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
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8
1
4
2
0
2
4
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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
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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.
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hi-def service
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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.
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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.
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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
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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.
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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.
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2
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y
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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
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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.
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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
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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.
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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.
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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
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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