1 - ---------------------------------------------------------------------- - ---------------------------------------------------------------------- UNITED STATES SECURITIES & EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-Q /X/ Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period ended September 30, 1996, or / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to _________ -------------------------- Commission File Number 0-18082 -------------------------- GREAT SOUTHERN BANCORP, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 43-1524856 (IRS Employer Identification Number) 1451 E. BATTLEFIELD SPRINGFIELD, MISSOURI (Address of principal executive offices) 65804 (Zip Code) (417) 887-4400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No The number of shares outstanding of each of the registrant's classes of common stock: 8,357,492 shares of common stock, par value $.01, outstanding at November 7, 1996 - ---------------------------------------------------------------------- - ----------------------------------------------------------------------
2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) <TABLE> <CAPTION> September 30, June 30, 1996 1996 ------------ ------------ <S> <C> <C> ASSETS Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,942,170 $ 6,661,290 Interest-bearing deposits in other financial institutions. . . . . . . . . 12,491,978 22,953,737 ----------- ----------- Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . 18,434,148 29,615,027 Available for sale securities. . . . . . . . . . . . . . . . . . . . . . . 4,937,039 4,655,816 Held to maturity securities (fair value $49,293,000 - September 1996; $49,291,000 - June 1996) . . . . . . . . . . . . . . . . . . . . . . . . 49,217,274 49,182,323 Loans receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 552,765,015 546,759,467 Foreclosed assets held for sale, net . . . . . . . . . . . . . . . . . . . 5,293,595 9,861,556 Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 6,592,776 6,686,954 Accrued interest receivable Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,944,685 4,289,192 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 919,560 1,067,230 Investment in FHLBank Stock. . . . . . . . . . . . . . . . . . . . . . . . 10,022,800 10,022,800 Prepaid expenses and other assets. . . . . . . . . . . . . . . . . . . . . 2,513,673 1,774,439 Excess of cost over fair value of net assets acquired. . . . . . . . . . . 5,000 1,101,961 Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,013,567 3,088,540 ------------ ------------ Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $657,659,132 $668,105,305 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $382,458,878 $397,054,516 Federal Home Loan Bank advances. . . . . . . . . . . . . . . . . . . . . . 178,597,750 180,797,043 Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . 19,421,096 16,467,825 Advances from borrowers for taxes and insurance. . . . . . . . . . . . . . 3,398,512 2,659,427 Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . 5,508,705 2,431,507 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,721,099 887,418 ------------ ------------ Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 591,106,040 600,297,736 ------------ ------------ Capital stock Serial preferred stock, $.01 par value; authorized 1,000,000 shares Common stock, $.01 par value; authorized 10,000,000 shares, issued 6,162,501 shares. . . . . . . . . . . . . . . . . . . . . . . . 61,625 61,625 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 16,834,507 16,834,507 Retained earnings (substantially restricted) . . . . . . . . . . . . . . . 67,666,638 67,917,888 Unrealized appreciation on available-for-sale securities, net of income taxes of $186,433 - September 1996 and $61,460 - June 1996. . . . 291,600 96,129 Treasury stock, at cost; 1,797,449 shares - September 1996; 1,756,453 shares - June 1996 . . . . . . . . . . . . . . . . . . . . . . (18,301,278) (17,102,580) ------------ ------------ Total Stockholders' Equity. . . . . . . . . . . . . . . . . . . . . . . 66,553,092 67,807,569 ------------ ------------ Total Liabilities and Stockholders' Equity . . . . . . . . . . . . . $657,659,132 $668,105,305 ============ ============ <FN> See Notes to Consolidated Financial Statements </TABLE>
3 GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 30, 1996 1995 ----------- ----------- <S> <C> <C> INTEREST INCOME Loans $12,624,995 $12,240,639 Investment Securities 1,009,441 925,041 Other 70,955 52,966 ---------- ---------- TOTAL INTEREST INCOME 13,705,391 13,218,646 ---------- ---------- INTEREST EXPENSE Deposits 4,203,351 4,278,824 FHLBank advances 2,662,821 2,519,093 Short-term borrowings 145,023 130,223 ---------- ---------- TOTAL INTEREST EXPENSE 7,011,195 6,928,140 ---------- ---------- NET INTEREST INCOME 6,694,196 6,290,506 PROVISION FOR LOAN LOSSES 410,593 324,080 ---------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,283,603 5,966,426 ---------- ---------- NONINTEREST INCOME Commissions 1,183,208 1,080,646 Service charge fees 610,151 607,381 Net realized gains on sales of loans and available-for-sale securities 265,113 733,377 Income (expense) on foreclosed assets 328,011 (22,999) Other income 334,088 343,368 ---------- ---------- TOTAL NONINTEREST INCOME 2,720,571 2,741,773 ---------- ---------- NONINTEREST EXPENSE Salaries and employee benefits 2,361,941 2,045,733 Net occupancy expense 561,863 550,491 Postage 145,572 148,289 Insurance 2,814,738 315,001 Amortization of goodwill 1,096,961 48,211 Advertising 112,794 82,450 Office supplies and printing 127,136 98,469 Other operating expenses 504,219 627,567 ---------- ---------- TOTAL NONINTEREST EXPENSE 7,725,224 3,916,211 ---------- ---------- INCOME BEFORE INCOME TAXES 1,278,950 4,791,988 PROVISION FOR INCOME TAXES 785,653 1,907,400 ---------- ---------- NET INCOME $ 493,297 $ 2,884,588 ========== ========== EARNINGS PER COMMON SHARE $.11 $.62 === === <FN> See Notes to Consolidated Financial Statements </TABLE>
4 GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> THREE MONTHS ENDED SEPTEMBER 30, 1996 1995 -------------- --------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 493,297 $ 2,884,588 Items not requiring (providing) cash: Depreciation 214,847 241,580 Amortization 1,096,961 21,195 Provision for loan losses 410,593 324,080 Provision for losses on foreclosed assets 0 75,000 Net realized gains on sale of loans (121,145) (125,789) Loss on sale of premises and equipment 0 (1,225) Gain on sale of foreclosed assets (352,506) (21,537) Amortization of deferred income, premiums and discounts (227,854) (179,373) Net realized gains on sale of available-for-sale securities (143,968) (607,188) Deferred income taxes (50,000) 155,000 Changes in: Accrued interest receivable 492,177 (104,527) Prepaid expenses and other assets (739,234) 91,525 Accounts payable and accrued expenses 3,077,198 360,774 Income taxes payable 833,681 1,232,012 ----------- ----------- Net cash provided by operating activities 4,984,047 4,346,115 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Net increase in loans (1,278,872) (6,225,133) Purchase of premises and equipment (120,669) (453,764) Proceeds from sale of premises and equipment 0 2,875 Proceeds from sale of foreclosed assets 215,044 18,200 Capitalized costs on foreclosed assets (13,462) (83,686) Proceeds from sale of available-for-sale securities 1,002,406 2,217,545 Proceeds from maturing held-to-maturity securities 8,801,992 20,916 Purchase of held-to-maturity securities (8,906,328) (1,502,398) Purchase of available-for-sale securities (819,217) (516,488) ----------- ----------- Net cash used in investing activities (1,119,106) (6,521,933) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in certificates of deposit (8,588,710) 3,212,370 Net decrease in checking and savings (6,006,929) (2,774,717) Proceeds from FHLBank advances 71,195,556 104,766,081 Repayments of FHLBank advances (73,394,849) (92,366,620) Net increase in short-term borrowings 2,953,272 4,586,027 Advances from borrowers for taxes and insurance 739,085 737,365 Purchase of treasury stock (1,215,973) (428,269) Dividends paid (744,547) (787,861) Stock options exercised 17,275 30,526 ----------- ----------- Net cash provided by (used in ) financing activities (15,045,820) 16,974,902 ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,180,879) 14,799,084 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 29,615,027 17,459,951 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,434,148 $ 32,259,035 =========== =========== <FN> See Notes to Consolidated Financial Statements </TABLE>
5 GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements of Great Southern Bancorp, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 1996 and 1995 are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 1996. When necessary, reclassifications have been made to prior period balances to conform to current period presentation. These reclassifications had no effect on net income. Subsequent to September 30, 1996, the Company declared and completed a 2-for-1 stock split effective October 21, 1996 for October 11, 1996 stockholders of record. All share information in this document are the shares before this subsequent split. ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The discussion set forth below, as well as other portions of this Form 10-Q, may contain forward-looking comments. Such comments are based upon the information currently available to management of the Company and management's perception thereof as of the date of this Form 10-Q. Actual results of the Company's operations could materially differ from those forward-looking comments. The differences could be caused by a number of factors or combination of factors including, but not limited to, changes in the availability and/or cost of capital; changes in demand for banking services; changes in the portfolio composition; change in the interest rate yield on the Company's investments; changes in management strategy; increased competition from both bank and non-bank companies; changes in the economic, political or regulatory environments in the United States; litigation involving the Company and/or its subsidiaries; and changes in the availability of qualified labor. Readers should take these factors into account in evaluating any such forward-looking comments.
6 General Parts of management's discussion and analysis in the annual report on Form 10-K are not included below. The following should be read in conjunction with management's discussion and analysis in the Company's June 30, 1996 Form 10-K. The consolidated net income of the Company and more specifically, the net income of its primary subsidiary, Great Southern Bank, FSB (the "Bank"), is primarily dependent upon the difference or spread between the average yield earned on loans and investments and the average rate paid on deposits and borrowings, as well as the relative amounts of such assets and liabilities. The interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. The Bank, like other financial institutions, is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different times, or on a different basis than its interest-earning assets. The Company's consolidated net income is also affected by, among other things, gains on sales of loans and available-for-sale investments, provisions for loan losses, service charge fees and commissions, operating expenses and income taxes. Management of the Company has developed and implemented an asset/liability management strategy to match the repricing and/or maturity of its interest-earning assets and its interest-bearing liabilities and to achieve improved and sustained operating income without adversely affecting asset quality. In implementing this strategy, the Company has sought, subject to market conditions, to increase its origination of adjustable-rate loans secured by one- to four-family residential real estate in order to increase its investment in loans that are interest rate sensitive. The Company has also sold substantially all of the fixed-rate, one- to four-family residential loans originated since fiscal 1986, with servicing retained through fiscal 1995 and primarily servicing released beginning in fiscal 1996. Beginning in fiscal 1992, the Company's lending returned to origination of adjustable-rate commercial real estate and commercial business loans. By doing so, the Company is attempting to increase significantly its loan fees, increase its investment in loans that are interest rate sensitive and improve the yield on its loan portfolio. The Company intends to continue to prudently evaluate the origination of commercial real estate loans (both to purchase existing properties and construct new properties) in its total loan portfolio subject to commercial real estate and other market conditions and to applicable regulatory restrictions and may increase the percent of the commercial real estate loans to the overall portfolio.
7 EFFECT OF FEDERAL LAWS AND REGULATIONS Federal legislation and regulation significantly affect the banking operations of the Company and the Bank, and have increased competition among savings institutions, commercial banks, mortgage banking enterprises and other financial institutions. In particular, the capital requirements and operations of regulated depository institutions such as the Company and the Bank have been and will be subject to changes in applicable statutes and regulations from time to time, which changes could, under certain circumstances, adversely affect the Company or the Bank. On September 30, 1996, the President of the United States signed into law legislation that impacts two major areas of the Bank. The first major area was a one-time assessment of SAIF-insured institutions of 65.7 basis points of March 31, 1995 SAIF-assessable deposits. The Bank has been assessed approximately $2.5 million ($1.6 million after income taxes) which is due to be paid at the end of November 1996. The payment was expensed at September 30, 1996 and had a significant impact on the Bank's earnings as of the time the payment was accrued. Along with this one-time SAIF assessment, the semi-annual SAIF assessment is projected to be reduced, beginning January 1, 1997, from an annualized 23 basis points on SAIF-assessable deposits, to approximately 6.4 basis points annualized on SAIF-assessable deposits. The Bank estimates this will reduce the monthly expense of the Bank, beginning January 1, 1997, by approximately $55,000 ($35,000 after tax). The second major area of change is the repeal of the bad debt reserve method of accounting for bad debts by large thrifts for taxable years beginning after 1995 (year ended June 30, 1997 for the Bank). The legislation requires applicable excess reserves accumulated after 1987 (year ended June 30, 1988 for the Bank) be recaptured and restored to income over a six year period with the first year beginning after 1995 (year ended June 30, 1997 for the Bank), and no longer creates recapture of the applicable excess reserves accumulated prior to 1988 for thrifts at the time they convert to bank charters. The post 1987 recapture may be delayed for a one- or two-year period if certain residential loan origination requirements are met. The amount of post 1987 recapture for the Bank is estimated at $5 million which would create income taxes of approximately $2 million, or $333,000 per year for each of the six years. The $2 million of tax has been accrued and expensed by the Bank in previous periods and accordingly, will not be reflected in earnings or capital when paid. Beginning with the year ending June 30, 1997, the Bank will be 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.
8 RECENT CHANGES IN ACCOUNTING PRINCIPLES In March 1995, the FASB issued Statement of Financial Accounting Standards No. 121. "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"). This statement applies to assets to be held and used as well as assets to be disposed of. SFAS 121 requires an entity to evaluate long-lived assets, certain identifiable intangibles, and related goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company adopted SFAS 121 during the current fiscal year ending June 30, 1997. The adoption of SFAS 121 has not had a material effect on the financial condition or net income of the Company. In May 1995, the FASB issued Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"). SFAS 122 requires that mortgage banking enterprises recognize as separate assets, rights to service mortgage loans for others, however those servicing rights are acquired. The Company adopted SFAS 122 during the current fiscal year ending June 30, 1997. The adoption of SFAS 122 has not had a material effect on the financial condition or net income of the Company. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 establishes a fair value based method of accounting for stock-based compensation plans. It encourages entities to adopt that method in place of the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees", for all arrangements under which employees receive shares of stock or other equity instruments of the employer or the employer incurs liabilities to employees in amounts based on the price of its stock. This statement applies to financial statements for fiscal 1997. Management is continuing to account for stock-based compensation in accordance with the provisions of APB No. 25. Therefore, SFAS 123 has not had a significant impact on the Company's consolidated financial statements. In June 1996, the FASB issued Statement of Financial Accounting Standards No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). SFAS 125 extends the rules in SFAS 122 from servicing of mortgage loans to all loan servicing. The Company adopted SFAS 125 during the current fiscal year ending June 30, 1997. The adoption of SFAS 125 has not had a material effect on the financial condition or net income of the Company. ASSET AND LIABILITY MANAGEMENT During the three months ended September 30, 1996, the Company experienced a slight decline in its total assets. Total assets decreased $10.5 million, primarily due to a decrease in interest- bearing deposits in other financial institutions of $11 million and a decrease in foreclosed assets of $4.6 million, offset by net loan originations of $6 million.
9 The decrease in interest-bearing deposits in other financial institutions primarily resulted from the reversal of the higher than normal balances at correspondent banks due to the timing of transferring funds with June 30, 1996 falling on the weekend. The increase in net loan originations was primarily from a loan originated for the sale of a large foreclosed asset. Total liabilities decreased $9.2 million, primarily from a decrease in deposits of $15 million and a decrease in FHLBank advances of $2 million, offset by an increase in short-term borrowings of $3 million and an increase in accrued expenses of $3.1 million, the majority of which is the one-time SAIF assessment to be paid in November 1996. The above represents the Company's continued practice of using primarily short-term FHLBank advances to fund net loan originations and other funding needs. Stockholders' equity decreased $1.3 million primarily as a result of dividend declarations and payments of $745,000 and net treasury stock repurchases of $1.2 million, offset by net income of $500,000 and unrealized appreciation on available-for-sale securities of $200,000. The Company repurchased 43,366 shares of common stock at an average price of $28.04 per share and reissued 2,370 shares of treasury stock at an average price of $7.29 per share for stock options exercised. Management believes that a key component of successful asset/liability management is the monitoring and management of interest rate sensitivity, which encompasses the repricing and maturity of interest-earning assets and interest-bearing liabilities. During any period in which a financial institution has a positive interest rate sensitivity gap, the amount of its interest-earning assets maturing or otherwise repricing within such period exceeds the amount of the interest-bearing liabilities maturing or otherwise repricing within the same period. Accordingly, in a rising interest rate environment, financial institutions with positive interest rate sensitivity gaps generally will experience greater increases in yield on their assets than in the cost of their liabilities. Conversely, in a falling interest rate environment, the cost of funds of financial institutions with positive interest rate sensitivity gaps generally will decrease less than the yield on their assets. Changes in interest rates generally will have the opposite effect on financial institutions with negative interest rate sensitivity gaps. In a rising interest rate environment financial institutions with negative gaps have more liabilities than assets mature or reprice during the relevant period, causing the increase in the cost of liabilities to exceed the increase in the yield on assets. Conversely, in a falling interest rate environment, the cost of funds of financial institutions with negative interest rate sensitivity gaps generally will decrease more than the yield on their assets. The Company's experience with interest rates is discussed in more detail under the headings "Results of Operations and Comparisons of the Three Months Ended September 30, 1996 and 1995" and in management's discussion and analysis in the June 30, 1996 Form 10-K.
10 The Company's one-year interest rate sensitivity gap, as a percentage of total interest-earning assets was a positive $98 million, or 12.5%, at September 30, 1996, as compared to a positive $89 million, or 13.6%, at June 30, 1996. The increase of $9 million resulted primarily from: (i) a $5 million increase in business loans, all in the one-year category; and (ii) a $6 million decrease in interest-bearing demand deposits, $2 million decrease in savings deposits, and $6 million decrease in time deposits from a decline in deposit balances; offset by, (iii) an $8 million increase in FHLBank advances mainly due to a shift from other periods; (iv) a $3 million increase in short-term borrowings; and (v) other smaller changes. 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 30% of total assets are currently invested in commercial real estate and commercial business loans. This part of the strategy was designed to improve asset yield and fee income, and to shorten the average maturity and increase the interest rate sensitivity of the loan portfolio. While efforts to date have contributed to the changes in the one-year interest rate sensitivity gap and increasing net interest income, such lending, commensurate with the increased risk levels, has also resulted in an increase in the level of non-performing assets. Management continually evaluates existing and potential commercial real estate and commercial business loans, in order to try to reduce undesirable risks including concentrations in a given geographic area or a particular loan category. While from a credit risk standpoint the Company would prefer higher levels of one- to four-family and other residential loan originations rather than commercial real estate and commercial business loan originations, the Company has adapted to the changing lending environment and originates commercial real estate and commercial business loans to help maintain the desired size of the loan portfolio and assets in total, as well as to maintain the desired yield on the Company's investments. Interest rate risk exposure estimates (the sensitivity gap) are not exact measures of an institution's actual interest rate risk. They are only indicators of interest rate risk exposure produced in a simplified modeling environment designed to allow management to gauge the Company's sensitivity to changes in interest rates. They do not necessarily indicate the impact of general interest rate movements on the Company's net interest income because the repricing of certain categories of assets and liabilities is subject to competitive and other factors beyond the Company's control. As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated period may in fact mature or reprice at different times and in different amounts and would therefore cause a change (which potentially could be material) in the Company's interest rate risk.
11 The following table sets forth the Company's interest rate sensitive assets and liabilities that mature or reprice within one year as of the dates indicated and on the basis of the factors and assumptions set forth at the end of the tables. <TABLE> <CAPTION> September 30, June 30, 1996 1996 ------------ -------- <S> <C> <C> (000'S OMITTED) Residential, commercial real estate and construction loans $464,617 $463,559 Commercial business loans 17,079 12,349 Consumer loans 16,724 16,202 Investment securities and other 75,938 76,343 ------- ------- Total interest rate sensitive assets repricing within one year 574,358 568,453 ------- ------- Interest-bearing demand deposits 106,345 112,289 Savings deposits 35,862 37,009 Time deposits 186,042 192,909 FHLBank advances 128,638 120,849 Other borrowings and liabilities 19,421 16,468 ------- ------- Total interest rate sensitive liabilities repricing within one year 476,308 479,524 ------- ------- One year interest rate sensitivity gap (1) $98,050 $ 88,929 ======= ======= Interest rate sensitive assets/interest rate sensitive liabilities 120.6% 118.5% ===== ===== One year interest rate sensitivity gap as a percent of interest-earning assets 12.5% 13.6% ==== ==== <FN> ___________________________________________ (1) Defined as the Company's interest-earning assets which mature or reprice within one year minus its interest-bearing liabilities that mature or reprice within one year. </TABLE>
12 The following table sets forth the interest rate sensitivity of the Company's assets and liabilities at September 30, 1996, on the basis of the factors and assumptions set forth below. <TABLE> <CAPTION> Maturing or Repricing --------------------------------------------------------------- Over 6 6 Months Months Over 1-3 Over 3-5 Over or Less to 1 Year Years Years 5 Years Total -------- --------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> (Dollars in thousands) Residential, commercial real estate and construction loans $357,835 $106,781 $ 19,302 $11,383 $34,814 $530,115 Commercial business loans 16,920 159 250 0 0 17,329 Consumer loans 14,215 2,509 7,038 0 0 23,762 Investment securities and other 50,092 9,039 17,538 0 0 76,669 ------- ------- ------- ------ ------ ------- Total interest-earning assets 439,062 118,488 44,128 11,383 34,814 647,875 ------- ------- ------- ------ ------ ------- Interest-bearing demand deposits 106,345 0 0 0 0 106,345 Savings deposits 35,862 0 0 0 0 35,862 Time deposit 129,623 56,420 34,453 4,304 5,555 230,355 FHLBank advances 113,273 15,365 22,159 10,880 16,725 178,402 Other borrowings and liabilities 19,421 0 0 0 0 19,421 ------- ------- ------- ------ ------ ------- Total interest-bearing liabilities 404,524 71,785 56,612 15,184 22,280 570,385 ------- ------- ------- ------ ------ ------- Interest-earning assets less interest-bearing liabilities $ 34,538 $ 46,703 $(12,484) $(3,801) $12,534 $ 77,490 ======= ======= ======= ====== ====== ======= Cumulative interest rate sensitivity gap $ 34,538 $ 81,241 $68,757 $64,956 $77,490 ======= ======= ====== ====== ====== Cumulative interest rate sensitivity gap as a percent of interest-earning assets at September 30, 1996 5.3% 12.5% 10.6% 10.0% 12.0% === ==== ==== ==== ==== Cumulative interest rate sensitivity gap as a percent of interest-earning assets at June 30, 1996 (0.4)% 13.6% 8.9% 8.3% 10.2% === ==== === === ==== <FN> The assumptions used in the above two tables are: -- Prepayment rates are derived from market prepayment rates observed on or about June 30, 1996. They are supplied by the FHLBank of Des Moines Risk Management Department. -- Fixed-rate loans, net of loans in process, deferred fees and discounts are shown on the basis of contractual amortization and the prepayment assumptions noted above. -- Adjustable-rate loans are assumed to reprice at the earlier of maturity or the next contractual repricing date. -- Zero growth and constant percentage composition of assets and liabilities and funds from contractual amortization are not reinvested. -- September 30, 1996 computations have been approximated based on the computations and assumptions of June 30, 1996. </TABLE>
13 RESULTS OF OPERATIONS AND COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1996 and 1995 The decrease in earnings for the three months ended September 30, 1996 when compared to the same period in 1995 of $2.4 million, or 82.9%, was primarily due to an increase in non-interest expense of $3.8 million and an increase in provision for loan losses of $85,000, offset by an increase in net interest income of $404,000, and a decrease in provision for income taxes of $1.1 million during the period. Interest Income Total interest income increased $486,000, or 3.7%, during the three months ended September 30, 1996, when compared to the three months ended September 30, 1995. The increase was primarily due to a $384,000, or 3.1%, increase in interest income on loans and a $102,000, or 10.4%, increase in interest income on investment securities and interest-bearing deposits. Interest income on loans increased from higher average balances, offset by a decrease from lower average yields. Interest income increased $614,000 as the result of higher average loan balances of $546 million during the three months ended September 30, 1996 compared to $519 million during the three months ended September 30, 1995. Interest income decreased $230,000 as the result of a decrease in average yield from 9.43% in the three months ended September 30, 1995, to 9.24% in the three months ended September 30, 1996, as a result of lower market rates. Of the increase in interest income on investment securities and interest-bearing deposits, $49,000 was the result of higher average balances from $75 million in the three months ended September 30,1995 to $78.6 million in the three months ended September 30, 1996, primarily as a result of increases in investment securities. The remaining increase of $53,000 was the result of an increase in average yields from 5.22% during the three months ended September 30, 1995 to 5.49% during the three months ended September 30, 1996 as a result of higher market rates on investment securities. Interest Expense Total interest expense increased $83,000, or 1.2%, during the three months ended September 30, 1996 when compared with the same period in 1995. The increase was primarily due to a $159,000, or 6%, increase in interest expense on FHLBank advances and other borrowings, offset by a $76,000, or 1.8%, decrease in interest expense on deposits.
14 Interest expense on FHLBank advances and other borrowings increased $254,000 due to higher average balances from $173 million in the three months ended September 30, 1995 to $190 million in the three months ended September 30, 1996. The increase was offset by a $95,000 decrease due to lower average interest rates from 6.14% in the three months ended September 30, 1995 to 5.90% in the three months ended September 30, 1996. Average balances increased as a result of the Company's use of short term FHLBank advances to partially fund loan growth and manage overall funds costs. The changes in average rates were a result of changes in market rates. Interest expense on deposits during the three months ended September 30, 1996, decreased primarily as a result of a decrease in market rates offset by an increase in volume. Interest expense decreased $160,000 primarily as a result of lower average rates on time deposits from 5.84% during the three months ended September 30, 1995, to 5.57% during the three months ended September 30, 1996. Lower average market rates was the primary factor causing the decrease in average rates. Interest expense on deposits increased $84,000 as a result of increases in volume. The increase in volume was primarily in time deposits and interest-bearing demand deposits, respectively, from average balances of $233 million and $104 million during the three months ended September 30, 1995 to average balances of $236 million and $110 million during the three months ended September 30, 1996. Net Interest Income The Company's overall interest rate spread increased 4 basis points, or 1%, from 3.84% during the three months ended September 30, 1995, to 3.88% during the three months ended September 30, 1996. The increase is due to an overall decrease in the weighted average rates paid on interest-bearing liabilities offset by a lesser overall decrease in the weighted average yield received on interest-earning assets. Provision for Loan Losses The provision for loan losses increased from $324,000 during the three months ended September 30, 1995 to $411,000 during the three months ended September 30, 1996. In any accounting period, the provision for loan losses is affected by many factors including, but not limited to, the change in the composition of the loan portfolio, the increase or decrease in total loans, the level of delinquencies and other non-performing loans and the historical loss experience of the portfolio.
15 Non-performing assets decreased $3.7 million, or 22%, during the three months ended September 30, 1996 from $16.9 million at June 30, 1996 to $13.1 million at September 30, 1996. Non-performing loans increased $900,000, or 15.3%, from $5.9 million at June 30, 1996 to $6.8 million at September 30, 1996, and foreclosed assets declined $4.5 million from $10.9 million at June 30, 1996 to $6.4 million at September 30, 1996. Non-performing loans at September 30, 1996 and June 30, 1996, included $451,000 and $452,000, respectively, of loans in connection with the sale of foreclosed assets, which are loans that have higher than usual loan-to-value ratios and are originated in connection with the sale of foreclosed assets. Substantially all of these loans were performing at September 30, 1996. The $900,000 increase in non-performing loans was primarily the result of (i) the addition of a net loan for $4.3 million as a result of 100% financing of the sale of the foreclosed asset described in the Company's Annual Report on Form 10-K for the year ended June 30, 1996 on page 31 under the heading "Branson, Missouri"; partially offset by (ii) the payoff of the $934,000 loan described in the Company's Annual Report on Form 10-K for the year ended June 30, 1996 on page 31 under the heading "Lake Ozark, Missouri"; (iii) the receipt of all scheduled payments currently due on the loans totaling $984,000 described in the Company's Annual Report on Form 10-K for the year ended June 30, 1996 on page 30 under the heading "Branson, Missouri - Restaurant"; (iv) the receipt of all scheduled payments currently due on the $600,000 Tax Increment Financing (TIF) loan of the project described in the Company's Annual Report on Form 10-K for the year ended June 30, 1996 on page 31 under the heading "Lake Ozark, Missouri" ; and (v) the foreclosure of a $250,000 restaurant loan, five single family homes totaling $440,000 and charge-offs on these foreclosures of approximately $100,000. The net loan of $4.3 million on the sale of the foreclosed assets has a deferred gain of $427,000 currently netted against it. If the buyer is able to liquidate the project as planned, this gain will be recognized at a future time when the loan has paid down to an adequate level. The $4.5 million decline in foreclosed assets during the three months ended September 30, 1996 was primarily due to: (i) the sale of the $4.3 million property noted in the non-performing loan section above; (ii) the sale of the $550,000 property described in the Company's Annual Report on Form 10-K for the year ended June 30, 1996 on page 33 under the heading "Springfield, Missouri - Ellis Trucking Terminal" with 28% cash down and normal long-term financing for the balance; (iii) the sale of condominium units carried at an aggregate of $312,000 and 1 single-family home carried at $54,000; offset by (iv) the foreclosure of the properties noted in item (v) in the non- performing loan section above; and (vi) various other activity of smaller properties in the account.
16 Potential problem loans increased $1.8 million during the three months ended September 30, 1996 from $4.7 million at June 30, 1996 to $6.5 million at September 30, 1996. 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 main reason for the increase in potential problem loans is: (i) an increase of $984,000 from the improved credit quality and upgrade from non-performing status of the project disclosed in the non-performing loan section above; (ii) the increase of $300,000 in a condominium project in Branson, Missouri due to additional advances from increased collateral positions; and (iii) the deterioration of the credit quality of various projects, partially offset by the improvement from non- performing of other projects, netting approximately $500,000. The allowance for loan losses at September 30, 1996 and June 30, 1996, respectively, totaled $14.7 million and $14.4 million, representing 2.7% and 2.6% of total loans, 216% and 243% of non- performing loans, and 110% and 136% of non-performing loans and potential problem loans in total. The allowance for foreclosed asset losses totaled $1.1 million at both September 30, 1996 and June 30, 1996, respectively, representing 17% and 9.9% of total foreclosed assets. Although the Company maintains the allowance for loan losses and the allowance for foreclosed asset losses at levels which it considers to be adequate to provide for potential losses and selling expenses, there can be no assurance that such losses will not exceed the estimated amounts, thereby adversely affecting future results of operations. Non-interest Income Non-interest income decreased $21,000, or .8%, in the three months ended September 30, 1996 when compared to the same period in 1995. The decrease was primarily due to: (i) a decrease in income of $464,000 from the sale of available-for-sale securities; offset by (ii) an increase in income on foreclosed assets of $351,000 from the sale in the September 30, 1996 quarter of the foreclosed properties discussed above; (iii) an increase in commission income of $102,000 from the travel, insurance and investment subsidiaries; and (iv) modest increases and decreases in other non-interest income items. Non-interest Expense Non-interest expense increased $3.8 million, or 97.3%, in the three months ended September 30, 1996 when compared to the same period in 1995. The increase was primarily due to: (i) an increase in insurance of $2.5 million due to the accrual of the one-time SAIF assessment discussed previously; (ii) an increase in goodwill amortization of $1 million due to the write-off of goodwill remaining from a 1982 failed thrift purchase; (iii) an increase of $316,000 in salaries and other employee benefits with approximately one-half of this increase in the Bank due to growth and the remainder primarily in the travel, insurance and investment subsidiaries; (iv) an increase in advertising of $31,000, or 38%, and (v) an increase in office supplies and printing of $29,000, or 30%.
17 Provision for Income Taxes Provision for income taxes as a percentage of pre-tax income increased from 40% in the three months ended September 30, 1995 to 61% in the three months ended September 30, 1996. The increase was primarily due to the write-off of the goodwill amortization discussed above, which is a non-deductible item. Average Balances, Interest Rates and Yields The following tables present for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. The tables do not include non-interest- bearing demand deposits and do not reflect any effect of income taxes. <TABLE> <CAPTION> Three Months Ended September 30, --------------------------------------------------------- 1996 1995 --------------------------- -------------------------- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate -------- -------- ------ -------- -------- ------ <S> <C> <C> <C> <C> <C> <C> (Dollars in thousands) Interest-earning assets: Loans receivable $546,358 $12,625 9.24% $519,450 $12,241 9.43% Investment securities and other interest-earning assets 78,642 1,080 5.49 74,968 978 5.22 ------- ------ ---- ------- ------- ---- Total interest-earning assets $625,000 13,705 8.77 $594,418 13,219 8.90 ======= ------ ---- ======= ------ ---- Interest-bearing liabilities: Demand deposits $110,263 688 2.50 $104,120 643 2.47 Savings deposits 36,620 225 2.46 37,578 235 2.50 Time deposits 236,292 3,290 5.57 232,787 3,401 5.84 ------- ----- ---- ------- ----- ---- Total deposits 383,175 4,203 4.39 374,485 4,279 4.57 FHLBank advances and other borrowings 190,345 2,808 5.90 172,699 2,649 6.14 ------- ----- ---- ------- ----- ---- Total interest-bearing liabilities $573,520 7,011 4.89 $547,184 6,928 5.06 ======= ----- ---- ======= ----- ---- Net interest income: Interest rate spread $6,694 3.88% $6,291 3.84% ===== ==== ===== ==== Net interest margin(1) 4.28% 4.23% ==== ==== Average interest-earning assets to average interest-bearing liabilities 109.0% 108.6% ===== ===== <FN> (1) Defined as the Company's net interest income divided by total interest-earning assets. </TABLE>
18 Rate/Volume Analysis The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest- earning assets and interest-bearing liabilities for the periods shown. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in rate (i.e., changes in rate multiplied by old volume) and (ii) changes in volume (i.e., changes in volume multiplied by old rate). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to volume and to rate. <TABLE> <CAPTION> Three Months Ended September 30, 1996 vs. 1995 -------------------------------- Increase (Decrease) Due to Total ------------- Increase Rate Volume (Decrease) ---- ------ ---------- <S> <C> <C> <C> (Dollars in thousands) Interest-earning assets: Loans receivable $(230) $ 614 $ 384 Investment securities and other interest-earning assets 53 49 102 --- --- --- Total interest-earning assets (177) 663 486 --- --- --- Interest-bearing liabilities: Demand deposits 7 38 45 Savings deposits (4) (6) (10) Time deposits (163) 52 (111) --- --- --- Total deposits (160) 84 (76) FHLBank advances and other borrowings (95) 254 159 --- --- --- Total interest-bearing liabilities (255) 338 83 --- --- --- Net interest income $ 78 $325 $ 403 === === === </TABLE>
19 LIQUIDITY AND CAPITAL RESOURCES General The Company's capital position remained strong, with stockholders' equity at $66.6 million, or 10.1% of total assets of $658 million at September 30, 1996 compared to equity at $67.8 million, or 10.1%, of total assets of $668 million at June 30, 1996. In addition, the Bank exceeds each of the regulatory capital requirements. At September 30, 1996, the Bank had ratios of tangible and core capital to assets of 8.1% and risk-based capital of 12.3%. Federal regulations at that date required tangible, core and risk-based capital ratios of 1.5%, 3% and 8%, respectively. The Bank is required by regulation to maintain liquidity ratios at certain levels. Currently, a minimum of 5% of the combined total of deposits and short-term borrowings must be maintained in the form of cash and eligible investments. The Bank has historically maintained its liquidity ratio at a level in excess of that required. As of September 30, 1996, the Bank's liquidity ratio was 5.9%, compared to 7.3% at June 30, 1996. Management believes that the Company has sufficient cash flows and borrowing capacity available to meet its commitments and other foreseeable cash needs for operations. At September 30, 1996, the Company had commitments of approximately $70 million to fund loan originations, issued lines of credit, outstanding letters of credit and unadvanced loans. At September 30, 1996, the investment securities held to maturity included $115,000 of gross unrealized gains and $39,000 of gross unrealized losses related to securities intended to be held until maturity. The unrealized gains and losses are not expected to have a material effect on future earnings beyond the usual amortization of acquisition premium or accretion of discount because no sale of the investment portfolio is foreseen. The Company's primary sources of funds are savings deposits, FHLBank advances, other borrowings, loan repayments, proceeds from sales of loans and available-for-sale securities and funds provided from operations. The Company utilizes particular sources of funds based on the comparative costs and availability at the time. The Company has from time to time chosen not to pay rates on deposits as high as the rates paid by certain of its competitors and, when necessary, supplement deposits with less expensive alternative sources of funds.
20 STATEMENT OF CASH FLOWS During the three months ended September 30, 1996 and 1995, the Company had positive cash flows from operating activities, and during the three months ended September 30, 1995, the Company had positive cash flows from financing activities. The Company experienced negative cash flows from investing activities during the three months ended September 30, 1996 and 1995, and had negative cash flows from financing activities during the three months ended September 30, 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 $5 million and $4.3 million in cash during the three months ended September 30, 1996 and 1995, respectively. During the three months ended September 30, 1996 and 1995, investing activities used cash of $1.1 million and $6.5 million, respectively, primarily due to the net increase of loans in both periods. Changes in cash flows from financing activities of the periods covered by the Statements of Cash Flows are due to changes in deposits after interest credited, changes in FHLBank advances and changes in short-term borrowings as well as purchases of treasury stock and dividend payments to stockholders. Financing activities used $15 million in cash during the three months ended September 30, 1996 and provided $17 million in cash during the three months ended September 30, 1995. Financing activities in the future are expected to primarily include changes in deposits, changes in FHLBank advances, and changes in short-term borrowings. DIVIDENDS During the three months ended September 30, 1996 and September 30, 1995, the Company declared and paid dividends in each period of $0.175 per share. The Board of Directors meets regularly to consider the level and the timing of dividend payments.
21 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Registrant and its subsidiaries are involved as plaintiff or defendant in various legal actions arising in the normal course of their business. While the ultimate outcome of the various legal proceedings involving the Registrant and its subsidiaries cannot be predicted with certainty, it is the opinion of management, after consultation with legal counsel, that these legal actions currently are not material to the Registrant. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to Vote of Common Stockholders At the Company's annual meeting of stockholders held on October 16, 1996, the results of the matters voted upon were as follows: (a) Each of the following nominees for election as director was elected. Affirmative Votes Director Votes Withheld ------------------ ----------- --------- William E. Barclay 3,898,186 3,776 Larry D. Frazier 3,899,525 2,437 (b) An affirmative vote in excess of the majority of the shares available to vote was obtained to approve the amendment to the Certificate of Incorporation to increase authorized common stock. Affirmative Negative Abstentions ----------- -------- ----------- 3,893,135 713 8,114 (c) An affirmative vote in excess of the majority of the shares available to vote was obtained to approve the appointment of Baird, Kurtz & Dobson as auditors for the current fiscal year. Affirmative Negative Abstentions ----------- -------- ----------- 3,868,661 20,153 13,148 Item 5. Other Information None.
22 Item 6. Exhibits and Reports on Form 8-K a) Exhibits See the attached exhibit 11, Statement re computation of earnings per share. See the attached exhibit 27, Financial Data Schedule. b) Reports on Form 8-K On August 23, 1996, the Registrant filed a Form 8-K announcing a 2-for-1 stock split contingent on stockholder approval of an increase in authorized common shares. On October 8, 1996, the Registrant filed a Form 8-K disclosing two items which materially impacted the September 30, 1996 quarterly earnings. The status of a stock buy-back program and the announcement of a new stock buy-back program were also disclosed.
23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Great Southern Bancorp, Inc. Registrant Date: November 14, 1996 /s/ William V. Turner -------------------------- William V. Turner Chairman of the Board, President and Chief Executive Officer Date: November 14, 1996 /s/ Don M. Gibson -------------------------- Don M. Gibson, Executive Vice President and Chief Financial Officer
24 Exhibit Index ------------- Exhibit No. Description - ------- ----------- 11 Statement Re Computation of Earnings Per Share 27 Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only and not filed.
25 <TABLE> <CAPTION> Exhibit 11- Statement Re Computation of Earnings Per Share Three Months Ended September 30, 1996 1995 ---------- ---------- <S> <C> <C> Primary: Average shares outstanding 4,385,267 4,497,324 Net effect of dilutive stock options - based on the treasury stock method using average market price 139,290 156,122 --------- --------- Primary shares 4,524,557 4,653,446 ========= ========= Net income $493,297 $2,884,588 ======= ========= Per share amount $0.11 $0.62 ==== ==== Fully diluted: Average shares outstanding 4,385,267 4,497,324 Net effect of dilutive stock options - based on the treasury stock method using average market price 144,744 157,850 --------- --------- Primary shares 4,530,011 4,655,174 ========= ========= Net income $493,297 $2,884,588 ======= ========= Per share amount $0.11 $0.62 ==== ==== </TABLE>