative interest rate
sensitivity gap as a percent
of interest-earning assets
at June 30, 1998 12.2% 10.2% 14.5% 14.7% 10.9%
==== ==== ==== ==== ====
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%
== === ==== === ====
</TABLE>
RESULTS OF OPERATIONS AND COMPARISON FOR THE YEARS ENDED JUNE 30,
1998 AND 1997
The increase in earnings of $5.1 million, or 54.6%, for the year
ended June 30, 1998 when compared to June 30, 1997, was primarily
due to an increase in non-interest income of $3.3 million, or
31.7%, and an increase in net interest income of $3.2 million, or
12.1%, offset by an increase in non-interest expense of $100,000,
or 0.5%, and an increase in provision for income taxes of $1.2
million, or 20.4%, during fiscal 1998.
TOTAL INTEREST INCOME
Total interest income increased $6.4 million, or 11.5%, during
fiscal 1998 primarily due to a $6.2 million, or 12.0%, increase in
interest income on loans.
<PAGE> 19 continued and 20
INTEREST INCOME - LOANS
During fiscal 1998, interest income on loans increased primarily
from higher average balances. Interest income increased $5.8
million as the result of higher average loan balances from $561
million during fiscal 1997 to $624 million during fiscal 1998. The
higher average balance resulted from the Bank's increased lending
in commercial real estate and commercial business lending and entry
into the indirect dealer consumer lending offset by a decline in
single-family residential lending. The average yield on loans
increased from 9.15% during fiscal 1997, to 9.22% during fiscal
1998 as a result of the change in the mix of loan types.
INTEREST INCOME - INVESTMENTS AND OTHER INTEREST-EARNING DEPOSITS
Interest income on investments and interest-earning deposits
increased $220,000, or 5.3%, during fiscal 1998 when compared to
fiscal 1997. Interest income increased $512,000 as a result of
higher average balances from $80 million during fiscal 1997 to $92
million in fiscal 1998. This increase was primarily in interest-
bearing deposits in FHLBank used to fund daily operations and
lending. Interest income declined $292,000 as a result of lower
average yields from 5.22% during fiscal 1997, to 4.76% during
fiscal 1998 due to lower short term market rates.
TOTAL INTEREST EXPENSE
Total interest expense increased $3.2 million, or 11.0%, during
fiscal 1998 when compared with fiscal 1997 primarily due to an
increase in interest expense on deposits of $3.0 million, or 16.7%.
INTEREST EXPENSE - DEPOSITS
Interest expense on time deposits increased $2.8 million as a
result of higher average balances from $262 million during fiscal
1997, to $312 million during fiscal 1998. The average balances of
time deposits increased primarily as a result of the Company's use
of brokered and other time deposits to fund loan growth. In recent
years, brokered deposit rates have become competitive with rates on
FHLBank advances and larger retail deposits.
Interest expense on deposits increased $250,000 as a result of
higher average balances of interest bearing demand deposits from
$109 million during fiscal 1997, to $121 million during fiscal
1998. This increase in balances was the result of the rapid growth
of personal checking customers during the fiscal year. The Bank
experienced this growth in large part due to acquisitions of
competitors by larger banking institutions. This increase was
partially offset by a $147,000 decrease in interest expense from
slightly lower average rates from 2.36% in fiscal 1997 to 2.20% in
fiscal 1998, due to the change of the deposit mix
<PAGE> 20 continued
INTEREST EXPENSE - FHLBANK ADVANCES AND OTHER BORROWINGS
Interest expense on FHLBank advances and other borrowings increased
$359,000 due to higher average balances from $185 million during
fiscal 1997 to $191 million during fiscal 1998. These higher
average balances resulted from the use of FHLBank advances for
funding a portion of the loan growth previously mentioned. Average
rates were slightly lower during fiscal 1998 at 5.77% compared to
5.88% during fiscal 1997.
NET INTEREST INCOME
The Company's overall interest rate spread remained constant at
3.79% during fiscal 1997 and fiscal 1998.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $150,000, or 8.6%, during
fiscal 1998 from $1.7 million during fiscal 1997 to $1.9 million
during fiscal 1998.
Management records a provision for loan losses in an amount
sufficient to result in an allowance for loan losses that will
cover current net charge-offs as well as risks believed to be
inherent in the loan portfolio of the Bank. The amount of
provision charged against current income is based on several
factors, including, but not limited to, past loss experience,
current portfolio mix, actual and potential losses identified in
the loan portfolio, economic conditions and regular reviews by
internal staff and regulatory examinations. During periods of loan
growth, a portion of the provision may reflect management's desire
to maintain a satisfactory allowance to protect the Company from
losses which occur as a routine part of the banking business.
Weak economic conditions, higher inflation or interest rates, or
other factors may lead to increased losses in the portfolio.
Management has established various controls in an attempt to limit
future losses, such as a watch list of possible problem loans,
documented loan administration policies and a loan review staff to
review the quality and anticipated collectibility of the portfolio.
Management determines which loans are potentially uncollectible, or
represent a greater risk of loss and makes additional provisions to
expense, if necessary, to maintain the allowance at a satisfactory
level.
Non-performing assets decreased $1.9 million, or 13.7%, during
fiscal 1998 from $13.9 million at June 30, 1997 to $12.0 million at
June 30, 1998. Non-performing loans decreased $670,000, or 8.5%,
from $7.9 million at June 30, 1997 to $7.2 million at June 30,
1998, and foreclosed assets declined $1.2 million, or 20.4%, from
$6 million at June 30, 1997 to $4.8 million at June 30, 1998.
<PAGE> 20 continued and 21
Potential problem loans increased $1.8 million, or 25.4%, during
fiscal 1998 from $7.1 million at June 30, 1997 to $9.0 million at
June 30, 1998. These are loans which management has identified
through routine internal review procedures as having possible
credit problems which may cause the borrowers difficulty in
complying with current loan repayment terms. These loans are not
reflected in the non-performing loans.
The allowance for loan losses at June 30, 1998 and June 30, 1997,
respectively, totaled $16.4 million and $15.5 million, representing
2.5% and 2.7% of total loans, 227% and 197% of non-performing
loans, and 101% and 103% of non-performing loans and potential
problem loans in total. The allowance for foreclosed asset losses
was $0 at June 30, 1998 and $319,000 at June 30, 1997, representing
0% and 5.3%, respectively, of total foreclosed assets.
Management considers the allowance for loan losses and the
allowance for foreclosed asset losses adequate to cover the
possible risk of loss in the Company's assets at this time, based
on current economic conditions. If economic conditions deteriorate
significantly, it is possible that additional assets would be
classified as non-performing, and accordingly, additional provision
for possible losses would be required, thereby adversely affecting
future results of operations.
NON-INTEREST INCOME
Non-interest income increased $3.3 million, or 31.7%, during fiscal
1998 compared to fiscal 1997. The increase was primarily due to:
(i) an increase of $1.2 million in profits on sale of available-
for-sale securities; (ii) an increase in service charge income of
$1.1 million, or 37.9%, on transaction accounts and electronic
transactions due to increased volumes from an expanded ATM network
and special promotions on debit card usage; (iii) an increase of
$683,000, or 13.7%, in commission income from the travel, insurance
and investment subsidiaries from growth in these areas; (iv) an
increase of $600,000 in profits on sale of loans from increased
levels of fixed rate loan refinancing due to historically low
rates; and (v) various increases and decreases in other non-
interest income items. Service charge income and commission income
is expected to remain at these higher levels in fiscal 1999.
Profits on sales of loans is expected to remain at these higher
levels in fiscal 1999 assuming home loan interest rates remain at
the current historically low levels. Profits on sale of available-
for-sale securities are more volatile. They are based on several
external factors which could cause the future profits to be more or
less than in fiscal 1998.
<PAGE> 21 continued
NON-INTEREST EXPENSE
Non-interest expense increased only slightly during fiscal 1998
when compared to fiscal 1997, however, there were some major
increases and decreases within non-interest expense items between
the two fiscal periods. The changes were: (i) a decrease in
insurance of $2.8 million due to the payment in fiscal 1997 of the
one-time SAIF assessment of thrifts in September 1996; and (ii) a
decrease in goodwill amortization of $1 million due to the write-
off in fiscal 1997 of goodwill remaining from a 1982 failed thrift
purchase; offset by (iii) an increase of $470,000 in tax consulting
fees paid to achieve a one-time $1.5 million reduction of state
financial institution taxes; (iv) an increase of $1.6 million in
salaries and employee related costs due to increased staffing
levels in transaction processing areas and expanded consumer and
commercial lending, both resulting from substantial asset and
customer growth; (v) an increase of $633,000 in occupancy and
equipment expense primarily due to expansion of the Company's ATM
network and other technology related purchases; (vi) an increase of
$300,000 in robbery and bad check losses; (vii) an increase of
$160,000 in audit, accounting and supervisory exam fees from
increased time in these areas and a previous under accrual; (viii)
an increase of $110,000 in package transaction account benefit
costs due to the increased number of personal checking customers;
and (ix) increases in the majority of other non-interest expense
items resulting from asset and earnings growth.
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
decreased from 38.1% in fiscal 1997 to 32.4% in fiscal 1998. The
38.1% in fiscal 1997 would have been 35.5% without the non-
deductible goodwill write-off that occurred during the period. A
large portion of the lower than normal percentage in the June 30,
1998 period was due to a refund of prior period state financial
institution taxes of $1.1 million. The refund was the result of a
review of the Bank's state financial institution tax returns by a
consulting firm. The refund resulted from the Bank's charter
change from a state charter to a federal savings bank charter in
December 1994. An additional current year reduction of $500,000
resulted from the Bank's charter change at June 30, 1998 from a
federal savings bank charter to a state trust company charter.
<PAGE> 21 continued and 22
RESULTS OF OPERATIONS AND COMPARISONS OF THE YEARS ENDED JUNE 30,
1997 AND 1996
The decrease in earnings for the year ended June 30, 1997 compared
to June 30, 1996 of $2 million, or 17.3%, was primarily due to an
increase in non-interest expense of $4.1 million and an increase in
provision for loan losses of $255,000, 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.
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, 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 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,
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 earned on
the redeployment of funds from maturing investments into new
investments at current market rates.
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 offset by a $260,000, or 2.3%, decrease in
interest expense 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, 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> 22 continued
NET INTEREST INCOME
The Company's overall net interest margin 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 received on interest-earning assets which was slightly
greater than the overall decrease in the weighted average rates
paid on interest-bearing liabilities.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $255,000, or 18%, in fiscal
1997 from fiscal 1996.
Non-performing 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 $4.9 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 loans in connection with the sale of
foreclosed assets. The majority of these loans are currently
performing according to their loan terms.
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.
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.
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> 22 continued and 23
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 salaries and employee
benefits of $850,000, or 10.2%, 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 due to ordering machine readable forms in additional
areas to streamline transaction processing and efficiency; (v) an
increase of $180,000, or 8.2%, 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.
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
include the average balances of non-accrual loans for each period.
Interest income on loans includes interest received on non-accrual
loans on a cash basis. The table does not reflect any effect of
income taxes.
<PAGE> 23 continued
<TABLE>
<CAPTION>
Table III Years Ended June 30,
--------------------------------------------------------------------
- --
(Dollars in thousands) June 30, 1998 1997 1996
1998 ----------------------- ----------------------- --------------------
- ---
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 8.96% $624,290 $57,537 9.22% $561,146 $51,365 9.15% $536,695 $49,884
9.29%
Investment securities and
other interest-earning assets 6.12 92,251 4,395 4.76 79,942 4,175 5.22 75,963 4,054
5.34
---- ------- ------ ---- ------- ------ ---- ------- ------ --
- --
Total interest-earning assets 8.73 $716,541 61,932 8.64 $641,088 55,540 8.66 $612,658 53,938
8.80
---- ======= ------ ---- ======= ------ ---- ======= ------ --
- --
Interest-bearing liabilities:
Demand deposits 2.25 $121,477 2,674 2.20 $108,750 2,571 2.36 $102,920 2,495
2.42
Savings deposits 2.51 34,874 859 2.46 35,252 867 2.46 36,901 914
2.48
Time deposits 5.53 312,077 17,418 5.58 262,214 14,513 5.53 238,791 13,594
5.69
---- ------- ------ ---- ------- ------ ---- ------- ------ --
- --
Total deposits 4.46 468,428 20,951 4.47 406,216 17,951 4.42 378,612 17,003
4.49
FHLBank advances
and other borrowings 6.09 191,260 11,041 5.77 184,917 10,871 5.88 186,522 11,129
5.97
---- ------- ------ ---- ------- ------ ---- ------- ------ --
- --
Total interest-bearing
liabilities 4.92 $659,688 31,992 4.85 $591,133 28,822 4.88 $565,134 28,132
4.98
---- ======= ------ ---- ======= ------ ---- ======= ------ --
- -
Net interest income:
Interest rate spread 3.81% $29,940 3.79% $26,718 3.79% $25,806
3.82%
==== ====== ==== ====== ==== ======
====
Net interest margin* 4.18% 4.17%
4.21%
==== ====
====
Average interest-earning assets
to average interest-bearing
liabilities 108.6% 108.5% 108.4%
===== ===== =====
<FN>
*Defined as the Company's net interest income divided by total
interest-earning assets.
</TABLE>
Rate/Volume Analysis
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.
<PAGE> 23 continued and 24
<TABLE>
<CAPTION>
Table IV Years Ended June 30,
---------------------------------------------------------------
(Dollars in thousands) 1997 vs. 1998 1996 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>
Interest-earning assets:
Loans receivable $355 $5,817 $6,172 $ (740) $2,221 $1,481
Investment securities and other
interest-earning assets (292) 512 220 (84) 205 121
--- ----- ----- --- ----- -----
Total interest-earning assets 63 6,329 6,392 (824) 2,426 1,602
--- ----- ----- --- ----- -----
Interest-bearing liabilities:
Demand deposits (147) 250 103 (59) 135 76
Savings deposits 1 (9) (8) (6) (41) (47)
Time deposits 123 2,782 2,905 (363) 1,282 919
--- ----- ----- --- ----- ---
Total deposits (23) 3,023 3,000 (428) 1,376 948
FHLBank advances
and other borrowings (189) 359 170 (163) (95) (258)
--- ----- ----- --- ----- ---
Total interest-bearing liabilities (212) 3,382 3,170 (591) 1,281 690
--- ----- ----- --- ----- ---
Net interest income $275 $2,947 $3,222 $(233) $1,145 $912
=== ===== ===== === ===== ===
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the Company's ability to generate
sufficient cash to meet present and future financial obligations in
a timely manner through either the sale or maturity of existing
assets or the acquisition of additional funds through liability
management. These obligations include the credit needs of
customers, funding deposit withdrawals, and the day-to-day
operations of the Company. Liquid assets include cash, interest-
bearing deposits with financial institutions and certain investment
securities and loans. As a result of the Company's management of
the ability to generate liquidity primarily through liability
funding, management believes that the Company maintains overall
liquidity sufficient to satisfy its depositors' requirements and
meet its customers' credit needs. At June 30, 1998, the Company
had commitments of approximately $110 million to fund loan
originations, issued lines of credit, outstanding letters of credit
and unadvanced loans.
Management continuously reviews the capital position of the Company
and the Bank to insure compliance with minimum regulatory
requirements, as well as exploring ways to increase capital either
by retained earnings or other means.
<PAGE> 24
The Company's capital position remained strong, with stockholders'
equity at $67.4 million, or 8.5%, of total assets of $795 million
at June 30, 1998 compared to equity at $60.3 million, or 8.5%, of
total assets of $708 million at June 30, 1997.
Banks are required to maintain minimum risk-based capital ratios.
These ratios compare capital, as defined by the risk-based
regulations, to assets adjusted for their relative risk as defined
by the regulations. Guidelines required banks to have a minimum
Tier 1 capital ratio, as defined, of 4.00% and a minimum Tier 2
capital ratio of 8.00%, and a minimum 4.00% leverage capital ratio.
On June 30, 1998, the Bank's Tier 1 capital ratio was 9.4% and Tier
2 capital ratio was 11.2% and leverage ratio was 7.5%.
At June 30, 1998, the held-to-maturity investment portfolio
included $180,000 of gross unrealized gains and no gross unrealized
losses. The unrealized gains are not expected to have a material
effect on future earnings beyond the usual amortization of
acquisition premium or accretion of discount because no sale of the
held-to-maturity investment portfolio is foreseen.
The Company's primary sources of funds are savings deposits,
FHLBank advances, other borrowings, loan repayments, proceeds from
sales of loans and securities and funds provided from operations.
The Company utilizes particular sources of funds based on the
comparative costs and availability at the time. The Company has
from time to time chosen not to pay rates on deposits as high as
the rates paid by certain of its competitors and, when believed to
be appropriate, supplements deposits with less expensive
alternative sources of funds.
Statements of Cash Flows. During the years ended June 30, 1998,
1997 and 1996, the Company had positive cash flows from operating
activities and positive cash flows from financing activities. The
Company experienced negative cash flows from investing activities
during each of the years ended June 30, 1998, 1997 and 1996.
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 $9.1
million, $11.7 million and $11.6 million in cash during the years
ended June 30, 1998, 1997 and 1996, respectively.
During the years ended June 30, 1998, 1997 and 1996, investing
activities used cash of $71.5 million, $36.1 million and $34.4
million primarily due to the net increase of loans in each period.
<PAGE> 24 continued
Changes in cash flows from financing activities during the periods
covered by the Statements of Cash Flows are due to changes in
deposits after interest credited, changes in FHLBank advances and
changes in short-term borrowings as well as purchases of treasury
stock and dividend payments to stockholders. Financing activities
provided $75.7 million, $27.3 million and $35.0 million in cash
during the years ended June 30, 1998, 1997 and 1996. Financing
activities in the future are expected to primarily include changes
in deposits and changes in FHLBank advances.
Dividends. During the year ended June 30, 1998, the Company
declared and paid dividends of $.43 per share, or 24% of net
income, compared to dividends declared and paid during the year
ended June 30, 1997 of $.3875 per share, or 35% of net income. The
Board of Directors meets regularly to consider the level and the
timing of dividend payments.
Common Stock Repurchases. The Company has been in various buy-back
programs since May 1990. During the year ended June 30, 1998, the
Company repurchased 156,888 shares of its common stock at an
average price of $23.55 per share and reissued 13,494 shares of
treasury stock at an average price of $6.57 per share to cover
stock option exercises. 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 to cover
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 of the control of the
Company. The primary factors, however, are the number of shares
available in the market from sellers at any given time and the
price of the stock within the market as determined by the market.
<PAGE> 25
<TABLE>
<CAPTION>
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
JUNE 30, 1998 AND 1997
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
Cash $ 12,199,490 $ 8,176,763
Interest bearing deposits in other financial institutions 33,631,748 24,308,337
----------- -----------
Cash and cash equivalents 45,831,238 32,485,100
Available-for-sale securities 6,362,700 7,408,020
Held-to-maturity securities 50,362,963 49,756,978
Loans receivable, net 655,226,070 583,709,446
Foreclosed assets held for sale, net 4,750,910 5,650,962
Premises and equipment 9,457,015 7,433,073
Refundable income taxes 240,623 -
Accrued interest receivable
Loans 5,159,425 4,225,771
Investments 738,382 767,541
Investment in FHLB stock 9,454,100 10,792,600
Prepaid expenses and other assets 3,960,573 2,982,653
Excess of cost over fair value of net assets acquired, at amortized cost 626,465 -
Deferred income taxes 2,920,665 2,629,140
----------- ------------
Total Assets $795,091,129 $707,841,284
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $553,365,464 $459,235,746
Federal Home Loan Bank advances 169,563,052 151,881,100
Short-term borrowings - 28,744,191
Advances from borrowers for
taxes and insurance 2,176,662 2,488,397
Accounts payable and accrued expenses 2,577,058 1,873,824
Income taxes payable - 3,269,659
----------- -----------
Total Liabilities 727,682,236 647,492,917
----------- -----------
STOCKHOLDERS' EQUITY
Capital stock
Serial preferred stock, $.01 par value; authorized 1,000,000 shares - -
Common stock, $.01 par value; authorized 20,000,000 shares,
issued 12,325,002 shares 123,250 123,250
Additional paid-in capital 17,110,496 17,058,326
Retained earnings - substantially restricted 84,955,740 73,980,259
Unrealized appreciation on available-for-sale securities, net of income
taxes of $669,921 and $870,860 at June 30, 1998 and 1997, respectively 1,047,824 1,362,116
Treasury stock, at cost; 1998 - 4,363,275 shares; 1997 - 4,219,881 shares (35,828,417) (32,175,584)
----------- -----------
Total Stockholders' Equity 67,408,893 60,348,367
----------- -----------
Total Liabilities and Stockholders' Equity $795,091,129 $707,841,284
=========== ===========
<FN>
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of income
FOR THE THREE YEARS ENDED JUNE 30, 1998 1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 57,536,900 $ 51,365,481 $ 49,884,135
Investment securities 3,838,790 3,892,077 3,849,815
Other 555,995 282,889 204,415
----------- ----------- -----------
61,931,685 55,540,447 53,938,365
----------- ----------- -----------
INTEREST EXPENSE
Deposits 20,950,665 17,950,677 17,002,724
FHLB advances 9,904,520 10,229,111 10,585,178
Short-term borrowings 1,136,493 642,356 544,509
----------- ----------- -----------
31,991,678 28,822,144 28,132,411
----------- ----------- -----------
NET INTEREST INCOME 29,940,007 26,718,303 25,805,954
PROVISION FOR LOAN LOSSES 1,852,597 1,706,142 1,450,754
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 28,087,410 25,012,161 24,355,200
----------- ----------- -----------
NONINTEREST INCOME
Commissions 5,652,388 4,968,695 4,412,600
Service charge fees 3,840,564 2,784,719 2,381,455
Net realized gains on sales of loans
and available-for-sale securities 2,522,981 726,590 1,220,336
Income on foreclosed assets 326,197 285,543 727,995
Other income 1,407,470 1,676,510 1,581,553
----------- ----------- -----------
13,749,600 10,442,057 10,323,939
----------- ----------- -----------
NONINTEREST EXPENSE
Salaries and employee benefits 10,828,683 9,233,943 8,381,708
Net occupancy expense 3,033,707 2,400,570 2,220,131
Tax consulting fees 469,157 - -
Postage 857,127 625,745 634,465
Insurance 637,339 3,428,428 1,267,765
Amortization of goodwill 65,410 1,106,961 192,845
Advertising 586,367 675,456 533,336
Office supplies and printing 665,878 562,668 435,427
Other operating expenses 3,325,593 2,329,382 2,608,707
----------- ----------- -----------
20,469,261 20,363,153 16,274,384
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 21,367,749 15,091,065 18,404,755
PROVISION FOR INCOME TAXES 6,923,700 5,751,200 7,110,800
----------- ----------- -----------
NET INCOME $ 14,444,049 $ 9,339,865 $ 11,293,955
=========== =========== ===========
EARNINGS PER COMMON SHARE - BASIC $ 1.79 $ 1.11 $ 1.27
=========== =========== ===========
EARNINGS PER COMMON SHARE - DILUTED $ 1.76 $ 1.10 $ 1.23
=========== =========== ===========
<FN>
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 27
<TABLE>
<CAPTION>
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
FOR THE THREE YEARS ENDED JUNE 30, 1998
Unrealized
Appreciation
(Depreciation)
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, JULY 1, 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 $809,400 - - - 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
Net income - - 14,444,049 - -
14,444,049
Stock issued under Stock
Option Plan - 52,170 - - 41,948
94,118
Dividends declared, $.43 per share - - (3,468,568) - -
(3,468,568)
Change in unrealized appreciation
on available-for-sale securities,
net of income taxes of $200,939 - - - (314,292) -
(314,292)
Treasury stock purchased - - - - (3,694,781)
(3,694,781)
------- ---------- ---------- --------- ---------- --------
- --
BALANCE, JUNE 30, 1998 $123,250 $ 17,110,496 $ 84,955,740 $1,047,824 $(35,828,417)
$67,408,893
======= ========== ========== ========= ==========
==========
<FN>
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
FOR THE THREE YEARS ENDED JUNE 30, 1998 1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 14,444,049 $ 9,339,865 $ 11,293,955
Items not requiring (providing) cash:
Depreciation 1,333,423 1,003,243 980,290
Amortization 55,410 1,101,961 192,845
Provision for loan losses 1,852,597 1,706,142 1,450,754
Provision for losses on foreclosed assets 100,000 100,000 275,000
Gain on sale of loans (1,125,153) (521,165) (539,979)
FHLB stock dividends received - - (176,400)
Net realized gains on available-for-sale securities (1,397,828) (205,425) (680,357)
(Gain) loss on sale of premises and equipment (65,417) (9,585) 2,171
Gain on sale of foreclosed assets (576,783) (559,902) (1,316,887)
Amortization of deferred income, premiums and discounts (704,900) (894,292) (680,395)
Deferred income taxes (90,586) (350,000) 604,000
Changes in:
Accrued interest receivable (904,495) 363,110 (470,643)
Prepaid expenses and other assets (977,920) (1,208,214) 924,293
Accounts payable and accrued expenses 703,234 (557,683) 80,325
Income taxes refundable/payable (3,510,282) 2,382,241 (336,363)
----------- ----------- -----------
Net cash provided by operating activities 9,135,349 11,690,296 11,602,609
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase in loans (70,945,760) (33,203,579) (30,161,082)
Purchase of additional business units (681,875) - -
Purchase of premises and equipment (3,505,798) (1,771,232) (955,690)
Proceeds from sale of premises and equipment 213,850 31,455 2,875
Proceeds from sale of foreclosed assets 1,099,476 1,017,514 2,044,721
Capitalized costs on foreclosed assets (302,040) (198,090) (206,107)
Proceeds from maturing held-to-maturity securities 19,500,000 39,398,775 9,526,632
Purchase of held-to-maturity securities (20,119,994) (40,159,443) (11,971,929)
Proceeds from sale of available-for-sale securities 3,359,677 1,377,623 2,942,647
Purchase of available-for-sale securities (1,431,760) (1,849,015) (4,262,442)
(Purchase) redemption of FHLB stock 1,338,500 (769,800) (1,360,400)
----------- ----------- -----------
Net cash used in investing activities (71,475,724) (36,125,792) (34,400,775)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in certificates of deposit 39,497,048 55,356,409 4,484,912
Net increase in checking and savings accounts 54,632,670 6,824,821 8,242,392
Proceeds from FHLB advances 895,823,200 539,345,121 425,700,856
Repayments of FHLB advances (878,141,248) (568,261,064) (399,226,851)
Net increase (decrease) in short-term borrowings (28,744,191) 12,276,366 2,520,881
Advances to borrowers for taxes and insurance (311,735) (171,030) (565,797)
Purchase of treasury stock (3,694,781) (15,584,673) (3,350,388)
Dividends paid (3,468,568) (3,277,494) (3,132,035)
Stock options exercised 94,118 797,113 279,272
----------- ----------- -----------
Net cash provided by financing activities 75,686,513 27,305,569 34,953,242
----------- ----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 13,346,138 2,870,073 12,155,076
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 32,485,100 29,615,027 17,459,951
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 45,831,238 $ 32,485,100 $ 29,615,027
=========== =========== ===========
<FN>
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE> 29
GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1998, 1997, and 1996
NOTE 1:
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Great Southern Bancorp, Inc. ("GSBC"or the "Company") operates as a
one-bank holding company. GSBC's business primarily consists of
the business of Great Southern Bank (the "Bank"), which provides a
full range of financial services, as well as travel, insurance,
investment services, loan closings and appraisals through the
Company's and the Bank's other wholly-owned subsidiaries to
customers primarily in southwest and central Missouri. The Company
and the Bank are subject to the regulation of certain federal
agencies and undergo periodic examinations by those regulatory
agencies.
In June 1998, the Bank converted to a state-chartered trust company
and the Company became a one-bank holding company. Until that time
the Bank had been a stock savings bank and the Company was a
savings bank holding company.
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 Capital Management and Great Southern Bank and its wholly-
owned subsidiaries, GSB One LLC, GSB Two LLC and Great Southern
Financial Corporation, and its wholly-owned subsidiary, Appraisal
Services, Inc. Significant intercompany accounts and transactions
have been eliminated in consolidation.
Reclassifications
Certain 1997 and 1996 amounts have been reclassified to conform to
the 1998 financial statements presentation. These
reclassifications had no effect on net income.
Cash and Investment Securities
The Bank is a member of the Federal Home Loan Bank system. As a
member of this system, it is required to maintain an investment in
capital stock of the Federal Home Loan Bank 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
Available-for-sale securities, which include any security for which
the Company has no immediate plan to sell but which may be sold in
the future, are carried at fair value. Realized gains and losses,
based on specifically identified amortized cost of the specific
security, are included in other income. Unrealized gains and
losses are recorded, net of related income tax effects, in
stockholders' equity. Premiums and discounts are amortized and
accreted, respectively, to interest income using the level-yield
method over the period to maturity.
Held-to-maturity securities, which include any security for which
the Company has the positive intent and ability to hold until
maturity, are carried at historical cost adjusted for amortization
of premiums and accretion of discounts. Premiums and discounts are
amortized and accreted, respectively, to interest income using the
level-yield method over the period to maturity.
Interest and dividends on investments in debt and equity securities
are included in income when earned.
Excess of Cost Over Fair Value of Net Assets Acquired
Unamortized costs in excess of the fair value of underlying net
assets acquired were $626,465 and $0 at June 30, 1998 and 1997,
respectively. These costs are amortized on a straight-line basis
for a period of five years. As a result of a revision of the
estimated future benefit, all unamortized costs in excess of the
fair value of underlying net tangible assets at June 30, 1996, were
fully expensed during 1997.
<PAGE> 29 continued and 30
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, 1998 and 1997.
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, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
As of June 30, 1998, the most recent notification from the Bank's
regulators categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum
total risk-based, Tier I risk-based and Tier I leverage ratios as
set forth in the table. There are no conditions or events since
that notification that management believes have changed the
institution's category.
The Company's and the Bank's actual capital amounts and ratios are
also presented in the table. No amount was deducted from capital
for interest-rate risk. The tangible capital ratio shown at June
30, 1997, is specific to thrift institutions.
<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, 1998
Total Risk-Based Capital
Great Southern Bancorp, Inc. $74,065 12.2% >=$48,616 >=8.0% N/A N/A
Great Southern Bank $67,254 11.2% >=$48,203 >=8.0% >=$60,770 >=10.0%
Tier I Risk-Based Capital
Great Southern Bancorp, Inc. $66,361 10.9% >=$24,308 >=4.0% N/A N/A
Great Southern Bank $59,487 9.4% >=$25,269 >=4.0% >=$37,904 >= 6.0%
Core Capital
Great Southern Bancorp, Inc. $66,361 8.3% >=$31,862 >=4.0% N/A N/A
Great Southern Bank $59,487 7.5% >=$31,629 >=4.0% >=$39,537 >= 5.0%
As of June 30, 1997
Total Risk-Based Capital
(Great Southern Bank) $60,430 11.6% >=$41,511 >=8.0% >=$51,889 >=10.0%
Tier I Risk-Based Capital
(Great Southern Bank) $53,832 10.4% >=$20,756 >=4.0% >=$31,134 >= 6.0%
Core Capital
(Great Southern Bank) $53,832 7.7% >=$21,001 >=3.0% >=$35,001 >= 5.0%
Tangible Capital
(Great Southern Bank) $53,832 7.7% >=$10,500 >=1.5% N/A N/A
</TABLE>
<PAGE> 30 continued and 31
The Bank is subject to certain restrictions on the amount of
dividends that it may declare without prior regulatory approval. At
June 30, 1998 and 1997, the Bank exceeded its minimum capital
requirements. The Bank may not pay dividends which would reduce
capital below the minimum requirements shown above.
Earnings Per Share
Effective December 15, 1997, the Company adopted the provisions of
SFAS No. 128, Earnings Per Share (EPS), which requires dual
presentation of basic and diluted EPS for all entities with complex
capital structures. Basic earnings per share is computed based on
the weighted average number of shares outstanding during each year.
Diluted earnings per share is computed using the weighted average
common shares and all potential dilutive common shares outstanding
during the period. All computations have been adjusted for the
stock split of October 21, 1996, (see Note 15).
The computation of per share earnings is as follows:
June 30,
----------------------------------
- ----
1998 1997
1996
----------- ---------- -------
- ----
Net income $14,444,049 $9,339,865
$11,293,955
========== =========
==========
Average common shares
Outstanding 8,052,413 8,394,080
8,926,192
Average common share
stock options outstanding 151,162 93,682
269,412
---------- --------- ------
- ----
Average diluted common shares 8,203,575 8,487,762
9,195,604
========== =========
==========
Earnings per common
share - basic $ 1.79 $ 1.11 $
1.27
========== =========
==========
Earnings per common
share - diluted $ 1.76 $ 1.10 $
1.23
========== =========
==========
Options to purchase 19,250 shares of common stock were outstanding
during 1998 but were not included in the computation of diluted EPS
because the options' exercise price was greater than the average
market price of the common shares. The options, which expire in
2008, were still outstanding at the end of 1998.
Cash Equivalents
The Bank considers all liquid investments with original maturities
of three months or less to be cash equivalents. At June 30, 1998
and 1997, cash equivalents consisted of interest bearing deposits
in other financial institutions.
<PAGE> 31 continued
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.
Impact of Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) recently adopted
Statement of Financial Accounting Standards (SFAS) No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This statement was effective for
transactions that occur after December 31, 1997, and imposes new
rules for determining when transfers of financial assets are
accounted for as sales versus when transfers are accounted for as
borrowings. Management believes that SFAS 125 does not have a
material impact on the Company's financial statements.
The FASB recently adopted SFAS 130, "Reporting Comprehensive
Income". This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of
financial statements. It does not address issues of recognition or
measurement. SFAS 130 is effective for fiscal years beginning
after December 15, 1997. The adoption of SFAS 130 is not expected
to have a material impact on the Company's financial statements.
The FASB recently adopted SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information." This statement establishes
standards for the way that public business enterprises report
information about operating segments. The statement also
establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS 131 is
effective for years beginning after December 15, 1997. Management
is in the process of evaluating the impact of the adoption of SFAS
131 on the Company's financial statements.
The FASB recently adopted SFAS 133, "Accounting for Derivative
Financial Instruments and Hedging Activities." This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. SFAS 133 is effective
for all fiscal quarters of fiscal years beginning after June 15,
1999, may be adopted early for periods beginning after issuance of
the Statement and may not be applied retroactively. Management
does not believe the adoption of SFAS 133 will have a material
impact on the Company's financial statements.
<PAGE> 31
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, 1998
-----------------------------------------
- -----
Gross Gross
Approximate
Amortized Unrealized Unrealized
Fair
Cost Gains Losses
Value
----------- ---------- ---------- ------
- ------
Equity securities $ 4,644,955 $1,717,745 $ - $
6,362,700
========= ========= =======
=========
June 30, 1997
-----------------------------------------
- ----
Gross Gross
Approximate
Amortized Unrealized Unrealized
Fair
Cost Gains Losses
Value
----------- ---------- ---------- ------
- ------
Equity securities $ 5,175,044 $ 2,232,976 $
7,408,020
========= =========
=========
The amortized cost and approximate fair value of held-to-maturity
securities are as follows:
June 30, 1998
-------------------------------------------
- ------
Gross Gross
Approximate
Amortized Unrealized Unrealized
Fair
Cost Gains Losses
Value
----------- ---------- ---------- ------
- ------
U.S. Treasury $ 2,103,414 $ 3,586 $ - $
2,107,000
U.S. Government agencies 48,259,549 174,451 -
48,434,000
---------- ------- ------ -----
- -----
$50,362,963 $178,037 $ -
$50,541,000
========== ======= ======
==========
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> 32
Maturities of held-to-maturity securities at June 30, 1998:
Amortized Cost Approximate Fair
Value
-------------- --------------------
- --
One year or less $ 31,762,376 $ 31,894,000
After one through
five years 18,600,587 18,647,000
----------- -----------
$ 50,362,963 $ 50,541,000
=========== ===========
Proceeds of $3,359,677, $1,377,623 and $2,942,647 with resultant
gross gains of $1,397,828, $205,425 and $680,357, were realized
from the sale of available-for-sale securities in 1998, 1997 and
1996, respectively.
The book value of securities pledged as collateral to secure public
deposits amounted to $10,195,000 and $9,677,000 at June 30, 1998
and 1997, respectively, with approximate fair values of $10,231,000
and $9,695,000. The book value of securities pledged as collateral
to secure collateralized borrowing accounts amounted to $-0- and
$13,772,000 at June 30, 1998 and 1997, respectively, with
approximate fair values of $-0- and $13,805,000. The book value of
securities pledged as collateral to secure Federal Home Loan Bank
advances amounted to $22,683,000 and $26,308,000 at June 30, 1998
and 1997, respectively, with approximate fair values of $22,760,000
and $26,360,000.
NOTE 3:
LOANS AND ALLOWANCE FOR LOAN LOSSES
Categories of loans at June 30, 1998 and 1997, include:
1998
1997
------------ -------
- -----
One to four family residential loans $ 217,688,415 $
243,006,249
Other residential mortgage loans 89,140,632
95,885,537
Commercial real estate loans 244,016,514
191,555,823
Other commercial loans 54,722,556
25,958,963
One to four family construction loans 16,031,577
9,528,872
Other residential construction loans 5,993,279
4,243,283
Commercial construction loans 27,156,092
21,931,695
Mortgage-backed securities 1,553,901
1,761,122
Installment and education loans 46,566,627
27,665,964
Discounts on loans purchased (1,031,702)
(1,150,880)
Undisbursed portion of loans in process (28,496,979)
(18,812,126)
Allowance for loan losses (16,372,700)
(15,523,541)
Deferred loan fees and gains, net (1,742,142)
(2,341,515)
----------- ------
- -----
$ 655,226,070 $
583,709,446
===========
===========
<PAGE> 32 continued
Transactions in the allowance for loan losses were as follows
Years Ended June 30,
-------------------------------------
- -----
1998 1997
1996
------------- ------------- -------
- -----
Balance, beginning of year $ 15,523,541 $ 14,356,147 $
14,600,870
Provision charged to expense 1,852,597 1,706,142
1,450,754
Loans charged off (1,142,584) (676,714)
(1,992,578)
Recoveries 139,146 137,966
297,101
---------- ---------- -----
- -----
Balance, end of year $ 16,372,700 $ 15,523,541 $
14,356,147
========== ==========
==========
The weighted average interest rate on loans receivable at June 30,
1998 and 1997, was 8.96% and 8.99%, respectively.
The Bank serviced whole mortgage loans and participations in
mortgage loans for others amounting to $60,047,000, $69,837,000 and
$79,985,000 at June 30, 1998, 1997 and 1996, respectively.
Impaired loans totaled $9,485,000, $10,163,000 and $5,455,000 at
June 30, 1998, 1997 and 1996, respectively. An allowance for loan
losses of $1,501,000, $1,622,000 and $832,000 relates to these
impaired loans at June 30, 1998, 1997 and 1996, respectively.
There were no impaired loans at June 30, 1998, 1997 and 1996,
without a related allowance for loan loss assigned.
Interest of $1,009,000, $487,000 and $923,000 was recognized on
average impaired loans of $12,009,000, $9,362,000 and $9,210,000
for 1998, 1997 and 1996. Interest recognized on impaired loans on
a cash basis during 1998, 1997 and 1996 was not materially
different.
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, 1998 and 1997,
loans outstanding to these directors and executive officers are
summarized as follows:
<PAGE> 32 continued
June 30,
---------------------------
1998 1997
----------- -----------
Balance, beginning of year $ 5,494,000 $ 1,382,000
New loans 1,048,000 4,353,000
Payments (397,000) (241,000)
--------- ---------
Balance, end of year $ 6,145,000 $ 5,494,000
========= =========
NOTE 4:
FORECLOSED ASSETS HELD FOR SALE
June 30,
---------------------------
1998 1997
----------- -----------
Foreclosed assets $ 4,750,910 $ 5,970,352
Valuation allowance - (319,390)
--------- ---------
$ 4,750,910 $ 5,650,962
========= =========
Transactions in the valuation allowance on foreclosed assets were
as follows:
Years Ended June 30,
----------------------------------
- --
1998 1997 1996
--------- ----------- --------
- --
Balance, beginning of year $ 319,390 $ 1,085,602 $
932,547
Provision charged to expense 100,000 100,000
275,000
Charge-offs, net of recoveries (419,390) (866,212)
(121,945)
------- --------- -------
- --
Balance, end of year $ 0 $ 319,390
$1,085,602
======= =========
=========
NOTE 5:
PREMISES AND EQUIPMENT
Major classifications of premises and equipment stated at cost at
June 30, 1998 and 1997, are as follows:
1998 1997
----------- -----------
Land $ 1,565,780 $ 1,628,981
Buildings and improvements 8,357,100 8,071,448
Furniture, fixtures and equipment 9,038,608 6,204,196
---------- ----------
18,961,488 15,904,625
Less accumulated depreciation 9,504,473 8,471,552
---------- ----------
$ 9,457,015 $ 7,433,073
========== ==========
Depreciation expense was $1,333,423, $1,003,243 and $980,290 for
1998, 1997 and 1996, respectively.
<PAGE> 33
NOTE 6:
DEPOSITS
Deposits at June 30, 1998 and 1997, are summarized as follows:
Weighted Average
Interest Rate 1998
1997
---------------- ------------ ------
- ------
Noninterest-bearing accounts $ 29,374,778 $
14,571,834
Interest-bearing checking 2.25% - 2.36% 155,485,084
115,231,966
Savings accounts 2.51% - 2.51% 34,644,369
35,064,843
----------- -----
- ------
219,504,231
164,868,643
----------- -----
- ------
Certificate accounts 0% - 3.99% 61,879
724,646
4% - 4.99% 17,476,479
14,165,816
5% - 5.99% 257,704,093
212,238,314
6% - 6.99% 51,064,400
51,540,038
7% - 7.99% 3,710,659
12,326,032
8% - 10.25% 250,971
506,619
----------- -----
- ------
330,268,481
291,501,465
Accrued interest on deposits 3,592,752
2,865,638
----------- -----
- ------
$ 553,365,464
$459,235,746
===========
===========
The weighted average interest rate on certificates of deposit was
5.50% and 5.53% at June 30, 1998 and 1997, respectively.
The aggregate amount of jumbo certificates of deposit in
denominations of $100,000 or more was approximately $48,675,000 and
$44,489,000 at June 30, 1998 and 1997, respectively. From time to
time the Bank purchases brokered deposits. The aggregate amount of
brokered deposits was approximately $118,977,000 and $77,387,000 at
June 30, 1998 and 1997, respectively.
At June 30, 1998, scheduled maturities of certificates of deposit
are as follows:
<TABLE>
<CAPTION>
1999 2000 2001 2002 Thereafter
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
0% to 3.99% $ 13,353 $ - $ - $ - $ 48,526
4% to 4.99% 17,467,458 7,989 1,032 - -
5% to 5.99% 234,685,215 16,183,095 3,019,801 941,300 2,874,682
6% to 6.99% 31,199,342 11,166,394 2,807,751 1,629,540 4,261,373
7% to 7.99% 294,968 769,847 67,646 1,881,683 696,515
8% to 10.25% 47,425 - - - 203,546
----------- ---------- ---------- --------- ---------
$283,707,761 $28,127,325 $ 5,896,230 $4,452,523 $8,084,642
=========== ========== ========== ========= =========
<PAGE> 33 continued
A summary of interest expense on deposits is as follows:
Years Ended June 30,
--------------------------------------
- --
1998 1997 1996
------------ ------------ ----------
- --
Checking accounts $ 2,673,921 $ 2,570,966 $
2,494,566
Savings accounts 858,880 866,810
914,310
Certificate accounts 17,485,313 14,579,734
13,667,688
Early withdrawal penalties (67,449) (66,833)
(73,840)
----------- ----------- ---------
- --
$ 20,950,665 $ 17,950,677 $
17,002,724
=========== ===========
===========
NOTE 7:
ADVANCES FROM FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank consist of the following:
June 30,
------------------------------------------------------
- ------
1998 1997
----------------------------- ------------------------
- ------
Weighted Average Weighted
Average
Amount Interest Rate Amount Interest
Rate
------------ ---------------- ------------- ----------
- ------
1998 $ - -% $ 117,602,967 6.18%
1999 69,220,415 6.04 4,890,593 6.14
2000 24,876,968 6.66 7,683,759 8.43
2001 13,453,605 5.75 3,248,520 6.33
2002 958,976 7.10 741,285 7.41
2003 11,041,651 5.66 810,579 7.42
2004 and
thereafter 49,957,237 5.75 16,844,616 7.16
----------- ---- ----------- ----
169,508,852 6.00 151,822,319 6.42
Accrued
interest on
advances 54,200 - 58,781 -
----------- ---- ----------- ----
$169,563,052 6.00% $151,881,100 6.42%
=========== ==== =========== ====
In addition to the above advances, the Bank had available a line of
credit amounting to $22,800,000 and $44,250,000 with the FHLB at
June 30, 1998 and 1997, respectively.
The FHLB requires the Bank to maintain FHLB stock, investment
securities and first mortgage loans free of pledges, liens and
encumbrances in an amount equal to at least 150% of outstanding
advances as collateral for such borrowings. Investment securities
with book values of $22,683,000 and $26,308,000, respectively, were
specifically pledged as collateral for advances at June 30, 1998
and 1997.
<PAGE> 33 continued and 34
NOTE 8:
SHORT-TERM BORROWINGS
Short-term borrowings at June 30, 1998 and 1997, are summarized as
follows:
1998 1997
------- ------------
United States government securities
sold under reverse repurchase
agreements $ - $10,342,523
Other borrowed money - 18,401,668
---- ----------
$ - $28,744,191
==== ==========
Prior to its conversion to a state trust charter, the Bank entered
into sales of securities under agreements to repurchase (reverse
repurchase agreements). Reverse repurchase agreements were treated
as financings, and the obligations to repurchase securities sold
were reflected as a liability in the statement of financial
condition. The dollar amount of securities underlying the
agreements remained in the asset accounts. As of June 30, 1998,
short-term borrowings have been reclassified to deposits.
Other borrowed money consisted of agreements with corporate
entities which are secured by a pledge of residential mortgage
loans, and margin loans with brokerage firms.
Securities sold under reverse repurchase agreements had a book
value including accrued interest of $14,012,000 and a fair value of
$13,805,000 at June 30, 1997. Mortgage loans securing other
borrowed money accounts had a carrying value of $11,695,000 at June
30, 1997.
Short-term borrowings had weighted average interest rates of 3.24%
at June 30, 1997. Securities and mortgage loans underlying the
agreements were being held by the Bank during the agreement period.
All agreements were written on a one month or less term.
Short-term borrowings averaged $ 32,234,000, $18,894,000 and
$17,344,000 for the years ended June 30, 1998, 1997 and 1996,
respectively. The maximum amounts outstanding at any month end
were $ 41,176,000, $28,744,000 and $20,132,000 during the years
ended June 30, 1998, 1997 and 1996, 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 beginning with
the fiscal year ending June 30, 1999. The amount of the deferred
tax liability which must be recaptured is $1,722,000 at June 30,
1998.
As of June 30, 1998 and 1997, retained earnings includes
approximately $17,500,000 for which no deferred income tax
liability has been recognized. This amount represents an
allocation of income to bad-debt deductions for tax purposes only
for tax years prior to 1988. If the Bank were to liquidate, the
entire amount would have to be recaptured and would create income
for tax purposes only, which would be subject to the then-current
corporate income tax rate. The unrecorded deferred income tax
liability on the above amount was approximately $6,475,000 at June
30, 1998 and 1997.
The provision for income taxes consists of:
Years Ended June 30,
------------------------------------
- ----
1998 1997
1996
---------- ---------- ------
- ----
Taxes currently payable $7,014,286 $6,101,200
$6,506,800
Deferred income taxes (90,586) (350,000)
604,000
--------- --------- -----
- ----
$6,923,700 $5,751,200
$7,110,800
========= =========
=========
<PAGE> 34 continued
The tax effects of temporary differences related to deferred taxes
shown on the June 30, 1998 and 1997, statements of financial
condition were:
1998 1997
---------- ----------
Deferred tax assets:
Allowance for loan and
foreclosed asset losses $5,746,586 $5,884,000
Accrued expenses 163,000 159,000
Partnership tax credits 46,000 24,000
Other 16,000 -
--------- ---------
5,971,586 6,067,000
--------- ---------
Deferred tax liabilities:
Tax loss reserve in excess
of base year (1,722,000) (1,922,000)
FHLB stock dividends (641,000) (641,000)
Unrealized appreciation on
available-for-sale securities (669,921) (870,860)
Other (18,000) (4,000)
--------- ---------
(3,050,921) (3,437,860)
--------- ---------
Net deferred tax asset $2,920,665 $2,629,140
========= =========
Reconciliations of the Company's provision for income taxes to the
statutory corporate tax rates are as follows:
Years Ended June 30,
------------------------------
1998 1997 1996
----- ----- -----
Tax at statutory rate 35.0% 35.0% 35.0%
State income taxes (3.1) 2.5 2.1
Other .5 .6 1.5
---- ---- ----
32.4% 38.1% 38.6%
==== ==== ====
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, 1994.
State legislation provides that savings banks will be taxed based
on an annual privilege tax of 7% of net income. The 1997 and 1996
state tax included in the provision for income tax amounted to
$652,000 and $552,000, respectively. Because the Bank converted to
a state chartered trust company in June 1998, the Bank does not
have to pay the privilege tax for 1998. During 1998 the Bank
received $1.1 million in state tax refunds of previously paid
taxes.
<PAGE> 34 continued
NOTE 10:
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments:
Cash and Cash Equivalents
For these short-term instruments, the carrying amount approximates
fair value.
Available-For-Sale Securities
Fair values for available-for-sale securities, which also are the
amounts recognized in the statements of financial condition, equal
quoted market prices, if available. If quoted market prices are
not available, fair values are estimated based on quoted market
prices of similar securities.
Held-To-Maturity Securities
Fair values for held-to-maturity securities equal quoted market
prices, if available. If quoted market prices are not available,
fair values are estimated based on quoted market prices of similar
securities.
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.
<PAGE> 35
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.
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.
1998
---------------------------------
Carrying Amount Fair Value
--------------- ------------
Financial assets:
Cash and cash equivalents $ 45,831,238 $ 45,831,238
Available-for-sale securities 6,362,700 6,362,700
Held-to-maturity securities 50,362,963 50,541,000
Loans, net of allowance
for loan losses 655,226,090 660,187,000
Accrued interest receivable 5,897,807 5,897,807
Financial liabilities:
Deposits 553,365,464 552,400,000
FHLB advances 169,563,052 169,637,000
Short-term borrowings - -
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
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
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, 1998, future minimum lease payments are as follows:
1999 $ 154,030
2000 118,840
2001 92,900
2002 90,600
2003 66,200
Later Years 170,500
-------
$ 693,070
=======
Rental expense was $222,429, $203,675 and $188,188 for the years
ended June 30, 1998, 1997 and 1996, respectively.
<PAGE> 35 continued and 36
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, 1998 and 1997, the Bank had outstanding commitments to
originate loans and fund commercial construction aggregating
approximately $63,174,000 and $59,987,000 including $28,497,000 and
$18,812,000, respectively, of undisbursed loans in process. The
commitments extend over varying periods of time with the majority
being disbursed within a 30- to 180-day period. Loan commitments
at fixed rates of interest amounted to $7,075,000 and $479,000 with
the remainder at floating market rates at June 30, 1998 and 1997,
respectively.
Letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private
borrowing arrangements, including commercial paper, bond financing
and similar transactions. The credit risk involved in issuing
letters of credit is essentially the same as that involved in
extending loans to customers.
The Bank had total outstanding letters of credit amounting to
$10,365,000 and $9,206,000 at June 30, 1998 and 1997, respectively,
with $2,118,000 and $959,000 of the letters of credit having terms
ranging from seven months to four years at June 30, 1998 and 1997,
respectively. The remaining $8,247,000 at June 30, 1998 and 1997,
consisted of an outstanding letter of credit to guarantee the
payment of principal and interest on a Multifamily Housing
Refunding Revenue Bond issue. The Federal Home Loan Bank has
issued a letter of credit backing the Bank's letter of credit.
Lines of credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Lines of credit generally have fixed expiration dates. Since a
portion of the line may expire without being drawn upon, the total
unused lines do not necessarily represent future cash requirements.
The Bank evaluates each customer's 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.
<PAGE> 36 continued
At June 30, 1998, the Bank had granted unused lines of credit to
borrowers aggregating approximately $30,385,000 and $5,313,000 for
commercial lines and open-end consumer lines, respectively. At
June 30, 1997, the Bank had granted unused lines of credit to
borrowers aggregating approximately $7,517,000 and $3,731,000 for
commercial lines and open-end consumer lines, respectively.
The Bank grants collateralized commercial, real estate and consumer
loans primarily to customers in the southwest and central portions
of Missouri. Although the Bank has a diversified portfolio, loans
(including loans in process) aggregating $60.9 million and $56.9
million at June 30, 1998 and 1997, 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 $63.2
million and $66.3 million at June 30, 1998 and 1997, respectively.
Loans aggregating $90.1 million and $97.6 million or 13.8% and
16.7% of the respective loan portfolios at June 30, 1998 and 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.
NOTE 14:
ADDITIONAL CASH FLOW INFORMATION
Years Ended June 30,
---------------------------------------
- ---
1998 1997 1996
------------ ------------ ---------
- ---
Noncash Investing and
Financing Activities
Conversion of loans to
foreclosed assets $ 4,068,122 $ 2,272,465 $
7,014,308
Conversion of foreclosed
assets to loans $ 4,647,521 $ 6,255,412 $
4,288,066
Additional Cash
Payment Information
Interest paid $ 31,323,755 $ 27,922,486 $
27,791,991
Income taxes paid $ 8,640,000 $ 3,943,814 $
6,045,000
<PAGE> 36 continued
NOTE 15:
STOCKHOLDERS' EQUITY
On October 1, 1996, the Board of Directors of GSBC declared a stock
split effected in the form of a dividend on the outstanding common
stock for shareholders of record on October 11, 1996. Each
shareholder received one additional share for each share owned on
the record date. Historical per share disclosures have been
updated where applicable to account for the stock split.
NOTE 16:
EMPLOYEE BENEFIT PLANS
The Company participates in a multi-employer defined benefit plan
covering all employees who have met minimum service requirements.
The Company's policy is to fund pension cost accrued. No
contribution was required for the three years ended June 30, 1998.
As a member of a multi-employer pension plan, disclosures of plan
assets and liabilities for individual employers are not required or
practicable.
Prior to 1998 the Company had established an Employee Stock
Ownership Plan (ESOP) for full-time employees age 21 years or older
who had at least one year of credited service. During fiscal 1996
the Company voted to terminate the ESOP and distributed the assets
of the Plan during fiscal 1997.
There was no contribution expense for either of the years ended
June 30, 1997 or 1996, respectively. Dividends declared on ESOP
shares were $184,610 and $334,210 for the years ended June 30, 1997
and 1996, respectively.
The Company has a defined contribution pension plan covering
substantially all employees. 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 1998, 1997 and 1996
were $82,575, $69,691 and $134,674, respectively.
NOTE 17:
STOCK OPTION PLAN
The Company established the 1989 Stock Option and Incentive Plan
for employees and directors of the Company and its subsidiaries.
Under the plan, stock options or awards may be granted with respect
to 1,232,496 shares of common stock.
In addition, the Board of Directors of the Company established the
1997 Stock Option and Incentive Plan for employees and directors of
the Company and its subsidiaries. Under the plan, stock options or
awards may be granted with respect to 800,000 shares of common
stock. No options had been awarded under this plan at June 30,
1998.
<PAGE> 36 continued and 37
Stock options may be either incentive stock options or nonqualified
stock options, and the option price must be at least equal to the
fair value of the Company's common stock on the date of grant.
Options are granted for a ten-year term and become exercisable in
four cumulative annual installments of 25% commencing two years
from the date of grant. The Stock Option Committee may accelerate
a participant's right to purchase shares under the plan.
Stock awards may be granted to key officers and employees upon
terms and conditions determined solely at the discretion of the
Stock Option Committee.
The table below summarizes transactions under the Company's stock
option plans:
Shares
--------------------------------
- -----
Weighted-
Available Under
Average
to Grant Option Exercise
Price
--------- ------- ---------
- -----
Balance, July 1, 1995 149,723 191,009 $
1.684
Granted (68,000) 68,000
10.955
Exercised - (43,888)
(1.581)
Forfeited 4,463 (4,463)
7.695
------- ------- ----
- --
Balance, June 30, 1996 86,186 210,658
4.571
Granted (37,500) 37,500
15.635
Exercised - (2,595)
(3.439)
Forfeited 2,090 (2,090)
(10.938)
Effect of 2-for-1 Stock Split 50,776 243,473
6.232
Granted (16,600) 16,600
17.267
Exercised - (249,796)
(1.973)
Forfeited 5,766 (5,766)
12.531
------- ------- ----
- --
Balance, June 30, 1997 90,718 247,984
11.114
Granted (51,600) 51,600
21.950
Exercised - (12,714)
(3.160)
Forfeited 5,979 (5,979)
(13.547)
------- ------- ----
- --
Balance, June 30, 1998 45,097 280,891
$13.413
======= =======
======
The fair value of each option granted is estimated on the date of
the grant using the Black Scholes pricing model with the following
weighted average assumptions:
1998 1997
Dividends per share $0.42 $0.36
Risk-Free Interest Rate 5.85% 6.04%
Expected Life of Options 4 Years 4 Years
Weighted-Average Fair Value
of Options Granted During Year $8.11 $5.76
<PAGE> 37 continued
The following table further summarizes information about stock
options under the plan outstanding at June 30, 1998:
Options Outstanding
------------------------------------------
- -
Weighted-
Weighted-
Average Average
Range of Number Remaining
Exercise
Exercise Prices Outstanding Contractual Life Price
--------------------- ------------ ----------------- ---------
- -
$1.271 to $5.021 39,062 2.04 years $2.20
$6.625 to $10.938 180,429 7.66 years $13.299
$7.00 to $8.70 32,000 8.93 years $17.783
$21.825 to $25.9375 29,400 8.19 years $24.965
Options Exercisable
----------------------------------------
Weighted-
Range of Number Average
Exercise Prices Exercisable Exercise Price
----------------- ----------- --------------
$1.271 to $5.021 39,062 $2.20
$6.625 to $10.938 22,747 $10.969
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans, and no compensation cost has been
recognized for the Plan. Had compensation cost for the Company's
Plan been determined based on the fair value at the grant dates
using Statement of Financial Accounting Standards No. 123, the
Company's net income would have decreased by $154,900 and $90,800
and earnings per share would have decreased by $.02 and $.01 for
1998 and 1997, respectively. The effects of applying this
statement for either recognizing compensation cost or providing pro
forma disclosures are not likely to be representative of the
effects on reported net income for future years because options
vest over several years and additional awards generally are made
each year.
NOTE 18:
SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Generally accepted accounting principles require disclosure of
certain significant estimates and current vulnerabilities due to
certain concentrations. Estimates related to the allowance for
loan losses are reflected in the footnote regarding loans. Current
vulnerabilities due to certain concentrations of credit risk are
discussed in the footnote on deposits and in the footnote on
commitments and credit risk.
<PAGE> 37 continued
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.
NOTE 20:
SUMMARY OF UNAUDITED QUARTERLY OPERATING RESULTS
Following is a summary of unaudited quarterly operating results for
the years ended June 30, 1998 and 1997:
1998
-----------------------------------------------
- -----
Three Months Ended
-----------------------------------------------
- -----
September 30 December 31 March 31 June
30
------------ ----------- ----------- -------
- -----
Interest income $ 14,933,696 $15,107,330 $15,858,000
$16,032,659
Interest expense 7,714,388 7,886,507 8,088,653
8,302,130
Provision for
loan losses 416,628 435,754 414,425
585,790
Net realized gains
on available-
for-sale securities 420,572 451,194 417,761
108,301
Net income 3,860,275 3,619,773 3,363,595
3,600,406
Earnings per
common share -
diluted $.47 $.44 $.41
$.44
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
<PAGE> 38
NOTE 21:
CONDENSED PARENT COMPANY STATEMENTS
The condensed balance sheets at June 30, 1998 and 1997, and
statements of income and cash flows for the years ended June 30,
1998, 1997 and 1996, for the parent company, Great Southern
Bancorp, Inc., are as follows:
1998 1997
----------- -----------
BALANCE SHEETS
Assets
Cash $ 1,555,186 $ 51,526
Available-for-sale securities 6,347,526 7,397,168
Investment in subsidiary bank 59,487,798 53,831,963
Investment in other subsidiaries 473,351 1,564,573
Loans receivable 585,000 -
Dividends receivable - 3,000
Income taxes receivable - 283,072
Other 50,000 494,348
---------- ----------
$68,498,861 $63,625,650
========== ==========
1998 1997
----------- -----------
Liabilities and Stockholders' Equity
Income taxes payable $ 420,047 $ -
Short-term borrowings - 2,406,423
Deferred income taxes 669,921 870,860
Common stock 123,250 123,250
Additional paid-in capital 17,110,496 17,058,326
Retained earnings 84,955,740 73,980,259
Unrealized appreciation on
available-for-sale
securities, net 1,047,824 1,362,116
Treasury stock, at cost (35,828,417) (32,175,584)
---------- ----------
$68,498,861 $63,625,650
========== ==========
<PAGE> 38 continued
1998 1997
1996
----------- ----------- ------
- -----
STATEMENTS OF INCOME
Income
Dividends from subsidiary bank $ 8,916,733 $11,952,241 $
3,335,250
Dividends from other subsidiaries 469,109 274,913
1,227,210
Income (loss) on foreclosed assets - (24,077)
94,848
Interest and dividend income 227,200 217,360
337,122
Net realized gains on sales of
available-for-sale securities 1,397,828 205,225
680,357
Other income (loss) (69,266) 47,472
(11,655)
---------- ---------- -----
- -----
Total income 10,941,604 12,673,134
5,663,132
---------- ---------- -----
- -----
Expense
Operating expenses 199,972 197,677
204,967
Interest expense 25,285 39,066
- -
---------- ---------- -----
- -----
Total expense 225,257 236,743
204,967
---------- ---------- -----
- -----
Income before income tax and
equity in undistributed
earnings of subsidiaries 10,716,347 12,436,391
5,458,165
Provision (credit) for income taxes 415,223 (40,848)
205,444
---------- ---------- ----
- ------
Income before equity in
earnings of subsidiaries 10,301,124 12,477,239
5,252,721
Equity in undistributed
earnings of subsidiaries 4,142,925 (3,137,374)
6,041,234
---------- ---------- -----
- -----
Net Income $14,444,049 $ 9,339,865
$11,293,955
========== ==========
==========
<PAGE> 38 continued
1998 1997
1996
STATEMENTS OF CASH FLOWS
Cash Flows From Operating Activities
Net income $14,444,049 $ 9,339,865
$11,293,955
Items not requiring (providing) cash:
Loss on low income
housing partnership 12,093 10,356
11,665
Equity in undistributed earnings
of subsidiaries (4,144,925) 3,137,376
(6,041,234)
Gain on sale of foreclosed assets - -
(30,415)
Net realized gains on sales of
available-for-sale securities (1,397,828) (205,225)
(680,357)
Changes in:
Dividends receivable 3,000 (3,000)
3,090
Other assets 57,505 (57,505)
- -
Income taxes 703,119 (340,577)
(18,071)
---------- ---------- -----
- -----
Net cash provided by
operating activities 9,677,013 11,881,290
4,538,633
---------- ---------- -----
- -----
Cash Flows From Investing Activities
Net loans originated (585,000) -
- -
Proceeds from sale of
foreclosed assets - 324,900
138,799
Purchase of available-for-sale
Securities (1,427,438) (1,845,970)
(4,262,729)
Proceeds from sale of
available-for-sale securities 3,359,677 1,376,123
2,942,647
Capitalized costs on
foreclosed assets - -
(1,151)
Investment in trust company (50,000) -
- -
Partnership distribution 5,062 3,542
5,332
---------- ---------- -----
- -----
Net cash provided by (used in)
investing activities 1,302,301 (141,405)
(1,177,102)
---------- ---------- -----
- -----
Cash Flows From Financing Activities
Net increase (decrease) in
short-term borrowings (2,406,423) 2,406,423
- -
Dividends paid (3,468,568) (3,277,494)
(3,132,035)
Stock options exercised 94,118 797,113
279,272
Treasury stock purchased (3,694,781) (15,584,673)
(3,350,388)
Net cash used in financing activities(9,475,654) (15,658,631)
(6,203,151)
---------- ---------- -----
- -----
Increase (Decrease) in Cash 1,503,660 (3,918,746)
(2,841,620)
Cash, Beginning of Year 51,526 3,970,272
6,811,892
---------- ---------- -----
- -----
Cash, End of Year $ 1,555,186 $ 51,526 $
3,970,272
========== ==========
==========
Additional Cash Payment Information
Income taxes paid (refunded) $ (250,772) $ 61,241 $
127,570
<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,
1998 and 1997, 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, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES as of
June 30, 1998 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended June 30,
1998, in conformity with generally accepted accounting principles.
/s/ Baird, Kurtz &
Dobson
August 19, 1998
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
PREIDENT, 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
Joseph W. Turner
EXECUTIVE VICE PRESIDENT and GENERAL COUNSEL
Officers of Great Southern Bancorp, Inc.
(This is a group picture of the 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
Mike Lawson
First Vice President and
Commercial Business Development
a native of Monett, MO
Steve Mitchem
First Vice President and
Senior Lending 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
Gene Barnes
Vice president and
Residential Lending Manager
a native of Miami, OK
<PAGE> 41 continued
Teresa Chasteen
Vice President and
Director of Marketing
a native of Mountain Grove, MO
Tracy Crider
Vice President and
Construction Loan Officer
a native of Dixon, MO
Debbie Flowers
Vice President and
Commercial Loan Administration
a native of Lebanon, MO
Doug Marrs
Vice President, Operations
a native of Canyon City, CO
Bruce Menke
Vice President and
Commercial Loan Officer
a native of PoughKeepsie, NY
Bob Ogden
Vice President and
Commercial Loan Officer
a native of Licking, MO
Eric Piel
Vice President and
Commercial Business Development
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 Resources
a native of Springfield, MO
Lin Thomason
Vice President and
Corporate Business Development
a native of Deslodge, MO
<PAGE> Back Cover
(This is the back cover which was a smaller picture similar to the
picture that was on the front cover. The majority of the page is a
solid maroon.)
</TABLE>
