Great Southern Bancorp
Annual Report 2007

Plain-text annual report

2007 Annual Report For Shareholders annual meeting The 19th Annual Meeting of Shareholders will be held at 10:00 a.m. on Wednesday, May 14, 2008, at the Great Southern Operations Center, 218 S. Glenstone, Springfield, Missouri. corporate profile corporate mission Great Southern Bancorp, Inc. (“GSBC” or the “Company”) is the holding company for Great Southern Bank (the “Bank”), which converted from a mutual to a stock company in December 1989. In June 1998, the Bank converted from a federal savings bank charter to a Missouri chartered trust company. Great Southern was founded in 1923 with a $5,000 investment, four employees and 936 members, and has grown to over $2.4 billion in assets, with more than 775 employees and in excess of 177,000 customers. The Bank is headquartered in Springfield, Mo. and operates 39 banking centers in 16 counties throughout Missouri, and loan production offices in St. Louis, Mo., Columbia, Mo., Overland Park, Kan. and Rogers, Ark. A community-oriented company, GSBC offers a full range of banking, lending, investment, insurance and travel services. The Company’s mission is to build winning relationships with our customers, associates, shareholders and communities. We carry out our mission through our core values of teamwork, mutual respect, doing what’s right and uncompromising ethical standards. We are deeply committed to our relationships with our four constituencies. We build winning relationships with our customers and help them make their lives better and easier with our products and services. We build winning relationships with our associates, who have chosen our company to share their skills and talents and who deserve the opportunity to reach their full potential. We build winning relationships with our shareholders, who have entrusted us with their wealth and financial future, and with our communities, upon which our company’s strength, prosperity and future rest. stock information The Company’s Common Stock is listed on The NASDAQ Global Select Market under the symbol “GSBC”. As of December 31, 2007, there were 13,400,197 total shares outstanding and approximately 2,650 shareholders of record. The last sale price of the Company’s Common Stock on December 31, 2007 was $21.96. HIGH/LOW STOCK PRICE First Quarter Second Quarter Third Quarter Fourth Quarter DIVIDEND DECLARATIONS First Quarter Second Quarter Third Quarter Fourth Quarter Year Ended December 31, 2007 Low High $27.30 $30.40 25.96 30.09 23.67 28.00 21.10 26.45 Year Ended December 31, 2007 $.160 .170 .170 .180 Year Ended December 31, 2006 Low High $27.15 $30.04 25.05 31.00 26.10 30.65 26.58 32.14 Year Ended December 31, 2006 $.140 .150 .150 .160 c2 general information CORPORATE HEADQUARTERS 1451 E. Battlefield Springfield, MO 65804 1 (800) 749-7113 MAILING ADDRESS P.O. Box 9009, Springfield, MO 65808 DIVIDEND REINVESTMENT For details on the automatic reinvestment of dividends in common stock of the Company call: 1 (800) 725-6651 or write: Great Southern Bancorp, Inc. Shareholder Relations P.O. Box 9009 Springfield, MO 65808 FORM 10-K The Annual Report on Form 10-K filed with the Securities and Exchange Commission may be obtained from the Company’s Web site at www.greatsouthernbank.com or without charge by request to: Rex Copeland Treasurer Great Southern Bancorp, Inc. P.O. Box 9009, Springfield, MO 65808 INVESTOR RELATIONS Teresa Chasteen-Calhoun or Kelly Polonus Great Southern Bank P.O. Box 9009, Springfield, MO 65808 AUDITORS BKD, LLP Hammons Tower P.O. Box 1190 Springfield, MO 65801 LEGAL COUNSEL Silver, Freedman & Taff, L.L.P. 3299 K St., NW, Suite 100 Washington, DC 20007 Carnahan, Evans, Cantwell & Brown P.O. Box 10009 Springfield, MO 65808 TRANSFER AGENT AND REGISTRAR Registrar & Transfer Company 10 Commerce Drive Cranford, NJ 07016 contents 2 8 1 4 2 0 2 4 2 8 to our shareholders We are committed to our long-term growth strategy and have an intense focus on areas that can make the greatest impact. hi-def service To customers, the result is akin to holding a prism in the sun, presenting a colorful and multi-faceted discovery of our full- spectrum involvement in serving them at every turn. expanding coordinates Our relationships drive the ongoing expansion of services. New services deepen relationships and attract new customers. Together, they drive our expansion into new territories and service coordinates. full-spectrum involvement Staying fully engaged in the unique cultures and well-being of each community we serve allows us to see opportunities where others see problems. peripheral vision We are committed to providing a fair and challenging workplace that respects and empowers the individual, and encourages professional growth through training, feedback and career pathing. directors and officers Meet the Directors of Great Southern Bancorp, Inc., the Bank’s Executive Officers and Great Southern’s Leadership Team. on the cover How do 3-D glasses work? Most human beings come equipped with two eyes and an absolutely amazing binocular vision system that lets us easily tell with good accuracy how far away an object is.The binocular vision system relies on the fact that our two eyes are spread about 2 inches (5cm) apart. Therefore, each eye sees the world from a slightly different perspective, and your brain has the ability to correlate them instantly. In a movie theater, the reason you wear 3-D glasses is to feed different images into your eyes. The flat, two- dimensional screen actually displays two images, and the glasses cause one of the images to enter one eye and the other to enter the other eye. The result is the perception of a third dimension: depth. – Taken in part from Howstuffworks.com 1 to our shareholders We are pleased to present our 2007 “Dimensions in Banking” Annual Report. This year’s report gives you the opportunity to view Great Southern from a multi-dimensional level – in how we serve our customers, how we create an enriching environment for our associates, how we partner with our communities, and how we create shareholder value. After 85 years of being in the financial services business, we know that you cannot form winning relationships by having a “one-size-fits-all” mentality. This perspective has guided our success through the years especially in how we serve our customers - the reason we exist. We recognize there are many aspects to consider in building long- lasting relationships. First, we must understand that our customers’ needs are unique and ever-changing. To make life better and easier for our customers, we need to bring the full power of our Company to them. With that power, we can bring banking, investment, insurance, and travel services when, where and how our customers prefer. We also must have a relentless focus on providing a superior customer experience and help them solve life’s everyday challenges and problems. Technology has enabled our Company to make banking easier and more convenient, but we will never lose sight that the foundation of a meaningful banking relationship is the connection and inherent trust between people. And, as we do a good job of serving our customers, our shareholders will ultimately benefit as our Company’s value grows over the long-term. As you look through this report, you’ll see that many positive things happened in our Company in 2007, even with the expected and unexpected events that transpired in the banking industry and the general economy. We knew that 2007 would be a challenging year in the banking sector, but few in the industry or on Wall Street predicted how tumultuous and turbulent the year would become. Continued negative reports related to the subprime credit crisis and subsequent credit crunch, liquidity pressures, rapid interest rate changes, increases in delinquent and non-performing loans, and a generally deteriorating economy have Joseph W. Turner President and Chief Executive Officer William V. Turner Chairman of the Board * Data Source: FDIC Website Data as of: June 30, 2007. ** The graph above compares the cumulative total stockholder return on GSBC Common Stock to the cumulative total returns of the Nasdaq U.S. Stock Index and the Nasdaq Financial Stocks Index for the period from December 31, 2002 through December 31, 2007. The graph assumes that $100 was invested in GSBC Common Stock on December 31, 2002 and that all dividends were reinvested. † Figure stated is as if the Company was publicly traded for all of the fiscal year 1990 (conversion was in Dec. 1989). 2 all worked together to cause the financial services sector to quickly fall out of favor with the investing community. Investor concerns related to rising loan defaults in subprime lending and other areas related to real estate led to significant decreases in the market valuations of the vast majority of major U.S. banks. It is important to note that Great Southern does not originate or hold subprime loans. However, we do, as a lending institution, have some exposure to housing markets which have weakened in some of our areas of operation. In 2007, the total return - the change in stock price plus dividends - of the S&P Bank Composite Index fell 30%, a historic decrease. Great Southern’s total return in 2007 decreased 24%, also a disappointing performance. Despite the disappointment in our stock price, our Company had a number of strong performance areas in 2007 with net income just under our record-setting 2006 net income results. Earnings for the twelve months ended Dec. 31, 2007, were $2.15 per diluted share ($29.3 million). Total assets grew 8.5% to $2.43 billion. The Company’s return on average assets was 1.25%; return on average equity was 15.78%; the efficiency ratio was 51.26%; and the net interest margin was 3.24%. Stockholders’ equity increased $14.3 million from year-end 2006 to $189.9 million (7.8% of total assets) with an equivalent book value of $14.17 per share. The Company’s capital position continued to be classified as well-capitalized with risk-based capital ratios at higher levels than in 2006 and ratios in line with our peer group. In 2007, the Company repurchased 342,377 shares of stock at an average price of $25.57. In 2007, net loans increased $141.1 million or 8.5% from 2006. As expected, loan growth slowed somewhat compared to growth rates in the last five-year period. We experienced gains in all loan categories with the exception of the commercial real estate category, which had a modest decline. Our loan production offices (LPO) continue to grow and provide the intended geographic diversity in our loan portfolio. In the last five years, the Company opened LPOs in the Kansas City and St. Louis metro areas, in the Northwest Arkansas region, and in Columbia, Mo., covering the Central Missouri region. These areas now make up a much larger percentage of our loan portfolio than in years past. The Greater Springfield and Branson markets continue to have the largest loan balance concentrations at 42% of the total loan portfolio, and the LPOs have an aggregate concentration of 34%. Of the remaining portfolio balances, 12% of loan balances are located in other Missouri and Kansas regions outside of the Company’s footprint, and another 12% reside in other states. During 2007, non-performing assets increased $30.9 million to $55.9 million, or 2.30% of total assets. The increase was due primarily to general market conditions, and more specifically, housing supply, absorption rates, and unique circumstances related to individual borrowers and projects. We discuss non-performing assets in detail in the “Management’s Discussion and Analysis” section of our Annual Report. In a very competitive marketplace, total deposit balances (excluding brokered and national certificates of deposit) increased $110 million, or 12%, from Dec. 31, 2006. Interest- bearing demand and savings account average balances grew by 14% and time deposits rose by 9% over 2006. Demand deposits fell nearly 10% primarily due to declining balances in our Correspondent Banking division as more banks have taken advantage of electronic settlement. *All per share amounts have been adjusted to reflect stock splits. The Company converted to a calendar year in December 1998; therefore prior years’ net income numbers will reflect a June 30 fiscal year end. 3 to our shareholders Our travel, insurance and investment divisions posted an 8% increase in revenue from 2006. The insurance and investment divisions saw increased net income in 2007 versus 2006. The travel division’s first quarter 2007 acquisition of The Travel Company in St. Louis contributed significantly to the increase in revenue. The travel division’s net income declined primarily due to expenses associated with the acquisition. In 2007, we began executing a corporate-wide strategic initiative - “Great to Greater.” This plan serves as a roadmap to achieve various Company goals, including loan and deposit growth, delivery channel expansion, efficiency targets and workplace enhancement strategies. In light of this initiative, the Company expanded its ability to reach and serve more customers in 2007. As mentioned previously, our travel company acquired a St. Louis-based travel agency, marking Great Southern Travel’s first physical presence in St. Louis. This well- established agency is located in close proximity to our LPO in Creve Coeur, Mo., furthering our brand recognition in the market. In keeping with our strategy to open two banking centers a year, the Company opened its 38th banking center located on West Republic Road in Springfield, a fast- growing area of the city. In the first quarter of 2008, we opened the third banking center in Branson, Mo., a growing region that Great Southern has served for decades. Also, to promote deposit generation, Corporate Services representatives have been placed in the Missouri LPOs to develop new and expand existing relationships. Representatives meet with existing commercial clients, as well as new prospects, and work to develop the relationship by providing depository solutions. The Company’s Deposit Direct product has been heavily utilized in this effort as it breaks down geographic barriers and allows clients to make non-cash deposits to their bank account from the convenience of their computer desktop. In the third quarter, the Company launched a new and improved Web site which included a new comprehensive investor relations site. The launch of this new site was a historical company milestone as a new retail online channel was made available to open depository accounts. This new channel allows us to broaden our marketing reach significantly in the Internet space and compete for deposits on a larger scale. We have always fared well when stacked up against local and national peers, and 2007 was no exception. According to an American Banker ranking, Great Southern ranked 75th on efficiency ratio among the largest 500 U. S. bank holding companies for the third quarter 2007. On a regional level, the Kansas City Star ranked Great Southern 25th on its “Star 50” list, which ranks the performance of publicly traded companies whose headquarters are located in Missouri and Kansas. Locally, we continued to distance ourselves from the rest of the pack in market share in our home base of operations - Greene and Christian counties. We increased deposit market share from 21.90% in 2006 to 22.39% in 2007, based on June 30, 2007, FDIC data. The closest competitor had market share of 9.95%. In addition, for the fifth consecutive year, Great Southern was named “Best Bank” in the Springfield News-Leader’s Best of the Ozarks readers’ poll. Readers also voted Great Southern as the Best Company to Work For, Best Mortgage Company, Best Travel Agency, and Best Investment Services/Brokerage. As the area’s leading financial institution, we understand the importance of giving back to the communities we serve. Our Company can only be as strong as the communities we serve and we view our community support as much more than a corporate obligation. It is simply the right thing to do. In 2007, we invested well over $300,000 in charitable contributions and sponsorships. Hundreds of volunteer hours were also generously given by our associates. Looking ahead, we anticipate that 2008 will be another challenging year. We are in the middle of a difficult credit cycle, and a certain amount of negative sentiment is expected. However, there is optimism that the industry will fare well once we are through this cycle. It will be a tough ride, but most banks will weather the storm and be ready for the recovery period. Unlike other previous credit cycles, the banking industry as a whole entered this difficult operating environment well-capitalized Readers of the Springfield News-Leader named Great Southern Best Bank, Best Company to Work For, Best Mortgage Company, Best Travel Agency and Best Investment Services/Brokerage firm in the 2007 “Best of the Ozarks” poll. 4 following years of record earnings. No one can speculate with any certainty of when this downturn will end, but we can say with certainty that we will continue to operate our Company with the same sound business principles and practices that have made us successful for the past 85 years. As always, we will maintain our focus on a strong capital position and prudent and appropriate credit and risk practices. We are always mindful, in good and difficult times, that we have the opportunity to enhance and expand our business, one customer at a time. In 2008, based on the current market conditions, we anticipate that loan and deposit growth will be relatively moderate for the year. We anticipate that some of our loan customers could face difficult times ahead, especially those in housing- related industries. In these circumstances, we will work diligently with our customers and devise an action plan to work through whatever credit issue is at hand. As a result of the Federal Reserve’s interest rate cuts in the first quarter of 2008, we believe that our net interest income will likely show improvement during the year as compared to 2007. We discuss the effects of the current interest rate environment on our net interest income and margin in detail in the “Management’s Discussion and Analysis” section of our Annual Report. In 2008, we will continue executing our “Great to Greater” strategic initiative. We are committed to our long-term growth strategy and have an intense focus on areas that can make the greatest impact. We’ll focus on further integrating our entire Company so that our customers can access any line of business with ease and simplicity. We’ll work to differentiate ourselves even more from the competition by enhancing the customer experience through unparalleled responsive and quality service. We’ll also make sure we are working as smart and efficiently as possible as we review our internal processes and procedures. In addition, new initiatives are being developed to improve our work culture, ensuring that we retain and hire talented and knowledgeable associates, the key to our success. In 2008, the Company will make its first retail banking entry into the St. Louis market with the opening of a new banking center in Creve Coeur, Mo. Construction is expected to begin in the second quarter. A second location in the Kansas City metropolitan area is also under review and a site is likely to be announced during the year. In addition, a LPO in a new metropolitan market is currently under consideration. We anticipate developing our retail online channel even further, motivated by what our younger generation of customers expect and demand. To make banking with Great Southern even more convenient, a Mobile Banking product will be launched so that customers can keep track of their banking from the convenience of their cell phone. As you can see, 2008 will be challenging, yet exciting! Our confidence in how we will fare in 2008 and beyond is grounded in our S E L E C T E D C O N S O L I D AT E D F I N A N C I A L D ATA Summary Statement of Condition Information: Assets Loans receivable, net Allowance for loan losses Available-for-sale securities Held-to-maturity securities Foreclosed assets held for sale, net Deposits Total borrowings Stockholders' equity (retained earnings substantially restricted) Average loans receivable Average total assets Average deposits Average stockholders' equity Number of deposit accounts Number of full service offices 2007 2006 2004 2003 December 31, 2005 (Dollars in thousands) $2,431,732 1,820,111 25,459 425,028 1,420 20,399 1,763,146 461,517 $2,240,308 1,674,618 26,258 344,192 1,470 4,768 1,703,804 325,900 189,871 1,774,253 2,340,443 1,784,060 185,725 95,908 38 175,578 1,653,162 2,179,192 1,646,370 165,794 91,470 37 $2,081,155 1,514,170 24,549 369,316 1,510 595 1,550,253 355,052 152,802 1,458,438 1,987,166 1,442,964 150,029 85,853 35 $1,851,214 1,334,508 23,489 355,104 1,545 2,035 1,298,723 401,625 $1,544,052 1,146,571 20,844 259,600 1,570 9,034 1,138,625 276,584 140,837 1,263,281 1,704,703 1,223,895 130,600 76,769 31 121,679 1,106,714 1,437,869 1,057,798 113,822 74,822 29 The tables on pages 5, 6, and 7 set forth selected consolidated financial information and other financial data of the Company.The selected balance sheet and statement of income data, insofar as they relate to the years ended December 31, 2007, 2006, 2005, 2004 and 2003, are derived from our consolidated financial statements, which have been audited by BKD, LLP. The amounts for 2004 and 2003 are restated amounts. See Item 6,“Selected Consolidated Financial Data - Restatement of Previously Issued Consolidated Financial Statements,” Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8, "Financial Statements and Supplementary Information" in the Company’s Annual Report on Form 10-K. Results for past periods are not necessarily indicative of results that may be expected for any future period. All share and per share amounts have been adjusted for the two- for-one stock split in the form of a stock dividend declared in May 2004. 5 to our shareholders belief in our team of associates and their ability to get the job done for our customers. We are humbled to work alongside this talented group of people. They come to work every day motivated to make life better and easier for our customers, and to show the communities we serve that we are an active, vibrant and community- minded company. Our associates demonstrate day-after-day that the “Great to Greater” initiative is more than just a strategic roadmap in their mind. They have shown us that they believe it’s an attitude. They ask themselves “What can I do today to take our Company from “Great to Greater?” We thank each and every associate for their hard work and their ability to see and understand the many dimensions we must consider when serving our customers, communities, shareholders and each other. We would also like to thank our customers, for they are the reason we exist. We know they place their trust in us expecting us to provide the solutions they need with the convenience, security and peace-of- mind they desire. And finally, we thank our shareholders for your investment and show of confidence in our Company. We appreciate your continued long- term support. Our enduring commitment to provide a superior long-term return on your investment, and to keep your interests in mind as we make daily decisions will never falter. As always, we welcome your thoughts and suggestions. We hope you enjoy looking through the pages of this Annual Report and learning about the many dimensions of Great Southern. Sincerely, William V. Turner Joseph W. Turner S E L E C T E D C O N S O L I D AT E D F I N A N C I A L D ATA 2007 For the Year Ended December 31, 2005 (Dollars in thousands) 2006 2004 2003 $142,719 21,152 163,871 $133,094 16,987 150,081 $98,129 16,366 114,495 $74,162 12,897 87,059 $66,739 9,440 76,179 76,232 6,964 7,356 1,914 92,466 71,405 5,475 65,733 8,138 5,648 1,335 80,854 69,227 5,450 42,269 7,873 4,969 986 56,097 58,398 4,025 28,952 6,091 1,580 610 37,233 49,826 4,800 25,147 5,400 588 594 31,729 44,450 4,800 65,930 63,777 54,373 45,026 39,650 9,933 15,153 1,037 9,166 14,611 944 8,726 13,309 983 7,793 12,726 992 5,859 11,214 2,187 13 (1) 85 (373) (1,140) 962 --- 1,567 (734) 1,430 --- 872 1,632 --- --- 1,781 29,371 30,161 7,927 2,230 1,473 1,446 879 1,363 1,247 608 1,498 --- --- 1,847 29,632 28,285 7,645 2,178 876 1,201 931 1,387 1,127 119 --- (6,600) 3,408 952 21,559 25,355 7,589 1,954 883 1,025 903 1,068 1,410 268 --- 1,136 8,881 1,282 33,309 22,007 7,247 1,784 761 794 811 903 1,309 485 795 --- 771 --- (3,089) 7,352 1,165 26,254 18,739 6,335 1,691 683 735 855 797 1,078 1,939 --- 4,325 51,659 43,642 14,343 $ 29,299 783 4,275 48,807 44,602 13,859 $ 30,743 --- 3,743 44,198 31,734 9,063 $ 22,671 --- 3,160 39,261 39,074 12,675 $ 26,399 --- 2,901 35,753 30,151 9,856 $20,295 Summary Income Statement Information: Interest income: Loans Investment securities and other Interest expense: Deposits Federal Home Loan Bank advances Short-term borrowings Subordinated debentures issued to capital trust Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income: Commissions Service charges and ATM fees Net realized gains on sales of loans Net realized gains (losses) on sales of available-for-sale securities Realized impairment of available-for-sale securities Late charges and fees on loans Change in interest rate swap fair value net of change in hedged deposit fair value Change in interest rate swap fair value Interest rate swap net settlements Other income Noninterest expense: Salaries and employee benefits Net occupancy expense Postage Insurance Advertising Office supplies and printing Telephone Legal, audit and other professional fees Expense on foreclosed assets Write-off of trust preferred securities issuance costs Other operating expenses Income before income taxes Provision for income taxes Net income 6 S E L E C T E D C O N S O L I D AT E D F I N A N C I A L D ATA Per Common Share Data: Basic earnings per common share Diluted earnings per common share Cash dividends declared Book value Average shares outstanding Year-end actual shares outstanding Year-end fully diluted shares outstanding Earnings Performance Ratios: Return on average assets(1) Return on average stockholders' equity(2) Non-interest income to average total assets Non-interest expense to average total assets Average interest rate spread(3) Year-end interest rate spread Net interest margin(4) Efficiency ratio(5) Net overhead ratio(6) Common dividend pay-out ratio Asset Quality Ratios: Allowance for loan losses/year-end loans Non-performing assets/year-end loans and foreclosed assets Allowance for loan losses/non-performing loans Net charge-offs/average loans Gross non-performing assets/year-end assets Non-performing loans/year-end loans Balance Sheet Ratios: Loans to deposits Average interest-earning assets as a percentage At or For the Year Ended December 31, 2005 (Dollars in thousands, except per share data) 2004 2006 $ 2.24 2.22 0.60 12.84 13,697 13,677 13,825 1.41% 18.54 1.36 2.23 2.83 2.95 3.39 49.37 0.88 27.03 $1.65 1.63 0.52 11.13 13,713 13,723 13,922 1.14% 15.11 1.08 2.21 2.73 3.05 3.13 55.28 1.14 31.90 $1.93 1.89 0.44 10.28 13,702 13,699 13,995 1.55% 20.21 1.95 2.27 2.81 2.63 3.10 47.23 0.35 23.28 2007 $2.16 2.15 0.68 14.17 13,566 13,400 13,654 1.25% 15.78 1.25 2.18 2.71 3.00 3.24 51.26 0.95 31.63 2003 $1.48 1.46 0.36 8.88 13,707 13,703 13,887 1.41% 17.83 1.83 2.35 2.98 2.88 3.27 50.57 0.66 24.32 1.38% 1.54% 1.59% 1.73% 1.78% 2.99 71.77 0.35 2.30 1.92 1.46 129.71 0.23 1.12 1.19 1.09 151.44 0.20 0.81 1.05 0.48 524.43 0.17 0.35 0.33 1.40 282.02 0.47 1.06 0.63 103.23% 98.29% 97.67% 102.76% 100.70% of average interest-bearing liabilities 112.71 114.26 113.05 112.56 112.30 Capital Ratios: Average stockholders' equity to average assets Year-end tangible stockholders' equity to assets Great Southern Bank: Tier 1 risk-based capital ratio Total risk-based capital ratio Tier 1 leverage ratio Ratio of Earnings to Fixed Charges:(7) Including deposit interest Excluding deposit interest 7.9% 7.7 10.4 11.7 9.0 1.47x 3.69x 7.6% 7.8 10.2 11.5 8.9 7.6% 7.2 10.1 11.3 8.3 7.7% 7.6 10.7 11.9 8.5 1.57x 3.29x 2.05x 5.72x 1.95x 5.58x 7.9% 7.9 11.0 12.3 9.0 2.18x 6.45x (1) Net income divided by average total assets. (2) Net income divided by average stockholders’ equity. (3) Yield on average interest- earning assets less rate on average interest-bearing liabilities. (4) Net interest income divided by average interest-earning assets. (5) Non-interest expense divided by the sum of net interest income plus non- interest income. (6) Non-interest expense less non-interest income divided by average total assets. In computing the ratio of earnings to fixed charges: (a) earnings have been based on income before (7) income taxes and fixed charges, and (b) fixed charges consist of interest and amortization of debt discount and expense including amounts capitalized and the estimated interest portion of rents. 7 hi-def service An informal, after-hours “Sunset Mixer” with all the goodies, including a grand prize vacation drawing, formally introduced our new mortgage lending director Bart Evans to area realtor friends. Helping our customers get the most for their money, our Health Savings accounts allow them to set aside savings tax-free for routine medical expenses. multiple levels, and drives ongoing product and service development as a virtual culture within our company. Internal programs like our “Great to Greater” strategic initiative help associates realize our company’s full potential as it relates to each of their customers, encouraging and rewarding personal initiative, innovative thinking and the spread of over-the-top client service across our various business lines. To our customers, the result is akin to holding a prism in the sun, presenting a colorful and multi- faceted discovery of Great Southern’s full-spectrum involvement in serving them at every turn. As savings rates fell and the investment market began to look uncertain for customers last summer, Great Southern Banking Center associates helped many of them find the extra investment security they were looking for in tax-advantaged annuities, along with the expert assistance of the Great Southern Financial Services team. Similarly, our Eighty-five years ago, the concept of providing good customer service was fairly black and white. You did something folks needed, they relied on you, you appreciated their business and they appreciated you. Maintaining a good business relationship was simply a matter of friendship, mutual trust and common courtesy. As our company celebrates its 85th year, we think our founders would be proud of where Great Southern stands today. Though we’ve grown from a staff of five to nearly 800 associates today, they’d recognize that we still keep a sharp focus on those core values in everything we do. And they'd be amazed at the innovative ways we’ve developed to better serve and enhance the lives of our neighbors and customers. Exploring new dimensions in our banking relationships continues to reveal a kaleidoscope of opportunities to grow and expand our relevance to customers at 8 A Quinceañera, a celebration for Hispanic girls turning 15, is a big event and often lavish. Our special account helps the family to save in advance. Health Savings Account added yet another dimension to family financial planning, presenting a tax- advantaged, federally-approved savings plan option especially designed to pay for current and future medical expenses. Familiarity with our customers’ needs led to the development of an innovative product for our growing Hispanic market as well. Like La Cuenta Sin Fronteras – our culturally- aware “No Borders” checking product that allows fee-free cash transfers to relatives outside the country – our new Quinceañera Account recognizes the cultural importance of a girl’s coming of age, at 15. A dedicated and easy-to- understand passbook savings plan, La Cuenta Quinceañera encourages financial planning for a bright future, and also serves as an ambassador, building trust in the integrity of the U.S. banking system, and of their relationship with Great Southern in particular. Bilingual associates, ATMs, lending officers and 24-hour 3 2 9 1 y a d o t When Great Southern first opened its doors in 1923, we saw new technologies changing communications: the first presidential address to be broadcast on radio, the world’s first portable radio, and the development of the loudspeaker. Today, Great Southern customers access their money, get insurance quotes, and make travel arrangements from their phones and computers, and we’re keeping up with changes as fast as they come. 9 hi-def service 3 2 9 1 In 1923, just nine years after Henry Ford’s assembly line began, Garret Morgan patented the first traffic light signal, streamlining traffic flow and reducing gridlock at intersections. Today, auto dealers in out-market areas can offer their customers Great Southern financing with our innovative Dealer Track online system, streamlining the loan application process. y a d o t 10 The largest bank seniors club in the region with more than 16,000 active members, Summit Club celebrated its 21st year with free concert tickets for members and their guests at the annual club birthday party, plus $25 gift cards for BOTH on guest member sign-ups. phone bank services underscore our commitment. We know what it takes to build lasting customer relationships. We want to. And we mean it. While our successes in relationship banking have helped us develop new customers, new service lines and expand into new territories, our primary focus remains laser sharp on taking care of the customers we have. It’s a competitive business, and simply maintaining our leadership as a preferred provider demands constant attention and adjustment. As things change, so does our prism of services. At one time, staffing live tellers at midnight was both an over- the-top convenience and highly marketable competitive advantage. As 24-hour ATMs changed that, so did we. Today, we still offer longer lobby and drive-thru hours than our competitors in most every community we serve. But no midnight tellers. Instead, we offer the High-style dining spots like the new Kai Restaurant are helping drive Springfield’s downtown resurgence. Just down the road from our original storefront on historic Walnut Street, Six23 Condos is Springfield’s first downtown residence project to be built from the ground up. area’s largest single-bank ATM network. Competition drives us. But to really understand Great Southern’s competitive strength, you have to keep the focus on relationships. We didn’t drop the Christmas Club account from our menu because everyone else did. We simply gave our customers something better and they stopped needing it. Conversely, our “Skip Pay” offer on consumer loan payments at Christmastime has become a welcome annual tradition at Great Southern. Last year’s mailing invitation generated a whopping 15% recipient participation, and a nice boost in fee income for the bank. Whether our competitors offer something similar is not the point. Our customers like it. So do we. Another direct mail campaign puts the focus on deposit acquisition. “Net Gain” targets households based on a sophisticated methodology that assigns prospects to one of five financial personality profiles based on their financial disciplines, proximity to our existing banking centers and likelihood to be motivated by certain features and offers. Mail drops in March, May and September each targeted approximately 85,000 residences, averaging 85% new prospects and 15% existing customers. The campaign generated approximately 3250 new checking, money market, CD, savings and IRA accounts, totaling nearly $26 million in balances. Along with helping us meet new customers, Net Gain’s primary function is to help fund loans being generated by our commercial lending and loan production offices. Great Southern partnerships in Springfield’s downtown renaissance include historic renovation projects like the Wilshire on Jefferson and South Pier on South Avenue; ground- up starts like Six23 Condos and Walnut Alley Townhomes on Walnut; and new business start-ups like the Kai Restaurant on Campbell. A project in the historic community of Galloway on Springfield’s south side will bring the first LEED (Leadership in Energy and Environmental Design) certified multi-family development to southern Missouri. The Dwellings at 11 Galloway Village are designed as energy-tight envelopes, using sustainable materials and innovative design techniques to offer efficient and environmentally-friendly living. For homebuyers and realtors, a new mortgage lending department initiative puts convenience in high- definition with the strategic placement of full-time loan officers at banking centers in Joplin, Branson, Ozark and West Republic Rd. in Springfield, at our loan production offices, and for some realtors, even on-site at their own headquarters. For Great Southern travelers, high- definition service is the delightful discovery of highly qualified and specialized help at every turn, right now, all at one place. There are cruise specialists. Group travel experts. Plus business and VIP travel counselors working alongside other specialists dedicated just for honeymooners and luxury travelers. Our Athletic division works exclusively on assisting college and university clients with complicated and time- sensitive team travel arrangements, and we’re proud of our designation Steve Mayfield puts realtor service in high-definition for Murney Associates in Springfield, manning a full-time residential lending desk at the company’s headquarters on Primrose. The basic principles of integrity, prudence, reliability and loyalty to customers have distinguished Great Southern mortgage lending service for generations of new home buyers. as the official travel agency of the Mizzou Tigers. We now even have specialists in missionary travel, a highly-focused service providing special fares and arrangements for those traveling to distant, out-of-the-way destinations for extended periods of time. If having such a specialty surprises you, the results will too. Missionary travel now accounts for about 10% of our overall corporate/business travel picture. A major initiative to update and expand our website presence was realized with the mid-year roll-out of “Opening Act,” introducing customers to not only our new look, but an array of sophisticated new tools -- including the ability to open and fully fund new accounts online. A complementary E-statement campaign touted the extra security and convenience of electing to receive monthly bank statements online instead of by mail, reducing internal postage and processing costs while simultaneously offering enhanced account research, tracking, accounting and free Bill Pay features. The new site further defines our role as “the most convenient bank around,” and like a Great Southern Banking Center, serves to “pull it all together” for our customers in one convenient stop, including direct links to specialists in our insurance, travel and financial services divisions. Importantly, our advanced site also opens the horizon to a world of fresh opportunities in target marketing, client development and new client acquisition for Great Southern. A Consumer Lending initiative dubbed “Dealer Track” projects our indirect lending expertise into targeted growth markets like St. Louis, offering area auto, boat, motorcycle and RV dealerships immediate online assistance with on-the-spot consumer 12 financing, an increasingly vital hands-on sales tool for them in today’s competitive new and used vehicle markets. On another front, Great Southern Insurance’s new online quoting service provides interested prospects with three different insurance quotes customized to their queries in virtual real-time at greatsouthern.miquote.com, along with click-to-submit convenience for direct personal assistance with plan enrollment. A unique “Next Day Coverage” option even offers complete online application with no medical exam required, and instant policy downloads with approval based upon answers to a few online health questions. It doesn’t matter where you live or who you are. As an experienced independent broker, we can compete with anyone, and add a healthy dose of Great Southern personal service and attention to the equation as well. Coming up on the immediate horizon is “Mobile Banking,” a new service still in development that will soon bring Great Southern’s full online banking interface to cell phones. hi-def service With successive major ice storms in January beginning to look like an annual event, Great Southern Insurance’s well- practiced response team quickly took advantage of our new Republic Road location to station an on-the-spot Travelers Storm Team claims office for hard-hit area neighbors. Wake up to true banking convenience. With Opening Act, customers can open and fund new accounts online, anywhere, anytime. The message IS the medium. Home page sponsorship presence on e-news sites like those of the Springfield Business Journal, the Lee’s Summit Journal, the Springfield Chamber of Commerce and The Mizzou Tigers help steer prospects to our own informative new world at greatsouthernbank.com. 13 expanding coordinates Grand Opening ceremonies at our newest Springfield location on West Republic Road in mid-July included a radio “road show,” a parking lot cookout and neighborly special offers ... and generated more than a million dollars in new deposit business by month’s end. Our new banking center in north Branson on the Shepherd of the Hills Expressway keeps Great Southern always “on the way” for customers, with four convenient locations now serving the Branson /Table Rock Lake area. In common usage, dimension (Latin, “measure out”) is a set of parameters describing size in terms of length, width and depth, and sometimes mass or speed. In mathematics, these parameters are used to develop a system of coordinates in space that can describe both an object’s size and relative position. And when mass and speed are applied, its impact. Dimension is also a good way to describe Great Southern. Our focus on building customer relationships drives the ongoing expansion of services. New services deepen relationships and attract new customers. Together, they drive our physical expansion into new territories and service coordinates. On home turf, the bank continued a branch expansion program that actually began in the the mid- seventies and has survived the influence of a long industry trend toward consolidation and brick & mortar downsizing. In terms of sheer physical 14 presence, Great Southern took over the leadership position in southern Missouri bank locations in 1995, with 24 branches. Since then, the margin has grown, and with the addition of a new location on West Republic Road in Springfield, Great Southern celebrated the opening of its 38th full- service banking center last summer. Our 39th is Grand Opening on Hwy. 248 in Branson even as you read this report, in April 2008, and within the next year, the Company expects to make its first retail banking entry in the St. Louis market with the completion of a banking center at the intersection of Olive and Questover in Creve Coeur. On the success of our Fall 2006 debut in the Kansas City market with the opening of a banking and travel center in Lee’s Summit, site planning for a second location in the Kansas City metropolitan area is well underway, and other metro market entries are currently under careful scrutiny. Given our experience and depth in product offerings, it’s easy to Spreading well beyond our southwest Missouri origins, Great Southern continues to expand its footprint in banking, commercial loans and travel services. cutline St. Louis’ historic City Hospital begins its new legacy as an architectural masterpiece in luxury townhome living, with 14-foot ceilings and a broad vista over the city’s downtown renaissance. Developer Chris Goodson and partners are overseeing the project with the assistance of Great Southern Vice President Kevin Baker. 15 expanding coordinates Developers Chris and Kerri Elder (right) keep Audubon Drive on the fast track with careful master planning and the attentive support of Vice President Jill Bolding at our Rogers LPO. The gated community of high-style French Country townhomes is located near Lake Maumelle, just north of Little Rock. The historic Olivia Building in Joplin is being renovated under the watchful eye of noted architect Austin Allen, whose other National Registry projects in Joplin include the St. Peter the Apostle Catholic Church, the City Hall building and the nearby Elk’s Club Lodge. imagine prospective new markets as “easy pickins” for Great Southern, but their unique competitive environments play an important and sobering role in the decision. Our “metro market model” on territorial expansion also takes into account proximity, population growth, demographic trends and traffic patterns, and the advance placement of satellite loan production offices (LPOs) has helped us scout retail banking opportunities in these new markets with some measure of certainty and added confidence. The establishment of dedicated LPOs in Kansas City (2003), Rogers, Ark. (2003), St. Louis (2005) and Columbia (2006) also serves a long- term strategic plan designed to spread and diversify the Company’s loan portfolio. Commercial loan production efforts at our Branson banking center on Hensley recorded over $94 million in new commercial and residential loan volume for the year, with outstanding loan balances of $152 million. Significant development partnerships in the Branson Lakes Area include Riverbend Place, a higher-end residential and condo project on Lake Taneycomo overlooking Branson Landing; Majestic at Table Rock, a similar high- end waterfront condo development on Table Rock Lake near the Chateau on the Lake resort; Fieldstone Villas at Branson Creek; and land development funding for Hollister Point, a multi-million dollar retail project spreading across 112 acres at the new Hollister Interchange on Hwy. 65. Within an hour’s drive of our headquarters, Branson is hardly new territory for us, we’ve been there since 1974. But its burgeoning growth in tourism and leisure & retirement living in recent years has put it on the radar screens of new competitors far and wide, so that right in our own backyard, the competition is still tough. But as we’ve discovered in our own new market ventures miles away from home, capability levels the playing field. And performance counts most of all. Progressive, proactive and responsive loan service has helped our LPOs introduce themselves and compete successfully in unfamiliar markets, and highly visible area partnerships like the new Belton Marketplace south of Kansas City, renovation of the historic City Hospital in downtown St. Louis and the new Northwest Arkansas 16 From the ground up, Great Southern partners with developers to finance projects using a variety of tax credit and public finance programs, which has helped the community of Belton, on the outskirts of Kansas City, realize the dream of its own big-city shopping mecca with the recent completion of Belton Marketplace. children’s clinic in Rogers, Ark. are making the Great Southern name a familiar and welcome sight. These partnerships also served to expand our coordinates and have introduced us to other opportunities both within and outside our on-site service areas. A client relationship in Rogers has taken Great Southern project signs and branding to the Audubon townhome development in Maumelle, Ark. on the outskirts of Little Rock, while a Springfield client referral led us to the 100,000 sq. ft. 1717 Marketplace development in Joplin. 3 2 9 1 When we opened our first office in the Seville Hotel in 1923, downtown was THE place to be. Today, Great Southern Community Development and historic building renovation partnerships are making downtown “the place to be” again in the state’s four largest cities. 17 expanding coordinates 3 2 9 1 Great Southern provided land development funding for Branson Creek’s Fieldstone Bluffs and Fieldstone Villas. Branson Creek amenities include two professional golf courses, a marina on Table Rock Lake and a choice of five unique neighborhoods, including Fieldstone Villas – with the look and feel of a Tuscan village. In October 1923, when Walt Disney founded the Disney Company, Great Southern was barely six months old. Today, our founders would be surprised to learn that we have a travel division. Much less that it’s become Disney’s #1 travel agency in the four-state region, and now ranks among the top 50 travel agencies in the nation. Disney cartoonist Stacia Martin has become a popular attraction at annual “Disney Day” celebrations in Springfield and Lee’s Summit. y a d o t 18 Exploring the new dimensions in banking these distant relationships reveal, our Corporate Services team now fields full-time client service representatives at our LPOs in Columbia, Kansas City and St. Louis to offer commercial loan customers and new prospects there a broad array of other corporate and small business bank services on the deposit side. Like “Desktop Business Banking,” packaging online business banking and desktop check depositing conveniences with sophisticated money management tools including Zero Balance, Cash Reserve Sweep and High Yield Money Market accounts. Combined with Great Southern’s trademark on- site personal attention, the expansion of our business service capability in these new markets opens the horizon to a world of new prospect and business development opportunities. The acquisition of one of St. Louis’ largest travel agencies marked Great Southern Travel’s entry last year into the state’s largest metro market. The Bank plans to follow suit this year. A significant investment in transportation infrastructure at Missouri’s Lake of the Ozarks playground has helped drive a resurgence in development activity to serve the growing recreational and vacation-home traffic pouring in from the state’s two largest cities. Our ongoing participation in major new projects like the The Hamptons underlines the Company’s long commitment to the region’s economic growth. Great Southern Travel joined the bank’s exploration of the mid- Missouri market with the locally- notable acquisition of Columbia’s respected Global Travel in 2005, and last summer, made its debut in the St. Louis market in equally grand style with the acquisition of The Travel Company, one of St. Louis’ largest travel agencies. recognizing innovative product development and client service, and Ensemble Travel, a consortium of more than 200 U.S. and Canadian travel agencies working together to pool buying power, named Great Southern Travel among North America’s Top 10 producers for the year. In short, we’re not just the new Outside the more obvious benefits name in town. We’re the best. of spreading our name around, a much more significant projection of identity is taking place in brand development: The scope and quality of Great Southern service. Our travel division has achieved national prominence as an “agency to watch” among the industry’s fastest- growing, and enjoys an equally stellar reputation with its global vendors. Our agency garnered Worry Free Vacations’ annual IRIS Award in 2007, a highly-respected industry accolade 19 full-spectrum involvement Associate teams from various departments take turns each week at McGregor Elementary stuffing backpacks with take-home food for students of low-income families. The Great Southern logo signifies the merging of different suns into one more intensified, unified body. The power of our company comes from the synergies of many into one, bringing an enhanced brightness to our customers, shareholders, and our communities. Where many competitors see community as simply a market, Great Southern understands the radiance we shine on community will reflect back upon our own success – we can only be as strong as the communities we serve. Our spectrum involvement gives us the ability to see many things others don’t. By being a light in the community, we can better seize on opportunities to strengthen our markets, thereby strengthening our Company. That awareness underscores our commitment in having the only locally based Community Development Department in southwest Missouri. Last fall, Great Southern partnered with Mark Holmes, a nationally 20 Leadership First Friday participants enjoy a box lunch at the Operations Center each month while reviewing a top business book. acclaimed consultant and motivational speaker, to help create Leadership First Fridays. This initiative, co-sponsored by the Springfield Business Journal, brings together business and community leaders monthly to learn about topical issues to build leadership capacity in our region. Our Company continues to be a leader for our communities in providing loans and investments to create affordable housing. We made a significant investment in the Kansas City Equity Fund, which partners with affordable housing developers in the Kansas City area by investing in low-income housing tax credits. In Springfield, we partnered with the Urban Neighborhoods Alliance and Freddie Mac to create the “Teacher on the Block” program. This program encourages teachers in high poverty rate (Title I) schools to live in their surrounding neighborhoods by offering special mortgages and grants to purchase a home. Students benefit by having one more positive role The spacious and centrally-located Operations Center parking lot is an ideal staging ground for Convoy of Hope disaster drills. Vintage race cars rolled into Springfield last June during the Hemmings Branson Road Rally. Drivers and navigators raced through the Ozarks' back roads to raise money for Autism Awareness, with a welcome pit stop at our Operations Center. model in their neighborhood, and teachers better understand the issues and environment of their students. Great Southern also successfully sponsored a $500,000 AHP grant through the Federal Home Loan Bank Board of Des Moines for the Springfield Victory Mission. The grant will be utilized for the Victory Square residential center to help remodel and improve the center that will house 60 formerly homeless or at-risk for homelessness residents. The spectrum also shines on our communities through the philanthropic efforts of the Company. Great Southern provided more than $300,000 in grants and sponsorships throughout our markets in 2007. We participated in important capital campaigns for the Ozarks Food Harvest, the Boys and Girls Clubs, and the Ozarks Regional YMCA. We provided a grant to Portland Elementary in Springfield for the “Food for Thought” program, which provides backpacks of food to take home on week-ends for low-income students. We also provided a grant to Drury University to assist them in making a safer campus environment for students to learn. Our markets are strengthened by the good works of many non-profit partners, and we try and help intensify their outreach by our charitable efforts. We not only help by the checks we write, we can also help by the hands we provide. Through our Caring and Sharing program, associates are provided paid time off to volunteer for community activities. Great Southern associates also serve on boards, volunteer on their own time, and provide financial expertise for many non-profits throughout our region. Our community involvement reaches other dimensions as well. Our markets have been vulnerable to many natural disasters in the past few years. To help with community preparedness, we worked with Convoy of Hope to host a disaster response drill at our Operations Center in Springfield. Convoy was able to utilize the exercise to make sure they had volunteers properly trained for the distribution of critical supplies in a time of crisis. Great Southern also provided weather radios to encourage public involvement in the mock relief effort. The Great Southern team also worked with the Community Blood Center of the Ozarks in their efforts to expand their needed services into a larger facility. By reaching out to other banking partners, we assembled a consortium of eight local banks to provide very competitive loan terms to assist the organization in procuring a new facility and making it affordable. By sharing the loan, the lending group was able to provide more attractive terms than any could have done individually. The community benefited by the cooperation, as will patients in need of the precious resources that CBCO provides. Our spectrum reaches smaller communities where we have a presence, too. Our Community Development Director worked closely 21 It would be hard to find a more sports- minded community than Great Southern’s hometown. Partnering with the wildly popular Springfield Cardinals, we’ve sponsored fun between-inning contests, promotions and special events like the “Deal or No Deal” game, a Hawaii trip giveaway from Travel, and the Texas League All Star Game. with other banks and local government in creating the DREAM Capital Corporation in Neosho, Mo. This community development corporation will provide much- needed capital for businesses to start or expand in the redeveloping downtown area. Besides providing technical assistance, Great Southern also has committed to invest in the $250,000 loan fund. Our array of light shines on other areas of the community as well. Athletics and recreation have always been a hallmark of community vibrancy. Great Southern has a tradition of support and involvement in those activities that enhance our quality of life in our markets. Our key sponsorship of the Springfield Cardinals, a double-A affiliate of the St. Louis Cardinals, enters into a fourth season. We remain a major sponsor and banking partner of the Cardinals, and this year will provide major support in bringing the Texas League All-Star game to Springfield. Our spectrum reaches out to education partners as well. Our long- standing partnership with Missouri State University will deepen with the late 2008 opening of JQH Arena, 22 full-spectrum involvement A long-time supporter of Missouri State athletics, our name gets plenty of exposure with these potential future customers. Encouraging even younger savers, our MSU Kids Club includes a premium Presidential Dollars Collector Set, with the first three coins in place. Great Southern Travel started off with a roar in Columbia, becoming the official travel agency of the Mizzou Tigers and arranging a group trip for fans traveling with the Tigers to the Cotton Bowl. named in honor of John Q. Hammons, a nationally-renowned hotel developer and alumnus of the school. Great Southern has committed to purchase the new arena’s state-of-the- art video scoreboard, which will proudly display our company name and logo, and enhance our brand for many years to come. The spectrum involvement of Great Southern in our communities allows us to see opportunities where others see problems. Our resources and talent radiate into the community to help strengthen our markets, and in turn that light is reflected back into the performance and success of our company. Our logo depicts four suns merging into one. The intensity of the focused energy shines brightly on the communities where we work, play, and most importantly, call home. The first organized baseball league, The Southwest League, got its start in 1887 in our hometown of Springfield. In 1932, the St. Louis Cardinals purchased a minor league team and moved them here, winning the first of several Western Association titles that year. They played at White City Field on Boonville Avenue until the team was moved in 1946. Returning to Springfield in 2005, the newly formed Springfield Cardinals have already set league attendance records and we’re proud to be a founding sponsor of this favorite community pastime. 23 2 3 9 1 y a d o t peripheral vision Proud to walk the walk, enthusiastic associates raised $12,500 last year to benefit Relay for Life. More than 80 associates participated in United Way's Day of Caring, forming and deploying teams to man worthy projects across the community. A team composed of managers and assistant managers from each of our 38 banking centers tackled an all-day painting project at the Family Violence Center, while another group cleaned up the Council of Churches building. Building long-lasting relationships with our associates is fundamental to our business. We fully appreciate that our associates lead very busy and active lives, and working at Great Southern is but one role they play. Deciding where to work is a major decision and one that can impact nearly all aspects of a person’s life. That’s why every effort is made to make our associates’ experience at Great Southern a rewarding and satisfying one. We see firsthand the impact we can make on our associates’ lives even outside of work. We have the opportunity to share in the exciting experience of helping an associate purchase their first home through our employee discount loan program. Or, we see the smile of an associate who graduates with a degree thanks to our educational assistance program. We hear the squeal of an associate’s child as they go to their first Springfield Cardinals baseball game by attending a Great Southern family outing at the ballpark. We also see the sincere gratitude of an associate who has been helped in a crisis, like a tragic 24 fire, through our associate-funded assistance fund. While these experiences form a deep and invaluable connection with associates, the deepest connection must be formed in the workplace. Today, creating an engaging and satisfying workplace is crucial to attract and retain the best associates in the financial services business. The ever-increasing competition for quality employees and the emerging labor pool shrinkage demands it. How do we go about creating such a workplace at Great Southern? It starts with a vision, along with a strong resolve and belief to make the vision a reality. On every Great Southern associate’s desk or workstation is a plastic six-sided “Mission” cube. Each side of the cube displays an important message about the many facets of Great Southern’s cultural environment - how we work and grow together as a team; how we serve and treat our customers; how we support our communities; and how we must keep the interests of our shareholders in mind in everything “Team GS” keeps the Great Southern name prominent at a wide variety of community causes and events year-round. Members of the Team GS cycling club racked up more than 400 miles each in the National MS Society ‘MS 150’, Breast Cancer Foundation ‘Cycle for Life’, and the Tour de Cox. we do. The Company’s mission to build winning relationships with our customers, associates, shareholders and communities is boldly displayed on the cube as well as our core values of doing what’s right, teamwork, mutual respect and uncompromising ethical standards. One side of the “Mission” cube addresses our commitment to all Great Southern associates. We are committed to providing a fair and challenging workplace with competitive compensation and benefits. We want to provide a workplace that respects and empowers the individual, and encourages professional growth through training, feedback and career pathing. And, finally, we understand the importance of recognizing and rewarding outstanding performance. We believe these are the tenants to 25 creating an engaging and rewarding work environment. While these messages are displayed on an inanimate object, these beliefs are firmly held by management and are a part of every day life at Great Southern. A sign of our progress was being voted once again in 2007 as the “Best Place to Work” by readers of the Springfield News-Leader in its annual poll. What Great Southern associates bring to the workplace every day – their skills, talents and dedication – is not taken for granted. We continuously reinforce that each associate’s role is critical to the success of our Company. We also engage associates to know how the entire Company operates as a whole, and how their position fits into the overall operation and affects performance. Through “Great to Greater”, the Company’s five-year strategic initiative, associates learn where the Company is going and how we’re going to get there. Each associate is reminded to ask themselves “What role do I play?” again reinforcing that all 775 associates have a crucial role. All 775 associates moving together with the same directives and beliefs is a powerful force. As part of “Great to Greater” moving forward, a focus will be on developing our mid-level managers’ leadership and communication skills. Studies show that employees most often stay or leave their employer based on the type of relationship they have with their immediate supervisor. With a Company our size, mid-level managers are the vital link in personally connecting with all associates. This link is two-way: they communicate and ensure compliance with management directives from the top down and receive input and suggestions from front-line associates. Also, getting all mid-level managers in the same room routinely Best Company to Work For 3 2 9 1 In May 1923, the U.S. Attorney General declared it legal for women to wear trousers anywhere. Today at Great Southern, “Casual Day” takes on added significance as an expression of community service. Associates contributing their time and money to worthy causes choose days to “dress down” in Great Southern logo shirts and jeans as a show of company pride. y a d o t 26 peripheral vision The “Students Go to Work” program invites classes from area elementary schools to the Operations Center for an inside look at the banking business. Associate “teachers” break the group into rotating classes to provide one-on-one, hands-on training in teller functions, lending services and back office processing duties. Recognizing the outstanding support he received during his active duty tour, Customer Service Supervisor and Missouri National Guard Staff Sergeant Ezekiel Jump (right) joined Steve Vanderhoof of the Guard's Employer Support committee in presenting the Patriot Award to supervisor Vicki Adams - Operations. helps build relationships and improves communication across the organization. In conjunction with developing mid-level managers, the Company will introduce enhanced and measurable service standards to the Great Southern team. With the Company’s rapid growth and expansion, it is necessary to ensure that we are consistently delivering a quality customer experience that meets or exceeds customers’ (external and internal) expectations. Company-wide service standards will be implemented in every division and department throughout the Company. At Great Southern, we want all associates to reach their full potential as an employee, but also as a person. Training and development are essential ingredients to continued growth. The Company’s expert Training division offers comprehensive training programs that help associates develop professionally and personally. Associates can choose from a wide range of classes that address technical, interpersonal and practical skills development. Courses about time management, organizational skills and life goal-setting skills are but a few courses that assist in personal development, which ultimately helps them be better employees. Associates are also given the opportunity to grow through volunteer opportunities. Whether it’s working at a United Way Day of Caring event, serving on a non-profit organization board or volunteering at a local school, Great Southern strongly encourages associates to be good community citizens and get involved. Besides simply being the right thing to do, it gives associates the chance to enhance leadership skills, earn personal recognition, expand relationships and make a difference in someone’s life. The skills they enhance through volunteerism are also a great benefit to our organization. Sometimes it’s the “little” things that happen in the workplace that can make coming to work more satisfying and fun! Quarterly service anniversary luncheons were in full force in 2007. Associates who celebrated their service anniversary during a respective quarter were invited to have lunch with President Joe Turner and hear a fun and motivating presentation. In addition, attending the “Great to Greater” kick- off picnic, outings to local sporting events and the annual holiday party were all events that helped tie associates and the Company closer together. Periodically receiving surprise treats to celebrate holidays or simply as a thank you helped to create a fun and connected atmosphere. Daily graphics and messages on associates’ computer desktops, a brainchild of a dedicated associate with creative technical expertise, was also added in 2007 and created quite a buzz in the Company and proved to be a new effective communication channel. As you can see, Great Southern does make creating an engaging work environment a priority, whether it’s through enterprise-wide initiatives or through more personal connections. Our people are the key to our company’s success, and while sounding almost cliché, this statement will never lose its significance. In an age where most financial products and services are nearly commoditized, a fundamental differentiator between our Company and competitors boils down to the team of associates we have assembled and the level of quality they provide. 27 Directors and Executive Officers Directors of Great Southern Bancorp, Inc. and Great Southern Bank Back row Joseph W. Turner President and Chief Executive Officer Larry D. Frazier Board Member Retired – Hollister, MO William E. Barclay Board Member Retired – Springfield, MO Thomas J. Carlson Board Member Partner, Carlson Gardner, Inc. Mayor of Springfield, MO Front row Julie T. Brown Board Member Shareholder, Carnahan, Evans, Cantwell & Brown, P.C. William V. Turner Chairman of the Board Earl A. Steinert, Jr. Board Member Co-owner, EAS Investment Enterprises, Inc./CPA Executive Officers of Great Southern Bank Left to Right Steve Mitchem Senior Vice President and Chief Lending Officer Rex Copeland Senior Vice President and Chief Financial Officer/Treasurer Joe Turner President and Chief Executive Officer Bill Turner Chairman of the Board Lin Thomason Vice President and Director of Information Services Doug Marrs Vice President and Director of Operations/Secretary 28 Great Southern Leadership Team Left to right Kelly Polonus Director of Corporate Communications Kris Conley Managing Director of Travel Bryan Tiede Director of Risk Management Teresa Chasteen-Calhoun Director of Marketing Doug Marrs Director of Operations/Secretary Byron Robison Insurance Agency Manager Lin Thomason Director of Information Services Steve Mitchem Chief Lending Officer Brian Fogle Director of Community Development Barby Pohl Director of Retail Banking Debbie Flowers Director of Credit Risk Management Matt Snyder Director of Human Resources Rex Copeland Chief Financial Officer/Treasurer Shannon Thomason Director of Internal Audit and Compliance Officer Tammy Baurichter Controller Joe Turner President and Chief Executive Officer 29 exploring new dimensions in banking. 2007 Annual Report For Shareholders annual meeting The 19th Annual Meeting of Shareholders will be held at 10:00 a.m. on Wednesday, May 14, 2008, at the Great Southern Operations Center, 218 S. Glenstone, Springfield, Missouri. corporate profile corporate mission Great Southern Bancorp, Inc. (“GSBC” or the “Company”) is the holding company for Great Southern Bank (the “Bank”), which converted from a mutual to a stock company in December 1989. In June 1998, the Bank converted from a federal savings bank charter to a Missouri chartered trust company. Great Southern was founded in 1923 with a $5,000 investment, four employees and 936 members, and has grown to over $2.4 billion in assets, with more than 775 employees and in excess of 177,000 customers. The Bank is headquartered in Springfield, Mo. and operates 39 banking centers in 16 counties throughout Missouri, and loan production offices in St. Louis, Mo., Columbia, Mo., Overland Park, Kan. and Rogers, Ark. A community-oriented company, GSBC offers a full range of banking, lending, investment, insurance and travel services. The Company’s mission is to build winning relationships with our customers, associates, shareholders and communities. We carry out our mission through our core values of teamwork, mutual respect, doing what’s right and uncompromising ethical standards. We are deeply committed to our relationships with our four constituencies. We build winning relationships with our customers and help them make their lives better and easier with our products and services. We build winning relationships with our associates, who have chosen our company to share their skills and talents and who deserve the opportunity to reach their full potential. We build winning relationships with our shareholders, who have entrusted us with their wealth and financial future, and with our communities, upon which our company’s strength, prosperity and future rest. stock information The Company’s Common Stock is listed on The NASDAQ Global Select Market under the symbol “GSBC”. As of December 31, 2007, there were 13,400,197 total shares outstanding and approximately 2,650 shareholders of record. The last sale price of the Company’s Common Stock on December 31, 2007 was $21.96. HIGH/LOW STOCK PRICE First Quarter Second Quarter Third Quarter Fourth Quarter DIVIDEND DECLARATIONS First Quarter Second Quarter Third Quarter Fourth Quarter Year Ended December 31, 2007 Low High $27.30 $30.40 25.96 30.09 23.67 28.00 21.10 26.45 Year Ended December 31, 2007 $.160 .170 .170 .180 Year Ended December 31, 2006 Low High $27.15 $30.04 25.05 31.00 26.10 30.65 26.58 32.14 Year Ended December 31, 2006 $.140 .150 .150 .160 3c2 general information CORPORATE HEADQUARTERS 1451 E. Battlefield Springfield, MO 65804 1 (800) 749-7113 MAILING ADDRESS P.O. Box 9009, Springfield, MO 65808 DIVIDEND REINVESTMENT For details on the automatic reinvestment of dividends in common stock of the Company call: 1 (800) 725-6651 or write: Great Southern Bancorp, Inc. Shareholder Relations P.O. Box 9009 Springfield, MO 65808 FORM 10-K The Annual Report on Form 10-K filed with the Securities and Exchange Commission may be obtained from the Company’s Web site at www.greatsouthernbank.com or without charge by request to: Rex Copeland Treasurer Great Southern Bancorp, Inc. P.O. Box 9009, Springfield, MO 65808 INVESTOR RELATIONS Teresa Chasteen-Calhoun or Kelly Polonus Great Southern Bank P.O. Box 9009, Springfield, MO 65808 AUDITORS BKD, LLP Hammons Tower P.O. Box 1190 Springfield, MO 65801 LEGAL COUNSEL Silver, Freedman & Taff, L.L.P. 3299 K St., NW, Suite 100 Washington, DC 20007 Carnahan, Evans, Cantwell & Brown P.O. Box 10009 Springfield, MO 65808 TRANSFER AGENT AND REGISTRAR Registrar & Transfer Company 10 Commerce Drive Cranford, NJ 07016 2007 Financial Information Contents 2 Letter to Our Shareholders. 5 Selected Consolidated Financial Data. 9 Management’s Discussion and Analysis of Financial Condition and Results of Operation. 44 Report of Independent Registered Public Accounting Firm. 45 Consolidated Statements of Financial Condition. 47 Consolidated Statements of Income. 48 Consolidated Statements of Stockholders’ Equity. 50 Consolidated Statements of Cash Flows. 53 Notes to Consolidated Financial Statements. to our shareholders We are pleased to present our 2007 “Dimensions in Banking” Annual Report. This year’s report gives you the opportunity to view Great Southern from a multi-dimensional level – in how we serve our customers, how we create an enriching environment for our associates, how we partner with our communities, and how we create shareholder value. After 85 years of being in the financial services business, we know that you cannot form winning relationships by having a “one-size-fits-all” mentality. This perspective has guided our success through the years especially in how we serve our customers - the reason we exist. We recognize there are many aspects to consider in building long- lasting relationships. First, we must understand that our customers’ needs are unique and ever-changing. To make life better and easier for our customers, we need to bring the full power of our Company to them. With that power, we can bring banking, investment, insurance, and travel services when, where and how our customers prefer. We also must have a relentless focus on providing a superior customer experience and help them solve life’s everyday challenges and problems. Technology has enabled our Company to make banking easier and more convenient, but we will never lose sight that the foundation of a meaningful banking relationship is the connection and inherent trust between people. And, as we do a good job of serving our customers, our shareholders will ultimately benefit as our Company’s value grows over the long-term. As you look through this report, you’ll see that many positive things happened in our Company in 2007, even with the expected and unexpected events that transpired in the banking industry and the general economy. We knew that 2007 would be a challenging year in the banking sector, but few in the industry or on Wall Street predicted how tumultuous and turbulent the year would become. Continued negative reports related to the subprime credit crisis and subsequent credit crunch, liquidity pressures, rapid interest rate changes, increases in delinquent and non-performing loans, and a generally deteriorating economy have Joseph W. Turner President and Chief Executive Officer William V. Turner Chairman of the Board * Data Source: FDIC Website Data as of: June 30, 2007. ** The graph above compares the cumulative total stockholder return on GSBC Common Stock to the cumulative total returns of the Nasdaq U.S. Stock Index and the Nasdaq Financial Stocks Index for the period from December 31, 2002 through December 31, 2007. The graph assumes that $100 was invested in GSBC Common Stock on December 31, 2002 and that all dividends were reinvested. † Figure stated is as if the Company was publicly traded for all of the fiscal year 1990 (conversion was in Dec. 1989). 2 2 all worked together to cause the financial services sector to quickly fall out of favor with the investing community. Investor concerns related to rising loan defaults in subprime lending and other areas related to real estate led to significant decreases in the market valuations of the vast majority of major U.S. banks. It is important to note that Great Southern does not originate or hold subprime loans. However, we do, as a lending institution, have some exposure to housing markets which have weakened in some of our areas of operation. In 2007, the total return - the change in stock price plus dividends - of the S&P Bank Composite Index fell 30%, a historic decrease. Great Southern’s total return in 2007 decreased 24%, also a disappointing performance. Despite the disappointment in our stock price, our Company had a number of strong performance areas in 2007 with net income just under our record-setting 2006 net income results. Earnings for the twelve months ended Dec. 31, 2007, were $2.15 per diluted share ($29.3 million). Total assets grew 8.5% to $2.43 billion. The Company’s return on average assets was 1.25%; return on average equity was 15.78%; the efficiency ratio was 51.26%; and the net interest margin was 3.24%. Stockholders’ equity increased $14.3 million from year-end 2006 to $189.9 million (7.8% of total assets) with an equivalent book value of $14.17 per share. The Company’s capital position continued to be classified as well-capitalized with risk-based capital ratios at higher levels than in 2006 and ratios in line with our peer group. In 2007, the Company repurchased 342,377 shares of stock at an average price of $25.57. In 2007, net loans increased $141.1 million or 8.5% from 2006. As expected, loan growth slowed somewhat compared to growth rates in the last five-year period. We experienced gains in all loan categories with the exception of the commercial real estate category, which had a modest decline. Our loan production offices (LPO) continue to grow and provide the intended geographic diversity in our loan portfolio. In the last five years, the Company opened LPOs in the Kansas City and St. Louis metro areas, in the Northwest Arkansas region, and in Columbia, Mo., covering the Central Missouri region. These areas now make up a much larger percentage of our loan portfolio than in years past. The Greater Springfield and Branson markets continue to have the largest loan balance concentrations at 42% of the total loan portfolio, and the LPOs have an aggregate concentration of 34%. Of the remaining portfolio balances, 12% of loan balances are located in other Missouri and Kansas regions outside of the Company’s footprint, and another 12% reside in other states. During 2007, non-performing assets increased $30.9 million to $55.9 million, or 2.30% of total assets. The increase was due primarily to general market conditions, and more specifically, housing supply, absorption rates, and unique circumstances related to individual borrowers and projects. We discuss non-performing assets in detail in the “Management’s Discussion and Analysis” section of our Annual Report. In a very competitive marketplace, total deposit balances (excluding brokered and national certificates of deposit) increased $110 million, or 12%, from Dec. 31, 2006. Interest- bearing demand and savings account average balances grew by 14% and time deposits rose by 9% over 2006. Demand deposits fell nearly 10% primarily due to declining balances in our Correspondent Banking division as more banks have taken advantage of electronic settlement. *All per share amounts have been adjusted to reflect stock splits. The Company converted to a calendar year in December 1998; therefore prior years’ net income numbers will reflect a June 30 fiscal year end. 3 3 to our shareholders Our travel, insurance and investment divisions posted an 8% increase in revenue from 2006. The insurance and investment divisions saw increased net income in 2007 versus 2006. The travel division’s first quarter 2007 acquisition of The Travel Company in St. Louis contributed significantly to the increase in revenue. The travel division’s net income declined primarily due to expenses associated with the acquisition. In 2007, we began executing a corporate-wide strategic initiative - “Great to Greater.” This plan serves as a roadmap to achieve various Company goals, including loan and deposit growth, delivery channel expansion, efficiency targets and workplace enhancement strategies. In light of this initiative, the Company expanded its ability to reach and serve more customers in 2007. As mentioned previously, our travel company acquired a St. Louis-based travel agency, marking Great Southern Travel’s first physical presence in St. Louis. This well- established agency is located in close proximity to our LPO in Creve Coeur, Mo., furthering our brand recognition in the market. In keeping with our strategy to open two banking centers a year, the Company opened its 38th banking center located on West Republic Road in Springfield, a fast- growing area of the city. In the first quarter of 2008, we opened the third banking center in Branson, Mo., a growing region that Great Southern has served for decades. Also, to promote deposit generation, Corporate Services representatives have been placed in the Missouri LPOs to develop new and expand existing relationships. Representatives meet with existing commercial clients, as well as new prospects, and work to develop the relationship by providing depository solutions. The Company’s Deposit Direct product has been heavily utilized in this effort as it breaks down geographic barriers and allows clients to make non-cash deposits to their bank account from the convenience of their computer desktop. In the third quarter, the Company launched a new and improved Web site which included a new comprehensive investor relations site. The launch of this new site was a historical company milestone as a new retail online channel was made available to open depository accounts. This new channel allows us to broaden our marketing reach significantly in the Internet space and compete for deposits on a larger scale. We have always fared well when stacked up against local and national peers, and 2007 was no exception. According to an American Banker ranking, Great Southern ranked 75th on efficiency ratio among the largest 500 U. S. bank holding companies for the third quarter 2007. On a regional level, the Kansas City Star ranked Great Southern 25th on its “Star 50” list, which ranks the performance of publicly traded companies whose headquarters are located in Missouri and Kansas. Locally, we continued to distance ourselves from the rest of the pack in market share in our home base of operations - Greene and Christian counties. We increased deposit market share from 21.90% in 2006 to 22.39% in 2007, based on June 30, 2007, FDIC data. The closest competitor had market share of 9.95%. In addition, for the fifth consecutive year, Great Southern was named “Best Bank” in the Springfield News-Leader’s Best of the Ozarks readers’ poll. Readers also voted Great Southern as the Best Company to Work For, Best Mortgage Company, Best Travel Agency, and Best Investment Services/Brokerage. As the area’s leading financial institution, we understand the importance of giving back to the communities we serve. Our Company can only be as strong as the communities we serve and we view our community support as much more than a corporate obligation. It is simply the right thing to do. In 2007, we invested well over $300,000 in charitable contributions and sponsorships. Hundreds of volunteer hours were also generously given by our associates. Looking ahead, we anticipate that 2008 will be another challenging year. We are in the middle of a difficult credit cycle, and a certain amount of negative sentiment is expected. However, there is optimism that the industry will fare well once we are through this cycle. It will be a tough ride, but most banks will weather the storm and be ready for the recovery period. Unlike other previous credit cycles, the banking industry as a whole entered this difficult operating environment well-capitalized Readers of the Springfield News-Leader named Great Southern Best Bank, Best Company to Work For, Best Mortgage Company, Best Travel Agency and Best Investment Services/Brokerage firm in the 2007 “Best of the Ozarks” poll. 44 following years of record earnings. No one can speculate with any certainty of when this downturn will end, but we can say with certainty that we will continue to operate our Company with the same sound business principles and practices that have made us successful for the past 85 years. As always, we will maintain our focus on a strong capital position and prudent and appropriate credit and risk practices. We are always mindful, in good and difficult times, that we have the opportunity to enhance and expand our business, one customer at a time. In 2008, based on the current market conditions, we anticipate that loan and deposit growth will be relatively moderate for the year. We anticipate that some of our loan customers could face difficult times ahead, especially those in housing- related industries. In these circumstances, we will work diligently with our customers and devise an action plan to work through whatever credit issue is at hand. As a result of the Federal Reserve’s interest rate cuts in the first quarter of 2008, we believe that our net interest income will likely show improvement during the year as compared to 2007. We discuss the effects of the current interest rate environment on our net interest income and margin in detail in the “Management’s Discussion and Analysis” section of our Annual Report. In 2008, we will continue executing our “Great to Greater” strategic initiative. We are committed to our long-term growth strategy and have an intense focus on areas that can make the greatest impact. We’ll focus on further integrating our entire Company so that our customers can access any line of business with ease and simplicity. We’ll work to differentiate ourselves even more from the competition by enhancing the customer experience through unparalleled responsive and quality service. We’ll also make sure we are working as smart and efficiently as possible as we review our internal processes and procedures. In addition, new initiatives are being developed to improve our work culture, ensuring that we retain and hire talented and knowledgeable associates, the key to our success. In 2008, the Company will make its first retail banking entry into the St. Louis market with the opening of a new banking center in Creve Coeur, Mo. Construction is expected to begin in the second quarter. A second location in the Kansas City metropolitan area is also under review and a site is likely to be announced during the year. In addition, a LPO in a new metropolitan market is currently under consideration. We anticipate developing our retail online channel even further, motivated by what our younger generation of customers expect and demand. To make banking with Great Southern even more convenient, a Mobile Banking product will be launched so that customers can keep track of their banking from the convenience of their cell phone. As you can see, 2008 will be challenging, yet exciting! Our confidence in how we will fare in 2008 and beyond is grounded in our S E L E C T E D C O N S O L I D AT E D F I N A N C I A L D ATA Summary Statement of Condition Information: Assets Loans receivable, net Allowance for loan losses Available-for-sale securities Held-to-maturity securities Foreclosed assets held for sale, net Deposits Total borrowings Stockholders' equity (retained earnings substantially restricted) Average loans receivable Average total assets Average deposits Average stockholders' equity Number of deposit accounts Number of full service offices 2007 2006 2004 2003 December 31, 2005 (Dollars in thousands) $2,431,732 1,820,111 25,459 425,028 1,420 20,399 1,763,146 461,517 $2,240,308 1,674,618 26,258 344,192 1,470 4,768 1,703,804 325,900 $2,081,155 1,514,170 24,549 369,316 1,510 595 1,550,253 355,052 $1,851,214 1,334,508 23,489 355,104 1,545 2,035 1,298,723 401,625 $1,544,052 1,146,571 20,844 259,600 1,570 9,034 1,138,625 276,584 189,871 1,774,253 2,340,443 1,784,060 185,725 95,908 38 175,578 1,653,162 2,179,192 1,646,370 165,794 91,470 37 152,802 1,458,438 1,987,166 1,442,964 150,029 85,853 35 140,837 1,263,281 1,704,703 1,223,895 130,600 76,769 31 121,679 1,106,714 1,437,869 1,057,798 113,822 74,822 29 The tables on pages 5, 6, and 7 set forth selected consolidated financial information and other financial data of the Company.The selected balance sheet and statement of income data, insofar as they relate to the years ended December 31, 2007, 2006, 2005, 2004 and 2003, are derived from our consolidated financial statements, which have been audited by BKD, LLP. The amounts for 2004 and 2003 are restated amounts. See Item 6,“Selected Consolidated Financial Data - Restatement of Previously Issued Consolidated Financial Statements,” Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 8, "Financial Statements and Supplementary Information" in the Company’s Annual Report on Form 10-K. Results for past periods are not necessarily indicative of results that may be expected for any future period. All share and per share amounts have been adjusted for the two- for-one stock split in the form of a stock dividend declared in May 2004. 5 5 to our shareholders belief in our team of associates and their ability to get the job done for our customers. We are humbled to work alongside this talented group of people. They come to work every day motivated to make life better and easier for our customers, and to show the communities we serve that we are an active, vibrant and community- minded company. Our associates demonstrate day-after-day that the “Great to Greater” initiative is more than just a strategic roadmap in their mind. They have shown us that they believe it’s an attitude. They ask themselves “What can I do today to take our Company from “Great to Greater?” We thank each and every associate for their hard work and their ability to see and understand the many dimensions we must consider when serving our customers, communities, shareholders and each other. We would also like to thank our customers, for they are the reason we exist. We know they place their trust in us expecting us to provide the solutions they need with the convenience, security and peace-of- mind they desire. And finally, we thank our shareholders for your investment and show of confidence in our Company. We appreciate your continued long- term support. Our enduring commitment to provide a superior long-term return on your investment, and to keep your interests in mind as we make daily decisions will never falter. As always, we welcome your thoughts and suggestions. We hope you enjoy looking through the pages of this Annual Report and learning about the many dimensions of Great Southern. Sincerely, William V. Turner Joseph W. Turner S E L E C T E D C O N S O L I D AT E D F I N A N C I A L D ATA 2007 For the Year Ended December 31, 2005 (Dollars in thousands) 2006 2004 2003 $142,719 21,152 163,871 $133,094 16,987 150,081 $98,129 16,366 114,495 $74,162 12,897 87,059 $66,739 9,440 76,179 76,232 6,964 7,356 1,914 92,466 71,405 5,475 65,733 8,138 5,648 1,335 80,854 69,227 5,450 42,269 7,873 4,969 986 56,097 58,398 4,025 28,952 6,091 1,580 610 37,233 49,826 4,800 25,147 5,400 588 594 31,729 44,450 4,800 65,930 63,777 54,373 45,026 39,650 9,933 15,153 1,037 9,166 14,611 944 8,726 13,309 983 7,793 12,726 992 5,859 11,214 2,187 13 (1) 85 (373) (1,140) 962 --- 1,567 (734) 1,430 --- 872 1,632 --- --- 1,781 29,371 30,161 7,927 2,230 1,473 1,446 879 1,363 1,247 608 1,498 --- --- 1,847 29,632 28,285 7,645 2,178 876 1,201 931 1,387 1,127 119 --- (6,600) 3,408 952 21,559 25,355 7,589 1,954 883 1,025 903 1,068 1,410 268 --- 1,136 8,881 1,282 33,309 22,007 7,247 1,784 761 794 811 903 1,309 485 795 --- 771 --- (3,089) 7,352 1,165 26,254 18,739 6,335 1,691 683 735 855 797 1,078 1,939 --- 4,325 51,659 43,642 14,343 $ 29,299 783 4,275 48,807 44,602 13,859 $ 30,743 --- 3,743 44,198 31,734 9,063 $ 22,671 --- 3,160 39,261 39,074 12,675 $ 26,399 --- 2,901 35,753 30,151 9,856 $20,295 Summary Income Statement Information: Interest income: Loans Investment securities and other Interest expense: Deposits Federal Home Loan Bank advances Short-term borrowings Subordinated debentures issued to capital trust Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income: Commissions Service charges and ATM fees Net realized gains on sales of loans Net realized gains (losses) on sales of available-for-sale securities Realized impairment of available-for-sale securities Late charges and fees on loans Change in interest rate swap fair value net of change in hedged deposit fair value Change in interest rate swap fair value Interest rate swap net settlements Other income Noninterest expense: Salaries and employee benefits Net occupancy expense Postage Insurance Advertising Office supplies and printing Telephone Legal, audit and other professional fees Expense on foreclosed assets Write-off of trust preferred securities issuance costs Other operating expenses Income before income taxes Provision for income taxes Net income 6 6 S E L E C T E D C O N S O L I D AT E D F I N A N C I A L D ATA Per Common Share Data: Basic earnings per common share Diluted earnings per common share Cash dividends declared Book value Average shares outstanding Year-end actual shares outstanding Year-end fully diluted shares outstanding Earnings Performance Ratios: Return on average assets(1) Return on average stockholders' equity(2) Non-interest income to average total assets Non-interest expense to average total assets Average interest rate spread(3) Year-end interest rate spread Net interest margin(4) Efficiency ratio(5) Net overhead ratio(6) Common dividend pay-out ratio Asset Quality Ratios: Allowance for loan losses/year-end loans Non-performing assets/year-end loans and foreclosed assets Allowance for loan losses/non-performing loans Net charge-offs/average loans Gross non-performing assets/year-end assets Non-performing loans/year-end loans Balance Sheet Ratios: Loans to deposits Average interest-earning assets as a percentage At or For the Year Ended December 31, 2005 (Dollars in thousands, except per share data) 2006 2004 $ 2.24 2.22 0.60 12.84 13,697 13,677 13,825 1.41% 18.54 1.36 2.23 2.83 2.95 3.39 49.37 0.88 27.03 $1.65 1.63 0.52 11.13 13,713 13,723 13,922 1.14% 15.11 1.08 2.21 2.73 3.05 3.13 55.28 1.14 31.90 $1.93 1.89 0.44 10.28 13,702 13,699 13,995 1.55% 20.21 1.95 2.27 2.81 2.63 3.10 47.23 0.35 23.28 2007 $2.16 2.15 0.68 14.17 13,566 13,400 13,654 1.25% 15.78 1.25 2.18 2.71 3.00 3.24 51.26 0.95 31.63 2003 $1.48 1.46 0.36 8.88 13,707 13,703 13,887 1.41% 17.83 1.83 2.35 2.98 2.88 3.27 50.57 0.66 24.32 1.38% 1.54% 1.59% 1.73% 1.78% 2.99 71.77 0.35 2.30 1.92 1.46 129.71 0.23 1.12 1.19 1.09 151.44 0.20 0.81 1.05 0.48 524.43 0.17 0.35 0.33 1.40 282.02 0.47 1.06 0.63 103.23% 98.29% 97.67% 102.76% 100.70% of average interest-bearing liabilities 112.71 114.26 113.05 112.56 112.30 Capital Ratios: Average stockholders' equity to average assets Year-end tangible stockholders' equity to assets Great Southern Bank: Tier 1 risk-based capital ratio Total risk-based capital ratio Tier 1 leverage ratio Ratio of Earnings to Fixed Charges:(7) Including deposit interest Excluding deposit interest 7.9% 7.7 10.4 11.7 9.0 1.47x 3.69x 7.6% 7.8 10.2 11.5 8.9 7.6% 7.2 10.1 11.3 8.3 7.7% 7.6 10.7 11.9 8.5 1.57x 3.29x 2.05x 5.72x 1.95x 5.58x 7.9% 7.9 11.0 12.3 9.0 2.18x 6.45x (1) Net income divided by average total assets. (2) Net income divided by average stockholders’ equity. (3) Yield on average interest- earning assets less rate on average interest-bearing liabilities. (4) Net interest income divided by average interest-earning assets. (5) Non-interest expense divided by the sum of net interest income plus non- interest income. (6) Non-interest expense less non-interest income divided by average total assets. In computing the ratio of earnings to fixed charges: (a) earnings have been based on income before (7) income taxes and fixed charges, and (b) fixed charges consist of interest and amortization of debt discount and expense including amounts capitalized and the estimated interest portion of rents. 77 RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS On January 23, 2006, the Company announced that it would restate certain of its historical financial statements for the quarters ended March 31, 2005, June 30, 2005, and September 30, 2005, and years ended December 31, 2004, 2003, 2002, and 2001. The restatement of this financial information relates to the correction of prior accounting errors relating to certain interest rate swaps associated with brokered certificates of deposit (CDs). The Company has entered into interest rate swap agreements to hedge the interest rate risk inherent in certain of its CDs. From the inception of the hedging program in 2000, the Company has applied a method of fair value hedge accounting under Statement of Financial Accounting Standards (SFAS) 133 to account for the CD swap transactions that allowed the Company to assume the effectiveness of such transactions (the so-called "short-cut" method). The Company concluded that the CD swap transactions did not qualify for this method in prior periods because the method to pay the related CD broker placement fee was determined, in retrospect, to have caused the swap to not have a fair value of zero at inception (which is required under SFAS 133 to qualify for the "short-cut" method). Although the impact of applying the alternative "long-haul" method of documentation using SFAS 133 and the results under the "short-cut" method are believed to result in no significant difference in the hedge effectiveness of the majority of these swaps, and management believes these interest rate swaps have been effective as economic hedges, hedge accounting under SFAS 133 is not allowed for the affected periods because the proper hedge documentation was not in place at the inception of the hedge. The Company is charged a fee in connection with its acquisition of brokered CDs. For those CDs that were part of the Company's accounting restatement for interest rate swaps in 2005, this fee was not paid separately by the Company to the CD broker, but rather was built in as part of the overall rate on the interest rate swap. In connection with the restatement, the Company determined that this broker fee should be accounted for separately as a prepaid fee at the origination of the brokered CD and amortized into interest expense over the maturity period of the brokered CD. If the Company calls the brokered CD (at par) prior to maturity, the remaining unamortized broker fee is expensed at that time. The remaining unamortized prepaid broker fees related to these brokered CDs (that were subject to the restatement) at December 31, 2007 and 2006, were $3.5 million and $4.7 million, respectively. After December 31, 2005, and for any brokered CDs that do not have a corresponding interest rate swap, the broker fee may be paid separately by the Company to the CD broker, in which case the fee would be amortized into interest expense over the maturity period of the brokered CD. In any instances where the fee was not paid separately by the Company to the CD broker, but rather was built in as part of the overall rate on the interest rate swap, the Company must include this in its assessment of the transaction's qualification for hedge accounting. As a result, the financial statements for all affected periods through December 31, 2005, reflect a cumulative charge of approximately $3.4 million (net of income taxes) to account for the interest rate swaps referred to above as if hedge accounting was never applicable to them. In addition, the fiscal year 2005 financial statements include a charge of approximately $5.1 million (net of income taxes), to reflect the same treatment. Fair value hedge accounting allows a company to record the change in fair value of the hedged item (in this case, brokered CDs) as an adjustment to income by offsetting the fair value adjustment on the related interest rate swap. Eliminating the application of fair value hedge accounting reverses the fair value adjustments that were made to the brokered CDs. Therefore, while the interest rate swap is recorded on the balance sheet at its fair value, the related hedged items, the brokered CDs, are required to be carried at par. Additionally, the net cash settlement payments received during each of the above periods for these interest rate swaps were reclassified from interest expense on brokered CDs to noninterest income. The effects of the change in accounting for certain interest rate swaps on the consolidated balance sheet as of, and income statement for the periods indicated previously, are detailed in the Company's December 31, 2005 Annual Report on Form 10-K. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Forward-looking Statements When used in this Annual Report 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," "intends" 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, the risks of lending and investing activities, including changes in the level and direction of loan delinquencies and write-offs and changes in estimates of the adequacy of the allowance for loan losses, the Company's ability to access cost-effective funding, fluctuations in real estate values and both residential and commercial real estate market conditions, demand for loans and deposits 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. Critical Accounting Policies, Judgments and Estimates The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States and general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates. The Company considers that the determination of the allowance for loan losses involves a higher degree of judgment and complexity than its other significant accounting policies. The allowance for loan losses is calculated with the objective of maintaining an allowance level believed by management to be sufficient to absorb estimated loan losses. Management's determination of the adequacy of the allowance is based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective as it requires material estimates, including, among others, expected default probabilities, loss once loans default, expected commitment usage, the amounts and timing of expected future cash flows on impaired loans, value of collateral, estimated losses, and general amounts for historical loss experience. The process also considers economic conditions, uncertainties in estimating losses and inherent risks in the loan portfolio. All of these factors may be susceptible to significant change. To the extent actual outcomes differ from management estimates, additional provisions for loan losses may be required that would adversely impact earnings in future periods. Additional discussion of the allowance for loan losses is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2007, under the section titled "Item 1. Business - Allowances for Losses on Loans and Foreclosed Assets." Judgments and assumptions used by management in the past have resulted in an overall allowance for loan losses that has been sufficient to absorb estimated loan losses. Inherent in this process is the evaluation of individual significant credit relationships. From time to time certain credit relationships may deteriorate due to payment performance, cash flow of the borrower, value of collateral, or other factors. In these instances, management may have to revise its loss estimates and assumptions for these specific credits due to changing circumstances. In some cases, additional losses may be realized; in other instances, the factors that led to the deterioration may improve or the credit may be refinanced elsewhere and allocated allowances may be released from the particular credit. For the periods included in these financial statements, management's overall methodology for evaluating the allowance for loan losses has not changed significantly. In addition, the company considers that the determination of the valuations of foreclosed assets held for sale involves a high degree of judgment and complexity. The carrying value of foreclosed assets reflects management’s best estimate of the amount to be realized from the sales of the assets. While the estimate is generally based on a valuation by an independent appraiser or recent sales of similar properties, the amount that the Company realizes from the sales of the assets could differ materially in the near term from the carrying value reflected in these financial statements, resulting in losses that could adversely impact earnings in future periods. 9 General The profitability of the Company and, more specifically, the profitability of its primary subsidiary, Great Southern 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 the interest it pays on interest-bearing liabilities, 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. In the year ended December 31, 2007, the Company's net loans increased $141.4 million, or 8.5%. As loan demand is affected by a variety of factors, including general economic conditions, and because of the competition we face, we cannot be assured that our loan growth will match or exceed the level of increases achieved in prior years. If economic conditions do not deteriorate, we believe that we are well positioned to continue to originate a substantial amount of loans in our Southwest Missouri market as well as our loan production markets of St. Louis, Kansas City, Central Missouri and Northwest Arkansas. In addition, we may consider other markets in which to establish loan production offices. In the year ended December 31, 2007, the disbursed portion of residential and commercial construction loan balances increased $59 million. Based upon the current lending environment and economic conditions, growth in our loan portfolio may be limited in 2008 to an amount that could be below our average of 11% over the last five years. In addition, the level of non-performing loans and foreclosed assets may affect our net interest income and net income. While the Company has not historically had an overall high level of charge-offs on non-performing loans, the Company does not accrue interest income on these loans and does not recognize interest income until the loan is repaid or interest payments have been made for a period of time sufficient to provide evidence of performance on the loan. Generally, the higher the level of non-performing assets, the greater the negative impact on interest income and net income. Loan growth continued in our Loan Production Offices (LPO). Many of these loans originated by our LPOs are construction loans where the customer has yet to draw the full line. In the year ended December 31, 2007, the Overland Park, Kansas LPO originated loans totaling $77.7 million with outstanding loan balances of $184.5 million at December 31, 2007. In the year ended December 31, 2007, the Rogers, Arkansas LPO originated loans totaling $130.8 million with outstanding loan balances of $173.7 million at December 31, 2007. In the year ended December 31, 2007, the St. Louis LPO originated loans totaling $160.4 million with outstanding loan balances of $251.5 million at December 31, 2007. The Columbia LPO, which began operating in March 2006 and serves the Columbia, Jefferson City, and Lake of the Ozarks, Mo., region, originated $47.9 million of loans with outstanding loan balances of $58.5 million at December 31, 2007. The Company attracts deposit accounts through the Bank's retail branch network, correspondent banking and corporate services areas, and brokered deposits. The Company then utilizes these deposit funds, along with FHLBank advances and other borrowings, to meet loan demand. In the year ended December 31, 2007, total deposit balances increased $59.3 million. Of this total increase, interest-bearing transaction accounts increased $101.0 million and retail certificates of deposit increased $25.2 million. Partially offsetting the increases in these deposit categories, non-interest-bearing checking accounts decreased $39.0 million. As the generation of increased net interest income is critical to the growth of Great Southern's earnings, the continued ability to attract deposits or generate other funding sources is very important to successful loan growth. There is a high level of competition for deposits in our markets. While it is our goal to gain checking account and certificate of deposit market share in our branch footprint, we cannot be assured of this in future periods. During the year ended December 31, 2007, our interest-bearing checking account balances have continued to increase; however, our non-interest-bearing checking account balances have decreased in this same time period. Non-interest-bearing checking accounts have decreased primarily as a result of lower balances being kept in correspondent bank customers' accounts. These lower balances are due to the effects of the correspondent customers clearing checks through other avenues using electronic presentment, thus requiring lower compensating balances. If this decrease in non-interest-bearing checking account balances continues, it could negatively impact our net interest income. In the year ended December 31, 2007, brokered deposit balances decreased $33.6 million. As these balances matured, we elected to replace these funds with the retail deposits noted here and supplemented this with additional FHLBank advances. Our ability to fund growth in future periods may also be dependent on our ability to continue to access brokered deposits and FHLBank advances. In times when our loan demand has outpaced our generation of new deposits, we have utilized brokered deposits and FHLBank advances to fund these loans. These funding sources have been attractive to us because we can create variable rate funding which more closely matches the variable rate nature of much of our loan portfolio. While we do not currently anticipate that our ability to access these sources will be reduced or eliminated in future periods, if this should happen, the limitation on our ability to fund additional loans would adversely affect our business, financial condition and results of operations. Our net interest income may be affected positively or negatively by market interest rate changes. A large portion of our loan portfolio is tied to the "prime" rate and adjusts immediately when this rate adjusts. We also have a large portion of our liabilities that will reprice with changes to the federal funds rate or the three-month LIBOR rate. We monitor our sensitivity to interest rate changes 10 on an ongoing basis (see “Quantitative and Qualitative Disclosures About Market Risk"). While we currently believe that neither increases nor decreases in market interest rates will materially adversely impact our net interest income, circumstances could change which may alter that outlook. Ongoing changes in the level and shape of the interest rate yield curve pose challenges for interest rate risk management. Beginning in the second half of 2004 and through September 30, 2006, the Board of Governors of the Federal Reserve System (the "FRB") increased short-term interest rates through steady increases to the Federal Funds rate. Other short-term rates, such as LIBOR and short-term U.S. Treasury rates, increased in conjunction with these increases by the FRB. By September 30, 2006, the FRB had raised the Federal Funds rates by 4.25% (from 1.00% in June 2004) and other short-term rates rose by corresponding amounts. However, there was not a parallel shift in the yield curve; intermediate and long-term interest rates did not increase at a corresponding pace. This caused the shape of the interest rate yield curve to become much flatter, which creates different issues for interest rate risk management. On September 18, 2007, the FRB decreased the Federal Funds rate by 50 basis points and many market interest rates began to fall in the following weeks. In the months following September 2007, the FRB has reduced the Federal Funds rate by an additional 175 basis points. The Federal Funds rate now stands at 3.00%. In addition, during 2006 and 2007, Great Southern's net interest margin was negatively affected by certain characteristics of some of its loans, deposit mix, loan and deposit pricing by competitors, and timing of interest rate increases by the FRB as compared to interest rate changes in the financial markets. For the years ended December 31, 2007 and 2006, interest income was reduced $1.6 million and $695,000, respectively, due to the reversal of accrued interest on loans which were added to non-performing status during 2007 and 2006. This reduced net interest income and net interest margin. Also, for the year ended December 31, 2007, the average balance of investment securities increased by approximately $44 million due to the purchase of securities to pledge against increased public funds deposits and customer repurchase agreements. While we earned a positive spread on these securities, it was much smaller than our overall net interest spread, having the effect of increasing net interest income but decreasing net interest margin. Generally, the flattening interest rate yield curve hurt Great Southern's ability to reinvest proceeds from loan and investment repayments at higher rates. In 2006 and the first nine months of 2007, the Company's cost of funds increased faster than its yield on loans and investments. This trend moderated beginning in the third quarter of 2007 as market interest rates started moving lower and the FRB cut the Federal Funds rate beginning in September 2007 by a total of 225 basis points to date. Prior to this downward trend, Great Southern had increased rates on checking, money market and retail certificate accounts in order to remain competitive, while not leading the market. With the decreases in the Federal Funds rate, Great Southern has lowered rates paid on deposits while trying to remain competitive in the market. Great Southern's deposit mix has also led to a relatively increased cost of funds. The Company has significant balances in high-dollar money market and premium NOW accounts, the owners of which are very rate sensitive and compare these products to other bank and non-bank products available by competing financial services companies. Another factor that negatively impacted net interest income in the latter portion of 2007, was the increase in LIBOR interest rates compared to Federal Funds rates in the last half of 2007 as a result of credit and liquidity concerns in financial markets. These LIBOR interest rates were elevated approximately 30-70 basis points compared to historical averages versus the stated Federal Funds rate. The Company has interest rate swaps and other borrowings that are indexed to LIBOR, thereby causing increased funding costs. These higher LIBOR interest rates began to decline to more normal levels during the first two weeks of January 2008. Additionally, recent FRB interest rate cuts have impacted net interest income. Generally, a rate cut by the FRB would have an anticipated immediate negative impact on net interest income due to the large total balance of loans that are tied to the "prime rate of interest" which generally adjust immediately as Fed Funds adjust. This negative impact is expected to be offset over the following 60- to 120-day period, and subsequently is expected to have a positive impact, as the Company's interest rates on deposits, borrowings and interest rate swaps should also reduce as a result of changes in interest rates by the FRB, assuming normal credit, liquidity and competitive loan and deposit pricing pressures. In 2006 and the first half of 2007, margin compression also occurred in the Company's investment securities portfolio. The Company added securities in previous years to pledge as collateral to secure public funds deposits and customer reverse repurchase agreements. The interest rates paid to these customers increased consistent with short-term market interest rate increases, while the overall yield on the investment portfolio did not increase as rapidly. In previous years, the Company earned a greater spread on these securities due to the very low rate environment and the then-steeper interest rate yield curve compared to 2006 and 2007. As borrowing costs increased, the spread earned on these securities decreased. The Company has also repositioned some of its investment portfolio over time to shorten the time frame its securities will reprice. Margin compression related to the Company's investment securities portfolio improved in the last half of 2007 as yields on securities continue to increase and the FRB lowered the Federal Funds rate. In 2007, the overall yield on the investment portfolio (including other interest-earning assets) increased and was 5.49% at December 31, 2007 compared to 5.03% at December 31, 2006. At December 31, 2007, the Company also had a portfolio of prime-based loans totaling approximately $1.22 billion with rates that change immediately with changes to the prime rate of interest. Of this total, $760 million represented loans which had interest rate floors. These floors were at varying rates, with $328 million of these loans having floor rates of 7.0% or greater and another $343 million of these loans having floor rates between 5.5% and 7.0%. During 2003 and 2004, the Company's loan portfolio 11 had loans with rate floors that were much lower. However, since market interest rates were also much lower at that time, these loan rate floors went into effect and established a loan rate which was higher than the contractual rate would have otherwise been. This contributed to a loan yield for the entire portfolio which was approximately 139 and 55 basis points higher than the "prime rate of interest" at December 31, 2003 and 2004, respectively. As interest rates rose in the second half of 2004 and throughout 2005 and 2006, these interest rate floors were exceeded and the loans reverted back to their normal contractual interest rate terms. At December 31, 2005, the loan yield for the portfolio was approximately 8 basis points higher than the "prime rate of interest," resulting in lower interest rate margins. At December 31, 2006, the loan portfolio yield was approximately 5 basis points lower than the "prime rate of interest." During the latter portion of 2007 and into 2008, as the "prime rate of interest" has gone down, the Company's loan portfolio again had loans with rate floors that went into effect and established a loan rate which was higher than the contractual rate would have otherwise been. This contributed to a loan yield for the entire portfolio which was approximately 33 basis points higher than the "prime rate of interest" at December 31, 2007. Through March 15, 2008, the "prime rate of interest" has decreased an additional 125 basis points since December 31, 2007. The Company's profitability is also affected by the level of its non-interest income and operating expenses. Non-interest income consists primarily of service charges and ATM fees, commissions earned by our travel, insurance and investment divisions, late charges and prepayment fees on loans, gains on sales of loans and available-for-sale investments and other general operating income. Non-interest income is also affected by the Company's hedging activities. Operating expenses consist primarily of salaries and employee benefits, occupancy-related expenses, postage, insurance, advertising and public relations, telephone, professional fees, office expenses and other general operating expenses. In the year ended December 31, 2007 compared to the year ended December 31, 2006, non-interest income decreased slightly due primarily to the impairment write-down in value of one available-for-sale Freddie Mac preferred stock security. This write-down totaled $1.1 million. In November and December 2007, the value of this security declined sharply due to the credit and capital concerns faced by many financial services companies, including government-sponsored enterprises Freddie Mac and Fannie Mae. Excluding this securities loss, non-interest income increased primarily as a result of higher commission revenues from our travel, insurance and investment divisions and deposit account charges, partially offset by lower fees on loans. This increase in commission revenues was primarily in the travel division as a result of the acquisition of a St. Louis travel agency in the first quarter of 2007 and internal growth. Fees from service charges and overdrafts will likely increase modestly in 2008 compared to 2007 as we expect that retail checking accounts will grow at a modest pace in 2008. We expect to continue to add checking balances; however, much of this growth is expected to come from additional corporate banking relationships which will not generate as much fee income as smaller individual checking accounts. The level of commission revenue in our travel division in 2008 is likely to remain consistent with 2007 levels; however, given current general economic conditions, substantial shocks could occur in the financial markets or the travel industry that could reduce travel by businesses and individuals in 2008. Currently the Company does not have any plans to acquire additional travel agencies. Increasing non-interest income in 2006 was the early repayment of five unrelated loans that triggered significant prepayment fees. Non-interest income increased $1.6 million in the year ended December 31, 2007, and increased $1.5 million in the year ended December 31, 2006, as a result of the change in the fair value of certain interest rate swaps and the related change in fair value of hedged deposits. In the year ended December 31, 2007 compared to the year ended December 31, 2006, operating expenses increased primarily due to the continued growth of the Company. The primary increases were in the categories of salaries and benefits expense, insurance, and expenses on foreclosed assets, with smaller increases and decreases in some of the other expense categories such as occupancy and equipment expense, postage, advertising and others. During the fourth quarter of 2006, Great Southern completed its acquisition of a travel agency in Columbia, Mo., and opened banking centers in Lee's Summit, Mo. and Ozark, Mo. In March 2007, Great Southern acquired a travel agency in St. Louis, Mo., and in June 2007, opened a banking center in Springfield, Mo. We anticipate that increases will occur again in 2008, at a moderate level, with regard to employee costs and occupancy expenses as we continue to add new banking centers to serve new and existing customers. We anticipate that expense increases in 2008 will be fairly consistent with the expense increases recorded in 2007. In addition, due to the increases in levels of foreclosed assets, foreclosure- related expenses in 2007 were higher than in 2006. In 2007, the Federal Deposit Insurance Corporation (FDIC) began to once again assess insurance premiums on insured institutions. Under the new pricing system, institutions in all risk categories, even the best rated, are charged an FDIC premium. Great Southern received a deposit insurance credit as a result of premiums previously paid. The Company's credit offset assessed premiums for the first half of 2007, but premiums were owed by the Company in the latter half of 2007. For the year ended December 31, 2007, the Company incurred additional insurance expense of $568,000. The Company expects a similar quarterly expense of $300,000 in future quarters, with additional expense based upon deposit growth. 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 deposits and borrowings 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. 12 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 commercial banks, savings institutions, 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. Recent Accounting Pronouncements In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements . This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure related to the use of fair value measures in financial statements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, and does not expand the use of fair value measures in financial statements, but standardizes its definition and guidance in generally accepted accounting principles. SFAS No. 157 emphasizes that fair value is a market-based measurement based on an exchange transaction between market participants in which an entity sells an asset or transfers a liability. SFAS No. 157 also establishes a fair value hierarchy from observable market data as the highest level to fair value based on an entity’s own fair value assumptions as the lowest level. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. SFAS No. 157 is effective for the Company on January 1, 2008 and is not expected to have a material effect on the Company’s financial position or results of operations. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 provides companies with the option to report selected financial assets and liabilities at fair value. Under the option, any changes in fair value would be included in earnings. This Statement seeks to reduce both complexity in accounting and volatility in earnings caused by differences in the existing accounting rules. Existing accounting principles use different measurement attributes for different assets and liabilities, which can lead to earnings volatility. SFAS No. 159 helps to mitigate this type of accounting-induced volatility by enabling companies to achieve a more consistent accounting for changes in the fair value of related assets and liabilities without having to apply complex hedge accounting provisions. Under this Statement, entities may measure at fair value financial assets and liabilities selected on a contract-by-contract basis. They would be required to display those values separately from those measured under different attributes on the face of the statement of financial condition. Furthermore, companies must provide additional information that would help investors and other users of financial statements to more easily understand the effect on earnings. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. SFAS No. 159 is effective for the Company on January 1, 2008 and is not expected to have a material effect on the Company’s financial position or results of operations. In January 2007, the FASB issued an exposure draft – Disclosures about Derivative Instruments and Hedging Activities . This exposure draft would amend and expand the disclosure requirements in SFAS No. 133, Accounting for Derivatives Instruments and Hedging Activities . The FASB issued this proposed Statement to address concerns that the existing disclosure requirements for derivative instruments and related hedged items do not provide adequate information on the effect that derivative activities have on an entity’s overall consolidated financial condition or results of operations. Specific disclosure requirements are outlined in the proposed Statement. At this time, the FASB continues its deliberations regarding this exposure draft and has not adopted the final Statement. The Company continues to monitor the exposure draft to determine the impact, if any, on the consolidated financial condition or results of operations of the Company. In November 2007, the Securities and Exchange Commission Staff issued Staff Accounting Bulletin (“SAB”) No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings . This SAB supersedes the guidance previously issued in SAB No. 105, Application of Accounting Principles to Loan Commitments . SAB No. 109 expresses the current view of the staff that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SAB No. 109 is effective for the Company on January 1, 2008 and is not expected to have a material effect on the Company’s financial position or results of operations. In December 2007, the FASB issued SFAS No. 141 (revised), Business Combinations. SFAS No. 141(revised) retains the fundamental requirements in Statement 141 that the acquisition method of accounting be used for business combinations, but broadens the scope of Statement 141 and contains improvements to the application of this method. The Statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Costs incurred to effect the acquisition are to be recognized separately from the acquisition. Assets and liabilities arising from contractual contingencies must be measured at fair value as of the acquisition date. Contingent onsideration must also be measured at fair value as of the acquisition date. SFAS No. 141 (revised) applies to business combinations occurring after January 1, 2009. 13 In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an Amendment of ARB No. 51 . SFAS No. 160 requires that a noncontrolling interest in a subsidiary be accounted for as equity in the consolidated statement of financial position and that net income include the amounts for both the parent and the noncontrolling interest, with a separate amount presented in the income statement for the noncontrolling interest share of net income. SFAS No. 160 also expands the disclosure requirements and provides guidance on how to account for changes in the ownership interest of a subsidiary. SFAS No. 160 is effective for the Company on January 1, 2009 and is not expected to have a material effect on the Company’s financial position or results of operations. In January 2008, the FASB issued Statement 133 Implementation Issue No. E23 – Issues Involving the Application of the Shortcut Method Under Paragraph 68 . This Implementation Issue amends the accounting and reporting requirements of paragraph 68 of Statement 133 (the shortcut method) to address certain practice issues. It addresses a limited number of issues that have caused implementation difficulties in the application of paragraph 68 of Statement 133. The objective is to improve financial reporting related to the shortcut method to increase comparability in financial statements. This pronouncement is effective for hedging relationships designated on or after January 1, 2008 and is not expected to have a material effect on the Company’s financial position or results of operations. Comparison of Financial Condition at December 31, 2007 and December 31, 2006 During the year ended December 31, 2007, the Company increased total assets by $191.4 million to $2.43 billion. Net loans increased by $141.4 million. The main loan areas experiencing increases were commercial and residential construction, commercial business, consumer and residential mortgage loans. The Company's strategy continues to be focused on growing the loan portfolio, while maintaining credit risk and interest rate risk at appropriate levels. For many years, the Company has developed a niche in commercial real estate and construction lending in Southwest Missouri. Great Southern's strategy is to continue to build on this competency in Southwest Missouri and in other geographic areas through the Company's loan production offices. Available-for-sale investment securities increased by $80.8 million, primarily due to increased balances of U. S. Government Agency securities which were used for pledging to public fund deposit accounts. While there is no specifically stated goal, the available-for-sale securities portfolio has in recent years been approximately 15% to 20% of total assets. The available-for-sale securities portfolio was 17.5% and 15.4% of total assets at December 31, 2007 and 2006, respectively. Cash and cash equivalents decreased $52.6 million, primarily due to smaller cash letter settlements between the Company and other banks at December 31, 2007. Foreclosed assets increased $15.6 million, primarily due to the foreclosure of several loan relationships throughout 2007. See "Non-performing Assets" for additional information on foreclosed assets. Total liabilities increased $177.1 million from December 31, 2006 to $2.24 billion at December 31, 2007. Deposits increased $59.3 million, FHLBank advances increased $34.7 million and short-term borrowings increased $95.8 million. The increase in short-term borrowings was the result of increases in securities sold under repurchase agreements with Bank customers ($23 million), increases in overnight borrowings ($23 million) and a term borrowing from the FRB ($50 million). FHLBank advances increased from $179.2 million at December 31, 2006, to $213.9 million at December 31, 2007. The level of FHLBank advances will fluctuate depending on growth in the Company's loan portfolio and other funding needs and sources of the Company. Retail certificates of deposit increased $25.2 million, to $421.9 million. Total brokered deposits were $674.6 million at December 31, 2007, down from $708.2 million at December 31, 2006. Interest-bearing checking balances increased $101.0 million in the year ended December 31, 2007, to $491.1 million. Non-interest-bearing checking balances decreased $39.0 million in the year ended December 31, 2007, to $166.2 million. Checking account balances totaled $657.4 million at December 31, 2007, up from $595.3 million at December 31, 2006. Subordinated debentures issued to capital trust increased $5.2 million as a result of the Company's decision to add a new issue of trust preferred securities in 2007. Stockholders' equity increased $14.3 million from $175.6 million at December 31, 2006 to $189.9 million at December 31, 2007. Net income for fiscal year 2007 was $29.3 million and accumulated other comprehensive income increased $1.3 million, partially offset by dividends declared of $9.2 million and net repurchases of the Company's common stock of $7.1 million. In 2007, the Company repurchased 342,377 shares of its common stock at an average price of $25.57 per share and reissued 65,609 shares of Company stock at an average price of $17.62 per share to cover stock option exercises. Management intends to continue to repurchase stock from time to time as long as management believes that repurchasing the stock contributes to the overall growth of shareholder value. The timing of repurchases, 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 the control of the Company. The primary factors, however, are the number of shares available in the market from sellers at any given time, the price of the stock within the market as determined by the market, and the projected impact on the Company's earnings per share. 14 Results of Operations and Comparison for the Years Ended December 31, 2007 and 2006 General Including the effects of the Company's hedge accounting entries recorded in 2007 and 2006, net income decreased $1.4 million, or 4.7%, during the year ended December 31, 2007, compared to the year ended December 31, 2006. This decrease was primarily due to an increase in non-interest expense of $2.9 million, or 5.8%, an increase in provision for income taxes of $484,000, or 3.5%, and a decrease in non-interest income of $261,000, or 0.9%, partially offset by an increase in net interest income of $2.2 million, or 3.1%. Excluding the effects of the Company's hedge accounting entries recorded in 2007 and 2006, net income decreased $1.7 million, or 5.7%, during the year ended December 31, 2007, compared to the year ended December 31, 2006. This decrease was primarily due to an increase in non-interest expense of $2.9 million, or 5.8%, an increase in provision for income taxes of $328,000, or 2.4%, and a decrease in non-interest income of $103,000, or 0.4%, partially offset by an increase in net interest income of $1.6 million, or 2.2%. See "Selected Consolidated Financial Data - Restatement of Previously Issued Consolidated Financial Statements" for a discussion of the current and previously reported financial statements due to the Company's accounting change for certain interest rate swaps in 2005. The information presented in the table below and elsewhere in this report excluding hedge accounting entries recorded (for the 2007 and 2006 periods) is not prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The tables below and elsewhere in this report excluding hedge accounting entries recorded (for the 2007 and 2006 periods) contain reconciliations of this information to the reported information prepared in accordance with GAAP. The Company believes that this non-GAAP financial information is useful in its internal management financial analyses and may also be useful to investors because the Company believes that the exclusion of these items from the specified components of net income better reflect the Company's underlying operating results during the periods indicated for the reasons described above. The amortization of the deposit broker fee and the net change in fair value of interest rate swaps and related deposits may be volatile. For example, if market interest rates decrease significantly, the interest rate swap counterparties may wish to terminate the swaps prior to their stated maturities. If a swap is terminated, it is likely that the Company would redeem the related deposit account at face value. If the deposit account is redeemed, any unamortized broker fee associated with the deposit account must be written off to interest expense. In addition, if the interest rate swap is terminated, there may be an income or expense impact related to the fair values of the swap and related deposit which were previously recorded in the Company's financial statements. The effect on net income, net interest income, net interest margin and non-interest income could be significant in any given reporting period. Non-GAAP Reconciliation (Dollars in thousands) Year Ended December 31, 2007 2006 Earnings Per Diluted Share Dollars Earnings Per Diluted Share Dollars Reported Earnings $ 29,299 $ 2.15 $ 30,743 $ 2.22 Amortization of deposit broker origination fees (net of taxes) Net change in fair value of interest rate swaps and related deposits (net of taxes) Earnings excluding impact of hedge accounting entries 762 .05 1,155 .08 (1,102) (.08) (1,204 ) (.08) $ 28,959 $ 2.12 $ 30,694 $ 2.22 15 Total Interest Income Total interest income increased $13.8 million, or 9.2%, during the year ended December 31, 2007 compared to the year ended December 31, 2006. The increase was due to a $9.6 million, or 7.2%, increase in interest income on loans and a $4.2 million, or 24.5%, increase in interest income on investments and other interest-earning assets. Interest income for both loans and investment securities and other interest-earning assets increased due to higher average balances. Interest income for investment securities and other interest-earning assets also increased due to higher average rates of interest while loans experienced average rates of interest that were effectively unchanged. Interest Income - Loans During the year ended December 31, 2007 compared to December 31, 2006, interest income on loans increased primarily due to higher average balances. Interest income increased $9.7 million as the result of higher average loan balances from $1.65 billion during the year ended December 31, 2006 to $1.77 billion during the year ended December 31, 2007. The higher average balance resulted principally from the Bank's increased commercial and residential construction lending, commercial business lending and consumer lending. The Bank's commercial real estate and multi-family residential average loan balances experienced small decreases, while one- to four-family residential average loan balances increased slightly during 2007. Interest income on loans decreased $116,000 as the result of a slight reduction in average interest rates. The average yield on loans decreased from 8.05% during the year ended December 31, 2006, to 8.04% during the year ended December 31, 2007. Average loan rates were generally similar in 2007 and 2006, as a result of market rates of interest, primarily the "prime rate" of interest. During the first half of 2006, market interest rates increased, with the "prime rate" of interest increasing 1.00% by the end of June 2006. A large portion of the Bank's loan portfolio adjusts with changes to the "prime rate" of interest. The Company has a portfolio of prime- based loans which have interest rate floors. Prior to 2005, many of these loan rate floors were in effect and established a loan rate which was higher than the contractual rate would have otherwise been. During 2005 and 2006, as market interest rates rose, many of these interest rate floors were exceeded and the loans reverted back to their normal contractual interest rate terms. In the year ended December 31, 2006, the average yield on loans was 8.05% versus an average prime rate for the period of 7.96%, or a difference of 9 basis points. In the year ended December 31, 2007, the average yield on loans was 8.04% versus an average prime rate for the period of 8.05%, or a difference of a negative 1 basis point. For the years ended December 31, 2007, and 2006, interest income was reduced $1.6 million and $695,000, respectively, due to the reversal of accrued interest on loans that were added to non-performing status during the period. Partially offsetting this, the Company collected interest that was previously charged off in the amount of $227,000 and $189,000 in the years ended December 31, 2007 and 2006, respectively. See "Net Interest Income" for additional information on the impact of this interest activity. Additionally, recent FRB interest rate cuts subsequent to December 31, 2007, have impacted interest income and net interest income. Generally, a rate cut by the FRB would have an anticipated immediate negative impact on interest income and net interest income due to the large total balance of loans which generally adjust immediately as Fed Funds adjust. This negative impact is expected to be offset over the following 60- to 120-day period, and subsequently is expected to have a positive impact, as the Company's interest rates on deposits, borrowings and interest rate swaps should also reduce as a result of changes in interest rates by the FRB, assuming normal credit, liquidity and competitive loan and deposit pricing pressures. Interest Income - Investments and Other Interest-earning Deposits Interest income on investments and other interest-earning assets increased as a result of higher average rates of interest during the year ended December 31, 2007, when compared to the year ended December 31, 2006. Interest income increased by $2.1 million as a result of an increase in average interest rates from 4.39% during the year ended December 31, 2006, to 4.91% during the year ended December 31, 2007. In 2006, as principal balances on mortgage-backed securities were paid down through prepayments and normal amortization, the Company replaced a portion of these securities with variable-rate mortgage-backed securities (primarily one-year and hybrid ARMs) which had a lower yield at the time of purchase relative to the fixed-rate securities remaining in the portfolio. As these securities reached interest rate reset dates in 2007, their rates increased along with market interest rate increases. Approximately $50-55 million will have interest rate resets at some time in 2008, with the currently projected weighted average coupon rate decreasing approximately .34% based on market interest rates at December 31, 2007. In addition, approximately $25-30 million will have initial interest rate resets at some time in 2009. The actual amount of securities that will reprice and the actual interest rate changes on these securities is subject to the level of prepayments on these securities and the changes that actually occur in market interest rates (primarily treasury rates and LIBOR rates). The Company has total variable-rate mortgage-backed securities of approximately $109 million at December 31, 2007. In addition, the Company also increased its portfolio of tax-exempt securities issued by states and municipalities over the past two years from $46 million at December 31, 2005 to $63 million at December 31, 2007. These securities generally have coupon yields that are comparable to treasury market interest rates; however, the tax-equivalent yield is higher. Interest income increased $2.0 million as a result of an increase in average balances from $387 million during the year 16 ended December 31, 2006, to $431 million during the year ended December 31, 2007. This increase was primarily in available-for- sale agency securities, where securities were needed for liquidity and pledging to deposit accounts under customer repurchase agreements and public fund deposits. Many of these agency securities are callable at the option of the issuer, so it is likely that, as market interest rates have declined, agency security balances will be reduced in 2008. Total Interest Expense Including the effects of the Company's accounting change in 2005 for certain interest rate swaps, total interest expense increased $11.6 million, or 14.4%, during the year ended December 31, 2007, when compared with the year ended December 31, 2006, primarily due to an increase in interest expense on deposits of $10.5 million, or 16.0%, an increase in interest expense on short- term borrowings of $1.7 million, or 30.2%, and an increase in interest expense on subordinated debentures issued to capital trust of $579,000, or 43.4%, partially offset by a decrease in interest expense on FHLBank advances of $1.2 million, or 14.4%. Excluding the effects of the Company's hedge accounting entries recorded in 2007 and 2006 for certain interest rate swaps, economically, total interest expense increased $12.2 million, or 15.4%, during the year ended December 31, 2007, when compared with the year ended December 31, 2006, primarily due to an increase in interest expense on deposits of $11.1 million, or 17.4%, an increase in interest expense on short-term borrowings of $1.7 million, or 30.2%, and an increase in interest expense on subordinated debentures issued to capital trust of $579,000, or 43.4%, partially offset by a decrease in interest expense on FHLBank advances of $1.2 million, or 14.4%. See "Selected Consolidated Financial Data - Restatement of Previously Issued Consolidated Financial Statements" for a discussion of the current and previously reported financial statements due to the Company's accounting change for certain interest rate swaps in 2005. Interest Expense - Deposits Including the effects of the Company's hedge accounting entries recorded in 2007 and 2006, interest on demand deposits increased $1.5 million due to an increase in average rates from 3.01% during the year ended December 31, 2006, to 3.34% during the year ended December 31, 2007. Average interest rates increased due to higher overall market rates of interest in 2006 and the first nine months of 2007. Market rates of interest on checking and money market accounts began to increase prior to 2007 as the FRB raised short-term interest rates. Interest on demand deposits increased $1.9 million due to an increase in average balances. The Company's interest-bearing checking balances have grown in the past several years through increased relationships with correspondent, corporate and retail customers. Average interest-bearing demand balances were $481 million, $421 million and $382 million in 2007, 2006 and 2005, respectively. Average non-interest bearing demand balances were $171 million, $189 million and $170 million in 2007, 2006 and 2005, respectively. Interest expense on deposits increased $2.1 million as a result of an increase in average rates of interest on time deposits from 5.12% during the year ended December 31, 2006, to 5.32% during the year ended December 31, 2007, and increased $5.1 million due to an increase in average balances of time deposits from $1.036 billion during the year ended December 31, 2006, to $1.132 billion during the year ended December 31, 2007. The average interest rates increased due to higher overall market rates of interest throughout 2006 and into 2007. As certificates of deposit matured in 2006 and the first half of 2007, they were generally replaced with certificates bearing a higher rate of interest. Market rates of interest on new certificates began to increase in the latter half of 2004 through the first half of 2007 as the FRB raised short-term interest rates. In 2006, the Company increased its balances of brokered certificates of deposit to fund a portion of its loan growth. Brokered certificates of deposit balances decreased $33.6 million in 2007, to $674.6 million. Retail certificates of deposit increased $25.2 million in 2007, to $421.9 million. In addition, the Company's interest rate swaps repriced higher in 2006 and 2007 in conjunction with the increases in market interest rates, specifically LIBOR. LIBOR interest rates increased compared to Federal Funds rates in the last half of 2007 as a result of credit and liquidity concerns in financial markets. These LIBOR interest rates were elevated approximately 30-70 basis points compared to historical averages versus the stated Federal Funds rate. The Company has interest rate swaps and other borrowings that are indexed to LIBOR, thereby causing increased funding costs. These higher LIBOR interest rates have declined significantly during January and February 2008. The effects of the Company's hedge accounting entries recorded in 2007 and 2006 did not impact interest on demand deposits. Excluding the effects of the Company's hedge accounting entries recorded in 2007 and 2006, economically, interest expense on deposits increased $2.8 million as a result of an increase in average rates of interest on time deposits from 4.95% during the year ended December 31, 2006, to 5.21% during the year ended December 31, 2007, and increased $4.9 million due to an increase in average balances of time deposits from $1.036 billion during the year ended December 31, 2006, to $1.132 billion during the year ended December 31, 2007. The average interest rates increased due to higher overall market rates of interest throughout 2006 and into 2007. See "Selected Consolidated Financial Data - Restatement of Previously Issued Consolidated Financial Statements" for a discussion of the current and previously reported financial statements due to the Company's accounting change for certain interest rate swaps in 2005. 17 Interest Expense - FHLBank Advances, Short-term Borrowings and Subordinated Debentures Issued to Capital Trust Interest expense on FHLBank advances decreased $1.7 million due to a decrease in average balances on FHLBank advances from $180 million in the year ended December 31, 2006, to $145 million in the year ended December 31, 2007. The reason for this decrease was the Company elected to utilize other forms of alternative funding during 2007. Partially offsetting this decrease, FHLBank advances experienced an increase in average interest rates from 4.51% during the year ended December 31, 2006, to 4.81% during the year ended December 31, 2007, resulting in increased interest expense of $514,000. Interest expense on short-term borrowings increased $1.8 million due to an increase in average balances on short-term borrowings from $130 million during the year ended December 31, 2006, to $171 million during the year ended December 31, 2007. Partially offsetting this increase, average interest rates decreased from 4.36% in the year ended December 31, 2006, to 4.30% in the year ended December 31, 2007, resulting in decreased interest expense of $75,000. The increase in balances of short-term borrowings was primarily due to increases in securities sold under repurchase agreements with Great Southern's corporate customers and increased short-term borrowings in the latter portion of 2007 to take advantage of declining Federal Funds rates. Market rates of interest on short-term borrowings increased beginning in the middle of 2004 through early 2007 as the FRB raised short-term interest rates. The FRB began to lower short-term interest rates in the latter portion of 2007 and has continued to lower these rates in the first two months of 2008. Interest expense on subordinated debentures issued to capital trust increased $646,000 due to increases in average balances from $18.7 million in the year ended December 31, 2006, to $28.2 million in the year ended December 31, 2007. The average rate of interest on these subordinated debentures decreased slightly in 2007 as these liabilities pay a variable rate of interest that is indexed to LIBOR. In November 2006, the Company redeemed its trust preferred debentures which were issued in 2001 and replaced them with new trust preferred debentures. These new debentures are not subject to an interest rate swap; however, they are variable-rate debentures and bear interest at a rate of three-month LIBOR plus 1.60%, adjusting quarterly. In July 2007, the Company issued additional trust preferred debentures. These new debentures are also not subject to an interest rate swap; however, they are variable- rate debentures and bear interest at a rate of three-month LIBOR plus 1.40%, adjusting quarterly. Net Interest Income Including the impact of the accounting entries recorded for certain interest rate swaps, net interest income for the year ended December 31, 2007 increased $2.2 million to $71.4 million compared to $69.2 million for the year ended December 31, 2006. Net interest margin was 3.24% in the year ended December 31, 2007, compared to 3.39% in 2006, a decrease of 15 basis points. This margin decrease was caused by several factors. For the years ended December 31, 2007, and 2006, interest income was reduced $1.6 million and $695,000, respectively, due to the reversal of accrued interest on loans that were added to non-performing status during the period. Partially offsetting this, the Company collected interest that was previously charged off in the amount of $227,000 and $189,000 in the years ended December 31, 2007 and 2006, respectively. Another factor that negatively impacted net interest income and net interest margin in 2007, was the increase in the spread between LIBOR interest rates compared to Federal Funds rates in the last half of 2007 as a result of credit and liquidity concerns in financial markets. These LIBOR interest rates were elevated approximately 30-70 basis points compared to historical averages versus the stated Federal Funds rate. The Company has interest rate swaps and other borrowings that are indexed to LIBOR, thereby causing increased funding costs. These relative higher LIBOR interest rates have declined to more normal levels in 2008. Additionally, recent FRB interest rate cuts have impacted net interest income. Generally, a rate cut by the FRB would have an anticipated immediate negative impact on net interest income due to the large total balance of loans which generally adjust immediately as Fed Funds adjust. This negative impact is expected to be offset over the following 60 to 120-day period, and subsequently is expected to have a positive impact, as the Company's interest rates on deposits, borrowings and interest rate swaps should also reduce as a result of changes in interest rates by the FRB, assuming normal credit, liquidity and competitive loan and deposit pricing pressures. The Company's overall interest rate spread decreased 12 basis points, or 4.2%, from 2.83% during the year ended December 31, 2006, to 2.71% during the year ended December 31, 2007. The decrease was due to a 19 basis point increase in the weighted average rate paid on interest-bearing liabilities, partially offset by a 7 basis point increase in the weighted average yield on interest- earning assets. The Company's overall net interest margin decreased 15 basis points, or 4.4%, from 3.39% for the year ended December 31, 2006, to 3.24% for the year ended December 31, 2007. In comparing the two years, the yield on loans decreased 1 basis point while the yield on investment securities and other interest-earning assets increased 52 basis points. The rate paid on deposits increased 22 basis points, the rate paid on FHLBank advances increased 30 basis points, the rate paid on short-term borrowings decreased 6 basis points, and the rate paid on subordinated debentures issued to capital trust decreased 34 basis points. See "Selected Consolidated Financial Data - Restatement of Previously Issued Consolidated Financial Statements" for a discussion of the current and previously reported financial statements due to the Company's accounting change for certain interest rate swaps in 2005. 18 For the year ended December 31, 2007, compared to 2006, the average balance of investment securities increased by approximately $44 million due to the purchase of securities in early 2007 to pledge against increased public fund deposits and customer repurchase agreements. While the Company earned a positive spread on these securities, it was much smaller than the Company's overall net interest spread, having the effect of increasing net interest income but decreasing net interest margin. Excluding the impact of the accounting entries recorded for certain interest rate swaps, economically, net interest income for the year ended December 31, 2007 increased $1.6 million to $72.6 million compared to $71.0 million for the year ended December 31, 2006. Net interest margin excluding the effects of the accounting change was 3.29% in the year ended December 31, 2007, compared to 3.48% in the year ended December 31, 2006. The Company's overall interest rate spread decreased 16 basis points, or 5.5%, from 2.93% during the year ended December 31, 2006, to 2.77% during the year ended December 31, 2007. The decrease was due to a 23 basis point increase in the weighted average rate paid on interest-bearing liabilities, partially offset by a 7 basis point increase in the weighted average yield on interest-earning assets. The Company's overall net interest margin decreased 19 basis points, or 5.5%, from 3.48% for the year ended December 31, 2006, to 3.29% for the year ended December 31, 2007. In comparing the two years, the yield on loans decreased 1 basis point while the yield on investment securities and other interest-earning assets increased 52 basis points. The rate paid on deposits increased 26 basis points, the rate paid on FHLBank advances increased 30 basis points, the rate paid on short-term borrowings decreased 6 basis points, and the rate paid on subordinated debentures issued to capital trust decreased 34 basis points. The prime rate of interest averaged 8.05% during the year ended December 31, 2007 compared to an average of 7.96% during the year ended December 31, 2006. The prime rate began to increase in the second half of 2004 and throughout 2005 and 2006 as the FRB began to raise short-term interest rates, and stood at 8.25% at December 31, 2006. In the last three months of 2007, the FRB began to decrease short-term interest rates. At December 31, 2007, the prime rate stood at 7.25%. Over half of the Bank's loans were tied to prime at December 31, 2007. The Company continues to utilize interest rate swaps and FHLBank advances that reprice frequently to manage overall interest rate risk. See "Quantitative and Qualitative Disclosures About Market Risk" for additional information on the Company's interest rate risk management. Non-GAAP Reconciliation (Dollars in thousands) Year Ended December 31, 2007 2006 $ % $ % Reported Net Interest Income/Margin $ 71,405 3.24% $ 69,227 3.39% Amortization of deposit broker origination fees 1,172 .05 1,777 .09 Net interest income/margin excluding impact of hedge accounting entries $ 72,577 3.29% $ 71,004 3.48% For additional information on net interest income components, refer to "Average Balances, Interest Rates and Yields" table in this Annual Report on Form 10-K. This table is prepared including the impact of the accounting changes for interest rate swaps. Provision for Loan Losses and Allowance for Loan Losses The provision for loan losses was $5.5 million and $5.5 million during the years ended December 31, 2007 and December 31, 2006, respectively. The allowance for loan losses decreased $0.8 million, or 3.0%, to $25.5 million at December 31, 2007 compared to $26.3 million at December 31, 2006. Net charge-offs were $6.3 million in 2007 versus $3.7 million in 2006. The increases in charge-offs and foreclosed assets were due to general market conditions, and more specifically, housing supply, absorption rates and unique circumstances related to individual borrowers and projects. As properties were transferred into foreclosed assets, evaluations were made of the value of these assets with corresponding charge-offs as appropriate. Management records a provision for loan losses in an amount it believes 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, regular reviews by internal staff and regulatory examinations. 19 Weak economic conditions, higher inflation or interest rates, or other factors may lead to increased losses in the portfolio and/or requirements for an increase in loan loss provision expense. 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. The Bank's allowance for loan losses as a percentage of total loans was 1.38% and 1.54% at December 31, 2007 and 2006, respectively. Management considers the allowance for loan losses adequate to cover losses inherent in the Company's loan portfolio at this time, based on recent internal and external reviews of the Company's loan portfolio and current economic conditions. Potential problem loans are included in management's consideration when determining the adequacy of the provision and allowance for loan losses. Non-performing Assets As a result of continued growth in the loan portfolio, changes in portfolio mix, changes in economic and market conditions that occur from time to time, and other factors specific to a borrower's circumstances, the level of non-performing assets will fluctuate. Non-performing assets at December 31, 2007, were $55.9 million, up $30.9 million from December 31, 2006. Non-performing assets as a percentage of total assets were 2.30% at December 31, 2007. Compared to December 31, 2006, non-performing loans increased $15.3 million to $35.5 million while foreclosed assets increased $15.6 million to $20.4 million. Commercial real estate, commercial and residential construction and business loans comprised $33.2 million, or 94%, of the total $35.5 million of non-performing loans at December 31, 2007. Commercial real estate, construction and business loans historically comprise the majority of non-performing loans. Net charge-offs for the year ended December 31, 2007, were $6.3 million as compared to $3.7 million for the year ended December 31, 2006. The increases in charge-offs and foreclosed assets were due to general economic and market conditions, and more specifically, housing supply, absorption rates and unique circumstances related to individual borrowers and projects. As properties were transferred into foreclosed assets, evaluations were made of the value of these assets with corresponding charge-offs as appropriate. The Company's allowance for loan losses was $25.5 million and $26.3 million at December 31, 2007 and 2006, respectively. Management considers the allowance for loan losses adequate to cover losses inherent in the Company's loan portfolio at this time, based on recent internal and external reviews of the Company's loan portfolio and current economic conditions. Potential problem loans are included in management's consideration when determining the adequacy of the provision and allowance for loan losses. Non-performing Loans. Compared to December 31, 2006, non-performing loans increased $15.3 million to $35.5 million. Non-performing loan increases and decreases are described below. Increases in non-performing loans in 2007 included: -- A $10.3 million loan relationship, which is primarily secured by a condominium and retail historic rehabilitation development in St. Louis, Mo. This was originally included as a $9.4 million relationship and has increased due to costs to complete construction. The project was completed during the first quarter of 2008 and the Company has begun marketing efforts to lease the condominium and retail spaces. The Company expects to receive Federal and State tax credits later in 2008, which should reduce the balance of this relationship to approximately $5.0 million. The Company has obtained a recent appraisal that substantiates the value of the project. Because of the tax credits involved, the Company expects to foreclose on this property at some point in the future and hold this property for several years. The Company expects to remove this relationship from loans and hold it as a depreciating asset once the tax credit process is completed. Current projections by the Company indicate that a positive return on the investment is expected once the space is leased. -- A $1.3 million loan relationship, which is secured by a restaurant building in northwest Arkansas. The Company has begun foreclosure on this property. -- A $2.4 million loan relationship, which was described in the March 31, 2007, Quarterly Report on Form 10-Q. During the six months ended December 31, 2007, the original $5.4 million relationship was reduced to $2.4 million through the foreclosure and subsequent sale of the real estate collateral. At the time of the foreclosure on these real estate assets, there was no charge-off against the allowance for loan losses. The remaining $2.4 million is secured by the borrower’s ownership interest in a business. The borrower is pursuing options to pay off this loan. 20 -- A $5.7 million loan relationship, which is primarily secured by two office and retail historic rehabilitation developments. At the time this relationship was transferred to the Non-performing Loans category the Company recorded a write-down of $240,000. Both of the projects are completed and the space in both cases is partially leased. The projects are located in southeast Missouri and southwest Missouri, respectively. The borrower is marketing the properties for sale; however, the Company has begun foreclosure proceedings in the event that the borrower is not successful in selling the properties. -- A $1.9 million loan relationship, which is secured by partially-developed subdivision lots in northwest Arkansas. The Company has begun foreclosure proceedings. At December 31, 2007, eight significant loan relationships accounted for $27.7 million of the total non-performing loan balance of $35.5 million. In addition to the five relationships noted above, three other loan relationships were previously included in Non-performing Loans and remained there at December 31, 2007. These relationships were described in the December 31, 2006, Annual Report on Form 10-K, and in previous Quarterly Reports on Form 10-Q. One of these relationships, a $3.3 million loan on a nursing home in the State of Missouri, was paid off in the first quarter of 2008 upon the sale of the facility. The Company had previously recorded a charge to the allowance for loan losses regarding this relationship and recovered approximately $500,000 to the allowance upon receipt of the loan payoff. The other two unrelated relationships totaled $1.0 million and $1.7 million, respectively. Both of these relationships are secured primarily by single-family houses and residential subdivision lots. The $1.0 million relationship has been foreclosed upon and transferred to foreclosed assets at a book value of $700,000 after a charge-off to the allowance for loan losses of $320,000. The Company is in process of foreclosing on the $1.7 million relationship and is currently determining what, if any, charge-off to the allowance for loan losses is needed regarding this relationship. Two other significant relationships were both added to the Non-performing Loans category and subsequently transferred to foreclosed assets during the year ended December 31, 2007: -- A $4.6 million loan relationship, described in the June 30, 2007, Quarterly Report on Form 10-Q, which is secured by two residential developments in the Kansas City, Mo., metropolitan area. At the time of the transfer to foreclosed assets, the asset was reduced to $4.3 million through a charge-off to the allowance for loan losses. -- A $1.5 million loan relationship, which was described in the June 30, 2007, Quarterly Report on Form 10-Q. During the quarter ended September 30, 2007, the loans in this relationship were transferred to foreclosed assets. At the time of the transfer, this relationship was reduced by $538,000 through a charge-off against the allowance for loan losses. One other significant relationship was included in the Non-performing Loans category at December 31, 2006, and subsequently transferred to foreclosed assets during the year ended December 31, 2007. This relationship involved a motel located in the State of Illinois. At December 31, 2007, this relationship was included in foreclosed assets at $2.6 million. This motel was sold in the first quarter 2008 with no additional loss incurred by the Company. Foreclosed Assets. Of the total $20.4 million of foreclosed assets at December 31, 2007, foreclosed real estate totaled $20.0 million and repossessed automobiles, boats and other personal property totaled $410,000. Foreclosed assets increased $15.6 million during the year ended December 31, 2007, from $4.8 million at December 31, 2006, to $20.4 million at December 31, 2007. During the year ended December 31, 2007, foreclosed assets increased primarily due to the addition of five significant relationships to the foreclosed assets category and the addition of several smaller relationships that involve houses that are completed and for sale or under construction, as well as developed subdivision lots, partially offset by the sale of similar houses and subdivision lots. These five significant relationships remain in foreclosed assets at December 31, 2007, and are described below. At December 31, 2007, five separate relationships totaled $13.1 million, or 65%, of the total foreclosed assets balance. These five relationships include: -- A $2.6 million relationship, which involves a motel in the State of Illinois. As discussed above, the motel was sold in the first quarter 2008 at no additional loss to the Company. -- A $3.1 million relationship, which involves residential developments in Northwest Arkansas. One of the developments has some completed houses and additional lots. The second development is comprised of completed duplexes and triplexes. A few sales of single-family houses have occurred and the remaining properties are being marketed for sale. -- A $4.3 million loan relationship, which involves two residential developments in the Kansas City, Mo., metropolitan area. These two subdivisions are primarily comprised of developed lots with some additional undeveloped ground. The Company is marketing these projects and has seen some recent interest by prospective purchasers. -- A $1.8 million relationship, which involves a residence and commercial building in the Lake of the Ozarks, Mo., area. The Company is marketing these properties for sale. -- A $1.3 million relationship, which involves residential developments, primarily residential lots in three different subdivisions and undeveloped ground, in the Branson, Mo., area. The Company has been in contact with various developers to determine interest in the projects. 21 Potential Problem Loans. Potential problem loans increased $16.7 million during the year ended December 31, 2007 from $13.6 million at December 31, 2006 to $30.3 million at December 31, 2007. Potential problem loans are loans which management has identified through routine internal review procedures as having possible credit problems that may cause the borrowers difficulty in complying with current repayment terms. These loans are not reflected in non-performing assets. During the year ended December 31, 2007, potential problem loans increased primarily due to the addition of six unrelated relationships totaling $20.0 million to the Potential Problem Loans category. Four of these relationships involve residential construction and development loans. Two relationships are in Springfield, Mo., and total $1.7 million and $3.0 million, respectively; one relationship near Little Rock, Ark. totals $4.8 million; and one relationship in the St. Louis area totals $4.3 million. This St. Louis area relationship was foreclosed in the first quarter 2008. The Company recorded a loan charge-off of $1.0 million at the time of transfer to foreclosed assets based upon updated valuations of the assets. The Company is pursuing collection efforts against the guarantors on this credit. The fifth relationship consists of a condominium development in Kansas City totaling $3.2 million. Some sales have occurred during 2007, with the outstanding balance decreasing $1.9 million in 2007. The sixth relationship consists of a retail center, improved commercial land and other collateral in the states of Georgia and Texas totaling $2.9 million. During the first quarter of 2008, performance on the relationship improved and the Company obtained additional collateral. At December 31, 2007, two other large unrelated relationships were included in the Potential Problem Loan category. Both of these relationships were included in the potential problem loan category at December 31, 2006. The first relationship totaled $3.3 million at December 31, 2006, and was reduced to $1.4 million at December 31, 2007, through the sale of houses and townhomes. The relationship is secured primarily by a retail center, developed and undeveloped residential subdivisions, and single-family houses being constructed for resale in the Springfield, Missouri, area. The second relationship totaled $2.7 million and is secured primarily by a motel in the State of Florida. The motel is operating but payment performance has been slow at times. At December 31, 2007, these eight significant relationships described above accounted for $24.1 million of the potential problem loan total. Subsequent Event Regarding Potential Problem Loans. One of the Bank’s largest lending relationships is a loan to an Arkansas-based bank holding company (ABHC). In addition, the Bank has made other loans to three of ABHC’s stockholders (two of which are directors and/or executive officers of the holding company and the bank), at least partially secured by ABHC’s stock. ABHC, through its subsidiary bank (ABank), is primarily a commercial real estate lender with an emphasis on land development and residential construction lending. In addition to the Arkansas lending franchise, ABank also has significant lending activities in the Mountain West and Southwest regions of the United States. The lending relationship with ABHC began in 1997, and is secured by a first lien against 100% of the stock of ABank. The loans to the stockholders are secured by each stockholder’s stock in ABHC, as well as other collateral. At December 31, 2007, the outstanding balance on the loan to ABHC was $30.0 million. The loan was current as of that date, and ABank’s capital exceeded the amount of the loan, but the borrower was in default on certain of its financial covenants. During the past several months, markets for land development and new housing nationally, and particularly in Arkansas and portions of the Southwest, have seen a downturn. ABank began to experience the effects of this downturn through increased delinquencies and somewhat higher levels of non-performing loans in 2007. As a result, ABank’s regulators restricted certain of ABank’s operations and required increased reserves and capital. Subsequent to December 31, 2007, ABank reported that non-performing loans and foreclosed assets increased dramatically and significant additional reserves were being taken, reducing ABank’s capital even further. As a result, during the March 31, 2008 quarter, Great Southern has classified ABHC’s loan as substandard and included it in “potential problem loans.” Based upon ABank’s most recent call report (as amended), ABank’s capital has been reduced but is still at a level that appears to provide adequate collateral for Great Southern’s loan. Thus, Great Southern has not made a specific allocation of its allowance for loan losses to the ABHC credit. Since the beginning of this year, Great Southern has obtained additional, unrelated collateral to help secure a portion of the outstanding balance of the loans to the individual stockholders, and a $3.3 million payment was made reducing one of the loans. To date, however, there is still a portion that is not covered by additional collateral. Therefore, $9.4 million of the loans to individual stockholders have been classified as substandard and are now included in “potential problem loans” and $6.4 million of these loans are now considered non-performing. A specific allocation in the Bank’s allowance for loan losses has been set up for a portion of the non-performing and a portion of the substandard loans to the individual stockholders. Based on the information currently available, the Company believes that its allowance for loan losses is adequate. The ability of ABHC to ultimately resolve its issues and pay the Bank’s loan off is subject to a number of factors, including the land development and housing markets in its market areas, the strength of its borrowers, the ability of ABHC and ABank to restructure their balance sheets and increase capital and the ability of ABHC and ABank to timely comply with the requirements of their federal bank regulators. The federal bank regulators have extensive enforcement authority over ABHC and ABank, giving them the ability to take actions which could negatively impact our lending position without prior notice to us. In addition, if ABHC and ABank are not successful in their efforts, the loan may be required to be charged off in whole or in part, significantly reducing future income. ABHC and ABank are actively pursuing various alternatives to work out their credit problems, increase capital ratios and strengthen their balance sheets. Great Southern is monitoring these activities closely, but does not control the process. 22 Non-interest Income Including the effects of the Company's hedge accounting entries recorded in 2007 and 2006 for certain interest rate swaps, non-interest income for the year ended December 31, 2007 was $29.4 million compared with $29.6 million for the year ended December 31, 2006. The $261,000, or 0.9%, decrease in non-interest income was primarily the result of the impairment write-down in value of one available-for-sale Freddie Mac preferred stock security. This write-down totaled $1.1 million. This security has an interest rate that resets to a market index every 24 months and currently yields a tax-equivalent interest rate of about 8.5-9.0%. The security has had unrealized gains and losses from time to time. These unrealized gains and losses were recorded directly to equity in prior periods, so this other-than-temporary write-down did not affect total equity. Throughout the first ten months of 2007, as expected, the fair value of the security increased as market interest rates fell. However, in November and December 2007 the value of this security declined sharply due to the credit and capital concerns faced by many financial services companies, including government-sponsored enterprises Freddie Mac and Fannie Mae. Freddie Mac and Fannie Mae have recently issued new perpetual preferred stock at higher yields than this security and that has also driven the value down for many of the previously issued preferred stocks. The Company has the ability to continue to hold this security in its portfolio for the foreseeable future and believes that the fair value of this security may recover from the current level in future periods, if and when credit and capital concerns subside for these government-sponsored enterprises. Other items of non-interest income in 2007 increased $879,000 compared to 2006, primarily as a result of higher revenue from commissions and deposit account charges, partially offset by lower fees on loans. For the year ended December 31, 2007, service charges on deposit accounts and ATM fees increased $542,000, or 3.7%, compared to 2006 due to the increase in deposit accounts. During 2007, commission income from the Company's travel, insurance and investment divisions increased $767,000, or 8.4%, compared to the same period in 2006. This increase was primarily in the travel division as a result of the acquisition of a St. Louis travel agency in the first quarter of 2007 and internal growth. Total late charges and fees on loans decreased $605,000 in the year ended December 31, 2007, compared to the same period in 2006 due primarily to the early repayment of five unrelated loans that triggered total prepayment fees of $532,000 in the year ended December 31, 2006. Although the Company does receive prepayment fees from time to time, it is difficult to forecast when and in what amounts these fees will be collected. Non-interest income increased $1.6 million in the year ended December 31, 2007, and increased $1.5 million in the year ended December 31, 2006, as a result of the change in the fair value of certain interest rate swaps and the related change in fair value of hedged deposits. See "Selected Consolidated Financial Data - Restatement of Previously Issued Consolidated Financial Statements" for a discussion of the current and previously reported financial statements due to the Company's accounting change for certain interest rate swaps in 2005. Other income in 2007 and 2006 includes the net benefits realized on federal historic tax credits utilized by the Company in both 2007 and 2006. The Company expects to utilize federal historic tax credits in the future; however, the timing and amount of these credits will vary depending upon availability of the credits and ability of the Company to utilize the credits. Non-GAAP Reconciliation (Dollars in thousands) Year Ended December 31, 2007 Effect of Hedge Accounting Entries Recorded Excluding Hedge Accounting Entries Recorded As Reported Non-interest income -- Net change in fair value of interest rate swaps and related deposits Non-interest income -- Net change in fair value of interest rate swaps and related deposits $ 29,371 $ 1,695 $ 27,676 Year Ended December 31, 2006 Effect of Hedge Accounting Entries Recorded Excluding Hedge Accounting Entries Recorded As Reported $ 29,632 $ 1,853 $ 27,779 23 Non-Interest Expense Total non-interest expense increased $2.9 million, or 5.8%, from $48.8 million in the year ended December 31, 2006, compared to $51.7 million in the year ended December 31, 2007. The increase was primarily due to: (i) an increase of $1.9 million, or 6.6%, in salaries and employee benefits; (ii) an increase of $597,000, or 68.2%, in insurance expense, primarily FDIC deposit insurance; (iii) an increase of $489,000, or 410%, in expense on foreclosed assets and (iv) smaller increases and decreases in other non-interest expense areas, such as occupancy and equipment expense, postage, advertising, telephone, legal and professional fees, and bank charges and fees related to additional correspondent relationships. The Company's efficiency ratio for the year ended December 31, 2007, was 51.26% compared to 49.37% in 2006. These efficiency ratios include the impact of the hedge accounting entries for certain interest rate swaps. Excluding the effects of these entries, the efficiency ratio for the full year 2007 was 51.53% compared to 49.41% in 2006. The Company's ratio of non-interest expense to average assets decreased from 2.23% for the year ended December 31, 2006, to 2.18% for the year ended December 31, 2007. As discussed in the Company's 2006 Annual Report on Form 10-K, changes were made to the Company's retirement plans in 2006. These changes resulted in a decrease of $315,000 in expenses in the year ended December 31, 2007, compared to 2006. In 2007, the Federal Deposit Insurance Corporation (FDIC) began to once again assess insurance premiums on insured institutions. Under the new pricing system, institutions in all risk categories, even the best rated, are charged an FDIC premium. Great Southern received a deposit insurance credit as a result of premiums previously paid. The Company's credit offset assessed premiums for the first half of 2007, but premiums were owed by the Company in the latter half of 2007. The Company incurred additional insurance expense of $568,000 related to this in 2007, and the Company expects expense of approximately $300,000 per quarter in subsequent quarters, with additional expense based upon deposit growth. Due to the increases in levels of foreclosed assets, foreclosure-related expenses in 2007 were higher than 2006 by approximately $489,000 (net of income received on foreclosed assets). As previously disclosed in the Company's filings for the fourth quarter and full year 2006, these periods included an expense item of $783,000 ($501,000 after tax), which was a non-cash write-off of unamortized issuance costs related to the redemption of the 9.0% Cumulative Trust Preferred Securities of Great Southern Capital Trust I. The Company's increase in non-interest expense in 2007 compared to 2006 also related to the continued growth of the Company. During the fourth quarter of 2006, Great Southern completed its acquisition of a travel agency in Columbia, Mo., and opened banking centers in Lee's Summit, Mo. and Ozark, Mo. In March 2007, Great Southern acquired a travel agency in St. Louis, Mo., and in June 2007, opened a banking center in Springfield, Mo. As a result, in the year ended December 31, 2007, compared to the year ended December 31, 2006, non-interest expenses increased $1.9 million related to the ongoing operations of these entities. Non-GAAP Reconciliation (Dollars in thousands) Year Ended December 31, Non-Interest Expense 2007 Revenue Dollars* % Non-Interest Expense 2006 Revenue Dollars* % Efficiency Ratio $ 51,659 $ 100,776 51.26% $ 48,807 $ 98,859 49.37% Amortization of deposit broker origination fees Net change in fair value of interest rate swaps and related deposits Efficiency ratio excluding impact of hedge accounting entries --- 1,172 (.61) --- 1,777 (.88) --- (1,695) .88 --- (1,853) .92 $ 51,659 $ 100,253 51.53% $ 48,807 $ 98,783 49.41% *Net interest income plus non-interest income. 24 Provision for Income Taxes Provision for income taxes as a percentage of pre-tax income increased from 31.1% for the year ended December 31, 2006, to 32.9% for the year ended December 31, 2007. The lower effective tax rate (as compared to the statutory federal tax rate of 35.0%) was primarily due to higher balances and rates of tax-exempt investment securities and loans, federal tax credits and deductions for stock options exercised by certain employees. For future periods, the Company expects the effective tax rate to be in the range of 32- 33% of pre-tax net income. Average Balances, Interest Rates and Yields The following table presents, for the periods indicated, the total dollar amount of interest income from average interest- earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and the net interest margin. Average balances of loans receivable include the average balances of non-accrual loans for each period. Interest income on loans includes interest received on non-accrual loans on a cash basis. Interest income on loans includes the amortization of net loan fees which were deferred in accordance with accounting standards. Fees included in interest income were $3.2 million, $2.8 million and $2.0 million for 2007, 2006 and 2005, respectively. Tax-exempt income was not calculated on a tax equivalent basis. The table does not reflect any effect of income taxes. 25  % 1 7 . 5 1 3 . 7 8 7 . 6 3 9 . 6 7 7 . 6 9 9 . 6 0 2 . 6 3 7 . 6 9 9 . 3 2 1 6 . 2 1 . 2 4 8 . 3 2 3 . 3 5 1 . 3 9 3 . 5 6 8 . 3 9 3 . 3 5 5 6 , 8 3 3 1 , 0 1 5 0 2 , 2 3 5 2 1 , 7 2 0 4 1 , 7 5 6 5 , 9 6 0 3 , 3 9 2 1 , 8 9 $ 2 7 5 , 7 7 1 4 8 3 , 8 1 1 5 2 3 , 5 7 4 3 1 6 , 1 9 3 6 2 4 , 5 0 1 2 7 7 , 6 3 1 6 4 3 , 3 5 8 3 4 , 8 5 4 , 1 6 6 3 , 6 1 1 9 6 , 9 0 4 5 9 4 , 4 1 1 9 2 1 , 8 6 8 , 1 3 9 0 , 8 6 7 1 , 4 3 9 6 2 , 2 4 9 6 9 , 4 6 8 9 3 7 8 , 7 7 9 0 , 6 5 2 0 4 , 2 9 5 3 6 , 6 2 6 6 1 , 7 8 9 , 1 0 4 8 , 1 8 3 5 2 9 , 0 9 8 5 6 7 , 2 7 2 , 1 7 4 7 , 7 5 1 6 0 3 , 8 1 9 1 7 , 3 0 2 7 3 5 , 2 5 6 , 1 1 0 4 , 4 1 9 9 1 , 0 7 1 7 3 1 , 7 3 8 , 1 9 2 0 , 0 5 1 $ $ 1 2 . 8 7 1 . 8 9 4 . 8 8 5 . 8 9 3 . 7 3 2 . 7 5 0 . 8 9 3 . 4 6 3 . 7 1 0 . 3 2 1 . 5 1 5 . 4 6 3 . 4 2 1 . 7 1 5 . 4 3 5 . 4 8 7 0 , 7 1 3 0 , 2 1 8 5 9 , 7 3 2 9 7 , 9 4 7 8 5 , 9 8 8 0 , 6 0 6 5 , 0 1 $ 1 5 2 , 6 8 0 4 0 , 7 7 1 0 1 7 , 4 6 4 3 4 3 , 6 8 5 2 4 7 , 1 1 1 7 7 8 , 2 4 1 9 9 1 , 4 8 4 9 0 , 3 3 1 2 6 1 , 3 5 6 , 1 7 8 9 , 6 1 0 1 1 , 7 8 3 1 8 0 , 0 5 1 2 7 2 , 0 4 0 , 2 ) s d n a s u o h t n i s r a l l o D ( 8 7 6 , 2 1 5 5 0 , 3 5 3 3 7 , 5 6 8 4 6 , 5 5 3 3 , 1 8 3 1 , 8 4 5 8 , 0 8 0 1 2 , 8 9 0 1 7 , 0 4 2 9 1 , 9 7 1 , 2 1 0 2 , 1 2 4 5 8 6 , 5 3 0 , 1 6 8 8 , 6 5 4 , 1 3 2 5 , 9 2 1 9 3 7 , 8 1 4 1 4 , 0 8 1 2 6 5 , 5 8 7 , 1 2 5 3 , 8 3 4 8 4 , 9 8 1 8 9 3 , 3 1 0 , 2 4 9 7 , 5 6 1 $ $ 8 4 . 8 4 2 . 8 1 3 . 8 4 2 . 8 8 4 . 7 9 7 . 6 4 0 . 8 1 9 . 4 3 4 . 7 4 3 . 3 2 3 . 5 3 7 . 4 0 3 . 4 8 7 . 6 1 8 . 4 2 7 . 4 4 1 9 , 6 4 1 7 , 2 1 4 1 6 , 7 3 3 9 9 , 5 5 0 6 1 , 4 1 0 8 4 , 1 1 4 4 8 , 3 $ 8 6 5 , 1 8 7 9 7 , 0 8 1 7 7 3 , 6 5 4 6 7 5 , 3 7 6 2 0 9 , 1 7 1 1 2 4 , 3 5 1 2 1 6 , 6 5 9 1 7 , 2 4 1 3 5 2 , 4 7 7 , 1 2 5 1 , 1 2 4 7 8 , 0 3 4 1 7 8 , 3 6 1 7 2 1 , 5 0 2 , 2 3 4 0 , 6 1 9 8 1 , 0 6 2 3 2 , 6 7 6 5 3 , 7 4 1 9 , 1 4 6 9 , 6 6 6 4 , 2 9 8 6 6 , 4 8 8 4 6 , 0 5 3 4 4 , 0 4 3 , 2 6 5 7 , 0 8 4 5 2 8 , 1 3 1 , 1 1 8 5 , 2 1 6 , 1 6 4 9 , 0 7 1 3 2 2 , 8 2 3 7 7 , 4 4 1 3 2 5 , 6 5 9 , 1 6 1 7 , 6 2 9 7 4 , 1 7 1 8 1 7 , 4 5 1 , 2 5 2 7 , 5 8 1 $ $ 6 7 . 7 9 6 . 7 2 6 . 7 0 3 . 7 7 0 . 8 9 1 . 7 8 5 7 . 9 4 . 5 8 1 . 7 5 7 . 2 3 8 . 4 8 1 . 4 5 7 . 3 3 5 . 6 2 2 . 4 8 1 . 4 d e d n E r a e Y 5 0 0 2 , 1 3 r e b m e c e D d e d n E r a e Y 6 0 0 2 , 1 3 r e b m e c e D d e d n E r a e Y 7 0 0 2 , 1 3 r e b m e c e D e t a R / d l e i Y t s e r e t n I e g a r e v A e c n a l a B e t a R / d l e i Y t s e r e t n I e g a r e v A e c n a l a B e t a R / d l e i Y t s e r e t n I e g a r e v A e c n a l a B , 1 3 r e b m e c e D 7 0 0 2 e t a R / d l e i Y $ % 0 8 . 6 $ % 3 0 . 7 $ % 2 0 . 7 l a i t n e d i s e r y l i m a f - r u o f o t - e n O : s t e s s a g n i n r a e - t s e r e t n I : e l b a v i e c e r s n a o L ) 1 ( s d n o b e u n e v e r l a i r t s u d n I e t a t s e l a e r l a i c r e m m o C l a i t n e d i s e r r e h t O s s e n i s u b l a i c r e m m o C n o i t c u r t s n o C s n a o l r e h t O e l b a v i e c e r s n a o l l a t o T ) 1 ( s t e s s a g n i n r a e - t s e r e t n i r e h t o d n a s e i t i r u c e s t n e m t s e v n I s t e s s a g n i n r a e - t s e r e t n i l a t o T s t n e l a v i u q e h s a c d n a h s a C s t e s s a g n i n r a e - n o n r e h t O : s t e s s a g n i n r a e - t s e r e t n i n o N s g n i v a s d n a d n a m e d g n i r a e b - t s e r e t n I : s e i t i l i b a i l g n i r a e b - t s e r e t n I d e u s s i s e r u t n e b e d d e t a n i d r o b u S s g n i w o r r o b m r e t - t r o h S s e c n a v d a B L H F s t i s o p e d l a t o T s t i s o p e d e m T i s t e s s a l a t o T s e i t i l i b a i l g n i r a e b - t s e r e t n i l a t o T : s e i t i l i b a i l g n i r a e b - t s e r e t n i n o N s e i t i l i b a i l l a t o T s t i s o p e d d n a m e D s e i t i l i b a i l r e h t O y t i u q e ’ s r e d l o h k c o t S 26 % 3 7 . 2 % 3 1 3 . 8 9 3 , 8 5 $ % 3 8 . 2 % 9 3 3 . 7 2 2 , 9 6 $ % 1 7 . 2 % 4 2 . 3 5 0 4 , 1 7 $ % 0 0 . 3 % 1 . 3 1 1 % 3 . 4 1 1 % 7 . 2 1 1 s e i t i l i b a i l g n i r a e b - t s e r e t n i e g a r e v a o t s t e s s a g n i n r a e - t s e r e t n i e g a r e v A * n i g r a m t s e r e t n i t e N d a e r p s e t a r t s e r e t n I : e m o c n i t s e r e t n i t e N 6 6 1 , 7 8 9 , 1 $ 2 9 1 , 9 7 1 , 2 $ 3 4 4 , 0 4 3 , 2 $ y t i u q e ' s r e d l o h k c o t s d n a s e i t i l i b a i l l a t o T d n a 6 0 0 2 , 7 0 0 2 r o f 0 0 0 , 7 7 5 , 3 $ d n a 0 0 0 , 2 2 0 , 4 $ , 0 0 0 , 9 4 4 , 4 $ s a w e l b a t s i h t n i d e d u l c n i s t e s s a t p m e x e - x a t n o e m o c n i t s e r e t n I . y l e v i t c e p s e r , 5 0 0 2 d n a 6 0 0 2 , 7 0 0 2 n i 0 0 0 , 5 9 3 , 8 1 $ d n a 0 0 0 , 6 6 7 , 5 2 $ , 0 0 0 , 3 8 5 , 0 3 $ e r e w s d n o b e u n e v e r l a i r t s u d n i t p m e x e - x a t e g a r e v a , n o i t i d d a n I . y l e v i t c e p s e r , 5 0 0 2 d n a 6 0 0 2 , 7 0 0 2 r o f 0 0 0 , 7 9 6 , 7 5 $ d n a 0 0 0 , 5 2 1 , 3 6 $ , 0 0 0 , 7 8 6 , 9 6 $ e r e w s e i t i r u c e s t n e m t s e v n i t p m e x e - x a t e g a r e v a , s e i t i r u c e s t n e m t s e v n i f o s e c n a l a b e g a r e v a l a t o t e h t f O ) 1 ( . y l e v i t c e p s e r , 5 0 0 2 d n a 6 0 0 2 , 7 0 0 2 r o f 0 0 0 , 0 0 9 , 2 $ d n a 0 0 0 , 0 2 8 , 2 $ , 0 0 0 , 6 7 1 , 3 $ s a w s t e s s a t p m e x e - x a t o t d e t a l e r e s n e p x e t s e r e t n i d e w o l l a s i d f o t e n e m o c n i t s e r e t n I . y l e v i t c e p s e r , 5 0 0 2 . s t e s s a g n i n r a e - t s e r e t n i l a t o t y b d e d i v i d e m o c n i t s e r e t n i ' t e n s y n a p m o C e h t s a d e n i f e D * Rate/Volume Analysis The following table 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 rate. Tax-exempt income was not calculated on a tax equivalent basis. Year Ended December 31, 2007 vs. December 31, 2006 Increase (Decrease) Due to Rate Volume Total Increase (Decrease) Rate (Dollars in thousands) Year Ended December 31, 2006 vs. December 31, 2005 Increase (Decrease) Due to Volume Total Increase (Decrease) Interest-earning assets: Loans receivable Investment securities and other interest-earning assets $ (116) $ 9,741 $ 9,625 $ 20,822 $ 14,143 $ 34,965 2,133 2,032 4,165 1,410 (789) 621 Total interest-earning assets 2,017 11,773 13,790 22,232 13,354 35,586 Interest-bearing liabilities: Demand deposits Time deposits Total deposits Short-term borrowings Subordinated debentures issued to capital trust FHLBank advances 1,462 2,076 3,538 (75) (67) 514 1,903 5,058 6,961 1,783 646 (1,688) 3,365 7,134 10,499 1,708 579 (1,174) 3,682 12,718 16,400 1,270 325 1,227 903 6,161 7,064 (591) 24 (962) 4,585 18,879 23,464 679 349 265 Total interest-bearing liabilities 3,910 7,702 11,612 19,222 5,535 24,757 Net interest income $ (1,893) $ 4,071 $ 2,178 $ 3,010 $ 7,819 $ 10,829 Results of Operations and Comparison for the Years Ended December 31, 2006 and 2005 General Including the effects of the Company's hedge accounting entries recorded in 2006 and accounting change for interest rate swaps in 2005, net income increased $8.1 million, or 35.6%, during the year ended December 31, 2006, compared to the year ended December 31, 2005. This increase was primarily due to an increase in net interest income of $10.8 million, or 18.5%, and an increase in non-interest income of $8.1 million, or 37.4%, partially offset by an increase in non-interest expense of $4.6 million, or 10.4%, an increase in provision for income taxes of $4.8 million, or 52.9%, and an increase in provision for loan losses of $1.4 million, or 35.4%. Excluding the effects of the Company's hedge accounting entries recorded in 2006 and accounting change for interest rate swaps in 2005, net income increased $3.0 million, or 10.7%, during the year ended December 31, 2006, compared to the year ended December 31, 2005. This increase was primarily due to an increase in net interest income of $8.0 million, or 12.7%, and an increase in non-interest income of $3.0 million, or 12.2%, partially offset by an increase in non-interest expense of $4.6 million, or 10.4%, an increase in provision for income taxes of $2.0 million, or 17.3%, and an increase in provision for loan losses of $1.4 million, or 35.4%. See "Selected Consolidated Financial Data - Restatement of Previously Issued Consolidated Financial Statements" for a discussion of the current and previously reported financial statements due to the Company's accounting change for certain interest rate swaps in 2005. 27  Non-GAAP Reconciliation (Dollars in thousands) Year Ended December 31, 2006 2005 Earnings Per Diluted Share Earnings Per Diluted Share Dollars Dollars Reported Earnings $ 30,743 $ 2.22 $ 22,671 $ 1.63 Amortization of deposit broker origination fees (net of taxes) Net change in fair value of interest rate swaps and related deposits (net of taxes) Earnings excluding impact of hedge accounting entries (2006)/ accounting change for interest rate swaps (2005) 1,155 .08 776 .05 (1,204) (.08) 4,290 .31 $ 30,694 $ 2.22 $ 27,737 $ 1.99 Total Interest Income Total interest income increased $35.6 million, or 31.1%, during the year ended December 31, 2006 compared to the year ended December 31, 2005. The increase was due to a $35.0 million, or 35.6%, increase in interest income on loans and a $621,000, or 3.8%, increase in interest income on investments and other interest-earning assets. Interest income for both loans and investment securities and other interest-earning assets increased due to higher average rates of interest. Interest income for loans also increased due to higher average balances while investment securities and other interest-earning assets experienced lower average balances. Interest Income - Loans During the year ended December 31, 2006 compared to December 31, 2005, interest income on loans increased due to higher average balances and higher average interest rates. Interest income increased $14.1 million as the result of higher average loan balances from $1.46 billion during the year ended December 31, 2005 to $1.65 billion during the year ended December 31, 2006. The higher average balance resulted principally from the Bank's increased commercial and residential construction lending, commercial business lending, consumer lending and financing of industrial revenue bonds. The Bank's commercial real estate and one- to four- family residential loan balances experienced little change, while multi-family residential loan balances decreased during 2006. Interest income on loans increased $20.8 million as the result of higher average interest rates. The average yield on loans increased from 6.73% during the year ended December 31, 2005, to 8.05% during the year ended December 31, 2006. Loan rates were generally lower in 2005 than in 2006, as a result of market rates of interest, primarily the "prime rate" of interest. During 2005 and through the first half of 2006, market interest rates increased substantially, with the "prime rate" of interest increasing 2.00% during 2005 and another 1.00% in 2006. A large portion of the Bank's loan portfolio adjusts with changes to the "prime rate" of interest. The Company has a portfolio of prime-based loans which have interest rate floors. Prior to 2005, many of these loan rate floors were in effect and established a loan rate which was higher than the contractual rate would have otherwise been. During 2005 and 2006, as market interest rates rose, many of these interest rate floors were exceeded and the loans reverted back to their normal contractual interest rate terms. In the year ended December 31, 2006, the average yield on loans was 8.05% versus an average prime rate for the period of 7.96%, or a difference of 9 basis points. In the year ended December 31, 2005, the average yield on loans was 6.73% versus an average prime rate for the period of 6.19%, or a difference of 54 basis points. 28 Interest Income - Investments and Other Interest-earning Deposits Interest income on investments and other interest-earning assets increased mainly as a result of higher average rates of interest during the year ended December 31, 2006, when compared to the year ended December 31, 2005. Interest income increased by $1.4 million as a result of an increase in average interest rates from 3.99% during the year ended December 31, 2005, to 4.39% during the year ended December 31, 2006. In 2005 and 2006, as principal balances on mortgage-backed securities were paid down through prepayments and normal amortization, the Company replaced a large portion of these securities with variable-rate mortgage- backed securities (primarily one-year and hybrid ARMs) which had a lower yield at the time of purchase relative to the fixed-rate securities remaining in the portfolio. As these securities reach interest rate reset dates, their rates should increase along with market interest rate increases. Approximately $55-60 million will have interest rate resets at some time in 2007, with the currently projected weighted average coupon rate increasing approximately 1.25%. The actual amount of securities that will reprice and the actual interest rate changes on these securities is subject to the level of prepayments on these securities and the changes that actually occur in market interest rates (primarily treasury rates and LIBOR rates). The Company has total variable-rate mortgage-backed securities of approximately $121 million at December 31, 2006. In addition, the Company increased its portfolio of tax-exempt securities issued by states and municipalities, from $34 million at December 31, 2004 to $52 million at December 31, 2006. These securities generally have coupon yields that are comparable to the variable-rate mortgage-backed securities that the Company purchased; however, the tax-equivalent yield is higher. Interest income decreased $789,000 as a result of a decrease in average balances from $410 million during the year ended December 31, 2005, to $387 million during the year ended December 31, 2006. This decrease was primarily in available-for-sale securities, where securities in excess of those needed for liquidity and pledging to deposit accounts under repurchase agreements were not replaced. Total Interest Expense Including the effects of the Company's accounting change in 2005 for certain interest rate swaps, total interest expense increased $24.8 million, or 44.1%, during the year ended December 31, 2006, when compared with the year ended December 31, 2005, primarily due to an increase in interest expense on deposits of $23.5 million, or 55.5%, an increase in interest expense on FHLBank advances of $265,000, or 3.4%, an increase in interest expense on short-term borrowings of $679,000, or 13.7%, and an increase in interest expense on subordinated debentures issued to capital trust of $349,000, or 35.4%. Excluding the effects of the Company's hedge accounting entries recorded in 2006 and accounting change in 2005 for certain interest rate swaps, economically, total interest expense increased $27.6 million, or 53.6%, during the year ended December 31, 2006, when compared with the year ended December 31, 2005, primarily due to an increase in interest expense on deposits of $26.3 million, or 69.8%, an increase in interest expense on FHLBank advances of $265,000, or 3.4%, an increase in interest expense on short-term borrowings of $679,000, or 13.7%, and an increase in interest expense on subordinated debentures issued to capital trust of $349,000, or 35.4%. See "Selected Consolidated Financial Data - Restatement of Previously Issued Consolidated Financial Statements" for a discussion of the current and previously reported financial statements due to the Company's accounting change for certain interest rate swaps in 2005. Interest Expense - Deposits Including the effects of the Company's hedge accounting entries recorded in 2006 and accounting change in 2005 for certain interest rate swaps, interest on demand deposits increased $3.7 million due to an increase in average rates from 2.12% during the year ended December 31, 2005, to 3.01% during the year ended December 31, 2006. The average interest rates increased due to higher overall market rates of interest in 2006. Market rates of interest on checking and money market accounts began to increase in the latter half of 2004 and throughout 2005 and 2006 as the FRB raised short-term interest rates. The Company's interest-bearing checking balances have grown in the past several years through increased relationships with correspondent, corporate and retail customers. Average interest-bearing demand balances were $421 million, $382 million and $382 million in 2006, 2005 and 2004, respectively. Average non-interest bearing demand balances were $189 million, $170 million and $138 million in 2006, 2005 and 2004, respectively. Interest expense on deposits increased $12.7 million as a result of an increase in average rates of interest on time deposits from 3.84% during the year ended December 31, 2005, to 5.12% during the year ended December 31, 2006, and increased $6.2 million due to an increase in average balances of time deposits from $891 million during the year ended December 31, 2005, to $1.036 billion during the year ended December 31, 2006. The average interest rates increased due to higher overall market rates of interest throughout 2006. As certificates of deposit matured in 2006, they were generally replaced with certificates bearing a higher rate of interest. Market rates of interest on new certificates began to increase in the latter half of 2004 and throughout 2005 and 2006 as the FRB started raising short-term interest rates. In 2005 and 2006, the Company increased its balances of brokered certificates of deposit to fund a portion of its loan growth. In addition, the Company's interest rate swaps repriced to higher rates in conjunction with the increases in market interest rates, specifically LIBOR. 29 The effects of the Company's hedge accounting entries recorded in 2006 and accounting change for interest rate swaps in 2005 did not impact interest on demand deposits. Excluding the effects of the Company's hedge accounting entries recorded in 2006 and accounting change in 2005 for certain interest rate swaps, economically, interest expense on deposits increased $16.3 million as a result of an increase in average rates of interest on time deposits from 3.32% during the year ended December 31, 2005, to 4.95% during the year ended December 31, 2006, and increased $5.4 million due to an increase in average balances of time deposits from $891 million during the year ended December 31, 2005, to $1.036 billion during the year ended December 31, 2006. The average interest rates increased due to higher overall market rates of interest throughout 2006. See "Selected Consolidated Financial Data - Restatement of Previously Issued Consolidated Financial Statements" for a discussion of the current and previously reported financial statements due to the Company's accounting change for certain interest rate swaps in 2005. Interest Expense - FHLBank Advances, Short-term Borrowings and Subordinated Debentures Issued to Capital Trust Interest expense on FHLBank advances increased $1.2 million due to an increase in average interest rates from 3.86% during the year ended December 31, 2005, to 4.51% during the year ended December 31, 2006. Partially offsetting this increase, average balances on FHLBank advances decreased from $204 million in the year ended December 31, 2005, to $180 million in the year ended December 31, 2006, resulting in decreased interest expense of $962,000. The Company elected to utilize other forms of alternative funding (primarily brokered CDs) during 2006. Interest expense on short-term borrowings increased $1.3 million due to an increase in average interest rates from 3.15% in the year ended December 31, 2005, to 4.36% in the year ended December 31, 2006. Partially offsetting this increase, average balances on short-term borrowings decreased from $158 million during the year ended December 31, 2005, to $130 million during the year ended December 31, 2006, resulting in decreased interest expense of $591,000. The decrease in balances of short-term borrowings was primarily due to decreases in securities sold under repurchase agreements with Great Southern's corporate customers. The average interest rates increased due to higher overall market rates of interest in 2006. Market rates of interest on short-term borrowings have increased since the middle of 2004 as the Federal Reserve Board began raising short-term interest rates. Interest expense on subordinated debentures issued to capital trust increased primarily due to increases in average rates from 5.39% in the year ended December 31, 2005, to 7.12% in the year ended December 31, 2006. The average rate on these subordinated debentures increased significantly in 2006 as these liabilities were subject to an interest rate swap that requires the Company to pay a variable rate of interest that is indexed to LIBOR. In November 2006, the Company redeemed its trust preferred debentures which were issued in 2001 and replaced them with new trust preferred debentures. These new debentures are not subject to an interest rate swap; however, they are variable-rate debentures and bear interest at a rate of three-month LIBOR plus 1.60%, adjusting quarterly. Net Interest Income Including the effects of the Company's hedge accounting entries recorded in 2006 and accounting change in 2005 for certain interest rate swaps, the Company's overall interest rate spread increased 10 basis points, or 3.7%, from 2.73% during the year ended December 31, 2005, to 2.83% during the year ended December 31, 2006. The increase was due to a 124 basis point increase in the weighted average yield on interest-earning assets, partially offset by a 114 basis point increase in the weighted average rate paid on interest-bearing liabilities. The Company's overall net interest margin increased 26 basis points, or 8.3%, from 3.13% for the year ended December 31, 2005, to 3.39% for the year ended December 31, 2006. In comparing the two years, the yield on loans increased 132 basis points while the yield on investment securities and other interest-earning assets increased 40 basis points. The rate paid on deposits increased 119 basis points, the rate paid on FHLBank advances increased 65 basis points, the rate paid on short-term borrowings increased 121 basis points, and the rate paid on subordinated debentures issued to capital trust increased 173 basis points. See "Selected Consolidated Financial Data - Restatement of Previously Issued Consolidated Financial Statements" for a discussion of the current and previously reported financial statements due to the Company's accounting change for certain interest rate swaps in 2005. The prime rate of interest averaged 7.96% during the year ended December 31, 2006 compared to an average of 6.19% during the year ended December 31, 2005. The prime rate began to increase in the second half of 2004 and throughout 2005 and 2006 as the FRB began to raise short-term interest rates, and stood at 8.25% at December 31, 2006. Over half of the Bank's loans were tied to prime at December 31, 2006. Interest rates paid on deposits, FHLBank advances and other borrowings increased significantly in 2006 compared to 2005. Interest costs on these liabilities increased in the latter half of 2004 and all of 2005 and 2006 as a result of rising short-term market interest rates, primarily increases by the FRB and increases in LIBOR. The Company continues to utilize interest rate swaps and FHLBank advances that reprice frequently to manage overall interest rate risk. See "Quantitative and Qualitative Disclosures About Market Risk" for additional information on the Company's interest rate risk management. 30 Excluding the effects of the Company's hedge accounting entries recorded in 2006 and accounting change in 2005 for certain interest rate swaps, economically, the Company's overall interest rate spread decreased 8 basis points, or 2.7%, from 3.01% during the year ended December 31, 2005, to 2.93% during the year ended December 31, 2006. The decrease was due to a 132 basis point increase in the weighted average rate paid on interest-bearing liabilities, partially offset by a 124 basis point increase in the weighted average yield on interest-earning assets. The Company's overall net interest margin increased 11 basis points, or 3.3%, from 3.37% for the year ended December 31, 2005, to 3.48% for the year ended December 31, 2006. In comparing the two years, the yield on loans increased 132 basis points while the yield on investment securities and other interest-earning assets increased 40 basis points. The rate paid on deposits increased 143 basis points, the rate paid on FHLBank advances increased 65 basis points, the rate paid on short-term borrowings increased 121 basis points, and the rate paid on subordinated debentures issued to capital trust increased 173 basis points. Non-GAAP Reconciliation (Dollars in thousands) Year Ended December 31, 2006 2005 Reported Net Interest Margin $ 69,227 3.39% $ 58,398 3.13% Amortization of deposit broker origination fees Interest rate swap net settlements Net interest margin excluding impact of hedge accounting entries 1,777 --- .09 --- 1,194 3,408 .06 .18 $ 71,004 3.48% $ 63,000 3.37% For additional information on net interest income components, refer to "Average Balances, Interest Rates and Yields" table in this Annual Report on Form 10-K. This table is prepared including the impact of the accounting changes for interest rate swaps. Provision for Loan Losses and Allowance for Loan Losses The provision for loan losses was $5.5 million and $4.0 million during the years ended December 31, 2006 and December 31, 2005, respectively. The allowance for loan losses increased $1.7 million, or 7.0%, to $26.3 million at December 31, 2006 compared to $24.5 million at December 31, 2005. Net charge-offs were $3.7 million in 2006 versus $3.0 million in 2005. Management records a provision for loan losses in an amount it believes 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, 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. The Bank's allowance for loan losses as a percentage of total loans was 1.54% and 1.59% at December 31, 2006 and 2005, respectively. Management considers the allowance for loan losses adequate to cover losses inherent in the Company's loan portfolio 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, an additional provision for losses would be required, thereby adversely affecting future results of operations and financial condition. Non-performing Assets As a result of continued growth in the loan portfolio, changes in portfolio mix, changes in economic and market conditions that occur from time to time, and other factors specific to a borrower's circumstances, the level of non-performing assets will fluctuate. Non-performing assets at December 31, 2006, were $25.0 million, up $8.2 million from December 31, 2005. Non-performing assets as 31 a percentage of total assets were 1.12% at December 31, 2006. Compared to December 31, 2005, non-performing loans increased $4.0 million to $20.2 million while foreclosed assets increased $4.2 million to $4.8 million. Commercial real estate, construction and business loans comprised $18.7 million, or 92%, of the total $20.2 million of non-performing loans at December 31, 2006. Commercial real estate, construction and business loans historically comprise the majority of non-performing loans. Non-performing Loans. Compared to December 31, 2005, non-performing loans increased $4.0 million to $20.2 million. Non-performing loans increased primarily as a result of the addition of two unrelated loan relationships to the non-performing category since December 31, 2005. In addition, two other relationships that were included in the non-performing loans category at December 31, 2005, were increased due to the transfer of additional loan balances from the potential problem loans category during 2006. These increases were partially offset by the reduction of several loan relationships that were included in the non-performing category at December 31, 2005. At December 31, 2006, the six significant relationships remaining in the non-performing category described below accounted for $16.0 million of the non-performing loan total. The two relationships that were added to the non-performing category during 2006 included a $3.1 million relationship and a $1.0 million relationship. The $3.1 million relationship was placed in the non-performing loans category during the quarter ended March 31, 2006. At December 31, 2005, this relationship was included in the Potential Problem Loans category and was described there in the December 31, 2005, Annual Report on Form 10-K. This relationship is primarily secured by a motel located in the State of Illinois. The motel is operating and is currently offered for sale. The borrower is currently making partial payments monthly to the Bank. In addition, the Small Business Administration has a significant loan, which is subordinated to the Bank's position, on this same collateral. The $1.0 million loan relationship was placed in the non-performing loans category during the quarter ended June 30, 2006. This relationship is primarily secured by subdivision lots, houses under construction and commercial real estate lots in the Lake of the Ozarks, Missouri, area. The two relationships that were increased in the non-performing category during 2006 included a $5.2 million relationship and a $5.1 million relationship. The $5.2 million relationship was included in non-performing loans as $3.7 million at December 31, 2005; $1.5 million was added to the non-performing loans category from the potential problem loans category during the three months ended June 30, 2006. The $3.7 million portion of this relationship is secured by a nursing home in Missouri that has had cash flow problems. The additional $1.5 million is secured by a second nursing home in the Springfield, Missouri, area. This second nursing home has performed satisfactorily; however, due to the performance issues of the other property, the entire relationship has now been categorized as non-performing. The $5.1 million relationship was discussed in the December 31, 2005 Annual Report on Form 10-K, where $1.5 million was included in the non-performing loans category and $6.2 million was included in the potential problem loans category. This relationship is secured by commercial real estate, vacant land, developed and undeveloped residential subdivisions, houses under construction and houses used as rental property. The Company determined that the transfer of the potential problem loans portion of the relationship to the non-performing loans category was warranted due to continued deterioration of payment performance. During the three months ended March 31, 2006, the Company recorded a charge-off of $283,000 on this relationship. In addition, during 2006, the borrower sold some of the commercial real estate, houses and subdivision lots. The proceeds of these sales were used to reduce loan balances. Two additional unrelated credit relationships were included in non-performing loan totals at December 31, 2005, and remain non-performing loans at December 31, 2006. The first relationship totaled $686,000 at December 31, 2006 and is secured primarily by a mobile home park in the Kansas City, Missouri, metropolitan area and other commercial real estate collateral. During the three months ended December 31, 2006, the Company recorded a charge-off of $190,000 on this relationship. The second relationship totaled $888,000 at December 31, 2006, and is secured primarily by commercial and residential real estate collateral in Missouri. At December 31, 2005, this relationship totaled $2.0 million and was also secured by an automobile dealership. During 2006, the borrower sold the automobile dealership. This sale reduced the relationship balance by approximately $1.0 million. Four other unrelated relationships that were included in non-performing assets at December 31, 2005, were repaid during 2006. These four relationships were: a $640,000 relationship secured by several single-family houses that were completed or under construction in Northwest Arkansas; a $993,000 relationship secured by the receivables, inventory, equipment and other business assets of a home building materials company in Springfield, Missouri; a $1.5 million relationship secured by commercial real estate and equipment of two restaurants; and a $649,000 relationship secured by a motel near Branson, Missouri and additional commercial real estate collateral. Two other significant unrelated relationships were both added to, and removed from, the non-performing category during 2006. A $3.1 million loan relationship was placed in the non-performing loans category during the quarter ended September 30, 2006. This relationship was primarily secured by a townhome/apartment development in the Kansas City, Mo., area. During the quarter ended December 31, 2006, this relationship was transferred to foreclosed assets. Subsequent to December 31, 2006, the Company entered into a contract to sell this property for the carrying value of the foreclosed asset, with a closing scheduled in March 2007. A $1.8 million loan relationship was also placed in the non-performing loans category during the quarter ended September 30, 2006. This relationship was primarily secured by a motel in Branson, Mo. Prior to December 31, 2006, this loan was refinanced at another institution and the principal balance was repaid. 32 Foreclosed Assets. Of the total $4.8 million of foreclosed assets at December 31, 2006, foreclosed real estate totaled $4.5 million and repossessed automobiles, boats and other personal property totaled $271,000. At December 31, 2006, the Company's only significant foreclosed real estate asset was the $3.1 million property discussed above. Potential Problem Loans. Potential problem loans decreased $4.8 million during the year ended December 31, 2006 from $18.4 million at December 31, 2005 to $13.6 million at December 31, 2006. Potential problem loans are loans which management has identified through routine internal review procedures as having possible credit problems that may cause the borrowers difficulty in complying with current repayment terms. These loans are not reflected in non-performing assets. During the year ended December 31, 2006, potential problem loans decreased primarily due to the transfer to the non-performing loan category portions of four unrelated loan relationships, partially offset by the addition of two significant unrelated loan relationships and other smaller unrelated relationships. At December 31, 2006, three large unrelated relationships made up a large portion of the potential problem loan category. The first relationship totaled $3.3 million and is secured primarily by a retail center, developed and undeveloped residential subdivisions, and single-family houses being constructed for resale in the Springfield, Missouri, area. The second relationship totaled $2.7 million and is secured primarily by a motel in the State of Florida. The motel is operating but payment performance has been slow at times. The third relationship totaled $1.0 million (with an additional $5.1 million included in Non-performing Loans) and is secured primarily by vacant land, developed and undeveloped residential subdivisions, and single-family houses used as rental property in the Branson, Missouri, area. At December 31, 2006, these three significant relationships described above accounted for $7.0 million of the potential problem loan total. Non-interest Income Including the effects of the Company's hedge accounting entries recorded in 2006 and restatement in 2005 for certain interest rate swaps, non-interest income for the year ended December 31, 2006 was $29.6 million compared with $21.5 million for the year ended December 31, 2005. The $8.1 million increase in non-interest income is primarily attributable to the effects of the accounting change for interest rate swaps on the prior period results. Non-interest income decreased $6.6 million in the year ended December 31, 2005, and increased $1.9 million in the year ended December 31, 2006, as a result of the change in the fair value of certain interest rate swaps. In addition, non-interest income for 2005 was also impacted by the reclassification of the net interest settlements on these swaps from net interest income to non-interest income. While this had no effect on total net income, non-interest income was increased by $3.4 million in the year ended December 31, 2005. There was no reclassification of net interest settlements in the year ended December 31, 2006. Full year 2006 income from commissions from the Company's travel, insurance and investment divisions increased $440,000, or 5.0%, compared to the year ended December 31, 2005. In January 2006, the Company completed its acquisition of a travel company in Lee's Summit, Missouri. During the quarter ended September 30, 2006, the Company completed its acquisition of a second travel company in Columbia, Missouri. The operations of these travel companies are now included in the operating results of the Company. The decrease in revenues in the investment division in the 2006 period is primarily related to lower sales of annuity products. Service charges on deposit accounts and ATM fees increased $1.3 million, or 9.8%, compared to the year ended December 31, 2005. In 2006 the Company increased some of its per-item charges on certain account activities. In addition, a portion of the fee increase is attributed to growth in accounts to which charges may apply. Other income increased $451,000 in 2006 compared to 2005 due to the net benefit realized on federal historic tax credits utilized by the Company in 2006. The Company expects to utilize federal historic tax credits in the future; however, the timing and amount of these credits will vary depending upon availability of the credits and ability of the Company to utilize the credits. One additional item that decreased non-interest income in the year ended December 31, 2005 was the impairment write- down in value of one available-for-sale government preferred stock agency security. This write-down totaled $734,000 in 2005. This security has a dividend rate that resets to a market index every 24 months. The security has had an unrealized loss that was recorded directly to equity prior to December 31, 2005, so the write-down did not affect total equity. During 2006, the fair value of the security has recovered some of the decline in value. This unrealized gain is being recorded directly to equity. The Company has the ability to continue to hold this security in its portfolio for the foreseeable future and believes that the fair value of this security may recover further in future periods, particularly as the next dividend rate reset date approaches. Excluding the effects of the Company's hedge accounting entries recorded in 2006 and restatement for interest rate swaps in 2005, economically, total non-interest income increased $3.0 million in the year ended December 31, 2006 when compared to the year ended December 31, 2005. The increases and decreases are the same as those stated above except that the interest rate swap net settlements would have been included in interest expense and the change in fair value of the interest rate swaps would have been recorded as an increase or decrease to the related brokered certificates of deposit. See "Selected Consolidated Financial Data 33 - Restatement of Previously Issued Consolidated Financial Statements" for a discussion of the current and previously reported financial statements due to the Company's accounting change for certain interest rate swaps in 2005. Non-GAAP Reconciliation (Dollars in thousands) Year Ended December 31, 2006 Effect of Hedge Accounting Entries Recorded Excluding Hedge Accounting Entries Recorded As Reported $ 29,632 $ 1,853 $ 27,779 Year Ended December 31, 2005 Effect of Hedge Accounting Entries Recorded Excluding Hedge Accounting Entries Recorded As Reported $ 21,559 $ (3,192 ) $ 24,751 Non-interest income -- Net change in fair value of interest rate swaps and related deposits Non-interest income -- Net change in fair value of interest rate swaps and related deposits Non-Interest Expense Total non-interest expense increased $4.6 million, or 10.4%, from $44.2 million in the year ended December 31, 2005, compared to $48.8 million in the year ended December 31, 2006. The increase was primarily due to: (i) an increase of $2.9 million, or 11.6%, in salaries and employee benefits and (ii) smaller increases and decreases in other non-interest expense areas, such as occupancy and equipment expense, postage, advertising, insurance, telephone, legal and professional fees, and bank charges and fees related to additional correspondent relationships. The Company's efficiency ratio for the year ended December 31, 2006, was 49.37% compared to 55.28% in 2005. These efficiency ratios include the impact of the accounting change for certain interest rate swaps. Excluding the effects of accounting for interest rate swaps, the efficiency ratio for the full year 2006 was 49.41% compared to 50.37% in 2005. The Company's ratio of non-interest expense to average assets has remained very constant over these recent periods at approximately 2.20%. In addition to the expenses discussed above, during the three months ended December 31, 2006, the Company redeemed the 9.0% Cumulative Trust Preferred Securities of Great Southern Capital Trust I. As a result of the redemption of the Trust I Securities, and as previously reported, approximately $783,000 ($510,000 after tax) of related unamortized issuance costs was written off as a noncash expense in the fourth quarter of 2006. The Company's increase in non-interest expense in 2006 compared to 2005 related to the continued growth of the Company. During the latter half of 2005, Great Southern completed its acquisition of three bank branches in central Missouri, acquired a Columbia, Mo.-based travel agency, and opened a banking center in Republic, Mo. In the first half of 2006, Great Southern acquired a travel agency in Lee's Summit, Mo., and established a new loan production office in Columbia, Mo. In September 2006, Great Southern opened new banking centers in Lee's Summit, Mo. and Ozark, Mo. As a result, in the year ended December 31, 2006, compared to the year ended December 31, 2005, non-interest expenses increased $1.8 million related to the ongoing operations of these new offices. In addition to these acquisitions and new offices, the Company expanded the loan production offices in St. Louis and Rogers, Ark., and added lending and lending support personnel in the Springfield market. Consistent with many other employers, the cost of health insurance premiums and other benefits for the Company continues to rise and added $546,000 in expenses in 2006 compared to 2005. Effective July 1, 2006, the Company reduced the benefits which may be earned by current employees in future periods under the Company's multi-employer defined benefit pension plan. In addition, employees hired after June 30, 2006, will not accrue any benefits under this plan. During the quarter ended December 31, 2006, the Company received an updated expense projection for its pension plan (which was modified by the Company effective July 1, 2006). This update indicated that benefit accruals for the 2006-2007 plan year have decreased. The Company recorded a corresponding reduction to expense of $222,000 in the fourth quarter of 2006. The Company expects that expenses related to the pension plan will 34 continue to be lower in 2007 than they were in 2006. The Company also made changes to other benefits in 2006. These changes resulted in non-recurring net decreases to accrued expenses of $147,000 in the three months ended December 31, 2006. The savings achieved by taking these steps may be offset by other expenses associated with this plan, including, without limitation, additional Company contributions that may be necessary from time to time to ensure the plan is adequately funded and by a planned increase in the matching portion of the Company's 401(k) plan for all eligible participants. As a result of the adoption of FAS 123(R) effective January 1, 2006, during the year ended December 31, 2006, the Company also recorded expenses of $480,000, or $.03 per diluted share, related to the cost of stock options previously granted by the Company. No corresponding expense was recorded in 2005. Non-GAAP Reconciliation (Dollars in thousands) Non-Interest Expense 2006 Revenue Dollars* Year Ended December 31, % Non-Interest Expense 2005 Revenue Dollars* % Efficiency Ratio $ 48,807 $ 98,859 49.37% $ 44,198 $ 79,957 55.28% Amortization of deposit broker origination fees Net change in fair value of interest rate swaps and related deposits Efficiency ratio excluding impact of hedge accounting entries --- 1,777 (.88) --- 1,194 (.75) --- (1,853) .92 --- 6,600 (4.16) $ 48,807 $ 98,783 49.41% $ 44,198 $ 87,751 50.37% *Net interest income plus non-interest income. Provision for Income Taxes Provision for income taxes as a percentage of pre-tax income increased from 28.6% for the year ended December 31, 2005, to 31.1% for the year ended December 31, 2006. The lower effective tax rate (as compared to the statutory federal tax rate of 35.0%) was primarily due to higher balances and rates of tax-exempt investment securities and loans, federal tax credits and deductions for stock options exercised by certain employees. For future periods, the Company expects the effective tax rate to be in the range of 30- 32% of pre-tax net income. 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 December 31, 2007, the Company had commitments of approximately $31.7 million to fund loan originations, $362.2 million of unused lines of credit and unadvanced loans, and $20.4 million of outstanding letters of credit. 35 The following table summarizes the Company's fixed and determinable contractual obligations by payment date as of December 31, 2007. Additional information regarding these contractual obligations is discussed further in Notes 6, 7, 8, 10 and 13 of the Notes to Consolidated Financial Statements. Deposits without a stated maturity Time and brokered certificates of deposit Federal Home Loan Bank advances Short-term borrowings Subordinated debentures Operating leases Dividends declared but not paid Interest rate swap fair value adjustment Payments Due In: One Year or Less Over One to Five Years Over Five Years Total (Dollars in thousands) $ 657,366 $ --- $ --- $ 657,366 736,376 93,395 216,721 --- 889 2,412 1,707,159 9,252 165,474 34,972 --- --- 1,660 --- 202,106 --- 194,678 85,500 --- 30,929 15 --- 311,122 --- 1,096,528 213,867 216,721 30,929 2,564 2,412 2,220,387 9,252 $1,716,411 $202,106 $311,122 $2,229,639 Management continuously reviews the capital position of the Company and the Bank to ensure compliance with minimum regulatory requirements, as well as to explore ways to increase capital either by retained earnings or other means. The Company's stockholders' equity was $189.9 million, or 7.8% of total assets of $2.43 billion at December 31, 2007, compared to equity of $175.6 million, or 7.8% of total assets of $2.24 billion at December 31, 2006. 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 require banks to have a minimum Tier 1 risk-based capital ratio, as defined, of 4.00%, a minimum total risk-based capital ratio of 8.00%, and a minimum 4.00% Tier 1 leverage ratio. On December 31, 2007, the Bank's Tier 1 risk-based capital ratio was 10.43%, total risk-based capital ratio was 11.67% and the Tier 1 leverage ratio was 8.98%. As of December 31, 2007, the Bank was "well capitalized" as defined by the Federal banking agencies' capital-related regulations. The FRB has established capital regulations for bank holding companies that generally parallel the capital regulations for banks. On December 31, 2007, the Company's Tier 1 risk-based capital ratio was 10.62%, total risk-based capital ratio was 11.86% and the Tier 1 leverage ratio was 9.13%. As of December 31, 2007, the Company was "well capitalized" under the capital ratios described above. At December 31, 2007, the held-to-maturity investment portfolio included no gross unrealized losses and $88,000 of gross unrealized gains. The Company's primary sources of funds are certificates of deposit, 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 believed to be appropriate, supplements deposits with less expensive alternative sources of funds. Statements of Cash Flows. During the years ended December 31, 2007, 2006 and 2005, the Company had positive cash flows from operating activities and positive cash flows from financing activities. The Company experienced negative cash flows from investing activities during each of these same time periods. 36 Cash flows from operating activities for the periods covered by the Statements of Cash Flows have been primarily related to changes in accrued and deferred assets, credits and other liabilities, the provision for loan losses, depreciation, 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. Net income adjusted for non-cash and non-operating items and the origination and sale of loans held-for-sale were the primary sources of cash flows from operating activities. Operating activities provided cash flows of $28.0 million, $47.1 million and $35.4 million during the years ended December 31, 2007, 2006 and 2005, respectively. During the years ended December 31, 2007, 2006 and 2005, investing activities used cash of $253.6 million, $143.1 million and $173.0 million, primarily due to the net increase of loans and the net purchases of investment securities in each period. Changes in cash flows from financing activities during the periods covered by the Statements of Cash Flows are due to changes in deposits after interest credited, changes in FHLBank advances and changes in short-term borrowings, as well as the purchases of Company stock and dividend payments to stockholders. Financing activities provided cash flows of $173.0 million, $111.4 million and $162.1 million for the years ended December 31, 2007, 2006 and 2005, respectively. Financing activities in the future are expected to primarily include changes in deposits, changes in FHLBank advances, changes in short-term borrowings, purchases of Company stock and dividend payments to stockholders. Dividends. During the year ended December 31, 2007, the Company declared dividends of $0.68 per share (31.6% of net income per share) and paid dividends of $0.66 per share (30.7% of net income per share). During the year ended December 31, 2006, the Company declared dividends of $0.60 per share (27.0% of net income per share) and paid dividends of $0.58 per share (26.1% of net income per share). The Board of Directors meets regularly to consider the level and the timing of dividend payments. The dividend declared but unpaid as of December 31, 2007, was paid to shareholders on January 16, 2008. Common Stock Repurchases. The Company has been in various buy-back programs since May 1990. During the year ended December 31, 2007, the Company repurchased 342,377 shares of its common stock at an average price of $25.57 per share and reissued 65,609 shares of Company stock at an average price of $17.62 per share to cover stock option exercises. During the year ended December 31, 2006, the Company repurchased 135,028 shares of its common stock at an average price of $27.56 per share and reissued 89,192 shares of Company stock at an average price of $14.25 per share to cover stock option exercises. Management intends to continue its stock buy-back programs from time to time as long as repurchasing the stock contributes to the overall growth of shareholder value. The number of shares of stock that will be repurchased and the price that will be paid is the result of many factors, several of which are outside of the control of the Company. The primary factors, however, are the number of shares available in the market from sellers at any given time and the price of the stock within the market as determined by the market. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Asset and Liability Management and Market Risk 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 to maturity and the purchase of other shorter term interest-earning assets. Since the Company uses laddered brokered deposits and FHLBank advances to fund a portion of its loan growth, the Company's assets tend to reprice more quickly than its liabilities. Our Risk When Interest Rates Change The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk. How We Measure the Risk To Us Associated with Interest Rate Changes In an attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor Great Southern's interest rate risk. In monitoring interest rate risk we regularly analyze and manage assets and liabilities based on their payment streams and interest rates, the timing of their maturities and their sensitivity to actual or potential changes in market interest rates. 37 The ability to maximize net interest income is largely dependent upon the achievement of a positive interest rate spread that can be sustained despite fluctuations in prevailing interest rates. Interest rate sensitivity is a measure of the difference between amounts of interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of time. The difference, or the interest rate repricing "gap," provides an indication of the extent to which an institution's interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities repricing during the same period, and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets during the same period. Generally, during a period of rising interest rates, a negative gap within shorter repricing periods would adversely affect net interest income, while a positive gap within shorter repricing periods would result in an increase in net interest income. During a period of falling interest rates, the opposite would be true. As of December 31, 2007, Great Southern's internal interest rate risk models indicate a one-year interest rate sensitivity gap that is slightly positive. Generally, a rate cut by the FRB would be expected to have an immediate negative impact on Great Southern’s net interest income due to the large total balances of loans which adjust to the “prime interest rate” daily. The Company believes that this negative impact would be negated over the subsequent 60- to 120-day period as the Company’s interest rates on deposits, borrowings and interest rate swaps should also reduce proportionately to the changes by the FRB, assuming normal credit, liquidity and competitive pricing pressures. 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 Bank's sensitivity to changes in interest rates. They do not necessarily indicate the impact of general interest rate movements on the Bank's net interest income because the repricing of certain categories of assets and liabilities is subject to competitive and other factors beyond the Bank'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 cause a change, which potentially could be material, in the Bank's interest rate risk. In order to minimize the potential for adverse effects of material and prolonged increases and decreases in interest rates on Great Southern's results of operations, Great Southern has adopted asset and liability management policies to better match the maturities and repricing terms of Great Southern's interest-earning assets and interest-bearing liabilities. Management recommends and the Board of Directors sets the asset and liability policies of Great Southern which are implemented by the asset and liability committee. The asset and liability committee is chaired by the Chief Financial Officer and is comprised of members of Great Southern's senior management. The purpose of the asset and liability committee is to communicate, coordinate and control asset/liability management consistent with Great Southern's business plan and board-approved policies. The asset and liability committee establishes and monitors the volume and mix of assets and funding sources taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources to produce results that are consistent with liquidity, capital adequacy, growth, risk and profitability goals. The asset and liability committee meets on a monthly basis to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital positions and anticipated changes in the volume and mix of assets and liabilities. At each meeting, the asset and liability committee recommends appropriate strategy changes based on this review. The Chief Financial Officer or his designee is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the Board of Directors at their monthly meetings. In order to manage its assets and liabilities and achieve the desired liquidity, credit quality, interest rate risk, profitability and capital targets, Great Southern has focused its strategies on originating adjustable rate loans, and managing its deposits and borrowings to establish stable relationships with both retail customers and wholesale funding sources. At times, depending on the level of general interest rates, the relationship between long- and short-term interest rates, market conditions and competitive factors, we may determine to increase our interest rate risk position somewhat in order to maintain or increase our net interest margin. The asset and liability committee regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and market value of portfolio equity, which is defined as the net present value of an institution's existing assets, liabilities and off-balance sheet instruments, and evaluating such impacts against the maximum potential changes in net interest income and market value of portfolio equity that are authorized by the Board of Directors of Great Southern. The Company enters into interest-rate swap derivatives, primarily as an asset/liability management strategy, in order to hedge the change in the fair value from recorded fixed rate liabilities (long term fixed rate CDs). The terms of the swaps are carefully matched to the terms of the underlying hedged item and when the relationship is properly documented as a hedge and proven to be effective, it is designated as a fair value hedge. The fair market value of derivative financial instruments is based on the present value of future expected cash flows from those instruments discounted at market forward rates and are recognized in the statement of financial condition in the prepaid expenses and other assets or accounts payable and accrued expenses caption. Effective changes in the fair market value of the hedged item due to changes in the benchmark interest rate are similarly recognized in the statement of 38 financial condition in the prepaid expenses and other assets or accounts payable and accrued expenses caption. Effective gains/losses are reported in interest expense and $805,000 of ineffectiveness was recorded in income in the non-interest income caption for the year ended December 31, 2007. Gains and losses on early termination of the designated fair value derivative financial instruments are deferred and amortized as an adjustment to the yield on the related liability over the shorter of the remaining contract life or the maturity of the related asset or liability. If the related liability is sold or otherwise liquidated, the fair market value of the derivative financial instrument is recorded on the balance sheet as an asset or a liability (in prepaid expenses and other assets or accounts payable and accrued expenses) with the resultant gains and losses recognized in non-interest income. The Company has entered into interest rate swap agreements with the objective of economically hedging against the effects of changes in the fair value of its liabilities for fixed rate brokered certificates of deposit caused by changes in market interest rates. The swap agreements generally provide for the Company to pay a variable rate of interest based on a spread to the one-month or three- month London Interbank Offering Rate (LIBOR) and to receive a fixed rate of interest equal to that of the hedged instrument. Under the swap agreements the Company is to pay or receive interest monthly, quarterly, semiannually or at maturity. At December 31, 2007, the notional amount of interest rate swaps outstanding was approximately $419.2 million. Of this amount, $225.7 million consisted of swaps in a net settlement receivable position and $193.5 million consisted of swaps in a net settlement payable position. At December 31, 2006, the notional amount of interest rate swaps outstanding was approximately $541.0 million. Of this amount, $125.0 million consisted of swaps in a net settlement receivable position and $416.0 million consisted of swaps in a net settlement payable position. The maturities of interest rate swaps outstanding at December 31, 2007 and 2006, in terms of notional amounts and their average pay and receive rates is discussed further in Note 14 of the Notes to Consolidated Financial Statements. 39 The following tables illustrate the expected maturities and repricing, respectively, of the Bank's financial instruments at December 31, 2007. These schedules do not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. The tables are based on information prepared in accordance with generally accepted accounting principles. Maturities December 31, 2008 2009 2010 2011 2012 Thereafter Total 2007 Fair Value Financial Assets: Interest bearing deposits Weighted average rate Available-for-sale equity securities Weighted average rate Available-for-sale debt securities(1) Weighted average rate Held-to-maturity securities Weighted average rate Adjustable rate loans Weighted average rate Fixed rate loans Weighted average rate Federal Home Loan Bank stock Weighted average rate $ $ $ 973 3.18% --- --- --- --- --- --- 691,834 7.58% --- --- --- --- 3,119 $ --- --- --- --- 5,505 $ 3.98% --- --- $ 204,383 4.00 % --- --- $ 159,154 7.60% 7.39 % 87,245 $ 30,644 $ 75,820 6.18% --- --- 8.29% --- --- 8.12 % --- --- $ $ $ (Dollars in thousands) --- --- --- --- 14,981 --- --- --- --- 8,765 $ 4.22% --- --- 77,435 7.66% 5.03 % --- --- $ 41,740 7.34 % --- --- 12,639 $ 7.41 % $ 380,019 $ 5.56 % 1,420 7.48 % $ $ $ $ 973 3.18% 12,639 7.41% 412,389 5.46% 1,420 7.48% $ $ $ $ 973 12,639 412,389 1,508 $ 240,387 $ 1,414,933 $ 1,415,732 7.17 % 28,239 $ 45,277 $ 166,116 9.03% --- --- 8.25 % --- --- 8.00 % $ 13,557 4.25 % $ $ 7.49% 433,341 7.77% 13,557 4.25% $ $ 445,034 13,557 Total financial assets $ 780,052 $ 238,146 $ 240,479 $ 120,655 $ 95,782 $ 814,138 $ 2,289,252 Financial Liabilities: Time deposits Weighted average rate Interest-bearing demand Weighted average rate Non-interest-bearing demand Weighted average rate Federal Home Loan Bank Weighted average rate Short-term borrowings Weighted average rate Subordinated debentures Weighted average rate $ 736,376 $ 87,130 $ 29,845 $ 33,335 $ 15,164 $ 194,678 $ 1,096,528 $ 1,104,887 $ $ $ $ 4.73% 491,135 2.75% 166,231 --- 93,395 4.29% 216,721 3.75% --- --- $ 4.97% --- --- --- --- 24,821 5.10% --- --- --- --- $ 4.56 % --- --- --- --- 4,978 5.69 % --- --- --- --- $ 5.04% --- --- --- --- 2,239 6.29% --- --- --- --- $ 5.03 % --- --- --- --- 2,934 6.04 % --- --- --- --- $ $ 4.99 % --- --- --- --- 85,500 3.70 % --- --- 30,929 6.53 % $ $ $ $ $ 4.83% 491,135 2.75% 166,231 --- 213,867 4.22% 216,721 3.75% 30,929 6.53% $ $ $ $ $ 491,135 166,231 214,498 216,721 30,929 Total financial liabilities $ 1,703,858 $ 111,951 $ 34,823 $ 35,574 $ 18,098 $ 311,107 $ 2,215,411 _______________ (1) Available-for-sale debt securities include approximately $222 million of mortgage-backed securities and collateralized mortgage obligations which pay interest and principal monthly to the Company. Of this total, $109 million represents securities that have variable rates of interest after a fixed interest period. These securities will experience rate changes at varying times over the next ten years, with $80 million experiencing rate changes in the next two years. This table does not show the effect of these monthly repayments of principal or rate changes. 40 Repricing December 31, 2008 2009 2010 2011 (Dollars in thousands) 2012 Thereafter Total 2007 Fair Value Financial Assets: Interest bearing deposits Weighted average rate Available-for-sale equity securities Weighted average rate Available-for-sale debt securities(1) Weighted average rate Held-to-maturity securities Weighted average rate Adjustable rate loans Weighted average rate Fixed rate loans Weighted average rate Federal Home Loan Bank stock Weighted average rate $ $ 973 3.18% --- --- 190,728 5.53% --- --- $ 1,346,832 $ $ 7.50% 87,245 6.18% 13,557 4.25% $ $ $ $ --- --- 4,555 8.66 % 3,119 3.98 % --- --- 17,252 6.39 % 30,644 8.29 % --- --- $ $ $ $ --- --- 1,500 8.24% 5,506 $ 4.00% --- --- 41,780 7.66% 75,820 8.12% --- --- $ $ --- --- --- --- 14,981 4.22 % --- --- 6,459 7.70 % 28,239 9.03 % --- --- $ $ $ $ --- --- 1,813 $ --- --- 4,771 8.53 % 5.63 % 8,765 $ 189,290 5.03 % --- --- 2,480 8.07 % $ $ 5.60 % 1,420 7.48 % 130 8.25 % $ $ $ $ 973 3.18 % 12,639 7.41 % 412,389 5.46 % 1,420 7.48 % $ $ $ $ 973 12,639 412,389 1,508 $ 1,414,933 $ 1,415,732 7.49 % 45,277 $ 166,116 $ 433,341 8.25 % --- --- 8.00 % --- --- 7.77 % $ 13,557 4.25 % $ $ 445,034 13,557 Total financial assets $ 1,639,335 $ 55,570 $ 124,606 $ 49,679 $ 58,335 $ 361,727 $ 2,289,252 $ 1,046,199 $ 36,656 $ 6,002 $ 2,293 $ 2,915 $ 2,463 $ 1,096,528 $ 1,104,887 Financial Liabilities: Time deposits(3) Weighted average rate Interest-bearing demand Weighted average rate Non-interest-bearing demand(2) Weighted average rate Federal Home Loan Bank advances Weighted average rate Short-term borrowings Weighted average rate Subordinated debentures Weighted average rate 4.82% $ 491,135 2.75% --- --- 205,574 4.14% 216,721 3.75% 30,929 6.53% $ $ $ Total financial liabilities $ 1,990,558 Periodic repricing GAP $ (351,223) 4.90 % --- --- --- --- 642 5.96 % --- --- --- --- $ 5.00% --- --- --- --- 1,978 5.69% --- --- --- --- 37,298 $ 7,980 18,272 $ 116,626 5.22 % --- --- --- --- 2,239 6.29 % --- --- --- --- 4,532 45,147 $ $ $ $ $ $ $ $ $ 5.25 % --- --- --- --- 2,934 6.04 % --- --- --- --- $ 4.73 % --- --- $ 166,231 --- 500 5.66 % --- --- --- --- $ $ $ $ $ 4.83 % 491,135 2.75 % 166,231 --- 213,867 4.22 % 216,721 3.75 % 30,929 6.53 % $ $ $ $ $ 491,135 166,231 214,498 216,721 30,929 5,849 $ 169,194 $ 2,215,411 52,486 $ 192,533 $ 73,841 Cumulative repricing GAP $ (351,223) $ (332,951 ) $ (216,325) $ (171,178 ) $ (118,692 ) $ 73,841 _______________ (1) (2) (3) Available-for-sale debt securities include approximately $222 million of mortgage-backed securities and collateralized mortgage obligations which pay interest and principal monthly to the Company. Of this total, $109 million represents securities that have variable rates of interest after a fixed interest period. These securities will experience rate changes at varying times over the next ten years, with $80 million experiencing rate changes in the next two years. This table does not show the effect of these monthly repayments of principal or rate changes. Non-interest-bearing demand is included in this table in the column labeled "Thereafter" since there is no interest rate related to these liabilities and therefore there is nothing to reprice. Time deposits include the effects of the Company's interest rate swaps on brokered certificates of deposit. These derivatives qualify for hedge accounting treatment. 41 THIS PAGE LEFT BLANK INTENTIONALLY 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 Directors and Executive Officers Directors of Great Southern Bancorp, Inc. and Great Southern Bank Back row Joseph W. Turner President and Chief Executive Officer Larry D. Frazier Board Member Retired – Hollister, MO William E. Barclay Board Member Retired – Springfield, MO Thomas J. Carlson Board Member Partner, Carlson Gardner, Inc. Mayor of Springfield, MO Front row Julie T. Brown Board Member Shareholder, Carnahan, Evans, Cantwell & Brown, P.C. William V. Turner Chairman of the Board Earl A. Steinert, Jr. Board Member Co-owner, EAS Investment Enterprises, Inc./CPA Executive Officers of Great Southern Bank Left to Right Steve Mitchem Senior Vice President and Chief Lending Officer Rex Copeland Senior Vice President and Chief Financial Officer/Treasurer Joe Turner President and Chief Executive Officer Bill Turner Chairman of the Board Lin Thomason Vice President and Director of Information Services Doug Marrs Vice President and Director of Operations/Secretary 9228 Great Southern Leadership Team Left to right Kelly Polonus Director of Corporate Communications Kris Conley Managing Director of Travel Bryan Tiede Director of Risk Management Teresa Chasteen-Calhoun Director of Marketing Doug Marrs Director of Operations/Secretary Byron Robison Insurance Agency Manager Lin Thomason Director of Information Services Steve Mitchem Chief Lending Officer Brian Fogle Director of Community Development Barby Pohl Director of Retail Banking Debbie Flowers Director of Credit Risk Management Matt Snyder Director of Human Resources Rex Copeland Chief Financial Officer/Treasurer Shannon Thomason Director of Internal Audit and Compliance Officer Tammy Baurichter Controller Joe Turner President and Chief Executive Officer 9329 exploring new dimensions in banking. 94 

Continue reading text version or see original annual report in PDF format above