-----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, C0jf6oP9nfmgWwnHLMaYluPX0RTn+hdcpbIOLCc7xxj1PwXuDeJZb4yBa1kzrv2i 327OwWj+58vGjAs5v5pjXQ== 0000854560-99-000028.txt : 19990817 0000854560-99-000028.hdr.sgml : 19990817 ACCESSION NUMBER: 0000854560-99-000028 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 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: 99690659 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 June 30, 1999 -------------------------- 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: 7,571,469 shares of common stock, par value $.01, outstanding at August 6, 1999. - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
June 30, December 31, 1999 1998 ------------- ------------ ASSETS Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,037,711 $ 24,115,015 Interest-bearing deposits in other financial institutions. . . . . . . . . 1,539,948 9,431,407 ----------- ----------- Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . 29,577,659 33,546,422 Available-for-sale securities. . . . . . . . . . . . . . . . . . . . . . . 54,185,309 6,475,897 Held-to-maturity securities (fair value $34,531,000 - June 1999; $49,287,000 - December 1998) . . . . . . . . . . . . . . . . . . . . . . 34,590,034 49,117,932 Loans receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 730,805,784 708,238,463 Interest receivable: Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,529,870 4,854,247 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 498,097 651,993 Prepaid expenses and other assets. . . . . . . . . . . . . . . . . . . . . 4,101,762 6,571,841 Foreclosed assets held for sale, net . . . . . . . . . . . . . . . . . . . 907,343 2,810,201 Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . 9,741,617 10,012,125 Investment in Federal Home Loan Bank Stock . . . . . . . . . . . . . . . . 9,632,700 9,454,100 Excess of cost over fair value of net assets acquired, at amortized cost . 473,424 543,278 Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,032,299 4,221,203 ------------ ------------ Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $884,075,898 $836,497,702 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $603,119,751 $597,624,994 Securities sold under repurchase agreements . . . . . . . . . . . . . . . 22,010,644 -- Federal Home Loan Bank advances. . . . . . . . . . . . . . . . . . . . . . 177,627,629 158,452,407 Short-term borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,753,693 798,247 Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . 4,545,839 5,356,558 Advances from borrowers for taxes and insurance. . . . . . . . . . . . . . 1,089,278 1,582,298 Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . 2,400,406 2,442,368 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,598,177 1,858,343 ------------ ------------ Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 817,145,417 768,115,215 ------------ ------------ 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 . . . . . . . . . . . . . . . . . . . . . . . . 17,376,828 17,224,451 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,210,142 90,459,992 Accumulated other comprehensive income: Unrealized appreciation on available-for-sale securities, net of income taxes of $104,342 at June 30, 1999 and $214,410 at December 31, 1998. . . . . . . . . . . . . . . . . . . . 160,107 335,359 . ----------- ----------- 112,870,327 108,143,052 Less treasury common stock, at cost; June 30, 1999 - 4,737,794 shares; December 31, 1998 - 4,522,323 shares . . . . . . . . . . . . . . . . . . (45,939,846) (39,760,565) ------------ ------------ Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . 66,930,481 68,382,487 ------------ ------------ Total Liabilities and Stockholders' Equity . . . . . . . . . . . . $884,075,898 $836,497,702 ============ ============ See Notes to Consolidated Financial Statements
3 GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED June 30, JUNE 30, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- INTEREST INCOME Loans $15,291,709 $14,880,797 $30,309,457 $29,658,710 Investment securities and other 940,516 1,151,862 1,847,077 2,231,949 ---------- ---------- ---------- ---------- TOTAL INTEREST INCOME 16,232,225 16,032,659 32,156,534 31,890,659 ---------- ---------- ---------- ---------- INTEREST EXPENSE Deposits 5,915,520 5,455,856 11,940,945 10,556,062 FHLBank advances 2,108,296 2,534,884 4,223,109 5,228,676 Short-term borrowings 212,435 311,390 255,115 606,045 ---------- ---------- ---------- ---------- TOTAL INTEREST EXPENSE 8,236,251 8,302,130 16,419,169 16,390,783 ---------- ---------- ---------- ---------- NET INTEREST INCOME 7,995,974 7,730,529 15,737,365 15,499,876 PROVISION FOR LOAN LOSSES 573,590 585,790 1,150,000 1,000,215 ---------- ----------- ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,422,384 7,144,739 14,587,365 14,499,661 ---------- ---------- ---------- ---------- NON-INTEREST INCOME Commissions 1,799,876 1,620,360 3,524,442 3,066,755 Service charge and ATM fees 1,080,991 1,132,184 2,080,481 2,087,309 Net realized gains on sales of loans 204,060 376,446 659,644 662,163 Net realized gains on available-for-sale securities 48,357 110,063 267,953 527,824 Income (expense) on foreclosed assets (130,323) (548) (173,831) (56,895) Other income 781,310 307,160 1,340,389 629,341 ---------- ---------- ---------- ---------- TOTAL NON-INTEREST INCOME 3,784,271 3,545,665 7,699,078 6,916,497 ---------- ---------- ---------- ---------- NON-INTEREST EXPENSE Salaries and employee benefits 3,208,652 2,846,374 6,473,166 5,601,381 Net occupancy and equipment expense 1,030,472 900,876 2,083,928 1,684,472 Postage 245,787 219,117 516,398 464,693 Insurance 149,917 140,396 323,633 285,713 Amortization of goodwill 39,927 33,261 79,854 65,410 Advertising 128,268 156,822 238,510 291,695 Office supplies and printing 211,067 168,042 497,670 342,891 Other operating expenses 1,267,172 896,814 2,079,084 1,849,902 ---------- ---------- ---------- ---------- TOTAL NON-INTEREST EXPENSE 6,281,262 5,361,702 12,292,243 10,586,157 ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 4,925,393 5,328,702 9,994,200 10,830,001 PROVISION FOR INCOME TAXES 1,699,500 1,728,296 3,321,600 3,866,000 ---------- ---------- ---------- ---------- NET INCOME $ 3,225,893 $ 3,600,406 $ 6,672,600 $ 6,964,001 ========== ========== ========== ========== BASIC EARNINGS PER COMMON SHARE $.43 $.45 $.87 $.87 === === === === DILUTED EARNINGS PER COMMON SHARE $.42 $.44 $.86 $.86 === === === === See Notes to Consolidated Financial Statements
4 GREAT SOUTHERN BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED JUNE 30, 1999 1998 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 6,672,600 $ 6,964,001 Items not requiring (providing) cash: Depreciation 1,071,381 783,422 Amortization 79,854 55,410 Provision for loan losses 1,150,000 1,000,215 Provision for foreclosed asset losses -- 100,000 Gain on sale of loans (659,644) (668,353) Proceeds from sales of loans held for sale 37,083,290 41,013,674 Originations of loans held for sale (33,034,346) (40,345,321) Net realized gains on sale of available-for-sale securities (267,953) (524,908) Loss on sale of premises and equipment 101,690 14,855 Gain on sale of foreclosed assets (897) (47,445) Amortization of deferred income, premiums and discounts (505,297) (356,603) Deferred income taxes 298,972 (140,586) Changes in: Accrued interest receivable (521,727) (978,185) Prepaid expenses and other assets 2,460,079 (688,086) Accounts payable and accrued expenses (852,681) (280,449) Income taxes refundable/payable 1,739,834 (95,646) ----------- ----------- Net cash provided by operating activities 14,815,155 5,805,995 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Net increase in loans (35,031,934) (34,381,914) Purchase of additonal business units -- (135,000) Purchase of premises and equipment (925,103) (1,878,377) Proceeds from sale of premises and equipment 22,540 12,842 Proceeds from sale of foreclosed assets 346,000 396,840 Capitalized costs on foreclosed assets (16,815) (267,063) Proceeds from maturing held-to-maturity securities 33,809,600 15,250,000 Purchase of held-to-maturity securities (9,367,313) (17,352,886) Proceeds from sale of available-for-sale securities 17,030,009 979,195 Purchase of available-for-sale securities (64,665,997) (1,431,760) (Purchase) redemption of FHLBank stock (178,600) 1,338,500 ----------- ----------- Net cash used in investing activities (58,977,613) (37,469,623) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in certificates of deposit 32,685,216 45,515,532 Net increase (decrease) in checking and savings (27,190,459) 43,420,064 Proceeds from Federal Home Loan Bank advances 597,296,036 450,396,334 Repayments of Federal Home Loan Bank advances (578,120,814) (467,196,588) Net increase in securities sold under repurchase agreements 22,010,644 -- Net increase (decrease) in short-term borrowings 1,955,446 (30,430,934) Advances from borrowers for taxes and insurance (493,020) 1,249,036 Purchase of treasury stock (6,271,455) (2,939,723) Dividends paid (1,933,926) (1,769,381) Stock options exercised 256,027 91,642 ----------- ----------- Net cash provided by financing activities 40,193,695 38,335,982 ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (3,968,763) 6,672,354 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 33,546,422 39,158,884 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 29,577,659 $ 45,831,238 =========== =========== 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 and six months ended June 30, 1999 and 1998 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 six month transition period ended December 31, 1998. When necessary, reclassifications have been made to prior period balances to conform to current period presentation. These reclassifications had no effect on net income. NOTE 2: OPERATING SEGMENTS The Company's banking operation is its only reportable segment. The banking operation segment is principally engaged in the business of originating residential and commercial real estate loans, commercial business and consumer loans and funding these loans through the attraction of deposits from the general public, originating brokered deposits and borrowing from the Federal Home Loan Bank and others. The operating results of this segment are regularly reviewed by management to make decisions about resource allocations and to assess performance. The following table provides information about segment profits and segment assets and has been prepared using the same accounting policies as those described in Note 1. There are no material inter-segment revenues, thus no reconciliations to amounts reported in the consolidated financial statements are necessary. Revenue from segments below the reportable segment threshold is attributable to four operating segments of the Company. These segments include an insurance agency, a travel agency, discount brokerage services and real estate appraisal services.
Three Months Ended June 30, 1999 Six Months Ended June 30, 1999 ---------------------------------------- --------------------------------------- Banking All Other Totals Banking All Other Totals ------------ ------------ ------------ ----------- ------------ ------------ Interest income $16,152,288 $ 79,937 $16,232,225 $32,042,932 $ 113,602 $32,156,534 Non-interest income 1,967,115 1,817,156 3,784,271 3,893,738 3,805,340 7,699,078 Segment profit 2,945,069 280,824 3,225,893 5,980,150 692,450 6,672,600
Three Months Ended June 30, 1998 Six Months Ended June 30, 1998 ---------------------------------------- --------------------------------------- Banking All Other Totals Banking All Other Totals ------------ ------------ ------------ ----------- ------------ ------------ Interest income $16,003,990 $ 28,669 $16,032,659 $31,827,251 $ 63,408 $31,890,659 Non-interest income 1,787,614 1,758,051 3,545,665 3,206,274 3,710,223 6,916,497 Segment profit 3,340,010 257,396 3,600,406 6,300,043 663,958 6,964,001
6 NOTE 3: COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income", requires the reporting of comprehensive income and its components. Comprehensive income is defined as the change in equity from transactions and other events and circumstances from non-owner sources, and excludes investments by and distributions to owners. Comprehensive income includes net income and other items of comprehensive income meeting the above criteria. The Company's only component of other comprehensive income is the unrealized gains and losses on available for sale securities.
Three Months Ended June 30, Six Months Ended June 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Net income $3,225,893 $3,600,406 $6,672,600 $6,964,001 --------- --------- --------- --------- Unrealized holding gains (losses), net of income taxes 189,822 (69,655) (1,083) (188,372) Less: reclassification adjustment for gains included in net income, net of income taxes (31,432) (71,541) (174,169) (343,086) --------- --------- --------- --------- 158,390 (141,196) (175,252) (531,458) --------- --------- --------- --------- Other comprehensive income $3,384,283 $3,459,210 $6,497,348 $6,432,543 ========= ========= ========= =========
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Forward-Looking Statements When used in this Form 10-Q and in future filings by the Company with the Securities and Exchange Commission (the "SEC"), in the Company's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result" "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake-and specifically declines any obligation- to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. 7 General The following should be read in conjunction with management's discussion and analysis in the Company's December 31, 1998 Form 10-K. The profitability of the Company, and more specifically, the profitability of its primary subsidiary Great Southern Bank (the "Bank"), depends primarily on its net interest income. Net interest income is the difference between the interest income it earns on its loans and investment portfolio, and its cost of funds, which consists mainly of interest paid on deposits and borrowings. Net interest income is affected by the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on these balances. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. The Company's profitability is also affected by the level of its non- interest income and operating expenses. Non-interest income consists primarily of gains on sales of loans and available-for-sale investments, service charge fees and commissions. Operating expenses consist primarily of salaries and employee benefits, occupancy-related expenses, equipment and technology-related expenses and other general operating expenses. The operations of the Bank, and banking institutions in general, are significantly influenced by general economic conditions and related monetary and fiscal policies of regulatory agencies. Deposit flows and the cost of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing real estate and other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting loan demand and the availability of funds. Effect of Federal Laws and 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. Potential Impact of Accounting Principles to be Implemented in the Future The FASB recently adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The effective date of SFAS No. 133 has been delayed by SFAS 137 until fiscal years beginning after June 15, 2000, but may be implemented early as of the beginning of any fiscal quarter after issuance. SFAS No. 133 may not be applied retroactively. Management does not believe adopting SFAS No. 133 will have a material impact on the Company's financial statements. 8 YEAR 2000 ISSUES The year 2000 issue confronting the Company and its suppliers, customers and competitors, centers on the inability of computer systems to recognize the year 2000. Many existing computer programs and systems were originally programmed with six digit dates that provided only two digits to identify the calendar year in the date field. With the impending new millennium, these programs and computers may recognize "00" as the year 1900 rather than the year 2000. Financial institution regulators have increased their focus upon year 2000 compliance issues and have issued guidance concerning the responsibilities of senior management and directors. The FDIC and the other federal banking regulators have issued safety and soundness guidelines to be followed by insured depository institutions, such as the Bank, to assure resolution of any year 2000 problems. The federal banking agencies have asserted that year 2000 testing and certification is a key safety and soundness issue in conjunction with regulatory exams, and thus an institution's failure to address appropriately the year 2000 issue could result in supervisory action, including such enforcement actions as the reduction of the institution's supervisory ratings, the denial of applications for approval of a merger or acquisition, or the imposition of civil money penalties. The Bank has experienced rapid growth in both the deposit and loan areas in recent years. Management of the Bank evaluated the need to upgrade the mission critical systems and determined conversion to a new hardware and software system was the best solution to meet the growth needs of the Bank, as well as to resolve the year 2000 issues. During the six months ended December 31, 1998, the Bank completed the conversion to the Jack Henry Silverlake system for its core processing system and internal financial reporting system. The new system has been certified year 2000 compliant, was tested by the Bank for year 2000 compliance in early 1999 and is believed to be year 2000 compliant. As an integral part of upgrading the core system, the Company has also been in a program of replacing its personal computers and wide area networks with systems believed to be year 2000 compliant systems. This program was also completed during the six months ended December 31, 1998. A complete inventory of non-mission critical hardware and software was completed in December 1997. Non-compliant software systems are scheduled for replacement or will be discontinued. Security systems, elevators, heating and air conditioning and like items have been tested and are expected to function as usual through the date of change. Third party vendors deemed appropriate will continue to be used and have indicated their products as compliant. Testing of these and certain other systems was completed by June 30, 1999. A budget of $2.4 million was established for the Bank to complete the necessary steps previously noted. The majority of this amount has been spent to date, with only a small amount of these costs being expensed in the six months ended June 30, 1999. The remaining amount spent to date has either been expensed previously or has been capitalized and is being amortized over a 3 to 5 year period. Management feels these expenses will not have a material impact on the financial condition of the Company. An outside consultant has been utilized throughout the process to provide an independent review of all areas. The Company's estimate of year 2000 project costs and completion dates are based on management's best estimates that have been derived utilizing numerous assumptions about future events. These estimates and actual results may differ materially. 9 The insurance, investment and travel subsidiaries operate on separate computer systems from the Bank and each other. The Year 2000 Committee of the Bank has been assisting these companies in performing a risk assessment of their systems and taking the steps believed necessary to achieve compliance with all year 2000 issues before December 31, 1999. The Company believes it has completed the majority of the actions necessary to achieve Year 2000 compliance for its core systems and the majority of the work necessary to achieve overall compliance. While the Company believes that its systems and technology will be compliant on January 2000 and thereafter, it faces an unquantifiable risk that third parties such as customers will encounter year 2000 problems that cause them to reduce their use of bank services, default on loans, or reduce levels of future borrowings. There is also a risk that other financial organizations that the Company maintains relations with could experience year 2000 issues that would adversely affect the Company. Finally, if other service providers, such as public utilities or telephone companies, are not year 2000 compliant, the Company could experience service interruptions that would make the conduct of business difficult. The Company has developed a contingency plan to address some of these uncertainties. It may employ back-up generators as needed to provide electric power beginning January 1, 2000. It plans to have in place a cellular based modern communications system at key branches to maintain communication with its data service location in the event that landline communications are disrupted. Immediately before the change of the century, electronic trial balances with extended information are to be downloaded for import into local database systems. A backup of all files considered pertinent will be performed before the century change, and critical information is expected to be printed in hard copy. The Company anticipates taking other steps to assure both liquidity and security. Asset and Liability Management During the six months ended June 30, 1999, total assets increased by $48 million to $884 million. Available-for-sale securities increased $47.7 million and loans increased $22.6 million offset by a decline in held-to- maturity securities of $14.5 million and a decline in foreclosed assets of $1.9 million. Total liabilities increased $49 million to $817 million. Deposits increased $5.5 million, securities sold under repurchase agreements (a new category of liabilities for the Company) increased $22 million and Federal Home Loan Bank ("FHLBank") advances increased $19.1 million. The deposit increase was actually greater as the December 31, 1998 balance included a portion of the accounts now classified as securities sold under repurchase agreements. The deposit increase was primarily from brokered deposits. The increase in FHLBank advances was used to fund the increase in securities. Management continues to feel that 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. 10 Stockholders' equity decreased $1.5 million primarily as a result of net treasury stock purchases of $6.2 million and dividend declarations and payments of $1.9 million, offset by an increase in unrealized gains on available-for-sale securities of $158,000 and net income of $6.7 million. The Company repurchased 260,440 shares of common stock at an average price of $24.08 per share during the six months ended June 30, 1999 and reissued 44,969 shares of treasury stock at an average price of $5.52 per share to cover stock option exercises. Interest Rate Sensitivity A principal operating objective of the Company is to produce stable earnings by achieving a favorable interest rate spread that can be sustained during fluctuations in prevailing interest rates. The Company has sought to reduce its exposure to adverse changes in interest rates by attempting to achieve a closer match between the periods in which its interest-bearing liabilities and interest-earning assets can be expected to reprice through the origination of adjustable-rate mortgages and loans with shorter terms and the purchase of other shorter term interest-earning assets. The term "interest rate sensitivity" refers to those assets and liabilities that mature within a stated period or reprice within that period in response to fluctuations in market rates and yields. As noted above, one of the principal goals of the Company's asset/liability program is to maintain and match the interest rate sensitivity characteristics of the asset and liability portfolios. In order to properly manage interest rate risk, the Bank's Board of Directors has established an Asset/Liability Management Committee ("ALCO") made up of members of management to monitor the difference between the Bank's maturing and repricing assets and liabilities and to develop and implement strategies to decrease the "gap" between the two. The primary responsibilities of the committee are to assess the Bank's asset/liability mix, recommend strategies to the Board that will enhance income while managing the Bank's vulnerability to changes in interest rates and report to the Board the results of the strategies used. The Company's experience with interest rates are discussed in more detail under the heading "Results of Operations and Comparisons of the Three and Six Months Ended June 30, 1999 and 1998." An important element of both earnings performance and liquidity is management of interest rate sensitivity. Interest rate sensitivity reflects the potential effect on net interest income of a movement in interest rates. The difference between the Company's interest-sensitive assets and interest- sensitive liabilities for a specified time frame is referred to as "gap." A financial institution is considered to be asset-sensitive, or having a positive gap, when the amount of its earning assets maturing or repricing within a given time period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. Conversely, a financial institution is considered to be liability-sensitive, or have a negative gap, when the amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of earning assets also maturing or repricing within that time period. During a period of rising interest rates, a positive gap would tend to increase net interest income, while a negative gap would tend to have an adverse effect on net interest income. During a period of falling interest rates, a positive gap would tend to have an adverse effect on net interest income, while a negative gap would tend to increase net interest income. 11 The Company evaluates interest sensitivity risk and then formulates guidelines regarding asset generation, funding sources and the pricing of each, and off-balance sheet commitments in order to decrease sensitivity risk. These guidelines are based upon management's outlook regarding future interest rate movements, the state of the regional and national economy and other financial and business risk factors. The Bank uses a static gap model and a computer simulation to measure the effect on net interest income of various interest rate scenarios over selected time periods. The Company's gap can be managed by repricing assets or liabilities, selling available-for-sale investments, replacing an asset or liability prior to maturity or adjusting the interest rate during the life of an asset or liability. Matching the amount of assets and liabilities repricing during the same time interval helps to reduce the risk and minimize the impact on net interest income in periods of rising or falling interest rates. 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 one-third 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. 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. 12 RESULTS OF OPERATIONS AND COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 and 1998 The decrease in earnings of $374,000, or 10.4%, for the three months ended June 30, 1999 when compared to the same period in 1998, was primarily due to an increase in non-interest expense of $919,000, or 17.1%, offset by an increase in net interest income of $265,000, or 3.4%, and an increase in non- interest income of $239,000, or 6.7%, during the three month period. The decrease in earnings of $291,000, or 4.2%, for the six months ended June 30, 1999 when compared to the same period in 1998, was primarily due to an increase in non-interest expense of $1.7 million, or 16.1%, offset by an increase in net interest income of $237,000, or 1.5%, and an increase in non- interest income of $783,000, or 11.3%, during the six month period. Total Interest Income Total interest income increased $200,000, or 1.2%, during the three months ended June 30, 1999, when compared to the three months ended June 30, 1998. The increase was due to a $411,000, or 2.8%, increase in interest income on loans offset by a $211,000, or 18.3% decrease in interest income on investments and other interest earning assets. Total interest income increased $266,000, or .8%, during the six months ended June 30, 1999, when compared to the six months ended June 30, 1998. The increase was due to a $650,000, or 2.2%, increase in interest income on loans offset by a $385,000, or 17.2% decrease in interest income on investments and other interest earning assets. Interest Income - Loans During the three months ended June 30, 1999, interest income on loans increased from higher average balances offset by a decline in average rates. Interest income increased $1.2 million as the result of higher average loan balances from $656 million during the three months ended June 30, 1998 to $726 million during the three months ended June 30, 1999. The higher average balance resulted from the Bank's increase in commercial real estate and commercial business lending and the indirect dealer consumer lending offset by a decline in single-family residential lending. Interest income decreased $829,000 as the result of lower average rates from 9.07% during the three months ended June 30, 1998 to 8.42% during the three months ended June 30, 1999. Changes in rates were due to market rate reductions partially offset by an increased percentage of the portfolio in higher yielding assets. During the six months ended June 30, 1999, interest income on loans increased from higher average balances offset by a decline in average rates. Interest income increased $2.4 million as the result of higher average loan balances from $647 million during the six months ended June 30, 1998 to $723 million during the six months ended June 30, 1999. The higher average balance resulted from the Bank's increase in commercial real estate and commercial business lending and the indirect dealer consumer lending offset by a decline in single-family residential lending. Interest income decreased $1.7 million as the result of lower average rates from 9.17% during the six months ended June 30, 1998 to 8.39% during the six months ended June 30, 1999. 13 Interest Income - Investments and Other Interest-Earning Deposits Interest income on investments and other interest-earning deposits decreased from lower average balances offset by higher average yields during the three months ended June 30, 1999 when compared to the three months ended June 30, 1998. Interest income decreased $428,000 as a result of lower average balances from $97 million during the three months ended June 30, 1998 to $69 million during the three months ended June 30, 1999. This decrease was primarily in interest-bearing deposits in FHLBank used to fund daily operations and lending. Interest income increased $217,000 as a result of higher average yields from 4.77% during the three months ended June 30, 1998, to 5.46% during the three months ended June 30, 1999 due to higher short term market rates. Interest income on investments and other interest-earning deposits decreased from lower average balances offset by higher average yields during the six months ended June 30, 1999 when compared to the six months ended June 30, 1998. Interest income decreased $952,000 as a result of lower average balances from $95 million during the six months ended June 30, 1998 to $67 million during the six months ended June 30, 1999. This decrease was primarily in interest-bearing deposits in FHLBank used to fund daily operations and lending. Interest income increased $567,000 as a result of higher average yields from 4.70% during the six months ended June 30, 1998, to 5.53% during the six months ended June 30, 1999 due to higher short term market rates. Total Interest Expense Total interest expense decreased $66,000, or .8%, during the three months ended June 30, 1999 when compared with the same period in 1998. The decrease during the three month period was primarily due to a $526,000, or 18.5%, decrease in interest expense on FHLBank advances and other borrowings offset by a $460,000, or 8.4%, increase in interest expense on deposits. Total interest expense increased $28,000, or .2%, during the six months ended June 30, 1999 when compared with the same period in 1998. The increase during the six month period was primarily due to a $1.4 million, or 13.1%, increase in interest expense on deposits offset by a $1.4 million, or 23.3%, decrease in interest expense on FHLBank advances and other borrowings. Interest Expense - Deposits Interest expense on deposits increased $718,000 as a result of higher average balances of time deposits from $330 million during the three months ended June 30, 1998, to $387 million during the three months ended June 30, 1999 and $206,000 due to higher average balances of interest-bearing demand deposits from $129 million during the three months ended June 30, 1998, to $151 million during the three months ended June 30, 1999. The average balances on time deposits increased as a result of the Company's use of brokered deposits and the average balances on interest-bearing demand deposits increased as a result of reclassifications to this category beginning June 30, 1998. Interest on time deposits decreased $230,000 due to lower rates from 5.54% during the three months ended June 30, 1998 to 5.24% during the three months ended June 30, 1999 and interest on interest-bearing demand deposits decreased $260,000 due to lower rates from 2.05% during the three months ended June 30, 1998 to 1.61% during the three months ended June 30, 1999. The other deposit category, savings, experienced only minor changes. 14 Interest expense on deposits increased $1.6 million as a result of higher average balances of time deposits from $319 million during the six months ended June 30, 1998, to $382 million during the six months ended June 30, 1999 and $271,000 due to higher average balances of interest-bearing demand deposits from $124 million during the six months ended June 30, 1998, to $154 million during the six months ended June 30, 1999. The average balances on time deposits increased as a result of the Company's use of brokered deposits and the average balances on interest-bearing demand deposits increased as a result of reclassifications to this category beginning June 30, 1998. Interest on time deposits decreased $445,000 due to lower rates from 5.55% during the six months ended June 30, 1998 to 5.25% during the six months ended June 30, 1999 and interest on interest-bearing demand deposits decreased $94,000 due to lower rates from 2.08% during the six months ended June 30, 1998 to 1.91% during the six months ended June 30, 1999. The other deposit category, savings, experienced only minor changes. Interest Expense - FHLBank Advances and Other Borrowings Interest expense on FHLBank advances and other borrowings decreased $648,000 due to lower average balances from $201 million in the three months ended June 30, 1998 to $158 million in the three months ended June 30, 1999 offset by an increase of $122,000 due to higher average rates from 5.64% in the three months ended June 30, 1998 to 5.89% during the three months ended June 30, 1999. The average balances decreased primarily as a result of the Company's increased use of brokered deposits. The average rates increased as the result of reduction of lower rate short-term advances. Interest expense on FHLBank advances and other borrowings decreased $1.5 million due to lower average balances from $207 million in the six months ended June 30, 1998 to $155 million in the six months ended June 30, 1999 offset by an increase of $120,000 due to higher average rates from 5.65% in the six months ended June 30, 1998 to 5.76% during the six months ended June 30, 1999. The average balances decreased primarily as a result of the Company's increased use of brokered deposits and the average rates increased as the result of the reduction of lower rate short-term advances. Net Interest Income The Company's overall interest rate spread decreased 9 basis points, or 2.4%, from 3.74% during the three months ended June 30, 1998, to 3.65% during the three months ended June 30, 1999. The decrease was due to a 34 basis point decline in the weighted average yields received on interest-earning assets partially offset by a 25 basis point decrease in the weighted average rates paid on interest-bearing liabilities. The Company's overall interest rate spread decreased 19 basis points, or 5%, from 3.81% during the six months ended June 30, 1998, to 3.62% during the six months ended June 30, 1999. The decrease was due to a 45 basis point decline in the weighted average yields received on interest-earning assets partially offset by a 26 basis point decrease in the weighted average rates paid on interest-bearing liabilities. Prime averaged 8.5% during the three and six months ended June 30, 1998 compared to an average of 7.75% (75 basis points less) during the three and six months ended June 30, 1999. As a large percentage of the Company's loans are tied in some form or another to prime, this reduction was the primary reason for the decline in the weighted average yields received on interest- earning assets. 15 Interest rates paid on deposits declined during the three and six months ended June 30, 1999 compared to the same periods one year earlier. However, as the Company has grown the assets of the Bank, the brokered and other time deposits needed to fund that growth have increased the average cost of deposits since time deposits are higher cost deposits for the Bank than are interest-bearing demand and savings. Interest rates paid on FHLBank advances and other borrowings increased during the three and six months ended June 30, 1999 compared to the same periods one year earlier primarily due to the reduction in average balances in the shorter maturities that carry lower rates than longer maturity advances retained. Provision for Loan Losses The provision for loan losses decreased from $586,000 during the three months ended June 30, 1998 to $574,000 during the three months ended June 30, 1999, and increased from $1 million during the six months ended June 30, 1998 to $1.2 million during the six months ended June 30, 1999. Management records a provision for loan losses in an amount sufficient to result in an allowance for loan losses that will cover current net charge-offs as well as risks believed to be inherent in the loan portfolio of the Bank. The amount of provision charged against current income is based on several factors, including, but not limited to, past loss experience, current portfolio mix, actual and potential losses identified in the loan portfolio, economic conditions and regular reviews by internal staff and regulatory examinations. Weak economic conditions, higher inflation or interest rates, or other factors may lead to increased losses in the portfolio. Management has established various controls in an attempt to limit future losses, such as a watch list of possible problem loans, documented loan administration policies and a loan review staff to review the quality and anticipated collectibility of the portfolio. Management determines which loans are potentially uncollectible, or represent a greater risk of loss and makes additional provisions to expense, if necessary, to maintain the allowance at a satisfactory level. Non-performing assets decreased $2 million during the six months ended June 30, 1999 from $12.9 million at December 31, 1998 to $10.9 million at June 30, 1999. Non-performing loans decreased $100,000, or 1%, from $10.1 million at December 31, 1998 to $10 million at June 30, 1999, and foreclosed assets decreased $1.9 million, or 67.9%, from $2.8 million at December 31, 1998 to $900,000 at June 30, 1999 primarily due to the sale of two large properties. Potential problem loans decreased $800,000 during the six months ended June 30, 1999 from $12.2 million at December 31, 1998 to $11.4 million at June 30, 1999. 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. Management considers the allowance for loan losses and the allowance for foreclosed asset losses adequate to cover losses inherent in the Company's assets at this time, based on current economic conditions. If economic conditions deteriorate significantly, it is possible that additional assets would be classified as non-performing, and accordingly, additional provision for losses would be required, thereby adversely affecting future results of operations and financial condition. 16 Non-interest Income Non-interest income increased $239,000, or 6.7%, in the three months ended June 30, 1999 when compared to the same period in 1998. The increase was primarily due to: (i) an increase in commission income of $180,000, or 11%, from increased sales in the travel, insurance and investment subsidiaries; (ii) a decrease in net realized gains on sales of fixed rate residential loans of $172,000, or 46%; (iii) a decrease of $62,000, or 56%, in profits on sale of available-for-sale securities; (iv) an increase of $130,000 in expenses on foreclosed assets; and (v) various increases or decreases in other non-interest income items. Non-interest income increased $783,000, or 11.3%, in the six months ended June 30, 1999 when compared to the same period in 1998. The increase was primarily due to: (i) an increase in commission income of $457,000, or 15%, from increased sales in the travel, insurance and investment subsidiaries; (ii) a decrease of $260,000, or 49%, in profits on sale of available-for-sale securities; (iii) an increase of $117,000 in expenses on foreclosed assets; and (iv) various increases or decreases in other non-interest income items. Non-interest Expense Non-interest expense increased $919,000, or 17.1%, in the three months ended June 30, 1999 when compared to the same period in 1998. The increase was primarily due to: (i) an increase of $363,000, or 12.8%, in salary and employee related costs due to increased staffing levels resulting from asset/customer growth and additional staffing required by the Bank's core computer conversion and Y2K testing; (ii) an increase of $129,000, or 14.3%, in occupancy and equipment expense due to the core computer conversion, Y2K testing and other technology related purchases; and (iii) increases or decreases in other non-interest expense items. Non-interest expense increased $1.7 million, or 16.1%, in the six months ended June 30, 1999 when compared to the same period in 1998. The increase was primarily due to: (i) an increase of $872,000, or 15.6%, in salary and employee related costs due to increased staffing levels resulting from asset/customer growth and additional staffing required by the Bank's core computer conversion and Y2K testing; (ii) an increase of $400,000, or 23.8%, in occupancy and equipment expense due to the core computer conversion, Y2K testing and other technology related purchases; (iii) an increase of $155,000, or 45.2% in office supplies and printing due to growth; and (iv) increases or decreases in other non-interest expense items. In conjunction with the Company's recent growth and the Year 2000 issue discussed previously in this document, the Company may be incurring additional operating costs associated with the implementation and operation of new mainframe hardware and software as well as possible 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. 17 Provision for Income Taxes Provision for income taxes as a percentage of pre-tax income increased from 32.4% in the three months ended June 30, 1998 to 34.5% in the three months ended June 30, 1999. Provision for income taxes as a percentage of pre-tax income decreased from 35.7% in the six months ended June 30, 1998 to 33.2% in the six months ended June 30, 1999. The lower percentage in the June 30, 1999 period was primarily due to lower state franchise and income taxes as a result of the organization by the Company of a Real Estate Investment Trust in July 1998. 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 June 30, --------------------------------------------------------- 1999 1998 --------------------------- -------------------------- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate -------- -------- ------ -------- -------- ------ (Dollars in thousands) Interest-earning assets: Loans receivable $726,087 $15,291 8.42% $656,473 $14,881 9.07% Investment securities and other interest-earning assets 68,883 941 5.46 96,610 1,152 4.77 ------- ------ ---- ------- ------- ---- Total interest-earning assets $794,970 16,232 8.17 $753,083 16,033 8.52 ======= ------ ---- ======= ------ ---- Interest-bearing liabilities: Demand deposits $151,307 610 1.61 $129,274 664 2.05 Savings deposits 33,061 240 2.90 34,790 214 2.46 Time deposits 386,809 5,066 5.24 330,407 4,578 5.54 ------- ----- ---- ------- ----- ---- Total deposits 571,177 5,916 4.14 494,471 5,456 4.41 FHLBank advances and other borrowings 157,502 2,320 5.89 201,089 2,989 5.64 ------- ----- ---- ------- ----- ---- Total interest-bearing liabilities $728,679 8,236 4.52 $695,560 8,302 4.77 ======= ----- ---- ======= ----- ---- Net interest income: Interest rate spread $7,996 3.65% $7,731 3.74% ===== ==== ===== ==== Net interest margin(1) 4.02% 4.11% ==== ==== Average interest-earning assets to average interest-bearing liabilities 109.1% 108.3% ===== ===== (1) Defined as the Company's net interest income divided by total interest-earning assets.
18
Six Months Ended June 30, --------------------------------------------------------- 1999 1998 --------------------------- -------------------------- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate -------- --------- ------ -------- -------- ------ (Dollars in thousands) Interest-earning assets: Loans receivable $722,586 $30,309 8.39% $646,539 $29,659 9.17% Investment securities and other interest-earning assets 66,854 1,847 5.53 95,069 2,232 4.70 ------- ------- ---- ------- ------- ---- Total interest-earning assets $789,440 32,156 8.15 $741,608 31,891 8.60 ======= ------- ---- ======= ------ ---- Interest-bearing liabilities: Demand deposits $153,792 1,466 1.91 $123,842 1,289 2.08 Savings deposits 33,008 440 2.67 34,649 424 2.45 Time deposits 382,465 10,035 5.25 318,717 8,843 5.55 ------- ------ ---- ------- ----- ---- Total deposits 569,265 11,941 4.20 477,208 10,556 4.42 FHLBank advances and other borrowings 155,395 4,478 5.76 206,575 5,835 5.65 ------- ------ ---- ------- ----- ---- Total interest-bearing liabilities $724,660 16,419 4.53 $683,783 16,391 4.79 ======= ------ ---- ======= ----- ---- Net interest income: Interest rate spread $15,737 3.62% $15,500 3.81% ====== ==== ===== ==== Net interest margin(1) 3.99% 4.18% ==== ==== Average interest-earning assets to average interest-bearing liabilities 108.9% 108.5% ===== ===== (1) Defined as the Company's net interest income divided by total interest-earning assets.
19 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 June 30, Six Months Ended June 30, 1999 vs. 1998 1999 vs. 1998 ------------------------------- ------------------------------ Increase Increase (Decrease) (Decrease) Due to Total Due to Total ----------------- Increase ----------------- Increase Rate Volume (Decrease) Rate Volume (Decrease) -------- ------- ---------- -------- ------- ---------- (Dollars in thousands) Interest-earning assets: Loans receivable $ (829) $1,239 $ 410 $(1,740) $2,390 $ 650 Investment securities and other interest-earning assets 217 (428) (211) 567 (952) (385) ----- ----- ----- ----- ----- ----- Total interest-earning assets (612) 811 199 (1,173) 1,438 265 ----- ----- ----- ----- ----- ----- Interest-bearing liabilities: Demand deposits (260) 206 (54) (94) 271 177 Savings deposits 36 (10) 26 34 (18) 16 Time deposits (230) 718 488 (445) 1,637 1,192 ----- ----- ----- ----- ----- ----- Total deposits (454) 914 460 (505) 1,890 1,385 FHLBank advances and other borrowings 122 (648) (526) 120 (1,477) (1,357) ----- ----- ----- ----- ----- ----- Total interest-bearing liabilities (332) 266 (66) (385) 413 28 ----- ----- ----- ----- ----- ----- Net interest income $ (280) $ 545 $ 265 $ (788) $1,025 $ 237 ===== ===== ===== ===== ===== =====
Liquidity and Capital Resources Liquidity is a measure of the Company's ability to generate sufficient cash to meet present and future financial obligations in a timely manner through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. These obligations include the credit needs of customers, funding deposit withdrawals, and the day-to-day operations of the Company. Liquid assets include cash, interest-bearing deposits with financial institutions and certain investment securities and loans. As a result of the Company's management of the ability to generate liquidity primarily through liability funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its customers' credit needs. At June 30, 1999, the Company had commitments of approximately $119 million to fund loan originations, issued lines of credit, outstanding letters of credit and unadvanced loans. Management continuously reviews the capital position of the Company and the Bank to insure compliance with minimum regulatory requirements, as well as to explore ways to increase capital either by retained earnings or other means. 20 The Company's capital position remained strong, with stockholders' equity at $66.9 million, or 7.6% of total assets of $884 million at June 30, 1999 compared to equity at $68.4 million, or 8.2%, of total assets of $836 million at December 31, 1998. Banks are required to maintain minimum risk-based capital ratios. These ratios compare capital, as defined by the risk-based regulations, to assets adjusted for their relative risk as defined by the regulations. Guidelines required banks to have a minimum Tier 1 capital ratio, as defined, of 4.00% and a minimum Tier 2 capital ratio of 8.00%, and a minimum leverage capital ratio of 4.00%. On June 30, 1999, the Bank's Tier 1 capital ratio was 8.8%, Tier 2 capital ratio was 10% and leverage capital ratio was 6.8%. At June 30, 1999, the held-to-maturity investment portfolio included $56,000 of gross unrealized gains and $115,000 of gross unrealized losses. The unrealized gains and losses are not expected to have a material effect on future earnings beyond the usual amortization of acquisition premium or accretion of discount because no sale of the held-to-maturity investment portfolio is foreseen. The Company's primary sources of funds are savings deposits, FHLBank advances, other borrowings, loan repayments, proceeds from sales of loans and securities and funds provided from operations. The Company utilizes particular sources of funds based on the comparative costs and availability at the time. The Company has from time to time chosen not to pay rates on deposits as high as the rates paid by certain of its competitors and, when believed to be appropriate, supplements deposits with less expensive alternative sources of funds. Statements of Cash Flows. During the six months ended June 30, 1999, and 1998, respectively, 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 origination and sale of loans held-for-sale, 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 during the six months ended June 30, 1999 and 1998, while originations of loans held-for-sale, net of proceeds from sales of loans held-for-sale was the primary use of cash flows from operating activities during the six months ended June 30, 1998. Operating activities provided cash flows of $14.8 million during the six months ended June 30, 1999 and $5.8 million during the six months ended June 30, 1998. During the six months ended June 30, 1999 and 1998, respectively, investing activities used cash of $59.0 million and $37.5 million primarily due to the net increase in available-for-sale and held-to-maturity securities and the net increase of loans. 21 Changes in cash flows from financing activities during the periods covered by the Statements of Cash Flows are due to changes in deposits after interest credited, changes in FHLBank advances, changes in securities sold under repurchase agreements and changes in short-term borrowings, as well as purchases of treasury stock and dividend payments to stockholders. Financing activities provided $40.2 million in cash during the six months ended June 30, 1999 and $38.3 million in cash during the six months ended June 30, 1998. Financing activities in the future are expected to primarily include changes in deposits, securities sold under repurchase agreements and FHLBank advances. Dividends. During the six months ended June 30, 1999, the Company declared and paid dividends of $.25 per share, or 29% of net income, compared to dividends declared and paid during the six months ended June 30, 1998 of $.235 per share, or 25% of net income. The Board of Directors meets regularly to consider the level and the timing of dividend payments. Common Stock Repurchases. The Company has been in various buy-back programs since May 1990. During the six months ended June 30, 1999, the Company repurchased 260,440 shares of its common stock at an average price of $24.08 per share and reissued 44,969 shares of treasury stock at an average price of $5.52 per share to cover stock option exercises. During the six months ended June 30, 1998, the Company repurchased 115,894 shares of its common stock at an average price of $25.34 per share and reissued 11,480 shares of treasury stock at an average price of $5.80 per share to cover stock option exercises. Management intends to continue its stock buy-back programs as long as repurchasing the stock contributes to the overall growth of shareholder value. The number of shares of stock that will be repurchased and the price that will be paid is the result of many factors, several of which are outside of the control of the Company. The primary factors, however, are the number of shares available in the market from sellers at any given time, availability of funds to purchase the shares and the price of the stock within the market as determined by the market. 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. 22 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 None. 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: August 13, 1999 /s/ William V. Turner -------------------------- William V. Turner Chairman of the Board, President and Chief Executive Officer Date: August 13, 1999 /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
Exhibit 11- Statement Re Computation of Earnings Per Share Three Months Ended Six Months Ended June 30, June 30, ------------------------ ------------------------- 1999 1998 1999 1998 ---------- ---------- ----------- ----------- Basic: Average shares outstanding 7,619,578 7,995,491 7,688,277 7,991,784 ========= ========= ========= ========= Net income $3,225,893 $3,600,406 $6,627,600 $6,964,001 ========= ========= ========= ========= Per share amount $0.43 $0.45 $0.87 $0.87 ==== ==== ==== ==== Diluted: Average shares outstanding 7,619,578 7,995,491 7,688,277 7,991,784 Net effect of dilutive stock options - based on the treasury stock method using average market price 101,976 143,904 101,976 151,510 --------- --------- --------- --------- Diluted shares 7,721,554 8,139,395 7,790,253 8,143,294 ========= ========= ========= ========= Net income $3,225,893 $3,600,406 $6,627,600 $6,964,001 ========= ========= ========= ========= Per share amount $0.42 $0.44 $0.86 $0.86 ==== ==== ==== ====
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
6-MOS DEC-31-1999 JUN-30-1999 28,038 1,540 0 0 54,185 34,590 34,531 730,806 17,215 884,076 603,120 94,589 11,634 107,804 0 0 123 66,807 884,076 30,310 1,847 0 32,157 11,941 16,419 15,737 1,150 268 12,292 9,994 9,994 0 0 6,673 .87 .86 3.99 9,951 0 0 11,403 16,928 2,160 1,297 17,215 17,215 0 0
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