2 0 0 8 A N N U A L R E P O R T F O R S H A R E H O L D E R S
POISED AND POSITIONED
A N N UA L M E E T I N G
The 20th Annual Meeting of
Shareholders will be held at
10:00 a.m. CDT on Wednesday, May 13,
2009, at the Great Southern Operations Center,
218 S. Glenstone, Springfield, Missouri.
C O R P O R AT E P RO F I L E CORPORATE MISSION
Great Southern Bank was founded in
The Company’s mission is to build
1923 with a $5,000 investment, four
employees and 936 customers. Today,
it has grown to $2.7 billion in total
assets, with more than 740 dedicated
associates serving in excess of 177,000
customers.
Headquartered in Springfield, Mo.,
the Company operates 39 banking
centers in 16 counties in southern,
central and western Missouri, and loan
production offices in St. Louis, Mo.,
Overland Park, Kan., and Rogers,Ark.
Beyond traditional banking services,
customers can also look to Great
Southern for help with investment,
insurance and travel services.
Great Southern Bancorp, Inc., the
holding company for Great Southern
Bank, is a public company and its
common stock (ticker: GSBC) is listed
on the NASDAQ Global Select Stock
Exchange.
S TO C K I N FO R M AT I O N
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.
The Company’s
Common Stock is listed
on The NASDAQ Global
Select Market System
under the symbol
“GSBC”.
As of December 31,
2008, there were
13,380,969 total shares
outstanding and
approximately 2,500
shareholders of record.
The last sale price of
the Company’s
Common Stock on
December 31, 2008 was
$11.44.
HIGH/LOW STOCK PRICE
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended
December 31, 2008
LOW
HIGH
$15.32
$21.81
7.73
15.95
7.82
15.50
7.03
13.15
DIVIDEND DECLARATIONS
Year Ended
December 31, 2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$.180
.180
.180
.180
Year Ended
December 31, 2007
LOW
HIGH
$30.40 $27.30
25.96
30.09
23.67
28.00
21.10
26.45
Year Ended
December 31, 2007
$.160
.170
.170
.180
G E N E R A L
I N FO R M AT I O N
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
C O N T E N T S
2
8
14
T O O U R S H A R E H O L D E R S
The Company’s annual financial performance was
disappointing, but the challenges of the year also
underscored the underlying strength of our Company.
C O U N T E R M O V E S
We’re not looking back, we’re looking forward. Our best
products come from anticipating customers’ future
needs. Our best service comes from keeping an eye on
the customer directly in front of us.
M O S T VA L U A B L E P L AY E R S
Our associates fulfill our mission every day and their
genuine involvement with our customers, our
communities, our shareholders and with one another is
what separates us from the competition.
16
P O S I T I O N E D T O S E RV E
We remain deeply involved in community efforts to
create a better place to live, work and play.
20
D I R E C T O R S A N D O F F I C E R S
Meet the Directors of Great Southern Bancorp, Inc.,
the Bank’s Executive Officers and Great Southern’s
Leadership Team.
On the cover
Our long-term success
will be dependent on the
strategic decisions we make
and actions we take today.
1
T O O U R S H A R E H O L D E R S
“Poised and Positioned,” the
theme of this year’s Annual
Report, describes Great Southern’s
philosophy of how we operate our
Company. Are we where we need to be
and ready to execute – today and in the
future? At all times, we must be ready
and able to deliver on our mission to
build winning relationships with our
customers, associates, shareholders and
communities.We must also be prepared
to take advantage of opportunities that
will make our Company even stronger
and more valuable. A great example of
this is our FDIC-assisted acquisition of
TeamBank discussed later in this letter.
Our long-term success will be
dependent on the strategic decisions
we make and actions we take today. In
the current recessionary environment,
our strategy and execution couldn’t be
more critical.
2008
No doubt, 2008 was a challenging
year for all financial institutions,
including Great Southern. Bad
economic and financial industry news
continually unfolded. Bank failures
around the country made the headlines,
leading to a loss of public confidence
and worry about the safety of deposits.
In the fall, the industry hit a low point
with the near failure of Fannie Mae and
Freddie Mac, the bankruptcy of Lehman
Brothers, and the near-collapse of
several other Wall Street investment
banks. To make matters worse, the
media used the term “bank” when
reporting on the Wall Street crisis
causing confusion by the general public
and a generalization that the entire
banking industry was in crisis. This
broad brush style of reporting
intensified worry among customers
and banks battled hard to restore
confidence and reassure customers
that their deposits were, and are, safe.
2008 proved to be one of the most, if
not the most, difficult year in our
Company’s history.While we are more
insulated in our market areas than some
other parts of the country, our Company
and some of our loan customers
experienced the ramifications of the
economic downturn, especially in the
residential construction and land
development sector. The Company’s
annual financial performance was
disappointing, but the challenges of the
year also underscored the underlying
strength of our Company. In response to
rapidly deteriorating market conditions,
we changed course quickly by
Joseph W. Turner
President and Chief Executive Officer
William V. Turner
Chairman of the Board
Market Share*
Based on Deposits in Greene
& Christian Counties
22.46%
Five Year Cumulative Total Return**
Great Southern
Bancorp
NASDAQ
Financial
NASDAQ
Composite
Net Income***
(per share of common stock)
$(.35)
20
16
12
8
4
0
k
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h
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C
Commerce
Great Southern
k
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i
p
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a
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i
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Liberty Bank
Guaranty Bank
Bank of America
h
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Bancorp South
Empire Bank
* Data Source: FDIC website
Data as of: June 30, 2008.
$
160
140
120
100
80
60
40
20
$56.93
0
DEC 03
DEC 04
DEC 05
DEC 06
DEC 07
DEC 08
** 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, 2003 through December 31, 2008. The graph assumes that $100 was
invested in GSBC Common Stock on December 31, 2003 and that all dividends were reinvested.
2
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0.00
-0.25
JUN
’90†
JUN
’95
DEC
’00
DEC
’05
DEC
’08
† Figure stated is as if the Company was
publicly traded for all of the fiscal year 1990
(conversion was in Dec. 1989).
curtailing loan growth and further
strengthening capital and liquidity
levels. By the end of 2008, the
Company’s and Bank’s risk-based capital
ratios were higher than year-end 2007
levels, even without Capital Purchase
Program funds discussed later in this
letter.
For full details on our 2008 financial
performance, please refer to the
financial section of this Annual Report.
A brief summary of our 2008 results is
below. For the year ended December
31, 2008, our Company posted a
disappointing loss of $4.7 million or
$.35 per common share – the first
annual loss since the Company went
public 20 years ago.Two extraordinary
items together equaling a loss of $1.96
per share played major roles in the loss.
The Company recorded a provision
expense and related charge-off of $35
million, equal to $1.70 per diluted share
(after tax), related to a large lending
relationship (see the Company’s
Quarterly Report on Form 10-Q for
March 31, 2008).A $5.8 million write-
down of the Company’s investment in
perpetual preferred stock of Fannie Mae
and Freddie Mac occurred.This write-
down equated to approximately $.26
per diluted share (after tax). In spite of
these losses, the Company remained
“well capitalized” under all regulatory
measures at all times in 2008.
In 2008, total assets grew 9.4% to
$2.7 billion. As of December 31, 2008,
total stockholders’ equity was $234.1
million (8.8% of total assets), and
common stockholders’ equity was
$178.5 million (6.7% of total assets),
equivalent to a book value of $13.34
per common share.
Loans outstanding declined by 5.4%
for the year, with declines primarily in
construction and land development
loans. However, we extended more than
$527.4 million in new credit to
consumers and businesses. Consumer
loan originations increased $3.6 million,
or 5.6%, to $68.1 million for the full
year 2008 as compared to 2007. Single-
family residential loan originations
increased $18.0 million, or 14.1%, to
$146.3 million for the full year 2008 as
compared to 2007.A detailed analysis of
the loan portfolio mix can be found in
the Loan Portfolio Presentation
contained in a February 19, 2009,
Current Report on Form 8-K.
Non-performing assets were
elevated, but at manageable levels. At
December 31, 2008, non-performing
assets grew to $65.9 million, or 2.48% of
total assets as compared to December
31, 2007. The increase was due
primarily to deteriorating 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.
As expected in recessionary times,
the allowance for loan and lease losses –
a reserve account to absorb loan charge-
offs - increased $3.7 million during the
year to $29.2 million as of December
31, 2008. The allowance as a percentage
of total loans was 1.66% at December
31, 2008 as compared to 1.38% at year-
end 2007. Quality review of our loan
portfolio was enhanced with nearly
every loan in excess of $1 million
evaluated on a regular basis. Our
objective is to identify potential
problems early and then work diligently
with customers to actively develop the
best course of action in resolving such
issues.
As previously mentioned, news of
bank failures and the Wall Street crisis
prompted customers to seek assurance
that their deposits were safe.We
demonstrated our “poised and
positioned” philosophy in dealing with
customer inquiries. Our associates
receive ongoing FDIC-related training
and did an excellent job reassuring
customers and working with them to
ensure their deposits were adequately
covered under FDIC rules.We believe
that our proactive training and
Total Assets
in billions
$2.66
Total Deposits
in billions
$1.91
Total Loans
in billions
$1.72
2.50
2.00
1.50
1.00
0.50
0.00
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’08
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0.00
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’08
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0.00
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’08
Commercial Real Estate
& Construction Loans
in millions
800
$787
700
600
500
400
300
200
100
0
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’08
*** 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
communications about Great Southern’s
safety and soundness gave us a
competitive advantage in the
marketplace.
In addition, our customers utilized
the Certificate of Deposit Account
Registry Service (CDARS®), which
offers access up to $50 million in FDIC
coverage while earning attractive
returns on their deposits.While many of
our competitors began adding this
service during this critical time, Great
Southern, having offered CDARS for
more than four years, was already well-
versed on the product and poised and
ready to make this available to our
customers.
In response to economic conditions,
Great Southern elected to participate in
two voluntary programs designed to
help restore confidence and stabilize
the market. Through the FDIC’s
Temporary Liquidity Guarantee Program
(TLGP), Great Southern is purchasing
additional FDIC insurance coverage for
eligible customers through a
component of the TLGP. Non-interest
bearing transaction accounts are fully
covered regardless of account balance
through the end of 2009.
Also, in December 2008, the Holding
Company became a participant in the
U.S. Treasury’s voluntary Capital
Purchase Program (CPP), made available
under the Troubled Asset Relief Program
(TARP). The program is designed to
promote economic stability and
increase the flow of credit to
consumers and businesses. The
Company received a CPP capital
investment of $58 million from the U.S.
Treasury. In addition to issuing to the
Treasury perpetual preferred stock with
a 5% annual dividend for the first five
years, GSBC also issued a warrant for
the Treasury to purchase 909,091 shares
of GSBC common stock at a price of
$9.57 per share.
This capital investment by the
Treasury significantly strengthened our
already “well capitalized” capital
position. The CPP funds provide capital
support to expand our capacity to make
sound loans to consumers and
businesses. The funds also give us
greater flexibility in considering
strategic opportunities.
With the ever-changing nature of
TARP and misperceptions of the CPP,
some negative sentiment by the general
public for banks receiving CPP funds
has occurred. The CPP funds are not a
hand-out. In most cases, including ours,
the Treasury is making an investment in
healthy financial institutions. In
exchange, the Treasury, and ultimately
the taxpayer, will receive a dividend,
plus participate in price appreciation of
the companies’ stock.
Negative sentiment also continues
with the perception that banks aren’t
lending. This is not true. The collapse
this past year of the secondary markets
for mortgages and other consumer
credit products has removed an
important pipeline of credit. Thus, the
many stories about the lack of credit are
due to the weakness of non-bank
lenders and the weakness in the
securitization markets. According to the
FDIC, bank credit has actually increased
over the course of this recession. Most
banks are making as many loans as they
responsibly can, given the recessionary
environment and capital constraints.
As noted above, Great Southern is
making loans and our commitment in
extending credit in our communities
has not faltered. Like all banks, our
capacity to lend is affected by many
factors, including customer demand,
credit quality, funding availability,
regulatory demands, and general
economic conditions. Moving forward,
we will continue to adhere to our sound
lending principles in a way that
balances our commitment to our
customers with our responsibility to
manage risk appropriately and deliver
value for investors.We know that sound
lending is vital to our country’s
economic recovery and our future
success.
Despite the many challenges in 2008,
4
we continued to expand our franchise.
The Company opened its 39th retail
banking center in Branson, Mo. The
Bank formed a new alliance with
Penney, Murray and Associates – a
private wealth advisory practice of
Ameriprise Financial Services. Included
in this, Great Southern transferred its
broker dealer relationship to Ameriprise
Financial Services. This new alliance
brings a more comprehensive range of
investment products and a higher level
of service to Great Southern clients.
2009
We fully expect that 2009 will be
another very difficult year for the
industry and our country, perhaps even
more difficult than 2008. Our hard work
in 2008 to reposition the Company and
the balance sheet will help us better
manage through the current recession
and position us for future
opportunities.We will maintain capital
and liquidity levels that are appropriate
to the market environment. Our top
business development goal in 2009 is to
generate core deposits and to acquire
and expand customer relationships. A
number of deposit acquisition
initiatives will be introduced
throughout the year.We anticipate
modest loan growth with further
decreases in the construction and land
development loan segment. We also
expect non-performing assets, charge-
offs and loan provisions to remain
elevated compared to our historic
averages, but at manageable levels.We’ll
continue to aggressively address credit
quality, including regular and thorough
evaluation of the loan portfolio.
The Company expects to expand its
retail banking center network in the St.
Louis and Kansas City metropolitan
regions in 2009. This is part of the
Company’s overall long-term plan to
open two to three banking centers per
year as market conditions warrant. The
Company’s first retail banking center in
the St. Louis market is expected to open
in May 2009. Located in Creve Coeur,
Mo., the full-service facility banking
center will complement a loan
production office and a Great Southern
Travel office already in operation in this
market. A second location in the Lee’s
Summit, Mo., market, a suburb of Kansas
City, is under construction. The banking
center should be completed in late
2009 and will enhance access and
service to Lee’s Summit-area customers.
At our Annual Meeting in 2008, we
said that in this difficult economy we
believed that significant opportunities
would arise and we needed to be ready
to act. A significant opportunity did
arise for our Company. On March 20,
2009, we entered into a purchase and
assumption agreement with loss share
with the FDIC to assume all of the
deposits (excluding brokered deposits)
and certain assets of TeamBank, N.A., a
full service commercial bank
headquartered in Paola, Kan, with 17
locations in Kansas, Missouri and
Nebraska.
Great Southern assumed
approximately $474 million of the
deposits of TeamBank at a premium of
1%. Additionally, Great Southern
purchased approximately $443 million
in loans and $7 million of other real
estate owned (ORE) at a discount of
$100 million. The loans and ORE
purchased are covered by a loss share
agreement between the FDIC and Great
Southern which affords Great Southern
significant protection.
We were attracted to this acquisition
because of the strong customer
relationships TeamBank formed through
the years. This acquisition further
strengthens our Company with the
addition of nearly 37,000 customer
deposit accounts and expansion
capabilities in two new states, Kansas
and Nebraska.
Although we expect that 2009 will
have challenges, we are optimistic
because we will continue to focus on
our customers needs and provide the
banking services that our needed in our
communities. Our optimism is grounded
on the belief in our team of associates
and their ability to get the job done for
our customers.We thank each and every
associate for their hard work and
commitment to be poised and
positioned to serve our customers and
communities.
We would also like to thank our
customers; you are the reason we exist.
We understand that trust and
confidence in our Company is
paramount, and we are committed to
preserving and strengthening this trust
and confidence for years to come.
commitment to provide a superior long-
term return on your investment and to
keep your interests in mind as we go
about our daily work is stronger than
ever.
As always, we welcome your
thoughts and suggestions.
Sincerely,
William V. Turner
And finally, we thank our
Joseph W. Turner
shareholders for your investment and
continued long-term support. Our
SELECTED CONSOLIDATED FINANCIAL DATA
Summary Statement of
Condition Information:
Assets
Loans receivable, net
Allowance for loan losses
Available-for-sale securities
Foreclosed assets held for sale, net
Deposits
Total borrowings
Stockholders' equity (retained
earnings substantially restricted)
Common stockholders’ equity
Average loans receivable
Average total assets
Average deposits
Average stockholders' equity
Number of deposit accounts
Number of full service offices
2008
2007
2005
2004
December 31,
2006
(Dollars in thousands)
$2,659,923
1,721,691
29,163
647,678
32,659
1,908,028
500,030
$2,431,732
1,820,111
25,459
425,028
20,399
1,763,146
461,517
$2,240,308 $ 2,081,155
1,514,170
1,674,618
24,549
26,258
369,316
344,192
4,768
595
1,550,253
1,703,804
355,052
325,900
$1,851,214
1,334,508
23,489
355,104
2,035
1,298,723
401,625
234,087
178,507
1,842,002
2,522,004
1,901,096
183,625
95,784
39
189,871
189,871
1,774,253
2,340,443
1,784,060
185,725
95,908
38
175,578
175,578
1,653,162
2,179,192
1,646,370
165,794
91,470
37
152,802
152,802
1,458,438
1,987,166
1,442,964
150,029
85,853
35
140,837
140,837
1,263,281
1,704,703
1,223,895
130,600
76,769
31
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 operations data,
insofar as they relate to the years ended December 31, 2008, 2007, 2006, 2005 and 2004, are
derived from our consolidated financial statements, which have been audited by BKD, LLP. The
amounts for 2004 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
SELECTED CONSOLIDATED FINANCIAL DATA
Summary Statement of Operations
Information:
Interest income:
Loans
Investment securities and other
Interest expense:
Deposits
Federal Home Loan Bank advances
Short-term borrowings and
repurchase agreements
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
Net gain (loss) on sale of fixed assets
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 (loss) before income taxes
Provision (credit) for income taxes
Net income (loss)
Preferred stock dividends and discount accretion
Net income (loss) available to common shareholders
2008
For the Year Ended December 31,
2005
2006
2007
(Dollars in thousands)
2004
$ 119,829
24,985
144,814
$ 142,719
21,152
163,871
$ 133,094
16,987
150,081
$
98,129
16,366
114,495
$ 74,162
12,897
87,059
60,876
5,001
5,892
1,462
73,231
71,583
52,200
19,383
8,724
15,352
1,415
76,232
6,964
7,356
1,914
92,466
71,405
5,475
65,930
9,933
15,153
1,037
65,733
8,138
5,648
1,335
80,854
69,227
5,450
63,777
9,166
14,611
944
42,269
7,873
4,969
986
56,097
58,398
4,025
54,373
8,726
13,309
983
28,952
6,091
1,580
610
37,233
49,826
4,800
45,026
7,793
12,726
992
44
13
(1)
85
(373)
(1,140)
48
962
1,632
---
---
1,781
29,419
30,161
7,927
2,230
1,473
1,446
879
1,363
1,247
608
---
4,373
51,707
43,642
14,343
$ 29,299
$
---
$ 29,299
---
167
1,567
1,498
---
---
1,680
29,632
28,285
7,645
2,178
876
1,201
931
1,387
1,127
119
783
4,275
48,807
44,602
13,859
$ 30,743
$
---
$ 30,743
(734)
30
1,430
---
(6,600)
3,408
922
21,559
25,355
7,589
1,954
883
1,025
903
1,068
1,410
268
---
3,743
44,198
31,734
9,063
$ 22,671
$
---
$ 22,671
---
403
872
---
1,136
8,881
879
33,309
22,007
7,247
1,784
761
794
811
903
1,309
485
---
3,160
39,261
39,074
12,675
$ 26,399
$
---
$ 26,399
(7,386)
191
819
6,981
---
---
2,004
28,144
31,081
8,281
2,240
2,223
1,073
820
1,396
1,739
3,431
---
3,422
55,706
(8,179)
(3,751)
(4,428)
242
(4,670)
$
$
$
6
SELECTED CONSOLIDATED FINANCIAL DATA
Per Common Share Data:
Basic earnings per common share
Diluted earnings per common share
Cash dividends declared
Book value per common share
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,
2006
(Dollars in thousands, except per share data)
2007
2005
2008
$(0.35)
(0.35)
0.72
13.34
13,381
13,381
13,381
(0.18)%
(2.47)
1.12
2.07
2.74
3.02
3.01
55.86
1.09
N/A
$ 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
51.28
0.95
31.63
$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
2004
$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
1.66%
1.38%
1.54%
1.59%
1.73%
3.69
87.84
2.63
2.48
1.90
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
90.23%
103.23%
98.29%
97.67%
102.76%
of average interest-bearing liabilities
108.98
112.71
114.26
113.05
112.56
Capital Ratios:
Average common stockholders' equity to average assets
Year-end tangible common stockholders' equity to assets
Great Southern Bancorp Inc.:
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Tier 1 leverage ratio
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
7.1%
6.7
7.9%
7.7
7.6%
7.8
7.6%
7.2
7.7%
7.6
13.8
15.1
10.1
10.7
11.9
7.8
10.6
11.9
9.1
10.4
11.7
9.0
10.7
11.9
9.2
10.2
11.5
8.9
10.2
11.4
8.4
10.1
11.3
8.3
10.8
12.0
8.5
10.7
11.9
8.5
0.89x
0.34x
1.47x
3.69x
1.55x
3.95x
1.57x
3.29x
2.05x
5.72x
(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
(7)
average total assets.
In computing the ratio of earnings to fixed charges: (a)
earnings have been based on income before 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
C O U N T E R M O V E S
As we celebrated our 85th year,
ongoing market uncertainties
served to highlight the true value
of strong customer relationships, and
further underscored the importance of
the role we’ve come to play in many of
our communities as the leading local
financial institution. Even as industry
woes occupied much national media
attention and analysis, people around
here still wanted to know, “What’s
Great Southern say?”
With leadership, of course, comes
much responsibility. But it’s a position
we’ve earned, one we’ve defined
carefully for ourselves over the years
on a foundation of ethics, loyalty and
mutual trust, and one we welcome
today, in these changing times, when
leadership is needed most.
To many area residents, 2008 looked
remarkably like ‘business as usual’ at
Great Southern. While other banks
appeared to fall silent in all the
uncertainty, we opened a third banking
center in Branson, announced a second
for Lee’s Summit and broke ground on
our first to serve the St. Louis market.
Likewise, as other banks pulled in their
horns on seniors’ clubs and other
higher maintenance, lower margin
service packages, Great Southern’s
Summit Club celebrated its 22nd year
stronger than ever with nearly 17,000
active members. Some 2,000 members
and their guests attended our
Anniversary Party last fall, hosted in the
Hammons Hall venue.
Do we know something the
competition doesn’t? Not especially.
But we do know what works for us:
Taking care of our customers takes us
where we need to be, when we need to
be there, with what we need to offer.
Our long trust in that basic business
philosophy gives us a unique
perspective. The same economic
uncertainty that inspired other banks
to purchase reassuring but alarming
full-page “Open letter from
management” ads defending their
solvency drove a Great Southern public
service campaign instead. Ads
explained the availability of increased
FDIC coverage, the tax advantages of
family health savings accounts, the
Full count.
We took the lead in public service ads
explaining increases in FDIC insurance
and, among other timely issues, how
investors can protect up to $50 million
through CDARS® and “keep all their eggs
in one basket” at Great Southern.
Back to the basics.
Reminiscent of our early years in
banking, newcomers in Republic
receive a warm community
“Welcome Wagon” introduction to
the neighborhood, including a
$100 start-up bonus on their new
Great Southern checking account.
8
Perks for pros.
A drive to attract high quality checking accounts is
getting underway with our Teachers Plus and Nurses
Perks programs, packaging an array of exclusive
benefits for targeted professional groups.
Show town.
The Grand Opening of our newest banking
center in Branson featured “The Best Show in
Checking” with popcorn, refreshments and the
extra convenience of a local Great Southern
Travel office inside.
Opening move.
The completion of a new banking center in Creve
Coeur, opening soon, marks the Company’s retail
debut in the St. Louis market. Our nearby loan
production office there opened in 2005.
9
Our best products
come from anticipating
customers’ future needs.
Our best service comes
from keeping an eye on
the customer directly
in front of us.
Poised with pride.
Participation in the Kansas City Equity
Fund carries forward a long Great
Southern tradition of active involvement in
local community quality-of-life issues. The
Bank joins with other Kansas City area
banks to help capitalize low income and
historic housing projects that, in turn, earn
federal and state community reinvestment
tax credits for the Company.
timely opportunity to lock in a low
fixed mortgage rate through
refinancing and the pros and cons of
reverse mortgages.
Our focus on service is confident,
and it shows.We’re not looking back,
we’re looking forward. Our best
products come from anticipating
customers’ future needs. Our best
service comes from keeping an eye on
the customer directly in front of us.
In changing times, to stay poised is
to stay flexible, and as the demand for
commercial and consumer lending
services fell back,Team Great Southern
repositioned its offense for a sustained
drive on deposit acquisition. It’s a
strategy that plays to our strengths.
Especially in our primary service area,
we’re the most convenient bank
around in terms of banking hours,
Face to face.
Supporting targeted media and
online messaging, “mini-billboards”
at each of our banking centers help
spread the word on-premise.
10
number of ATM locations, drive-thru
lanes and product offerings – all key
factors in the competition for primary
deposit relationships.
The offense occurred on several
fronts at once in a coordinated drive
focusing on new deposit relationships,
customer development and account
retention. Online banking plays an
increasingly important role in both our
product/service mix and marketing
strategy. Our enhanced GreatAccess
Online site serves as a welcome and
user-friendly front door to the
convenience and ease of banking at
Great Southern, and offers visitors the
instant gratification of being able to
securely open and fully fund a new
account online at will. Internally,“do-
it-yourself banking” also promises huge
operational efficiencies, making a win-
win proposition of our offer to provide
free online bill pay services when
customers elect to receive monthly
statements online instead of by mail.
Of our 115,000 customers, more
than 20,000 are now banking online
with us, and as the number grows, so
does our ability to employ online
marketing as an effective channel of
communication, targeting and even
product testing. To gauge the potential
of our new electronic newsletter, the
introductory edition of Great
Southern e-News featured a “Click &
Win” incentive offering $50 account
deposits to the first twenty
responders. Nearly 800 customers
replied in the first 30 minutes of the
canvass, and within 24 hours, the
number had grown to more than
3,500. Our follow-up edition featured
an instant $10 deposit bonus on
e-statement enrollments, and produced
more than 200 account conversions to
paperless notification in less than
48 hours.
While the medium can sometimes
be the message, the message is most
important, and ongoing product
development and exposure is key to
maintaining our competitive edge in
The best defense.
Our new IdentiSafe program offers
customers state-of-the-art fraud security
and ID theft protection technology.
Special teams.
An All-Star Open House celebrated our
new alliance with Ameriprise Financial and
Penney, Murray & Associates while
introducing customers to America’s largest
financial planning company.
11
Questions and answers.
Penney, Murray & Associates hosted live
webcasts at the Operations Center as top
economic and investment professionals
answered questions and discussed new
strategies and opportunities in the
changing year.
providing superior banking service and
convenience. An advancement in
internal communications technology
dubbed “Branch Capture” now lets us
offer distant business banking
customers the convenience of
extended same-day deposits until
closing at their nearby neighborhood
banking center. On another front, an
exclusive new premium service brings
Great Southern account holders
unprecedented security in a
comprehensive fraud protection plan
for just $5 a month. “IdentiSafe”
features real-time credit theft
monitoring, defenses and alerts along
with identity theft insurance and
personal fraud assistance.
Under the bold headline “We want
to be your bank,” Great Southern’s
Drive for Checking campaign takes the
message to the great outdoors and
leverages the bank’s physical
convenience, enticing new checking
customers with a chance at winning a
new Pontiac Solstice convertible ... on
rotating display at our metro banking
centers.
Great Southern has long enjoyed a
reputation as the local “low-cost
provider” of checking services, but as
other banks have followed suit with
their own free products and perks, the
consumer distinction has shifted from
low cost to high convenience. The
distinction is important. Not only
Eye candy.
Our Drive for Checking campaign
focuses drive-by attention on the physical
convenience of our many banking center
locations.
Always open.
The Great Access Online banking experience is just
like you’d expect of “The Most Convenient Bank in
Town” – full-featured and super user-friendly.
12
Option play.
Reverse mortgage veteran Kevin Hanks
helps homeowners explore the option
of “turning their mortgage around” to
provide a nice monthly income, easy
line of credit or welcome lump sum in
their golden years.
because it plays right back to our other
competitive strengths in physical
presence and customer support, it also
serves a broader goal: to be the “single
source provider” of multiple financial
products and related services for our
neighbors.
Highly targeted new products like
“Teachers Plus” and “Nurses Perks”
focus the drive on the quality of the
new account relationships we acquire,
and package an array of value-added
banking benefits exclusively for
checking prospects in desirable
customer models. Benefits run the
gamut – from free checks, safe deposit
boxes and global ATM services to
preferred rates on CDs and consumer
loans and discounted mortgage closing
costs.
At every position, we’re poised to be
better. We’re not playing to keep up.
We’re playing to win.
On the front line.
Great Southern Travel at the airport will
enjoy heightened visibility at the
entrance of “The Ozarks’ New Front
Door” as the Springfield-Branson
National Airport moves into its new
terminal facility May 2009.
13
M O S T
V A L U A B L E P L A Y E R S
Great Southern’s mission is to
build winning relationships
with its customers, associates,
shareholders and communities.We are
committed to these relationships and
strive to grow them by focusing on our
core values: teamwork, mutual respect,
doing what is right and
uncompromising ethical standards.
Our focus on the Great Southern
Team fosters a culture that provides a
fair and challenging workplace for all
associates, that respects and empowers
the individual while encouraging
professional growth. Leading by
example, our goal is to have a positive
impact on all aspects of our associates’
lives to help them succeed.
We support them with training,
feedback, technical tools and the
resources they need to build their own
fulfilling relationships helping
customers discover the many products,
services and values we offer.
Associates are encouraged to learn,
grow and advance in their careers with
our Company and have access to
integrated in-house training, including
a new virtual web class program that
allows them to participate, interact and
learn without having to travel to and
from class. In addition to in-house
training, we offer a competitive
education reimbursement package for
associates seeking to advance their
expertise with specialized outside
training.
Recognizing the win/win value of a
healthy workforce, Great Southern
recently introduced an enhanced
Employee Wellness Program that
provides an initial Health Risk
Assessment – and then follows up with
a personal wellness coach to help
achieve individual wellness goals.
For a company our size, maintaining
an atmosphere where associates can
connect with one another could be a
big job, but at Great Southern it seems
to come quite naturally. Just for fun, at
a Holiday Bazaar associates showcased
their talents by renting booths and
selling their items for profit.We
discovered that we work among more
Join the team.
Human Resources’ new “Cyber Recruiter”
interface lets interested applicants research
available positions and job descriptions at
Great Southern ahead of time, online. If
they see something that fits, they can
apply online as well.
Soup line.
Lunch at the Ops Center break room
is haute cuisine when associates serve
their favorite homemade soup and
chili recipes to benefit the American
Cancer Society’s Relay for Life.
14
High cheers.
Great Southern Travel’s annual balloon
delivery on Valentine’s is becoming a
highly anticipated tradition for students
at our Partner-in-Education school.
than just bankers. From photographers
to gourmet chefs, we share a lot of
hidden talents. Associates donated the
profits from booth rental and silent
auctions to the Ronald McDonald
House.
Great Southern associates are
known in their communities for the
time, money and talent they contribute
to a variety of organizations – as
members of boards, planning
committees or as volunteers reading to
children, spending their lunch hours
mentoring students or manning
charitable events after hours. They
make Great Southern what it is and
their actions truly make a difference.
Our associates fulfill our mission every
day and their genuine involvement
with our customers, our communities,
our shareholders and with one another
is what separates us from the
competition.
House calls.
There’s no waiting to see the
doctor when Cox’s Health Risk
Assessment team sets up at the
Operations Center.
15
P O S I T I O N E D T O S E R V E
As one of the largest financial
institutions in the region, we
understand the importance of
our role as a vital partner in the growth
and prosperity of our communities.We
believe that our Company is only as
strong as the communities we serve,
which is why we have a legacy of
positioning ourselves in the heart of
our communities. As our mission
states, we “build winning relationships”
and remain deeply involved in
community efforts to create a better
place to live, work and play.
Lending is more important than ever
in community development, and it’s
fundamental that we provide services
and capital to help businesses and
organizations grow. The Community
Blood Center of the Ozarks moved into
a new 64,000-square-foot headquarters
last fall with Great Southern providing
the permanent financing for the
building, land and equipment. Great
Southern was also the lead bank of
seven other banks participating in an
Industrial Revenue Bond issue to
provide funding for the project. Since
1996, blood donations at the
Community Blood Center of the Ozarks
have grown 300 percent, underscoring
the need for greatly expanded
facilities.
Our long-time partnership with
Missouri State University and its
athletic program proved especially
rewarding with the unveiling of the
new JQH Arena in the fall of 2008. Our
sponsorship of the video scoreboard
and other amenities in the new arena
puts us center stage at events, but
more importantly it recognizes the
university’s role in the social fabric of
our community. Not only does MSU
provide an excellent platform of
quality higher education for students, it
is also a key driver of economic
development.
Great Southern spearheaded a
consortium of local banks to help close
the deal on the long-awaited new
Missouri State Highway Patrol Crime
Laboratory that opened in downtown
Springfield in December. The
innovative partnership of federal, state,
city and county governments alongside
In perspective.
Great Southern Chairman Bill Turner
received Ozarks Technical Community
College’s prestigious Excellence in
Business Award. Co-sponsored by the
Springfield Area Chamber of Commerce
and Springfield Business Journal, “A
Conversation with Bill Turner” explored
his distinctive leadership style and the
transformation of Great Southern from a
small local savings and loan association
into a dominant regional financial
institution and travel company.
Great Southern
remains deeply
involved in
community efforts
to create a better
place to live, work
and play.
16
For kids’ sake.
Bowling teams from 17 local banks faced off in
“The Bankers Challenge” at Century Lanes in Nixa
benefitting Big Brothers & Big Sisters. Great Southern
took top honors, but we had a slight edge: nine of the
37 teams participating were ours.
Right in the center.
Dwarfing installers as they prepare to raise it to the
rafters, the new JQH Arena video scoreboard stands 3
stories tall and sports 4-sided big screens to keep
close-up tabs on the action below. One image is
constant and right where you’d expect it to be: the
Great Southern name in the center.
(Below) Permanent cupholders at every seat are just
like the bank: personal and convenient.
17
True blood.
Great Southern was the key player in
making the dream of a new facility for
the Community Blood Center of the
Ozarks come true.
private local banks to fund the $6.2
million project has garnered national
attention as a lesson on how to get
things done in the true spirit of
cooperation.
Our Company’s philanthropic
efforts include corporate sponsorships
and financial grants, but the embrace
of our associates greatly magnifies the
impact. The Company contributed
more than $300,000 in grants and
sponsorships during the year, helping
dedicated non-profit organizations in
our communities provide services to
those who need it the most. Although
2008 was a hard year economically, our
associates also donated more than
$12,000 to local charities through our
Caring & Sharing Casual Days program,
where associates pay to “dress down”
for a day. We are proud of our
associates’ passion and their
commitment to those in need and how
they continue to carry out our mission.
We have a passion for children’s
education and welcome the
opportunity to help improve the lives
of young people in our community. We
know they are our future. Each year,
Great Southern partners with children-
focused charities as well as elementary
and middle school districts to host
special programs like “Students Go to
Work,” combining hands-on lessons in
banking with a fun, interactive tour of
our Operations Center.
Our involvement in The Ozarks Food
Harvest, which collects and distributes
food to 340 agencies in 29 counties
Our Company’s
philanthropic efforts
include corporate sponsorships
and financial grants, but the
embrace of our associates
greatly magnifies
the impact.
18
Solving problems.
Southwest Missouri’s own “CSI”
crime lab focuses state-of-the-art
technology on the growing
caseload of state and local
criminal investigations, including
extensive on-premise DNA work
and evidence examination.
Recognizing greatness.
A founding member of the Missouri
Sports Hall of Fame, our Company
celebrated its 85th year in
appreciation of the core values our
founders held dear in the vision of
what makes Great Southern great.
throughout Southwest Missouri, is
helping the organization expand into a
new facility that will offer the
warehouse space they need to
continue to fight hunger in the Ozarks.
On another front, our commitment in
the American Red Cross capital
campaign is assisting the development
of a generator-powered Disaster
Operations Center to be more
prepared when disaster strikes the
Ozarks. Great Southern’s own
Operations Center parking lot will be
the physical location where Red Cross
staff, volunteers and collaborating
organizations come together to
coordinate response recovery actions
and resources. The Boys and Girls
Clubs of Springfield give youth the
opportunity to be involved in social,
physical and education development
activities that strengthen their self-
esteem and help them become better
citizens of the community. In support,
Great Southern participates in a
campaign to renovate and expand
current buildings to reach the needs of
all youth in the community.
Being a responsible corporate
citizen and supporting our neighbors
is as important as ever, and Great
Southern remains positioned and
poised to be the strong resource they
can always count on. Our grounded
position, even in tough times,
underscores our character and our
commitment to the communities
we serve.
19
D I R E C T O R S A N D E X E C U T I V E O F F I C E R S
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.
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
20
G R E A T S O U T H E R N L E A D E R S H I P T E A M
Left to right
Steve Mitchem
Chief Lending Officer
Kelly Polonus
Director of Corporate Communications
Doug Marrs
Director of Operations/Secretary
Rex Copeland
Chief Financial Officer/Treasurer
Byron Robison
Insurance Agency Manager
Lin Thomason
Director of Information Services
Shannon Thomason
Director of Internal Audit and
Compliance Officer
Joe Turner
President and
Chief Executive Officer
Tammy Baurichter
Controller
Kris Conley
Managing Director of Travel
Teresa Chasteen-Calhoun
Director of Marketing
Matt Snyder
Director of Human Resources
Bryan Tiede
Director of Risk Management
Debbie Flowers
Director of Credit Risk Management
Barby Pohl
Director of Retail Banking
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2 0 0 8 A N N U A L R E P O R T F O R S H A R E H O L D E R S
POISED AND POSITIONED
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A N N UA L M E E T I N G
The 20th Annual Meeting of
Shareholders will be held at
10:00 a.m. CDT on Wednesday, May 13,
2009, at the Great Southern Operations Center,
218 S. Glenstone, Springfield, Missouri.
C O R P O R AT E P RO F I L E CORPORATE MISSION
Great Southern Bank was founded in
The Company’s mission is to build
1923 with a $5,000 investment, four
employees and 936 customers. Today,
it has grown to $2.7 billion in total
assets, with more than 740 dedicated
associates serving in excess of 177,000
customers.
Headquartered in Springfield, Mo.,
the Company operates 39 banking
centers in 16 counties in southern,
central and western Missouri, and loan
production offices in St. Louis, Mo.,
Overland Park, Kan., and Rogers,Ark.
Beyond traditional banking services,
customers can also look to Great
Southern for help with investment,
insurance and travel services.
Great Southern Bancorp, Inc., the
holding company for Great Southern
Bank, is a public company and its
common stock (ticker: GSBC) is listed
on the NASDAQ Global Select Stock
Exchange.
S TO C K I N FO R M AT I O N
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.
The Company’s
Common Stock is listed
on The NASDAQ Global
Select Market System
under the symbol
“GSBC”.
As of December 31,
2008, there were
13,380,969 total shares
outstanding and
approximately 2,500
shareholders of record.
The last sale price of
the Company’s
Common Stock on
December 31, 2008 was
$11.44.
HIGH/LOW STOCK PRICE
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended
December 31, 2008
LOW
HIGH
$15.32
$21.81
7.73
15.95
7.82
15.50
7.03
13.15
DIVIDEND DECLARATIONS
Year Ended
December 31, 2008
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$.180
.180
.180
.180
Year Ended
December 31, 2007
LOW
HIGH
$30.40 $27.30
25.96
30.09
23.67
28.00
21.10
26.45
Year Ended
December 31, 2007
$.160
.170
.170
.180
G E N E R A L
I N FO R M AT I O N
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
2008 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 Operations.
46 Report of Independent Registered Public Accounting Firm.
47 Consolidated Statements of Financial Condition.
49 Consolidated Statements of Operations.
50 Consolidated Statements of Stockholders’ Equity.
52 Consolidated Statements of Cash Flows.
55 Notes to Consolidated Financial Statements.
Presidents Message p2-7 gry 4/1/09 5:26 PM Page 2
T O O U R S H A R E H O L D E R S
“Poised and Positioned,” the
theme of this year’s Annual
Report, describes Great Southern’s
philosophy of how we operate our
Company. Are we where we need to be
and ready to execute – today and in the
future? At all times, we must be ready
and able to deliver on our mission to
build winning relationships with our
customers, associates, shareholders and
communities.We must also be prepared
to take advantage of opportunities that
will make our Company even stronger
and more valuable. A great example of
this is our FDIC-assisted acquisition of
TeamBank discussed later in this letter.
Our long-term success will be
dependent on the strategic decisions
we make and actions we take today. In
the current recessionary environment,
our strategy and execution couldn’t be
more critical.
2008
No doubt, 2008 was a challenging
year for all financial institutions,
including Great Southern. Bad
economic and financial industry news
continually unfolded. Bank failures
around the country made the headlines,
leading to a loss of public confidence
and worry about the safety of deposits.
In the fall, the industry hit a low point
with the near failure of Fannie Mae and
Freddie Mac, the bankruptcy of Lehman
Brothers, and the near-collapse of
several other Wall Street investment
banks. To make matters worse, the
media used the term “bank” when
reporting on the Wall Street crisis
causing confusion by the general public
and a generalization that the entire
banking industry was in crisis. This
broad brush style of reporting
intensified worry among customers
and banks battled hard to restore
confidence and reassure customers
that their deposits were, and are, safe.
2008 proved to be one of the most, if
not the most, difficult year in our
Company’s history.While we are more
insulated in our market areas than some
other parts of the country, our Company
and some of our loan customers
experienced the ramifications of the
economic downturn, especially in the
residential construction and land
development sector. The Company’s
annual financial performance was
disappointing, but the challenges of the
year also underscored the underlying
strength of our Company. In response to
rapidly deteriorating market conditions,
we changed course quickly by
Joseph W. Turner
President and Chief Executive Officer
William V. Turner
Chairman of the Board
Market Share*
Based on Deposits in Greene
& Christian Counties
22.46%
Five Year Cumulative Total Return**
Great Southern
Bancorp
NASDAQ
Financial
NASDAQ
Composite
Net Income***
(per share of common stock)
$(.35)
20
16
12
8
4
0
k
n
a
B
n
r
k
e
n
h
a
B
t
u
e
o
c
r
S
e
m
t
a
m
e
r
o
G
C
Commerce
Great Southern
k
n
a
B
e
r
i
p
m
E
A
N
a
c
i
r
e
m
A
k
n
a
B
y
t
r
e
b
L
k
n
a
B
y
t
n
a
r
a
u
G
Liberty Bank
Guaranty Bank
Bank of America
h
t
u
o
S
p
r
o
c
n
a
B
f
o
k
n
a
B
i
Bancorp South
Empire Bank
* Data Source: FDIC website
Data as of: June 30, 2008.
$
160
140
120
100
80
60
40
20
$56.93
0
DEC 03
DEC 04
DEC 05
DEC 06
DEC 07
DEC 08
** 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, 2003 through December 31, 2008. The graph assumes that $100 was
invested in GSBC Common Stock on December 31, 2003 and that all dividends were reinvested.
2
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0.00
-0.25
JUN
’90†
JUN
’95
DEC
’00
DEC
’05
DEC
’08
† Figure stated is as if the Company was
publicly traded for all of the fiscal year 1990
(conversion was in Dec. 1989).
Presidents Message p2-7 gry 4/1/09 5:26 PM Page 3
curtailing loan growth and further
strengthening capital and liquidity
levels. By the end of 2008, the
Company’s and Bank’s risk-based capital
ratios were higher than year-end 2007
levels, even without Capital Purchase
Program funds discussed later in this
letter.
For full details on our 2008 financial
performance, please refer to the
financial section of this Annual Report.
A brief summary of our 2008 results is
below. For the year ended December
31, 2008, our Company posted a
disappointing loss of $4.7 million or
$.35 per common share – the first
annual loss since the Company went
public 20 years ago.Two extraordinary
items together equaling a loss of $1.96
per share played major roles in the loss.
The Company recorded a provision
expense and related charge-off of $35
million, equal to $1.70 per diluted share
(after tax), related to a large lending
relationship (see the Company’s
Quarterly Report on Form 10-Q for
March 31, 2008).A $5.8 million write-
down of the Company’s investment in
perpetual preferred stock of Fannie Mae
and Freddie Mac occurred.This write-
down equated to approximately $.26
per diluted share (after tax). In spite of
these losses, the Company remained
“well capitalized” under all regulatory
measures at all times in 2008.
In 2008, total assets grew 9.4% to
$2.7 billion. As of December 31, 2008,
total stockholders’ equity was $234.1
million (8.8% of total assets), and
common stockholders’ equity was
$178.5 million (6.7% of total assets),
equivalent to a book value of $13.34
per common share.
Loans outstanding declined by 5.4%
for the year, with declines primarily in
construction and land development
loans. However, we extended more than
$527.4 million in new credit to
consumers and businesses. Consumer
loan originations increased $3.6 million,
or 5.6%, to $68.1 million for the full
year 2008 as compared to 2007. Single-
family residential loan originations
increased $18.0 million, or 14.1%, to
$146.3 million for the full year 2008 as
compared to 2007.A detailed analysis of
the loan portfolio mix can be found in
the Loan Portfolio Presentation
contained in a February 19, 2009,
Current Report on Form 8-K.
Non-performing assets were
elevated, but at manageable levels. At
December 31, 2008, non-performing
assets grew to $65.9 million, or 2.48% of
total assets as compared to December
31, 2007. The increase was due
primarily to deteriorating 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.
As expected in recessionary times,
the allowance for loan and lease losses –
a reserve account to absorb loan charge-
offs - increased $3.7 million during the
year to $29.2 million as of December
31, 2008. The allowance as a percentage
of total loans was 1.66% at December
31, 2008 as compared to 1.38% at year-
end 2007. Quality review of our loan
portfolio was enhanced with nearly
every loan in excess of $1 million
evaluated on a regular basis. Our
objective is to identify potential
problems early and then work diligently
with customers to actively develop the
best course of action in resolving such
issues.
As previously mentioned, news of
bank failures and the Wall Street crisis
prompted customers to seek assurance
that their deposits were safe.We
demonstrated our “poised and
positioned” philosophy in dealing with
customer inquiries. Our associates
receive ongoing FDIC-related training
and did an excellent job reassuring
customers and working with them to
ensure their deposits were adequately
covered under FDIC rules.We believe
that our proactive training and
Total Assets
in billions
$2.66
Total Deposits
in billions
$1.91
Total Loans
in billions
$1.72
2.50
2.00
1.50
1.00
0.50
0.00
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’08
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0.00
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’08
1.75
1.50
1.25
1.00
0.75
0.50
0.25
0.00
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’08
Commercial Real Estate
& Construction Loans
in millions
800
$787
700
600
500
400
300
200
100
0
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’08
*** 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
Presidents Message p2-7 gry 4/1/09 5:26 PM Page 4
communications about Great Southern’s
safety and soundness gave us a
competitive advantage in the
marketplace.
In addition, our customers utilized
the Certificate of Deposit Account
Registry Service (CDARS®), which
offers access up to $50 million in FDIC
coverage while earning attractive
returns on their deposits.While many of
our competitors began adding this
service during this critical time, Great
Southern, having offered CDARS for
more than four years, was already well-
versed on the product and poised and
ready to make this available to our
customers.
In response to economic conditions,
Great Southern elected to participate in
two voluntary programs designed to
help restore confidence and stabilize
the market. Through the FDIC’s
Temporary Liquidity Guarantee Program
(TLGP), Great Southern is purchasing
additional FDIC insurance coverage for
eligible customers through a
component of the TLGP. Non-interest
bearing transaction accounts are fully
covered regardless of account balance
through the end of 2009.
Also, in December 2008, the Holding
Company became a participant in the
U.S. Treasury’s voluntary Capital
Purchase Program (CPP), made available
under the Troubled Asset Relief Program
(TARP). The program is designed to
promote economic stability and
increase the flow of credit to
consumers and businesses. The
Company received a CPP capital
investment of $58 million from the U.S.
Treasury. In addition to issuing to the
Treasury perpetual preferred stock with
a 5% annual dividend for the first five
years, GSBC also issued a warrant for
the Treasury to purchase 909,091 shares
of GSBC common stock at a price of
$9.57 per share.
This capital investment by the
Treasury significantly strengthened our
already “well capitalized” capital
position. The CPP funds provide capital
support to expand our capacity to make
sound loans to consumers and
businesses. The funds also give us
greater flexibility in considering
strategic opportunities.
With the ever-changing nature of
TARP and misperceptions of the CPP,
some negative sentiment by the general
public for banks receiving CPP funds
has occurred. The CPP funds are not a
hand-out. In most cases, including ours,
the Treasury is making an investment in
healthy financial institutions. In
exchange, the Treasury, and ultimately
the taxpayer, will receive a dividend,
plus participate in price appreciation of
the companies’ stock.
Negative sentiment also continues
with the perception that banks aren’t
lending. This is not true. The collapse
this past year of the secondary markets
for mortgages and other consumer
credit products has removed an
important pipeline of credit. Thus, the
many stories about the lack of credit are
due to the weakness of non-bank
lenders and the weakness in the
securitization markets. According to the
FDIC, bank credit has actually increased
over the course of this recession. Most
banks are making as many loans as they
responsibly can, given the recessionary
environment and capital constraints.
As noted above, Great Southern is
making loans and our commitment in
extending credit in our communities
has not faltered. Like all banks, our
capacity to lend is affected by many
factors, including customer demand,
credit quality, funding availability,
regulatory demands, and general
economic conditions. Moving forward,
we will continue to adhere to our sound
lending principles in a way that
balances our commitment to our
customers with our responsibility to
manage risk appropriately and deliver
value for investors.We know that sound
lending is vital to our country’s
economic recovery and our future
success.
Despite the many challenges in 2008,
4
we continued to expand our franchise.
The Company opened its 39th retail
banking center in Branson, Mo. The
Bank formed a new alliance with
Penney, Murray and Associates – a
private wealth advisory practice of
Ameriprise Financial Services. Included
in this, Great Southern transferred its
broker dealer relationship to Ameriprise
Financial Services. This new alliance
brings a more comprehensive range of
investment products and a higher level
of service to Great Southern clients.
2009
We fully expect that 2009 will be
another very difficult year for the
industry and our country, perhaps even
more difficult than 2008. Our hard work
in 2008 to reposition the Company and
the balance sheet will help us better
manage through the current recession
and position us for future
opportunities.We will maintain capital
and liquidity levels that are appropriate
to the market environment. Our top
business development goal in 2009 is to
generate core deposits and to acquire
and expand customer relationships. A
number of deposit acquisition
initiatives will be introduced
throughout the year.We anticipate
modest loan growth with further
decreases in the construction and land
development loan segment. We also
expect non-performing assets, charge-
offs and loan provisions to remain
elevated compared to our historic
averages, but at manageable levels.We’ll
continue to aggressively address credit
quality, including regular and thorough
evaluation of the loan portfolio.
The Company expects to expand its
retail banking center network in the St.
Louis and Kansas City metropolitan
regions in 2009. This is part of the
Company’s overall long-term plan to
open two to three banking centers per
year as market conditions warrant. The
Company’s first retail banking center in
the St. Louis market is expected to open
in May 2009. Located in Creve Coeur,
Presidents Message p2-7 gry 4/1/09 5:26 PM Page 5
Mo., the full-service facility banking
center will complement a loan
production office and a Great Southern
Travel office already in operation in this
market. A second location in the Lee’s
Summit, Mo., market, a suburb of Kansas
City, is under construction. The banking
center should be completed in late
2009 and will enhance access and
service to Lee’s Summit-area customers.
At our Annual Meeting in 2008, we
said that in this difficult economy we
believed that significant opportunities
would arise and we needed to be ready
to act. A significant opportunity did
arise for our Company. On March 20,
2009, we entered into a purchase and
assumption agreement with loss share
with the FDIC to assume all of the
deposits (excluding brokered deposits)
and certain assets of TeamBank, N.A., a
full service commercial bank
headquartered in Paola, Kan, with 17
locations in Kansas, Missouri and
Nebraska.
Great Southern assumed
approximately $474 million of the
deposits of TeamBank at a premium of
1%. Additionally, Great Southern
purchased approximately $443 million
in loans and $7 million of other real
estate owned (ORE) at a discount of
$100 million. The loans and ORE
purchased are covered by a loss share
agreement between the FDIC and Great
Southern which affords Great Southern
significant protection.
We were attracted to this acquisition
because of the strong customer
relationships TeamBank formed through
the years. This acquisition further
strengthens our Company with the
addition of nearly 37,000 customer
deposit accounts and expansion
capabilities in two new states, Kansas
and Nebraska.
Although we expect that 2009 will
have challenges, we are optimistic
because we will continue to focus on
our customers needs and provide the
banking services that our needed in our
communities. Our optimism is grounded
on the belief in our team of associates
and their ability to get the job done for
our customers.We thank each and every
associate for their hard work and
commitment to be poised and
positioned to serve our customers and
communities.
We would also like to thank our
customers; you are the reason we exist.
We understand that trust and
confidence in our Company is
paramount, and we are committed to
preserving and strengthening this trust
and confidence for years to come.
commitment to provide a superior long-
term return on your investment and to
keep your interests in mind as we go
about our daily work is stronger than
ever.
As always, we welcome your
thoughts and suggestions.
Sincerely,
William V. Turner
And finally, we thank our
Joseph W. Turner
shareholders for your investment and
continued long-term support. Our
SELECTED CONSOLIDATED FINANCIAL DATA
Summary Statement of
Condition Information:
Assets
Loans receivable, net
Allowance for loan losses
Available-for-sale securities
Foreclosed assets held for sale, net
Deposits
Total borrowings
Stockholders' equity (retained
earnings substantially restricted)
Common stockholders’ equity
Average loans receivable
Average total assets
Average deposits
Average stockholders' equity
Number of deposit accounts
Number of full service offices
2008
2007
2005
2004
December 31,
2006
(Dollars in thousands)
$2,659,923
1,721,691
29,163
647,678
32,659
1,908,028
500,030
$2,431,732
1,820,111
25,459
425,028
20,399
1,763,146
461,517
$2,240,308 $ 2,081,155
1,514,170
1,674,618
24,549
26,258
369,316
344,192
595
4,768
1,550,253
1,703,804
355,052
325,900
$1,851,214
1,334,508
23,489
355,104
2,035
1,298,723
401,625
234,087
178,507
1,842,002
2,522,004
1,901,096
183,625
95,784
39
189,871
189,871
1,774,253
2,340,443
1,784,060
185,725
95,908
38
175,578
175,578
1,653,162
2,179,192
1,646,370
165,794
91,470
37
152,802
152,802
1,458,438
1,987,166
1,442,964
150,029
85,853
35
140,837
140,837
1,263,281
1,704,703
1,223,895
130,600
76,769
31
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 operations data,
insofar as they relate to the years ended December 31, 2008, 2007, 2006, 2005 and 2004, are
derived from our consolidated financial statements, which have been audited by BKD, LLP. The
amounts for 2004 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
Presidents Message p2-7 gry 4/1/09 5:26 PM Page 6
SELECTED CONSOLIDATED FINANCIAL DATA
Summary Statement of Operations
Information:
Interest income:
Loans
Investment securities and other
Interest expense:
Deposits
Federal Home Loan Bank advances
Short-term borrowings and
repurchase agreements
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
Net gain (loss) on sale of fixed assets
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 (loss) before income taxes
Provision (credit) for income taxes
Net income (loss)
Preferred stock dividends and discount accretion
Net income (loss) available to common shareholders
2008
For the Year Ended December 31,
2005
2006
2007
(Dollars in thousands)
2004
$ 119,829
24,985
144,814
$ 142,719
21,152
163,871
$ 133,094
16,987
150,081
$
98,129
16,366
114,495
$ 74,162
12,897
87,059
60,876
5,001
5,892
1,462
73,231
71,583
52,200
19,383
8,724
15,352
1,415
76,232
6,964
7,356
1,914
92,466
71,405
5,475
65,930
9,933
15,153
1,037
65,733
8,138
5,648
1,335
80,854
69,227
5,450
63,777
9,166
14,611
944
42,269
7,873
4,969
986
56,097
58,398
4,025
54,373
8,726
13,309
983
28,952
6,091
1,580
610
37,233
49,826
4,800
45,026
7,793
12,726
992
44
13
(1)
85
(373)
(1,140)
48
962
1,632
---
---
1,781
29,419
30,161
7,927
2,230
1,473
1,446
879
1,363
1,247
608
---
4,373
51,707
43,642
14,343
$ 29,299
$
---
$ 29,299
---
167
1,567
1,498
---
---
1,680
29,632
28,285
7,645
2,178
876
1,201
931
1,387
1,127
119
783
4,275
48,807
44,602
13,859
$ 30,743
$
---
$ 30,743
(734)
30
1,430
---
(6,600)
3,408
922
21,559
25,355
7,589
1,954
883
1,025
903
1,068
1,410
268
---
3,743
44,198
31,734
9,063
$ 22,671
$
---
$ 22,671
---
403
872
---
1,136
8,881
879
33,309
22,007
7,247
1,784
761
794
811
903
1,309
485
---
3,160
39,261
39,074
12,675
$ 26,399
$
---
$ 26,399
(7,386)
191
819
6,981
---
---
2,004
28,144
31,081
8,281
2,240
2,223
1,073
820
1,396
1,739
3,431
---
3,422
55,706
(8,179)
(3,751)
(4,428)
242
(4,670)
$
$
$
6
Presidents Message p2-7 gry 4/1/09 5:26 PM Page 7
SELECTED CONSOLIDATED FINANCIAL DATA
Per Common Share Data:
Basic earnings per common share
Diluted earnings per common share
Cash dividends declared
Book value per common share
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,
2006
(Dollars in thousands, except per share data)
2005
2007
2008
$(0.35)
(0.35)
0.72
13.34
13,381
13,381
13,381
(0.18)%
(2.47)
1.12
2.07
2.74
3.02
3.01
55.86
1.09
N/A
$ 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
51.28
0.95
31.63
$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
2004
$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
1.66%
1.38%
1.54%
1.59%
1.73%
3.69
87.84
2.63
2.48
1.90
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
90.23%
103.23%
98.29%
97.67%
102.76%
of average interest-bearing liabilities
108.98
112.71
114.26
113.05
112.56
Capital Ratios:
Average common stockholders' equity to average assets
Year-end tangible common stockholders' equity to assets
Great Southern Bancorp Inc.:
Tier 1 risk-based capital ratio
Total risk-based capital ratio
Tier 1 leverage ratio
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
7.1%
6.7
7.9%
7.7
7.6%
7.8
7.6%
7.2
7.7%
7.6
13.8
15.1
10.1
10.7
11.9
7.8
10.6
11.9
9.1
10.4
11.7
9.0
10.7
11.9
9.2
10.2
11.5
8.9
10.2
11.4
8.4
10.1
11.3
8.3
10.8
12.0
8.5
10.7
11.9
8.5
0.89x
0.34x
1.47x
3.69x
1.55x
3.95x
1.57x
3.29x
2.05x
5.72x
(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
(7)
average total assets.
In computing the ratio of earnings to fixed charges: (a)
earnings have been based on income before 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
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, 2008 and 2007, were $393,000 and $3.5 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
1
8
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. The Bank's latest annual regulatory
examination was completed in October 2008.
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, 2008, 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
2
9
Goodwill and Intangible Assets
Goodwill and intangibles assets that have indefinite useful lives are subject to an impairment test at least annually and
more frequently if circumstances indicate their value may not be recoverable. Goodwill is tested for impairment using a process
that estimates the fair value of each of the Company’s reporting units compared with its carrying value. The Company defines
reporting units as a level below each of its operating segments for which there are discrete financial information that is regularly
reviewed. As of December 31, 2008, the Company has two reporting units to which goodwill has been allocated – the Bank and
the Travel division (which is a division of a subsidiary of the Bank). If the fair value of a reporting unit exceeds its carrying value,
then no impairment is recorded. If the carrying value amount exceeds the fair value of a reporting unit, further testing is completed
comparing the implied fair value of the reporting unit’s goodwill to its carrying value to measure the amount of impairment.
Intangible assets that are not amortized will be tested for impairment at least annually by comparing the fair values to those assets
to their carrying values. At December 31, 2008, goodwill consisted of $379,000 at the Bank reporting unit and $875,000 at the
Travel reporting unit. Other identifiable intangible assets that are subject to amortization are amortized on a straight-line basis
over periods ranging from three to seven years. At December 31, 2008, the amortizable intangible assets consisted of core deposit
intangibles of $314,000 at the Bank reporting unit and $119,000 of non-compete agreements at the Travel reporting unit. These
amortizable intangible assets are reviewed for impairment if circumstances indicate their value may not be recoverable based on a
comparison of fair value. See Note 1 “Summary of Significant Accounting Policies” to the consolidated financial statements for
additional information.
For purposes of testing goodwill for impairment, the Company used a market approach to value its reporting units. The
market approach applies a market multiple, based on observed purchase transactions for each reporting unit, to the metrics
appropriate for the valuation of the operating unit. Significant judgment is applied when goodwill is assessed for impairment. This
judgment may include developing cash flow projections, selecting appropriate discount rates, identifying relevant market
comparables and incorporating general economic and market conditions.
Based on the Company’s goodwill impairment testing, management does not believe any of its goodwill or other
intangible assets are impaired as of December 31, 2008. While the Company believes no impairment existed at December 31,
2008, different conditions or assumptions used to measure fair value of reporting units, or changes in cash flows or profitability, if
significantly negative or unfavorable, could have a material adverse effect on the outcome of the Company’s impairment
evaluation in the future.
Current Economic Conditions
The current economic environment presents financial institutions with unprecedented circumstances and challenges
which in some cases have resulted in large declines in the fair values of investments and other assets, constraints on liquidity and
significant credit quality problems, including severe volatility in the valuation of real estate and other collateral supporting
loans. The financial statements have been prepared using values and information currently available to the Company.
Given the volatility of current economic conditions, the values of assets and liabilities recorded in the financial
statements could change rapidly, resulting in material future adjustments in asset values, the allowance for loan losses, or capital
that could negatively impact the Company’s ability to meet regulatory capital requirements and maintain sufficient liquidity.
General
The profitability of the Company and, more specifically, the profitability of its primary subsidiary, Great Southern
Bank (the "Bank"), depends primarily on its net interest income. Net interest income is the difference between the interest income
the Bank 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, 2008, Great Southern's net loans decreased $96.4 million, or 5.3%, from $1.81 billion
at December 31, 2007, to $1.72 billion at December 31, 2008. 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. Based upon the current lending environment and economic conditions, the
Company does not expect to grow the overall loan portfolio significantly, if at all, at this time. However, some loan categories
have experienced increases. The main loan areas experiencing increases in 2008 were commercial real estate loans, one- to four-
family and multifamily real estate loans and consumer loans, partially offset by lower balances in construction loans and
commercial business loans. In the year ended December 31, 2008, outstanding residential and commercial construction loan
balances decreased $142.1 million, to $543.9 million at December 31, 2008. In addition, the undisbursed portion of construction
and land development loans decreased $180.7 million from $254.6 million at December 31, 2007, to $73.9 million at December
31, 2008. The Company's strategy continues to be focused on maintaining credit risk and interest rate risk at appropriate levels
given the current credit and economic environments.
10
3
10
In addition, the level of non-performing loans and foreclosed assets may affect our net interest income and net income.
While we have not had an overall high level of charge-offs on our non-performing loans prior to 2008, we do not accrue interest
income on these loans and do 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 loans. Generally, the higher the level of non-performing
assets, the greater the negative impact on interest income and net income. We expect loan loss provision, non-performing assets
and foreclosed assets to remain elevated. In addition, expenses related to the credit resolution process should also remain
elevated.
In the year ended December 31, 2008, Great Southern's available-for-sale securities increased $222.7 million, or
52.4%, from $425 million at December 31, 2007, to $648 million at December 31, 2008. The Company’s mix of securities
changed in 2008 primarily in two categories. U.S. Government agency debt securities decreased $91.0 million primarily due to
maturing short-term securities and longer term securities that were called at par by the issuing agency. The Company elected to
replace these securities with U.S. Government agency mortgage-backed securities, which increased $302.1 million, to cover
pledging requirements for public funds and customer repurchase agreements. Most of these agency mortgage-backed securities
purchased in 2008 have interest rates that are fixed for a period of three to ten years and then adjust annually. Securities which
provided the Company an acceptable yield were also purchased in 2008 to utilize the excess liquidity from loan repayments and
the issuance of brokered deposits.
In addition, Great Southern had cash and cash equivalents of $168 million at December 31, 2008 compared to $81
million at December 31, 2007. Subsequent to December 31, 2008, additional customer deposits have been placed with Great
Southern, resulting in cash and cash equivalents of $337 million at March 5, 2009. The Company could elect to utilize these funds
by repaying some of its brokered deposits or purchasing additional investment securities, or it may maintain its cash equivalents.
The Company attracts deposit accounts through our retail branch network, correspondent banking and corporate
services areas, and brokered deposits. The Company then utilizes these deposit funds, along with Federal Home Loan Bank
(FHLBank) advances and other borrowings, to meet loan demand. In the year ended December 31, 2008, total deposit balances
increased $144.9 million, or 8.2%. However, the mix of deposits continued to shift from checking deposits to certificates of
deposit, primarily brokered CDs. Interest-bearing transaction accounts decreased $104.6 million while non-interest-bearing
checking accounts decreased $27.5 million. Retail certificates of deposit decreased $34.6 million. 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. In 2007 and 2008, our non-interest-bearing checking account
balances 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. Subsequent to December 31, 2008, correspondent balances have begun
to increase again. A significant amount of the reduction in interest-bearing checking balances was the result of customers moving
funds into customer reverse repurchase agreements.
Total brokered deposits were $974.5 million at December 31, 2008, up from $674.6 million at December 31, 2007.
Included in these totals at December 31, 2008 and December 31, 2007, were Great Southern Bank customer deposits totaling
$168.3 million and $88.8 million, respectively, that are part of the CDARS program which allows bank customers to maintain
balances in an insured manner that would otherwise exceed the FDIC deposit insurance limit. The Company decided to increase
the amount of longer-term brokered certificates of deposit in 2008 to provide liquidity for operations and to maintain in reserve its
available secured funding lines with the Federal Home Loan Bank (FHLBank) and the Federal Reserve Bank. In 2008, the
Company issued approximately $359 million of new brokered certificates which are fixed rate certificates with maturity terms of
generally two to four years, which the Company (at its discretion) may redeem at par generally after six months. As market
interest rates on these types of deposits have decreased in recent months, the Company has begun to redeem some of these
deposits in 2009 in order to lock in cheaper funding rates or reduce excess cash balances. In addition in 2008, the Company issued
approximately $137 million of new brokered certificates, which are fixed rate certificates with maturity terms of generally two to
four years, which the Company may not redeem prior to maturity. There are no interest rate swaps associated with these brokered
certificates.
These funding changes contributed to decreases in our net interest income and net interest margin. These longer-term
certificates carry an interest rate that is approximately 150 basis points higher than the interest rate that the Company would have
paid if it instead utilized short-term advances from the FHLBank. The Company decided the higher rate was justified by the
longer term and the ability to keep committed funding lines available. The net interest margin was also negatively impacted as the
Company originated some of the new certificates in advance of the anticipated terminations of the existing certificates, thereby
causing the Company to have excess funds for a period of time. These excess funds were invested in short-term cash equivalents
at rates that at times caused the Company to earn a negative spread. Partially offsetting the increase in brokered CDs, several
existing brokered certificates were redeemed by the Company in 2008 as the related interest rate swaps were terminated by the
swap counterparties. These redeemed certificates had effective interest rates through the interest rate swaps of approximately 90-
day LIBOR. Interest rate swap notional amounts have decreased from $419 million at December 31, 2007, to $12 million at
December 31, 2008.
11
4
11
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, if desired, 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 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 on an ongoing basis (see "Quantitative and Qualitative Disclosures About Market Risk").
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 450 basis points. The Federal Funds rate now stands at 0.25%. However,
funding costs for most financial services companies have not declined in tandem with these reductions in the Federal Funds rate.
Competition for deposits, the desire for longer term funding, elevated LIBOR interest rates and wide credit spreads have kept
borrowing costs relatively high in the current environment.
Another factor that continues to negatively impact net interest income is the elevated level of LIBOR interest rates
compared to Federal Funds rates as a result of credit and liquidity concerns in financial markets. These LIBOR interest rates were
elevated approximately 50-75 basis points compared to historical averages versus the stated Federal Funds rate for much of 2008.
In the latter portion of December 2008 and so far into 2009, LIBOR rates have decreased from their higher levels in comparison to
the stated Federal Funds rate. While these LIBOR interest rates are still elevated compared to historical averages in relation to
Federal Funds, they have decreased along with recent decreases in the Federal Funds rate. The Company has reduced the amount
and percentage of interest rate swaps and other borrowings that are indexed to LIBOR. The Company does not find LIBOR-based
interest rate swaps to be attractive at this time. Funding costs related to local market deposits and brokered certificates of deposit
have also been elevated due to competition by issuers seeking to generate significant funding.
The FRB most recently cut interest rates on December 16, 2008. Great Southern has a significant portfolio of loans
which are tied to a "prime rate" of interest. Some of these loans are tied to some national index of "prime," while most are indexed
to "Great Southern prime." The Company has elected to leave its “Great Southern prime rate” of interest at 5.00% in light of the
current highly competitive funding environment for deposits, including LIBOR rates that have been elevated. This does not affect
a large number of customers as a majority of the loans indexed to “Great Southern prime” are already at interest rate floors which
are provided for in individual loan documents. But for the interest rate floors, a rate cut by the FRB generally would have an
anticipated immediate negative impact on the Company’s net interest income due to the large total balance of loans which
generally adjust immediately as the Federal Funds rate adjusts. Because the Federal Funds rate is already very low, there may also
be a negative impact on the Company's net interest income due to the Company's inability to lower its funding costs in the current
environment. Usually any 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 would
normally also go down as a result of a reduction in interest rates by the FRB, assuming normal credit, liquidity and competitive
loan and deposit pricing pressures. Any anticipated positive impact will likely be reduced by the change in the funding mix noted
above, as well as retail deposit competition in the Company's market areas.
In addition, Great Southern's net interest margin has been negatively affected by certain characteristics of some of its
loans, deposit mix, loan and deposit pricing by competitors, and timing of interest rate changes by the FRB as compared to interest
rate changes in the financial markets. For the twelve months ended December 31, 2008, and 2007, interest income was reduced
$1.2 million and $1.6 million, respectively, due to the reversal of accrued interest on loans which were added to non-performing
status during the period. Partially offsetting this, the Company collected interest which was previously charged off in the amount
of $227,000 and $183,000 in the twelve months ended December 31, 2008, and 2007, respectively, due to work-out efforts on
non-performing assets. On a combined basis, this reduced net interest income and net interest margin. In addition, net interest
income and net interest margin were negatively impacted by the effects of the accounting entries recorded for certain interest rate
swaps (amortization of deposit broker origination fees). This amortization expense reduced net interest income by $3.1 million
and $1.2 million in 2008 and 2007, respectively.
12
5
12
The negative impact of declining loan interest rates has been partially mitigated by the positive effects of the
Company’s loans which have interest rate floors. At December 31, 2008, the Company had a portfolio of prime-based loans
totaling approximately $969 million with rates that change immediately with changes to the prime rate of interest. Of this total,
$779 million also had interest rate floors. These floors were at varying rates, with $182 million of these loans having floor rates of
7.0% or greater and another $548 million of these loans having floor rates between 5.0% and 7.0%. At December 31, 2008, $739
million of these loans were at their floor rates. During 2003 and 2004, the Company's loan portfolio 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 throughout 2008, as the "prime rate of interest" has gone down, the Company's loan portfolio
again has 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. At December 31, 2008, the loan yield for the portfolio had
increased to a level that was approximately 310 basis points higher than the national "prime rate of interest." While interest rate
floors have had an overall positive effect on the Company’s results, they do subject the Company to the risk that borrowers will
elect to refinance their loans with other lenders.
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 interest rate hedging activities. Operating expenses
consist primarily of salaries and employee benefits, occupancy-related expenses, expenses related to foreclosed assets, postage,
insurance, advertising and public relations, telephone, professional fees, office expenses and other general operating expenses.
Non-interest income for 2008 decreased primarily as a result of the impairment write-down in value of the Company’s
investments in available-for-sale Fannie Mae and Freddie Mac perpetual preferred stock and certain other available-for-sale equity
investments and lower commission revenue from the Company's travel and investment divisions, partially offset by an increase in
income related to the change in the fair value of certain interest rate swaps and the related change in fair value of hedged deposits.
The impairment write-down totaled $7.4 million on a pre-tax basis (including $5.6 million related to Fannie Mae and Freddie Mac
preferred stock, which was discussed in previous filings). These equity investments have experienced significant fair value
declines over the past year. It is unclear if or when the values of these investment securities will improve, or whether such values
will deteriorate further. Based on these developments, the Company recorded an other-than-temporary impairment. The Company
continues to hold these securities in the available-for-sale category. The Company also recorded an impairment write-down of
$1.1 million on a pre-tax basis in 2007.
The change in the fair value of certain interest rate swaps and the related change in fair value of hedged deposits
resulted in an increase in non-interest income of $7.0 million in 2008, and an increase of $1.6 million in 2007. Income of this
magnitude related to the change in the fair value of certain interest rate swaps and the related change in the fair value of hedged
deposits should not be expected in future periods. This income is part of a 2005 accounting restatement in which approximately
$3.4 million (net of taxes) was charged against retained earnings in 2005. This charge has been (and continues to be) recovered in
subsequent periods as interest rate swaps matured or were terminated by the swap counterparty.
Total non-interest expense increased in 2008 compared to 2007 due to expenses related to problem loans and
foreclosed assets, expenses related to FDIC insurance premiums and the continued growth of the Company. Due to the increase in
the level of foreclosed assets, foreclosure-related expenses increased $3.3 million in 2008 compared to 2007. 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 and into 2008. The Company incurred additional
deposit insurance expense of $827,000 in 2008 compared to 2007. The Company expects significantly increased expense in 2009
as a result of the FDIC increasing regular insurance premiums for all banks. In addition, the FDIC has proposed a special
assessment to be levied against all banks in 2009 -- see Item 1. "Business, Government Supervision and Regulations, Insurance of
Accounts and Regulation by the FDIC" in the Company’s Annual Report on Form 10-K.
In addition to the expense increases noted above, the Company's increase in non-interest expense in the year ended
December 31, 2008, compared to 2007, related to the continued growth of the Company. Late in the first quarter of 2007, Great
Southern completed its acquisition of a travel agency in St. Louis. In addition, since June 2007, the Company opened banking
centers in Springfield, Mo. and Branson, Mo.
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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.
Business Initiatives
The Company is expanding its retail banking center network in the St. Louis and Kansas City metropolitan regions.
This is part of the Company's overall long-term plan to open two to three banking centers per year as market conditions warrant.
The Company's first retail banking center in the St. Louis market is expected to open in April 2009. Located in Creve Coeur, Mo.,
the full-service banking center will complement a loan production office and a Great Southern Travel office already in operation
in this market. Construction will be underway soon on a second banking center in the Lee's Summit, Mo., market, a suburb of
Kansas City. The banking center should be completed in late 2009 and will enhance access and service to Lee's Summit-area
customers. Great Southern opened its first Lee's Summit retail location in 2006.
Great Southern is participating in the FDIC's Temporary Liquidity Guarantee Program (TLGP), which consists of two
basic components: (1) the Transaction Account Guarantee Program and (2) the Debt Guarantee Program. Through the Transaction
Account Guarantee Program, Great Southern is purchasing additional FDIC insurance coverage for its customers. Great Southern
customers with noninterest-bearing deposit accounts, Lawyer's Trust Accounts, and NOW accounts paying interest at a rate less
than 0.50 percent will be fully insured by the FDIC regardless of the account balance, through December 31, 2009. Coverage
under the Transaction Account Guarantee Program is in addition to and separate from the coverage available under the FDIC's
general deposit insurance rules, which was recently increased from $100,000 to $250,000 per depositor.
The Debt Guarantee Program, which guarantees newly issued senior unsecured debt of banks and thrifts, could be
utilized by the Company in the future. At present, the Company has no senior unsecured debt outstanding.
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 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 consideration 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. Based on its current activities, the Company does not expect the adoption
of this Statement will have a material effect on the Company’s financial position or results of operations.
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. Based on its current activities, the Company does
not expect the adoption of this Statement will have a material effect on the Company’s financial position or results of operations.
In February 2008, the FASB issued FASB Staff Position No. 157-2. The staff position delays the effective date of
SFAS No. 157, Fair Value Measurements (which was adopted by the Company on January 1, 2008) for nonfinancial assets and
nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring
basis. The delay was intended to allow additional time to consider the effect of various implementation issues with regard to the
application of SFAS No. 157. This staff position deferred the effective date of SFAS No. 157 to January 1, 2009, for items within
the scope of the staff position and is not expected to have a material effect on the Company's financial position or results of
operations.
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In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities –
an amendment of FASB Statement No. 133, which requires enhanced disclosures about an entity’s derivative and hedging
activities intended to improve the transparency of financial reporting. Under SFAS No. 161, entities will be required to provide
enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under Statement 133 and its related interpretations and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted SFAS No. 161
effective January 1, 2009. The adoption of this standard is not anticipated to have a material effect on the Company’s financial
position or results of operations.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS
No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation
of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles
in the United States (the GAAP hierarchy). The FASB concluded that the GAAP hierarchy should reside in the accounting
literature established by the FASB and is issuing this Statement to achieve that result. SFAS No. 162 is effective sixty days
following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments
to AU Section 411. The adoption of this standard is not anticipated to have a material effect on the Company’s financial position
or results of operations.
In June 2008, the FASB issued an Exposure Draft of a proposed Statement of Financial Accounting Standards,
Disclosure of Certain Loss Contingencies—an amendment of FASB Statements No. 5 and 141(R). The purpose of the proposed
statement is intended to improve the quality of financial reporting by expanding disclosures required about certain loss
contingencies. Investors and other users of financial information have expressed concerns that current disclosures required in
SFAS No. 5, Accounting for Contingencies, do not provide sufficient information in a timely manner to assist users of financial
statements in assessing the likelihood, timing, and amount of future cash flows associated with loss contingencies. If approved as
written, this proposed Statement would expand disclosures about certain loss contingencies in the scope of SFAS No. 5 or SFAS
No. 141 (revised 2007), Business Combinations, and would be effective for fiscal years ending after December 15, 2008, and
interim and annual periods in subsequent fiscal years. The FASB continues to deliberate this proposed standard at this time.
In June 2008, the FASB issued an Exposure Draft of a proposed Statement of Financial Accounting Standards,
Accounting for Hedging Activities—an amendment of FASB Statement No. 133. The purpose of the proposed Statement is
intended to simplify hedge accounting resulting in increased comparability of financial results for entities that apply hedge
accounting. Specifically, the proposed statement would eliminate the multiple methods of hedge accounting currently being used
for the same transaction. It also would require an entity to designate all risks as the hedged risk (with certain exceptions) in the
hedged item or transaction, thus better reflecting the economics of such items and transactions in the financial statements.
Additional objectives of the proposed Statement are to: simplify accounting for hedging activities; improve the financial reporting
of hedging activities to make the accounting model and associated disclosures more useful and easier to understand for users of
financial statements; resolve major practice issues related to hedge accounting that have arisen under Statement 133, Accounting
for Derivative Instruments and Hedging Activities; and address differences resulting from recognition and measurement anomalies
between the accounting for derivative instruments and the accounting for hedged items or transactions. If approved as written, the
proposed Statement would require application of the amended hedging requirements for financial statements issued for fiscal
years beginning after June 15, 2009, and interim periods within those fiscal years. The FASB continues to deliberate this proposed
standard at this time.
In August 2008, the FASB issued an Exposure Draft of a proposed Statement of Financial Accounting Standards,
Earnings per Share—an amendment of FASB Statement No. 128. The FASB is issuing this proposed Statement as part of a joint
project with the International Accounting Standards Board (IASB). The FASB and the IASB undertook that project to eliminate
differences between FASB Statement No. 128, Earnings per Share, and IAS 33, Earnings per Share, in ways that also would
clarify and simplify the earnings per share (EPS) computation. This proposed Statement proposes amendments to Statement 128
that would improve the comparability of EPS because the denominator used to compute EPS under Statement 128 would be the
same as the denominator used to compute EPS under IAS 33, with limited exceptions. The FASB continues to deliberate this
proposed standard at this time.
In October 2008, the FASB issued FASB Staff Position No. 157-3, Determining the Fair Value of an Asset When the
Market for That Asset Is Not Active. FSP 157-3 clarifies how Statement of Financial Accounting Standards (SFAS) No. 157 “Fair
Value Measurements” (SFAS 157) should be applied when valuing securities in markets that are not active and illustrates how an
entity would determine fair value in this circumstance. The FSP states that an entity should not automatically conclude that a
particular transaction price is determinative of fair value. In a dislocated market, judgment is required to evaluate whether
individual transactions are forced liquidations or distressed sales. When relevant observable market information is not available, a
valuation approach that incorporates management’s judgments about the assumptions that market participants would use in
pricing the asset in a current sale transaction would be acceptable. The FSP also indicates that quotes from brokers or pricing
services may be relevant inputs when measuring fair value, but are not necessarily determinative in the absence of an active
market for the asset. The adoption of FSP 157-3, effective upon issuance, did not impact the Company’s financial position or
results of operations.
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In October 2008, the FASB issued an Exposure Draft of a proposed Statement of Financial Accounting Standards,
Subsequent Events. The objective of this proposed Statement is to establish general standards of accounting for and disclosure of
events that occur subsequent to the balance sheet date but before financial statements are issued or are available to be issued. In
particular, this proposed Statement sets forth: (1) the period after the balance sheet date during which management of a reporting
entity would evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; (2)
the circumstances under which an entity would recognize events or transactions occurring after the balance sheet date in its
financial statements; and (3) the disclosures that an entity would make about events or transactions that occurred after the balance
sheet date. The FASB continues to deliberate this proposed standard at this time.
In December 2008, the FASB issued FASB Staff Position No. 140-4 and FIN 46(R)-8, Disclosure by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities. This FSP amends SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to require public entities to provide
additional disclosures about transfers of financial assets and amends FIN 46(R), Consolidation of Variable Interest Entities, to
require public entities to provide additional disclosures about their involvement in variable interest entities and certain special
purpose entities. This FSP was effective for the first reporting period ending after December 15, 2008. The Company has not
engaged in these types of transfers of financial assets; therefore, no additional disclosures were required.
In January 2009, the FASB issued proposed FASB Staff Position No. 107-b and APB 28-a, Interim Disclosures about
Fair Value of Financial Instruments. This proposed FSP would amend FASB Statement No. 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of financial instruments in interim financial statements as well as in
annual financial statements. This FSP also would amend APB Opinion No. 28, Interim Financial Reporting, to require those
disclosures in all interim financial statements. This FSP, if adopted as it is currently written, is effective for interim and annual
reporting periods ending after March 15, 2009.
In February 2009, the FASB decided to reexpose proposed FASB Staff Position No. 157-c, Measuring Liabilities
under FASB Statement No. 157. This proposed FSP would clarify the principles in FASB Statement No. 157, Fair Value
Measurements, on the measurement of liabilities. This FSP, if adopted as it is currently written, will be applied on a prospective
basis effective on the beginning of the period that includes the issuance date of the FSP.
In March 2008, the FASB issued proposed FSP FAS 132(R)-a, Employers’ Disclosures about Postretirement Benefit
Plan Assets. In December 2008, the FASB issued the final FSP FAS 132(R)-1, Employers’ Disclosures about Postretirement
Benefit Plan Assets. This FSP is the result of FASB’s redeliberations of that proposed FSP. The provisions of this FSP only apply
to single-employer defined benefit plans; the Company participates in a multi-employer defined benefit pension plan. Therefore,
the requirements of this FSP will not affect the consolidated financial condition or results of operations of the Company, or the
related disclosures about plan assets.
Comparison of Financial Condition at December 31, 2008 and December 31, 2007
During the year ended December 31, 2008, the Company increased total assets by $228.2 million to $2.66 billion. Net
loans decreased by $96.4 million. The main loan areas experiencing decreases were commercial and residential construction and
commercial business. This was partially offset by increases in single-family and multi-family residential mortgage loans and
consumer loans. Given the current economy, the Company expects that loan growth overall may continue to be negative as the
construction loan category will likely continue to decrease. The Company expects to continue to increase balances in single-
family and multi-family residential mortgage loans and consumer loans. Available-for-sale investment securities increased by
$222.7 million, primarily due to increased balances of U. S. Government and U. S. Government Agency mortgage-backed
securities which were used for pledging to public fund deposit accounts and customer repurchase agreements, and to provide
additional liquidity to the Company. 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 24.3% and 17.5% of
total assets at December 31, 2008 and 2007, respectively. Cash and cash equivalents increased $87.4 million, again due to the
Company’s decision to maintain additional liquidity in 2008 and due to funds received from U.S. Treasury under the Capital
Purchase Program (CPP). Foreclosed assets increased $12.3 million, primarily due to the foreclosure of several loan relationships
throughout 2008. See "Non-performing Assets" for additional information on foreclosed assets.
Total liabilities increased $184.0 million from December 31, 2007 to $2.43 billion at December 31, 2008. Deposits
increased $144.9 million, securities sold under reverse repurchase agreements with customers increased $71.5 million, structured
repurchase agreements increased $50.0 million and short-term borrowings increased $10.4 million, while FHLBank advances
decreased $93.4 million. The increases in securities sold under repurchase agreements with customers was the result of corporate
customers’ desires to place funds in excess of deposit insurance limits in secured accounts. The increase in short-term borrowings
related to additional term borrowings from the FRB under the Term Auction Facility program. FHLBank advances decreased from
$213.9 million at December 31, 2007, to $120.5 million at December 31, 2008. 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. In September 2008,
the Company entered into a structured repo borrowing transaction for $50 million. This borrowing bears interest at a fixed rate of
4.34% if three-month LIBOR remains at 2.81% or less on quarterly interest reset dates; if LIBOR is above the 2.81% rate on
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quarterly interest reset dates, then the Company’s borrowing rate decreases by 2.5 times the difference in LIBOR (up to 250 basis
points). Deposits (excluding brokered and national certificates of deposit) decreased $166.7 million from December 31, 2007.
Retail CDs and non-interest-bearing transaction accounts decreased $34.6 million and $27.5 million, respectively. Interest-bearing
checking accounts (mainly money market accounts) decreased $104.6 million. Checking account balances totaled $525.2 million
at December 31, 2008, down from $657.4 million at December 31, 2007. A significant amount of this reduction in checking
balances was moved into customer reverse repurchase agreements as noted above. Total brokered deposits were $974.5 million at
December 31, 2008, up from $674.6 million at December 31, 2007. Included in these totals at December 31, 2008 and December
31, 2007, were Great Southern Bank customer deposits totaling $168.3 million and $88.8 million, respectively, that are part of the
CDARS program which allows bank customers to maintain balances in an insured manner that would otherwise exceed the FDIC
deposit insurance limit. The Company decided to increase the amount of longer-term brokered certificates of deposit in 2008 to
provide liquidity for operations and to maintain in reserve its available secured funding lines with the FHLBank and the FRB. In
2008, the Company issued approximately $359 million of new brokered certificates which are fixed rate certificates with maturity
terms of generally two to four years, which the Company (at its discretion) may redeem at par generally after six months. As
market interest rates on these types of deposits have decreased in recent months, the Company has begun to redeem some of these
certificates in 2009 in order to lock in cheaper funding rates or reduce excess cash balances. In addition during 2008, the
Company issued approximately $137 million of new brokered certificates, which are fixed rate certificates with maturity terms of
generally two to four years, which the Company may not redeem prior to maturity. There are no interest rate swaps associated
with these brokered certificates.
Total stockholders' equity increased $44.2 million from $189.9 million at December 31, 2007 to $234.1 million at
December 31, 2008. The large increase was the result of the Company’s participation in the Treasury’s CPP, under which the
Company issued $58.0 million of perpetual preferred stock and common stock warrants. The Company recorded a net loss for
fiscal year 2008 of $4.4 million and accumulated other comprehensive loss decreased $400,000. Total stockholders’ equity was
also reduced by common dividends declared of $9.6 million and preferred dividends of $210,000. In 2008, the Company
repurchased 21,200 shares of its common stock at an average price of $19.19 per share and reissued 1,972 shares of Company
stock at an average price of $13.23 per share to cover stock option exercises. At December 31, 2008, common stockholders' equity
was $178.5 million (6.7% of total assets), equivalent to a book value of $13.34 per common share.
Our participation in the CPP currently precludes us from purchasing shares of the Company’s stock until the earlier of
December 5, 2011 or our repayment of the CPP funds. Management has historically utilized stock buy-back programs from time
to time as long as repurchasing the stock contributed to the overall growth of shareholder value. The number of shares of stock
repurchased and the price 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.
Results of Operations and Comparison for the Years Ended December 31, 2008 and 2007
General
Including the effects of the Company's hedge accounting entries recorded in 2008 and 2007, net income decreased
$33.7 million, or 115.1%, during the year ended December 31, 2008, compared to the year ended December 31, 2007. This
decrease was primarily due to an increase in provision for loan losses of $46.7 million, or 853.4%, an increase in non-interest
expense of $4.0 million, or 7.7%, and a decrease in non-interest income of $1.3 million, or 4.3%, partially offset by a decrease in
provision for income taxes of $18.1 million, or 126.2%, and an increase in net interest income of $178,000, or 0.2%.
Excluding the effects of the Company's hedge accounting entries recorded in 2008 and 2007, net income decreased
$35.9 million, or 124.0%, during the year ended December 31, 2008, compared to the year ended December 31, 2007. This
decrease was primarily due to an increase in provision for loan losses of $46.7 million, or 853.4%, an increase in non-interest
expense of $4.0 million, or 7.7%, and a decrease in non-interest income of $6.6 million, or 23.6%, partially offset by a decrease in
provision for income taxes of $19.3 million, or 136.0%, and an increase in net interest income of $2.1 million, or 2.9%. See "
Restatement of Previously Issued Consolidated Financial Statements."
The information presented in the table below and elsewhere in this report excluding hedge accounting entries recorded
(for the 2008, 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 2008, 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
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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,
2008
Earnings Per
Diluted Share
2007
Earnings Per
Diluted Share
Dollars
Dollars
Reported Earnings (per common share)
$
(4,670)
$
(0.35)
$
29,299
$
2.15
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
Total Interest Income
2,022
(4,534)
762
(1,102 )
$
(7,182)
$
28,959
Total interest income decreased $19.1 million, or 11.6%, during the year ended December 31, 2008 compared to the
year ended December 31, 2007. The decrease was due to a $22.9 million, or 16.0%, decrease in interest income on loans, partially
offset by a $3.8 million, or 18.1%, increase in interest income on investments and other interest-earning assets. Interest income for
loans, investment securities and other interest-earning assets increased due to higher average balances. Interest income for
investment securities and other interest-earning assets decreased slightly due to lower average rates of interest while loans
experienced a significant decrease in average rates of interest due to the significant rate cuts by the FRB in 2008.
Interest Income - Loans
During the year ended December 31, 2008 compared to the year ended December 31, 2007, interest income on loans
decreased primarily due to significantly lower average interest rates. Interest income on loans decreased $28.2 million as the result
of lower average interest rates. The average yield on loans decreased from 8.04% during the year ended December 31, 2007, to
6.51% during the year ended December 31, 2008. Average loan rates were much lower in 2008 compared to 2007, as a result of
market rates of interest, primarily the "prime rate" of interest. During the last quarter of 2007, market interest rates decreased, with
the "prime rate" of interest decreasing 1.00% by the end of December 2007. Then in 2008, the “prime rate” decreased another
4.00% to a rate of 3.25% at December 31, 2008. 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 2008, the declining interest rates once again put these loan rate floors in effect
and established a loan rate which was higher than the contractual rate would have otherwise been. 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. In the year ended December 31, 2008, the average yield on loans was 6.51% versus an average prime rate for the
period of 5.10%, or a difference of 141 basis points.
Interest income increased $5.3 million as the result of higher average loan balances from $1.77 billion during the year
ended December 31, 2007 to $1.84 billion during the year ended December 31, 2008. The higher average balance resulted
principally from the Bank's increased commercial real estate lending, single-family and multi-family residential lending and
consumer lending. The Bank's commercial and residential construction and commercial business average loan balances
experienced small decreases compared to 2007.
For the years ended December 31, 2008, and 2007, interest income was reduced $1.2 million and $1.6 million,
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 $183,000 in the
years ended December 31, 2008 and 2007, respectively, due to work-out efforts on non-performing loans. See "Net Interest
Income" for additional information on the impact of this interest activity.
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Interest Income - Investments and Other Interest-earning Deposits
Interest income on investments and other interest-earning assets increased as a result of higher average balances during
the year ended December 31, 2008, when compared to the year ended December 31, 2007. Interest income increased $4.8 million
as a result of an increase in average balances from $431 million during the year ended December 31, 2007, to $534 million during
the year ended December 31, 2008. This increase was primarily in available-for-sale mortgage-backed securities, where securities
were needed for liquidity and pledging against deposit accounts under customer repurchase agreements and public fund deposits.
The balance of available-for-sale mortgage-backed securities has increased from $183.1 million at December 31, 2007 to $485.2
million at December 31, 2008. Interest income decreased by $1.0 million as a result of a decrease in average interest rates from
4.91% during the year ended December 31, 2007, to 4.68% during the year ended December 31, 2008. In previous years, 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).
As these securities reached interest rate reset dates in 2007, their rates typically increased along with market interest rate
increases. As market interest rates (primarily treasury rates and LIBOR rates) generally declined in 2008 and into 2009, the
interest rates on those securities that reprice in 2009 likely will decrease at their next interest rate reset date. The majority of the
securities added in 2008 are backed by hybrid ARMs which will have fixed rates of interest for a period of time (generally three to
ten years) and then will adjust annually. 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). In addition at December 31, 2007, the Company had several agency securities
that were callable at the option of the issuer. Many of these securities were redeemed by the issuer in 2008, so the balance of U. S.
Government agency securities has decreased from $125.8 million at December 31, 2007 to $34.8 million at December 31, 2008.
This balance has declined further in 2009.
In addition to the increase in securities, the Company has also experienced an increase in interest-earning deposits and
non-interest-earning cash equivalents, where additional liquidity was maintained in 2008 due to uncertainty in the financial
system. These deposits and cash equivalents earn very low (or no) yield and therefore negatively impact the Company’s net
interest margin. At December 31, 2008, the Company had cash and cash equivalents of $167.9 million compared to $80.5 million
at December 31, 2007.
Total Interest Expense
Including the effects of the Company's accounting change in 2005 for certain interest rate swaps, total interest expense
decreased $19.2 million, or 20.8%, during the year ended December 31, 2008, when compared with the year ended December 31,
2007, primarily due to a decrease in interest expense on deposits of $15.4 million, or 20.1%, a decrease in interest expense on
FHLBank advances of $2.0 million, or 28.2%, a decrease in interest expense on short-term borrowings and structured repurchase
agreements of $1.5 million, or 19.9%, and a decrease in interest expense on subordinated debentures issued to capital trust of
$452,000, or 23.6%.
Excluding the effects of the Company's hedge accounting entries recorded in 2008 and 2007 for certain interest rate
swaps, economically, total interest expense decreased $21.2 million, or 23.2%, during the year ended December 31, 2008, when
compared with the year ended December 31, 2007, primarily due to a decrease in interest expense on deposits of $17.3 million, or
23.0%, a decrease in interest expense on FHLBank advances of $2.0 million, or 28.2%, a decrease in interest expense on short-
term borrowings and structured repurchase agreements of $1.5 million, or 19.9%, and a decrease in interest expense on
subordinated debentures issued to capital trust of $452,000, or 23.6%. See 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 2008 and 2007, interest on demand
deposits decreased $7.8 million due to a decrease in average rates from 3.34% during the year ended December 31, 2007, to
1.73% during the year ended December 31, 2008. Average interest rates decreased due to lower overall market rates of interest in
2008. Market rates of interest on checking and money market accounts began to decrease in late 2007 and throughout 2008 as the
FRB reduced short-term interest rates. Interest on demand deposits increased $124,000 due to an increase in average balances
from $481 million during the year ended December 31, 2007, to $484 million during the year ended December 31, 2008. 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 $484 million, $481 million and
$421 million in 2008, 2007 and 2006, respectively. Average non-interest bearing demand balances were $148 million, $171
million and $189 million in 2008, 2007 and 2006, respectively.
Interest expense on deposits decreased $14.4 million as a result of a decrease in average rates of interest on time
deposits from 5.32% during the year ended December 31, 2007, to 4.14% during the year ended December 31, 2008, and
increased $6.7 million due to an increase in average balances of time deposits from $1.13 billion during the year ended December
31, 2007, to $1.27 billion during the year ended December 31, 2008. Average interest rates decreased due to lower overall market
19
12
19
rates of interest in 2008. Market rates of interest on certificates of deposit began to decrease in late 2007 and throughout 2008 as
the FRB reduced short-term interest rates. As certificates of deposit matured in 2008, they were generally replaced with
certificates bearing a lower rate of interest. In 2006 and 2007, the Company increased its balances of brokered certificates of
deposit to fund a portion of its loan growth. In 2008, the Company increased its balances of brokered certificates of deposit to
lengthen a portion of its funding liabilities and to increase liquidity on its balance sheet in addition to its off-balance sheet funding
credit lines. Brokered certificates of deposit balances increased $299.9 million in 2008, from $674.6 million at December 31,
2007, to $974.5 million at December 31, 2008. A large portion of this increase relates to the program described below.
Included in the brokered deposits total at December 31, 2008, is $337.1 which is part of the Certificate of Deposit
Account Registry Service (CDARS). This total includes $168.3 in CDARS customer deposit accounts and $168.8 in CDARS
purchased funds. Included in the brokered deposits total at December 31, 2007, was $164.7 which was part of the CDARS. This
total includes $88.8 in CDARS customer deposit accounts and $75.9 in CDARS purchased funds. CDARS customer deposit
accounts are accounts that are just like any other deposit account on the Company’s books, except that the account total exceeds
the FDIC deposit insurance maximum. When a customer places a large deposit with a CDARS Network bank, that bank uses
CDARS to place the funds into deposit accounts issued by other banks in the CDARS Network. This occurs in increments of less
than the standard FDIC insurance maximum, so that both principal and interest are eligible for complete FDIC protection. Other
Network Members do the same thing with their customers' funds.
CDARS purchased funds transactions represent an easy, cost-effective source of funding without collateralization or
credit limits for the Company. Purchased funds transactions help the Company obtain large blocks of funding while providing
control over pricing and diversity of wholesale funding options. Purchased funds transactions are obtained through a bid process
that occurs weekly, with varying maturity terms.
The effects of the Company's hedge accounting entries recorded in 2008 and 2007 did not impact interest on demand
deposits.
Excluding the effects of the Company's hedge accounting entries recorded in 2008 and 2007, economically, interest
expense on deposits decreased $16.2 million as a result of a decrease in average rates of interest on time deposits from 5.21%
during the year ended December 31, 2007, to 3.89% during the year ended December 31, 2008, and increased $6.6 million due to
an increase in average balances of time deposits from $1.13 billion during the year ended December 31, 2007, to $1.27 billion
during the year ended December 31, 2008. The average interest rates decreased due to lower overall market rates of interest
throughout 2008. See 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 Structured Repurchase Agreements and
Subordinated Debentures Issued to Capital Trust
Interest expense on FHLBank advances decreased $609,000 due to a decrease in average balances on FHLBank
advances from $145 million in the year ended December 31, 2007, to $133 million in the year ended December 31, 2008. The
reason for this decrease was the Company elected to utilize other forms of alternative funding during 2008. In addition, FHLBank
advances experienced a decrease in average interest rates from 4.81% during the year ended December 31, 2007, to 3.75% during
the year ended December 31, 2008, resulting in decreased interest expense of $1.4 million.
Interest expense on short-term borrowings and structured repurchase agreements decreased $4.4 million due to a
decrease in average interest rates from 4.30% in the year ended December 31, 2007, to 2.25% in the year ended December 31,
2008. Partially offsetting this decrease, average balances increased from $171 million during the year ended December 31, 2007,
to $262 million during the year ended December 31, 2008, resulting in increased interest expense of $2.9 million. 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, utilization of the Federal Reserve’s Term Auction Facility and a structured repurchase agreement
borrowing entered into in 2008. The FRB began to lower short-term interest rates in the latter portion of 2007 and continued to
maintain very low rates throughout 2008.
Interest expense on subordinated debentures issued to capital trust decreased $622,000 due to a decrease in average
interest rates from 6.78% in the year ended December 31, 2007, to 4.73% in the year ended December 31, 2008. Partially
offsetting this decrease, interest expense on subordinated debentures issued to capital trust increased $170,000 due to increases in
average balances from $28.2 million in the year ended December 31, 2007, to $30.9 million in the year ended December 31, 2008.
The average rate of interest on these subordinated debentures decreased in 2008 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.
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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, 2008 increased $178,000 to $71.6 million compared to $71.4 million for the year ended December 31, 2007.
Net interest margin was 3.01% in the year ended December 31, 2008, compared to 3.24% in 2007, a decrease of 23 basis points.
Most of the decrease in net interest margin resulted from the decision by the Company to increase the amount of
longer-term brokered certificates of deposit during 2008 to provide liquidity for operations and to maintain in reserve its available
secured funding lines with the FHLBank and the FRB. In 2008, the Company issued approximately $359 million of new brokered
certificates which are fixed rate certificates with maturity terms of generally two to four years, which the Company (at its
discretion) may redeem at par generally after six months. As market interest rates on these types of deposits have decreased in
recent months, the Company has begun to redeem some of these certificates in 2009 in order to lock in cheaper funding rates. In
addition during 2008, the Company issued approximately $137 million of new brokered certificates, which are fixed rate
certificates with maturity terms of generally two to four years, which the Company may not redeem prior to maturity. There are no
interest rate swaps associated with these brokered certificates. These longer-term certificates carry an interest rate that is
approximately 150 basis points higher than the interest rate that the Company would have paid if it instead utilized short-term
advances from the FHLBank. The Company decided the higher rate was justified by the longer term and the ability to keep
committed funding lines available throughout 2008. The net interest margin was also negatively impacted as the Company
originated some of the new certificates in advance of the anticipated terminations of these existing certificates, thereby causing the
Company to have excess funds for a period of time. These excess funds were invested in short-term cash equivalents at rates that
at times caused the Company to earn a negative spread. The average balance of interest-bearing cash equivalents in the three and
twelve months ended December 31, 2008, was $76 million and $42 million, respectively. This compares to the average balance of
interest-bearing cash equivalents in the three and twelve months ended December 31, 2007, of $3 million and $9 million,
respectively. Partially offsetting the increase in brokered CDs, several existing brokered certificates were redeemed by the
Company in 2008 as the related interest rate swaps were terminated by the swap counterparties. Interest rate swap notional
amounts have decreased from $419 million at December 31, 2007, to $11 million at December 31, 2008. The Company expects to
redeem or replace more brokered deposits in 2009 as the excess liquidity is determined by management to no longer be warranted.
Interest rates on brokered deposits of similar maturities to those that are callable by the Company have decreased as much as 150
basis points from the rates currently paid on these deposits by the Company. The Company currently has approximately $257
million of such brokered deposits which may be redeemed at the Company’s discretion in the first half of 2009.
Another factor that in 2008 negatively impacted net interest income was the elevated level of LIBOR interest rates
compared to Federal Funds rates as a result of credit and liquidity concerns in financial markets. These LIBOR interest rates were
elevated approximately 50-75 basis points compared to historical averages versus the stated Federal Funds rate for a significant
portion of 2008. This elevated spread has continued into 2009 as the FRB has kept the Federal Funds rate at .25%. While these
LIBOR interest rates are still elevated compared to historical averages in relation to Federal Funds, they have decreased along
with recent decreases in the Federal Funds rate. The Company has reduced the amount and percentage of interest rate swaps and
other borrowings that are indexed to LIBOR. Funding costs related to local market deposits and brokered certificates of deposit
have also been elevated due to competition by issuers seeking to generate significant funding.
For the years ended December 31, 2008 and 2007, interest income was reduced $1.2 million and $1.6 million,
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 $183,000 in the
years ended December 31, 2008 and 2007, respectively.
The Company's overall interest rate spread increased 3 basis points, or 1.1%, from 2.71% during the year ended
December 31, 2007, to 2.74% during the year ended December 31, 2008. The increase was due to a 136 basis point decrease in the
weighted average rate paid on interest-bearing liabilities, partially offset by a 133 basis point decrease in the weighted average
yield on interest-earning assets. The Company's overall net interest margin decreased 23 basis points, or 7.1%, from 3.24% for the
year ended December 31, 2007, to 3.01% for the year ended December 31, 2008. In comparing the two years, the yield on loans
decreased 153 basis points while the yield on investment securities and other interest-earning assets decreased 23 basis points. The
rate paid on deposits decreased 126 basis points, the rate paid on FHLBank advances decreased 106 basis points, the rate paid on
short-term borrowings decreased 205 basis points, and the rate paid on subordinated debentures issued to capital trust decreased
205 basis points. See "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.
Excluding the impact of the accounting entries recorded for certain interest rate swaps, economically, net interest
income for the year ended December 31, 2008 increased $2.1 million to $74.7 million compared to $72.6 million for the year
ended December 31, 2007. Net interest margin excluding the effects of the accounting change was 3.14% in the year ended
December 31, 2008, compared to 3.29% in the year ended December 31, 2007. The Company's overall interest rate spread
increased 11 basis points, or 4.0%, from 2.77% during the year ended December 31, 2007, to 2.88% during the year ended
December 31, 2008. The increase was due to a 144 basis point decrease in the weighted average rate paid on interest-bearing
liabilities, partially offset by a 133 basis point decrease in the weighted average yield on interest-earning assets. The Company's
overall net interest margin decreased 15 basis points, or 4.6%, from 3.29% for the year ended December 31, 2007, to 3.14% for
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the year ended December 31, 2008. In comparing the two years, the yield on loans decreased 153 basis points while the yield on
investment securities and other interest-earning assets decreased 23 basis points. The rate paid on deposits decreased 136 basis
points, the rate paid on FHLBank advances decreased 106 basis points, the rate paid on short-term borrowings decreased 205 basis
points, and the rate paid on subordinated debentures issued to capital trust decreased 205 basis points.
The prime rate of interest averaged 5.10% during the year ended December 31, 2008 compared to an average of 8.05%
during the year ended December 31, 2007. In the last three months of 2007 and throughout 2008, the FRB decreased short-term
interest rates. At December 31, 2008, the national “prime rate” stood at 3.25% and the Company’s average interest rate on its loan
portfolio was 6.35%. Over half of the Bank's loans were tied to prime at December 31, 2008; however, most of these loans had
interest rate floors or were indexed to “Great Southern Bank prime,” which has not been reduced below 5.00%. 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
2008
%
$
2007
%
$
Reported Net Interest Income/Margin
$
71,583
3.01%
$
71,405
3.24%
Amortization of deposit broker
origination fees
Net interest income/margin excluding
impact of hedge accounting entries
3,111
.13
1,172
.05
$
74,694
3.14%
$
72,577
3.29%
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 $52.2 million and $5.5 million during the years ended December 31, 2008 and
December 31, 2007, respectively. The allowance for loan losses increased $3.7 million, or 14.5%, to $29.2 million at December
31, 2008 compared to $25.5 million at December 31, 2007. Net charge-offs were $48.5 million in 2008 versus $6.3 million in
2007. The increase in provision for loan losses and charge-offs for the year ended December 31, 2008, was due principally to the
$35 million which was provided for and charged off in the quarter ended March 31, 2008, related to the Company's loans to the
Arkansas-based bank holding company and related loans to individuals described in the Company's Quarterly Report on Form 10-
Q for March 31, 2008. In addition, general market conditions, and more specifically, housing supply, absorption rates and unique
circumstances related to individual borrowers and projects also contributed to increased provisions and charge-offs. As properties
were transferred into non-performing loans or foreclosed assets, evaluations were made of the value of these assets with
corresponding charge-offs as appropriate.
In May 2008, the Company determined to record a provision expense and related charge-off of $35 million related to a
$30 million stock loan to an Arkansas-based bank holding company (ABHC) and the under-collateralized portion of other
associated loans totaling $5 million, which loans were previously discussed in the Company's Annual Report on Form 10-K filed
on March 17, 2008, Current Report on Form 8-K filed on May 12, 2008, and Quarterly Report on Form 10-Q filed on May 19,
2008. The charge-off resulted from the appointment of the FDIC as Receiver for ABHC's subsidiary, ABank, by the OCC on
May 9, 2008, and the closing of ABank by the FDIC that same day. As a result of these regulatory actions, the $30 million loan as
well as $5 million, representing the undercollateralized portion of other related loans, were charged off by the Company, with the
provision expense and associated charge-off recorded in the first quarter of 2008.
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 and/or requirements for an increase in loan loss provision expense. Management has long ago established various
controls in an attempt to limit future losses, such as a watch list of possible problem loans, documented loan administration
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policies and a loan review staff to review the quality and anticipated collectability of the portfolio. More recently, additional
procedures have been implemented to provide for more frequent management review of the loan portfolio based on loan size, loan
type, delinquencies, on-going correspondence with borrowers, and problem loan work-outs. 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 1.66%, 1.63% and 1.38% at December 31,
2008, September 30, 2008, and December 31, 2007, 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. If economic conditions remain weak or deteriorate significantly, it is possible that
additional loan loss provisions would be required, thereby adversely affecting future results of operations and financial condition.
Non-performing Assets
As a result of changes in balances and composition of the loan portfolio, 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, 2008, were $65.9 million, up $10.0 million from December 31, 2007. Non-
performing assets as a percentage of total assets were 2.48% at December 31, 2008, compared to 2.30% at December 31, 2007.
Compared to December 31, 2007, non- performing loans decreased $2.3 million to $33.2 million while foreclosed assets increased
$12.3 million to $32.7 million. Commercial real estate, construction and business loans comprised $29.7 million, or 89%, of the
total $33.2 million of non-performing loans at December 31, 2008.
Non-performing Loans. Compared to December 31, 2007, non-performing loans decreased $2.3 million to $33.2
million. Non-performing loan increases and decreases are described below.
Increases in non-performing loans in 2008, that remained in Non-Performing Loans at December 31, 2008, included:
•
•
•
•
•
An $8.3 million loan relationship, which is secured primarily by multiple subdivisions in the St. Louis area. This
relationship was charged down $2 million upon transfer to non-performing loans. The $8.3 million balance
represents the Company's total exposure, but only 55% of the total borrowers' liability, with 45% participated to
other banks. This relationship has been with Great Southern since 2005 and lot sales have slowed.
A $1.6 million loan relationship, which is secured primarily by eleven houses for sale in Northwest Arkansas. Four
of the houses are either under contract or have contracts pending, but none of these sales have been completed at
this time.
A $3.0 million loan relationship, which is secured primarily by a condominium development in Kansas City. Some
sales occurred during 2007, with the outstanding balance decreasing $1.9 million in 2007. No sales occurred in
2008; however, some principal reduction payments were made. This relationship was charged down approximately
$285,000 upon transfer to non-performing loans in the third quarter of 2008, to a balance of $2.5 million.
A $1.9 million loan relationship, which is secured primarily by a residential subdivision development and
developed lots in various subdivisions in Springfield, Mo. This relationship was charged down $413,000 to $1.4
million at December 31, 2008 upon receipt of updated appraisals to establish the current value of the collateral.
A $2.3 million loan relationship, which is secured primarily by commercial land and acreage to be developed into
commercial lots in Northwest Arkansas. This relationship was transferred to non-performing loans in the third
quarter of 2008. It was charged down approximately $320,000 upon transfer to foreclosed assets in the first quarter
of 2009, to a balance of $2.0 million.
At December 31, 2008, six loan relationships in excess of $1 million accounted for $23.8 million of the total non-
performing loan balance of $33.2 million. In addition to the five relationships in excess of $1 million noted above, one other
significant loan relationship was included in Non-performing Loans at December 31, 2007, and remained there at December 31,
2008. This relationship is described below:
•
A $7.7 million loan relationship, which is secured by a condominium and retail historic rehabilitation development
in St. Louis. The original relationship has been reduced through the receipt of Tax Increment Financing funds and a
portion of the Federal and State historic tax credits ultimately expected to be received by the Company in 2008.
Upon receipt of the remaining Federal and State tax credits, the Company expects to reduce the balance of this
relationship to approximately $5.0 million, the value of which is substantiated by a recent appraisal. The Company
expects to remove this relationship from loans and hold it as a real estate asset once the tax credit process is
completed. To date, six of the ten residential units are leased. The retail space is not leased at this time.
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23
Three other significant relationships were both added to the Non
transferred to foreclosed assets during the year ended December 31, 2008:
-performing Loans category and subsequently
•
•
•
A $2.5 million loan relationship, which was secured primarily by an office and residential historic rehabilitation
project in St. Loui
performing loan.
s, was assumed by a new borrower upon the sale of the collateral. This is now considered a
A portion of the primary collateral underlying a $1.2 million loan relationship, lots, houses and duplexes for resale
in the Joplin, Mo., area, was sold during the fourth
quarter of 2008. The remaining properties, totaling $325,000,
were foreclosed during the fourth quarter of 2008.
A $1.7 million loan relationship, which involves a retail/office rehabilitation project in the St. Louis metrop
area, was added to Non-Performing Loans in the first quarter of 2008. This relationship was transferred to
foreclosed assets during the second quarter of 2008. A charge-off of approximately $1.0 million was recorded upon
the tran
sfer of the relationship to foreclosed assets. This relationship remains in foreclosed assets at December 31,
2008.
olitan
Two other significant relationships were both added to the Non-performing Loans category and subsequently paid of
during the year ended December 31, 2008. The first relationship was $2.7 million, and was secured primarily by a motel in the
State of Florida. The primary collateral was sold by the borrower during the third quarter of 2008. The Company received a
principal reduction on the debt and financed the new owner. The second relationship was $6.6 million, and was previously secured
by a stock investment in a bank holding company, and then was replaced with anticipated tax refunds, interests in various busin
ess
ventures and other collateral. A charge-off of approximately $5.1 million was recorded upon the transfer of the relationship to
Non-Performing Loans in the first quarter of 2008. This relationship was reduced to $687,000, during the third quarter of 2
through receipt of a portion of the anticipated tax refunds. In November 2008, the Company received a
payment from the
bo
rrower which reduced the outstanding balance of this relationship on the Company's books to $-0-.
008
f
Five other significant relationships were included in the Non-performing Loans category at December 31, 2007, and
quently transferred to foreclosed assets during the year ended December 31, 2008. These relationships are described
were subse
b
elow:
•
•
•
•
•
A $1.3 million loan relationship, which involves a restaurant building in Northwest Arkansas, wa
during the second quarter of 2008. The Company sold this property prior to December 31, 2008.
s foreclosed upon
A $1.9 million loan relationship, which involves partially-developed subdivision lots in northwest Arkansas, was
foreclosed upon in the second quarter of 2008. This relationship remains in foreclosed assets at December 31, 2008.
A $1.0 million loan relationship, which involves subdivision lots and houses in central Missouri, was foreclosed
upon during the first quarter of 2008. This relationship was charged down to
assets. This relationship remains in foreclosed assets at December 31, 2008.
$660,000 upon transfer to foreclosed
A $5.7 million loan relationship, which involves 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. The project in southwest Missouri was sold prior to December 31,
2008. The project in southeast Missouri remains in foreclosed assets at December 31, 2008, with a balance of $3.9
million. While this asset is included in the Company’s Non-Performing Asset totals and ratios, the
Company does
not consider it to be a “Substandard Asset” as it produces a market return on the amount invested.
A $1.3 million loan relationship, which involves several completed houses in the Branson, Mo., area, was
foreclosed upon during the second quarter of 2008. At December 31, 2008, this relationship was recorded in
foreclosed assets at $1.0 million after a $200,000 write-down in the sec
of the properties which reduced the relationship balance by $219,000.
ond quarter of 2008 and the sale of a portion
Two other significant relationships were included in the Non-performing Loans category at December 31, 2007, and
subsequently were paid off during the year ended December 31, 2008. The first relationship was $3.3 million, which was secured
by a nursing home in the State of Missouri. This relationship 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 second relationship was $2.6 million. A portion of
the primary collateral underlying this loan relationship, the borrowers’ interest in a publicly regulated entity, was sold by the
b
de
ird quarter of 2008. The borrower sold a two-thirds interest in the entity and the new owner assumed the
orrower during the th
Company.
bt to the
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Foreclosed Assets. Of the total $32.7 million of foreclosed assets at December 31, 2008, foreclosed real estate totaled
$31.9 million and repossessed automobiles, boats and other personal property totaled $746,000. Foreclosed assets increased $1
million during the year ended December 31, 2008, from $20.4 million at December 31, 2007, to $32.7 million at December
31,
2008. During the year ended December 31, 2008, 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 develo
an
remain in t
ped subdivision lots, partially offset by the sale of similar houses
d subdivision lots. These five significant relationships, along with four significant relationships from December 31, 2007 that
he foreclosed assets category, are described below.
2.3
At December 31, 2008, nine separate relationships totaled $20.4 million, or 63%, of the total foreclosed assets balance.
el
ne r ationships include:
These ni
•
•
•
•
•
•
•
•
•
A $3.3 million asset relationship, which involves a residential development in the St. Louis, Mo., metropolitan area
.
This St. Louis area relationship was foreclosed in the first quarter 2
008. 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.
A $3.9 million asset relationship, which involves an office and retail historic rehabilitation development in
southeast Missouri. While this asset is included in the Company’s Non-Performing Asset totals and ratios, the
Company does not consider it to be a “Substandard Asset” as it produces a market return on the amount invested.
A $2.7 million asset relationship, which involves a mixed use development in the St. Louis, Mo., metropolitan area.
This was originally a $15 million loan relationship t
hat was reduced by guarantors paying down the balance by $10
million and the allocation of a portion of the collateral to a performing loan, the payment of which comes from Tax
Increment Financing revenues of the development.
A $2.3 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 complete
duplexes and triplexes. A few sales of single-family houses have occurred and the remaining properties are being
marketed for sale. This relationship has been reduced from $3.1 million through the sale of some of the houses.
d
A $2.2 million loan relationship, which previously involved two residential developments (now one development)
in the Kansas City, Mo., metropolitan area. This subdivision is primarily comprised of developed
additional undeveloped ground. This relationship has been reduced from $4.3 million through the sale of one of the
subdivisions and a charge down of the balance. The Company is marketing the property for sale.
lots with some
A $1.9 million loan relationship, which is involves partially-developed subdivision lots in northwest Arkansas, wa
foreclosed upon in the second quarter of 2008. The Company is marketing the property for sale.
s
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 $1.4 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 and is marketing these properties for sale.
A $1.0 million loan relationship, which involves several completed houses in the Branson, Mo., area. The Company
is marketing these properties for sale.
Potential Problem Loans. Potential problem loans decreased $12.5 million during the year ended December 31, 20
08
f
rom $30.3 million at December 31, 2007 to $17.8 million at December 31, 2008. Potential problem loans are loans which
m
anageme
borrowers difficulty in complying with current repayment terms. These loans are not reflected in non-performing assets.
nt has identified through routine internal review procedures as having possible credit problems that may cause the
During the year ended December 31, 2008, potential problem loans decreased primarily due to the transfer of four
unrelated significant relationships totaling $13.3 million from the Potential Problem Loans category to other non-performing asset
categories as previously discussed above. Two of these relationships involve residential construction and development loans - one
relationship in Springfield totaling $3.0 million and one relationship in the St. Louis area totaling $4.3 million. The two other
relationships involve a motel in the State of Florida totaling $2.7 million and a condominium development in Kansas City totaling
$
3.2 million. In addition, one other relationship that is secured primarily by a subdivision and vacant land near Little Rock,
A
rkansas w
to the project as well as additional guarantor support, and a reduction of $562,000 from the sale of a portion of the collateral.
as removed from the Potential Problem Loan category due to an ownership change in the project, which added equi
ty
25
18
25
During the year ended December 31, 2008, potential problem loans increased primarily due to the addition of four
unrelated relationships totaling $5.7 million to the Potential Problem Loans category. The first relationship consists of an office
building and commercial land near Springfield, Missouri totaling $3.2 million. The borrower has experienced cash flow problems
on other projects which have led to payment delinquencies on this project. The second relationship consists of vacan
si
projections
million. The fourth relationship consists of subdivision lots and houses in southwest Missouri totaling $0.7 million.
t land (pad
tes) to be developed for condominiums near Branson, Missouri totaling $0.9 million. Sales of the units have been slower than
resulting in cash flow problems. The third relationship consists of subdivision lots in southwest Missouri totaling $0.9
At December 31, 2008, three other large unrelated relationships were included in the Potential Problem Loan catego
ry.
All three of these relationships were included in the Potential Problem Loan category at December 31, 2007. The first relationship
totaled $1.4 million at December 31, 2007, and was reduced to $1.1 million at December 31, 2008, through the sale of houses.
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 consists of a retail center, improved
ral in the states of Georgia and Texas totaling $3.3 million. During 2008, the Company obtained
commercial land and other collate
ad
totaling $2.1 million. A
th
ditional collateral and guarantor support. The third relationship consists of a residential subdivision in Springfield, Missouri
t December 31, 2008, these seven significant relationships described above accounted for $12.2 million of
e potential problem loan total.
Non-interest Income
Including the effects of the Company's hedge accounting entries recorded in 2008 and 2007 for certain interest rate
swaps, non-interest income for the year ended December 31, 2008 was $28.1 million compared with $29.4 million for the year
ended December 31, 2007. The $1.3 million, or 4.3%, decrease
w
and investm
swaps and the related change in fair value of hedged deposits.
rite-down in value of certain available-for-sale equity investments and lower commission revenue from the Company's travel
ent divisions, partially offset by an increase in income related to the change in the fair value of certain interest rate
in non-interest income was primarily the result of the impairment
The impairment write-down totaled $7.4 million on a pre-tax basis (including $5.3 million related to Fannie Mae and
Freddie Mac preferred stock, which was discussed in the September 30, 2008, Quarterly Report on Form 10-Q). These equity
investments have experienced significant fair value declines over the past year. It is unclear if or wh
in
vestment securities will improve, or whether such values will deteriorate further. Based on these developments, the Company
re or d n other-than-temporary impairment. The Company continues to hold these securities in the available-for-sale categor
c de a
The Company also recorded an impairment write-down of $1.1 million on a pre-tax basis in 2007.
en the values of these
y.
For the year ended December 31, 2008, commission income from the Company's travel, insurance and investment
divisions decreased $1.2 million, or 12.2%, compared to 2007. Part of this decrease ($775,000) was in the investment division
result of the alliance formed with Ameriprise Financial Services through Penney, Murray and Associates. As a result of this
change, Great Southern
now records most of its investment services activity on a net basis in non-interest income. Thus, non-
in
terest expense related to the investment services division is also reduced. The Company's travel division also experienced a
decrease in
economic conditions.
commission income of $543,000 in 2008 compared to 2007. Customers are reducing their travel as a result of current
as a
A significant increase in non-interest income was due to the change in the fair value of certain interest rate swaps and
the related change in fair value of hedged deposits, which resulted in an increase of $7.0 million in the year ended December
31,
2008, and an increase of $1.6 million in the year ended December 31, 2007. Income of this magnitude related to the change in
the
fair value of certain interest rate swaps and the related change in the fair value of hedged deposits should not be expected in future
years. This income is part of a 2005 accounting restatement in which approximately $3.4 million (net of taxes) was charged
against retained earnings in 2005. This charge has been (and continues to be) recovered in subsequent periods as interest ra
te
swaps matured or were terminated by the swap counterparty. In the first quarter of 2009, the interest rate swap counterparties
have
e
lected to exercise the call options on the remaining callable swaps and the Company has elected to redeem the related certificates
See " Restatement of Previously Issued Consolidated Financial Statements" for a discussion of the current and
of deposit.
previously reported financial statements due to the Company's accounting change for certain interest rate swaps in 2005.
Excluding the securities losses and interest rate swap income discussed above, non-interest income for the y
31
, 2008, was $28.5 million compared with $28.9 million for the year ended December 31, 2007, or a decrease of
December
$409,000. This decrease was primarily attributable to the lower commission revenue from the Company's travel and investment
divisions, w ich was discussed above, partially offset by an increase of $378,000 in gains on sales of mortgage loans.
ear ended
h
26
19
26
Non-GAAP Rec
onciliation
)
(Dollars in thousands
31
, 2008
Yea
r Ended December
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
Non-Interest Expense
$
$
28,144
$
6,976
$
21,168
31
, 2007
Yea
r Ended December
Effect of
Hedge Accounting
Entries Recorded
Excluding
Hedge Accounting
Entries Recorded
As Reported
29,419
$
1,695
$
27,724
Total non-interest expense increased $4.0 million, or 7.7%, from $51.7 million in the year ended December 31, 2007,
compared to $55.7 million in the year ended December 31, 2008. The increase was primarily due to: (i) an increase of $920,000,
or 3.1%, in salaries and employee benefits; (ii) an increase of $750,000, or 50.9%, in insurance expense (primarily FDIC deposit
insurance); (iii) an increase of $2.8 million, or 464.3%, in expense on foreclosed assets; (iv) an increase of $492,000, or 39.5%, in
legal and professional fees (primarily legal fees related to the credit resolution process) and (v) smaller increases and decreases in
other non-interest expense areas, such as occupancy and equipment expense, postage, advertising and telephone. The Company's
cy ratios include
efficiency ratio for the year ended December 31, 2008, was 55.86% compared to 51.28% in 2007. These efficien
the impact f the hedge accounting entries for certain interest rate swaps. Excluding the effects of these entries, the efficiency ratio
for the full
decreased from 2.18% for the year ended December 31, 2007, to 2.07% for the year ended December 31, 2008.
o
year 2008 was 58.11% compared to 51.55% in 2007. The Company's ratio of non-interest expense to average assets
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 we
2
Company e
with additional expense based upon deposit growth.
008. The Company incurred additional deposit insurance expense of $827,000 related to this in 2008 compared to 2007. The
xpects significant increased expense in 2009 as a result of the FDIC increasing insurance premiums for all banks a
re owed by the Company beginning in the latter half of 2007 and throughout
nd
Due to the increases in levels of foreclosed assets, foreclosure-related expenses in 2008 were higher than 2007 by
tely $2.8 million (net of income received on foreclosed assets). The Company expects that expenses on foreclosed
approxima
assets and expenses related to the credit resolution process will remain elevated in 2009.
e
The Company's increase in non-interest expense in 2008 compared to 2007 also related to the continued growth of th
arch 2007, Great Southern completed its acquisition of a travel agency in St. Louis. In addition since June 2007,
Company. In M
the Company opened banking centers in Springfield, Mo. and Branson, Mo. As a result, in the year ended December 31, 2008,
compared t the year ended December 31, 2007, non-interest expenses increased $576,000 related to the ongoing operations of
these entities.
o
27
20
27
Non-GAAP Reconc
iliation:
(Doll
ars in t
housands)
Year Ended De
cember 31,
No
n-Interest
Ex ense
p
2008
evenue
R
Dollars*
%
No
n-Interest
ense
Exp
2007
evenue
R
Dollars*
%
Efficiency Ratio
$
55,706
$ 99,727
55.86% $
51,707 $ 100,824
51.28%
Amortization of deposit bro
origination fees
t change in fair value of
Ne
interest rate swaps and rel
ker
ated deposits
---
3,111
(1.81)
---
1,172
(.61)
---
(6,976)
4.06
---
(1,695)
.88
Efficiency ratio excluding
impact of hedge accounting entries
$
55,706
$ 95,862
58.11
% $
51,707 $ 100,301
51.55
%
*Net interest income plus non-interest income.
Provision
for Income Taxes
Provision for income taxes as a percentage of pre-tax income was 32.9% for the year ended December 31, 2007. The
Company’s effective tax benefit rate was 45.9% for the year ended December 31, 2008. The effective tax rate (as compared to the
statutory federal tax rate of 35.0%) was primarily affected by higher balances and rates of tax-exempt investment securities and
loans in bo years, and in 2008, was also influenced by the amount of the tax-exempt interest income relative to the Company’s
pre-tax loss. For future periods, the Company expects the effective tax
te to be in the range of 32-35% of pre-tax net income.
ra
th
[Remainder of this page left blank intentionally]
28
21
28
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 $2.5 million, $3.2 million and $2.8 million for 2008, 2007 and 2006, respectively. Tax-exempt income was
not calculated on a tax equivalent basis. The table does not reflect any effect of income taxes.
December
31,
2008
Year Ended
December 31, 2008
Year Ended
December 31, 2007
Yield/Rate
Average
Balance Interest Yield/Rate
Average
Balance Interest Yield/Rate
(Dollars in thousands)
Year Ended
December 31, 2006
Average
Balance Interest Yield/Rate
Interest-earning assets:
Loans receivable:
One- to four-family
residential
Other residential
Commercial real estate
Construction
Commercial business
Other loans
Industrial revenue
bonds(1)
Total loans
receivable
Investment securities and
other interest- earning
assets(1)
Total interest-earning
assets
Noninterest-earning
assets:
Cash and cash
equivalents
Other non-earning
assets
Total assets
Interest-bearing
liabilities:
Interest-bearing
demand and savings
Time deposits
Total deposits
Short-term borrowings
Subordinated debentures
issued to capital trust
FHLB advances
Total interest-
bearing liabilities
Noninterest-bearing
liabilities:
Demand deposits
Other liabilities
6.22% $ 206,299 $ 13,290
6.54 109,348 7,214
6.46 479,347 32,250
5.98 649,037 41,448
5.91 162,512 10,013
7.32 179,731 11,871
6.44% $ 180,797 $ 12,714
6.60
6,914
81,568
6.73 456,377 37,614
6.39 673,576 55,993
6.16 171,902 14,160
6.60 153,421 11,480
7.03% $ 177,040 $ 12,031
8.48
86,251 7,078
8.24 464,710 37,958
8.31 586,343 49,792
8.24 111,742 9,587
7.48 142,877 10,560
6.80 %
8.21
8.17
8.49
8.58
7.39
6.38
55,728 3,743
6.72
56,612
3,844
6.79
84,199 6,088
7.23
6.35 1,842,002 119,829
6.51 1,774,253 142,719
8.04 1,653,162 133,094
8.05
5.00 533,567 24,985
4.68 430,874 21,152
4.91 387,110 16,987
4.39
5.97 2,375,569 144,814
6.10 2,205,127 163,871
7.43 2,040,272 150,081
7.36
71,989
74,446
84,668
50,648
98,210
40,710
$ 2,522,004
$2,340,443
$2,179,192
1.18 $ 484,490 8,370
3.67 1,268,941 52,506
3.13 1,753,431 60,876
1.78 262,004 5,892
1.73 $ 480,756 16,043
4.14 1,131,825 60,189
3.47 1,612,581 76,232
7,356
2.25 170,946
3.34 $ 421,201 12,678
5.32 1,035,685 53,055
4.73 1,456,886 65,733
4.30 129,523 5,648
30,929 1,462
4.87
3.30 133,477 5,001
28,223
4.73
3.75 144,773
1,914
6,964
18,739 1,335
6.78
4.81 180,414 8,138
3.01
5.12
4.51
4.36
7.12
4.51
2.95 2,179,841 73,231
3.36 1,956,523 92,466
4.72 1,785,562 80,854
4.53
147,665
10,873
Total liabilities
2,338,379
Stockholders’ equity
Total liabilities and
stockholders' equity
183,625
$ 2,522,004
171,479
26,716
2,154,718
185,725
$2,340,443
189,484
38,352
2,013,398
165,794
$2,179,192
Net interest income:
Interest rate spread
Net interest margin*
Average interest-earning
assets to average interest-
bearing liabilities
3.02%
$ 71,583
2.74%
3.01%
$ 71,405
2.71%
3.24%
$ 69,227
2.83 %
3.39 %
109.0%
112.7 %
114.3 %
29
______________________
* Defined as the Company's net interest income divided by total interest-earning assets.
(1) Of the total average balances of investment securities, average tax-exempt investment securities were $62.4 million, $69.7 million and $63.1 million for 2008,
2007 and 2006, respectively. In addition, average tax-exempt industrial revenue bonds were $33.1 million, $30.6 million and $25.8 million in 2008, 2007 and
2006, respectively. Interest income on tax-exempt assets included in this table was $4.7 million $4.4 million and $4.0 million for 2008, 2007 and 2006,
respectively. Interest income net of disallowed interest expense related to tax-exempt assets was $3.6 million, $3.2 million and $2.8 million for 2008, 2007
and 2006, respectively.
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, 2008 vs.
December 31, 2007
Year Ended
December 31, 2007 vs.
December 31, 2006
Increase
(Decrease)
Due to
Total
Increase
(Decrease)
Increase
(Decrease)
Due to
Total
Increase
(Decrease)
Rate
Volume
Rate
Volume
(Dollars in thousands)
Interest-earning assets:
Loans receivable
Investment securities and other interest-earning assets
$ (28,166 ) $
(1,013 )
5,276 $
4,846
(22,890) $
3,833
(116) $
2,133
9,741 $
2,032
9,625
4,165
Total interest-earning assets
(29,179 )
10,122
(19,057)
2,017
11,773
13,790
Interest-bearing liabilities:
Demand deposits
Time deposits
(7,797 )
124
(14,403 )
6,720
(7,673)
(7,683)
1,462
2,076
1,903
5,058
Total deposits
Short-term borrowings and structured repo
Subordinated debentures issued to capital trust
FHLBank advances
(22,200 )
(4,396 )
(622 )
(1,354 )
6,844
2,932
170
(609)
(15,356)
(1,464)
(452)
(1,963)
3,538
(75)
(67)
514
6,961
1,783
646
(1,688)
3,365
7,134
10,499
1,708
579
(1,174 )
Total interest-bearing liabilities
(28,572 )
9,337
(19,235)
3,910
7,702
11,612
Net interest income
$
(607 ) $
785 $
178 $ (1,893) $
4,071 $
2,178
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 $213,000, or 0.7%, 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 $55,000, or 0.2%, partially offset by an increase in
net interest income of $1.6 million, or 2.2%. See "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.
30
23
30
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
Dollars
Earnings Per
Diluted Share
Dollars
Earnings Per
Diluted Share
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
Total Interest Income
762
(1,102)
1,155
(1,204)
$
28,959
$
30,694
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%
31
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 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 "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
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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 "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 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.
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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 "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.
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.
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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
Net interest income/margin excluding
impact of hedge accounting entries
1,172
.05
1,777
.09
$
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.
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
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36
•
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.
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
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37
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.
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 $213,000, or 0.7%, 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 "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-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-GAAP Reconciliation
(Dollars in thousands)
Year Ended December 31, 2007
Effect of
Hedge Accounting
Entries Recorded
Excluding
Hedge Accounting
Entries Recorded
As Reported
29,419
$
1,695
$
27,724
As Reported
29,632
Year Ended December 31, 2006
Effect of
Hedge Accounting
Entries Recorded
Excluding
Hedge Accounting
Entries Recorded
1,853
$
27,779
$
38
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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 51.28% 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 51.55% 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
$
51,707
$ 100,824
51.28% $
48,807
$ 98,859
49.37%
Amortization of deposit broker
origination fees
Net change in fair value of
interest rate swaps and related deposits
---
---
1,172
(.61)
---
1,777
(.88)
(1,695)
.88
---
(1,853)
.92
Efficiency ratio excluding
impact of hedge accounting entries
$
51,707
$ 100,301
51.55% $
48,807 $ 98,783
49.41%
*Net interest income plus non-interest income.
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.
39
32
39
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, 2008, the Company had commitments of approximately $8.4 million to fund
loan originations, $152.6 million of unused lines of credit and unadvanced loans, and $16.3 million of outstanding letters of credit.
The following table summarizes the Company's fixed and determinable contractual obligations by payment date as of
December 31, 2008. Additional information regarding these contractual obligations is discussed further in Notes 6, 7, 8, 11 and 14
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
Structured repurchase agreements
Subordinated debentures
Operating leases
Dividends declared but not paid
Interest rate swap fair value adjustment
One Year or
Less
Payments Due In:
Over One to
Five
Years
(Dollars in thousands)
Over Five
Years
$ 525,241
789,228
24,821
298,629
---
---
839
2,618
1,641,376
1,215
$ ---
569,543
10,376
---
---
---
1,331
---
581,250
---
$ ---
22,801
85,275
---
50,000
30,929
36
---
189,041
---
Total
$ 525,241
1,381,572
120,472
298,629
50,000
30,929
2,206
2,618
2,411,667
1,215
$1,642,591
$581,250
$189,041
$2,412,882
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 total stockholders' equity was $234.1 million, or 8.8% of total assets of $2.66 billion at December 31,
2008, compared to equity of $189.9 million, or 7.8% of total assets of $2.43 billion at December 31, 2007. As of December 31,
2008, common stockholders' equity was $178.5 million, or 6.7% of total assets, equivalent to a book value of $13.34 per common
share.
On December 5, 2008, the Company completed a transaction to participate in the U.S. Treasury's voluntary Capital
Purchase Program. The Capital Purchase Program, a part of the Emergency Economic Stabilization Act of 2008, is designed to
provide capital to healthy financial institutions, thereby increasing confidence in the banking industry and increasing the flow of
financing to businesses and consumers. The Company received $58.0 million from the U.S. Treasury through the sale of 58,000
shares of the Company's newly authorized Fixed Rate Cumulative Perpetual Preferred Stock, Series A. The Company also issued
to the U.S. Treasury a warrant to purchase 909,091 shares of common stock at $9.57 per share. The amount of preferred shares
sold represents approximately 3% of the Company's risk-weighted assets as of September 30, 2008. Through its preferred stock
investment, the Treasury will receive a cumulative dividend of 5% per year for the first five years, or $2.9 million per year, and
9% per year thereafter. The preferred shares are callable at 100% of the issue price, subject to consultation by the U.S. Treasury
with the Company's primary federal regulator. In addition, for a period of the earlier of three years or until these preferred shares
have been redeemed by the Company or divested by the Treasury, the Company has certain limitations on dividends that may be
declared on its common or preferred stock and is prohibited from repurchasing shares of its common or other capital stock or any
trust preferred securities issued by the Company.
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, 2008, the Bank's Tier 1 risk-based capital ratio was 10.7%, total risk-based capital
ratio was 11.9% and the Tier 1 leverage ratio was 7.8%. As of December 31, 2008, 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
40
33
40
41
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.
Our participation in the Treasury’s Capital Purchase Program (CPP) currently precludes us from purchasing shares of
the Company’s stock until the earlier of December 5, 2011 or our repayment of the CPP funds. Management has historically
utilized stock buy-back programs from time to time as long as repurchasing the stock contributed to the overall growth of
shareholder value. The number of shares of stock repurchased and the price 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.
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, 2008, Great Southern's internal interest rate risk models indicate a one-year
interest rate sensitivity gap that is negative. Generally, a rate increase by the FRB (which does not appear likely in the near term
based on current economic conditions) would be expected to have an immediate negative impact on Great Southern’s net interest
income. As the Federal Funds rate is now very low, the Company’s interest rate floors have been reached on most of its “prime
rate” loans. In addition, Great Southern has elected to leave its “Great Southern Prime Rate” at 5.00% for those loans that are
indexed to “Great Southern Prime” rather than “Wall Street Journal Prime.” While these interest rate floors and prime rate
adjustments have helped keep the rate on our loan portfolio higher in this very low interest rate environment, they will also reduce
the positive effect to our loan rates when market interest rates, specifically the “prime rate,” begin to increase. The interest rate on
these loans will not increase until the loan floors are reached and the “Wall Street Journal Prime” interest rate exceeds 5.00%. The
operating environment has not been normal and interest cost for deposits and borrowings have been and continue to be elevated
because of abnormal credit, liquidity and competitive pricing pressures, therefore we expect the net interest margin will continue
to be somewhat compressed.
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
42
35
42
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 has entered 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 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 $(931,000) and $805,000 of ineffectiveness was
recorded in income in the non-interest income caption for the years ended December 31, 2008 and 2007, respectively. 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.
At September 15, 2008, the Company had six SFAS No. 133 designated swaps with Lehman Brothers Special
Financing, Inc. (“Lehman”). Since that date, four of these swaps have been terminated or matured. On September 15, 2008,
Lehman filed for bankruptcy protection and hedge accounting was immediately terminated. The fair market value of the
underlying hedged items (certificates of deposit) through September 15, 2008, is being amortized over the remaining life of the
hedge period on a straight-line basis. The fair market value of the swaps as of September 15, 2008, included both assets and
liabilities totaling a net asset of $235,000. These swaps were valued using the income approach with observable Level 2 market
expectations at the measurement date and standard valuation techniques to convert future amounts to a single discounted present
amount. The Level 2 inputs are limited to quoted prices for similar assets or liabilities in active markets (specifically futures
contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset or liability
(specifically LIBOR cash and swap rates, volatilities and credit risk at commonly quoted intervals). Mid-market pricing is used as
a practical expedient for fair value measurements. The Company has a netting agreement with Lehman and the collectability of
the net asset is uncertain at this time. The Company has a valuation allowance of $235,000 on the asset as of December 31, 2008.
The Company has entered into interest rate swap agreements with the objective of economically hedging against the
43
36
43
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, 2008, the notional amount of interest rate swaps outstanding was approximately $11.5 million, all of
which were in a net settlement receivable position. Subsequent to December 31, 2008, the remaining swaps were terminated. 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. The maturities of interest rate swaps outstanding at December 31, 2008 and 2007, in terms of notional amounts
and their average pay and receive rates is discussed further in Note 15 of the Notes to Consolidated Financial Statements.
The following tables illustrate the expected maturities and repricing, respectively, of the Bank's financial instruments at
December 31, 2008. 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
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
$
$
$
December 31,
2009
2010
2011
2012
2013
Thereafter
Total
(Dollars in thousands)
2008
Fair Value
970
0.02 %
---
---
---
---
---
---
655,242
6.09 %
---
---
---
---
376
$
5.63%
---
---
---
---
5,850
$
3.79 %
$
---
---
$ 151,366
---
---
$ 105,984
---
---
---
---
---
---
---
---
267 $ 4,402
3.88%
---
---
---
---
$ 43,276 $ 49,803
5.76 %
5.17%
57,329
$ 43,091 $ 41,552
127,904
$
7.28 %
---
---
59,606
5.45%
$
7.91%
---
---
7.58 %
---
---
8.26%
---
---
---
---
1,596
3.53%
635,187
5.34%
1,360
7.49%
221,822
5.69%
196,005
7.61%
8,333
3.00%
$
$
$
$
1,596
$
970
0.02 %
$
3.53 %
$
5.30 %
$
7.49 %
1,360
646,082
970
1,596
646,082
1,422
$ 1,227,493
$ 1,237,721
$
$
525,487
5.85 %
$
7.57 %
$
3.00 %
8,333
531,021
8,333
Total financial assets
$
784,116
$ 211,348
$ 169,163
$ 86,634 $ 95,757
$ 1,064,303
$ 2,411,321
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
Structured repurchase agreements
Weighted average rate
Subordinated debentures
Weighted average rate
$
$
$
$
$
790,443
$ 307,692
$ 218,932
$ 39,740 $ 3,179
3.27 %
4.08%
386,540
1.18 %
138,701
---
24,821
1.29 %
298,629
$
1.35 %
---
---
---
---
---
---
---
---
4,978
$
3.63%
---
---
---
---
---
---
4.31 %
6.29 %
---
---
---
---
2,239
---
---
---
---
---
---
4.77%
---
---
---
---
$ 2,934 $
6.04%
---
---
---
---
---
---
22,801
5.14%
---
---
---
---
85,275
3.69%
---
---
50,000
4.34%
30,929
4.87%
$ 1,382,787
$ 1,403,908
$
$
$
$
$
$
386,540
3.69 %
$
1.18 %
$
138,701
---
120,472
$
3.30 %
$
1.35 %
$
4.34 %
$
4.87 %
50,000
30,929
298,629
386,540
138,701
123,895
298,629
56,674
30,929
Total financial liabilities
$ 1,639,134
$ 312,670
$ 221,171
$ 42,674 $ 3,404
189,005
$ 2,408,058
_______________
(1)
Available-for-sale debt securities include approximately $557 million of mortgage-backed securities and collateralized mortgage obligations which pay
interest and principal monthly to the Company. Of this total, $367 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 $107 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.
44
37
44
$
$
5.03 %
$
$
5.42 %
$
6.97 %
$
---
---
$
4.62 %
---
---
---
---
225
$
5.81 %
---
---
---
---
---
---
$
$
$
Repricing
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
December 31,
2009
2010
2011
2012
(Dollars in thousands)
2013
Thereafter Total
2008
Fair Value
$
970
0.02%
---
$
---
141,174
$
$
4.96%
---
---
$ 1,173,151
127,904
$
5.80%
$
7.28%
8,333
3.30%
$
$
---
---
--- $
---
7,077 $
4.85 %
---
---
18,648 $
7.12 %
59,606 $
7.91 %
---
---
---
---
---
---
10,038 $
3.94 %
---
---
25,221 $
6.69 %
57,329 $
7.58 %
---
---
---
---
--- $
---
20,603 $
5.33 %
---
---
5,485 $
7.30 %
43,091 $
8.26 %
---
---
---
---
--- $
---
34,263 $
4.88 %
--- $
---
3,610 $
6.59 %
41,552 $
6.97 %
---
---
970
1,596
646,082
--- $
970 $
---
0.02 %
1,596 $
1,596 $
3.53%
3.53 %
432,927 $
646,082 $
5.48%
5.30 %
1,360 $
1,360 $
7.49%
7.49 %
1,378 $ 1,227,493 $ 1,237,721
6.59%
5.85 %
525,487 $
196,005 $
7.61%
7.57 %
8,333 $
--- $
---
3.30 %
531,021
1,422
8,333
Total financial assets
$ 1,451,532
$
85,331 $
92,588 $
69,179 $
79,425 $
633,266 $ 2,411,321
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
Structured repurchase agreements
Weighted average rate
Subordinated debentures
Weighted average rate
$
$
$
$
$
$
801,941
3.25%
386,540
1.18%
---
---
24,821
$
1.29%
298,629
1.35%
50,000
4.34%
30,929
4.87%
$ 307,692 $ 214,317 $
4.32 %
---
---
---
---
2,239 $
6.29 %
---
---
---
---
---
---
4.08 %
---
---
---
---
89,978 $
3.68 %
---
---
---
---
---
---
39,740 $
4.77 %
---
---
---
---
2,934 $
6.04 %
---
---
---
---
---
---
3,179 $
4.62 %
---
---
--- $
---
225 $
5.81 %
---
---
---
---
---
---
15,918 $ 1,382,787 $ 1,403,908
5.21%
--- $
---
138,701 $
---
275 $
5.54%
--- $
---
--- $
---
--- $
---
3.67 %
386,540 $
1.18 %
138,701 $
---
120,472 $
3.30 %
298,629 $
1.35 %
50,000 $
4.34 %
30,929 $
4.87 %
386,540
138,701
123,895
298,629
56,674
30,929
Total financial liabilities
$ 1,592,860
$ 397,670 $ 216,556 $
42,674 $
3,404 $
154,894 $ 2,408,058
Periodic repricing GAP
$ (141,328)
$ (312,339) $ (123,968) $
26,505 $
76,021 $
478,372 $
3,263
Cumulative repricing GAP
$ (141,328)
$ (453,667) $ (577,635) $ (551,130) $ (475,109) $
3,263
_______________
(1) Available-for-sale debt securities include approximately $557 million of mortgage-backed securities and collateralized mortgage obligations which pay
interest and principal monthly to the Company. Of this total, $367 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 $107 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.
(2) 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
(3) Time deposits include the effects of the Company's interest rate swaps on brokered certificates of deposit. These derivatives qualify for hedge accounting
there is nothing to reprice.
treatment.
45
46
Great Southern Bancorp, Inc.
Consolidated Statements of Financial Condition
December 31, 2008 and 2007
(In Thousands, Except Per Share Data)
Assets
Cash
2008
2007
$
135,043
$
79,552
Interest-bearing deposits in other financial institutions
32,877
973
Cash and cash equivalents
167,920
80,525
Available-for-sale securities
647,678
425,028
Held-to-maturity securities
Mortgage loans held for sale
1,360
4,695
1,420
6,717
Loans receivable, net of allowance for loan losses of
$29,163 and $25,459 at December 31, 2008 and
2007, respectively
1,716,996
1,813,394
Interest receivable
Prepaid expenses and other assets
Foreclosed assets held for sale, net
Premises and equipment, net
Goodwill and other intangible assets
Federal Home Loan Bank stock
Refundable income taxes
Deferred income taxes
13,287
14,179
32,659
30,030
1,687
8,333
7,048
14,051
15,441
14,904
20,399
28,033
1,909
13,557
1,701
8,704
Total assets
$ 2,659,923
$ 2,431,732
See Notes to Consolidated Financial Statements
47
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Federal Home Loan Bank advances
Securities sold under reverse repurchase agreements
with customers
Structured repurchase agreements
Short-term borrowings
Subordinated debentures issued to capital trust
Accrued interest payable
Advances from borrowers for taxes and insurance
Accounts payable and accrued expenses
2008
2007
$ 1,908,028
120,472
$ 1,763,146
213,867
215,261
50,000
83,368
30,929
9,225
334
8,219
143,721
—
73,000
30,929
6,149
378
10,671
Total liabilities
2,425,836
2,241,861
Commitments and Contingencies
—
—
Stockholders’ Equity
Capital stock
Serial preferred stock, $.01 par value; authorized
1,000,000 shares; issued and outstanding
December 2008 – 58,000 shares
Common stock, $.01 par value; authorized
20,000,000 shares; issued and outstanding
2008 – 13,380,969 shares, 2007 – 13,400,197
shares
Common stock warrants; December 2008 –
909,091 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Unrealized loss on available-for-sale securities,
net of income taxes of $(74) and $(290) at
December 31, 2008 and 2007, respectively
55,580
—
134
134
2,452
19,811
156,247
—
19,342
170,933
(137)
(538)
Total stockholders’ equity
234,087
189,871
Total liabilities and stockholders’ equity
$ 2,659,923
$ 2,431,732
48
2
Great Southern Bancorp, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Data)
Interest Income
Loans
Investment securities and other
Interest Expense
Deposits
Federal Home Loan Bank advances
Short-term borrowings and repurchase agreements
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 gains on loan sales
Net realized gains (losses) on sales of available-for-sale
securities
Realized impairment of available-for-sale securities
Net gain on sale of fixed assets
Late charges and fees on loans
Change in interest rate swap fair value net of change in hedged
deposit fair value
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 (Loss) Before Income Taxes
Provision (Credit) for Income Taxes
Net Income (Loss)
Preferred Stock Dividends and Discount Accretion
Net Income (Loss) Available to Common Shareholders
Earnings (Loss) Per Common Share
Basic
Diluted
See Notes to Consolidated Financial Statements
49
2008
2007
2006
$
$
119,829
24,985
144,814
$
142,719
21,152
163,871
133,094
16,987
150,081
60,876
5,001
5,892
1,462
73,231
71,583
52,200
19,383
8,724
15,352
1,415
44
(7,386)
191
819
6,981
2,004
28,144
31,081
8,281
2,240
2,223
1,073
820
1,396
1,739
3,431
—
3,422
55,706
(8,179)
(3,751)
(4,428)
242
76,232
6,964
7,356
1,914
92,466
71,405
5,475
65,930
9,933
15,153
1,037
13
(1,140)
48
962
1,632
1,781
29,419
30,161
7,927
2,230
1,473
1,446
879
1,363
1,247
608
—
4,373
51,707
43,642
14,343
29,299
—
65,733
8,138
5,648
1,335
80,854
69,227
5,450
63,777
9,166
14,611
944
(1)
—
167
1,567
1,498
1,680
29,632
28,285
7,645
2,178
876
1,201
931
1,387
1,127
119
783
4,275
48,807
44,602
13,859
30,743
—
$
$
$
(4,670)
$
29,299
$
30,743
(.35)
(.35)
$
$
2.16
2.15
$
$
2.24
2.22
3
Great Southern Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2008, 2007 and 2006
(In Thousands, Except Per Share Data)
Income
(Loss)
Preferred
Stock
Common
Stock
Balance, December 31, 2005
$
Net income
Stock issued under Stock Option Plan
Dividends declared, $.60 per share
Change in unrealized gain on available-for-sale
securities, net of income taxes of $1,194
Company stock purchased
Reclassification of treasury stock per Maryland law
$
$
$
$
Comprehensive income
Balance, December 31, 2006
Net income
Stock issued under Stock Option Plan
Common dividends declared, $.68 per share
Change in unrealized loss on available-for-sale securities,
net of income tax benefit of $690
Company stock purchased
Reclassification of treasury stock per Maryland law
Comprehensive income
Balance, December 31, 2007
Net loss
Preferred stock issued
Common stock warrants issued
Stock issued under Stock Option Plan
Common dividends declared, $.72 per share
Preferred stock discount accretion
Preferred stock dividends accrued (5%)
Change in unrealized loss on available-for-sale securities,
net of income tax benefit of $216
Company stock purchased
Reclassification of treasury stock per Maryland law
$
—
30,743
—
—
2,217
—
—
32,960
—
29,299
—
—
$
—
—
—
—
—
—
—
—
—
—
—
1,282
—
—
—
—
—
30,581
—
(4,428)
—
—
—
—
—
—
—
—
55,548
—
—
—
32
—
401
—
—
—
—
—
137
—
—
—
—
—
—
137
—
—
—
—
—
(3)
134
—
—
—
—
—
—
—
—
—
—
Balance, December 31, 2008
$
(4,027)
$
55,580
$
134
See Notes to Consolidated Financial Statements
50
Common
Stock
Warrants
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Loss)
Treasury
Stock
Total
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,452
—
—
—
—
—
—
—
17,781
—
700
—
—
—
—
18,481
—
861
—
—
—
—
19,342
—
—
—
469
—
—
—
—
—
—
$
138,921
30,743
—
(8,214)
—
—
(2,670)
158,780
29,299
—
(9,205)
—
—
(7,941)
170,933
(4,428)
—
—
—
(9,633)
(32)
(210)
—
—
(383)
(4,037)
—
—
—
2,217
—
—
(1,820)
—
—
—
1,282
—
—
(538)
—
—
—
—
—
—
—
401
—
—
$
—
—
1,052
—
—
(3,722)
2,670
—
—
812
—
—
(8,756)
7,944
—
—
—
—
25
—
—
—
—
(408)
383
152,802
30,743
1,752
(8,214)
2,217
(3,722)
—
175,578
29,299
1,673
(9,205)
1,282
(8,756)
—
189,871
(4,428)
55,548
2,452
494
(9,633)
—
(210)
401
(408)
—
$
2,452
$
19,811
$
156,247
$
(137)
$
0
$
234,087
51
4
Great Southern Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2008, 2007 and 2006
(In Thousands)
Operating Activities
Net income (loss)
Proceeds from sales of loans held for sale
Originations of loans held for sale
Items not requiring (providing) cash
Depreciation
Amortization
Write-off of trust preferred securities
issuance costs
Provision for loan losses
Net gains on loan sales
Net realized (gains) losses and impairment
on available-for-sale securities
Gain on sale of premises and equipment
(Gain) loss on sale of foreclosed assets
Amortization of deferred income,
premiums and discounts
Change in interest rate swap fair value net
of change in hedged deposit fair value
Deferred income taxes
Changes in
Interest receivable
Prepaid expenses and other assets
Accounts payable and accrued expenses
Income taxes refundable/payable
2008
2007
2006
$
(4,428)
94,935
(91,914)
$
29,299
77,234
(73,035)
$
30,743
71,964
(68,076)
2,446
383
—
52,200
(1,415)
7,342
(191)
1,456
2,706
374
—
5,475
(1,037)
1,127
(48)
(209)
2,932
380
783
5,450
(944)
(1)
(167)
(184)
(1,960)
(3,918)
(1,849)
(6,983)
(5,562)
2,154
(2,698)
2,626
(5,347)
(1,713)
2,978
(1,854)
468
(10,453)
605
(1,908)
(365)
(2,746)
108
14,036
(3,012)
Net cash provided by operating
activities
43,044
27,999
47,144
See Notes to Consolidated Financial Statements
52
5
Great Southern Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2008, 2007 and 2006
(In Thousands)
2008
2007
2006
Investing Activities
Net change in loans
Purchase of loans
Proceeds from sale of student loans
Purchase of additional business units
Purchase of premises and equipment
Proceeds from sale of premises and equipment
Proceeds from sale of foreclosed assets
Capitalized costs on foreclosed assets
Proceeds from maturities, calls and repayments
of held-to-maturity securities
Proceeds from sale of available-for-sale securities
Proceeds from maturities, calls and repayments
of available-for-sale securities
Purchase of available-for-sale securities
(Purchase) redemption of Federal Home Loan
Bank stock
$
34,189
(12,030)
634
—
(4,686)
434
11,183
(567)
60
85,242
$
(168,183) $
(4,649)
3,052
(730)
(4,080)
106
3,290
(156)
(127,762)
(47,508)
2,314
(143)
(4,094)
2,177
2,861
—
50
4,415
40
26,679
206,902
(522,071)
482,153
(565,819)
295,188
(294,218)
5,224
(3,078)
1,378
Net cash used in investing activities
(195,486)
(253,629)
(143,088)
See Notes to Consolidated Financial Statements
53
6
Great Southern Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2008, 2007 and 2006
(In Thousands)
Financing Activities
Net increase (decrease) in certificates of deposit
Net increase (decrease) in checking and savings
accounts
Proceeds from Federal Home Loan Bank advances
Repayments of Federal Home Loan Bank advances
Net increase (decrease) in short-term borrowings
Proceeds from issuance of structured repurchase
agreement
Proceeds from issuance of preferred stock and
related common stock warrants to U.S. Treasury
Proceeds from issuance of trust preferred
debentures
Repayment of trust preferred debentures
Advances to borrowers for taxes and insurance
Company stock purchased
Dividends paid
Stock options exercised
2008
2007
2006
$
285,044
$
(8,400) $
144,203
(132,125)
503,000
(596,395)
81,908
62,017
1,568,000
(1,533,303)
95,765
6,038
952,200
(976,465)
(12,602)
50,000
58,000
—
—
(44)
(408)
(9,637)
494
—
—
5,000
—
(10)
(8,756)
(8,981)
1,673
—
—
25,000
(17,250)
155
(3,722)
(7,947)
1,752
Net cash provided by financing activities
239,837
173,005
111,362
Increase (Decrease) in Cash and Cash
Equivalents
87,395
(52,625)
15,418
Cash and Cash Equivalents, Beginning of Year
80,525
133,150
117,732
Cash and Cash Equivalents, End of Year
$
167,920
$
80,525
$
133,150
See Notes to Consolidated Financial Statements
54
7
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations and Operating Segments
Great Southern Bancorp, Inc. (GSBC or the “Company”) operates as a one-bank holding company.
GSBC’s business primarily consists of the business of Great Southern Bank (the “Bank”), which
provides a full range of financial services as well as travel and insurance services through the
Bank’s other wholly owned subsidiaries to customers primarily in southwest and central Missouri.
In addition, the Company serves the loan needs of customers through its loan origination offices in
St. Louis and Kansas City, Missouri, and Rogers, Arkansas. Outside of Missouri, the states with
the largest concentrations of loans by the Company are Arkansas and Kansas. The Company and
the Bank are subject to the regulation of certain federal and state agencies and undergo periodic
examinations by those regulatory agencies.
The Company’s banking operation is its only reportable segment. The banking operation is
principally engaged in the business of originating residential and commercial real estate loans,
construction loans, commercial business loans and consumer loans and funding these loans through
attracting deposits from the general public, accepting brokered deposits and borrowing from the
Federal Home Loan Bank and others. The operating results of this segment are regularly reviewed
by management to make decisions about resource allocations and to assess performance. Revenue
from segments below the reportable segment threshold is attributable to three operating segments
of the Company. These segments include insurance services, travel services and investment
services. Selected information is not presented separately for the Company’s reportable segment,
as there is no material difference between that information and the corresponding information in
the consolidated financial statements.
Use of Estimates
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 reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination
of the allowance for loan losses and the valuation of real estate acquired in connection with
foreclosures or in satisfaction of loans. In connection with the determination of the allowance for
loan losses and the valuation of foreclosed assets held for sale, management obtains independent
appraisals for significant properties.
Principles of Consolidation
The consolidated financial statements include the accounts of Great Southern Bancorp, Inc., its
wholly owned subsidiary, the Bank, and the Bank’s wholly owned subsidiaries, Great Southern
Real Estate Development Corporation, GSB One LLC (including its wholly owned subsidiary,
GSB Two LLC), Great Southern Financial Corporation, Great Southern Community Development
Corporation, GS, LLC, GSSC, LLC, GS-RE Holding, LLC and GS-RE Holding II, LLC. All
significant intercompany accounts and transactions have been eliminated in consolidation.
55
8
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Reclassifications
Certain prior periods’ amounts have been reclassified to conform to the 2008 financial statements
presentation. These reclassifications had no effect on net income.
Federal Home Loan Bank Stock
Federal Home Loan Bank stock is a required investment for institutions that are members of the
Federal Home Loan Bank system. The required investment in common stock is based on a
predetermined formula.
Securities
Available-for-sale securities, which include any security for which the Company has no immediate
plan to sell but which may be sold in the future, are carried at fair value. Unrealized gains and
losses are recorded, net of related income tax effects, in other comprehensive income.
Held-to-maturity securities, which include any security for which the Company has the positive
intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of
premiums and accretion of discounts.
Amortization of premiums and accretion of discounts are recorded as interest income from
securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses
on sales of securities are determined on the specific-identification method.
Mortgage Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are carried at the lower of
cost or fair value in the aggregate. Write-downs to fair value are recognized as a charge to earnings
at the time the decline in value occurs. Nonbinding forward commitments to sell individual
mortgage loans are generally obtained to reduce market risk on mortgage loans in the process of
origination and mortgage loans held for sale. Gains and losses resulting from sales of mortgage
loans are recognized when the respective loans are sold to investors. Fees received from borrowers
to guarantee the funding of mortgage loans held for sale and fees paid to investors to ensure the
ultimate sale of such mortgage loans are recognized as income or expense when the loans are sold
or when it becomes evident that the commitment will not be used.
Loans
Loans that management has the intent and ability to hold for the foreseeable future or until maturity
or payoff are reported at their outstanding principal balances adjusted for any charge-offs, the
allowance for loan losses, any deferred fees or costs on originated loans and unamortized premiums
or discounts on purchased loans. Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term. Generally, loans are placed on
nonaccrual status at 90 days past due and interest is considered a loss, unless the loan is well
secured and in the process of collection.
56
9
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Discounts and premiums on purchased loans are amortized to income using the interest method
over the remaining period to contractual maturity, adjusted for anticipated prepayments.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a
provision for loan losses charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon
management’s periodic review of the collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to
repay, estimated value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are susceptible to significant revision
as more information becomes available.
A loan is considered impaired when, based on current information and events, it is probable that
the Bank will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired. Management determines the
significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan
basis for commercial and construction loans by either the present value of expected future cash
flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair
value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogenous loans are collectively evaluated for impairment.
Accordingly, the Bank does not separately identify consumer and one-to-four family residential
loans for impairment disclosures.
Foreclosed Assets Held for Sale
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at
fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are carried at the lower of
carrying amount or fair value less estimated cost to sell. Revenue and expenses from operations
and changes in the valuation allowance are included in net expense on foreclosed assets.
57
10
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is charged
to expense using the straight-line and accelerated methods over the estimated useful lives of the
assets. Leasehold improvements are capitalized and amortized using the straight-line and
accelerated methods over the terms of the respective leases or the estimated useful lives of the
improvements, whichever is shorter.
Long-Lived Asset Impairment
The Company evaluates the recoverability of the carrying value of long-lived assets whenever
events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset
is tested for recoverability and the undiscounted estimated future cash flows expected to result from
the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset
cost is adjusted to fair value and an impairment loss is recognized as the amount by which the
carrying amount of a long-lived asset exceeds its fair value.
No asset impairment was recognized during the years ended December 31, 2008 and 2007.
Goodwill and Intangible Assets
Goodwill is tested annually for impairment. If the implied fair value of goodwill is lower than its
carrying amount, a goodwill impairment is indicated and goodwill is written down to its implied
fair value. Subsequent increases in goodwill value are not recognized in the financial statements.
Intangible assets are being amortized on the straight-line basis over periods ranging from three to
seven years. Such assets are periodically evaluated as to the recoverability of their carrying value.
A summary of goodwill and intangible assets is as follows:
Goodwill – Branch acquisitions
Goodwill – Travel agency acquisitions
Deposit intangibles
Noncompete agreements
December 31,
2008
2007
(In Thousands)
$
$
379
875
314
119
379
875
401
254
$
1,687
$
1,909
58
11
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Loan Servicing and Origination Fee Income
Loan servicing income represents fees earned for servicing real estate mortgage loans owned by
various investors. The fees are generally calculated on the outstanding principal balances of the
loans serviced and are recorded as income when earned. Loan origination fees, net of direct loan
origination costs, are recognized as income using the level-yield method over the contractual life of
the loan.
Stockholders’ Equity
At the 2004 Annual Meeting of Stockholders, the Company’s stockholders approved the
Company’s reincorporation to the State of Maryland. This reincorporation was completed in June
2004. Under Maryland law, there is no concept of “Treasury Shares.” Instead, shares purchased
by the Company constitute authorized but unissued shares under Maryland law. Accounting
principles generally accepted in the United States of America state that accounting for treasury
stock shall conform to state law. The Company’s consolidated statements of financial condition
reflects this change. The cost of shares purchased by the Company has been allocated to common
stock and retained earnings balances.
Earnings Per Share
Basic earnings per share is computed based on the weighted average number of shares outstanding
during each year. Diluted earnings per share is computed using the weighted average common
shares and all potential dilutive common shares outstanding during the period.
Earnings per share (EPS) were computed as follows:
2008
2007
(In Thousands, Except Per Share Data)
2006
Net income (loss)
Net income (loss) available-to-common
shareholders
$
$
(4,428)
$
29,299
$
30,743
(4,670)
$
29,299
$
30,743
Average common shares outstanding
13,381
13,566
13,697
Average common share stock options
and warrants outstanding
N/A
88
128
Average diluted common shares
13,381
13,654
13,825
Earnings (loss) per common share – basic
Earnings (loss) per common share – diluted
$
$
(0.35)
(0.35)
$
$
2.16
2.15
$
$
2.24
2.22
59
12
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Because of the Company’s loss from continuing operations, no potential options to purchase shares
of common stock or common stock warrants were included in the calculation of diluted earnings
per share for the year ended December 31, 2008. Options to purchase 386,015 and 318,695 shares
of common stock were outstanding during the years ended December 31, 2007 and 2006,
respectively, but were not included in the computation of diluted earnings per share for that year
because the options’ exercise price was greater than the average market price of the common
shares.
Stock Option Plans
The Company has stock-based employee compensation plans, which are described more fully in
Note 19. On January 1, 2006, the Company adopted SFAS No. 123(R), Share Based Payment.
SFAS No. 123(R) specifies the accounting for share-based payment transactions in which an entity
receives employee services in exchange for (a) equity instruments of the entity or (b) liabilities that
are based on the fair value of the entity’s equity instruments or that may be settled by the issuance
of such equity instruments. SFAS No. 123(R) requires an entity to recognize as compensation
expense within the income statement the grant-date fair value of stock options and other equity-
based compensation granted to employees. As a result, compensation cost related to share-based
payment transactions is now recognized in the Company’s consolidated financial statements using
the modified prospective transition method provided for in the standard. For the years ended
December 31, 2008, 2007 and 2006, share-based compensation expense totaling $468,000,
$518,000 and $480,000, respectively, has been included in salaries and employee benefits expense
in the consolidated statements of operations.
Prior to the adoption of SFAS No. 123(R), the Company accounted for stock compensation using
the intrinsic value method permitted by APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. Prior to 2006, no stock-based employee compensation cost
was reflected in the consolidated statements of operations, as all options granted had an exercise
price at least equal to the market value of the underlying common stock on the grant date.
On December 31, 2005, the Board of Directors of the Company approved the accelerated vesting of
certain outstanding out-of-the-money unvested options (Options) to purchase shares of the
Company’s common stock held by the Company’s officers and employees. Options to purchase
183,935 shares which would otherwise have vested from time to time over the next five years
became immediately exercisable as a result of this action. The accelerated Options had a weighted
average exercise price of $31.49. The closing market price on December 30, 2005, was $27.61.
The Company also placed a restriction on the sale or other transfer of shares (including pledging
the shares as collateral) acquired through the exercise of the accelerated Options prior to the
original vesting date. With the acceleration of these Options, the compensation expense, net of
taxes, that was recognized in the Company’s income statements for 2006, 2007 and 2008 was
reduced by approximately $267,000 for each year. The Company estimates that, with the
acceleration of these Options, the compensation expense, net of taxes, that will be recognized in its
income statement for 2009 and 2010, will be reduced by approximately $238,000 and $103,000,
respectively. The accelerated Options represent approximately 41% of the unvested Company
options and 27% of the total of all outstanding Company options.
60
13
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Cash Equivalents
The Company considers all liquid investments with original maturities of three months or less to be
cash equivalents. At December 31, 2008 and 2007, cash equivalents consisted of interest-bearing
deposits in other financial institutions. At December 31, 2008, nearly all of the interest-bearing
deposits were uninsured, with nearly all of these balances held at the Federal Home Loan Bank.
Income Taxes
Deferred tax assets and liabilities are recognized for the tax effects of differences between the financial
statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred
tax assets if it is more likely than not that a deferred tax asset will not be realized.
Interest Rate Swaps
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 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 any ineffectiveness is recorded in income in the noninterest income caption.
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 noninterest
income.
Restriction on Cash and Due From Banks
The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve
Bank. The reserve required at December 31, 2008 and 2007, respectively, was $31,396,000 and
$32,463,000.
61
14
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Recent Accounting Pronouncements
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 consideration 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. Based on its
current activities, the Company does not expect the adoption of this Statement will have a material
effect on the Company’s financial position or results of operations.
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. Based on its current
activities, the Company does not expect the adoption of this Statement will have a material effect
on the Company’s financial position or results of operations.
In February 2008, the FASB issued FASB Staff Position No. 157-2. The staff position delays the
effective date of SFAS No. 157, Fair Value Measurements (which was adopted by the Company on
January 1, 2008) for nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on a recurring basis. The delay was
intended to allow additional time to consider the effect of various implementation issues with
regard to the application of SFAS No. 157. This staff position deferred the effective date of SFAS
No. 157 to January 1, 2009, for items within the scope of the staff position and is not expected to
have a material effect on the Company’s financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities – an amendment of FASB Statement No. 133, which requires enhanced
disclosures about an entity’s derivative and hedging activities intended to improve the transparency
of financial reporting. Under SFAS No. 161, entities will be required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and its related
interpretations and (c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008. The
Company adopted SFAS No. 161 effective January 1, 2009. The adoption of this standard is not
anticipated to have a material effect on the Company’s financial position or results of operations.
62
15
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles. SFAS No. 162 identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting principles in the
United States (the GAAP hierarchy). The FASB concluded that the GAAP hierarchy should reside
in the accounting literature established by the FASB and is issuing this Statement to achieve that
result. SFAS No. 162 is effective sixty days following the Securities and Exchange Commission’s
approval of the Public Company Accounting Oversight Board amendments to AU Section 411. The
adoption of this standard is not anticipated to have a material effect on the Company’s financial
position or results of operations.
In June 2008, the FASB issued an Exposure Draft of a proposed Statement of Financial Accounting
Standards, Disclosure of Certain Loss Contingencies—an amendment of FASB Statements No. 5
and 141(R). The purpose of the proposed statement is intended to improve the quality of financial
reporting by expanding disclosures required about certain loss contingencies. Investors and other
users of financial information have expressed concerns that current disclosures required in SFAS
No. 5, Accounting for Contingencies, do not provide sufficient information in a timely manner to
assist users of financial statements in assessing the likelihood, timing and amount of future cash
flows associated with loss contingencies. If approved as written, this proposed Statement would
expand disclosures about certain loss contingencies in the scope of SFAS No. 5 or SFAS No. 141
(revised 2007), Business Combinations, and would be effective for fiscal years ending after
December 15, 2008, and interim and annual periods in subsequent fiscal years. The FASB
continues to deliberate this proposed standard at this time.
In June 2008, the FASB issued an Exposure Draft of a proposed Statement of Financial Accounting
Standards, Accounting for Hedging Activities—an amendment of FASB Statement No. 133. The
purpose of the proposed Statement is intended to simplify hedge accounting resulting in increased
comparability of financial results for entities that apply hedge accounting. Specifically, the
proposed statement would eliminate the multiple methods of hedge accounting currently being
used for the same transaction. It also would require an entity to designate all risks as the hedged
risk (with certain exceptions) in the hedged item or transaction, thus better reflecting the economics
of such items and transactions in the financial statements. Additional objectives of the proposed
Statement are to: simplify accounting for hedging activities; improve the financial reporting of
hedging activities to make the accounting model and associated disclosures more useful and easier
to understand for users of financial statements; resolve major practice issues related to hedge
accounting that have arisen under Statement 133, Accounting for Derivative Instruments and
Hedging Activities; and address differences resulting from recognition and measurement anomalies
between the accounting for derivative instruments and the accounting for hedged items or
transactions. If approved as written, the proposed Statement would require application of the
amended hedging requirements for financial statements issued for fiscal years beginning after June
15, 2009, and interim periods within those fiscal years. The FASB continues to deliberate this
proposed standard at this time.
In August 2008, the FASB issued an Exposure Draft of a proposed Statement of Financial
Accounting Standards, Earnings per Share—an amendment of FASB Statement No. 128. The
FASB is issuing this proposed Statement as part of a joint project with the International Accounting
Standards Board (IASB). The FASB and the IASB undertook that project to eliminate differences
63
16
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
between FASB Statement No. 128, Earnings per Share, and IAS 33, Earnings per Share, in ways
that also would clarify and simplify the earnings per share (EPS) computation. This proposed
Statement proposes amendments to Statement 128 that would improve the comparability of EPS
because the denominator used to compute EPS under Statement 128 would be the same as the
denominator used to compute EPS under IAS 33, with limited exceptions. The FASB continues to
deliberate this proposed standard at this time.
In October 2008, the FASB issued FASB Staff Position No. 157-3, Determining the Fair Value of
an Asset When the Market for That Asset Is Not Active. FSP 157-3 clarifies how Statement of
Financial Accounting Standards (SFAS) No. 157 “Fair Value Measurements” (SFAS 157) should
be applied when valuing securities in markets that are not active and illustrates how an entity
would determine fair value in this circumstance. The FSP states that an entity should not
automatically conclude that a particular transaction price is determinative of fair value. In a
dislocated market, judgment is required to evaluate whether individual transactions are forced
liquidations or distressed sales. When relevant observable market information is not available, a
valuation approach that incorporates management’s judgments about the assumptions that market
participants would use in pricing the asset in a current sale transaction would be acceptable. The
FSP also indicates that quotes from brokers or pricing services may be relevant inputs when
measuring fair value, but are not necessarily determinative in the absence of an active market for
the asset. The adoption of FSP 157-3, effective upon issuance, did not impact the Company’s
financial position or results of operations.
In October 2008, the FASB issued an Exposure Draft of a proposed Statement of Financial
Accounting Standards, Subsequent Events. The objective of this proposed Statement is to establish
general standards of accounting for and disclosure of events that occur subsequent to the balance
sheet date but before financial statements are issued or are available to be issued. In particular, this
proposed Statement sets forth: (1) the period after the balance sheet date during which management
of a reporting entity would evaluate events or transactions that may occur for potential recognition
or disclosure in the financial statements; (2) the circumstances under which an entity would
recognize events or transactions occurring after the balance sheet date in its financial statements;
and (3) the disclosures that an entity would make about events or transactions that occurred after
the balance sheet date. The FASB continues to deliberate this proposed standard at this time.
In December 2008, the FASB issued FASB Staff Position No. 140-4 and FIN 46(R)-8, Disclosure
by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities. This FSP amends SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, to require public entities to provide additional
disclosures about transfers of financial assets and amends FIN 46(R), Consolidation of Variable
Interest Entities, to require public entities to provide additional disclosures about their involvement
in variable interest entities and certain special purpose entities. This FSP was effective for the first
reporting period ending after December 15, 2008. The Company has not engaged in these types of
transfers of financial assets; therefore, no additional disclosures were required.
64
17
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
In January 2009, the FASB issued proposed FASB Staff Position No. 107-b and APB 28-a, Interim
Disclosures about Fair Value of Financial Instruments. This proposed FSP would amend FASB
Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures
about fair value of financial instruments in interim financial statements as well as in annual
financial statements. This FSP also would amend APB Opinion No. 28, Interim Financial
Reporting, to require those disclosures in all interim financial statements. This FSP, if adopted as it
is currently written, is effective for interim and annual reporting periods ending after March 15,
2009.
In February 2009, the FASB decided to reexpose proposed FASB Staff Position No. 157-c,
Measuring Liabilities under FASB Statement No. 157. This proposed FSP would clarify the
principles in FASB Statement No. 157, Fair Value Measurements, on the measurement of
liabilities. This FSP, if adopted as it is currently written, will be applied on a prospective basis
effective on the beginning of the period that includes the issuance date of the FSP.
In March 2008, the FASB issued proposed FSP FAS 132(R)-a, Employers’ Disclosures about
Postretirement Benefit Plan Assets. In December 2008, the FASB issued the final FSP FAS
132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets. This FSP is the result
of FASB’s redeliberations of that proposed FSP. The provisions of this FSP only apply to single-
employer defined benefit plans; the Company participates in a multiemployer defined benefit
pension plan. Therefore, the requirements of this FSP will not affect the consolidated financial
condition or results of operations of the Company, or the related disclosures about plan assets.
Note 2:
Investments in Debt and Equity Securities
The amortized cost and approximate fair values of securities classified as available-for-sale were as
follows:
U.S. government agencies
Collateralized mortgage
obligations
Mortgage-backed securities
States and political subdivisions
Corporate bonds
Equity securities
Amortized
Cost
December 31, 2008
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Approximate
Fair
Value
$
34,968
$
32
$
244
$
34,756
73,976
480,349
55,545
1,500
1,552
585
6,029
107
—
—
2,647
1,182
2,549
295
48
71,914
485,196
53,103
1,205
1,504
$
647,890
$
6,753
$
6,965
$
647,678
65
18
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Amortized
Cost
December 31, 2007
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Approximate
Fair
Value
U.S. government agencies
Collateralized mortgage
obligations
Mortgage-backed securities
States and political subdivisions
Corporate bonds
Equity securities
$
126,117
$
53
$
375
$
125,795
39,769
183,023
62,572
1,501
12,874
425,856
$
$
214
1,030
533
—
4
1,834
$
654
916
453
25
239
2,662
$
39,329
183,137
62,652
1,476
12,639
425,028
Additional details of the Company's collateralized mortgage obligations and mortgage-backed
securities at December 31, 2008, are described as follows:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Approximate
Fair
Value
(In Thousands)
Collateralized mortgage obligations
FHLMC fixed
GNMA fixed
Total agency
Nonagency
Mortgage-backed securities
FHLMC fixed
FHLMC hybrid ARM
Total FHLMC
FNMA fixed
FNMA hybrid ARM
Total FNMA
GNMA fixed
GNMA hybrid ARM
Total GNMA
Total fixed
Total hybrid ARM
$
$
$
$
$
$
$
$
$
$
$
$
12,691
48,817
61,508
12,468
73,976
53,137
188,545
241,682
40,141
175,410
215,551
14,441
8,675
23,116
480,349
107,719
372,630
480,349
66
$
403
182
585
—
$
585
113
$
—
113
2,534
2,647
$
1,279
1,559
2,838
1,561
1,583
3,144
30
17
47
6,029
2,870
3,159
6,029
$
$
$
$
5
369
374
—
616
616
—
192
192
1,182
5
1,177
1,182
$
$
$
$
12,981
48,999
61,980
9,934
71,914
54,411
189,735
244,146
41,702
176,378
218,080
14,471
8,499
22,970
485,196
110,584
374,612
485,196
19
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
The amortized cost and fair value of available-for-sale securities at December 31, 2008, by
contractual maturity, are shown below. Expected maturities will differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without call or prepayment
penalties.
One year or less
After one through five years
After five through ten years
After ten years
Securities not due on a single maturity date
Equity securities
Amortized
Cost
Approximate
Fair
Value
(In Thousands)
$
$
—
924
38,315
52,774
554,325
1,552
—
931
38,071
50,062
557,110
1,504
$
647,890
$
647,678
The amortized cost and approximate fair values of securities classified as held-to-maturity were as
follows:
Amortized
Cost
December 31, 2008
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Approximate
Fair
Value
$
1,360 $
62
$
0
$
1,422
Amortized
Cost
December 31, 2007
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Approximate
Fair
Value
$
1,420 $
88
$
0
$
1,508
States and political
subdivisions
States and political
subdivisions
67
20
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
The held-to-maturity securities at December 31, 2008, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties.
After one through five years
After five through ten years
After ten years
Amortized
Cost
Approximate
Fair
Value
(In Thousands)
$
$
—
1,260
100
—
1,315
107
$
1,360
$
1,422
The amortized cost and approximate fair values of securities pledged as collateral was as follows at
December 31, 2008 and 2007:
2008
2007
Amortized
Cost
Approximate
Fair
Value
Amortized
Cost
Approximate
Fair
Value
(In Thousands)
$
140,452
$
140,660
$
194,889
$
194,401
222,307
220,755
163,989
163,941
57,251
57,412
—
—
2,782
2,893
47,038
46,998
3,021
2,965
4,779
4,770
$
425,813
$
424,685
$
410,695
$
410,110
Public deposits
Collateralized borrowing
accounts
Structured repurchase
agreements
Federal Home Loan Bank
advances
Interest rate swaps and
treasury, tax and loan
accounts
Certain investments in debt and marketable equity securities are reported in the financial statements
at an amount less than their historical cost. Total fair value of these investments at December 31,
2008 and 2007, respectively, was approximately $222,228,000 and $204,056,000 which is
approximately 34.24% and 47.9% of the Company’s available-for-sale and held-to-maturity
investment portfolio, respectively.
Based on evaluation of available evidence, including recent changes in market interest rates, credit
rating information and information obtained from regulatory filings, management believes the
declines in fair value for these debt securities are temporary.
68
21
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Should the impairment of any of these securities become other than temporary, the cost basis of the
investment will be reduced and the resulting loss recognized in net income in the period the other-
than-temporary impairment is identified. During 2008, the Company determined that the
impairment of certain available-for-sale equity securities with an original cost of $8.4 million had
become other than temporary. Consequently, the Company recorded a $7.4 million pre-tax charge
to income during 2008. This total charge included $5.7 million related to Fannie Mae and Freddie
Mac preferred stock. During 2007, the Company determined that the impairment of certain
available-for-sale equity securities with an original cost of $5.3 million had become other than
temporary. Consequently, the Company recorded a $1.1 million pre-tax charge to income during
2008.
The following table shows the Company’s gross unrealized losses and fair value, aggregated by
investment category and length of time that individual securities have been in a continuous
unrealized loss position at December 31, 2008 and 2007:
Description of Securities Fair Value
Less than 12 Months
Unrealized
Losses
2008
12 Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(In Thousands)
U.S. government agencies
Mortgage-backed securities
Collateralized mortgage
obligations
State and political subdivisions
Corporate bonds
Equity securities
29,756
$
129,048
(244)
$
(1,010)
$
—
8,479
$
—
(172)
$ 29,756
137,527
(244)
$
(1,182)
3,609
37,491
440
—
(232)
(1,739)
(60)
—
10,063
2,124
766
452
(2,415)
(810)
(235)
(48)
13,672
39,615
1,206
452
(2,647)
(2,549)
(295)
(48)
$ 200,344
$ (3,285)
$ 21,884
$ (3,680)
$ 222,228
$ (6,965)
Description of Securities Fair Value
Less than 12 Months
Unrealized
Losses
2007
12 Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(In Thousands)
$
43,418
22,498
$
U.S. government agencies
Mortgage-backed securities
Collateralized mortgage
obligations
State and political subdivisions
Corporate bonds
Equity securities
11,705
23,398
1,476
4,766
(80)
(100)
(154)
(421)
(25)
(239)
$ 13,524
62,817
$
18,238
2,216
—
—
(295)
(816)
(500)
(32)
—
—
$ 56,942
85,315
$
29,943
25,614
1,476
4,766
(375)
(916)
(654)
(453)
(25)
(239)
$ 107,261
$ (1,019)
$ 96,795
$ (1,643)
$ 204,056
$ (2,662)
69
22
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Note 3: Other Comprehensive Income (Loss)
Unrealized gain (loss) on available-for-sale
securities, net of income taxes of $(2,354) for
December 31, 2008; $296 for December 31,
2007; $1,194 for December 31, 2006
Less reclassification adjustment for gain (loss)
included in net income, net of income taxes of
$(2,570) for December 31, 2008; $(394) for
December 31, 2007; $0 for December 31, 2006
Change in unrealized gain (loss) on available-for-
2008
2007
(In Thousands)
2006
$
(4,371)
$
549
$
2,217
(4,772)
(733)
—
sale securities, net of income taxes
$
401
$
1,282
$
2,217
Note 4: Loans and Allowance for Loan Losses
Categories of loans at December 31, 2008 and 2007, included:
One-to-four family residential mortgage loans
Other residential mortgage loans
Commercial real estate loans
Other commercial loans
Industrial revenue bonds
Construction loans
Installment, education and other loans
Prepaid dealer premium
Discounts on loans purchased
Undisbursed portion of loans in process
Allowance for loan losses
Deferred loan fees and gains, net
$
2008
2007
(In Thousands)
$
222,100
127,122
477,551
139,591
59,413
604,965
177,480
13,917
(4)
(73,855)
(29,163)
(2,121)
185,253
87,177
471,573
207,059
61,224
919,059
154,015
10,759
(6)
(254,562)
(25,459)
(2,698)
$ 1,716,996
$ 1,813,394
70
23
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Transactions in the allowance for loan losses were as follows:
Balance, beginning of year
Provision charged to expense
Loans charged off, net of recoveries
of $4,531 for 2008, $2,595 for 2007
and $2,500 for 2006
2008
2007
(In Thousands)
2006
$
25,459
52,200
$
26,258
5,475
$
24,549
5,450
(48,496)
(6,274)
(3,741)
Balance, end of year
$
29,163
$
25,459
$
26,258
The weighted average interest rate on loans receivable at December 31, 2008 and 2007, was 6.35%
and 7.58%, respectively.
Loans serviced for others are not included in the accompanying consolidated statements of
financial condition. The unpaid principal balances of loans serviced for others were $87,104,000
and $66,013,000 at December 31, 2008 and 2007, respectively. In addition, available lines of
credit on these loans were $31,463,000 and $25,815,000 at December 31, 2008 and 2007,
respectively.
Gross impaired loans totaled approximately $45,569,000 and $35,475,000 at December 31, 2008
and 2007, respectively. An allowance for loan losses of $3,720,000 and $2,583,000 relates to
impaired loans of $34,263,000 and $10,234,000 at December 31, 2008 and 2007, respectively.
There were $11,306,000 of impaired loans at December 31, 2008, and $25,241,000 of impaired
loans at December 31, 2007, without a related allowance for loan losses assigned.
Interest of approximately $1,122,000, $1,097,000 and $722,000 was received on average impaired
loans of approximately $33,596,000, $31,757,000 and $22,630,000 for the years ended
December 31, 2008, 2007 and 2006, respectively. Interest of approximately $2,874,000,
$2,659,000 and $1,954,000 would have been recognized on an accrual basis during the years ended
December 31, 2008, 2007 and 2006, respectively.
At December 31, 2008 and 2007, accruing loans delinquent 90 days or more totaled approximately
$318,000 and $196,000, respectively. Nonaccruing loans at December 31, 2008 and 2007, were
approximately $32,884,000 and $35,279,000, respectively.
Certain of the Bank’s real estate loans are pledged as collateral for borrowings as set forth in
Notes 7 and 9.
71
24
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Certain directors and executive officers of the Company and the Bank are customers of and had
transactions with the Bank in the ordinary course of business. Except for the interest rates on loans
secured by personal residences, in the opinion of management, all loans included in such
transactions were made on substantially the same terms as those prevailing at the time for
comparable transactions with unrelated parties. Generally, residential first mortgage loans and
home equity lines of credit to all employees and directors have been granted at interest rates equal
to the Bank’s cost of funds, subject to annual adjustments in the case of residential first mortgage
loans and monthly adjustments in the case of home equity lines of credit. At December 31, 2008
and 2007, loans outstanding to these directors and executive officers are summarized as follows:
Balance, beginning of year
New loans
Payments
December 31,
2008
2007
(In Thousands)
$
$
28,879
21,465
(21,626)
20,205
24,114
(15,440)
Balance, end of year
$
28,718
$
28,879
Note 5: Premises and Equipment
Major classifications of premises and equipment, stated at cost, were as follows:
Land
Buildings and improvements
Furniture, fixtures and equipment
Less accumulated depreciation
December 31,
2008
2007
(In Thousands)
$
$
10,933
21,490
23,650
56,073
26,043
8,475
20,788
22,719
51,982
23,949
$
30,030
$
28,033
72
25
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Note 6: Deposits
Deposits are summarized as follows:
Weighted Average
Interest Rate
December 31,
2007
2008
(In Thousands, Except
Interest Rates)
Noninterest-bearing accounts
Interest-bearing checking and
savings accounts
—
$
138,701
$
166,231
1.18% - 2.75%
386,540
491,135
Certificate accounts
Interest rate swap fair value
adjustment
0% - 1.99%
2% - 2.99%
3% - 3.99%
4% - 4.99%
5% - 5.99%
6% - 6.99%
7% and above
525,241
657,366
38,987
205,426
446,799
646,458
42,847
869
186
598
22,850
93,717
470,718
497,877
10,394
374
1,381,572
1,096,528
1,215
9,252
$
1,908,028
$
1,763,146
The weighted average interest rate on certificates of deposit was 3.67% and 4.83% at December 31,
2008 and 2007, respectively.
The aggregate amount of certificates of deposit originated by the Bank in denominations greater
than $100,000 was approximately $152,745,000 and $167,313,000 at December 31, 2008 and
2007, respectively. The Bank utilizes brokered deposits as an additional funding source. The
aggregate amount of brokered deposits, which are primarily in denominations of $100,000 or more,
was approximately $974,490,000 and $674,609,000 at December 31, 2008 and 2007, respectively.
73
26
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
At December 31, 2008, scheduled maturities of certificates of deposit were as follows (in
thousands):
2009
2010
2011
2012
2013
Thereafter
Retail
Brokered
Total
$
$
$
347,223
47,436
4,543
3,491
3,179
1,210
442,005
260,256
214,389
36,249
—
21,591
789,228
307,692
218,932
39,740
3,179
22,801
$
407,082
$
974,490
$ 1,381,572
A summary of interest expense on deposits is as follows:
2008
2007
(In Thousands)
2006
Checking and savings accounts
Certificate accounts
Early withdrawal penalties
$
$
8,370
52,616
(110)
$
16,043
60,295
(106)
12,679
53,145
(91)
$
60,876
$
76,232
$
65,733
Note 7: Advances From Federal Home Loan Bank
Advances from the Federal Home Loan Bank consisted of the following:
December 31, 2008
December 31, 2007
Due In
Amount
Weighted
Average
Interest
Rate
Amount
(In Thousands, Except Interest Rates)
$
2008
2009
2010
2011
2012
2013
2014 and thereafter
$
—
24,821
4,978
2,239
2,934
225
85,275
—%
1.29
3.63
6.29
6.04
5.81
3.69
93,395
24,821
4,978
2,239
2,934
225
85,275
Weighted
Average
Interest
Rate
4.29%
5.10
5.69
6.29
6.04
5.81
3.69
$
120,472
3.30
$
213,867
4.22
74
27
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Included in the Bank’s FHLB advances is a $30,000,000 advance with a maturity date of
March 29, 2017. The interest rate on this advance is 4.07%. The advance has a call provision that
allows the Federal Home Loan Bank of Des Moines to call the advance quarterly.
Included in the Bank’s FHLB advances is a $25,000,000 advance with a maturity date of
December 7, 2016. The interest rate on this advance is 3.81%. The advance has a call provision
that allows the Federal Home Loan Bank of Des Moines to call the advance quarterly.
Included in the Bank’s FHLB advances is a $30,000,000 advance with a maturity date of
November 24, 2017. The interest rate on this advance is 3.20%. The advance has a call provision
that allows the Federal Home Loan Bank of Des Moines to call the advance quarterly.
The Bank has pledged FHLB stock, investment securities and first mortgage loans free of pledges,
liens and encumbrances as collateral for outstanding advances. Investment securities with
approximate carrying values of $2,893,000 and $46,998,000, respectively, were specifically
pledged as collateral for advances at December 31, 2008 and 2007. Loans with carrying values of
approximately $606,362,000 and $520,005,000 were pledged as collateral for outstanding advances
at December 31, 2008 and 2007, respectively.
Note 8: Short-Term Borrowings
Short-term borrowings are summarized as follows:
December 31,
2008
2007
(In Thousands)
Federal Reserve Term Auction Facility (see Note 9)
Note payable – Kansas City Equity Fund
Overnight borrowings
Short-term borrowings
Securities sold under reverse repurchase agreements
$
$
83,000
368
—
83,368
215,261
50,000
—
23,000
73,000
143,721
$
298,629
$
216,721
The Bank enters into sales of securities under agreements to repurchase (reverse repurchase
agreements). Reverse repurchase agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as a liability in the statements of financial condition. The
dollar amount of securities underlying the agreements remains in the asset accounts. Securities
underlying the agreements are being held by the Bank during the agreement period. All
agreements are written on a one-month or less term.
75
28
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Short-term borrowings had weighted average interest rates of 1.35% and 3.75% at December 31,
2008 and 2007, respectively. Short-term borrowings averaged approximately $234,250,000 and
$170,946,000 for the years ended December 31, 2008 and 2007, respectively. The maximum
amounts outstanding at any month end were $298,262,000 and $216,721,000, respectively, during
those same periods.
Note 9: Federal Reserve Bank Borrowings
The Bank has a potentially available $215,265,000 line of credit under a borrowing arrangement
with the Federal Reserve Bank at December 31, 2008. The line is secured primarily by commercial
loans.
In December 2007, the Federal Reserve established a temporary Term Auction Facility (TAF).
Under the TAF program, the Federal Reserve auctions term funds to depository institutions against
the collateral that can be used to secure loans at the discount window. All depository institutions
that are judged to be in generally sound financial condition by their local Reserve Bank and that are
eligible to borrow under the primary credit discount window program are eligible to participate in
TAF auctions. All advances must be fully collateralized. Each TAF auction is for a fixed amount
and a fixed maturity date, with the rate determined by the auction process.
TAF borrowing arrangements are summarized as follows:
December 31,
2008
2007
(In Thousands)
TAF maturing 1/31/08 – rate 4.67%
$
—
$
50,000
TAF maturing 1/29/09 – rate .60%
TAF maturing 2/26/09 – rate .42%
58,000
25,000
—
—
$
83,000
$
50,000
Note 10: Structure Repurchase Agreements
In September 2008, the Company entered into a structured repo borrowing transaction for $50
million. This borrowing bears interest at a fixed rate of 4.34% if three-month LIBOR remains at
2.81% or less on quarterly interest reset dates; if LIBOR is above the 2.81% rate on quarterly
interest reset dates, then the Company’s borrowing rate decreases by 2.5 times the difference in
LIBOR (up to 250 basis points). The Company pledges investment securities to collateralize this
borrowing.
76
29
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Note 11: Subordinated Debentures Issued to Capital Trust
Great Southern Capital Trust I (Trust I), a Delaware statutory trust, issued 1,725,000 shares of
unsecured 9.00% Cumulative Trust Preferred Securities at $10 per share in an underwritten public
offering. The gross proceeds of the offering were used to purchase 9.00% Junior Subordinated
Debentures from the Company totaling $17,784,000. The Company’s proceeds from the issuance
of the Subordinated Debentures to Trust I, net of underwriting fees and offering expenses, were
$16.3 million. The Subordinated Debentures were scheduled to mature in 2031; the Company
elected to redeem the debentures (and as a result the Trust I securities) in November 2006. As a
result of the redemption of the Trust I securities, approximately $510,000 (after tax) of related
unamortized issuance costs were written off as a noncash expense in 2006. The Company entered
into an interest rate swap agreement to effectively convert this fixed rate debt to variable rates of
interest. The variable rate was three-month LIBOR plus 202 basis points, adjusting quarterly. The
interest rate swap was terminated in November 2006 at no cost to the Company.
In November 2006, Great Southern Capital Trust II (Trust II), a statutory trust formed by the
Company for the purpose of issuing the securities, issued a $25,000,000 aggregate liquidation
amount of floating rate Cumulative Trust Preferred Securities. The Trust II securities bear a
floating distribution rate equal to 90-day LIBOR plus 1.60%. The Trust II securities are
redeemable at the Company’s option beginning in February 2012, and if not sooner redeemed,
mature on February 1, 2037. The Trust II securities were sold in a private transaction exempt from
registration under the Securities Act of 1933, as amended. The gross proceeds of the offering were
used to purchase Junior Subordinated Debentures from the Company totaling $25,774,000. The
initial interest rate on the Trust II debentures was 6.98%. The interest rate was 4.79% at December
31, 2008.
In July 2007, Great Southern Capital Trust III (Trust III), a statutory trust formed by the Company
for the purpose of issuing the securities, issued a $5,000,000 aggregate liquidation amount of
floating rate Cumulative Trust Preferred Securities. The Trust III securities bear a floating
distribution rate equal to 90-day LIBOR plus 1.40%. The Trust III securities are redeemable at the
Company’s option beginning October 2012, and if not sooner redeemed, mature on October 1,
2037. The Trust III securities were sold in a private transaction exempt from registration under the
Securities Act of 1933, as amended. The gross proceeds of the offering were used to purchase
Junior Subordinated Debentures from the Company totaling $5,155,000. The initial interest rate on
the Trust III debentures was 6.76%. The interest rate was 5.28% at December 31, 2008.
Subordinated debentures issued to capital trust are summarized as follows:
December 31,
2008
2007
(In Thousands)
Subordinated Debentures
$
30,929
$
30,929
77
30
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Note 12:
Income Taxes
The Company files a consolidated federal income tax return. As of December 31, 2008 and 2007,
retained earnings included approximately $17,500,000 for which no deferred income tax liability
had been recognized. This amount represents an allocation of income to bad debt deductions for
tax purposes only for tax years prior to 1988. If the Bank were to liquidate, the entire amount
would have to be recaptured and would create income for tax purposes only, which would be
subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability
on the above amount was approximately $6,475,000 at December 31, 2008 and 2007.
The provision (credit) for income taxes included these components:
Taxes currently payable
Deferred income taxes
Income tax expense (credit)
2008
$
$
1,811
(5,562)
(3,751)
2007
(In Thousands)
$
11,365
2,978
14,343
$
2006
$
$
14,224
(365)
13,859
The tax effects of temporary differences related to deferred taxes shown on the statements of
financial condition were:
Deferred tax assets
Allowance for loan losses
Interest on nonperforming loans
Accrued expenses
Excess of cost over fair value of net assets acquired
Unrealized loss and realized impairment on available-
$
for-sale securities
Fair value of interest rate swaps and related deposits
Write-down of foreclosed assets
Other
Deferred tax liabilities
Tax depreciation in excess of book depreciation
FHLB stock dividends
Bank franchise tax refund
Partnership tax credits
Prepaid expenses
Deferred broker fees on CDs
Other
December 31,
2008
2007
(In Thousands)
$
10,207
1,146
457
181
2,659
414
527
1
15,592
(254)
(227)
(28)
(157)
(576)
(137)
(162)
(1,541)
8,911
—
429
176
946
593
95
10
11,160
(114)
(227)
(28)
(151)
(518)
(1,226)
(192)
(2,456)
Net deferred tax asset
$
14,051
$
8,704
78
31
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Reconciliations of the Company’s effective tax rates to the statutory corporate tax rates were as
follows:
Tax at statutory rate
Nontaxable interest and dividends
Tax credits
Other
2008
(35.0)%
(15.4)
—
4.5
2007
35.0%
(2.5)
—
.4
2006
35.0%
(2.2)
(.9)
(.8)
(45.9)%
32.9%
31.1%
Note 13: Disclosures About Fair Value of Financial Instruments
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements, which
defines fair value and establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 has
been applied prospectively as of the beginning of this fiscal year. The adoption of SFAS No. 157
did not have an impact on our financial statements except for the expanded disclosures noted
below.
The following definitions describe the fair value hierarchy of levels of inputs used in the Fair Value
Measurements.
• Quoted prices in active markets for identical assets or liabilities (Level 1): Inputs that are
quoted unadjusted prices in active markets for identical assets that the Company has the
ability to access at the measurement date. An active market for the asset is a market in
which transactions for the asset or liability occur with sufficient frequency and volume to
provide pricing information on an ongoing basis.
• Other observable inputs (Level 2): Inputs that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data obtained from
sources independent of the reporting entity including quoted prices for similar assets,
quoted prices for securities in inactive markets and inputs derived principally from or
corroborated by observable market data by correlation or other means.
• Significant unobservable inputs (Level 3): Inputs that reflect assumptions of a source
independent of the reporting entity or the reporting entity’s own assumptions that are
supported by little or no market activity or observable inputs.
Financial instruments are broken down as follows by recurring or nonrecurring measurement
status. Recurring assets are initially measured at fair value and are required to be remeasured at
fair value in the financial statements at each reporting date. Assets measured on a nonrecurring
basis are assets that, due to an event or circumstance, were required to be remeasured at fair value
after initial recognition in the financial statements at some time during the reporting period.
79
32
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
The following is a description of valuation methodologies used for assets recorded at fair value on
a recurring basis at December 31, 2008.
Securities Available for Sale. Investment securities available for sale are recorded at fair value on
a recurring basis. The fair values used by the Company are obtained from an independent pricing
service, which represent either quoted market prices for the identical asset or fair values determined
by pricing models, or other model-based valuation techniques, that consider observable market
data, such as interest rate volatilities, LIBOR yield curve, credit spreads and prices from market
makers and live trading systems. Recurring Level 1 securities include exchange traded equity
securities. Recurring Level 2 securities include U.S. government agency securities, mortgage-
backed securities, collateralized mortgage obligations, state and municipal bonds and U.S.
government agency equity securities. Recurring Level 3 securities include one corporate debt
security.
Fair Value Measurements Using
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
Fair Value
December 31,
2008
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(In Thousands)
$
34,756
$
—
$
34,756
$
71,914
485,196
1,205
53,103
1,504
—
—
760
—
716
71,914
485,196
—
53,103
788
—
—
—
445
—
—
$
647,678
$
1,476
$
645,757
$
445
Available for sale securities
U.S government agencies
Collateralized mortgage
obligations
Mortgage-backed securities
Corporate bonds
States and political subdivisions
Equity securities
Total available-for-sale
securities
The following is a reconciliation of activity for available-for-sale securities measured at fair value
based on significant unobservable (Level 3) information. $10.0 million of U.S. government agency
securities were reclassified from Level 3 to Level 2 due to a model-driven valuation with market
observable inputs being utilized.
Balance, January 1, 2008
Unrealized loss included in comprehensive income
Transfer from Level 3 to Level 2
Balance, December 31, 2008
80
Investment
Securities
(In Thousands)
$
$
10,450
(5)
(10,000)
445
33
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Interest Rate Swap Agreements. The fair value is estimated by a third party using inputs that are
observable or that can be corroborated by observable market data and, therefore, are classified
within Level 2 of the valuation hierarchy. These fair value estimations include primarily market
observable inputs, such as yield curves and option volatilities, and include the value associated
with counterparty credit risk. Fair value estimates related to the Company’s hedged deposits are
derived in the same manner. As of December 31, 2008, the Company assessed the significance of
the impact of the credit valuation adjustments on the overall valuation of its interest rate swap
positions, and determined that the credit valuation adjustments are not significant to the overall
valuation of its derivatives.
Fair Value Measurements Using
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(In Thousands)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
December 31,
2008
Interest rate swap
agreements
$
31 $
— $
31 $
—
The following is a description of valuation methodologies used for assets recorded at fair value on
a nonrecurring basis at December 31, 2008.
Loans Held for Sale. Mortgage loans held for sale are recorded at the lower of carrying value or
fair value. The fair value of mortgage loans held for sale is based on what secondary markets are
currently offering for portfolios with similar characteristics. As such, the Company classifies
mortgage loans held for sale as Nonrecurring Level 2. Write-downs to fair value typically do not
occur as the Company generally enters into commitments to sell individual mortgage loans at the
time the loan is originated to reduce market risk. The Company typically does not have
commercial loans held for sale.
Impaired Loans. A loan is considered to be impaired when it is probable that all of the principal
and interest due may not be collected according to its contractual terms. Generally, when a loan is
considered impaired, the amount of reserve required under SFAS No. 114 is measured based on the
fair value of the underlying collateral. The Company makes such measurements on all material
loans deemed impaired using the fair value of the collateral for collateral dependent loans. The fair
value of collateral used by the Company is determined by obtaining an observable market price or
by obtaining an appraised value from an independent, licensed or certified appraiser, using
observable market data. This data includes information such as selling price of similar properties
and capitalization rates of similar properties sold within the market, expected future cash flows or
earnings of the subject property based on current market expectations, and other relevant factors. In
addition, management may apply selling and other discounts to the underlying collateral value to
determine the fair value. If an appraised value is not available, the fair value of the impaired loan
is determined by an adjusted appraised value including unobservable cash flows.
81
34
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
The Company records impaired loans as Nonrecurring Level 3. If a loan’s fair value as estimated
by the Company is less than its carrying value, the Company either records a charge-off of the
portion of the loan that exceeds the fair value or establishes a specific reserve as part of the
allowance for loan losses. In accordance with the provisions of SFAS No. 114, impaired loans
with a carrying value of $45.6 million, with an associated valuation reserve of $3.7 million, were
recorded at their fair value of $41.9 million at December 31, 2008. Losses of $51.7 million related
to impaired loans were recognized in earnings through the provision for loan losses during the year
ended December 31, 2008.
Fair Value Measurements Using
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
(In Thousands)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
December 31,
2008
Loans held for sale
Impaired loans
$
4,695 $
41,849
— $
—
4,695 $
—
—
41,849
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments:
Cash and Cash Equivalents and Federal Home Loan Bank Stock
The carrying amount approximates fair value.
Loans and Interest Receivable
The fair value of loans is estimated by discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit ratings and for the same
remaining maturities. Loans with similar characteristics are aggregated for purposes of the
calculations. The carrying amount of accrued interest receivable approximates its fair value.
Deposits and Accrued Interest Payable
The fair value of demand deposits and savings accounts is the amount payable on demand at the
reporting date, i.e., their carrying amounts. The fair value of fixed maturity certificates of deposit
is estimated using a discounted cash flow calculation that applies the rates currently offered for
deposits of similar remaining maturities. The carrying amount of accrued interest payable
approximates its fair value.
82
35
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Federal Home Loan Bank Advances
Rates currently available to the Company for debt with similar terms and remaining maturities are
used to estimate fair value of existing advances.
Short-Term Borrowings
The carrying amount approximates fair value.
Subordinated Debentures Issued to Capital Trust
The subordinated debentures have floating rates that reset quarterly. The carrying amount of these
debentures approximate their fair value.
Structured Repurchase Agreements
Structured repurchase agreements are collateralized borrowings from a counterparty. In addition to
the principal amount owed, the counterparty also determines an amount that would be owed by
either party in the event the agreement is terminated prior to maturity by the Company. The fair
values of the structured repurchase agreements are estimated based on the amount the Company
would be required to pay to terminate the agreement at the balance sheet date.
Commitments to Originate Loans, Letters of Credit and Lines of Credit
The fair value of commitments is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed rates. The fair value of
letters of credit is based on fees currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparties at the reporting date.
The following table presents estimated fair values of the Company’s financial instruments. The
fair values of certain of these instruments were calculated by discounting expected cash flows,
which method involves significant judgments by management and uncertainties. Fair value is the
estimated amount at which financial assets or liabilities could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale. Because no market exists for
certain of these financial instruments and because management does not intend to sell these
financial instruments, the Company does not know whether the fair values shown below represent
values at which the respective financial instruments could be sold individually or in the aggregate.
83
36
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
December 31, 2008
Fair
Value
Carrying
Amount
December 31, 2007
Fair
Value
Carrying
Amount
(In Thousands)
$ 167,920
647,678
1,360
4,695
1,716,996
13,287
8,333
31
$ 167,920
647,678
1,422
4,695
1,732,758
13,287
8,333
31
$
80,525
425,028
1,420
6,717
1,813,394
15,441
13,557
3,293
$
80,525
425,028
1,508
6,717
1,825,886
15,441
13,557
3,293
1,908,028
120,472
298,629
50,000
30,929
9,225
—
1,929,149
123,895
298,629
56,674
30,929
9,225
—
1,763,146
213,867
216,721
—
30,929
6,149
2,202
1,771,505
214,498
216,721
—
30,929
6,149
2,202
—
45
—
—
45
—
—
69
—
—
69
—
Financial assets
Cash and cash equivalents
Available-for-sale securities
Held-to-maturity securities
Mortgage loans held for sale
Loans, net of allowance for loan losses
Accrued interest receivable
Investment in FHLB stock
Interest rate swaps
Financial liabilities
Deposits
FHLB advances
Short-term borrowings
Structured repurchase agreements
Subordinated debentures
Accrued interest payable
Interest rate swaps
Unrecognized financial instruments
(net of contractual value)
Commitments to originate loans
Letters of credit
Lines of credit
Note 14: Operating Leases
The Company has entered into various operating leases at several of its locations. Some of the
leases have renewal options.
At December 31, 2008, future minimum lease payments were as follows (in thousands):
2009
2010
2011
2012
2013
Thereafter
$
839
507
371
354
99
36
$
2,206
Rental expense was $934,000, $866,000 and $718,000 for the years ended December 31, 2008,
2007 and 2006, respectively.
84
37
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Note 15:
Interest Rate Swaps
In the normal course of business, the Company uses derivative financial instruments (primarily
interest rate swaps) to assist in its interest rate risk management. In accordance with SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, all derivatives are measured and
reported at fair value on the Company’s consolidated statement of financial condition as either an
asset or a liability. For derivatives that are designated and qualify as a fair value hedge, the gain or
loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the
hedged risk, are recognized in current earnings during the period of the change in the fair values.
For all hedging relationships, derivative gains and losses that are not effective in hedging the
changes in fair value of the hedged item are recognized immediately in current earnings during the
period of the change. Similarly, the changes in the fair value of derivatives that do not qualify for
hedge accounting under SFAS 133 are also reported currently in earnings in noninterest income.
The net cash settlements on derivatives that qualify for hedge accounting are recorded in interest
income or interest expense, based on the item being hedged. The net cash settlements on
derivatives that do not qualify for hedge accounting are reported in noninterest income.
At the inception of the hedge and quarterly thereafter, a formal assessment is performed to
determine whether changes in the fair values of the derivatives have been highly effective in
offsetting the changes in the fair values of the hedged item and whether they are expected to be
highly effective in the future. The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and strategy for
undertaking the hedge. This process includes identification of the hedging instrument, hedged
item, risk being hedged and the method for assessing effectiveness and measuring ineffectiveness.
In addition, on a quarterly basis, the Company assesses whether the derivative used in the hedging
transaction is highly effective in offsetting changes in fair value of the hedged item and measures
and records any ineffectiveness. The Company discontinues hedge accounting prospectively when
it is determined that the derivative is or will no longer be effective in offsetting changes in the fair
value of the hedged item, the derivative expires, is sold or terminated or management determines
that designation of the derivative as a hedging instrument is no longer appropriate.
The estimates of fair values of the Company’s derivatives and related liabilities are calculated by
an independent third party using proprietary valuation models. The fair values produced by these
valuation models are in part theoretical and reflect assumptions which must be made in using the
valuation models. Small changes in assumptions could result in significant changes in valuation.
The risks inherent in the determination of the fair value of a derivative may result in income
statement volatility.
85
38
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
At December 31, 2008, the Company had three SFAS No. 133 designated swaps with Lehman
Brothers Special Financing, Inc. (Lehman). One of these three interest rate swaps was terminated
by Lehman (at no cost to the Company) subsequent to December 31, 2008. As a result, the
Company terminated the related deposit account. On September 15, 2008, Lehman filed for
bankruptcy protection and hedge accounting was immediately terminated. The fair market value of
the underlying hedged items (certificates of deposit) through September 15, 2008, is being
amortized over the remaining life of the hedge period on a straight-line basis. The fair market
value of the swaps as of September 15, 2008, included both assets and liabilities totaling a net asset
of $235,000. These swaps were valued using the income approach with observable Level 2 market
expectations at the measurement date and standard valuation techniques to convert future amounts
to a single discounted present amount. The Level 2 inputs are limited to quoted prices for similar
assets or liabilities in active markets (specifically futures contracts on LIBOR for the first two
years) and inputs other than quoted prices that are observable for the asset or liability (specifically
LIBOR cash and swap rates, volatilities and credit risk at commonly quoted intervals). Mid-market
pricing is used as a practical expedient for fair value measurements. The Company has a netting
agreement with Lehman and the collectability of the net asset is uncertain at this time. The
Company has a valuation allowance of $235,000 on the asset as of December 31, 2008.
The Company uses derivatives to modify the repricing characteristics of certain assets and
liabilities so that changes in interest rates do not have a significant adverse effect on net interest
income and cash flows and to better match the repricing profile of its interest-bearing assets and
liabilities. As a result of interest rate fluctuations, certain interest-sensitive assets and liabilities
will gain or lose market value. In an effective fair value hedging strategy, the effect of this change
in value will generally be offset by a corresponding change in value on the derivatives linked to the
hedged assets and liabilities.
At December 31, 2008 and 2007, the Company’s fair value hedges include interest rate swaps to
convert the economic interest payments on certain brokered CDs from a fixed rate to a floating rate
based on LIBOR. At December 31, 2008, these fair value hedges were considered to be highly
effective and any hedge ineffectiveness was deemed not material. The notional amounts of the
liabilities being hedged were $11.5 million and $419.2 million at December 31, 2008 and 2007,
respectively. At December 31, 2008, swaps in a net settlement receivable position totaled $11.5
million. There were no swaps in a net settlement payable position. At December 31, 2007, swaps
in a net settlement receivable position totaled $225.7 million and swaps in a net settlement payable
position totaled $193.5 million. The net gains recognized in earnings on fair value hedges were
$7.0 million, $1.6 million and $1.5 million for the years ended December 31, 2008, 2007 and 2006,
respectively.
86
39
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
The maturities of interest rate swaps outstanding at December 31, 2008 and 2007, in terms of
notional amounts and their average pay and receive rates were as follows:
Fixed
To
Variable
2008
Average
Pay
Rate
Average
Receive
Rate
Fixed
To
Variable
(In Millions)
2007
Average
Pay
Rate
Average
Receive
Rate
Interest Rate Swaps(1)
Expected
Maturity Date
2008
2009
2010
2011(2)
2012
2013
2014
2015
2016
2017(2)
2019
2020
2023
$ —
—
—
4.6
—
—
—
—
—
6.9
—
—
—
— %
—
—
1.77
—
—
—
—
—
2.10
—
—
—
— %
—
—
4.00
—
—
—
—
—
5.00
—
—
—
$ 109.2
50.5
23.8
31.1
12.3
42.0
16.3
29.0
24.0
15.5
44.3
14.7
6.5
4.68%
4.95
4.90
4.95
4.91
4.85
4.90
4.84
5.09
4.87
4.90
4.97
5.10
5.16%
4.04
4.01
4.12
4.81
4.52
5.09
4.84
4.81
5.28
4.88
4.00
5.10
$ 11.5
1.97
4.60
$ 419.2
4.86
4.70
(1) Interest rate swaps with Lehman Brothers Special Financing, Inc. are not included in this table.
(2) This interest rate swap and the related deposit account were terminated subsequent to
December 31, 2008.
Note 16: Commitments and Credit Risk
Commitments to Originate Loans
Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since a significant portion of the
commitments may expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each customer’s
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based on management’s credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable, inventory, property and
equipment, commercial real estate and residential real estate.
87
40
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
At December 31, 2008 and 2007, the Bank had outstanding commitments to originate loans and
fund commercial construction aggregating approximately $900,000 and $30,777,000, respectively.
The commitments extend over varying periods of time with the majority being disbursed within a
30- to 180-day period.
Mortgage loans in the process of origination represent amounts that the Bank plans to fund within a
normal period of 60 to 90 days, many of which are intended for sale to investors in the secondary
market. Total mortgage loans in the process of origination amounted to approximately $7,516,000
and $905,000 at December 31, 2008 and 2007, respectively.
Letters of Credit
Standby letters of credit are irrevocable conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party. Financial standby letters of credit are primarily
issued to support public and private borrowing arrangements, including commercial paper, bond
financing and similar transactions. Performance standby letters of credit are issued to guarantee
performance of certain customers under nonfinancial contractual obligations. The credit risk
involved in issuing standby letters of credit is essentially the same as that involved in extending
loans to customers. Fees for letters of credit issued after December 31, 2002, are initially recorded
by the Bank as deferred revenue and are included in earnings at the termination of the respective
agreements. Should the Bank be obligated to perform under the standby letters of credit the Bank
may seek recourse from the customer for reimbursement of amounts paid.
The Company had total outstanding standby letters of credit amounting to approximately
$16,335,000 and $20,422,000 at December 31, 2008 and 2007, respectively, with $11,769,000 and
$15,447,000, respectively, of the letters of credit having terms up to three years. The remaining
$4,566,000 and $4,975,000 at December 31, 2008 and 2007, respectively, consisted of an
outstanding letter of credit to guarantee the payment of principal and interest on a Multifamily
Housing Refunding Revenue Bond Issue.
Lines of Credit
Lines of credit are agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Lines of credit generally have fixed expiration dates. Since a
portion of the line may expire without being drawn upon, the total unused lines do not necessarily
represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management’s credit evaluation of the counterparty. Collateral
held varies but may include accounts receivable, inventory, property and equipment, commercial
real estate and residential real estate. The Bank uses the same credit policies in granting lines of
credit as it does for on-balance-sheet instruments.
88
41
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
At December 31, 2008, the Bank had granted unused lines of credit to borrowers aggregating
approximately $106,909,000 and $45,714,000 for commercial lines and open-end consumer lines,
respectively. At December 31, 2007, the Bank had granted unused lines of credit to borrowers
aggregating approximately $318,321,000 and $43,915,000 for commercial lines and open-end
consumer lines, respectively.
Credit Risk
The Bank grants collateralized commercial, real estate and consumer loans primarily to customers
in the southwest and central portions of Missouri. Although the Bank has a diversified portfolio,
loans aggregating approximately $214,042,000 and $215,708,000 at December 31, 2008 and 2007,
respectively, are secured by motels, restaurants, recreational facilities, other commercial properties
and residential mortgages in the Branson, Missouri, area. Residential mortgages account for
approximately $85,843,000 and $79,628,000 of this total at December 31, 2008 and 2007,
respectively.
In addition, loans aggregating approximately $218,529,000 and $250,205,000 at December 31,
2008 and 2007, respectively, are secured by apartments, condominiums, residential and
commercial land developments, industrial revenue bonds and other types of commercial properties
in the St. Louis, Missouri, area.
Note 17: Additional Cash Flow Information
Noncash Investing and Financing Activities
Real estate acquired in settlement of
loans
Sale and financing of foreclosed assets
Conversion of foreclosed assets to
premises and equipment
Dividends declared but not paid
Additional Cash Payment Information
Interest paid
Income taxes paid
Income taxes refunded
2008
2007
(In Thousands)
2006
$31,600
$7,268
—
$2,618
$70,155
$4,590
$172
$24,615
$5,759
$300
$2,412
$92,127
$8,044
—
$7,869
$1,019
—
$2,188
$79,659
$12,938
—
89
42
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Note 18: Employee Benefits
The Company participates in a multiemployer defined benefit pension plan covering all employees
who have met minimum service requirements. Effective July 1, 2006, this plan was closed to new
participants. Employees already in the plan will continue to accrue benefits. The Company’s
policy is to fund pension cost accrued. Employer contributions charged to expense for the years
ended December 31, 2008, 2007 and 2006, were approximately $1.2 million, $1.1 million and $1.5
million, respectively. As a member of a multiemployer pension plan, disclosures of plan assets and
liabilities for individual employers are not required or practicable.
The Company has a defined contribution retirement plan covering substantially all employees. In
2006, the Company matched 100% of the employee’s contribution on the first 3% of the
employee’s compensation, and also matched 50% of the employee’s contribution on the next 2% of
the employee’s compensation. Effective January 1, 2007, the Company matches 100% of the
employee’s contribution on the first 4% of the employee’s compensation, and also matches 50% of
the employee’s contribution on the next 2% of the employee’s compensation. Employer
contributions charged to expense for the years ended December 31, 2008, 2007 and 2006, were
approximately $673,000, $642,000 and $520,000, respectively.
Note 19: Stock Option Plan
The Company established the 1989 Stock Option and Incentive Plan for employees and directors of
the Company and its subsidiaries. Under the plan, stock options or other awards could be granted
with respect to 2,464,992 (adjusted for stock splits) shares of common stock. This plan has
terminated; therefore, no new stock options or other awards may be granted under this plan. At
December 31, 2008, there were 2,450 options outstanding under this plan.
The Company established the 1997 Stock Option and Incentive Plan for employees and directors of
the Company and its subsidiaries. Under the plan, stock options or other awards could be granted
with respect to 1,600,000 (adjusted for stock splits) shares of common stock. Upon stockholders’
approval of the 2003 Stock Option and Incentive Plan, the 1997 Stock Option and Incentive Plan
was frozen; therefore, no new stock options or other awards may be granted under this plan. At
December 31, 2008, there were 113,112 options outstanding under this plan.
The Company established the 2003 Stock Option and Incentive Plan for employees and directors of
the Company and its subsidiaries. Under the plan, stock options or other awards could be granted
with respect to 1,196,448 (adjusted for stock splits) shares of common stock. At December 31,
2008, there were 584,835 options outstanding under the plan.
Stock options may be either incentive stock options or nonqualified stock options, and the option
price must be at least equal to the fair value of the Company’s common stock on the date of grant.
Options are granted for a 10-year term and generally become exercisable in four cumulative annual
installments of 25% commencing two years from the date of grant. The Stock Option Committee
may accelerate a participant’s right to purchase shares under the plan.
90
43
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Stock awards may be granted to key officers and employees upon terms and conditions determined
solely at the discretion of the Stock Option Committee.
The table below summarizes transactions under the Company’s stock option plans:
Available To
Grant
Shares Under
Option
769,635
(94,720)
—
—
10,913
685,828
(99,710)
—
—
41,540
627,658
(72,030)
—
—
30,560
688,892
94,720
(89,192)
(3,150)
(10,913)
680,357
99,710
(65,609)
(2,625)
(41,540)
670,293
72,030
(1,972)
(9,394)
(30,560)
$
Weighted
Average
Exercise
Price
21.877
30.600
(14.249)
(16.752)
(26.098)
24.048
25.459
(17.618)
(16.457)
(29.010)
24.423
8.516
(13.233)
(16.229)
(26.794)
Balance, December 31, 2005
Granted
Exercised
Forfeited from terminated plan(s)
Forfeited from current plan(s)
Balance, December 31, 2006
Granted
Exercised
Forfeited from terminated plan(s)
Forfeited from current plan(s)
Balance, December 31, 2007
Granted
Exercised
Forfeited from terminated plan(s)
Forfeited from current plan(s)
Balance, December 31, 2008
586,188
700,397
$
23.003
The Company’s stock option grants contain terms that provide for a graded vesting schedule
whereby portions of the options vest in increments over the requisite service period. These options
typically vest one-fourth at the end of years two, three, four and five from the grant date. As
provided for under SFAS No. 123(R), the Company has elected to recognize compensation expense
for options with graded vesting schedules on a straight-line basis over the requisite service period
for the entire option grant. In addition, SFAS No. 123(R) requires companies to recognize
compensation expense based on the estimated number of stock options for which service is
expected to be rendered. Because the historical forfeitures of its share-based awards have not been
material, the Company has not adjusted for forfeitures in its share-based compensation expensed
under SFAS No. 123(R).
91
44
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
The fair value of each option award is estimated on the date of the grant using the Black-Scholes
option pricing model with the following assumptions:
December 31, December 31, December 31,
2007
2006
2008
Expected dividends per share
Risk-free interest rate
Expected life of options
Expected volatility
Weighted average fair value of
options granted during year
$0.72
2.05%
5 years
46.93%
$0.68
4.21%
5 years
21.89%
$0.59
4.71%
5 years
23.19%
$1.72
$5.01
$7.26
Expected volatilities are based on the historical volatility of the Company’s stock, based on the
monthly closing stock price. The expected term of options granted is based on actual historical
exercise behavior of all employees and directors and approximates the graded vesting period of the
options. Expected dividends are based on the annualized dividends declared at the time of the
option grant. The risk-free interest rate is based on the five-year treasury rate on the grant date of
the options.
The following table presents the activity related to options under all plans for the year ended
December 31, 2008.
Options outstanding, January 1, 2008
Granted
Exercised
Forfeited
Options outstanding, December 31,
2008
Options exercisable, December 31,
2008
Weighted
Average
Exercise
Price
$24.423
8.516
13.233
24.310
23.003
Options
670,293
72,030
(1,972)
(39,954)
700,397
453,474
23.358
92
Weighted
Average
Remaining
Contractual
Term
5.68
—
—
—
6.21
4.90
45
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
For the years ended December 31, 2008, 2007 and 2006, options granted were 72,030, 99,710 and
94,720, respectively. The total intrinsic value (amount by which the fair value of the underlying
stock exceeds the exercise price of an option on exercise date) of options exercised during the years
ended December 31, 2008, 2007 and 2006, was $7,000, $605,000 and $1.3 million, respectively.
Cash received from the exercise of options for the years ended December 31, 2008, 2007 and 2006,
was $26,000, $1.8 million and $1.3 million, respectively. The actual tax benefit realized for the tax
deductions from option exercises totaled $182, $238,000 and $715,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.
The following table presents the activity related to nonvested options under all plans for the year
ended December 31, 2008.
Nonvested options, January 1, 2008
Granted
Vested this period
Nonvested options forfeited
Options
264,109
72,030
(72,201)
(17,015)
Nonvested options, December 31, 2008
246,923
Weighted
Average
Exercise
Price
Weighted
Average
Grant Date
Fair Value
$27.002
8.516
24.860
25.338
19.968
$5.976
1.718
5.681
5.724
4.354
At December 31, 2008, there was $1.0 million of total unrecognized compensation cost related to
nonvested options granted under the Company’s plans. This compensation cost is expected to be
recognized through 2013, with the majority of this expense recognized in 2009 and 2010.
The following table further summarizes information about stock options outstanding at
December 31, 2008:
Range of
Exercise Prices
$7.688 to $9.078
$10.110 to $13.594
$18.188 to $25.000
$25.480 to $36.390
Options Outstanding
Weighted
Average
Remaining
Contractual
Life
Number
Outstanding
90,275
46,452
204,415
359,255
7.67 years
2.80 years
4.59 years
7.20 years
Weighted
Average
Exercise
Price
$8.290
$12.392
$20.044
$29.756
Options Exercisable
Number
Exercisable
24,145
42,952
196,415
189,962
Weighted
Average
Exercise
Price
$8.100
$12.578
$19.917
$31.293
700,397
6.21 years
$23.003
453,474
$23.358
93
46
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Note 20: Significant Estimates and Concentrations
Accounting principles generally accepted in the United States of America require disclosure of
certain significant estimates and current vulnerabilities due to certain concentrations. Estimates
related to the allowance for loan losses are reflected in the footnote regarding loans. Current
vulnerabilities due to certain concentrations of credit risk are discussed in the footnotes on loans,
deposits and on commitments and credit risk.
Other significant estimates not discussed in those footnotes include valuations of foreclosed assets
held for sale. 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.
Current Economic Conditions
The current economic environment presents financial institutions with unprecedented
circumstances and challenges, which in some cases have resulted in large declines in the fair values
of investments and other assets, constraints on liquidity and significantly credit quality problems,
including severe volatility in the valuation of real estate and other collateral supporting loans. The
financial statements have been prepared using values and information currently available to the
Company.
Given the volatility of current economic conditions, the values of assets and liabilities recorded in
the financial statements could change rapidly, resulting in material future adjustments in asset
values, the allowance for loan losses or capital that could negatively impact the Company’s ability
to meet regulatory capital requirements and maintain sufficient liquidity.
Note 21: Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can result in certain
mandatory and possibly additional discretionary actions by regulators that, if undertaken, could
have a direct and material effect on the Company’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Company and the Bank
must meet specific capital guidelines that involve quantitative measures of the Company’s and the
Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Company’s and the Bank’s capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk weightings and other
factors.
94
47
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Quantitative measures established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I Capital (as
defined in the regulations) to risk-weighted assets (as defined) and of Tier I Capital (as defined) to
adjusted tangible assets (as defined). Management believes, as of December 31, 2008, that the
Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2008, the most recent notification from the Bank’s regulators categorized the
Bank as well capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based
and Tier 1 leverage capital ratios as set forth in the table. There are no conditions or events since
that notification that management believes have changed the Bank’s category.
The Company’s and the Bank’s actual capital amounts and ratios are presented in the following
table. No amount was deducted from capital for interest-rate risk.
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Amount
Ratio
(In Thousands)
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
As of December 31, 2008
Total risk-based capital
Great Southern Bancorp, Inc.
Great Southern Bank
$286,332
$226,091
15.1%
11.9%
≥$151,806
≥$151,543
≥8.0%
≥8.0%
N/A
≥$189,429
N/A
≥10.0%
Tier I risk-based capital
Great Southern Bancorp, Inc.
Great Southern Bank
$262,545
$202,345
13.8%
10.7%
≥$75,903
≥$75,772
≥4.0%
≥4.0%
N/A
≥$113,657
N/A
≥6.0%
Tier I leverage capital
Great Southern Bancorp, Inc.
Great Southern Bank
$262,545
$202,345
10.1%
7.8%
≥$104,471
≥$104,336
≥4.0%
≥4.0%
N/A
≥$130,420
N/A
≥5.0%
As of December 31, 2007
Total risk-based capital
Great Southern Bancorp, Inc.
Great Southern Bank
$243,777
$239,568
11.9%
11.7%
≥$164,465
≥$164,161
≥8.0%
≥8.0%
N/A
≥$205,201
N/A
≥10.0%
Tier I risk-based capital
Great Southern Bancorp, Inc.
Great Southern Bank
$218,318
$214,109
10.6%
10.4%
≥$82,233
≥$82,080
≥4.0%
≥4.0%
N/A
≥$123,120
N/A
≥6.0%
Tier I leverage capital
Great Southern Bancorp, Inc.
Great Southern Bank
$218,318
$214,109
9.1%
9.0%
≥$95,603
≥$95,410
≥4.0%
≥4.0%
N/A
≥$119,263
N/A
≥5.0%
95
48
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
The Company and the Bank are subject to certain restrictions on the amount of dividends that may
be declared without prior regulatory approval. At December 31, 2008 and 2007, the Company and
the Bank exceeded their minimum capital requirements. The entities may not pay dividends which
would reduce capital below the minimum requirements shown above.
Note 22: Litigation Matters
In the normal course of business, the Company and its subsidiaries are subject to pending and
threatened legal actions, some for which the relief or damages sought are substantial. After
reviewing pending and threatened litigation with counsel, management believes at this time that the
outcome of such litigation will not have a material adverse effect on the results of operations or
stockholders’ equity. We are not able to predict at this time whether the outcome or such actions
may or may not have a material adverse effect on the results of operations in a particular future
period as the timing and amount of any resolution of such actions and its relationship to the future
results of operations are not known.
Note 23: Summary of Unaudited Quarterly Operating Results
Following is a summary of unaudited quarterly operating results for the years 2008, 2007 and
2006:
Interest income
Interest expense
Provision for loan losses
Net realized gains (losses) and
impairment on available-for-sale
securities
Noninterest income
Noninterest expense
Provision (credit) for income taxes
Net income (loss)
Net income (loss) available to
common shareholders
Earnings (loss) per common share –
diluted
2008
Three Months Ended
March 31
June 30
September 30 December 31
(In Thousands, Except Per Share Data)
$38,340
20,497
37,750
$35,664
17,533
4,950
$35,024
16,657
4,500
$35,786
18,544
5,000
6
10,182
14,116
(8,688)
(15,153)
(15,153)
(1.13)
96
1
9,864
13,557
3,156
6,332
6,332
.47
(5,293)
1,789
14,650
182
824
824
.06
(2,056)
6,309
13,383
1,599
3,569
3,327
.25
49
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Interest income
Interest expense
Provision for loan losses
Net realized gains (losses) and
impairment on available-for-sale
securities
Noninterest income
Noninterest expense
Provision for income taxes
Net income
Earnings per common share – diluted
Interest income
Interest expense
Provision for loan losses
Net realized gains (losses) on
available-for-sale securities
Noninterest income
Noninterest expense
Provision for income taxes
Net income
Earnings per common share – diluted
2007
Three Months Ended
March 31
June 30
September 30 December 31
(In Thousands, Except Per Share Data)
$39,458
22,272
1,350
$41,703
23,215
1,425
$41,976
24,044
1,350
$40,733
22,934
1,350
—
6,965
11,918
3,548
7,335
.53
—
7,927
12,742
4,041
8,207
.60
4
7,610
13,320
3,555
7,317
.54
(1,131)
6,915
13,726
3,199
6,439
.48
2006
Three Months Ended
March 31
June 30
September 30 December 31
(In Thousands, Except Per Share Data)
$34,197
17,565
1,325
$37,228
20,105
1,425
$39,204
21,339
1,350
$39,452
21,845
1,350
—
7,123
11,750
3,484
7,196
.52
(29)
7,441
12,115
3,500
7,524
.54
28
7,090
12,288
3,287
8,030
.58
—
7,978
12,654
3,588
7,993
.58
97
50
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Note 24: Condensed Parent Company Statements
The condensed statements of financial condition at December 31, 2008 and 2007, and statements of
operations and cash flows for the years ended December 31, 2008, 2007 and 2006, for the parent
company, Great Southern Bancorp, Inc., were as follows:
Statements of Financial Condition
Assets
Cash
Available-for-sale securities
Investment in subsidiary bank
Income taxes receivable
Deferred income taxes
Premises and equipment
Prepaid expenses
Other assets
Liabilities and Stockholders’ Equity
Accounts payable and accrued expenses
Subordinated debentures issued to capital trust
Preferred stock
Common stock
Common stock warrants
Additional paid-in capital
Retained earnings
Unrealized loss on available-for-sale securities, net
December 31,
2008
2007
(In Thousands)
$
$
60,943
1,359
203,870
656
17
12
13
1,164
4,335
2,335
215,602
91
59
134
18
1,172
$
268,034
$
223,746
$
$
3,018
30,929
55,580
134
2,452
19,811
156,247
(137)
2,946
30,929
—
134
—
19,342
170,933
(538)
$
268,034
$
223,746
98
51
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Statements of Operations
Income
Dividends from subsidiary bank
Interest and dividend income
Net realized losses on
impairments of available-for-
sale securities
Other income
Expense
Provision for loan losses
Operating expenses
Interest expense
Income before income tax and
equity in undistributed earnings
of subsidiaries
Credit for income taxes
Income before equity in earnings
of subsidiaries
Equity in undistributed earnings of
subsidiaries
2008
2007
(In Thousands)
2006
$
40,000 $
114
10,000
8
$
(1,718)
145
38,541
—
1
10,009
29,579
1,091
1,462
32,132
—
1,109
1,914
3,023
10,000
47
—
1
10,048
—
1,779
1,334
3,113
6,409
(11,716)
6,986
(972)
6,935
(981)
18,125
7,958
7,916
(22,553)
21,341
22,827
Net income (loss)
$
(4,428) $
29,299
$
30,743
99
52
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Statements of Cash Flows
Operating Activities
Net income (loss)
Items not requiring (providing) cash
Equity in undistributed earnings of subsidiary
Depreciation
Amortization
Provision for loan losses
Net realized gains on sale of fixed assets
Net realized losses on impairments of available-
for-sale securities
Net realized (gains) losses on other investments
Changes in
Prepaid expenses and other assets
Accounts receivable
Accounts payable and accrued expenses
Income taxes
Net cash provided by operating activities
Investing Activities
Investment in subsidiaries
Purchase of fixed assets
Proceeds from sale of fixed assets
Purchase of loans
Net change in loans
Purchase of available-for-sale securities
Net cash used in investing activities
Financing Activities
Proceeds from issuance of preferred stock and related
common stock warrants
Proceeds from issuance of trust preferred debentures
Repayment of trust preferred debentures
Dividends paid
Stock options exercised
Company stock purchased
Net cash provided by (used in) financing
activities
Increase (Decrease) in Cash
Cash, Beginning of Year
Cash, End of Year
Additional Cash Payment Information
Interest paid
2008
2007
(In Thousands)
2006
$
(4,428)
$
29,299
$
30,743
22,553
7
—
29,579
(151)
1,718
8
5
—
(134)
(565)
48,592
(10,500)
(34)
300
(30,000)
421
(620)
(40,433)
58,000
—
—
(9,637)
494
(408)
48,449
56,608
4,335
(21,341)
10
—
—
—
—
(1)
(3)
—
189
(12)
8,141
—
—
—
—
—
(2,006)
(2,006)
—
5,000
—
(8,981)
1,673
(8,756)
(11,064)
(4,929)
9,264
$
60,943
$
4,335
$
(22,827)
9
806
—
—
—
(1)
(1)
113
198
(39)
9,001
—
—
—
—
—
(500)
(500)
—
25,000
(17,250)
(7,947)
1,752
(3,722)
(2,167)
6,334
2,930
9,264
$1,559
$1,751
$1,136
100
53
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
Note 25: Preferred Stock and Common Stock Warrant
On December 5, 2008, as part of the Troubled Asset Relief Program (TARP) Capital Purchase
Program of the United States Department of the Treasury (Treasury), the Company entered into a
Letter Agreement and Securities Purchase Agreement (collectively, the “Purchase Agreement”)
with Treasury, pursuant to which the Company (i) sold to Treasury 58,000 shares of the
Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred
Stock”), having a liquidation preference amount of $1,000 per share, for a purchase price of $58.0
million in cash and (ii) issued to Treasury a ten-year warrant (the “Warrant”) to purchase
909,091 shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”),
at an exercise price of $9.57 per share.
The Series A Preferred Stock will qualify as Tier 1 capital and will pay cumulative dividends on
the liquidation preference amount on a quarterly basis at a rate of 5% per annum for the first five
years, and 9% per annum thereafter. Pursuant to the Purchase Agreement, subject to the prior
approval of the Board of Governors of the Federal Reserve System, the Series A Preferred Stock is
redeemable at the option of the Company in whole or in part at a redemption price of 100% of the
liquidation preference amount plus any accrued and unpaid dividends, provided that the Series A
Preferred Stock may be redeemed prior to the first dividend payment date falling after the third
anniversary of the issue date (December 5, 2011) only if (i) the Company has raised aggregate
gross proceeds in one or more Qualified Equity Offerings of at least $14.5 million and (ii) the
aggregate redemption price does not exceed the aggregate net proceeds from such Qualified Equity
Offerings. A “Qualified Equity Offering” is defined as the sale for cash by the Company of
preferred stock or common stock that qualifies as Tier 1 capital. These provisions have been
modified as discussed below.
The exercise price of and number of shares of Common Stock underlying the Warrant are subject
to customary anti-dilution adjustments. Treasury may not transfer a portion or portions of the
Warrant with respect to, and/or exercise the Warrant for more than one-half of, the 909,091 shares
of Common Stock underlying the Warrant until the earlier of (i) the date on which the Company
has received aggregate gross proceeds of at least $58.0 million from one or more Qualified Equity
Offerings and (ii) December 31, 2009. If the Company completes one or more Qualified Equity
Offerings on or prior to December 31, 2009, that result in the Company receiving aggregate gross
proceeds of at least $58.0 million, then the number of the shares of Common Stock underlying the
Warrant will be reduced to 50% of the original number of shares of Common Stock underlying the
Warrant. Treasury has agreed not to exercise voting power with respect to any shares of Common
Stock issued to it upon exercise of the Warrant.
The enactment of the American Recovery and Reinvestment Act of 2009 on February 17, 2009,
permits the Company to repay the Treasury without penalty and without the need to raise new
capital, subject to the Treasury’s consultation with the recipient’s appropriate regulatory agency.
Additionally, upon repayment the Treasury will liquidate all outstanding warrants at their current
market value.
101
54
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
The proceeds from the TARP Capital Purchase Program were allocated between the Series A
Preferred Stock and the Warrant based on relative fair value, which resulted in an initial carrying
value of $55.5 million for the Series A Preferred Shares and $2.5 million for the Warrant. The
resulting discount to the Series A Preferred Shares of $2.5 million will accrete on a level yield
basis over five years ending December 2013 and is being recognized as additional preferred stock
dividends. The fair value assigned to the Series A Preferred Shares was estimated using a
discounted cash flow model. The discount rate used in the model was based on yields on
comparable publicly traded perpetual preferred stocks. The fair value assigned to the warrant was
based on a Black Scholes option-pricing model using several inputs, including risk-free rate,
expected stock price volatility and expected dividend yield.
The Series A Preferred Stock and the Warrant were issued in a private placement exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Securities
Act”). In accordance with the Purchase Agreement, the Company subsequently registered the
Series A Preferred Stock, the Warrant and the shares of Common Stock underlying the Warrant
under the Securities Act.
Note 26: Subsequent Event
In addition to the regular quarterly deposit insurance assessments, due to losses and projected
losses attributed to failed institutions, on February 27, 2009, the FDIC adopted a rule, effective
April 1, 2009, imposing on every insured institution a special assessment equal to 20 basis points
of its assessment base as of June 30, 2009, to be collected on September 30, 2009. There is a
proposal under discussion, under which the FDIC’s line of credit with the U.S. Treasury would be
increased and the FDIC would reduce the special assessment to 10 basis points. There can be no
assurance whether the proposal will become effective. The special assessment rule also authorizes
the FDIC to impose additional special assessments if the reserve ratio of the DIF is estimated to fall
to a level that the FDIC’s board believes would adversely affect public confidence or that is close
to zero or negative. Any additional special assessment would be in amount up to 10 basis points on
the assessment base for the quarter in which it is imposed and would be collected at the end of the
following quarter.
102
55
103
Officers p20-Cover 3 gry 4/1/09 5:19 PM Page 20
D I R E C T O R S A N D E X E C U T I V E O F F I C E R S
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.
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
104
Officers p20-Cover 3 gry 4/1/09 5:19 PM Page 21
G R E A T S O U T H E R N L E A D E R S H I P T E A M
Left to right
Steve Mitchem
Chief Lending Officer
Kelly Polonus
Director of Corporate Communications
Doug Marrs
Director of Operations/Secretary
Rex Copeland
Chief Financial Officer/Treasurer
Byron Robison
Insurance Agency Manager
Lin Thomason
Director of Information Services
Shannon Thomason
Director of Internal Audit and
Compliance Officer
Joe Turner
President and
Chief Executive Officer
Tammy Baurichter
Controller
Kris Conley
Managing Director of Travel
Teresa Chasteen-Calhoun
Director of Marketing
Matt Snyder
Director of Human Resources
Bryan Tiede
Director of Risk Management
Debbie Flowers
Director of Credit Risk Management
Barby Pohl
Director of Retail Banking
Covers 1&4 08 gry 4/1/09 5:32 PM Page C4
P O I S E D A N D P O S I T I O N E D