-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FdmFzXpzD60SfGU/9EOkVL5dRj8rL16xO1EW0LRwtucUJq/vDai31qhCQAaC8vtw kYV3VdilUcZd2titMH0wWg== 0000854560-98-000017.txt : 19980518 0000854560-98-000017.hdr.sgml : 19980518 ACCESSION NUMBER: 0000854560-98-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREAT SOUTHERN BANCORP INC CENTRAL INDEX KEY: 0000854560 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 431524856 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18082 FILM NUMBER: 98623059 BUSINESS ADDRESS: STREET 1: 1451 E BATTLEFIELD CITY: SPRINGFIELD STATE: MO ZIP: 65804 BUSINESS PHONE: 4178874400 MAIL ADDRESS: STREET 2: P O BOX 9009 CITY: SPRINGFIELD STATE: MO ZIP: 65808-9009 10-Q 1 1 - ---------------------------------------------------------------------- - ---------------------------------------------------------------------- UNITED STATES SECURITIES & EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-Q /X/ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period ended March 31, 1998, 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: 7,999,533 shares of common stock, par value $.01, outstanding at May 7, 1998. - ---------------------------------------------------------------------- - ---------------------------------------------------------------------- 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
March 31, June 30, 1998 1997 ------------- ------------ ASSETS Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,844,311 $ 8,176,763 Interest-bearing deposits in other financial institutions. . . . . . . . . 56,528,582 24,308,337 ----------- ----------- Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . 68,372,893 32,485,100 Available for sale securities. . . . . . . . . . . . . . . . . . . . . . . 5,742,577 7,408,020 Held to maturity securities (fair value $49,923,000 - March 1998; $49,859,000 - June 1997) . . . . . . . . . . . . . . . . . . . . . . . . 49,768,362 49,756,978 Loans receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 653,557,147 583,709,446 Foreclosed assets held for sale, net . . . . . . . . . . . . . . . . . . . 4,939,385 5,650,962 Premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 8,731,035 7,433,073 Accrued interest receivable Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,818,801 4,225,771 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 695,010 767,541 Investment in FHLBank Stock. . . . . . . . . . . . . . . . . . . . . . . . 10,792,600 10,792,600 Prepaid expenses and other assets. . . . . . . . . . . . . . . . . . . . . 4,210,305 2,982,653 Excess cost over fair value of net assets acquired . . . . . . . . . . . . 504,726 0 Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,722,600 2,629,140 ------------ ------------ Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $814,855,441 $707,841,284 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $497,121,824 $459,235,746 Federal Home Loan Bank advances. . . . . . . . . . . . . . . . . . . . . . 211,557,404 151,881,100 Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . 35,625,711 28,744,191 Advances from borrowers for taxes and insurance. . . . . . . . . . . . . . 1,499,659 2,488,397 Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . 2,250,613 1,873,824 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,829 3,269,659 ------------ ------------ Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 748,058,040 647,492,917 ------------ ------------ Capital stock Serial preferred stock, $.01 par value; authorized 1,000,000 shares Common stock, $.01 par value; authorized 20,000,000 shares; issued 12,325,002 shares. . . . . . . . . . . . . . . . . . . . . . . . . . . 123,250 123,250 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 17,093,505 17,058,326 Retained earnings (substantially restricted) . . . . . . . . . . . . . . . 82,236,730 73,980,259 Unrealized appreciation on available-for-sale securities, net of income taxes of $760,193 - March 1998 and $870,860 - June 1997 . . . . . 1,189,020 1,362,116 Treasury stock, at cost; 4,288,581 shares - March 1998; 4,219,881 shares - June 1997 . . . . . . . . . . . . . . . . . . . . . . (33,845,104) (32,175,584) ------------ ------------ Total Stockholders' Equity. . . . . . . . . . . . . . . . . . . . . . . 66,797,401 60,348,367 ------------ ------------ Total Liabilities and Stockholders' Equity . . . . . . . . . . . . . $814,855,441 $707,841,284 ============ ============ See Notes to Consolidated Financial Statements
3 GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, 1998 1997 1998 1997 ----------- ----------- ---------- ----------- INTEREST INCOME Loans $14,777,913 $12,949,649 $42,656,103 $38,265,046 Investment Securities 945,327 931,273 2,900,283 2,926,323 Other 134,760 60,549 342,640 193,222 ---------- ---------- ---------- ---------- TOTAL INTEREST INCOME 15,858,000 13,941,471 45,899,026 41,384,591 ---------- ---------- ---------- ---------- INTEREST EXPENSE Deposits 5,100,206 4,820,305 15,494,809 13,062,173 FHLBank advances 2,693,792 2,317,515 7,369,636 7,871,619 Short-term borrowings 294,655 130,766 825,103 451,522 ---------- ---------- ---------- ---------- TOTAL INTEREST EXPENSE 8,088,653 7,268,586 23,689,548 21,385,314 ---------- ---------- ---------- ---------- NET INTEREST INCOME 7,769,347 6,672,885 22,209,478 19,999,277 PROVISION FOR LOAN LOSSES 414,425 427,615 1,266,807 1,287,100 ---------- ----------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,354,922 6,245,270 20,942,671 18,712,177 ---------- ---------- ---------- ---------- NON-INTEREST INCOME Commissions 1,446,395 1,103,300 4,032,028 3,684,975 Service charge fees 955,125 673,886 2,708,380 2,004,445 Net realized gains on sales of loans and available-for-sale securities 703,478 181,370 2,036,472 578,487 Income (expense) on foreclosed assets (56,347) (23,517) 326,745 292,919 Other income 322,181 372,473 1,100,310 1,037,176 ---------- ---------- ---------- ---------- TOTAL NON-INTEREST INCOME 3,370,832 2,307,512 10,203,935 7,598,002 ---------- ---------- ---------- ---------- NON-INTEREST EXPENSE Salaries and employee benefits 2,755,007 2,331,679 7,982,309 6,856,723 Net occupancy expense 783,596 589,509 2,132,831 1,696,091 Tax consulting fees -- -- 439,157 -- Postage 245,576 164,971 638,010 470,232 Insurance 145,317 119,290 496,943 3,262,927 Amortization of goodwill 32,149 0 32,149 1,106,961 Advertising 134,873 143,843 429,545 416,578 Office supplies and printing 174,849 151,344 497,836 388,000 Other operating expenses 953,092 526,483 2,458,783 1,599,228 ---------- ---------- ---------- ---------- TOTAL NON-INTEREST EXPENSE 5,224,459 4,027,119 15,107,563 15,796,740 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 5,501,295 4,525,663 16,039,043 10,513,439 PROVISION FOR INCOME TAXES 2,137,700 1,616,413 5,195,400 4,203,157 ---------- ---------- ---------- ---------- NET INCOME $ 3,363,595 $ 2,909,250 $10,843,643 $ 6,310,282 ========== ========== ========== ========== BASIC EARNINGS PER COMMON SHARE $.42 $.35 $1.34 $.74 === === === === DILUTED EARNINGS PER COMMON SHARE $.41 $.35 $1.32 $.74 === === === === See Notes to Consolidated Financial Statements
4 GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED MARCH 31, 1998 1997 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 10,843,643 $ 6,310,282 Items not requiring (providing) cash: Depreciation 892,160 682,166 Amortization 27,149 1,101,961 Provision for loan losses 1,266,807 1,287,100 Provision for losses on foreclosed assets 100,000 100,000 Net realized gains on sale of loans (742,577) (373,062) Gain on sale of premises and equipment (78,049) (2,382) Gain on sale of foreclosed assets (558,444) (511,420) Amortization of deferred income, premiums and discounts (539,839) (710,439) Net realized gains on sale of available-for-sale securities (791,658) (205,426) Deferred income taxes (481,817) (300,000) Changes in: Accrued interest receivable (520,499) 323,665 Prepaid expenses and other assets (1,227,652) (878,819) Accounts payable and accrued expenses 376,789 (287,259) Income taxes payable (3,244,251) 796,127 ----------- ----------- Net cash provided by operating activities 5,321,762 7,332,494 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Net increase in loans (69,592,295) (27,419,910) Purchase of additional business units (531,875) -- Purchase of premises and equipment (2,323,081) (807,467) Proceeds from sale of premises and equipment 211,008 5,791 Proceeds from sale of foreclosed assets 1,016,136 945,514 Capitalized costs on foreclosed assets (66,818) (194,660) Proceeds from sale of available-for-sale securities 3,010,376 1,377,623 Proceeds from maturing held-to-maturity securities 11,750,000 31,398,775 Purchase of held-to-maturity securities (11,780,478) (31,185,375) Purchase of available-for-sale securities (338,014) (1,659,384) Purchase of FHLBank stock -- (769,800) ----------- ----------- Net cash used in investing activities (68,645,041) (28,308,893) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in certificates of deposit 18,667,738 72,506,020 Net increase (decrease) in checking and savings 19,218,340 (6,666,632) Proceeds from FHLBank advances 646,406,675 363,210,755 Repayments of FHLBank advances (586,730,371) (410,274,400) Net increase in short-term borrowings 6,881,520 (478,571) Advances from borrowers for taxes and insurance (988,738) (924,062) Purchase of treasury stock (1,699,484) (12,234,178) Dividends paid (2,587,172) (2,435,244) Stock options exercised 42,564 724,561 ----------- ----------- Net cash provided by financing activities 99,211,072 3,428,249 ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35,887,793 (17,548,150) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 32,485,100 29,615,027 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 68,372,893 $ 12,066,877 =========== =========== See Notes to Consolidated Financial Statements
5 GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements of Great Southern Bancorp, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The financial statements presented herein reflect all adjustments, which are in the opinion of management, necessary for a fair statement of the results for the periods presented. Operating results for the three months and nine months ended March 31, 1998 and 1997 are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 1997. When necessary, reclassifications have been made to prior period balances to conform to current period presentation. These reclassifications had no effect on net income. The Company completed a 2-for-1 stock split on October 21, 1996. Prior period information included in this form 10-Q reflects this stock split, when necessary. ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The discussion set forth below, as well as other portions of this Form 10-Q, may contain forward-looking comments. Such comments are based upon the information currently available to management of the Company and management's perception thereof as of the date of this Form 10-Q. Actual results of the Company's operations could materially differ from those forward-looking comments. The differences could be caused by a number of factors or combination of factors including, but not limited to; changes in the availability and/or cost of capital; changes in demand for banking services; changes in the portfolio composition; change in the interest rate yield on the Company's investments; changes in management strategy; increased competition from both bank and non-bank companies; changes in the economic, political or regulatory environments in the United States; litigation involving the Company and/or its subsidiaries; and changes in the availability of qualified labor. Readers should take these factors into account in evaluating any such forward-looking comments. 6 General Parts of management's discussion and analysis in the annual report on Form 10-K are not included below. The following should be read in conjunction with management's discussion and analysis in the Company's June 30, 1997 Form 10-K. The consolidated net income of the Company and more specifically, the net income of its primary subsidiary, Great Southern Bank, FSB (the "Bank"), is primarily dependent upon the difference or spread between the average yield earned on loans and investments and the average rate paid on deposits and borrowings, as well as the relative amounts of such assets and liabilities. The interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. The Bank, like other financial institutions, is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different times, or on a different basis than its interest-earning assets. The Company's consolidated net income is also affected by, among other things, gains on sales of loans and available-for-sale investments, provisions for loan losses, service charge fees and commissions, operating expenses and income taxes. Management of the Company has developed and implemented an asset/liability management strategy to match the repricing and/or maturity of its interest-earning assets and its interest-bearing liabilities and to achieve improved and sustained operating income without adversely affecting asset quality. In implementing this strategy, the Company has sought, subject to market conditions, to increase its origination of adjustable-rate loans secured by various types of real estate in order to increase its investment in loans that are interest rate sensitive. The Company has also sold substantially all of the fixed-rate, one- to four-family residential loans originated since fiscal 1986, with servicing retained through fiscal 1995 and primarily servicing released beginning in fiscal 1996. EFFECT OF FEDERAL LAWS AND REGULATIONS Federal legislation and regulation significantly affect the banking operations of the Company and the Bank, and have increased competition among savings institutions, commercial banks, mortgage banking enterprises and other financial institutions. In particular, the capital requirements and operations of regulated depository institutions such as the Company and the Bank have been and will be subject to changes in applicable statutes and regulations from time to time, which changes could, under certain circumstances, adversely affect the Company or the Bank. 7 On September 30, 1996, the President of the United States signed into law, legislation that impacted two major areas of the Bank. The first major area was a one-time assessment of SAIF-insured institutions of 65.7 basis points of March 31, 1995 SAIF-assessable deposits. The Bank was assessed approximately $2.5 million ($1.6 million after income taxes) which was paid at the end of November 1996. The payment was expensed in the September 30, 1996 quarter and had a significant impact on the Bank's earnings as of the time the payment was accrued. Along with this one-time SAIF assessment, the semi-annual SAIF assessment was reduced, beginning January 1, 1997, from an annualized 23 basis points on SAIF-assessable deposits, to approximately 6.48 basis points annualized on SAIF-assessable deposits. This reduced the monthly expense of the Bank, beginning January 1, 1997, by approximately $55,000 ($35,000 after tax). As a result of this lower assessment rate, the Bank significantly increased (approximately $80 million) the level of brokered deposits used to fund asset growth beginning in the March 31, 1997 quarter. The rates paid on these deposits, when compared to alternative sources and allowing for deposit insurance costs, is comparable to FHLBank advances but do not require the asset pledging the FHLBank requires. The second major area of change is the repeal of the bad debt reserve method of accounting for bad debts by large thrifts for taxable years beginning after 1995 (year ended June 30, 1997 for the Bank). The legislation requires applicable excess reserves accumulated after 1987 (year ended June 30, 1988 for the Bank) be recaptured and restored to income over a six year period with the first year beginning after 1995 (year ended June 30, 1997 for the Bank), and no longer creates recapture of the applicable excess reserves accumulated prior to 1988 for thrifts at the time they convert to bank charters. The post 1987 recapture may be delayed for a one- or two-year period if certain residential loan origination requirements are met. The Bank met these requirements for fiscal year June 30, 1997. The amount of post 1987 recapture for the Bank is estimated at $5 million which would create income taxes of approximately $2 million, or $400,000 per year for each of the five years remaining in the recapture period. The $2 million of tax has been accrued and expensed by the Bank in previous periods and accordingly, will not be reflected as a reduction in earnings or capital when paid. Beginning with the fiscal year ending June 30, 1997, the Bank is required to follow the specific charge-off method which only allows a bad debt deduction equal to actual charge-offs, net of recoveries, experienced during the fiscal year of the deduction. In a year where recoveries exceed charge-offs, the Bank will be required to include the net recoveries in taxable income. 8 YEAR 2000 COMPUTER PROGRAM PROBLEMS A large amount of information has been distributed concerning the potential computer and equipment crash that may occur in the year 2000. Many computers, computer programs and other technology items that only distinguish the year by the last two digits instead of all four digits are expected to read the year 2000 as the year 1900. This is expected to potentially produce catastrophic errors. The Company, like most other companies and financial institutions, relies on timely, accurate, efficient data processing for every area of its operations. Any problems which might occur due to the year 2000 concern could be detrimental to the operations and financial stability of the Company. The Board of Directors of the Bank adopted a Year 2000 Compliance Policy which mandates to senior management and all employees, full compliance with the time frames dictated by sound business practice and the Federal Financial Institutions Examination Council. The Bank's Year 2000 Compliance Project is an ongoing process and the Bank expects to be in compliance by December 31, 1998. The first stage of the Compliance process for the Bank was an internal risk assessment performed by the Information Systems Steering Committee along with major vendors and consultants. The Risk Assessment revealed the need to replace the Bank's mainframe operating system and to replace the majority of the online terminals, which are desktop computers. The desktop systems have been purchased and installed. The Bank has experienced sizeable growth in recent years which, independent of the year 2000 issue, has created the need to upgrade the core mainframe hardware and software systems to handle the increased growth. The Year 2000 Committee and management reviewed various proposals and attended presentations of core mainframe hardware and software systems. One of the main items included in each proposal was written certification of compliance with the year 2000 issue. Subsequent to March 31, 1998, the Bank signed an agreement to convert to the Jack Henry Silverlake system. The time table agreed to by the Bank and Jack Henry is for the conversion to be completed during the December 1998 quarter. The approximate cost to convert to the new core mainframe system and to upgrade the desktop computers and other equipment is estimated at $1.5 million. This amount will be expensed over a 3 to 5 year period. Management does not feel it will have a material impact on the financial condition of the Company. The insurance, investment and travel subsidiaries operate on separate computer systems from the Bank and each other. The Year 2000 Committee of the Bank will be assisting these companies in performing a Risk Assessment of their systems and taking the steps necessary to ensure compliance with all year 2000 issues before December 31, 1999. 9 RECENT CHANGES IN ACCOUNTING PRINCIPLES In March 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaces the presentation of primary earnings per share with a presentation of basic earnings per share. It requires dual presentation of basic and diluted earnings per share by entities with complex capital structures and requires a reconciliation of the numerators and denominators between the two calculations. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company adopted SFAS 128 at December 31, 1997. The adoption of SFAS 128 did not have a material effect on the financial statements of the Company. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). SFAS 132 revises disclosure requirements for pension and other postretirement benefit plans but does not change the measurement or recognition of those plans. SFAS 132 is effective for fiscal years beginning after December 15, 1997. The Company will adopt SFAS 132 in its June 30, 1999 fiscal year. The adoption of SFAS 132 is not expected to have a material effect on the financial statements of the Company. ASSET AND LIABILITY MANAGEMENT During the nine months ended March 31, 1998, the Company increased total assets by $107 million. The main areas of change were an increase in net loans of $70 million and an increase in cash and interest-bearing deposits of $36 million. The following loan categories experienced net increases as noted: Commercial real estate and construction loans $41 million Commercial business loans 26 million Consumer (primarily automobile and student) loans 14 million The following loan categories experienced net decreases as noted: Single-family and other residential loans $11 million The increase in cash and interest-bearing deposits was primarily due to large cash letters in the process of collection at the end of the quarter and the timing of transfers of funds from cash letters. 10 Total liabilities increased $100 million during the nine months ended March 31, 1998, primarily from an increase in FHLBank advances of $60 million and an increase in deposits of $38 million. The deposit increase was primarily from brokered deposits. The increase in FHLBank advances and deposits was to fund the brisk loan demand during the nine month period. Management feels FHLBank advances and brokered deposits are viable alternatives to retail deposits when factoring all the costs associated with the generation and maintenance of retail deposits. Stockholders' equity increased $6.5 million primarily as a result of net income of $10.8 million offset by dividend declarations and payments of $2.6 million and net treasury stock purchases of $1.6 million. The Company repurchased 79,034 shares of common stock at an average price of $21.53 per share during the nine months ended March 31, 1998 and issued 10,334 shares at an average price of $6.01 per share for exercised stock options. Management believes that a key component of successful asset/liability management is the monitoring and management of interest rate sensitivity, which encompasses the repricing and maturity of interest-earning assets and interest-bearing liabilities. During any period in which a financial institution has a positive interest rate sensitivity gap, the amount of its interest-earning assets maturing or otherwise repricing within such period exceeds the amount of the interest-bearing liabilities maturing or otherwise repricing within the same period. Accordingly, in a rising interest rate environment, financial institutions with positive interest rate sensitivity gaps generally will experience greater increases in yield on their assets than in the cost of their liabilities. Conversely, in a falling interest rate environment, the cost of funds of financial institutions with positive interest rate sensitivity gaps generally will decrease less than the yield on their assets. Changes in interest rates generally will have the opposite effect on financial institutions with negative interest rate sensitivity gaps. In a rising interest rate environment financial institutions with negative gaps have more liabilities than assets mature or reprice during the relevant period, causing the increase in the cost of liabilities to exceed the increase in the yield on assets. Conversely, in a falling interest rate environment, the cost of funds of financial institutions with negative interest rate sensitivity gaps generally will decrease more than the yield on their assets. The Company's experience with interest rates is discussed in more detail under the headings "Results of Operations and Comparisons of the Nine Months Ended March 31, 1998 and 1997" and in management's discussion and analysis in the June 30, 1997 Form 10-K. 11 The Company's one-year interest rate sensitivity gap, as a percentage of total interest-earning assets was a positive $57 million, or 7.1%, at March 31, 1998, as compared to a positive $48 million, or 6.9%, at June 30, 1997. The increase of $9 million resulted primarily from: (i) an $24 million increase in commercial real estate commercial business and consumer loans; (ii) a $46 million increase in investment securities and interest-earning deposits due to a large temporary increase in interest-earning deposits at the end of the March 31, 1998 quarter and the shifting of $15 million of maturities from the 1 to 2 years category into the 1 year or less category; (iii) a $23 million increase in FHLBank advances; (iv) a $25 million increase in time deposits, with the majority being brokered deposits in the 1 year or less category; and (v) a $13 million and $9 million increase, respectively, in interest-bearing demand deposits and other borrowings due to the Company's recent growth in these customer accounts. As a part of its asset and liability management strategy, the Company has increased its investment in loans which are interest rate sensitive by emphasizing the origination of adjustable-rate, one- to four-family residential loans and adjustable-rate or relatively short- term commercial business and consumer loans, and originating fixed- rate, one- to four-family residential loans primarily for immediate resale in the secondary market. Approximately 40% of total assets are currently invested in commercial real estate and commercial business loans. This part of the strategy was designed to improve asset yield and fee income, and to shorten the average maturity and increase the interest rate sensitivity of the loan portfolio. While efforts to date have contributed to the changes in the one-year interest rate sensitivity gap and increased net interest income, such lending, commensurate with the increased risk levels, has also resulted in an increase in the level of non-performing assets. Management continually evaluates existing and potential commercial real estate and commercial business loans, in order to try to reduce undesirable risks including concentrations in a given geographic area or a particular loan category. While from a credit risk standpoint the Company would prefer higher levels of one- to four-family and other residential loan originations rather than commercial real estate and commercial business loan originations, the Company has adapted to the changing lending environment and originates commercial real estate and commercial business loans to achieve the desired growth of the loan portfolio and assets in total, as well as to maintain the desired yield on the Company's investments. 12 Interest rate risk exposure estimates (the sensitivity gap) are not exact measures of an institution's actual interest rate risk. They are only indicators of interest rate risk exposure produced in a simplified modeling environment designed to allow management to gauge the Company's sensitivity to changes in interest rates. They do not necessarily indicate the impact of general interest rate movements on the Company's net interest income because the repricing of certain categories of assets and liabilities is subject to competitive and other factors beyond the Company's control. As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated period may in fact mature or reprice at different times and in different amounts and would therefore cause a change (which potentially could be material) in the Company's interest rate risk. (Remainder of page intentionally left blank) 13 The following table sets forth the Company's interest rate sensitive assets and liabilities that mature or reprice within one year as of the dates indicated and on the basis of the factors and assumptions set forth at the end of the tables.
March 31, June 30, 1998 1997 ------------- --------- (000'S OMITTED) Residential real estate loans $247,331 262,123 Construction loans 28,662 5,908 Commercial real estate loans 202,797 206,020 Commercial business loans 47,488 25,557 Consumer loans 28,073 22,549 Investment securities and other 107,062 60,628 ------- ------- Total interest rate sensitive assets repricing within one year 661,413 582,785 ------- ------- Interest-bearing demand deposits 127,980 115,299 Savings deposits 34,685 35,065 Time deposits 265,328 240,643 FHLBank advances 141,066 117,659 Other borrowings and liabilities 35,626 26,338 ------- ------- Total interest rate sensitive liabilities repricing within one year 604,685 535,004 ------- ------- One year interest rate sensitivity gap (1) $56,728 $ 47,781 ======= ======= Interest rate sensitive assets/interest rate sensitive liabilities 109.4% 108.9% ===== ===== One year interest rate sensitivity gap as a percent of interest-earning assets 7.1% 6.9% === === ___________________________________________ (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.
14 The following table sets forth the interest rate sensitivity of the Company's assets and liabilities at March 31, 1998, on the basis of the factors and assumptions set forth below.
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 -------- --------- -------- -------- -------- -------- (Dollars in thousands) Residential real estate loans $169,067 $ 78,264 $ 50,037 $ 4,087 $33,783 $335,238 Construction loans 28,662 -- -- -- -- 28,662 Commercial real estate loans 201,111 1,686 11,446 2,749 2,479 219,471 Commercial business loans 47,329 159 131 69 7 47,695 Consumer loans 25,065 3,008 9,027 3,867 330 41,297 Investment securities and other 85,306 21,756 15,770 -- -- 122,832 ------- ------- ------- ------ ------ ------- Total interest-earning assets 556,540 104,873 86,411 10,772 36,599 795,195 ------- ------- ------- ------ ------ ------- Interest-bearing demand deposits 127,980 -- -- -- -- 127,980 Savings deposits 34,685 -- -- -- -- 34,685 Time deposit 187,879 77,449 36,520 8,670 2,450 312,968 FHLBank advances 125,484 15,582 38,309 11,959 20,223 211,557 Other borrowings and liabilities 35,626 -- -- -- -- 35,626 ------- ------- ------- ------ ------ ------- Total interest-bearing liabilities 511,654 93,031 74,829 20,629 22,673 722,816 ------- ------- ------- ------ ------ ------- Interest-earning assets less interest-bearing liabilities $ 44,886 $ 11,842 $ 11,582 $ (9,857) $13,926 $ 72,379 ======= ======= ======= ====== ====== ======= Cumulative interest rate sensitivity gap $ 44,886 $ 56,728 $68,310 $ 58,453 $72,379 ======= ======= ====== ====== ====== Cumulative interest rate sensitivity gap as a percent of interest-earning assets at March 31, 1998 5.6% 7.1% 8.6% 7.4% 9.1% === === === === === Cumulative interest rate sensitivity gap as a percent of interest-earning assets at June 30, 1997 0.1% 6.9% 10.1% 9.6% 10.5% === === ==== === ==== The assumptions used in the above two tables are: -- Prepayment rates are derived from market prepayment rates observed on or about March 31, 1998. -- Fixed-rate loans, net of loans in process, deferred fees and discounts are shown on the basis of contractual amortization and the prepayment assumptions noted above. -- Adjustable-rate loans are assumed to reprice at the earlier of maturity or the next contractual repricing date. -- Zero growth and constant percentage composition of assets and liabilities and funds from contractual amortization are not reinvested.
15 RESULTS OF OPERATIONS AND COMPARISON OF THE THREE AND NINE MONTHS ENDED MARCH 31, 1998 and 1997 The increase in earnings of $455,000, or 15.6%, for the three months ended March 31, 1998 when compared to the same period in 1997, was primarily due to an increase in non-interest income of $1.1 million, or 46.1%, and an increase in net interest income of $1.1 million, or 16.4%, offset by an increase in non-interest expense of $1.2 million, or 29.7%, and an increase in provision for income taxes of $522,000, or 32.3%, during the three month period. The increase in earnings of $4.5 million, or 71.9%, for the nine months ended March 31, 1998 when compared to the same period in 1997, was primarily due to an increase in non-interest income of $2.6 million, or 34.3%, an increase in net interest income of $2.2 million, or 11.1%, and a decrease in non-interest expense of $690,000, or 4.4%, offset by an increase in provision for income taxes of $1 million, or 23.6%, during the nine month period. Total Interest Income Total interest income increased $1.9 million, or 13.8%, during the three months ended March 31, 1998, when compared to the three months ended March 31, 1997. The increase was primarily due to a $1.8 million, or 14.1%, increase in interest income on loans. Total interest income increased $4.5 million, or 10.9%, during the nine months ended March 31, 1998, when compared to the nine months ended March 31, 1997. The increase was primarily due to a $4.4 million, or 11.5%, increase in interest income on loans. Interest Income - Loans During the three months ended March 31, 1998, interest income on loans increased primarily from higher average balances. Interest income increased $1.6 million as the result of higher average loan balances from $567 million during the three months ended March 31, 1997 to $636 million during the three months ended March 31, 1998. The average yield on loans increased from 9.13% during the three months ended March 31 1997, to 9.29% during the three months ended March 31, 1998. 16 During the nine months ended March 31, 1998, interest income on loans increased primarily from higher average balances. Interest income increased $4 million as the result of higher average loan balances from $556 million during the nine months ended March 31, 1997 to $614 million during the nine months ended March 31, 1998. Interest income increased $270,000 during the nine months ended March 31, 1998 as the result of the receipt of interest on a commercial real estate loan with a zero principal balance that is being accounted for on a cash basis. The average yield on loans increased from 9.17% during the nine months ended March 31 1997, to 9.27% during the nine months ended March 31, 1998. Interest Income - Investments and Other Interest-Earning Deposits Since the Company derives the majority of its interest income from loans, the net increase in interest income on investments and interest-earning deposits during the three and nine months ended March 31, 1998 of $88,000 and $124,000, respectively, when compared to the three and nine months ended March 31, 1997, was not material. Total Interest Expense Total interest expense increased $820,000, or 11.3%, during the three months ended March 31, 1998 when compared with the same period in 1997. The increase during the three month period was due to a $540,000, or 22.0%, increase in interest expense on FHLBank advances and other borrowings and a $280,000, or 5.8%, increase in interest expense on deposits. Total interest expense increased $2.3 million, or 10.8%, during the nine months ended March 31, 1998 when compared with the same period in 1997. The increase during the nine month period was primarily due to a $2.4 million, or 18.6%, increase in interest expense on deposits, offset by a $128,000, or 1.5%, decrease in interest expense on FHLBank advances and other borrowings. Interest Expense - Deposits Interest expense on deposits increased $280,000 as a result of higher average balances of time deposits from $293 million during the three months ended March 31, 1997, to $307 million during the three months ended March 31, 1998 and due to higher average balances of interest-bearing demand deposits from $105 million during the three months ended March 31, 1997, to $118 million during the three months ended March 31, 1997. The average balances increased as a result of the Company's use of brokered deposits to fund loan growth . Time deposits experienced small increases due to higher rates while interest-bearing deposits experienced small decreases due to lower rates. The other deposit category, savings, experienced only minor increases due to slightly higher balances. 17 Interest expense on deposits increased $2.2 million as a result of higher average balances of time deposits from $252 million during the nine months ended March 31, 1997, to $306 million during the nine months ended March 31, 1998. The average balances increased as a result of the Company's use of brokered deposits to fund loan growth . Time deposits experienced small increases due to higher rates and the other deposit areas also experienced small increases or decreases due to rates and or balances. Interest Expense - FHLBank Advances and Other Borrowings Interest expense on FHLBank advances and other borrowings increased $638,000 due to higher average balances from $167 million in the three months ended March 31, 1997 to $212 million in the three months ended March 31, 1998. Average rates were slightly lower during the three months ended March 31, 1998 at 5.64% compared to 5.88% during the three months ended March 31, 1997. The average balances increased as a result of the Company's use of FHLBank advances to fund a portion of the loan growth. Interest expense on FHLBank advances and other borrowings decreased $137,000 due to lower average rates from 5.91% in the nine months ended March 31, 1997 to 5.81% in the nine months ended March 31, 1998. Average balances during both nine month periods were $188 million. Net Interest Income The Company's overall interest rate spread increased 9 basis points, or 2.4%, from 3.78% during the three months ended March 31, 1997, to 3.87% during the three months ended March 31, 1998. The increase was due to a slight increase in the weighted average yields received on interest-earning assets combined with a slight decrease in the weighted average rates paid on interest-bearing liabilities. The Company's overall interest rate spread decreased 1 basis point, or .3%, from 3.82% during the nine months ended March 31, 1997, to 3.81% during the nine months ended March 31, 1998. The decrease was due to a decrease in the weighted average yields received on interest- earning assets. Provision for Loan Losses The provision for loan losses decreased slightly from $428,000 during the three months ended March 31, 1997 to $414,000 during the three months ended March 31, 1998. 18 The provision for loan losses decreased slightly from $1,287,000 during the nine months ended March 31, 1997 to $1,267,000 during the nine months ended March 31, 1998. In any accounting period, the provision for loan losses is affected by many factors including, but not limited to, the change in the composition of the loan portfolio, the increase or decrease in total loans, the level of delinquencies and other non-performing loans and the historical loss experience of the portfolio. Non-performing assets decreased slightly during the nine months ended March 31, 1998 from $13.9 million at June 30, 1997 to $12.4 million at March 31, 1998. Non-performing loans decreased $500,000, or 6.3%, from $7.9 million at June 30, 1997 to $7.4 million at March 31, 1998, and foreclosed assets declined $1 million from $6 million at June 30, 1997 to $5 million at March 31, 1998. Potential problem loans increased $1.1 million during the nine months ended March 31, 1998 from $7.1 million at June 30, 1997 to $8.2 million at March 31, 1998. These are loans which management has identified through routine internal review procedures as having possible credit problems which may cause the borrowers difficulty in complying with current loan repayment terms. These loans are not reflected in the non-performing loans The allowance for loan losses at March 31, 1998 and June 30, 1997, respectively, totaled $16 million and $15.5 million, representing 2.5% and 2.7% of total loans, 216% and 197% of non-performing loans, and 102% and 103% of non-performing loans and potential problem loans in total. The allowance for foreclosed asset losses totaled $69,000 at March 31, 1998 and $319,000 at June 30, 1997, representing 1.4% and 5.3%, respectively, of total foreclosed assets. Although the Company maintains the allowance for loan losses and the allowance for foreclosed asset losses at levels which it considers to be adequate to provide for potential losses and selling expenses, there can be no assurance that such losses will not exceed the estimated amounts, thereby adversely affecting future results of operations. Non-interest Income Non-interest income increased $1.1 million, or 46.1%, in the three months ended March 31, 1998 when compared to the same period in 1997. The increase was primarily due to: (i) an increase of $444,000 in profits on sale of available-for-sale securities; (ii) an increase in commission income from the travel, insurance and investment subsidiaries of $343,000, or 31%; (iii) an increase in service charge income of $281,000, or 42%, on transaction accounts and electronic transactions from increased volumes; and (iv) various increases and decreases in other non-interest income items. 19 Non-interest income increased $2.6 million, or 34.3%, in the nine months ended March 31, 1998 when compared to the same period in 1997. The increase was primarily due to: (i) an increase of $1.1 million in profits on sale of available-for-sale securities; (ii) an increase in service charge income of $704,000, or 35%, on transaction accounts and electronic transactions from increased volumes; (iii) an increase in commission income from the travel, insurance and investment subsidiaries; and (iv) various increases and decreases in other non- interest income items. Non-interest Expense Non-interest expense increased $1.2 million, or 29.7%, in the three months ended March 31, 1998 when compared to the same period in 1997. The increase was primarily due to: (i) an increase of $423,000 in salary and employee related costs due to increased staffing levels resulting from asset and customer growth and an expanded consumer lending department; (ii) an increase of $194,000 in occupancy and equipment expense due to expansion of the Company's ATM network and other technology related purchases; (iii) an increase of $130,000 from robbery losses; and (iii) increases in the majority of other non- interest expense items resulting from asset and earnings growth. Non-interest expense decreased $689,000, or 4.4%, in the nine months ended March 31, 1998 when compared to the same period in 1997. The decrease was primarily due to: (i) a decrease in insurance of $2.8 million due to the accrual in the September 30, 1996 quarter of the one-time SAIF assessment discussed previously; and (ii) a decrease in goodwill amortization of $1.1 million due to the write-off in the September 30, 1996 quarter of goodwill remaining from a 1982 failed thrift purchase; offset by (iii) an increase of $440,000 in tax consulting fees paid as the result of a recovery of $1.1 million of state financial institution taxes; (iv) an increase of $1.1 million in salaries and employee related costs due to increased staffing levels resulting from asset and customer growth and expanded consumer lending department; (v) an increase of $437,000 in occupancy and equipment expense due to expansion of the Company's ATM network and other technology related purchases; (vi) an increase of $225,000 in robbery and bad check losses; (vii) an increase of $120,000 in internal and external audit fees; (viii) an increase of $110,000 in package transaction account benefit costs; and (ix) increases in the majority of other non-interest expense items resulting from asset and earnings growth. 20 In conjunction with the Company's recent growth and the year 2000 issue discussed previously in this document, the Company will be incurring additional operating costs associated with the evaluation, purchase, implementation and operation of new mainframe hardware and software as well as other replacement computer and equipment items. In addition, it is probable that the insurance, investment and travel subsidiaries will incur costs in the evaluation, purchase, implementation and operation of their systems to bring them into compliance to avoid potential year 2000 issues. While the exact impact of the cost to correct or convert the various systems of the Company is not known at this time, management does not feel it will be material to the overall operations or financial condition of the Company. Provision for Income Taxes Provision for income taxes as a percentage of pre-tax income increased from 35.7% in the three months ended March 31, 1997 to 38.9% in the three months ended March 31, 1998 due to fluctuations in tax credits and other estimated items. Provision for income taxes as a percentage of pre-tax income decreased from 40.0% in the nine months ended March 31, 1997 to 32.4% in the nine months ended March 31, 1998. The larger than normal percentage in the March 31, 1997 period was due to the non-deductible goodwill write-off in that period. The small percentage in the March 31, 1998 period was due to a refund of prior period state financial institution taxes of $1.1 million. The refund was the result of a review of the Bank's state financial institution tax returns by a consulting firm. The refund resulted from the Bank's charter change from a state charter to a federal savings bank charter in December 1994. 21 Average Balances, Interest Rates and Yields The following tables present for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. The tables do not include non-interest- bearing demand deposits and do not reflect any effect of income taxes.
Three Months Ended March 31, --------------------------------------------------------- 1998 1997 --------------------------- -------------------------- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate -------- -------- ------ -------- -------- ------ (Dollars in thousands) Interest-earning assets: Loans receivable $636,495 $14,778 9.29% $567,456 $12,949 9.13% Investment securities and other interest-earning assets 93,510 1,080 4.62 77,887 992 5.09 ------- ------ ---- ------- ------- ---- Total interest-earning assets $730,005 15,858 8.69 $645,343 13,941 8.64 ======= ------ ---- ======= ------ ---- Interest-bearing liabilities: Demand deposits $118,350 625 2.11 $104,598 578 2.21 Savings deposits 34,506 210 2.43 34,118 207 2.43 Time deposits 306,897 4,265 5.56 292,788 4,035 5.51 ------- ----- ---- ------- ----- ---- Total deposits 459,753 5,100 4.49 431,504 4,820 4.47 FHLBank advances and other borrowings 212,122 2,989 5.64 166,507 2,448 5.88 ------- ----- ---- ------- ----- ---- Total interest-bearing liabilities $671,875 8,089 4.82 $598,011 7,268 4.86 ======= ----- ---- ======= ----- ---- Net interest income: Interest rate spread $7,769 3.87% $6,673 3.78% ===== ==== ===== ==== Net interest margin(1) 4.26% 4.14% ==== ==== Average interest-earning assets to average interest-bearing liabilities 108.7% 107.9% ===== ===== (1) Defined as the Company's net interest income divided by total interest-earning assets.
22
Nine Months Ended March 31, --------------------------------------------------------- 1998 1997 --------------------------- -------------------------- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate -------- -------- ------ -------- -------- ------ (Dollars in thousands) Interest-earning assets: Loans receivable $613,569 $42,656 9.27% $556,183 $38,265 9.17% Investment securities and other interest-earning assets 90,822 3,243 4.76 78,106 3,119 5.32 ------- ------ ---- ------- ------- ---- Total interest-earning assets $704,391 45,899 8.69 $634,289 41,384 8.70 ======= ------ ---- ======= ------ ---- Interest-bearing liabilities: Demand deposits $118,880 2,010 2.25 $108,228 1,942 2.39 Savings deposits 34,901 645 2.46 35,399 653 2.46 Time deposits 305,966 12,840 5.60 252,442 10,467 5.53 ------- ------ ---- ------- ------ ---- Total deposits 459,747 15,495 4.49 396,069 13,062 4.40 FHLBank advances and other borrowings 188,078 8,195 5.81 187,875 8,323 5.91 ------- ------ ---- ------- ------ ---- Total interest-bearing liabilities $647,825 23,690 4.88 $583,944 21,385 4.88 ======= ------ ---- ======= ------ ---- Net interest income: Interest rate spread $22,209 3.81% $19,999 3.82% ====== ==== ====== ==== Net interest margin(1) 4.20% 4.20% ==== ==== Average interest-earning assets to average interest-bearing liabilities 108.7% 108.6% ===== ===== (1) Defined as the Company's net interest income divided by total interest-earning assets.
23 Rate/Volume Analysis The following schedule presents the dollar amount of changes in interest income and interest expense for major components of interest- earning assets and interest-bearing liabilities for the periods shown. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in rate (i.e., changes in rate multiplied by old volume) and (ii) changes in volume (i.e., changes in volume multiplied by old rate). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to volume and to rate.
Three Months Ended March 31, Nine Months Ended March 31, 1998 vs. 1997 1998 vs. 1997 -------------------------------- -------------------------------- Increase Increase (Decrease) (Decrease) Due to Total Due to Total -------------- Increase -------------- Increase Rate Volume (Decrease) Rate Volume (Decrease) ---- ------ ---------- ---- ------ ---------- (Dollars in thousands) (Dollars in thousands) Interest-earning assets: Loans receivable $ 230 $1,599 $1,829 $ 405 $3,986 $4,391 Investment securities and other interest-earning assets (76) 164 88 (230) 354 124 --- ----- ----- --- ----- ----- Total interest-earning assets 154 1,763 1,917 175 4,340 4,515 --- ----- ----- --- ----- ----- Interest-bearing liabilities: Demand deposits (24) 71 47 (96) 164 68 Savings deposits 1 2 3 1 (9) (8) Time deposits 34 196 230 128 2,245 2,373 --- ----- ----- --- ----- ----- Total deposits 11 269 280 33 2,400 2,433 FHLBank advances and other borrowings (97) 638 541 (137) 9 (128) --- ----- ----- --- ----- ----- Total interest-bearing liabilities (86) 907 821 (104) 2,409 2,305 --- ----- ----- --- ----- ----- Net interest income $ 240 $ 856 $1,096 $ 279 $1,931 $2,210 === ===== ===== === ===== =====
24 LIQUIDITY AND CAPITAL RESOURCES General The Company's capital position remained strong, with stockholders' equity at $66.8 million, or 8.2% of total assets of $815 million at March 31, 1998 compared to equity at $60.3 million, or 8.5%, of total assets of $708 million at June 30, 1997. In addition, the Bank exceeds each of the regulatory capital requirements. At March 31, 1998, the Bank's tier 1 capital ratio was 6.97% and total risk-based capital ratio was 10.57%. Federal regulations at that date required tier 1 capital of 3% and total risk-based capital of 8%. The Bank is required by regulation to maintain liquidity ratios at certain levels. Currently, a minimum of 5% of the combined total of deposits and short-term borrowings must be maintained in the form of cash and eligible investments. The Bank has historically maintained its liquidity ratio at a level in excess of that required. As of March 31, 1998, the Bank's liquidity ratio was 7.8%, compared to 7.4% at June 30, 1997. Management believes that the Company has sufficient cash flows and borrowing capacity available to meet its commitments and other foreseeable cash needs for operations. At March 31, 1998, the Company had commitments of approximately $92.5 million to fund loan originations, issued lines of credit, outstanding letters of credit and unadvanced loans. At March 31, 1998, the investment securities held to maturity included $170,000 of gross unrealized gains and $15,000 of gross unrealized losses related to securities intended to be held until maturity. The unrealized gains and losses are not expected to have a material effect on future earnings beyond the usual amortization of acquisition premium or accretion of discount because no sale of the investment portfolio is foreseen. The Company's primary sources of funds are savings deposits, FHLBank advances, other borrowings, loan repayments, proceeds from sales of loans and available-for-sale securities and funds provided from operations. The Company utilizes particular sources of funds based on the comparative costs and availability at the time. The Company has from time to time chosen not to pay rates on deposits as high as the rates paid by certain of its competitors and, when necessary, supplement deposits with less expensive alternative sources of funds. 25 STATEMENT OF CASH FLOWS During the nine months ended March 31, 1998 and March 31, 1997, the Company experienced positive cash flows from operating activities and financing activities, and negative cash flows from investing activities. Cash flows from operating activities for the periods covered by the Statements of Cash Flows have been primarily related to adjustments in deferred assets, credits and other liabilities, the provision for loan losses and losses on foreclosed assets, depreciation, sale of foreclosed assets and the amortization of deferred loan origination fees and discounts (premiums) on loans and investments, all of which are non-cash or non-operating adjustments to operating cash flows. As a result, net income, adjusted for non-cash and non-operating items, was the primary source of cash flows from operating activities. Operating activities provided cash flows of $5.3 million and $7.3 million, respectively, during the nine months ended March 31, 1998 and 1997. During the nine months ended March 31, 1998 and 1997, investing activities used cash of $68.6 million and $28.3 million, respectively, primarily due to the net increase of loans in both periods. Changes in cash flows from financing activities of the periods covered by the Statements of Cash Flows are due to changes in deposits after interest credited, changes in FHLBank advances and changes in short-term borrowings as well as purchases of treasury stock and dividend payments to stockholders. Financing activities provided $99.2 million and $3.4 million, respectively, in cash during the nine months ended March 31, 1998 and 1997. Financing activities in the future are expected to primarily include changes in deposits, changes in FHLBank advances, changes in short-term borrowings and changes in treasury stock. DIVIDENDS During the nine months ended March 31, 1998 and 1997, respectively, the Company declared and paid dividends of $0.33 and $0.30 per share. The Board of Directors meets regularly to consider the level and the timing of dividend payments. 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Registrant and its subsidiaries are involved as plaintiff or defendant in various legal actions arising in the normal course of their business. While the ultimate outcome of the various legal proceedings involving the Registrant and its subsidiaries cannot be predicted with certainty, it is the opinion of management, after consultation with legal counsel, that these legal actions currently are not material to the Registrant. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to Vote of Common Stockholders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K a) Exhibits See the attached exhibit 11, Statement re computation of earnings per share. See the attached exhibit 27, Financial Data Schedule. b) Reports on Form 8-K On April 3, 1998, the Registrant filed a Form 8-K announcing a stock repurchase program of up to 800,000 shares of its common stock. 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Great Southern Bancorp, Inc. Registrant Date: May 15, 1998 /s/ William V. Turner -------------------------- William V. Turner Chairman of the Board, President and Chief Executive Officer Date: May 15, 1998 /s/ Don M. Gibson -------------------------- Don M. Gibson, Executive Vice President and Chief Financial Officer 28 Exhibit Index ------------- Exhibit No. Description - ------- ----------- 11 Statement Re Computation of Earnings Per Share 27 Financial Data Schedule, which is submitted electronically to the Securities and Exchange Commission for information only and not filed. 29
Exhibit 11- Statement Re Computation of Earnings Per Share Three Months Ended Nine Months Ended March 31, March 31, 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Basic: Average shares outstanding 8,049,032 8,312,650 8,071,169 8,476,188 ========= ========= ========= ========= Net income $3,363,595 $2,909,249 $10,843,643 $6,310,281 ========= ========= ========== ========= Per share amount $0.42 $0.35 $1.34 $0.74 ==== ==== ==== ==== Diluted: Average shares outstanding 8,049,032 8,312,650 8,071,169 8,476,188 Net effect of dilutive stock options - based on the treasury stock method using average market price 135,238 104,676 135,238 104,676 --------- --------- --------- --------- Diluted shares 8,184,270 8,417,326 8,206,407 8,580,864 ========= ========= ========= ========= Net income $3,363,595 $2,909,249 $10,843,643 $6,310,281 ========= ========= ========== ========= Per share amount $0.41 $0.34 $1.32 $0.74 ==== ==== ==== ====
EX-27 2 FINANCIAL DATA SCHEDULE
9 This schedule contains summary financial information extracted from the Consolidated Balance Sheet and the Consolidated Statement of Income filed as part of the quarterly report on Form 10-Q and is qualified in its entirety by reference to such quarterly report on Form 10-Q. 1,000
9-MOS JUN-30-1998 MAR-31-1998 11,844 56,529 0 0 5,742 49,768 49,923 653,557 16,010 814,855 497,122 166,686 3,752 80,497 0 0 123 66,674 814,855 42,656 2,900 343 45,899 15,495 23,690 22,209 1,267 1,290 15,108 16,039 16,039 0 0 10,844 1.34 1.32 4.20 7,401 0 0 8,239 15,524 909 128 16,010 16,010 0 0
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