2009 AnnuAl RepoRt FoR ShAReholdeRS
p r o g r e s s a s p r o m i s e d
Cov 2 & Pres Message p1-8 4/2/10 4:47 PM Page C2
ANNUAL MEETING
The 21st Annual Meeting of Shareholders will
be held at 10:00 a.m. CDT on Wednesday, May
12, 2010, at the Great Southern Operations
Center, 218 S. Glenstone, Springfield, Missouri.
CORPORATE PROFILE
Great Southern Bank was founded in
1923 with a $5,000 investment, four
employees and 936 customers. Today,
it has grown to $3.6 billion in total
assets, with more than 1,000 dedicated
associates serving in excess of 214,000
customers.
Headquartered in Springfield, Mo.,
the Company operates 72 retail
banking centers and more than 200
ATMs in Missouri, Iowa, Kansas and
Nebraska.The Company also serves
lending needs through a loan
production office in 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.
CORPORATE MISSION
The Company’s mission is to build
winning relationships with our
customers, associates, shareholders
and communities. We carry out our
mission through our core values of
teamwork, mutual respect, doing
what’s right and uncompromising
ethical standards.
We are deeply committed to our
relationships with our four
constituencies.
We build winning relationships with
our customers and help them make
their lives better and easier with our
products and services.
We build winning relationships with
our associates, who have chosen our
company to share their skills and
talents and who deserve the
opportunity to reach their full
potential.
We build winning relationships with
our shareholders, who have entrusted
us with their wealth and financial
future, and with our communities,
upon which our company’s strength,
prosperity and future rest.
STOCK INFORMATION
The Company’s
Common Stock is listed on
The NASDAQ Global Select
Market under the symbol
“GSBC”.
As of December 31,
2009, there were
13,406,403 total shares of
common stock outstanding
and approximately 2,300
shareholders of record.
The last sale price of the
Company’s Common Stock
on December 31, 2009, was
$21.36.
HIGH/LOW STOCK PRICE
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended
December 31, 2009
LOW
HIGH
$ 9.04
$15.26
13.16
22.96
18.33
24.47
20.68
24.60
DIVIDEND DECLARATIONS
Year Ended
December 31, 2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$.180
.180
.180
.180
Year Ended
December 31, 2008
LOW
HIGH
$21.81 $15.32
7.73
15.95
7.82
15.50
7.03
13.15
Year Ended
December 31, 2008
$.180
.180
.180
.180
GENERAL
INFORMATION
CORPORATE HEADQUARTERS
1451 E. Battlefield
Springfield, MO 65804
1 (800) 749-7113
MAILING ADDRESS
P.O. Box 9009, Springfield, MO 65808
DIVIDEND REINVESTMENT
For details on the automatic reinvestment
of dividends in common stock of the
Company call:
1 (800) 725-6651 or write:
Great Southern Bancorp, Inc.
Shareholder Relations
P.O. Box 9009
Springfield, MO 65808
FORM 10-K
The Annual Report on Form 10-K filed with
the Securities and Exchange Commission
may be obtained from the Company’s Web
site at www.greatsouthernbank.com
or without charge by request to:
Rex Copeland
Treasurer
Great Southern Bancorp, Inc.
P.O. Box 9009, Springfield, MO 65808
INVESTOR RELATIONS
Teresa Chasteen-Calhoun
or Kelly Polonus
Great Southern Bank
P.O. Box 9009, Springfield, MO 65808
AUDITORS
BKD, LLP
P.O. Box 1190
Springfield, MO 65801- 1190
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
Cov 2 & Pres Message p2-8 4/6/10 4:38 PM Page 2
T O O U R S H A R E H O L D E R S
On last year’s Great Southern Annual
Report cover we declared that our
Company was “Poised and Positioned.”
We reported that we were poised and
positioned to serve our customers’
changing needs, to navigate successfully
through the recession, and to take
advantage of acquisition opportunities
that would likely arise during 2009.
We said in the 2008 Report:“We
expect that 2009 will be another
difficult year for the industry, but 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 growth. Our number one
business development goal in 2009 is to
generate deposits and to expand
customer relationships. Our focus on
doing what is right for our customers,
our communities and our shareholders
will be key to our success.”
We are now pleased to present this
year’s Annual Report entitled “Progress
as Promised,” which is a reflection of
our well-positioned Company and our
accomplishments in 2009.
2009 – Progress as Promised
In 2009, the Company experienced
unprecedented growth and delivered
record financial results. Our well-
capitalized position and historically
high liquidity levels enabled us to make
the Great Southern franchise more
diverse and expansive while enhancing
the Company’s long-term value.We
added 33 new banking centers – 31
through two FDIC-assisted transactions
and two through de novo openings – in
primarily all new markets to bring our
banking center network total to 72 in
2
Joseph W. Turner
President and Chief Executive Officer
William V. Turner
Chairman of the Board
four states. More importantly, we
welcomed 306 talented associates and
customers in 48,000 households to
Great Southern. The Company ended
the year at $3.6 billion in assets, up
from $2.7 billion at Dec. 31, 2008,
representing a 33% increase.Total
deposits were up $805.9 million, or
42.2%, and total gross loans, including
FDIC-covered loans, increased $376.1
million, or 21.5%, from the end of 2008.
We reported record annual earnings
available to common shareholders of
$61.7 million, or $4.44 per diluted
common share.
FDIC-Assisted Acquisitions
The FDIC-assisted acquisitions of
certain assets and the assumptions of
certain liabilities of Paola, Kan.-based
Cov 2 & Pres Message p2-8 4/6/10 4:38 PM Page 3
TeamBank, N.A. in March 2009 and
Sioux City, Iowa-based Vantus Bank in
September 2009 have contributed much
to our Company. These transactions
were not only compelling financial
transactions, but more importantly,
excellent strategic opportunities for us.
The Company provided financial details
about these transactions in Current
Reports on Form 8-K/A in 2009.
In 2009, one-time non-interest
income gains totaling $89.8 million
(pre-tax) were recorded as a result of
the TeamBank ($43.9 million) and
Vantus Bank ($45.9 million)
transactions.The gains were based upon
the estimated fair value of the assets
acquired and liabilities assumed.
Additional income may be recognized in
future periods as loans are collected.
The fair value of the assets acquired
totaling $1.1 billion are covered by
FDIC loss share agreements, which
substantially protect the Company from
losses in both loan portfolios. These
acquisitions have also importantly
generated additional deposits, liquidity
and capital for the Company.
The TeamBank acquisition added 16
banking centers with six locations in
the Kansas City metropolitan area, five
facilities in eastern Kansas, two
locations in southwestern Missouri and
three in metropolitan Omaha, Neb. The
Vantus Bank acquisition added 15
locations with eight banking centers in
the Sioux City area in northwestern
Iowa, one location in South Sioux City,
Neb., and six offices in central Iowa,
including four in the Des Moines
market area.
Both organizations were attractive to
us in that they had been in existence for
decades, had built strong customer
relationships and their markets
complemented our existing footprint
very well. Operational integration is
complete for both organizations and we
are very pleased with the quality of our
new markets both in terms of customer
relationships and our new associates.
Customer deposit retention has been
excellent with more than 98% of
deposits retained since the acquisition
date of both institutions. This stellar
retention rate is reflective of the
excellent customer relationships that
had been built prior to the acquisitions
and the exceptional work done by the
same local associates throughout the
transition to Great Southern. We are
delighted with the skill sets of our
newest associates and the contributions
they are making. We understand that
transitions can be difficult and we
appreciate their patience and dedication.
De Novo Growth
As market conditions warrant, the
Company maintains a strategy of
opening two to three banking centers
per year in strategic markets. In May
2009, we opened our first retail banking
center in the St. Louis market with a
full-service location in Creve Coeur, Mo.
This facility complements our loan
production office and two Great
Southern Travel agencies already
serving this market and is the
Company’s most successful banking
center opening to date generating more
than $95 million in customer deposits.
In September 2009, we also
strengthened our presence in Lee’s
Summit, Mo., a part of the Kansas City
metropolitan area, by opening our
second banking center in this growing
market. Great Southern now operates
eight retail banking centers in the
Kansas City area, which includes offices
acquired in the TeamBank acquisition.
2009 Record Performance
The headline for 2009 will be related
to the acquisitions and the one-time
gains we recorded as a result. But more
importantly, people who follow our
company will be looking at our core
operations and its potential earnings
power in the future. Overall, our core
operating engine is doing well,
especially in this economic
3
environment. As expected in 2009,
provisions for loan losses remained high
and we had significant increases in
expenses primarily related to higher
FDIC deposit insurance premiums, the
FDIC-assisted acquisitions and a higher
level of foreclosure expenses. We know
there is definitely room for
improvement in our operations and we
will continue to focus and pay attention
to our revenue and expense drivers
moving forward. We have to continually
look at how we’re serving our
customers and if we’re doing it by the
most effective and efficient means. Our
core operating engine needs to
continue to get stronger and more
diverse as we come out of the recession
and move into recovery.
As stated above, our assets grew by
approximately $900 million, or 33%, to
$3.6 billion in 2009.As of Dec. 31, 2009,
total stockholders’ equity was $298.9
million (8.2% of total assets), and
common stockholders’ equity was
$242.9 million (6.7% of total assets),
equivalent to a book value of $18.12 per
common share. Net income available to
common stockholders was $61.7
million, or $4.44 per diluted common
share, for the year ended Dec. 31, 2009.
The capital position of the Company
continued to be strong throughout
2009, significantly exceeding the “well
capitalized” thresholds established by
regulators. Our 2009 earnings
contributed to increases in common
stockholders’ equity, our tangible
common equity, and our regulatory
capital ratios. We continue to participate
in the U.S.Treasury’s Capital Purchase
Program (CPP). Our management team
and Board of Directors regularly review
our participation in the program. The
Company would be in a strong “well
capitalized” position without the CPP
funds; however, we have no immediate
plans to repay the funds due to the
continued uncertainty in the economy
and potential opportunities for growth
in the next 12 to 18 months.
Cov 2 & Pres Message p2-8 4/6/10 4:38 PM Page 4
Total gross loans, including FDIC-
covered loans, increased $376.1 million,
or 21.5%, from Dec. 31, 2008. As
compared to Dec. 31, 2008, and
excluding FDIC-covered loans,
construction and land development
loan balances were down $222.9
million, or 41.0%, while we saw
increases in balances in commercial real
estate loans, commercial business loans,
and single-family and multi-family real
estate loans. Consumer loan balances
were down slightly from the end of
2008 as demand was sluggish.
As expected, credit quality and the
resolution of non-performing assets
remained a focus for our Company. We
saw periodic increases and decreases in
non-performing loans and foreclosed
assets throughout the year. Non-
performing assets, excluding FDIC-
covered non-performing assets, at Dec.
31, 2009, were $65.0 million, a decrease
of $860,000 from Dec. 31, 2008. Non-
performing assets as a percentage of
total assets were 1.79% at Dec. 31, 2009,
compared to 2.48% at Dec. 31, 2008.
Compared to Dec. 31, 2008, non-
performing loans decreased $6.7 million
to $26.5 million while foreclosed assets
increased $5.8 million to $38.5 million.
Construction and land development
loans comprised $8.7 million, or 33%, of
the total $26.5 million of non-
performing loans at Dec. 31, 2009.
Problem credits continued to migrate
Our strong performance enabled us
through the credit resolution process.
Net charge-offs were $24.9 million in
the year ended Dec. 31, 2009. To remain
well reserved against inherent credit
losses, the allowance for loan losses
increased $10.9 million, or 37.5%, to
$40.1 million at December 31, 2009,
compared to $29.2 million at December
31, 2008. We believe our reserve is
adequate and is appropriate for current
conditions. The ratio of allowance for
loan losses to total loans, excluding
FDIC-covered loans, was 2.35% as of
Dec. 31, 2009, and 1.66% at Dec. 31,
2008.
The Company’s liquidity position
remained at historic high levels.We saw
significant improvement in our deposit
mix in 2009. Total deposits increased by
42.2% since Dec. 31, 2008, primarily due
to the FDIC-assisted acquisitions which
added $868.4 million in non-brokered
deposits, and also due to strong core
deposit growth in our original Great
Southern footprint. The deposit mix
shifted considerably with a 66.1%
reduction in brokered deposits and an
increase in demand deposit accounts
and retail certificates of deposit by
106% and 147%, respectively. The
Company also experienced growth in
CDARS® customer deposits during
2009 with an increase of $190.9
million, or 113.4%.
to continue to give back to the
communities we serve – all over our
expanded franchise. Both acquired
organizations shared in the same
philanthropic philosophy as Great
Southern and held the same belief that
our Company can only be as strong as
the communities we serve. We’re proud
to report that in 2009 we invested more
than $325,000 in charitable
contributions and sponsorships.
Hundreds of volunteer hours were also
generously given by our associates.
2010 – More Progress Ahead
We believe that the economic
environment will remain challenging
for the foreseeable future, but will offer
opportunities for well-positioned
institutions like Great Southern.
We expect the landscape to change
on many fronts; whether it’s regulatory
reform, rising interest rates or
competitive pressures. We are
anticipating many changes in our
industry and our objective is to have the
Company appropriately positioned to
comply with whatever new rules come
along, mitigate the associated risks of
operating in a rising interest rate
environment, and to deliver our
products and services better than
anyone else in our markets as customer
preferences evolve. Strategic
Five Year Cumulative Total Return**
Great Southern
Bancorp
NASDAQ
Financial
NASDAQ
Composite
Net Income***
(per share of common stock)
$4.44
$
160
140
120
100
80
60
40
20
$72.04
0
DEC 04
DEC 05
DEC 06
DEC 07
DEC 08
DEC 09
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
JUN
’90†
JUN
’95
DEC
’00
DEC
’05
DEC
’09
** 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, 2004 through December 31, 2009.
The graph assumes that $100 was invested in GSBC Common Stock on December 31, 2004 and that all dividends were reinvested.
† Figure stated is as if the Company was publicly traded for all of the
fiscal year 1990 (conversion was in Dec. 1989).
4
Cov 2 & Pres Message p2-8 4/6/10 4:39 PM Page 5
opportunities that may become
available through FDIC-assisted
transactions are very much on the radar
and will be a focus during the year.
Our most important objective in
2010, like every other year, is to focus
on our customers and their ever-
changing needs. The core of our overall
strategy is to acquire, retain and deepen
customer relationships. With our
expanded footprint and more diverse
customer base, it’s critical that we
consistently deliver our products and
services with unmatched service
excellence everywhere we operate and
in the most effective and efficient
manner. We know that we have a
“proving ground” with customers in
many of our new markets. We’ll work
hard to increase our recognition in
these communities and to make the
Great Southern sun logo a welcome and
familiar sight.
Credit quality and the resolution of
non-performing assets are also top
objectives in 2010. While we are
working through many of our problem
credits and making progress, we expect
non-performing assets, loan loss
provisions and net charge-offs to
continue to be elevated, but at
manageable levels. Based upon the
current lending environment and
economic conditions, the Company
does not expect to grow the overall
loan portfolio significantly at this time.
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 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.
The number of bank failures in 2010
is expected to surpass 2009 levels.The
pace of failures is expected to
accelerate in the coming months now
that the FDIC’s Deposit Insurance Fund
has been replenished and FDIC staffing
constraints are being remedied. Our
Company will continue to look for more
opportunities to enhance our franchise
through additional FDIC-assisted
transactions. We know that this unique
window of opportunity will close as the
banking industry heals itself and the
majority of the weaker players will be
consolidated through FDIC-assisted
transactions and other deals in the next
year or two. Bidding on FDIC deals has
become highly competitive as more and
more entities, including private
investment groups, have entered into
the bidding process. Based on the
current bidding environment, we’ll
continue to analyze the playing field
and submit bids that we believe make
long-term financial and operational
sense for our Company.
The Company expects to expand its
banking center network by three
locations in 2010, regardless of whether
we are a successful bidder in FDIC-
assisted transactions. The first banking
center should open in May 2010 in
Rogers, Ark., representing the
Company’s first retail banking presence
in the Northwest Arkansas region. The
Company announced its intention to
branch into Arkansas in February 2010
by acquiring a bank charter from
another Arkansas-based institution. The
banking center will operate in the same
location as the Company’s loan
production office and travel agency.
Additionally, the Company will build
its first facility in Forsyth, Mo., which is
part of the Branson, Mo., market area.
Located east of Branson, the facility will
complement the Company’s four
banking centers operating in this region
with three locations in Branson and one
in Kimberling City, Mo. A second full-
service banking center will also open in
the St. Louis metropolitan area.The
banking center will be located in Des
Peres, Mo., and is approximately seven
miles from the Company’s Creve Coeur,
Total Assets
in billions
$3.64
Total Deposits
in billions
$2.71
Total Loans
in billions
$2.09
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’09
2.5
2.0
1.5
1.0
0.5
0.0
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’09
2.0
1.5
1.0
0.5
0.0
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’09
Commercial Real Estate
& Construction Loans (1)
in millions
800
$759.6
700
600
500
400
300
200
100
0
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’09
*** 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.
(1) Excludes loans covered by loss sharing agreements.
5
Cov 2 & Pres Message p2-8 4/6/10 4:39 PM Page 6
Mo., facility. Both of these banking
centers are expected to open in late
2010.
No doubt, 2010 will be a challenging
year. However, we are confident that
progress will continue as we build out
our growing company. Our performance
in 2009 further bolstered our desire and
confidence to come out of this
recession even stronger and more
valuable than before the recession hit.
We will not merely survive the
recession, we believe that we are
positioned to thrive.
None of this, of course, would be
possible without our team of associates.
2009 was probably one of the most
challenging of many of our associates’
careers. Many went well beyond the call
of duty. We are humbled to work with
such a great team and are grateful to
each and every associate for their hard
work and commitment 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.
To the Great Southern Board of
Directors, we appreciate your guidance
and wisdom throughout 2009. Your
knowledge, management expertise and
thoughtful questions and advice guided
us well in our Company’s most
successful year yet.
And finally, we thank our
stockholders for your investment and
continued long-term support. Our
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
Joseph W.Turner
S E L E C T E D C O N S O L I D AT E D F I N A N C I A L D ATA
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
2009
2008
December 31,
2007
(Dollars in thousands)
2006
2005
$3,641,119
2,091,394
40,101
764,291
41,660
2,713,961
591,908
298,908
242,891
2,028,067
3,403,059
2,483,264
274,684
173,842
72
$2,659,923
1,721,691
29,163
647,678
32,659
1,908,028
500,030
234,087
178,507
1,842,002
2,522,004
1,901,096
183,625
95,784
39
$2,431,732
1,820,111
25,459
425,028
20,399
1,763,146
461,517
189,871
189,871
1,774,253
2,340,443
1,784,060
185,725
95,908
38
$2,240,308
1,674,618
26,258
344,192
4,768
1,703,804
325,900
175,578
175,578
1,653,162
2,179,192
1,646,370
165,794
91,470
37
$ 2,081,155
1,514,170
24,549
369,316
595
1,550,253
355,052
152,802
152,802
1,458,438
1,987,166
1,442,964
150,029
85,853
35
The tables on pages 6, 7 and 8 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, 2009, 2008, 2007, 2006
and 2005, are derived from our Consolidated Financial Statements, which have been audited by BKD, LLP. See Item 6,“Selected
Consolidated Financial Data,” 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.
6
Cov 2 & Pres Message p2-8 4/6/10 4:39 PM Page 7
S E L E C T E D C O N S O L I D AT E D F I N A N C I A L D ATA
Summary Statement of 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
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
Initial gain recognized on business acquisition
Accretion of income related to business
acquisition
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
2009
For the Year Ended December 31,
2006
2007
2008
(Dollars in thousands)
2005
$ 123,463
32,405
155,868
$ 119,829
24,985
144,814
$ 142,719
21,152
163,871
$ 133,094
16,987
150,081
$ 98,129
16,366
114,495
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
44
13
(1)
(7,386)
819
6,981
––
––
––
––
2,195
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)
(1,140)
962
1,632
––
––
––
––
1,829
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
––
1,567
1,498
––
––
––
––
1,847
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
$
$
$
42,269
7,873
4,969
986
56,097
58,398
4,025
54,373
8,726
13,309
983
85
(734)
1,430
––
(6,600)
3,408
––
––
952
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
54,087
5,352
6,393
773
66,605
89,263
35,800
53,463
6,775
17,669
2,889
2,787
(4,308)
672
1,184
––
––
89,795
2,733
2,588
122,784
40,450
12,506
2,789
5,716
1,488
1,195
1,828
2,778
4,959
––
4,486
78,195
98,052
33,005
$ 65,047
$
3,353
$ 61,694
7
Cov 2 & Pres Message p2-8 4/6/10 4:39 PM Page 8
S E L E C T E D C O N S O L I D AT E D F I N A N C I A L D ATA
Per Common Share Data:
Basic earnings per common share
Diluted earnings per common share
Cash dividends declared
Book value 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:(8)
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,
2007
(Dollars in thousands, except per share data)
2008
2006
$(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
2009
$4.61
4.44
0.72
18.12
13,390
13,406
13,382
1.91%
29.72
3.61
2.15
2.98
3.56
3.03
36.88
(1.31)
15.35
2005
$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
2.35%
1.66%
1.38%
1.54%
1.59%
2.99
151.38
1.44
1.79
1.24
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
77.06%
90.23%
103.23%
98.29%
97.67%
of average interest-bearing liabilities
102.17
108.98
112.71
114.26
113.05
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 and
Preferred Stock Dividend Requirement: :(7)
Including deposit interest
Excluding deposit interest
6.4%
6.5
7.1%
6.7
7.9%
7.7
7.6%
7.8
7.6%
7.2
15.0
16.3
8.6
12.9
14.2
7.4
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
2.30x
6.29x
0.88x
0.33x
1.47x
3.69x
1.55x
3.95x
1.57x
3.29x
(1) Net income (loss) divided by average total assets.
(2) Net income (loss) 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 and
preferred stock dividend requirement: (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.
(8) Excludes assets covered by FDIC loss sharing agreements.
8
2009 Financial Information
Contents
10 Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
54 Report of Independent Registered Public Accounting Firm.
55 Consolidated Statements of Financial Condition.
57 Consolidated Statements of Operations.
58 Consolidated Statements of Stockholders’ Equity.
60 Consolidated Statements of Cash Flows.
63 Notes to Consolidated Financial Statements.
9
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, (i) expected cost savings, synergies and other benefits from the Company’s merger and acquisition
activities might not be realized within the anticipated time frames or at all, and costs or difficulties relating to integration matters,
including but not limited to customer and employee retention, might be greater than expected; (ii) changes in economic
conditions, either nationally or in the Company’s market areas; (iii) fluctuations in interest rates; (iv) 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; (v) the possibility of other-than-temporary impairments of securities held in the
Company’s securities portfolio; (vi) the Company’s ability to access cost-effective funding; (vii) fluctuations in real estate values
and both residential and commercial real estate market conditions; (viii) demand for loans and deposits in the Company’s market
areas; (ix) legislative or regulatory changes that adversely affect the Company’s business; (x) monetary and fiscal policies of the
Federal Reserve Board and the U.S. Government and other governmental initiatives affecting the financial services industry; (xi)
results of examinations of the Company and Great Southern by their regulators, including the possibility that the regulators may,
among other things, require the Company to increase its allowance for loan losses or to write-down assets; (xii) the uncertainties
arising from the Company’s participation in the TARP Capital Purchase Program, including impacts on employee recruitment and
retention and other business and practices, and uncertainties concerning the potential redemption by us of the U.S. Treasury’s
preferred stock investment under the program, including the timing of, regulatory approvals for, and conditions placed upon, any
such redemption; (xiii) costs and effects of litigation, including settlements and judgments; and (xiv) competition. 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.
Allowance for Loan Losses and Valuation of Foreclosed Assets
The Company believes 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 of, 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. In
addition, the Bank’s regulators could require additional provisions for loan losses as part of their examination process. The Bank's
latest annual regulatory examination was completed in November 2009.
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, 2009, 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
10
12
11
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 from the carrying value reflected in these financial statements, resulting in losses that could adversely impact earnings
in future periods.
Acquisition Fair Value Estimates
The Company considers that the determination of the initial fair value of loans acquired in the March 20, 2009 and
September 4, 2009, FDIC-assisted transactions and the initial fair value of the related FDIC indemnification assets involve a high
degree of judgment and complexity. The carrying value of the acquired loans and the FDIC indemnification assets reflect
management’s best estimate of the amounts to be realized on each of these assets. The Company determined current fair value
accounting estimates of the assumed assets and liabilities in accordance with FASB ASC 805 (SFAS No. 141(R), Business
Combinations). However, the amount that the Company realizes on these assets could differ materially from the carrying value
reflected in its financial statements, based upon the timing of collections on the acquired loans in future periods. Because of the
loss sharing agreements with the FDIC on these assets, the Company should not incur any significant losses. To the extent the
actual values realized for the acquired loans are different from the estimates, the indemnification asset will generally be impacted
in an offsetting manner due to the loss sharing support from the FDIC. Subsequent to the initial valuation, the Company continues
to monitor identified loan pools and related loss sharing assets for changes in estimated cash flows projected for the loan pools,
anticipated credit losses and changes in the accretable yield. Analysis of these variables requires significant estimates and a high
degree of judgment. See Note 5 "Acquired Loans, Loss Sharing Agreements and FDIC Indemnification Assets" to the
Consolidated Financial Statements for additional information.
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 is discrete financial information that is regularly
reviewed. As of December 31, 2009, 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, 2009, 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, 2009, the amortizable intangible assets consisted of core deposit
intangibles of $4.9 million at the Bank reporting unit and $31,000 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, 2009. While the Company believes no impairment existed at December 31,
2009, 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.
10
11
13
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 Company’s 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, as well as provisions for loan losses and the level of non-interest
income and non-interest expense. 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, 2009, Great Southern's net loans increased $365 million, or 21.3%, from $1.72 billion
at December 31, 2008, to $2.08 billion at December 31, 2009. The Company added $199.8 million of loans, net of significant
discounts, due to its FDIC-assisted acquisition of certain TeamBank loans and other assets and added $226.0 million of loans, net
of significant discounts, due to its FDIC-assisted acquisition of certain Vantus Bank loans and other assets. The pre-acquisition
loan portfolio decreased by approximately $60.6 million. 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 beyond the additions from the TeamBank and Vantus Bank transactions. The main loan areas experiencing
increases in 2009 were commercial real estate loans, one- to four-family and multifamily real estate loans and commercial
business loans, partially offset by lower balances in construction loans. In the year ended December 31, 2009, outstanding
residential and commercial construction loan balances decreased $222.9 million (excluding loans covered by loss sharing
agreements), to $321.0 million at December 31, 2009. In addition, the undisbursed portion of construction and land development
loans decreased $19.1 million from $73.9 million at December 31, 2008, to $54.7 million at December 31, 2009. Much of these
changes relates to construction loans for which the projects have been completed and the loan has moved to permanent financing,
thereby reducing construction loans and increasing commercial real estate loans. 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.
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, 2009, Great Southern's available-for-sale securities increased $116.6 million, or
18.0%, from $647.7 million at December 31, 2008, to $764.3 million at December 31, 2009. The Company added $111.8 million
and $23.1 million of investment securities due to its FDIC-assisted acquisitions of certain investments and other assets of
TeamBank and Vantus Bank, respectively. The vast majority of the securities added are agency mortgage-backed securities and
agency collateralized mortgage obligations.
In addition, Great Southern had cash and cash equivalents of $444.6 million at December 31, 2009 compared to $167.9
million at December 31, 2008. Cash and cash equivalents increased significantly as a result of the FDIC-assisted transactions. Also
in 2009, additional customer deposits were placed with Great Southern, in addition to the deposits added as a part of the FDIC-
assisted transactions, resulting in increased liquidity. The Company could elect to utilize these funds by repaying some of its
brokered deposits (which it has done to a large extent during 2009) or purchasing additional investment securities, or it may
maintain its cash equivalents.
The Company attracts deposit accounts through its 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, 2009, total deposit balances
increased $805.9 million, or 42.2%. The Company added approximately $512 million of deposits due to its assumption of certain
TeamBank deposits and added approximately $350 million of deposits due to its assumption of certain Vantus Bank
12
6
deposits. With these assumptions, the mix of deposits shifted from brokered deposits to checking deposits and retail certificates of
deposits. Interest-bearing transaction accounts increased $434.3 million and non-interest-bearing checking accounts increased
$120.1 million. Retail certificates of deposit increased $598.9 million while total brokered deposits decreased $347.4 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 addition to these totals at
December 31, 2009 and December 31, 2008, were Great Southern Bank customer deposits totaling $359.1 million and $168.3
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 FDIC considers these customer accounts to be
brokered deposits due to the fees paid in the CDARS program.
Total brokered deposits, excluding the CDARS accounts discussed above, were $273.5 million at December 31, 2009,
down from $806.2 million at December 31, 2008. 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. The addition of the TeamBank deposits created
additional liquidity and reduced the need for brokered deposits. The Company had issued new brokered deposits which were 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
redeemed or replaced many of these deposits in 2009 in order to lock in cheaper funding rates or reduce some of its excess
liquidity. There are no interest rate swaps associated with these brokered certificates.
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 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 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 and wide credit spreads have kept borrowing costs relatively high in the current
environment.
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. 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. Loans at their floor rates are subject to the risk that borrowers will seek to refinance elsewhere at the lower
market rate, however. 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 90- to 180-day period, and subsequently is expected to have a positive impact,
as the Company's interest rates on deposits and borrowings 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.
13
15
12
The negative impact of declining loan interest rates has been mitigated by the positive effects of the Company’s loans
which have interest rate floors. At December 31, 2009, the Company had a portfolio (excluding the loans acquired in the FDIC-
assisted transactions) of prime-based loans totaling approximately $830 million with rates that change immediately with changes
to the prime rate of interest. Of this total, $715 million also had interest rate floors. These floors were at varying rates, with $133
million of these loans having floor rates of 7.0% or greater and another $514 million of these loans having floor rates between
5.0% and 7.0%. In addition, there were $68 million of these loans with floor rates between 3.25% and 5.0%. At December 31,
2009, $715 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" decreased,
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. The loan yield for the portfolio had
increased to a level that was approximately 300 and 310 basis points higher than the national "prime rate of interest" at December
31, 2009 and December 31, 2008, respectively. 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. In 2009, non-interest income was also affected by the gains recognized on the FDIC-assisted transactions. Non-
interest income may also be affected by the Company's interest rate hedging activities. On July 1, 2010, a federal rule will go into
effect which prohibits a financial institution from automatically enrolling customers in overdraft protection programs, on ATM
and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service. This recent federal rule is
likely to adversely affect the amount of non-interest income we generate. Operating expenses consist primarily of salaries and
employee benefits, occupancy-related expenses, expenses related to foreclosed assets, postage, FDIC deposit insurance,
advertising and public relations, telephone, professional fees, office expenses and other general operating expenses.
Non-interest income for 2009 increased $94.6 million primarily as a result of the one-time initial gain of $43.9 million
related to the TeamBank transaction and the one-time initial gain of $45.9 million related to the Vantus Bank transaction. These
gains were calculated based upon the initial estimated fair value of the assets acquired and liabilities assumed in accordance with
FASB ASC 805. ASC 805 allows a measurement period of up to one year to adjust initial fair value estimates as of the acquisition
date. Subsequent to the initial fair value estimate calculations for the TeamBank transaction in the first quarter of 2009, additional
information was obtained about the fair value of assets acquired and liabilities assumed as of March 20, 2009, which resulted in
adjustments to the initial fair value estimates. Most significantly, additional information was obtained on the credit quality of
certain loans as of the acquisition date which resulted in increased fair value estimates of the acquired loan pools. The fair values
of these loan pools were adjusted and the provisional fair values finalized. These adjustments resulted in a $15.1 million increase
to the first quarter 2009 initial one-time gain of $28.8 million. Thus, the final first quarter 2009 gain on the TeamBank transaction
was $43.9 million related to the fair value of the acquired assets and assumed liabilities. Other increases in non-interest income
were primarily the result of income of $2.7 million recorded due to the discount related to the FDIC indemnification
asset recorded in connection with the FDIC-assisted transaction completed in the first quarter of 2009. Deposit account charges
increased primarily as a result of the first quarter of 2009 acquisition. Gains on the sales of residential mortgage loans increased
due to higher volumes of new purchase and refinance fixed-rate loans. The increase was partially offset by the impairment write-
down in value of certain investments. The impairment write-down totaled $4.3 million on a pre-tax basis. 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. In addition, non-interest income declined 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
income of $1.2 million in the year ended December 31, 2009, and was $7.0 million in the year ended December 31, 2008. 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 recovered in subsequent periods as interest rate swaps matured or were terminated by the
swap counterparty.
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Total non-interest expense increased in 2009 compared to 2008 due to costs related to the acquisitions of TeamBank
and Vantus Bank assets and liabilities, expenses related to FDIC insurance premiums and expenses related to problem loans and
foreclosed assets. The Company recorded expenses of operating the acquired banking centers and operational areas beginning in
the second quarter of 2009. In addition, other acquisition costs of certain assets and liabilities of TeamBank and Vantus Bank and
other related expenses were recorded during 2009. Due to the increase in the level of foreclosed assets, foreclosure-related
expenses have increased significantly in 2009 compared to 2008.
In 2009, the FDIC significantly increased insurance premiums for all banks. This resulted in increased expense for the
Company due to higher assessable deposits and a higher assessment rate. Due to losses and projected losses to the deposit
insurance fund, in addition to the regular quarterly deposit insurance assessments, the FDIC imposed a five basis point special
assessment on all insured depository institutions based on assets as of June 30, 2009. This resulted in additional expense of $1.7
million, which was recorded by the Company in the second quarter of 2009. In November 2009, the FDIC amended its
assessment regulations to require insured depository institutions to prepay their estimated quarterly regular risk-based assessments
for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, on December 30, 2009. The Company prepaid $13.2 million,
which will be expensed in the normal course of business throughout this three-year period.
In addition to the expense increases noted above, the Company's increase in non-interest expense in the year ended
December 31, 2009, compared to 2008, related to the continued growth of the Company. In May 2009, the Company opened
banking centers in Creve Coeur, Mo. and Lee’s Summit Mo.
Business Initiatives
The Company plans to open two to three banking centers per year as market conditions warrant as part of its overall
long-term strategic plan. Construction plans are underway to build full-service banking centers in 2010 in Forsyth, Mo., and Des
Peres, Mo. Both banking centers have received necessary regulatory approvals.
The Company will build its first facility in Forsyth, which is part of the Branson, Mo., market area. The facility,
located at 15695 Highway 160 and east of Branson, will complement the Company’s four banking centers operating in this region
with three locations in Branson and one in Kimberling City, Mo. The banking center is expected to open later in 2010.
The full-service banking center in Des Peres will be the Company’s second location in the St. Louis metropolitan area.
The Des Peres location at 11689 Manchester is approximately seven miles from the Company’s Creve Coeur, Mo., banking
center, which opened in May 2009 and is the Company’s most successful banking center opening to date generating more than
$80 million in core deposits. The Company also operates a loan production office and two Great Southern Travel offices in the St.
Louis market. The banking center in Des Peres is expected to open in late 2010.
Great Southern will continue its participation in the FDIC’s Transaction Account Guarantee Program (a part of the
Temporary Liquidity Guarantee Program), which was extended by the FDIC until June 30, 2010. By participating in this program,
Great Southern is purchasing additional FDIC insurance coverage for its customers. Great Southern customers with noninterest-
bearing deposit accounts, Lawyer’s Trust Accounts or IOLTA’s, 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. 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.
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.
FDIC-Assisted Acquisitions of Certain Assets and Liabilities
Vantus Bank
On September 4, 2009, Great Southern Bank entered into a purchase and assumption agreement with loss sharing with
the Federal Deposit Insurance Corporation (FDIC) to assume all of the deposits and acquire certain assets of Vantus Bank, a full
service thrift headquartered in Sioux City, Iowa. The Company provided significant details about this transaction in its Current
Report on Form 8-K/A filed on November 9, 2009. This transaction is an opportunistic extension of our business initiatives noted
above. The loans, commitments and foreclosed assets purchased are covered by a loss sharing agreement between the FDIC and
Great Southern Bank which affords Great Southern Bank significant protection. Preliminarily, the Company anticipates buying all
primary banking center buildings available for purchase from the FDIC. Acquisition costs of the buildings and related furniture
and equipment will be based on current appraisals.
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Since the September acquisition, customer deposits have remained stable with a high retention rate. At the end of
business on December 11, 2009, the Company merged the former Vantus Bank operational systems into Great Southern’s
systems. This conversion allows all Great Southern and former Vantus Bank customers to conduct business and have access to
consistent products and services at all banking centers throughout the Great Southern franchise. Back office support functions
were consolidated shortly after the systems conversion, with operational efficiencies anticipated to be realized beginning in the
first quarter of 2010.
As a result of the transaction described above, Great Southern determined current fair value accounting estimates of the
assumed assets and liabilities. This resulted in the Company booking a one-time gain of $45.9 million in accordance with FASB
ASC 805, in the third quarter of 2009. We expect to recognize additional income in future periods as loans are collected from
customers and as reimbursements of losses are collected from the FDIC, but we cannot estimate the timing of this income due to
the variables associated with this transaction. Based on the level of discounts expected to be accreted into income in future years,
the acquired Vantus Bank loans are not considered non-performing as we have a reasonable expectation to recover both the
discounted book balances of such loans as well as a yield on the discounted book balances.
TeamBank
On March 20, 2009, Great Southern Bank entered into a purchase and assumption agreement with loss sharing with the
FDIC to assume all of the deposits (excluding brokered deposits) and acquire certain assets of TeamBank, N.A., a full service
commercial bank headquartered in Paola, Kansas. The Company provided significant details about this transaction in its Current
Report on Form 8-K/A filed on June 5, 2009. This transaction is an opportunistic extension of our business initiatives noted above.
The loans, commitments and foreclosed assets purchased are covered by a loss sharing agreement between the FDIC and Great
Southern Bank which affords Great Southern Bank significant protection. The Company has agreed to buy all primary banking
center buildings available for purchase from the FDIC, except the Lee’s Summit office, which was closed on July 17, 2009.
Acquisition costs of the buildings and related furniture and equipment, which total less than $10 million, are based on current
appraisals.
Since the March acquisition, customer deposits have remained stable with a high retention rate. At the end of business
on July 24, 2009, the Company merged the former TeamBank operational systems into Great Southern’s systems. This conversion
allows all Great Southern and former TeamBank customers to conduct business and have access to consistent products and
services at all banking centers throughout the Great Southern franchise. Back office support functions were consolidated shortly
after the systems conversion, and operational efficiencies were realized beginning in the fourth quarter of 2009.
As a result of the transaction described above, Great Southern determined current fair value accounting estimates of the
assumed assets and liabilities. This resulted in the Company booking a one-time gain of $43.9 million in accordance with FASB
ASC 805, in the first quarter of 2009. ASC 805 allows a measurement period of up to one year to adjust initial fair value estimates
as of the acquisition date. Subsequent to the initial fair value estimate calculations for the TeamBank transaction in the first
quarter of 2009, additional information was obtained about the fair value of assets acquired and liabilities assumed as of March
20, 2009, which resulted in adjustments to the initial fair value estimates. Most significantly, additional information (as of the
acquisition date) was obtained on the credit quality of certain loans as of the acquisition date which resulted in increased fair value
estimates of the acquired loan pools. The fair values of these loan pools were adjusted and the provisional fair values finalized.
These adjustments resulted in a $15.1 million increase to the first quarter 2009 initial one-time gain of $28.8 million. Thus, the
final first quarter 2009 gain on the TeamBank transaction was $43.9 million related to the fair value of the acquired assets and
assumed liabilities. Additional income will be recognized in future periods as loans are collected from customers and as
reimbursements of losses are collected from the FDIC, but we cannot estimate the timing of this income due to the variables
associated with this transaction. Based on the level of discounts expected to be accreted into income in future years, the acquired
TeamBank loans are not considered non-performing as we have a reasonable expectation to recover both the discounted book
balances of such loans as well as a yield on the discounted book balances.
Attractiveness of Acquisitions
Great Southern’s management has from time to time become aware of acquisition opportunities and has performed
various levels of review related to potential acquisitions in the past. These particular transactions were attractive to us for a variety
of reasons, including:
the ability to expand into non-overlapping yet complementary markets—for the most part, these locations were close
enough to be operationally efficient, but didn’t overlap our existing footprint.
the very strong market position enjoyed by most of the acquired banking centers. We reviewed market share and total
deposits by banking center and realized that many of these locations were as strong or stronger in their markets than our
legacy Great Southern banking centers.
the attractiveness of immediate core deposit growth with low cost of funds. Over the past several years, organic core
deposit growth has been exceptionally difficult as financial institutions fought over deposits. These acquisitions allowed
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us to immediately increase core deposits by a significant amount at an attractive cost.
the opportunities to enhance income and efficiency due to duplications of effort and decentralized processes. The
Company has historically operated very efficiently, and expects to enhance income by centralizing some duties and
removing duplications of effort.
Recent Accounting Pronouncements
In February 2010, the FASB issued Accounting Standards Update No. (ASU) 2010-09, Subsequent
Events: Amendments to Certain Recognition and Disclosure Requirements (FASB ASU 2010-09). This Update eliminates the
requirement for an SEC filer to disclose the date through which subsequent events were reviewed for both issued and revised
financial statements. This Update was effective upon issuance for the Company and did not have a material impact on its
financial position or results of operations.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving Disclosures about Fair
Value Measurements (FASB ASU 2010-09), which amends FASB ASC Subtopic 820-10, Fair Value Measurements and
Disclosures. This Update requires new disclosures to show significant transfers in and out of Level 1 and Level 2 fair value
measurements as well as discussion regarding the reasons for the transfers. It also clarifies existing disclosures requiring fair
value measurement disclosures for each class of assets and liabilities. The Update describes a class as being a subset of assets and
liabilities within a line item on the statement of financial condition which will require management judgment to designate. Use of
the terminology “classes of assets and liabilities” represents an amendment from the previous terminology “major categories of
assets and liabilities”. Clarification is also provided for disclosures of Level 2 and Level 3 recurring and nonrecurring fair value
measurements requiring discussion about the valuation techniques and inputs used. These provisions of the Update are effective
for interim and annual reporting periods beginning after December 15, 2009. Another new disclosure requires an expanded
reconciliation of activity in Level 3 fair value measurements to present information about purchases, sales, issuances and
settlements on a gross basis rather than netting the amounts in one number. This requirement is effective for interim and annual
reporting periods beginning after December 15, 2010. The adoption of this Update is not expected to have a material impact on
the Company’s financial position or results of operations.
In January 2010, the FASB issued Accounting Standards Update No. 2010-01, Accounting for Distributions to
Shareholders with Components of Stock and Cash (FASB ASU 2010-01). This Update is a consensus of the FASB Emerging
Issues Task Force and clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or
stock with a limit on the amount of cash that will be distributed is not a stock dividend for purposes of applying FASB ASC 505,
Equity, and FASB ASC 260, Earnings per Share. The amendments in this Update are effective for interim and annual periods
ending on or after December 15, 2009, and should be applied on a retrospective basis. The Company does not expect the adoption
of the amendments to have a material impact on the Company’s financial position or results of operations.
In December 2009, the FASB issued Accounting Standards Update No. 2009-17, Consolidations (Topic 810):
Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (FASB ASU 2009-17), which
impacts FASB ASC 810 (FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities). The guidance was
originally issued in June 2009 as FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R), and changes how a
company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should
be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an
entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s
economic performance. The new guidance requires additional disclosures about the reporting entity’s involvement with variable-
interest entities and any significant changes in risk exposure due to that involvement as well as its effect on the entity’s financial
statements. The guidance will be effective for the Company January 1, 2010. The Company does not expect the adoption of this
guidance to have a material impact on the Company’s financial position or results of operations.
In December 2009, the FASB issued Accounting Standards Update No. 2009-16, Transfers and Servicing (Topic 860):
Accounting for Transfers of Financial Assets (FASB ASU 2009-16), which amends FASB ASC 860 (SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities). The guidance was originally issued in June
2009 as FASB Statement No. 166, Accounting for Transfers of Financial Assets, to enhance reporting about transfers of financial
assets, including securitizations and situations where companies have continuing exposure to the risks related to transferred
financial assets. The new guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements
for derecognizing financial assets. It also requires additional disclosures about all continuing involvements with transferred
financial assets including information about gains and losses resulting from transfers during the period. This guidance will be
effective for the Company January 1, 2010. The Company does not expect the adoption of this guidance to have a material impact
on the Company’s financial position or results of operations.
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In October 2009, the FASB issued Accounting Standards Update No. 2009-15, Accounting for Own-Share Lending
Arrangements in Contemplation of Convertible Debt Issuance or Other Financing (FASB ASU 2009-15). This Update is a
consensus of the FASB Emerging Issues Task Force. This Update amends guidance in FASB ASC 470, Debt, and FASB ASC
260, Earnings per Share, and clarifies how a corporate entity should (1) account for a share-lending arrangement that is entered
into in contemplation of a convertible debt offering and (2) calculate earnings per share. This Update is effective for fiscal years
beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the
beginning of those fiscal years. Retrospective application is required for all arrangements outstanding as of the beginning of fiscal
years beginning on or after December 15, 2009. The Company does not expect the adoption of this Update to have a material
impact on the Company’s financial position or results of operations.
In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Fair Value Measurements and
Disclosures (FASB ASU 2009-05). This Update provides amendments to Subtopic 820-10, Fair Value Measurements and
Disclosures – Overall, for the fair value measurement of liabilities. This Update provides clarification that in circumstances in
which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair
value using one or more specified valuation techniques. The amendments in this Update also clarify that when estimating the fair
value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the
existence of a restriction that prevents the transfer of the liability. It also clarifies that both a quoted price in an active market for
the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active
market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. This new guidance
was effective for the first reporting period (including interim periods) beginning after issuance. The adoption of this Update did
not have a material impact on the Company’s financial position or results of operations.
In August 2009, the FASB issued Accounting Standards Update No. 2009-04, Accounting for Redeemable Equity
Instruments (FASB ASU 2009-04). This guidance amends Section 480-10-S99, Distinguishing Liabilities from Equity, per EITF
Topic D-98, Classification and Measurement of Redeemable Securities. The adoption of this guidance did not have a material
impact on the Company’s financial position or results of operations.
Effective July 1, 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. (SFAS) 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles – a replacement of FASB Statement No. 162 (FASB ASC 105-10, Generally Accepted Accounting Principles). The
FASB Accounting Standards Codification (“FASB ASC”) will be the single source of authoritative nongovernmental generally
accepted accounting principles (“GAAP”) in the United States of America. Rules and interpretive releases of the SEC under
authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the
Codification carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the
Codification is superseded and deemed non-authoritative. SFAS No. 168 was effective for the Company’s interim and annual
financial statements for periods ending after September 15, 2009. Other than resolving certain minor inconsistencies in current
GAAP, the FASB ASC is not intended to change GAAP, but rather to make it easier to review and research GAAP applicable to a
particular transaction or specific accounting issue. The adoption of this Statement did not have a material impact on the
Company’s financial position or results of operations. Technical references to GAAP included in these Notes to Consolidated
Financial Statements are provided under the new FASB ASC structure with the prior terminology included parenthetically when
first used.
In June 2009, the FASB issued an Exposure Draft of a proposed guidance on disclosure about the credit quality of
financing receivables and the allowance for credit losses. The purpose of the proposed guidance is to improve the quality of
financial reporting by providing disclosure information that allows financial statement users to understand the nature of credit risk
inherent in the creditor’s portfolio of financing receivables; how that risk is analyzed and assessed in arriving at the allowance for
credit losses; and the changes, and reasons for those changes, in both the receivables and the allowance for credit losses. To
achieve this objective, this guidance would require disclosure of a creditor’s accounting policies for estimating the allowance for
credit losses, qualitative and quantitative information about the credit risk inherent in its financing receivables portfolio, the
methods used in determining the components of the allowance for credit losses, and quantitative disaggregated information about
the change in receivables and the related allowance for credit losses. The FASB continues to deliberate this proposed guidance at
this time. As currently written, this proposed guidance would be effective beginning with the first interim or annual reporting
period ending after December 15, 2009.
In June 2009, the SEC issued Staff Accounting Bulletin (“SAB”) No. 112. This SAB amends or rescinds portions of
the interpretive guidance included in the Staff Accounting Bulletin Series in order to make the relevant interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The staff is updating the
Series in order to bring existing guidance into conformity with recent pronouncements by the FASB, specifically, amendments to
FASB ASC 815 and FASB ASC 810.
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In May 2009, the FASB issued proposed guidance impacting FASB ASC 829 (FASB Staff Position No. 157-f,
Measuring Liabilities under FASB Statement No. 157). This proposed guidance would clarify the principles in FASB ASC 820 on
the measurement of liabilities. This guidance, if adopted as it is currently written, will be effective for the first reporting period
(including interim periods) beginning after issuance. In the period of adoption, entities must disclose any change in valuation
technique resulting from the application of this guidance, and quantify its effect, if practicable. The FASB continues to deliberate
this proposed guidance at this time.
In May 2009, the FASB issued guidance impacting FASB ASC 855 (SFAS No. 165, Subsequent Events). The
guidance concerns the recognition or disclosure of events or transactions that occur subsequent to the balance sheet date but prior
to the release of the financial statements. The guidance sets forth that management of a public company must evaluate subsequent
events for recognition and/or disclosure through the date of issuance. The guidance also defines the recognition and disclosure
requirements for Recognized Subsequent Events and Non-Recognized Subsequent Events. Recognized Subsequent Events
provide additional evidence about conditions that existed as of the balance sheet date and will be recognized in the entity’s
financial statements. Non-Recognized Subsequent Events provide evidence about conditions that did not exist as of the balance
sheet date and if material will warrant disclosure of the nature of the subsequent event and the financial impact. This guidance
was effective for interim and annual reporting periods ending after June 15, 2009, and was adopted by the Company at June 30,
2009. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.
In April 2009, the FASB issued guidance impacting FASB ASC 820 (FSP FAS 157-4, Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are
Not Orderly). This guidance provides additional guidance for estimating fair value in accordance with FASB ASC 829 (SFAS No.
157, Fair Value Measurements), when the volume and level of activity for the asset or liability have significantly decreased. The
new guidance also includes guidance on identifying circumstances that indicate a transaction is not orderly. In addition, the
guidance requires additional disclosures of valuation inputs and techniques in interim periods and defines the major security types
that are required to be disclosed. The guidance was effective for the Company’s financial statements beginning with the three
months ended June 30, 2009. The adoption of this guidance did not have a material effect on the Company’s financial position or
results of operations.
In April 2009, the FASB issued guidance impacting FASB ASC 320 (FSP FAS 115-2 and FAS 124-2, Recognition
and Presentation of Other-Than-Temporary Impairments). This guidance amends the other-than-temporary impairment guidance
for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements. This guidance requires an entity to recognize the credit
component of an other-than-temporary impairment of a debt security in earnings and the noncredit component in other
comprehensive income (OCI) when the entity does not intend to sell the security and it is more likely than not that the entity will
not be required to sell the security prior to recovery. The guidance also requires expanded disclosures. The new guidance was
effective for the Company’s financial statements beginning with the three months ended June 30, 2009. The adoption of this
guidance did not have a material effect on the Company’s financial position or results of operations.
In conjunction with the issuance of the guidance impacting FASB ASC 320 discussed in the paragraph above, the SEC
issued SAB No. 111. This SAB amends Topic 5.M. in the Staff Accounting Bulletin Series entitled Other Than Temporary
Impairment of Certain Investments in Debt and Equity Securities (Topic 5.M.) as well as FASB ASC 320. This SAB maintains
the SEC’s previous views related to equity securities. It also amends Topic 5.M. to exclude debt securities from its scope.
In April 2009, the FASB issued guidance impacting FASB ASC 825 (FSP FAS 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments). This guidance amends FASB ASC 825 (SFAS No. 107, Disclosures
about Fair Value of Financial Instruments), to require expanded disclosures for all financial instruments that are not measured at
fair value through earnings as defined by FASB ASC 825 in interim periods, as well as in annual periods. Also required are
disclosures about the fair value of financial instruments in interim financial statements as well as in annual financial
statements. The guidance also amends FASB ASC 270 (APB Opinion No. 28, Interim Financial Reporting), to require those
disclosures in all interim financial statements. The disclosures required by the new guidance were effective for the Company’s
financial statements beginning with the three months ended June 30, 2009, and are included in Note 14 to the Consolidated
Financial Statements.
In April 2009, the FASB issued guidance impacting FASB ASC 805-20-25 (FASB Staff Position FAS 141(R)-1,
Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies). This
guidance addresses application issues raised by preparers, auditors, and members of the legal profession on initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a
business combination. The new guidance was effective for the Company for business combinations entered into on or after
January 1, 2009.
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In June 2008, the FASB issued an Exposure Draft of proposed guidance on disclosure of certain loss contingencies.
This guidance would amend FASB ASC 450 (SFAS No. 5, Accounting for Contingencies) and FASB ASC 805 (SFAS
141(R)). The purpose of the proposed guidance is 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 FASB ASC 450 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 guidance would expand disclosures about certain loss contingencies in the scope of FASB ASC 450 or
FASB ASC 805 and would have been 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 guidance at this time.
In March 2008, the FASB issued guidance impacting FASB ASC 815 (SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No. 133).This new guidance requires enhanced
disclosures about an entity’s derivative and hedging activities intended to improve the transparency of financial reporting. Under
the new guidance, 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 FASB ASC 815 and its related
interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial
performance and cash flows. This guidance was effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. The Company adopted this guidance effective January 1, 2009. The adoption of the guidance
did not have a material effect on the Company’s financial position or results of operations. For information about the Company’s
derivative financial instruments, see Note 16 to the Consolidated Financial Statements.
In February 2008, the FASB issued guidance impacting FASB ASC 820, Fair Value Measurements and Disclosures
(FASB Staff Position No. 157-2). The staff position delays the effective date of certain guidance within FASB ASC 820 (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 FASB ASC 820. This staff position deferred the effective date to January 1, 2009, for items within the scope of the
staff position did not have a material effect on the Company's financial position or results of operations.
In December 2007, the FASB issued new guidance impacting FASB ASC 805, Business Combinations (SFAS No. 141
(revised), Business Combinations). FASB ASC 805 retains the fundamental requirements that the acquisition method of
accounting be used for business combinations, but broadens the scope of the original guidance and contains improvements to the
application of this method. The guidance 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. FASB ASC 805 applies to business combinations occurring after January 1, 2009. The Company adopted this
guidance on January 1, 2009, and applied it with regard to its March 20, 2009 and September 4, 2009, FDIC-assisted transactions
described in Note 27 to the Consolidated Financial Statements.
In December 2007, the FASB issued guidance impacting FASB ASC 810, Consolidation (SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51), which 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. FASB ASC 810 also expands the disclosure requirements and
provides guidance on how to account for changes in the ownership interest of a subsidiary. The new guidance in FASB ASC 810
was adopted by the Company on January 1, 2009. Based on its current activities, the adoption of this guidance did not have a
material effect on the Company’s financial position or results of operations.
Comparison of Financial Condition at December 31, 2009 and December 31, 2008
During the year ended December 31, 2009, the Company increased total assets by $981.2 million to $3.6 billion. Most
of the increase was attributable to the cash, loans, FDIC indemnification asset and investment securities acquired in the FDIC-
assisted transactions of TeamBank and Vantus Bank. Net loans increased by $365.1 million; the net increase in loans added from
TeamBank was $199.8 million and the net increase in loans added from Vantus Bank was $226.0 million at December 31, 2009.
The main loan areas experiencing increases during 2009 were commercial real estate loans, commercial business loans and one- to
four-family and multi-family real estate loans, partially offset by significantly lower balances in construction loans. In the year
ended December 31, 2009, the disbursed portion of residential and commercial construction loan balances decreased $222.9
million (excluding loans covered in by loss sharing agreements). 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. The Company does not
expect to grow the loan portfolio significantly at this time. Related to the loans purchased in the FDIC-assisted transactions, the
Company recorded an asset with a remaining balance of $141.5 million which represents an estimate of the remaining fair value
of the FDIC indemnification of losses in the TeamBank and Vantus Bank loans acquired. This amount will fluctuate over time, in
tandem with the balance of loans acquired in the transaction, as the results of loan workouts and collections are recognized.
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Available-for-sale investment securities increased $116.6 million and cash and cash equivalents increased $276.7 million. The
increase in investment securities is primarily attributable to the investment securities acquired in the FDIC-assisted transactions.
During the year ended December 31, 2009, the Company experienced excess funding due to increases in deposits and customer
reverse repurchase accounts. In some instances, the Company invested these excess funds in short-term cash equivalents that
caused the Company to earn a negative spread. While the Company generally earned a positive spread on securities purchased, 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 in the early portion of 2009. In the latter quarters of 2009, the Company’s net interest margin
improved as brokered deposits were redeemed or replaced with lower rate deposits and retail certificates of deposit matured and
were replaced with certificates of deposit that have a lower interest rate. While there is no specifically stated goal, the available-
for-sale securities portfolio has in recent quarters been approximately 15% to 25% of total assets. The available-for-sale securities
portfolio was 21.0% and 24.3% of total assets at December 31, 2009 and December 31, 2008, respectively. The Company expects
that it may maintain a higher level of investment securities and cash and cash equivalents for the time being as excess liquidity in
these uncertain times for the U.S. economy and the banking industry, subject to funding activities which are discussed below, and
recognizing that this will continue to have the effect of suppressing net interest margin and net interest income. Foreclosed assets
increased $9.0 million during the year ended December 31, 2009. See “Non-performing Assets – Foreclosed Assets” for
additional information on the Company’s foreclosed assets.
Total liabilities increased $916.4 million from December 31, 2008 to $3.34 billion at December 31, 2009. Deposits
increased $805.9 million, securities sold under reverse repurchase agreements with customers increased $120.6 million and
FHLBank advances increased $51.1 million. The increase 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. FHLBank advances
increased from $120.5 million at December 31, 2008, to $171.6 million at December 31, 2009, as a result of the advances
assumed in the FDIC-assisted transaction involving TeamBank. 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. Total deposits increased $805.9
million from December 31, 2008. Deposits assumed in the FDIC-assisted transactions were approximately $862 million. Retail
certificates of deposit increased $598.9 million; non-interest-bearing transaction accounts increased $120.1 million, and interest-
bearing checking accounts (mainly money market accounts) increased $434.3 million. Checking account balances totaled $1.1
billion at December 31, 2009, up from $525.2 million at December 31, 2008. Total brokered deposits (excluding CDARS
customer account balances) were $273.5 million at December 31, 2009, down from $806.2 million at December 31, 2008. In
addition at December 31, 2009 and December 31, 2008, there were Great Southern Bank customer deposits totaling $359.1
million and $168.3 million, respectively, that were 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 FDIC counts these deposits as
brokered, but these are deposit accounts that we generate with customers in our local markets. The Company had also increased
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. As market interest rates on these types of deposits
decreased in recent months, the Company has redeemed or replaced many of these certificates in 2009 in order to lock in cheaper
funding rates or reduce some of its excess liquidity. During the year ended December 31, 2009, the Company redeemed $454
million of these callable deposits. In addition, the Company has had several brokered deposits mature in 2009 without replacement
due to the deposit increases in other areas. The Company reduced its short-term borrowings by $83.1 million, to $289,000 at
December 31, 2009, through repayment of all of its outstanding borrowings from the FRB.
Total stockholders' equity increased $64.8 million from $234.1 million at December 31, 2008 to $298.9 million at
December 31, 2009. The Company recorded net income of $65.0 million for the year ended December 31, 2009, common and
preferred dividends declared were $12.6 million and accumulated other comprehensive income increased $11.6 million. The
increase in accumulated other comprehensive income resulted from increases in the fair value of the Company's available-for-sale
investment securities.
Our participation in the Capital Purchase Program ("CPP") of the U.S. Department of the Treasury (the "Treasury")
currently precludes us from purchasing shares of the Company’s stock without the Treasury's consent until the earlier of
December 5, 2011 or our repayment of the CPP funds or the transfer by the Treasury to third parties of all of the shares of
preferred stock we issued to the Treasury pursuant to the CPP. 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, 2009 and 2008
General
Including the effects of the Company's accounting entries recorded in 2009 and 2008 for certain interest rate swaps, net
income increased $69.4 million during the year ended December 31, 2009, compared to the year ended December 31, 2008. Net
income was $65.0 million for the year ended December 31, 2009 compared to a net loss of $4.4 million for the year ended
December 31, 2008. This increase was primarily due to an increase in non-interest income of $94.6 million, or 336.3%, an
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increase in net-interest income of $17.7 million, or 24.7%, and a decrease in provision for loan losses of $16.4 million, or 31.4%,
partially offset by a increase in non-interest expense of $22.5 million, or 40.4%, and an increase in provision for income taxes of
$36.8 million. Net income available to common shareholders was $61.7 million for the year ended December 31, 2009 compared
to a net loss of $4.7 million for the year ended December 31, 2008.
Excluding the effects of the Company's accounting entries recorded in 2009 and 2008 for certain interest rate swaps,
net income increased $71.5 million during the year ended December 31, 2009, compared to the year ended December 31, 2008.
On this basis, net income was $64.5 million for the year ended December 31, 2009 compared to a net loss of $6.9 million for the
year ended December 31, 2008. This increase was primarily due to an increase in non-interest income of $100.4 million, or
474.6%, an increase in net interest income of $15.0 million, or 20.0%, and a decrease in provision for loan losses of $16.4 million,
or 31.4%, partially offset by a increase in non-interest expense of $22.5 million, or 40.4%, and an increase in provision for income
taxes of $37.8 million. On this basis, net income available to common shareholders was $61.2 million for the year ended
December 31, 2009 compared to a net loss of $7.2 million for the year ended December 31, 2008.
The information presented in the table below and elsewhere in this report excluding hedge accounting entries recorded
(for the 2009, 2008 and 2007 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 2009, 2008
and 2007 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,
2009
2008
Earnings Per
Diluted
Share
Dollars
Earnings Per
Diluted
Share
Dollars
Reported Earnings (per common share)
$
61,694 $
4.44 $
(4,670) $
(0.35)
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
256
2,022
(770)
(4,534)
$
61,180
$
(7,182)
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Total Interest Income
Total interest income increased $11.1 million, or 7.6%, during the year ended December 31, 2009 compared to the year
ended December 31, 2008. The increase was due to a $3.6 million, or 3.0%, increase in interest income on loans, and a $7.4
million, or 29.7%, increase in interest income on investments and other interest-earning assets. Interest income from investment
securities and other interest-earning assets increased due to higher average balances, partially offset by lower average rates of
interest. The higher average balances were primarily a result of increased levels of securities and interest-earning deposits held for
the purpose of liquidity and the securities and cash equivalents added from the acquisitions in the first and third quarters of 2009.
Interest income from loans increased due to slightly higher average balances, partially offset by lower average rates of interest.
The higher average balances were primarily a result of the discounted loans added through the FDIC-assisted transactions in the
first and third quarters of 2009. The lower average rates were primarily a result of the lower market interest rates (prime rate) in
2009 compared to 2008, partially offset by the yields earned on the discounted loans added through the FDIC-assisted transactions
in the first and third quarters of 2009.
Interest Income - Loans
During the year ended December 31, 2009 compared to the year ended December 31, 2008, interest income on loans
increased due to higher average balances, partially offset by lower average rates of interest. Interest income increased $11.6
million as the result of higher average loan balances from $1.84 billion during the year ended December 31, 2008 to $2.03 billion
during the year ended December 31, 2009. The higher average balance resulted principally from the loans added at their fair
market value from the FDIC-assisted transactions and increases in average balances in commercial real estate loans and one- to
four-family mortgage loans, partially offset by lower average balances in construction loans. The Bank's one- to four-family
residential loan portfolio balance increased in 2008 and 2009 due to increased production by the Bank’s mortgage division. The
Bank generally sells fixed-rate one- to four-family residential loans in the secondary market. The Bank’s outstanding construction
loan balance has decreased significantly as many projects have been completed in the past 12-18 months and demand for new
construction loans has declined.
Interest income decreased $8.0 million as the result of lower average interest rates on loans. The average yield on loans
decreased from 6.51% during the year ended December 31, 2008, to 6.09% during the year ended December 31, 2009. The
average yield on the Company’s loan portfolio decreased primarily due to interest rate cuts by the FRB in 2008. 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. Average loan rates were much lower in 2009
compared to 2008, as a result of reduced market rates of interest, primarily the "prime rate" of interest. During 2008, the “prime
rate” decreased 4.00% to a rate of 3.25% at December 31, 2008, where the prime rate now remains. 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. Beginning 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. 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 “prime rate” of interest at 5.00% in light of the current highly competitive funding environment for deposits
and wholesale funds. 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. 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 a positive 141
basis points. In the year ended December 31, 2009, the average yield on loans was 6.09% versus an average prime rate for the
period of 3.25%, or a difference of a positive 284 basis points.
For the years ended December 31, 2009 and 2008, interest income was reduced $1.1 million and $1.2 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 $48,000 and $227,000 in the years
ended December 31, 2009 and 2008, respectively, due to work-out efforts on non-performing loans. See "Net Interest Income" for
additional information on the impact of this interest activity.
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, 2009, when compared to the year ended December 31, 2008. Interest income increased $14.7
million as a result of an increase in average balances from $534 million during the year ended December 31, 2008, to $918 million
during the year ended December 31, 2009. This increase was primarily in interest-earning deposits and 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
$485.2 million at December 31, 2008 to $632.2 million at December 31, 2009. Interest income decreased by $7.3 million as a
result of a decrease in average interest rates from 4.68% during the year ended December 31, 2008, to 3.53% during the year
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ended December 31, 2009. 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 2009, the interest rates on those securities that repriced in 2009 decreased at their 2009 interest rate
reset date. The majority of the securities added in 2008 and 2009 are backed by hybrid ARMs which will have fixed rates of
interest for a period of time (generally one 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). These mortgage-backed securities
are also currently experiencing lower yields due to more rapid prepayments in the underlying mortgages. As a result, premiums on
these securities are being amortized against interest income more quickly, thereby reducing the yield recorded. In addition in
2008, the Company had several agency securities that were callable at the option of the issuer which had interest rates that were
higher than the current portfolio average rate. Many of these securities were redeemed by the issuer in 2008 and 2009. On March
20, 2009 and September 4, 2009, the Company acquired approximately $112 million and $23 million, respectively, of investment
securities as part of the two FDIC-assisted acquisitions. These investments were recorded at their fair values at the date of
acquisition with related market yields at that time.
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 and 2009 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, 2009, the Company had cash and cash equivalents of $444.6 million compared to $167.9
million at December 31, 2008. For the years ended December 31, 2009 and 2008, the average balance of investment securities and
other interest-earning assets increased by approximately $384 million, due to excess funds for liquidity and the purchase of
investment securities to pledge against public funds deposits, customer repurchase agreements and structured repo borrowings.
While the Company earned a positive spread on these securities (leading to higher net interest income), it was much smaller than
the Company's overall net interest spread, having the effect of decreasing net interest margin. See "Net Interest Income" for
additional information on the impact of this interest activity.
Total Interest Expense
Including the effects of the Company's accounting entries recorded in 2009 and 2008 for certain interest rate swaps,
total interest expense decreased $6.6 million, or 9.0%, during the year ended December 31, 2009, when compared with the year
ended December 31, 2008, primarily due to a decrease in interest expense on deposits of $6.8 million, or 11.2%, and a decrease in
interest expense on subordinated debentures issued to capital trust of $689,000, or 47.1%, partially offset by an increase in interest
expense on short-term and structured repo borrowings of $501,000, or 8.5%, and an increase in interest expense on FHLBank
advances of $351,000, or 7.0%.
Excluding the effects of the Company's hedge accounting entries recorded in 2009 and 2008 for certain interest rate
swaps, economically, total interest expense decreased $3.9 million, or 5.6%, during the year ended December 31, 2009, when
compared with the year ended December 31, 2008, primarily due to a decrease in interest expense on deposits of $4.1 million, or
7.0%, and a decrease in interest expense on subordinated debentures issued to capital trust of $689,000, or 47.1%, partially offset
by an increase in interest expense on short-term and structured repo borrowings of $501,000, or 8.5%, and an increase in interest
expense on FHLBank advances of $351,000, or 7.0%.
The amortization of the deposit broker origination fees which were originally recorded as part of the 2005 accounting
change regarding interest rate swaps significantly increased interest expense in 2008, but did not have a significant effect in the
year ended December 31, 2009. The amortization of these fees totaled $393,000 and $3.1 million in the years ended December 31,
2009 and 2008, respectively. The Company has now amortized the remaining fees as the interest rate swaps and related brokered
deposits have been terminated. In the year ended December 31, 2009, the Company amortized $879,000 in additional broker fees
that were related to deposits originated by the Company in 2008. These were remaining unamortized fees on deposits that were
redeemed at the discretion of the Company to reduce some of the excess liquidity and to reduce deposits with interest rates
generally in excess of 4.00%. The total of such deposits redeemed during 2009 was $454 million.
Interest Expense - Deposits
Including the effects of the Company's accounting entries recorded in 2009 and 2008 for certain interest rate swaps,
interest on demand deposits decreased $3.6 million due to a decrease in average rates from 1.73% during the year ended
December 31, 2008, to 1.08% during the year ended December 31, 2009. The average interest rates decreased due to lower overall
market rates of interest throughout 2008 and 2009. Market rates of interest on checking and money market accounts began to
decrease in the fourth quarter of 2007 as the FRB reduced short-term interest rates. These FRB reductions continued throughout
2008 and some market rates continued to decrease in 2009. Interest on demand deposits increased $1.9 million due to an increase
in average balances from $484 million during the year ended December 31, 2008, to $611 million during the year ended
December 31, 2009. Average noninterest-bearing demand balances increased from $147 million in the three months ended
September 30, 2008, to $260 million in the three months ended September 30, 2009. Average noninterest-bearing demand
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balances increased from $148 million for the year ended December 31, 2008, to $221 million for the year ended December 31,
2009. The increase in average balances on all types of deposits is primarily a result of the FDIC-assisted transactions completed in
March and September of 2009, as well as organic growth in the Company’s deposit base.
Interest expense on deposits decreased $18.4 million as a result of a decrease in average rates of interest on time
deposits from 4.14% during the year ended December 31, 2008, to 2.88% during the year ended December 31, 2009. This
average rate of interest included the amortization of the deposit broker origination fee discussed above. Interest expense on
deposits increased $13.4 million due to an increase in average balances of time deposits from $1.27 billion during the year ended
December 31, 2008, to $1.65 billion during the year ended December 31, 2009. Market rates of interest on new certificates have
decreased since late 2007 as the FRB reduced short-term interest rates and other market rates have declined. A large portion of the
Company’s certificates of deposit portfolio matures within one year; this is consistent with the portfolio over the past several
years. The increase in average balances on certificates of deposit is primarily a result of the FDIC-assisted transactions completed
in March and September of 2009, as well as organic growth in the Company’s deposit base. In addition, the Company reduced its
total balance of outstanding brokered deposits at December 31, 2009 compared to December 31, 2008.
Included in the brokered deposits total at December 31, 2009, is $455.0 million which is part of the Certificate of
Deposit Account Registry Service (CDARS). This total includes $359.1 million in CDARS customer deposit accounts and $95.9
million in CDARS purchased funds. Included in the brokered deposits total at December 31, 2008, was $337.1 million which was
part of CDARS. This total includes $168.3 million in CDARS customer deposit accounts and $168.8 million 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.
Excluding the effects of the Company's accounting entries recorded in 2009 and 2008 for certain interest rate swaps,
economically, interest expense on deposits decreased $15.1 million as a result of a decrease in average rates of interest on time
deposits from 3.89% during the year ended December 31, 2008, to 2.85% during the year ended December 31, 2009, and
increased $12.8 million due to an increase in average balances of time deposits from $1.27 billion during the year ended
December 31, 2008, to $1.65 billion during the year ended December 31, 2009.
Interest Expense - FHLBank Advances, Short-term Borrowings and Structured Repurchase Agreements and
Subordinated Debentures Issued to Capital Trust
During the year ended December 31, 2009 compared to the year ended December 31, 2008, interest expense on
FHLBank advances increased due to higher average balances, partially offset by lower average interest rates. Interest expense on
FHLBank advances increased $1.8 million due to an increase in average balances from $133 million during the year ended
December 31, 2008, to $191 million during the year ended December 31, 2009. The reason for this increase is the addition of
advances assumed in the FDIC-assisted transaction completed in March of 2009. Interest expense on FHLBank advances
decreased $1.5 million due to a decrease in average interest rates from 3.75% in the year ended December 31, 2008, to 2.80% in
the year ended December 31, 2009. Rates on advances decreased as the Company employed some advances which matured in a
relatively short term and advances which are indexed to one-month LIBOR and adjust monthly, taking advantage of the falling
interest rate environment.
Interest expense on short-term borrowings and structured repurchase agreements increased $2.5 million due to an
increase in average balances from $262 million during the year ended December 31, 2008, to $400 million during the year ended
December 31, 2009. The increase in balances of short-term borrowings and structured repurchase agreements was primarily due to
significant increases in securities sold under repurchase agreements with the Company's deposit customers. In addition, in
September 2008, the Company entered into a structured repo borrowing agreement totaling $50 million which bears interest at a
fixed rate unless LIBOR exceeds 2.81%. If LIBOR exceeds 2.81%, the borrowing costs decrease by a multiple of the difference
between LIBOR and 2.81%. This rate adjusts quarterly. Interest expense on short-term borrowings and structured repurchase
agreements decreased $2.0 million due to a decrease in average rates on short-term borrowings and structured repurchase
agreements from 2.25% in the year ended December 31, 2008, to 1.60% in the year ended December 31, 2009. The average
interest rates decreased due to lower overall market rates of interest in 2009 compared to 2008. Market rates of interest on short-
term borrowings began to decrease in the fourth quarter of 2007 and continued to decrease throughout 2008 and 2009, as the FRB
decreased short-term interest rates and other market rates also decreased.
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Interest expense on subordinated debentures issued to capital trust decreased $689,000 due to decreases in average
rates from 4.73% in the year ended December 31, 2008, to 2.50% in the year ended December 31, 2009. As LIBOR rates
decreased from the prior year, the interest rates on these instruments also adjusted lower. The average rate of interest on these
subordinated debentures decreased in 2009 as these liabilities pay a variable rate of interest that is indexed to LIBOR. These
debentures are not subject to an interest rate swap; however, they are variable-rate debentures and bear interest at an average rate
of three-month LIBOR plus 1.57%, adjusting quarterly.
Net Interest Income
Including the effects of the Company's accounting entries recorded in 2009 and 2008 for certain interest rate swaps, net
interest income for the year ended December 31, 2009 increased $17.7 million to $89.3 million compared to $71.6 million for the
year ended December 31, 2008. Net interest margin was 3.03% for the year ended December 31, 2009, compared to 3.01% in
2008, an increase of 2 basis points.
In 2008, the Company decided to increase the amount of longer-term brokered certificates of deposit to provide
additional 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 deposits 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 2009, the Company has redeemed or replaced nearly all of these
certificates in 2009 in order to lock in cheaper funding rates or reduce some of its excess liquidity. These longer-term certificates
carried an interest rate that was approximately 3-4%. The Company decided that maintaining these deposits was justified by the
longer term and the ability to keep committed funding lines available. Excess funds were invested in short-term cash equivalents
at rates that resulted in a negative spread. The average balance of cash and cash equivalents for the years ended December 31,
2009 and December 31, 2008, was $425 million and $114 million, respectively. These 2009 levels are higher than our historical
averages.
The Company’s margin was also positively impacted by a change in the deposit mix. The addition of the TeamBank
and Vantus Bank core deposits provided a relatively lower cost funding source, which allowed the Company to reduce some of its
higher cost funds. The Company also had significant maturities in its retail certificate portfolio and renewed many of these
certificates at significantly lower rates in many cases. In addition, the TeamBank and Vantus Bank loans were recorded at their
fair value at acquisition, which provided a current market yield on the portfolio.
The Federal Reserve last 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 "prime rate" of interest at 5.00% in light of the current highly
competitive funding environment for deposits and wholesale funds. 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. At its most recent meeting on March 16, 2010, the Federal Reserve Board elected to leave the Federal Funds rate
unchanged and did not indicate that rate changes are imminent, although banking regulators are advising banks to prepare
themselves now for rising interest rates.
For the years ended December 31, 2009 and 2008, interest income was reduced $1.1 million and $1.2 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 $48,000 and $227,000 in the years
ended December 31, 2009 and 2008, respectively.
The Company's overall interest rate spread increased 24 basis points, or 8.8%, from 2.74% during the year ended
December 31, 2008, to 2.98% during the year ended December 31, 2009. The increase was due to a 105 basis point decrease in the
weighted average rate paid on interest-bearing liabilities, partially offset by an 81 basis point decrease in the weighted average
yield on interest-earning assets. The Company's overall net interest margin increased 2 basis points, or 0.6%, from 3.01% for the
year ended December 31, 2008, to 3.03% for the year ended December 31, 2009. In comparing the two years, the yield on loans
decreased 42 basis points while the yield on investment securities and other interest-earning assets decreased 115 basis points. The
rate paid on deposits decreased 108 basis points, the rate paid on FHLBank advances decreased 95 basis points, the rate paid on
short-term borrowings decreased 65 basis points, and the rate paid on subordinated debentures issued to capital trust decreased
223 basis points.
Excluding the effects of the Company's accounting entries recorded in 2009 and 2008 for certain interest rate swaps,
economically, net interest income for the year ended December 31, 2009 increased $15.0 million to $89.7 million compared to
$74.7 million for the year ended December 31, 2008. Net interest margin excluding the effects of the accounting change was
3.04% in the year ended December 31, 2009, compared to 3.14% in the year ended December 31, 2008. The Company's overall
interest rate spread increased 11 basis points, or 3.8%, from 2.88% during the year ended December 31, 2008, to 2.99% during the
year ended December 31, 2009. The increase was due to a 91 basis point decrease in the weighted average rate paid on interest-
bearing liabilities, partially offset by an 81 basis point decrease in the weighted average yield on interest-earning assets. The
Company's overall net interest margin decreased 10 basis points, or 3.2%, from 3.14% for the year ended December 31, 2008, to
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3.04% for the year ended December 31, 2009. In comparing the two years, the yield on loans decreased 42 basis points while the
yield on investment securities and other interest-earning assets decreased 115 basis points. The rate paid on deposits decreased 92
basis points, the rate paid on FHLBank advances decreased 95 basis points, the rate paid on short-term borrowings decreased 65
basis points, and the rate paid on subordinated debentures issued to capital trust decreased 223 basis points.
The prime rate of interest averaged 3.25% during the year ended December 31, 2009 compared to an average of 5.10%
during the year ended December 31, 2008. In the last three months of 2007 and throughout 2008, the FRB decreased short-term
interest rates. At December 31, 2009, the national “prime rate” stood at 3.25% and the Company’s average interest rate on its loan
portfolio was 6.25%. Over half of the Bank's loans were tied to prime at December 31, 2009; 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
2009
2008
$
%
$
%
Reported Net Interest Income/Margin
$
89,263
3.03% $
71,583
3.01%
Amortization of deposit broker
origination fees
Net interest income/margin excluding
impact of hedge accounting entries
393
.01
3,111
.13
$
89,656
3.04%
$
74,694
3.14%
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 decreased $16.4 million, from $52.2 million during the year ended December 31, 2008,
to $35.8 million during the year ended December 31, 2009. See the Company’s Quarterly Report on Form 10-Q for March 31,
2008, for additional information regarding the large provision for loan losses in the first quarter of 2008. The allowance for loan
losses increased $10.9 million, or 37.5%, to $40.1 million at December 31, 2009, compared to $29.2 million at December 31,
2008. Net charge-offs were $24.9 million in the year ended December 31, 2009, versus $48.5 million in the year ended December
31, 2008. The amount of charge-offs for the twelve months 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 2009, the majority of the charge-offs related to twelve relationships which were charged down, with the
largest charge-off being approximately $3.9 million. 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 in both 2008 and 2009. 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 long ago 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 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.
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Loans acquired in the March 20, 2009 and September 4, 2009, FDIC-assisted transactions are covered by loss sharing
agreements between the FDIC and Great Southern Bank which afford Great Southern Bank significant protection from losses in
the acquired portfolio of loans. The acquired loans were grouped into pools based on common characteristics and were recorded at
their estimated fair values, which incorporated estimated credit losses at the acquisition dates. These loan pools are systematically
reviewed by the Company to determine the risk of losses that may exceed those identified at the time of the acquisition.
Techniques used in determining risk of loss are similar to the legacy Great Southern Bank portfolio, with most focus being placed
on those loan pools which include the larger loan relationships and those loan pools which exhibit higher risk characteristics.
Review of the acquired loan portfolio also includes meetings with customers, review of financial information and collateral
valuations to determine if any additional losses are apparent.
The Bank's allowance for loan losses as a percentage of total loans, excluding loans supported by the FDIC loss
sharing agreements, was 2.35% and 1.66% at December 31, 2009 and 2008, respectively. Management considers the allowance
for loan losses adequate to cover losses inherent in the Company's loan portfolio at December 31, 2009, based on recent 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
Former TeamBank and Vantus Bank non-performing assets, including foreclosed assets, are not included in the totals
and in the discussion of non-performing loans, potential problem loans and foreclosed assets below due to the respective loss
sharing agreements with the FDIC, which substantially cover principal losses that may be incurred in these portfolios. In addition,
these covered assets were recorded at their estimated fair values as of March 20, 2009, for TeamBank and September 4, 2009, for
Vantus Bank, and no material additional losses or changes to these estimated fair values have been identified as of December 31,
2009.
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, 2009, were $65.0 million, a decrease of $860,000 from December 31, 2008.
Non-performing assets, excluding FDIC-covered assets, as a percentage of total assets were 1.79% at December 31, 2009,
compared to 2.48% at December 31, 2008. Compared to December 31, 2008, non-performing loans decreased $6.7 million to
$26.5 million while foreclosed assets increased $5.9 million to $38.5 million. Construction and land development loans comprised
$8.7 million, or 33%, of the total $26.5 million of non-performing loans at December 31, 2009. Commercial real estate loans
comprised $8.9 million, or 33%, of the total $26.5 million of non-performing loans at December 31, 2009.
Non-performing Loans. Compared to December 31, 2008, non-performing loans decreased $6.7 million to $26.5
million. Decreases in non-performing loans during the year ended December 31, 2009, were primarily due to the transfer of all or
a portion of eight loan relationships from the Non-performing Loans category to the Foreclosed Assets category (five of which
were non-performing relationships at December 31, 2008 and three of which were added to non-performing relationships in
2009), the repayment in full of one relationship (which was added to non-performing relationships in 2009) and the return of two
relationships to performing status due to receipt of payments or additional collateral (both of which were added to non-performing
relationships in 2009). The decreases were as follows:
A $2.3 million loan relationship, which was also added to Non-performing Loans in 2009, secured primarily by single
family residences, duplexes and triplexes in the Joplin, Mo. area. This relationship was charged down approximately
$500,000 prior to foreclosure in the fourth quarter of 2009.
A $2.4 million loan relationship, which was also added to Non-performing Loans in 2009, secured by a partially-
completed subdivision in Springfield, Mo. and improved commercial and residential land in Branson, Mo. This
relationship was charged down approximately $1 million at foreclosure in the fourth quarter of 2009.
A $1.6 million loan relationship, which was included in Non-performing Loans at December 31, 2008, secured primarily
by eleven houses for sale in Northwest Arkansas. These houses were transferred to foreclosed assets during the third and
fourth quarters of 2009. Of the eleven houses foreclosed, five were sold prior to December 31, 2009.
An original $3.2 million loan relationship, which was also added to Non-performing Loans in 2009, secured primarily by
an office building near Springfield, Mo. and commercial land in Branson, Mo. This relationship was charged down
approximately $1.5 million upon transfer to non-performing loans. A parcel of commercial land was foreclosed in the
second quarter of 2009, and the remainder of the relationship was transferred to foreclosed assets in the third quarter of
2009.
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An $8.3 million loan relationship, which was included in Non-performing Loans at December 31, 2008, secured
primarily by lots in multiple subdivisions in the St. Louis area, was removed from the Non-performing Loans category
through the transfer of $6.4 million to foreclosed assets during the first and second quarters of 2009 and the charge-off of
$1.4 million prior to foreclosure. This relationship was previously charged down $2.0 million upon transfer to non-
performing loans. The $6.4 million remaining balance in foreclosed assets represents lots in nine subdivisions in the St.
Louis area.
A $7.7 million loan relationship, which was included in Non-performing Loans at December 31, 2008, secured by a
condominium and retail historic rehabilitation development in St. Louis, was transferred to foreclosed assets during the
second quarter of 2009. The original relationship had been reduced through the receipt of Tax Increment Financing funds
and Federal and State historic tax credits. Upon receipt of the remaining Federal and State tax credits in 2009, the
Company reduced the balance of this relationship to approximately $5.5 million. At the time of foreclosure, this
relationship was further reduced to $4.4 million through a charge-off of $1.1 million.
A $2.5 million loan relationship, which was included in Non-performing Loans at December 31, 2008, secured by a
condominium development in Kansas City, was transferred to foreclosed assets during the first quarter of 2009. Five
condominium units were sold during 2009 and four remain in foreclosed assets at December 31, 2009 represented by a
balance of $700,000.
A $2.3 million loan relationship, which was included in Non-performing Loans at December 31, 2008, secured by
commercial land to be developed into commercial lots in Northwest Arkansas, was transferred to foreclosed assets. This
relationship was previously charged down approximately $285,000 upon transfer to non-performing loans and was
charged down an additional $320,000 in the first quarter of 2009 upon the transfer to foreclosed assets. The balance
remaining in Foreclosed Assets was $1.7 million at December 31, 2009, after an additional $300,000 was charged down
through expenses on foreclosed assets in the third quarter of 2009.
A $1.4 million loan relationship, which was also added to Non-performing Loans in 2009, secured by a condominium
historic rehabilitation development in St. Louis was returned to performing status during the third quarter of 2009 due to
receipt of payments. This is a participation loan in which Great Southern is not the lead bank. The remaining
condominium units have been converted to apartment units with satisfactory lease-up and cash flows.
A $1.5 million loan relationship, which was also added to Non-performing Loans in 2009, secured by an ownership in a
closely-held corporation. Additional collateral, including a non-owner occupied residence and a debt service reserve,
was provided in the fourth quarter of 2009. Repayment is anticipated from the sale of the residence. As noted below,
this loan was considered to be a potential problem loan at December 31, 2009.
A $1.1 million loan relationship, which was also added to Non-performing Loans in 2009, secured by a motel in central
Missouri. The collateral was purchased by a third party at foreclosure and the loan was paid off in the second quarter of
2009.
Partially offsetting these decreases in non-performing loans were the following additions to loans in this category
during the year ended December 31, 2009, which remained as Non-performing Loans at December 31, 2009:
A $2.8 million loan relationship, secured by the real estate of car dealerships in Southwest Missouri. In February of
2010, the Company began foreclosure proceedings on this property.
A $1.9 million loan relationship, secured primarily by a mini-storage facility, rental houses and equipment in Southwest
Missouri.
A $1.6 million relationship, secured by an apartment complex and campground in the Branson, Mo. area.
A $1.4 million relationship, secured by a subdivision and spec houses in the Branson, Mo. area.
A $1.4 million relationship secured by residential lots, a commercial building and complete and incomplete non-owner
occupied houses located in Southwest Missouri.
A $1.0 million relationship secured by rental properties located in Central Missouri.
A $5.3 million relationship, which is secured by commercial lots and acreage located in Northwest Arkansas. The
slowdown in the market has made it difficult for the borrower to market or develop the property.
As noted above, there were six additional relationships that were added to Non-performing Loans in 2009 that were
subsequently removed from Non-performing Loans in 2009. At December 31, 2009, six significant loan relationships in excess of
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$1 million accounted for $14.4 million of the total non-performing loan balance of $26.5 million. No other relationships in excess
of $1 million were in the non-performing loan category as of December 31, 2009. None of the significant loan relationships
included in Non-performing Loans at December 31, 2008, remained in this category at December 31, 2009.
Foreclosed Assets. Of the total $41.7 million of foreclosed assets at December 31, 2009, $3.1 million represents the
fair value of foreclosed assets acquired in the FDIC-assisted transactions in March and September of 2009. These acquired
foreclosed assets are subject to the loss sharing agreements with the FDIC and, therefore, are not included in the following
discussion of foreclosed assets. Excluding these loss sharing assets, foreclosed assets increased $5.8 million during the year
ended December 31, 2009, from $32.7 million at December 31, 2008, to $38.5 million at December 31, 2009. During the year
ended December 31, 2009, 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, along with three significant relationships from December 31, 2008 that remain in the foreclosed
assets category, are described below.
At December 31, 2009, eight separate relationships totaled $20.7 million, or 54%, of the total foreclosed assets
balance. These eight relationships include:
A $3.0 million asset relationship, which was included in Foreclosed Assets at December 31, 2008, involving a residential
development in the St. Louis, Mo., metropolitan area. 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.
A $2.7 million asset relationship, which was included in Foreclosed Assets at December 31, 2008, involving a mixed use
development in the St. Louis, Mo., metropolitan area. This was originally a $15 million loan relationship that was
reduced by guarantors paying down the balance by $10 million in 2008 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 $2.1 million asset relationship, which was included in Foreclosed Assets at December 31, 2008, and previously
involved two residential developments (now one development) in the Kansas City, Mo., metropolitan area. This
subdivision is primarily comprised of developed lots with some 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 in
2008. The Company is marketing the property for sale.
A $6.4 million asset relationship, which involves lots in nine subdivisions in the St. Louis, Mo., area. This relationship
was foreclosed during the first and second quarters of 2009, and was discussed above as an $8.3 million relationship
under Non-performing Loans.
A $1.8 million asset relationship, which involves twenty-one residential investment properties in the Joplin, Mo. Area,
and was discussed above as a $2.3 million relationship under Non-performing Loans. The Company is marketing these
properties for sale.
A $1.7 million asset relationship, which involves commercial land to be developed into commercial lots in Northwest
Arkansas, and was discussed above as a $2.3 million relationship under Non-performing Loans. The Company is
marketing the property for sale.
A $1.5 million asset relationship, which involves an office building near Springfield, Mo., and was discussed above as an
original $3.2 million relationship under Non-performing Loans. The Company is marketing the property for sale.
A $1.4 million asset relationship, which involves a partially completed subdivision in Springfield, Mo., and was
discussed above as a $2.4 million relationship under Non-performing Loans. The Company is marketing the property for
sale.
The addition of five significant relationships to foreclosed assets during 2009 was partially offset by decreases in
significant relationships such as the sale of a $3.9 million relationship consisting of an office building in Southeast Missouri; the
sale of a $1.5 million house that was part of a $1.8 million relationship and the sales of portions of relationships consisting of
condominiums in Kansas City, Mo. and houses in Northwest Arkansas.
Potential Problem Loans. Potential problem loans increased $32.7 million during the year ended December 31, 2009
from $17.8 million at December 31, 2008 to $50.5 million at December 31, 2009. 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.
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During the year ended December 31, 2009, potential problem loans increased primarily due to the addition of ten
unrelated relationships totaling $40.7 million to the Potential Problem Loans category. These ten relationships include:
A $9.6 million relationship secured by condominium units and commercial land located at Lake of the Ozarks, Mo. In
February of 2010, the Company began foreclosure proceedings on this property.
A $9.0 million relationship consisting of a condominium project located in Branson, Mo. This project is experiencing
slower than expected sales.
A $5.6 million relationship secured by an apartment and retail complex located in St. Louis.
A $5.5 million relationship secured by subdivisions and land in the Springfield, Mo., and Branson, Mo., areas.
A $2.7 million relationship secured by commercial improved ground located near Springfield, Mo. The borrower is in
the development business and is experiencing some cash flow difficulties.
A $2.0 million relationship secured by a motel located in Springfield, Mo. The motel is operating but has experienced
lower occupancy rates and cash flow difficulties.
A $1.8 million relationship (previously a $1.5 million loan relationship included in the Non-Performing Loan category),
secured by an ownership in a closely-held corporation. Improvement with the credit occurred when a non-owner
occupied residence and a debt service reserve were taken as additional collateral in the fourth quarter of
2009. Repayment is anticipated from the sale of the residence.
A $1.8 million relationship secured by rental houses and duplexes located in Springfield, Mo. The borrower is
experiencing some cash flow difficulties as a result of higher than normal vacancies.
A $1.7 million loan secured by rental houses and lots located in the Springfield, Mo. area. The borrower is experiencing
some cash flow difficulties as a result of higher than normal vacancies.
A $1.0 million loan secured by duplexes near Springfield, Mo. The borrower is experiencing some cash flow difficulties
as a result of higher than normal vacancies.
During the year ended December 31, 2009, potential problem loans decreased primarily due to the transfer of ten
unrelated significant relationships totaling $17.9 million from the Potential Problem Loans category to other non-performing asset
categories as previously discussed above.
At December 31, 2009, two other large unrelated relationships were included in the Potential Problem Loan category,
which were included in the Potential Problem Loan category at December 31, 2008. One consists of a retail center, improved
commercial land and other collateral in the states of Georgia and Texas totaling $1.8 million. During 2008, the Company obtained
additional collateral and guarantor support; however, the Company still considers a portion of this relationship as having possible
credit problems that may cause the borrowers difficulty in complying with current repayment terms. The other, a $1.2 million
relationship, consists of a subdivision and leased houses in Joplin, Missouri. At December 31, 2009, the twelve significant
relationships described above accounted for $43.7 million of the potential problem loan total.
Non-interest Income
Non-interest income for the year ended December 31, 2009 was $122.8 million compared with $28.1 million for the
year ended December 31, 2008. The $94.7 million increase was mainly the result of gains recognized on the two FDIC-assisted
transactions, which are discussed below along with other items:
FDIC-assisted transactions: A total of $89.8 million of one-time pre-tax gains was recorded related to the fair value
accounting estimates of the assets acquired and liabilities assumed in the FDIC-assisted transactions involving TeamBank and
Vantus Bank. Additional income of $2.7 million was recorded due to the discount related to the FDIC indemnification assets
booked in connection with these transactions. Additional income will be recognized in future periods as loans are collected from
customers and as reimbursements of losses are collected from the FDIC, but we cannot estimate the timing of this income due to
the variables associated with these transactions.
Gain on loan sales: Net realized gains on loan sales increased $1.5 million, or 104.2%, for the year ended December
31, 2009 compared to the year ended December 31, 2008. The gain on loan sales was mainly due to a higher volume of fixed-rate
residential mortgage loan originations, which the Company typically sells in the secondary market. The higher volume mainly
came from the Company’s operations in Springfield and its Iowa operations acquired through the Vantus Bank transaction.
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Securities gains, losses and impairments: Net losses on securities sales and impairments for the year ending December
31, 2009, were $1.5 million compared to net losses on securities sales and impairments in the year ending December 31, 2008, of
$7.3 million. The 2009 losses included a $2.9 million impairment related to a non-agency collateralized mortgage obligation,
$530,000 related to the impairment of equity securities and a $575,000 impairment on pooled trust preferred investments. These
impairment losses were partially offset by gains on the sales of various investment securities throughout 2009. The losses in 2008
were primarily due to the impairment write-down of $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 were subsequently sold in
2009. An additional $2.1 million loss recorded in the 2008 period related to an impairment write-down in value of certain
available-for-sale equity investments. The Company continues to hold the majority of these securities in the available-for-sale
category.
Deposit account charges: Deposit account charges and ATM and debit card usage fees increased $2.3 million, or
15.1%, in the year ended December 31, 2009, compared to the year ended December 31, 2008. Total income on deposit account
charges was $17.7 million in 2009. A large portion of this increase was the result of the customers added in the FDIC-
assisted transactions as well as organic growth in the legacy Great Southern footprint.
Partially offsetting the above positive income items for 2009 as compared with 2008 were the following items:
Interest rate swaps: 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 of $1.2 million in the year ended December 31, 2009, compared to an increase of $5.3
million in the year ended December 31, 2008. This income was part of the 2005 accounting restatement described in previous
filings. There should be no income or expense related to this in future periods.
Commission revenue: Commission income for the year ended December 31, 2009 from the Company’s travel,
insurance and investment divisions decreased $1.9 million, or 22.3%, compared to the year ended December 31, 2008. The
decrease was primarily in the Company’s travel division, where customers have reduced their travel in light of current economic
conditions. Another large portion of the decrease also occurred in the investment division as a result of the alliance formed in
2008 with Ameriprise Financial Services. As a result of this change, Great Southern now records most of its investment services
activity on a net basis in non-interest income.
Non-GAAP Reconciliation
(Dollars in thousands)
Year Ended December 31, 2009
Effect of
Hedge Accounting
Entries Recorded
Excluding
Hedge Accounting
Entries Recorded
As Reported
$
122,784 $
1,184 $ 121,600
Year Ended December 31, 2008
Effect of
Hedge Accounting
Entries Recorded
Excluding
Hedge Accounting
Entries Recorded
As Reported
$
28,144 $
6,976 $ 21,168
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
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Non-Interest Expense
Total non-interest expense increased $22.5 million, or 40.4%, from $55.7 million in the year ended December 31,
2008, compared to $78.2 million in the year ended December 31, 2009. The Company’s efficiency ratio for the year ended
December 31, 2009, was 36.88% compared to 55.86% in 2008. The Company’s ratio of non-interest expense to average assets
increased from 2.07% for the year ended December 31, 2008, to 2.15% for the year ended December 31, 2009. The efficiency
ratio in 2009 was positively impacted by the TeamBank and Vantus Bank-related one-time gains and negatively impacted by the
investment securities impairment write-downs recorded by the Company in 2009 and the other expenses discussed below. The
following were key items related to the increases in non-interest expense for the year ended December 31, 2009 as compared to
the year ended December 31, 2008:
TeamBank N.A. FDIC-assisted transaction: A portion of the Company’s increase in non-interest expense during 2009
compared to 2008 related to the FDIC-assisted acquisition and operations of the former TeamBank. For the year ended December
31, 2009, non-interest expenses related to the acquisition and on-going operations of the former TeamBank banking centers was
$10.0 million. In addition, the Company recorded other non-interest expenses related to TeamBank that have been absorbed in
other pre-existing areas of the Company. In the year ended December 31, 2009, the Company incurred costs related to the
conversion of deposits and loans to its core computer processing systems and incurred expenses related to retention and separation
pay for employees whose positions were consolidated. The largest expense increases were in the areas of salaries and benefits and
occupancy and equipment expenses.
Vantus Bank FDIC-assisted transaction: The Company’s increase in non-interest expense during 2009 compared to
2008 was also related to the FDIC-assisted acquisition and operations of Vantus Bank. For the year ended December 31, 2009,
non-interest expenses associated with the acquisition and on-going operations of the former Vantus Bank banking centers was
$4.9 million. In addition, the Company recorded other non-interest expenses related to the operation of other areas of the former
Vantus Bank, such as lending and certain support functions. During 2009, the Company incurred costs related to the conversion
of deposit and loan information to its core computer processing systems and incurred expenses related to retention and separation
pay for employees whose positions were consolidated. The largest expense increases were in the areas of salaries and benefits and
occupancy and equipment expenses.
New banking centers: The Company’s increase in non-interest expense during 2009 compared to 2008 was also
related to the continued internal growth of the Company. The Company opened its first retail banking center in Creve Coeur, Mo.,
in May 2009, and its second banking center in Lee’s Summit, Mo., in late September 2009. In the year ended December 31, 2009,
compared to the year ended December 31, 2008, non-interest expenses increased $686,000 associated with the ongoing operations
of these locations.
FDIC insurance premiums: In 2009, the FDIC significantly increased insurance premiums for all banks, nearly
doubling the regular quarterly deposit insurance assessments compared to the 2008 rates. In addition, the FDIC imposed a special
five basis point assessment on all insured depository institutions based on assets (minus Tier 1 capital) as of June 30, 2009. The
Company recorded an expense of $1.7 million in the second quarter of 2009 for this special assessment. Due to growth of the
Company and the increased assessment rates, FDIC insurance expense (including the second quarter special assessment) increased
from $2.2 million for the year ended December 31, 2008, to $5.7 million for the year ended December 31, 2009.
On November 12, 2009, the FDIC adopted a final rule amending the assessment regulations to require insured
depository institutions to prepay their estimated quarterly regular risk-based assessments for the fourth quarter of 2009, and for all
of 2010, 2011 and 2012 on December 30, 2009. The Company prepaid $13.2 million, which will be expensed in the normal
course of business throughout this three-year period.
Foreclosure-related expenses: Due to the increases in levels of foreclosed assets, foreclosure-related expenses
increased $1.5 million (net of income received on foreclosed assets) for the year ended December 31, 2009 compared to the year
ended December 31, 2008. The Company expects that expenses on foreclosed assets and expenses related to the credit resolution
process will remain elevated in 2010.
Net occupancy and equipment expenses: Significant increases in occupancy and equipment expenses were primarily
related to the two FDIC-assisted transactions. For the year ended December 31, 2009, these expenses were $12.5 million, an
increase of $4.2 million, compared to the year ended December 31, 2008.
32
33
35
Non-GAAP Reconciliation:
(Dollars in thousands)
Year Ended December 31,
2009
Non-
Interest
Expense
Revenue
Dollars*
%
2008
Non-
Interest
Expense
Revenue
Dollars*
%
Efficiency Ratio
$
78,195
$ 212,047
36.88% $
55,706 $
99,727
55.86%
Amortization of deposit broker
origination fees
Net change in fair value of
interest rate swaps and related deposits
Efficiency ratio excluding
impact of hedge accounting entries
—
—
393
(.07)
(1,184)
.20
—
—
3,111
(1.81)
(6,976)
4.06
$
78,195
$ 211,256
37.01% $
55,706 $
95,862
58.11%
*Net interest income plus non-interest income.
Provision for Income Taxes
Provision for income taxes as a percentage of pre-tax income was 33.7% for the year ended December 31, 2009. 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. 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, and in 2008, was also significantly 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 rate to be
in the range of 32-36% of pre-tax net income.
Average Balances, Interest Rates and Yields
The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-
earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in
dollars and rates, and the net interest margin. Average balances of loans receivable include the average balances of non-accrual
loans for each period. Interest income on loans includes interest received on non-accrual loans on a cash basis. Interest income on
loans includes the amortization of net loan fees which were deferred in accordance with accounting standards. Fees included in
interest income were $1.8 million, $2.5 million and $3.2 million for 2009, 2008 and 2007, respectively. Tax-exempt income was
not calculated on a tax equivalent basis. The table does not reflect any effect of income taxes.
34
28
December
31,
2009
Yield/
Rate
Year Ended
December 31, 2009
Average
Balance
Interest
Yield/
Rate
Year Ended
December 31, 2008
Year Ended
December 31, 2007
Average
Balance
Interest
(Dollars in thousands)
Yield/
Rate
Average
Balance
Interest
Yield/
Rate
5.87% $
6.03
6.21
5.80
5.68
6.88
6.12
292,409
136,668
605,149
567,405
156,236
205,768
64,432
$ 17,224
8,528
39,066
31,269
10,044
13,033
4,299
5.89% $
6.24
6.46
5.51
6.43
6.33
6.67
206,299
109,348
479,347
649,037
162,512
179,731
55,728
$ 13,290
7,214
32,250
41,448
10,013
11,871
3,743
6.44% $
6.60
6.73
6.39
6.16
6.60
6.72
180,797
81,568
456,377
673,576
171,902
153,421
56,612
$ 12,714
6,914
37,614
55,993
14,160
11,480
3,844
7.03%
8.48
8.24
8.31
8.24
7.48
6.79
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
6.25
2,028,067
123,463
6.09
1,842,002
119,829
6.51
1,774,253
142,719
8.04
Investment securities and other interest-
earning assets(1)
4.68
917,843
32,405
3.53
533,567
24,985
4.68
430,874
21,152
4.91
Total interest-earning assets
5.47
2,945,910
155,868
5.29
2,375,569
144,814
6.10
2,205,127
163,871
7.43
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
1.00
2.33
1.88
1.20
1.85
4.00
1.91
250,422
206,727
$ 3,403,059
$
611,136
1,650,913
2,262,049
399,587
30,929
190,903
71,989
74,446
$ 2,522,004
$
484,490
1,268,941
1,753,431
262,004
30,929
133,477
8,370
52,506
60,876
5,892
1,462
5,001
6,600
47,487
54,087
6,393
773
5,352
1.08
2.88
2.39
1.60
2.50
2.80
2,883,468
66,605
2.31
2,179,841
73,231
1.73
4.14
3.47
2.25
4.73
3.75
3.36
84,668
50,648
$ 2,340,443
$
480,756
1,131,825
1,612,581
170,946
16,043 3.34
5.32
60,189
4.73
76,232
7,356 4.30
28,223
144,773
1,914 6.78
4.81
6,964
1,956,523
92,466
4.72
Noninterest-bearing liabilities:
Demand deposits
Other liabilities
Total liabilities
Stockholders’ equity
221,215
23,692
3,128,375
274,684
147,665
10,873
2,338,379
183,625
171,479
26,716
2,154,718
185,725
Total liabilities and stockholders'
equity
$ 3,403,059
$ 2,522,004
$ 2,340,443
Net interest income:
Interest rate spread
Net interest margin*
3.56%
$ 89,263
2.98%
$ 71,583
2.74%
$ 71,405
2.71%
3.03%
3.01%
3.24%
Average interest-earning assets to
average interest-bearing liabilities
_____________________________
102.2%%
109.0%
112.7%
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 $68.3 million, $62.4 million and $69.7 million for 2009,
2008 and 2007, respectively. In addition, average tax-exempt industrial revenue bonds were $38.0 million, $33.1 million and $30.6 million in 2009, 2008 and
2007, respectively. Interest income on tax-exempt assets included in this table was $3.8 million $4.7 million and $4.4 million for 2009, 2008 and 2007,
respectively. Interest income net of disallowed interest expense related to tax-exempt assets was $3.0 million, $3.6 million and $3.2 million for 2009, 2008 and
2007, respectively.
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29
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, 2009 vs.
December 31, 2008
Year Ended
December 31, 2008 vs.
December 31, 2007
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
$
(7,995) $
11,629
$
3,634 $
(28,166) $
5,276 $
(22,890)
(7,274)
14,694
7,420
(1,013)
4,846
3,833
Total interest-earning assets
(15,269)
26,323
11,054
(29,179)
10,122
(19,057)
Interest-bearing liabilities:
Demand deposits
Time deposits
(3,621)
(18,431)
1,851
13,412
(1,770)
(5,019)
(7,797)
(14,403)
124
6,720
(7,673)
(7,683)
Total deposits
Short-term borrowings and structured repo
Subordinated debentures issued to capital trust
FHLBank advances
(22,052)
(2,017)
(689)
(1,459)
15,263
2,518
—
1,810
(6,789)
501
(689)
351
(22,200)
(4,396)
(622)
(1,354)
6,844
2,932
170
(609)
(15,356)
(1,464)
(452)
(1,963)
Total interest-bearing liabilities
(26,217)
19,591
(6,626)
(28,572)
9,337
(19,235)
Net interest income
$
10,948
$
6,732
$
17,680 $
(607) $
785 $
178
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%.
36
30
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
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
2007
Dollars
Earnings Per
Diluted
Share
Dollars
Earnings Per
Diluted
Share
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
762
(4,534)
(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.
37
31
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.
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%.
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
38
40
39
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
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.
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.
38
39
41
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.
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 decreased, the
Company began 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. No interest rate swaps are 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 negatively impacted net interest income in 2008 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 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.
40
42
41
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.
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
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.
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41
43
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
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 had been completed at December 31,
2008.
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
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36
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.
Three other significant relationships were both added to the Non-performing Loans category and subsequently
transferred to foreclosed assets during the year ended December 31, 2008:
A $2.5 million loan relationship, which was secured primarily by an office and residential historic rehabilitation project
in St. Louis, was assumed by a new borrower upon the sale of the collateral. This is now considered a performing loan.
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 metropolitan 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 transfer of the
relationship to foreclosed assets. This relationship remains in foreclosed assets at December 31, 2008.
Two other significant relationships were both added to the Non-performing Loans category and subsequently paid off
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 business
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 2008
through receipt of a portion of the anticipated tax refunds. In November 2008, the Company received a payment from the
borrower which reduced the outstanding balance of this relationship on the Company's books to $-0-.
Five other significant relationships were included in the Non-performing Loans category at December 31, 2007, and
were subsequently transferred to foreclosed assets during the year ended December 31, 2008. These relationships are described
below:
A $1.3 million loan relationship, which involves a restaurant building in Northwest Arkansas, was foreclosed upon
during the second quarter of 2008. The Company sold this property prior to December 31, 2008.
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 remained 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 $660,000 upon transfer to foreclosed assets. This
relationship remained in foreclosed assets at December 31, 2008.
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 remained 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.
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43
45
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 second quarter of 2008 and the sale of a portion of the properties which
reduced the relationship balance by $219,000.
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
borrower during the third quarter of 2008. The borrower sold a two-thirds interest in the entity and the new owner assumed the
debt to the Company.
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 $12.3
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 developed subdivision lots, partially offset by the sale of similar houses
and subdivision lots. These five significant relationships, along with four significant relationships from December 31, 2007 that
remain in the foreclosed assets category, are described below.
At December 31, 2008, nine separate relationships totaled $20.4 million, or 63%, of the total foreclosed assets balance.
These nine relationships include:
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 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.
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 that 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 completed 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.
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 lots with some 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.
A $1.9 million loan relationship, which is involves partially-developed subdivision lots in northwest Arkansas, was
foreclosed upon in the second quarter of 2008. The Company is marketing the property for sale.
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, 2008
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46
45
from $30.3 million at December 31, 2007 to $17.8 million at December 31, 2008. 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, 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,
Arkansas was removed from the Potential Problem Loan category due to an ownership change in the project, which added equity
to the project as well as additional guarantor support, and a reduction of $562,000 from the sale of a portion of the collateral.
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 vacant land (pad
sites) to be developed for condominiums near Branson, Missouri totaling $0.9 million. Sales of the units have been slower than
projections resulting in cash flow problems. The third relationship consists of subdivision lots in southwest Missouri totaling $0.9
million. The fourth relationship consists of subdivision lots and houses in southwest Missouri totaling $0.7 million.
At December 31, 2008, three other large unrelated relationships were included in the Potential Problem Loan category.
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
commercial land and other collateral in the states of Georgia and Texas totaling $3.3 million. During 2008, the Company obtained
additional collateral and guarantor support. The third relationship consists of a residential subdivision in Springfield, Missouri
totaling $2.1 million. At December 31, 2008, these seven significant relationships described above accounted for $12.2 million of
the 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 in non-interest income was primarily the result of the impairment
write-down in value of certain 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 $5.3 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 experienced significant fair value declines over the preceding year. 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.
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 as a
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-
interest expense related to the investment services division is also reduced. The Company's travel division also experienced a
decrease in commission income of $543,000 in 2008 compared to 2007. Customers are reducing their travel as a result of current
economic conditions.
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 rate
swaps matured or were terminated by the swap counterparty. In the first quarter of 2009, the interest rate swap counterparties have
elected to exercise the call options on the remaining callable swaps and the Company has elected to redeem the related certificates
of deposit.
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45
47
Excluding the securities losses and interest rate swap income discussed above, non-interest income for the year ended
December 31, 2008, was $28.5 million compared with $28.9 million for the year ended December 31, 2007, or a decrease of
$409,000. This decrease was primarily attributable to the lower commission revenue from the Company's travel and investment
divisions, which was discussed above, partially offset by an increase of $378,000 in gains on sales of mortgage loans.
Non-GAAP Reconciliation
(Dollars in thousands)
Year Ended December 31, 2008
Effect of
Hedge Accounting
Entries Recorded
Excluding
Hedge Accounting
Entries Recorded
As Reported
$
28,144 $
6,976 $
21,168
Year Ended December 31, 2007
Effect of
Hedge Accounting
Entries Recorded
Excluding
Hedge Accounting
Entries Recorded
As Reported
$
29,419 $
1,695 $
27,724
Non-interest income --
Net change in fair value of
interest rate swaps and
related deposits
Non-interest income --
Net change in fair value of
interest rate swaps and
related deposits
Non-Interest Expense
Total non-interest expense increased $4.0 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
efficiency ratio for the year ended December 31, 2008, was 55.86% compared to 51.28% in 2007. 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 2008 was 58.11% compared to 51.55% in 2007. The Company's ratio of non-interest expense to average assets
decreased from 2.18% for the year ended December 31, 2007, to 2.07% for the year ended December 31, 2008.
In 2007, the FDIC began to once again assess insurance premiums on insured institutions. 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 beginning in the latter half of 2007 and throughout 2008. The Company
incurred additional deposit insurance expense of $827,000 related to this in 2008 compared to 2007.
Due to the increases in levels of foreclosed assets, foreclosure-related expenses in 2008 were higher than 2007 by
approximately $2.8 million (net of income received on foreclosed assets). The Company expects that expenses on foreclosed
assets and expenses related to the credit resolution process will remain elevated in 2009.
The Company's increase in non-interest expense in 2008 compared to 2007 also related to the continued growth of the
Company. In March 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. As a result, in the year ended December 31, 2008,
compared to the year ended December 31, 2007, non-interest expenses increased $576,000 related to the ongoing operations of
these entities.
46
48
47
Non-GAAP Reconciliation:
(Dollars in thousands)
Year Ended December 31,
Non-Interest
Expense
2008
Revenue
Dollars* %
Non-Interest
Expense
2007
Revenue
Dollars* %
Efficiency Ratio
$
55,706
$ 99,727
55.86% $
51,707 $ 100,824
51.28%
Amortization of deposit broker
origination fees
Net change in fair value of
interest rate swaps and related 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 both 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 rate to be in the range of 32-35% of pre-tax net income.
Liquidity and Capital Resources
Liquidity is a measure of the Company's ability to generate sufficient cash to meet present and future financial
obligations in a timely manner through either the sale or maturity of existing assets or the acquisition of additional funds through
liability management. These obligations include the credit needs of customers, funding deposit withdrawals and the day-to-day
operations of the Company. Liquid assets include cash, interest-bearing deposits with financial institutions and certain investment
securities and loans. As a result of the Company's management of the ability to generate liquidity primarily through liability
funding, management believes that the Company maintains overall liquidity sufficient to satisfy its depositors' requirements and
meet its customers' credit needs. At December 31, 2009, the Company had commitments of approximately $29.4 million to fund
loan originations, $131.7 million of unused lines of credit and unadvanced loans, and $16.2 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, 2009. Additional information regarding these contractual obligations is discussed further in Notes 7, 8, 9, 10, 11, 12
and 15 of the Notes to Consolidated Financial Statements.
Payments Due In:
One Year or
Less
Over One to
Five
Years
Over Five
Years
Total
(Dollars in thousands)
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
$
$
1,079,654
1,356,132
17,028
336,182
—
—
1,096
2,800
— $
277,075
58,005
—
3,194
—
3,154
—
— $
1,100
96,570
—
50,000
30,929
219
—
1,079,654
1,634,307
171,603
336,182
53,194
30,929
4,469
2,800
$
2,792,892
$
341,428 $
178,818 $
3,313,138
47
41
At December 31, 2009, the Company anticipates purchasing the real estate and furniture and fixtures of a majority of
the branch locations currently being operated as a result of the FDIC-assisted transactions which took place during 2009 for an
estimated $21.3 million.
At December 31, 2009, the Company had committed to purchase a total of $13.1 million of federal low income tax
credits related to the construction of houses or apartments as part of three unrelated projects. The Company will invest $9.5
million to acquire these credits. None of these transactions involve related parties related to the Company.
Subsequent to December 31, 2009, the Company committed to purchase a total of $3.2 million of federal low income
tax credits related to the construction of houses or apartments as part of one project. One of the principal developers of this project
is a director of the Company. The Company will invest $2.4 million to acquire these credits, which is consistent with pricing the
Company has paid to acquire other tax credits from non-related parties.
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.
At December 31, 2009, the Company's total stockholders' equity was $298.9 million, or 8.2% of total assets. At
December 31, 2009, common stockholders' equity was $242.9 million, or 6.7% of total assets, equivalent to a book value of
$18.12 per common share. Total stockholders’ equity at December 31, 2008, was $234.1 million, or 8.8% of total assets. At
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. Common stockholders’ equity increased $64.4 million, or 36.1%, in the year ended December 31,
2009.
At December 31, 2009, the Company’s tangible common equity to total assets ratio was 6.5% as compared to 6.6% at
December 31, 2008, due to increased assets from the FDIC-assisted acquisitions and increases in cash equivalents and
investments. The Company’s tangible common equity to total risk-weighted assets ratio was 11.4% at December 31, 2009.
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, 2009, the Bank's Tier 1 risk-based capital ratio was 12.9%, total risk-based capital
ratio was 14.2% and the Tier 1 leverage ratio was 7.4%. As of December 31, 2009, the Bank was "well capitalized" as defined by
the Federal banking agencies' capital-related regulations. The FRB has established capital regulations for bank holding companies
that generally parallel the capital regulations for banks. On December 31, 2009, the Company's Tier 1 risk-based capital ratio was
15.0%, total risk-based capital ratio was 16.3% and the Tier 1 leverage ratio was 8.6%. As of December 31, 2009, the Company
was "well capitalized" under the capital ratios described above.
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 2009, 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 without the Treasury’s consent.
At December 31, 2009, the held-to-maturity investment portfolio included $365,000 of gross unrealized losses and
$140,000 of gross unrealized gains.
The Company's primary sources of funds are customer deposits, FHLBank advances, other borrowings, loan
repayments, unpledged securities, proceeds from sales of loans and available-for-sale securities and funds provided from
operations. The Company utilizes particular sources of funds based on the comparative costs and availability at the time. The
Company has from time to time chosen not to pay rates on deposits as high as the rates paid by certain of its competitors and,
when believed to be appropriate, supplements deposits with less expensive alternative sources of funds.
48
50
49
At December 31, 2009 (and more recent information as of March 10, 2010), the Company had these available secured
lines and on-balance sheet liquidity:
Federal Home Loan Bank line
Federal Reserve Bank line
Interest-Bearing and Non-Interest-Bearing Deposits
Unpledged Securities
December 31, 2009
March 10, 2010
$239.3 million
$254.4 million
$444.6 million
$2.0 million
$312.3 million
$247.1 million
$587.4 million
$1.8 million
Statements of Cash Flows. During the years ended December 31, 2009, 2008 and 2007, the Company had positive
cash flows from operating activities. The Company experienced positive cash flows from investing activities during 2009 and
negative cash flows from investing activities during 2008 and 2007. The Company experienced negative cash flows from
financing activities during 2009 and positive cash flows from financing activities during 2008 and 2007.
Cash flows from operating activities for the periods covered by the Statements of Cash Flows have been primarily
related to changes in accrued and deferred assets, credits and other liabilities, the provision for loan losses, impairments of
investment securities, depreciation, gains on the purchase of additional business units and the amortization of deferred loan
origination fees and discounts (premiums) on loans and investments, all of which are non-cash or non-operating adjustments to
operating cash flows. Net income adjusted for non-cash and non-operating items and the origination and sale of loans held-for-
sale were the primary sources of cash flows from operating activities. Operating activities provided cash flows of $38.8 million,
$43.0 million and $28.0 million during the years ended December 31, 2009, 2008 and 2007, respectively.
During the year ended December 31, 2009, investing activities provided cash of $382.0 million primarily due to the
cash received from the purchase of additional business units and the repayment of loans. During the years ended December 31,
2008 and 2007, investing activities used cash of $195.5 million and $253.6 million, respectively, primarily due to the net
purchases of investment securities in each period and the net increase of loans in the 2007 period.
Changes in cash flows from financing activities during the periods covered by the Statements of Cash Flows are due to
changes in deposits after interest credited, changes in FHLBank advances, changes in short-term borrowings, proceeds from the
issuance of preferred stock under the Treasury's CPP and changes in structured repurchase agreements, as well as the purchases of
Company stock and dividend payments to stockholders. Financing activities used cash flows of $144.1 million during the year
ended December 31, 2009, primarily due to the repayment of advances from the FHLBank and reduction of brokered deposit
balances. Financing activities provided cash flows of $239.8 million and $173.0 million for the years ended December 31, 2008
and 2007, respectively. Financing activities in the future are expected to primarily include changes in deposits, changes in
FHLBank advances, changes in short-term borrowings and dividend payments to stockholders.
Dividends. During the year ended December 31, 2009, the Company declared and paid common stock cash dividends
of $0.72 per share (16.2% of net income per common share). During the year ended December 31, 2008, the Company declared
and paid common stock cash dividends of $0.72 per share. The Board of Directors meets regularly to consider the level and the
timing of dividend payments. The dividend declared but unpaid as of December 31, 2009, was paid to shareholders on January 13,
2010. As a result of the issuance of preferred stock to the U.S. Treasury in December 2008, the Company paid preferred
dividends totaling $2.7 million during the year ended December 31, 2009.
Our participation in the Treasury’s Capital Purchase Program (CPP) currently precludes us from increasing our
common stock cash dividend above $0.18 per share per quarter without the consent of the Treasury until the earlier of December
5, 2011 or our repayment of the CPP funds or the transfer by the Treasury to third parties of all of the shares of preferred stock we
issued to the Treasury pursuant to the CPP. As a result of the issuance of preferred stock to the Treasury pursuant to the CPP in
December 2008, the Company also paid a preferred stock cash dividend of $564,000 on February 17, 2009, paid a preferred stock
cash dividend of $725,000 on May 15, 2009, paid a preferred stock cash dividend of $725,000 on August 15, 2009, and paid a
preferred stock cash dividend of $725,000 on November 16, 2009. Quarterly payments of $725,000 will be due for the next four
years, as long as the preferred stock is outstanding. Thereafter, for as long as the preferred stock remains outstanding, the
preferred stock quarterly dividend payment will increase to $1.3 million.
Common Stock Repurchases. The Company has been in various buy-back programs since May 1990. During the year
ended December 31, 2009, the Company did not repurchase any shares of its common stock. During the year ended December
31, 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.
Our participation in the CPP currently precludes us from purchasing shares of the Company’s stock without the
Treasury’s consent until the earlier of December 5, 2011, or our repayment of the CPP funds or the transfer by the Treasury to
third parties of all of the shares of preferred stock we issued to the Treasury pursuant to the CPP. Management has historically
49
43
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, 2009, 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 very near
term based on current economic conditions and recent comments by FRB officials) 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 costs 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. However, if rates remain generally
unchanged in the short-term, we expect that our cost of funds will continue to decrease as we have redeemed some of our
brokered deposits. In addition, a significant portion of our retail certificates of deposit mature in the next few months and we
expect that they will be replaced with new certificates of deposit at lower interest rates.
Interest rate risk exposure estimates (the sensitivity gap) are not exact measures of an institution's actual interest rate
risk. They are only indicators of interest rate risk exposure produced in a simplified modeling environment designed to allow
management to gauge the Bank's sensitivity to changes in interest rates. They do not necessarily indicate the impact of general
interest rate movements on the Bank's net interest income because the repricing of certain categories of assets and liabilities is
subject to competitive and other factors beyond the Bank's control. As a result, certain assets and liabilities indicated as maturing
or otherwise repricing within a stated period may in fact mature or reprice at different times and in different amounts and cause a
change, which potentially could be material, in the Bank's interest rate risk.
50
52
51
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.
From time to time, 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 $(98,000) and
$(931,000) of ineffectiveness was recorded in income in the non-interest income caption for the years ended December 31, 2009
and 2008, 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.
From time to time the Company has entered into interest rate swap agreements with the objective of economically
hedging against the effects of changes in the fair value of its liabilities for fixed rate brokered certificates of deposit caused by
changes in market interest rates. The swap agreements generally provide for the Company to pay a variable rate of interest based
on a spread to the one-month or three-month London Interbank Offering Rate (LIBOR) and to receive a fixed rate of interest equal
to that of the hedged instrument. Under the swap agreements the Company is to pay or receive interest monthly, quarterly,
semiannually or at maturity.
At December 31, 2009, the notional amount of interest rate swaps outstanding was $-0-. 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.
50
51
53
The following tables illustrate the expected maturities and repricing, respectively, of the Bank's financial instruments at
December 31, 2009. 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,
2010
2011
2012
2013
(Dollars in thousands)
2014
Thereafter
Total
2009
Fair Value
$
201,853
0.06%
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
201,853
$ 201,853
0.06%
— $
—
1,878
0.36%
642
4.46%
—
—
658,583
5.71%
$
656
5.97%
—
—
$ 123,321
5.71%
$
903
5.35%
—
—
$ 98,065
5.06%
$
4,644
3.26%
—
—
$ 91,079
4.51%
$
931
6.11%
— $
—
$ 50,194
$
$
754,637
4.69%
16,290
6.21%
368,042
$ 1,389,284
$ 1,394,241
5.63%
5.41%
5.50%
323,972
$ 98,022
$ 114,230
$ 62,569
$ 69,441
$
268,115
6.96%
—
—
6.79%
—
—
6.96%
—
—
6.84%
—
—
6.56%
— $
—
7.59%
11,223
2.13%
$
$
936,349
$ 937,372
7.90%
11,223
$
11,223
2.13%
$
$
$
1,878
$
1,878
0.36%
762,413
$ 762,413
4.68%
16,290
$
16,065
6.21%
Total financial assets
$ 1,185,050
$ 221,999
$ 213,198
$ 158,292
$ 120,566
$ 1,420,185
$ 3,319,290
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
$ 1,356,132
$ 191,783
$
$
$
$
2.10%
820,862
1.00%
258,792
—
18,079
4.40%
336,182
0.70%
3.40%
—
—
—
—
$ 33,016
4.28%
—
—
$ 68,443
3.42%
—
—
—
—
$ 23,187
4.41%
—
—
$
9,462
$
3.62%
—
—
—
—
310
5.68%
—
—
$
$
—
—
—
—
—
—
—
—
— $
—
—
—
3,194
4.68%
—
—
$
$
7,387
3.24%
—
—
—
—
365
5.47%
—
—
— $
—
— $
—
1,100
4.17%
—
—
—
—
96,646
3.73%
—
—
50,000
4.34%
30,929
1.85%
$ 1,634,307
$ 1,637,187
$
$
$
$
$
$
2.32%
820,862
$ 820,862
1.00%
258,792
—
171,603
4.00%
$ 258,792
$ 177,725
336,182
$ 336,182
0.70%
53,194
4.34%
30,929
1.85%
$
$
59,092
30,929
Total financial liabilities
$ 2,790,047
$ 224,799
$ 91,630
$ 12,966
$
7,752
$
178,675
$ 3,305,869
_______________
(1) Available-for-sale debt securities include approximately $684 million of mortgage-backed securities and collateralized mortgage obligations which pay
interest and principal monthly to the Company. Of this total, $512 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. This table does not show the effect of these monthly
repayments of principal or rate changes.
52
46
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,
2010
2011
2012
2013
2014
(Dollars in thousands)
Thereafter
Total
2009
Fair Value
$
201,853
0.06%
—
—
105,751
3.92%
15,100
6.13%
$
$
$ 1,272,750
—
—
—
—
$ 101,228
—
—
—
—
$ 39,922
—
—
—
—
$ 68,374
4.37%
—
—
$ 40,906
5.15%
—
—
$ 25,079
4.61%
—
—
$ 22,109
—
—
— $
—
— $ 201,853 $
—
1,878 $
0.36%
0.06%
1,878 $
0.36%
201,853
1,878
$ 46,491 $ 400,647 $ 762,413 $
762,413
5.33%
— $
—
$ 20,800 $
4.68%
4.86%
16,290 $
1,190 $
6.21%
7. 27%
7,640 $ 1,389,284 $ 1,394,241
5.50%
4.74%
16,290
5.44%
6.63%
6.41%
6.33%
5.22%
$
$
323,972
$ 98,022
$ 114,230
$ 62,569
$ 69,441 $ 268,115 $ 936,349 $
937,372
6.98%
11,223
2.13%
6.79%
—
—
6.96%
—
—
6.84%
—
—
6.56%
—
—
7.59%
— $
—
7.90%
11,223 $
2.13%
11,223
Total financial assets
$ 1,930,649
$ 240,156
$ 179,231
$ 153,052
$ 136,732 $ 679,470 $ 3,319,290
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
$ 1,356,132
$ 191,783
$ 68,443
$
2.10%
$
820,862
1.00%
—
—
103,078
4.40%
336,182
0.70%
50,000
4.34%
30,929
1.85%
$
$
$
$
3.40%
—
—
—
—
$ 33,016
3.42%
—
—
—
—
$ 23,187
$
4.28%
—
—
—
—
—
—
4.41%
—
—
— $
—
—
—
$
$
9,462
3.62%
—
—
—
—
310
5.77%
—
—
3,194
4.68%
—
—
1,100 $ 1,634,307 $ 1,637,187
2.32%
4.17%
—
1.00%
— $ 820,862 $
—
7,387 $
3.24%
—
—
— $ 258,792 $ 258,792 $
—
366 $
5.48%
—
—
—
—
—
—
— $ 336,182 $
—
— $
—
— $
—
0.70%
53,194 $
4.34%
30,929 $
1.85%
11,646 $ 171,603 $
5.14%
4.00%
—
820,862
258,792
177,725
336,182
59,092
30,929
Total financial liabilities
$ 2,697,183
$ 224,799
$ 91,630
$ 12,966
$
7,753 $ 271,538 $ 3,305,869
Periodic repricing GAP
$ (766,534)
$ 15,357
$ 87,601
$ 140,086
$ 128,979 $ 407,932 $
13,421
Cumulative repricing GAP
$ (766,534)
$(751,177)
$(663,576)
$(523,490)
$(394,511) $
13,421
_______________
(1) Available-for-sale debt securities include approximately $684 million of mortgage-backed securities and collateralized mortgage obligations which
pay interest and principal monthly to the Company. Of this total, $512 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. 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 there is nothing to reprice.
(3) Time deposits include the effects of the Company's interest rate swaps on brokered certificates of deposit. These derivatives qualify for hedge
accounting treatment.
47
53
54
Great Southern Bancorp, Inc.
Consolidated Statements of Financial Condition
December 31, 2009 and 2008
(In Thousands, Except Per Share Data)
Assets
Cash
2009
2008
$
242,723
$
135,043
Interest-bearing deposits in other financial institutions
201,853
32,877
Cash and cash equivalents
444,576
167,920
Available-for-sale securities
764,291
647,678
Held-to-maturity securities
Mortgage loans held for sale
16,290
9,269
1,360
4,695
Loans receivable, net of allowance for loan losses of
$40,101 and $29,163 at December 31, 2009 and
2008, respectively
2,082,125
1,716,996
FDIC indemnification asset
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
141,484
15,582
66,020
41,660
42,383
6,216
11,223
—
13,287
14,179
32,659
30,030
1,687
8,333
Current and deferred income taxes
—
21,099
Total assets
$ 3,641,119
$ 2,659,923
54
See Notes to Consolidated Financial Statements
55
57
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Federal Home Loan Bank advances
Securities sold under reverse repurchase agreements
with customers
Short-term borrowings
Structured repurchase agreements
Subordinated debentures issued to capital trust
Accrued interest payable
Advances from borrowers for taxes and insurance
Accounts payable and accrued expenses
Current and deferred income taxes
Total liabilities
2009
2008
$ 2,713,961
171,603
$ 1,908,028
120,472
335,893
289
53,194
30,929
6,283
1,268
9,423
19,368
3,342,211
215,261
83,368
50,000
30,929
9,225
334
8,219
—
2,425,836
Commitments and Contingencies
—
—
Stockholders’ Equity
Capital stock
Serial preferred stock, $.01 par value; authorized
1,000,000 shares; issued and outstanding 58,000
shares
Common stock, $.01 par value; authorized
20,000,000 shares; issued and outstanding
2009 – 13,406,403 shares, 2008 – 13,380,969
shares
Common stock warrants; 909,091 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive gain (loss)
Unrealized gain (loss) on available-for-sale
securities, net of income taxes of $6,192 and
$(74) at December 31, 2009 and 2008,
respectively
Total stockholders’ equity
56,017
55,580
134
2,452
20,180
208,625
134
2,452
19,811
156,247
11,500
298,908
(137)
234,087
Total liabilities and stockholders’ equity
$ 3,641,119
$ 2,659,923
56
58
57
Great Southern Bancorp, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2009, 2008 and 2007
(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 on sales of available-for-sale securities
Realized impairment of available-for-sale securities
Late charges and fees on loans
Change in interest rate swap fair value net of change in hedged
deposit fair value
Initial gain recognized on business acquisition
Accretion of income related to business acquisition
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
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
57
59
2009
2008
2007
$
$
123,463
32,405
155,868
$
119,829
24,985
144,814
142,719
21,152
163,871
54,087
5,352
6,393
773
66,605
89,263
35,800
53,463
6,775
17,669
2,889
2,787
(4,308)
672
1,184
89,795
2,733
2,588
122,784
40,450
12,506
2,789
5,716
1,488
1,195
1,828
2,778
4,959
4,486
78,195
98,052
33,005
65,047
3,353
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)
819
6,981
—
—
2,195
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)
962
1,632
—
—
1,829
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
—
$
$
$
61,694
$
(4,670)
$
29,299
4.61
4.44
$
$
(.35)
(.35)
$
$
2.16
2.15
56
Great Southern Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2009, 2008 and 2007
(In Thousands, Except Per Share Data)
Income
(Loss)
Preferred
Stock
Common
Stock
Balance, January 1, 2007
$
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 taxes 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 taxes of $216
Company stock purchased
Reclassification of treasury stock per Maryland law
Balance, December 31, 2008
Net income
Stock issued under Stock Option Plan
Common dividends declared, $.72 per share
Preferred stock discount accretion
Preferred stock dividends accrued (5%)
Change in unrealized gain on available-for-sale
securities, net of income taxes of $6,266
Reclassification of treasury stock per Maryland law
$
$
$
$
—
29,299
—
—
1,282
—
—
30,581
—
(4,428)
—
—
—
—
—
—
401
—
—
(4,027)
—
65,047
—
—
—
—
11,637
—
$
$
—
—
—
—
—
—
—
—
—
55,548
—
—
—
32
—
—
—
—
55,580
—
—
—
437
—
—
—
137
—
—
—
—
—
(3)
134
—
—
—
—
—
—
—
—
—
—
134
—
—
—
—
—
—
—
Balance, December 31, 2009
$
76,684
$
56,017
$
134
See Notes to Consolidated Financial Statements
58
60
59
Common
Stock
Warrants
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Loss)
Treasury
Stock
Total
$
$
—
—
—
—
—
—
—
—
—
—
2,452
—
—
—
—
—
—
—
2,452
—
—
—
—
—
—
—
18,481
—
861
—
—
—
—
19,342
—
—
—
469
—
—
—
—
—
—
19,811
—
369
—
—
—
—
—
$
$
158,780
29,299
—
(9,205)
—
—
(7,941)
170,933
(4,428)
—
—
—
(9,633)
(32)
(210)
—
—
(383)
156,247
65,047
—
(9,642)
(437)
(2,916)
—
326
(1,820)
—
—
—
1,282
—
—
(538)
—
—
—
—
—
—
—
401
—
—
(137)
—
—
—
—
—
11,637
—
$
$
—
—
812
—
—
(8,756)
7,944
—
—
—
—
25
—
—
—
—
(408)
383
—
—
326
—
—
—
—
(326)
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)
—
234,087
65,047
695
(9,642)
—
(2,916)
11,637
—
$
2,452
$
20,180
$
208,625
$
11,500
$
0
$
298,908
58
59
61
Great Southern Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008 and 2007
(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
Compensation expense for stock option
grants
Provision for loan losses
Net gains on loan sales
Net realized losses and impairment on
available-for-sale securities
Gain on sale of premises and equipment
(Gain) loss on sale of foreclosed assets
Gain on purchase of additional business
units
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
2009
2008
2007
$
65,047
194,599
(196,726)
$
(4,428)
94,935
(91,914)
$
29,299
77,234
(73,035)
2,723
756
337
35,800
(2,889)
1,521
(47)
2,855
2,446
383
468
52,200
(1,415)
7,342
(191)
1,456
(89,795)
—
2,706
374
517
5,475
(1,037)
1,127
(48)
(209)
—
(6,626)
(1,960)
(3,918)
(1,184)
24,875
1,916
923
(4,584)
9,267
(6,983)
(5,562)
2,154
(2,698)
2,626
(5,347)
(1,713)
2,978
(1,854)
468
(10,453)
605
Net cash provided by operating
activities
38,768
43,512
28,516
See Notes to Consolidated Financial Statements
60
62
61
Great Southern Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008 and 2007
(In Thousands)
Investing Activities
Net change in loans
Purchase of loans
Proceeds from sale of student loans
Cash received from purchase of additional
business units
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 of held-to-maturity securities
(Purchase) redemption of Federal Home Loan
Bank stock
2009
2008
2007
$
$
103,995
(23,252)
9,407
34,189
(12,030)
634
$
(168,183)
(4,649)
3,052
265,769
—
(15,121)
266
18,155
(502)
70
110,739
—
—
(4,686)
434
11,183
(567)
60
85,242
—
(730)
(4,080)
106
3,290
(156)
50
4,415
229,069
(283,453)
(40,000)
206,902
(522,071)
—
482,153
(565,819)
—
6,924
5,224
(3,078)
Net cash provided by (used in) investing
activities
382,066
(195,486)
(253,629)
See Notes to Consolidated Financial Statements
61
63
Great Southern Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008 and 2007
(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 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
Advances to borrowers for taxes and insurance
Company stock purchased
Dividends paid
Stock options exercised
2009
2008
2007
$
(277,165) $
285,044
$
(8,400)
224,577
—
(103,148)
23,679
(132,125)
503,000
(596,395)
81,908
62,017
1,568,000
(1,533,303)
95,765
—
—
—
(103)
—
(12,376)
358
50,000
58,000
—
(44)
(408)
(9,637)
26
—
—
5,000
(10)
(8,756)
(8,981)
1,156
Net cash provided by (used in) financing
activities
(144,178)
239,369
172,488
Increase (Decrease) in Cash and Cash
Equivalents
276,656
87,395
(52,625)
Cash and Cash Equivalents, Beginning of Year
167,920
80,525
133,150
Cash and Cash Equivalents, End of Year
$
444,576
$
167,920
$
80,525
62
See Notes to Consolidated Financial Statements
62
63
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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 operations 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 in Missouri, Iowa, Kansas and Nebraska. In
addition, the Company serves the loan needs of customers through a loan origination office in
Rogers, Arkansas. 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, the valuation of the FDIC indemnification asset and other-
than-temporary impairments (OTTI) and fair values of financial instruments. 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. The valuation of the
FDIC indemnification asset is determined in relation to the fair value of assets acquired through
FDIC-assisted transactions for which cash flows are monitored on an ongoing basis.
63
8
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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 (including its wholly owned subsidiary,
GS RE Management, LLC) and GS-RE Holding II, LLC. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Reclassifications
Certain prior periods’ amounts have been reclassified to conform to the 2009 financial statements
presentation. These reclassifications had no effect on net income.
Federal Home Loan Bank Stock
Federal Home Loan Bank common 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, carried at cost and evaluated for impairment.
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.
Effective April 1, 2009, the Company adopted new accounting guidance related to recognition and
presentation of other-than-temporary impairment (FASB ASC 320-10). When the Company does
not intend to sell a debt security, and it is more likely than not the Company will not have to sell
the security before recovery of its cost basis, it recognizes the credit component of an other-than-
temporary impairment of a debt security in earnings and the remaining portion in other
comprehensive income. For held-to-maturity debt securities, the amount of an other-than-
temporary impairment recorded in other comprehensive income for the noncredit portion of a
previous other-than-temporary impairment is amortized prospectively over the remaining life of the
security on the basis of the timing of future estimated cash flows of the security.
64
9
65
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
As a result of this guidance, the Company’s consolidated statement of operations as of
December 31, 2009, reflect the full impairment (that is, the difference between the security’s
amortized cost basis and fair value) on debt securities that the Company intends to sell or would
more likely than not be required to sell before the expected recovery of the amortized cost basis.
For available-for-sale and held-to-maturity debt securities that management has no intent to sell
and believes that it more likely than not will not be required to sell prior to recovery, only the credit
loss component of the impairment is recognized in earnings, while the noncredit loss is recognized
in accumulated other comprehensive income. The credit loss component recognized in earnings is
identified as the amount of principal cash flows not expected to be received over the remaining
term of the security as projected based on cash flow projections.
Prior to the adoption of the accounting guidance on April 1, 2009, management considered, in
determining whether other-than-temporary impairment exists, (1) the length of time and the extent
to which the fair value has been less than cost, (2) the financial condition and near-term prospects
of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair value.
For equity securities, when the Company has decided to sell an impaired available-for-sale security
and the Company does not expect the fair value of the security to fully recover before the expected
time of sale, the security is deemed other-than-temporarily impaired in the period in which the
decision to sell is made. The Company recognizes an impairment loss when the impairment is
deemed other than temporary even if a decision to sell has not been made.
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.
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Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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.
The allowance consists of allocated and general components. The allocated component relates to
loans that are classified as impaired. For those loans that are classified as impaired, an allowance is
established when the discounted cash flows (or collateral value or observable market price) of the
impaired loan is lower than the carrying value of that loan. The general component covers
nonclassified loans and is based on historical charge-off experience and expected loss given default
derived from the Company’s internal risk rating process. Other adjustments may be made to the
allowance for pools of loans after an assessment of internal or external influences on credit quality
that are not fully reflected in the historical loss or risk rating data.
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.
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Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Method of Accounting for Loans Acquired in a Business Combination
Loans acquired in business combinations with evidence of credit deterioration since origination and
for which it is probable that all contractually required payments will not be collected are considered
to be credit impaired. Evidence of credit quality deterioration as of purchase dates may include
information such as past-due and nonaccrual status, borrower credit scores and recent loan to value
percentages. Acquired credit-impaired loans are accounted for under the accounting guidance for
loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially
measured at fair value, which includes estimated future credit losses expected to be incurred over
the life of the loans. Accordingly, allowances for credit losses related to these loans are not carried
over and recorded at the acquisition dates. Loans acquired through business combinations that do
not meet the specific criteria of ASC 310-30, but for which a discount is attributable, at least in part
to credit quality, are also accounted for under this guidance. As a result, related discounts are
recognized subsequently through accretion based on the expected cash flow of the acquired loans.
FDIC Indemnification Asset
Through two FDIC-assisted transactions during 2009, the Bank acquired certain loans and
foreclosed assets which are covered under loss sharing agreements with the FDIC. These
agreements commit the FDIC to reimburse the Bank for a portion of realized losses on these
covered assets. Therefore, as of the dates of acquisition, the Company calculated the amount of
such reimbursements it expects to receive from the FDIC using the present value of anticipated
cash flows from the covered assets based on the credit adjustments estimated for each pool of loans
and the estimated losses on foreclosed assets. In accordance with FASB ASC 805, each FDIC
Indemnification Asset was initially recorded at its fair value, and is measured separately from the
loan assets and foreclosed assets because the loss sharing agreements are not contractually
embedded in them or transferrable with them in the event of disposal. The balance of the FDIC
Indemnification Asset increases and decreases as the expected and actual cash flows from the
covered assets fluctuate, as loans are paid off or impaired and as loans and foreclosed assets are
sold. There are no contractual interest rates on these contractual receivables from the FDIC;
however, a discount was recorded against the initial balance of the FDIC Indemnification Asset in
conjunction with the fair value measurement as this receivable will be collected over the term of
the loss sharing agreements. This discount will be accreted to income over future periods. These
acquisitions and agreements are more fully discussed in Note 5 and Note 27.
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 less estimated cost to sell 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.
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Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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, 2009, 2008 and 2007.
Goodwill and Intangible Assets
Goodwill is tested at least 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
Branch acquisitions
TeamBank
Vantus Bank
Noncompete agreements
December 31,
2009
2008
(In Thousands)
$
$
379
875
226
2,631
2,074
31
379
875
314
—
—
119
$
6,216
$
1,687
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Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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.
Mortgage Servicing Rights
Mortgage servicing assets are recognized separately when rights are acquired through purchase or
through sale of financial assets. Under the servicing assets and liabilities accounting guidance
(FASB ASC 860-50), servicing rights resulting from the sale or securitization of loans originated
by the Company are initially measured at fair value at the date of transfer. In 2009, the Company
acquired mortgage servicing rights as part of two FDIC-assisted transactions. These mortgage
servicing assets were initially recorded at their fair values as part of the acquisition valuation. The
initial fair values recorded for the mortgage servicing assets, acquired in 2009, totaled $923,000.
Mortgage servicing assets were $1.1 million at December 31, 2009. The Company has elected to
measure the mortgage servicing rights for consumer mortgage loans using the amortization method,
whereby servicing rights are amortized in proportion to and over the period of estimated net
servicing income. The amortized assets are assessed for impairment or increased obligation based
on fair value at each reporting date.
Fair value is based on a valuation model that calculates the present value of estimated future net
servicing income. The valuation model incorporates assumptions that market participants would
use in estimating future net servicing income, such as the cost to service, the discount rate, the
custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and
losses. These variables change from quarter to quarter as market conditions and projected interest
rates change, and may have an adverse impact on the value of the mortgage servicing right and may
result in a reduction to noninterest income.
Each class of separately recognized servicing assets subsequently measured using the amortization
method are evaluated and measured for impairment. Impairment is determined by stratifying rights
into tranches based on predominant characteristics, such as interest rate, loan type and investor
type. Impairment is recognized through a valuation allowance for an individual tranche, to the
extent that fair value is less than the carrying amount of the servicing assets for that tranche. The
valuation allowance is adjusted to reflect changes in the measurement of impairment after the
initial measurement of impairment. At December 31, 2009, no valuation allowance was recorded.
Fair value in excess of the carrying amount of servicing assets is not recognized.
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
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Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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:
2009
2008
(In Thousands, Except Per Share Data)
2007
Net income (loss)
Net income (loss) available-to-common
shareholders
$
$
65,047
$
(4,428)
$
29,299
61,694
$
(4,670)
$
29,299
Average common shares outstanding
13,390
13,381
13,566
Average common share stock options
and warrants outstanding
492
N/A
88
Average diluted common shares
13,882
13,381
13,654
Earnings (loss) per common share – basic
Earnings (loss) per common share – diluted
$
$
4.61
4.44
$
$
(0.35)
(0.35)
$
$
2.16
2.15
Options to purchase 573,393 and 386,015 shares of common stock were outstanding during the
years ended December 31, 2009 and 2007, 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. Because of the Company’s net loss, 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.
Stock Option Plans
The Company has stock-based employee compensation plans, which are described more fully in
Note 20. On January 1, 2006, the Company adopted FASB ASC Topic 718, Compensation – Stock
Compensation, (SFAS No. 123(R), Share Based Payment). Topic 718 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
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71
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
equity instruments or that may be settled by the issuance of such equity instruments. Topic 718
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, 2009, 2008 and 2007, share-based
compensation expense totaling $337,000, $468,000 and $518,000, respectively, has been included
in salaries and employee benefits expense in the consolidated statements of operations.
Prior to the adoption of Topic 718, 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 2007, 2008 and 2009 was
reduced by approximately $267,000, $267,000 and $238,000, respectively. 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 2010, will be reduced by approximately $103,000.
The accelerated Options represent approximately 41% of the unvested Company options and 27%
of the total of all outstanding Company options.
Cash Equivalents
The Company considers all liquid investments with original maturities of three months or less to be
cash equivalents. At December 31, 2009 and 2008, cash equivalents consisted of interest-bearing
deposits in other financial institutions. At December 31, 2009, nearly all of the interest-bearing
deposits were uninsured, with nearly all of these balances held at the Federal Home Loan Bank or the
Federal Reserve Bank.
Income Taxes
The Company accounts for income taxes in accordance with income tax accounting guidance
(FASB ASC 740, Income Taxes). The income tax accounting guidance results in two components
of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid
or refunded for the current period by applying the provisions of the enacted tax law to the taxable
income or excess of deductions over revenues. The Company determines deferred income taxes
using the liability (or balance sheet) method. Under this method, the net deferred tax asset or
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Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
liability is based on the tax effects of the differences between the book and tax bases of assets and
liabilities, and enacted changes in tax rates and laws are recognized in the period in which they
occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between
periods. Deferred tax assets are recognized if it is more likely than not, based on the technical
merits, that the tax position will be realized or sustained upon examination. The term more likely
than not means a likelihood of more than 50 percent; the terms examined and upon examination
also include resolution of the related appeals or litigation processes, if any. A tax position that
meets the more-likely-than-not recognition threshold is initially and subsequently measured as the
largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon
settlement with a taxing authority that has full knowledge of all relevant information. The
determination of whether or not a tax position has met the more-likely-than-not recognition
threshold considers the facts, circumstances and information available at the reporting date and is
subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if,
based on the weight of evidence available, it is more likely than not that some portion or all of a
deferred tax asset will not be realized. At December 31, 2009 and 2008, no valuation allowance
was established.
The Company recognizes interest and penalties on income taxes as a component of income tax
expense.
The Company files consolidated income tax returns with its subsidiaries.
Interest Rate Swaps
The Company has entered into interest-rate swap derivatives from time to time, 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.
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Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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, 2009 and 2008, respectively, was $72,055,000 and
$31,396,000.
Recent Accounting Pronouncements
In February 2010, the FASB issued Accounting Standards Update No. (ASU) 2010-09, Subsequent
Events: Amendments to Certain Recognition and Disclosure Requirements (FASB ASU 2010-
09). This Update eliminates the requirement for an SEC filer to disclose the date through which
subsequent events were reviewed for both issued and revised financial statements. This Update was
effective upon issuance for the Company and did not have a material impact on its financial
position or results of operations.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving
Disclosures about Fair Value Measurements (FASB ASU 2010-09), which amends FASB ASC
Subtopic 820-10, Fair Value Measurements and Disclosures. This Update requires new disclosures
to show significant transfers in and out of Level 1 and Level 2 fair value measurements as well as
discussion regarding the reasons for the transfers. It also clarifies existing disclosures requiring fair
value measurement disclosures for each class of assets and liabilities. The Update describes a class
as being a subset of assets and liabilities within a line item on the statement of financial condition
which will require management judgment to designate. Use of the terminology “classes of assets
and liabilities” represents an amendment from the previous terminology “major categories of assets
and liabilities.” Clarification is also provided for disclosures of Level 2 and Level 3 recurring and
nonrecurring fair value measurements requiring discussion about the valuation techniques and
inputs used. These provisions of the Update are effective for interim and annual reporting periods
beginning after December 15, 2009. Another new disclosure requires an expanded reconciliation of
activity in Level 3 fair value measurements to present information about purchases, sales, issuances
and settlements on a gross basis rather than netting the amounts in one number. This requirement is
effective for interim and annual reporting periods beginning after December 15, 2010. The
adoption of this Update is not expected to have a material impact on the Company’s financial
position or results of operations.
In January 2010, the FASB issued Accounting Standards Update No. 2010-01, Accounting for
Distributions to Shareholders with Components of Stock and Cash (FASB ASU 2010-01). This
Update is a consensus of the FASB Emerging Issues Task Force and clarifies that the stock portion
of a distribution to shareholders that allows them to elect to receive cash or stock with a limit on the
amount of cash that will be distributed is not a stock dividend for purposes of applying FASB ASC
505, Equity, and FASB ASC 260, Earnings per Share. The amendments in this Update are
effective for interim and annual periods ending on or after December 15, 2009, and should be
applied on a retrospective basis. The Company does not expect the adoption of the amendments to
have a material impact on the Company’s financial position or results of operations.
In December 2009, the FASB issued Accounting Standards Update No. 2009-17, Consolidations
(Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest
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72
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Entities (FASB ASU 2009-17), which impacts FASB ASC 810 (FASB Interpretation No. 46(R),
Consolidation of Variable Interest Entities). The guidance was originally issued in June 2009 as
FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R), and changes how a
company determines when an entity that is insufficiently capitalized or is not controlled through
voting (or similar rights) should be consolidated. The determination of whether a company is
required to consolidate an entity is based on, among other things, an entity’s purpose and design
and a company’s ability to direct the activities of the entity that most significantly impact the
entity’s economic performance. The new guidance requires additional disclosures about the
reporting entity’s involvement with variable-interest entities and any significant changes in risk
exposure due to that involvement as well as its effect on the entity’s financial statements. The
guidance will be effective for the Company January 1, 2010. The Company does not expect the
adoption of this guidance to have a material impact on the Company’s financial position or results
of operations.
In December 2009, the FASB issued Accounting Standards Update No. 2009-16, Transfers and
Servicing (Topic 860): Accounting for Transfers of Financial Assets (FASB ASU 2009-16), which
amends FASB ASC 860 (SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities). The guidance was originally issued in June 2009 as
FASB Statement No. 166, Accounting for Transfers of Financial Assets, to enhance reporting about
transfers of financial assets, including securitizations and situations where companies have
continuing exposure to the risks related to transferred financial assets. The new guidance
eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for
derecognizing financial assets. It also requires additional disclosures about all continuing
involvements with transferred financial assets including information about gains and losses
resulting from transfers during the period. This guidance will be effective for the Company
January 1, 2010. The Company does not expect the adoption of this guidance to have a material
impact on the Company’s financial position or results of operations.
In October 2009, the FASB issued Accounting Standards Update No. 2009-15, Accounting for
Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other
Financing (FASB ASU 2009-15). This Update is a consensus of the FASB Emerging Issues Task
Force. This Update amends guidance in FASB ASC 470, Debt, and FASB ASC 260, Earnings per
Share, and clarifies how a corporate entity should (1) account for a share-lending arrangement that
is entered into in contemplation of a convertible debt offering and (2) calculate earnings per share.
This Update is effective for fiscal years beginning on or after December 15, 2009, and interim
periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal
years. Retrospective application is required for all arrangements outstanding as of the beginning of
fiscal years beginning on or after December 15, 2009. The Company does not expect the adoption
of this Update to have a material impact on the Company’s financial position or results of
operations.
In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Fair Value
Measurements and Disclosures (FASB ASU 2009-05). This Update provides amendments to
Subtopic 820-10, Fair Value Measurements and Disclosures – Overall, for the fair value
measurement of liabilities. This Update provides clarification that in circumstances in which a
quoted price in an active market for the identical liability is not available, a reporting entity is
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75
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
required to measure fair value using one or more specified valuation techniques. The amendments
in this Update also clarify that when estimating the fair value of a liability, a reporting entity is not
required to include a separate input or adjustment to other inputs relating to the existence of a
restriction that prevents the transfer of the liability. It also clarifies that both a quoted price in an
active market for the identical liability at the measurement date and the quoted price for the
identical liability when traded as an asset in an active market when no adjustments to the quoted
price of the asset are required are Level 1 fair value measurements. This new guidance was
effective for the first reporting period (including interim periods) beginning after issuance. The
adoption of this Update did not have a material impact on the Company’s financial position or
results of operations.
In August 2009, the FASB issued Accounting Standards Update No. 2009-04, Accounting for
Redeemable Equity Instruments (FASB ASU 2009-04). This guidance amends Section 480-10-
S99, Distinguishing Liabilities from Equity, per EITF Topic D-98, Classification and Measurement
of Redeemable Securities. The adoption of this guidance did not have a material impact on the
Company’s financial position or results of operations.
Effective July 1, 2009, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. (SFAS) 168, The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB
Statement No. 162 (FASB ASC 105-10, Generally Accepted Accounting Principles). The FASB
Accounting Standards Codification (FASB ASC) will be the single source of authoritative
nongovernmental generally accepted accounting principles (GAAP) in the United States of
America. Rules and interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative guidance for SEC registrants. All guidance contained in the
Codification carries an equal level of authority. All nongrandfathered, non-SEC accounting
literature not included in the Codification is superseded and deemed non-authoritative. SFAS No.
168 was effective for the Company’s interim and annual financial statements for periods ending
after September 15, 2009. Other than resolving certain minor inconsistencies in current GAAP, the
FASB ASC is not intended to change GAAP, but rather to make it easier to review and research
GAAP applicable to a particular transaction or specific accounting issue. The adoption of this
Statement did not have a material impact on the Company’s financial position or results of
operations. Technical references to GAAP included in these Notes to Consolidated Financial
Statements are provided under the new FASB ASC structure with the prior terminology included
parenthetically when first used.
In June 2009, the FASB issued an Exposure Draft of a proposed guidance on disclosure about the
credit quality of financing receivables and the allowance for credit losses. The purpose of the
proposed guidance is to improve the quality of financial reporting by providing disclosure
information that allows financial statement users to understand the nature of credit risk inherent in
the creditor’s portfolio of financing receivables; how that risk is analyzed and assessed in arriving
at the allowance for credit losses; and the changes, and reasons for those changes, in both the
receivables and the allowance for credit losses. To achieve this objective, this guidance would
require disclosure of a creditor’s accounting policies for estimating the allowance for credit losses,
qualitative and quantitative information about the credit risk inherent in its financing receivables
portfolio, the methods used in determining the components of the allowance for credit losses, and
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Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
quantitative disaggregated information about the change in receivables and the related allowance
for credit losses. The FASB continues to deliberate this proposed guidance at this time. As
currently written, this proposed guidance would be effective beginning with the first interim or
annual reporting period ending after December 15, 2009.
In June 2009, the SEC issued Staff Accounting Bulletin (SAB) No. 112. This SAB amends or
rescinds portions of the interpretive guidance included in the Staff Accounting Bulletin Series in
order to make the relevant interpretive guidance consistent with current authoritative accounting
and auditing guidance and SEC rules and regulations. The staff is updating the Series in order to
bring existing guidance into conformity with recent pronouncements by the FASB, specifically,
amendments to FASB ASC 815 and FASB ASC 810.
In May 2009, the FASB issued proposed guidance impacting FASB ASC 829 (FASB Staff Position
No. 157-f, Measuring Liabilities under FASB Statement No. 157). This proposed guidance would
clarify the principles in FASB ASC 820 on the measurement of liabilities. This guidance, if adopted
as it is currently written, will be effective for the first reporting period (including interim periods)
beginning after issuance. In the period of adoption, entities must disclose any change in valuation
technique resulting from the application of this guidance, and quantify its effect, if practicable. The
FASB continues to deliberate this proposed guidance at this time.
In May 2009, the FASB issued guidance impacting FASB ASC 855 (SFAS No. 165, Subsequent
Events). The guidance concerns the recognition or disclosure of events or transactions that occur
subsequent to the balance sheet date but prior to the release of the financial statements. The
guidance sets forth that management of a public company must evaluate subsequent events for
recognition and/or disclosure through the date of issuance. The guidance also defines the
recognition and disclosure requirements for Recognized Subsequent Events and Non-Recognized
Subsequent Events. Recognized Subsequent Events provide additional evidence about conditions
that existed as of the balance sheet date and will be recognized in the entity’s financial statements.
Non-Recognized Subsequent Events provide evidence about conditions that did not exist as of the
balance sheet date and if material will warrant disclosure of the nature of the subsequent event and
the financial impact. This guidance was effective for interim and annual reporting periods ending
after June 15, 2009, and was adopted by the Company at June 30, 2009. The adoption of this
guidance did not have a material impact on the Company’s financial position or results of
operations.
In April 2009, the FASB issued guidance impacting FASB ASC 820 (FSP FAS 157-4, Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly). This guidance provides additional
guidance for estimating fair value in accordance with FASB ASC 829 (SFAS No. 157, Fair Value
Measurements), when the volume and level of activity for the asset or liability have significantly
decreased. The new guidance also includes guidance on identifying circumstances that indicate a
transaction is not orderly. In addition, the guidance requires additional disclosures of valuation
inputs and techniques in interim periods and defines the major security types that are required to be
disclosed. The guidance was effective for the Company’s financial statements beginning with the
three months ended June 30, 2009. The adoption of this guidance did not have a material effect on
the Company’s financial position or results of operations.
76
21
77
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
In April 2009, the FASB issued guidance impacting FASB ASC 320 (FSP FAS 115-2 and FAS
124-2, Recognition and Presentation of Other-Than-Temporary Impairments). This guidance
amends the other-than-temporary impairment guidance for debt securities to make the guidance
more operational and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in the financial statements. This guidance requires an
entity to recognize the credit component of an other-than-temporary impairment of a debt security
in earnings and the noncredit component in other comprehensive income (OCI) when the entity
does not intend to sell the security and it is more likely than not that the entity will not be required
to sell the security prior to recovery. The guidance also requires expanded disclosures. The new
guidance was effective for the Company’s financial statements beginning with the three months
ended June 30, 2009. The adoption of this guidance did not have a material effect on the
Company’s financial position or results of operations.
In conjunction with the issuance of the guidance impacting FASB ASC 320 discussed in the
paragraph above, the SEC issued SAB No. 111. This SAB amends Topic 5.M. in the Staff
Accounting Bulletin Series entitled Other Than Temporary Impairment of Certain Investments in
Debt and Equity Securities (Topic 5.M.) as well as FASB ASC 320. This SAB maintains the
SEC’s previous views related to equity securities. It also amends Topic 5.M. to exclude debt
securities from its scope.
In April 2009, the FASB issued guidance impacting FASB ASC 825 (FSP FAS 107-1 and APB 28-
1, Interim Disclosures about Fair Value of Financial Instruments). This guidance amends FASB
ASC 825 (SFAS No. 107, Disclosures about Fair Value of Financial Instruments), to require
expanded disclosures for all financial instruments that are not measured at fair value through
earnings as defined by FASB ASC 825 in interim periods, as well as in annual periods. Also
required are disclosures about the fair value of financial instruments in interim financial statements
as well as in annual financial statements. The guidance also amends FASB ASC 270 (APB
Opinion No. 28, Interim Financial Reporting), to require those disclosures in all interim financial
statements. The disclosures required by the new guidance were effective for the Company’s
financial statements beginning with the three months ended June 30, 2009, and are included in Note
14.
In April 2009, the FASB issued guidance impacting FASB ASC 805-20-25 (FASB Staff Position
FAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination
That Arise from Contingencies). This guidance addresses application issues raised by preparers,
auditors and members of the legal profession on initial recognition and measurement, subsequent
measurement and accounting and disclosure of assets and liabilities arising from contingencies in a
business combination. The new guidance was effective for the Company for business combinations
entered into on or after January 1, 2009.
In June 2008, the FASB issued an Exposure Draft of proposed guidance on disclosure of certain
loss contingencies. This guidance would amend FASB ASC 450 (SFAS No. 5, Accounting for
Contingencies) and FASB ASC 805 (SFAS 141(R)). The purpose of the proposed guidance is 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 FASB ASC 450 do not provide sufficient information in a timely
77
22
76
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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
guidance would expand disclosures about certain loss contingencies in the scope of FASB ASC 450
or FASB ASC 805 and would have been 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 guidance at this time.
In March 2008, the FASB issued guidance impacting FASB ASC 815 (SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133).
This new guidance requires enhanced disclosures about an entity’s derivative and hedging activities
intended to improve the transparency of financial reporting. Under the new guidance, 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
FASB ASC 815 and its related interpretations and (c) how derivative instruments and related
hedged items affect an entity’s financial position, financial performance and cash flows. This
guidance was effective for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008. The Company adopted this guidance effective January 1, 2009. The
adoption of the guidance did not have a material effect on the Company’s financial position or
results of operations. For information about the Company’s derivative financial instruments, see
Note 16.
In February 2008, the FASB issued guidance impacting FASB ASC 820, Fair Value Measurements
and Disclosures (FASB Staff Position No. 157-2). The staff position delays the effective date of
certain guidance within FASB ASC 820 (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 FASB ASC 820. This staff position deferred
the effective date to January 1, 2009, for items within the scope of the staff position did not have a
material effect on the Company’s financial position or results of operations.
In December 2007, the FASB issued new guidance impacting FASB ASC 805, Business
Combinations (SFAS No. 141 (revised), Business Combinations). FASB ASC 805 retains the
fundamental requirements that the acquisition method of accounting be used for business
combinations, but broadens the scope of the original guidance and contains improvements to the
application of this method. The guidance 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. FASB ASC 805 applies to business combinations
occurring after January 1, 2009. The Company adopted this guidance on January 1, 2009, and
applied it with regard to its March 20, 2009, and September 4, 2009, FDIC-assisted transactions
described in Note 27.
78
23
79
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
In December 2007, the FASB issued guidance impacting FASB ASC 810, Consolidation (SFAS
No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB
No. 51), which 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. FASB ASC 810 also expands the disclosure
requirements and provides guidance on how to account for changes in the ownership interest of a
subsidiary. The new guidance in FASB ASC 810 was adopted by the Company on January 1,
2009. Based on its current activities, the adoption of this guidance did not have a material effect on
the Company’s financial position or results of operations.
Note 2:
Investments in Debt and Equity Securities
The amortized cost and fair values of securities classified as available-for-sale were as follows:
Amortized
Cost
December 31, 2009
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair
Value
U.S. government agencies
Collateralized mortgage
obligations
Mortgage-backed securities
States and political subdivisions
Corporate bonds
Equity securities
$
15,931
$
28
$
—
$
15,959
51,221
614,338
63,686
49
1,374
746,599
$
1,042
18,508
705
21
504
20,808
$
$
527
672
1,904
13
—
3,116
$
51,736
632,174
62,487
57
1,878
764,291
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)
Fair
Value
$
34,968
$
32
$
244
$
34,756
73,976
480,349
55,545
1,500
1,552
647,890
$
79
$
585
6,029
107
—
—
6,753
$
2,647
1,182
2,549
295
48
6,965
$
71,914
485,196
53,103
1,205
1,504
647,678
24
78
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Additional details of the Company’s collateralized mortgage obligations and mortgage-backed
securities at December 31, 2009, are described as follows:
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair
Value
Collateralized mortgage obligations
FHLMC fixed
FHLMC variable
Total FHLMC
FNMA fixed
FNMA variable
Total FNMA
GNMA fixed
GNMA variable
Total GNMA
Total agency
Nonagency fixed
Nonagency variable
Total nonagency
Total fixed
Total variable
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
26,197
20
26,217
11,604
142
11,746
4,867
49
4,916
42,879
3,250
5,092
8,342
51,221
45,918
5,303
51,221
55,623
242,103
297,726
46,885
182,180
229,065
19,128
68,419
87,547
614,338
121,636
492,702
614,338
80
637
4
641
237
8
245
96
6
102
988
10
44
54
1,042
980
62
1,042
1,758
8,407
10,165
1,472
6,600
8,072
108
163
271
18,508
3,338
15,170
18,508
$
$
$
$
$
$
$
$
0
0
0
0
2
2
0
0
0
2
2
523
525
527
2
525
527
6
58
64
14
1
15
106
487
593
672
126
546
672
$
$
$
$
$
$
$
$
26,834
24
26,858
11,841
148
11,989
4,963
55
5,018
43,865
3,258
4,613
7,871
51,736
46,896
4,840
51,736
57,375
250,452
307,827
48,343
188,779
237,122
19,130
68,095
87,225
632,174
124,848
507,326
632,174
25
81
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
The amortized cost and fair value of available-for-sale securities at December 31, 2009, 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
Fair
Value
(In Thousands)
$
$
637
7,053
17,737
54,239
665,559
1,374
642
7,134
17,830
52,897
683,910
1,878
$
746,599
$
764,291
The amortized cost and fair values of securities classified as held to maturity were as follows:
Amortized
Cost
December 31, 2009
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair
Value
U.S. government agencies
States and political
subdivisions
$
15,000 $
—
$
365
$
14,635
1,290
140
—
1,430
$
16,290 $
140
$
365
$
16,065
Amortized
Cost
December 31, 2008
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair
Value
States and political
subdivisions
$
1,360 $
62
$
0
$
1,422
80
81
26
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
The held-to-maturity securities at December 31, 2009, 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 five through ten years
After ten years
Amortized
Cost
Fair
Value
(In Thousands)
$
1,190 $
15,100
1,328
14,737
$
16,290
$
16,065
The amortized cost and fair values of securities pledged as collateral was as follows at
December 31, 2009 and 2008:
Public deposits
Collateralized borrowing
accounts
Structured repurchase
agreements
Federal Home Loan Bank
advances
Federal Reserve Bank
borrowings
Interest rate swaps and
treasury, tax and loan
accounts
2009
2008
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(In Thousands)
$
315,459
$
322,995
$
140,452
$
140,660
309,447
315,590
222,307
220,755
66,571
68,603
57,251
57,412
—
—
11,452
11,544
2,782
—
2,893
—
5,610
5,746
3,021
2,965
$
708,539
$
724,478
$
425,813
$
424,685
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,
2009 and 2008, respectively, was approximately $139,985,000 and $222,228,000 which is
approximately 17.93% and 34.24% 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.
82
27
83
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
During 2009, the Company determined that the impairment of certain available-for-sale securities
with a book value of $8.5 million had become other than temporary. Consequently, the Company
recorded a $4.3 million pre-tax charge to income during 2009. This total charge included $2.9
million related to a nonagency collateralized mortgage obligation. 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 2007.
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, 2009 and 2008:
Description of Securities Fair Value
Less than 12 Months
Unrealized
Losses
$
14,635
102,796
$
U.S. government agencies
Mortgage-backed securities
Collateralized mortgage
obligations
State and political subdivisions
Corporate bonds
1,993
9,876
5
(365)
(672)
(385)
(156)
(13)
2009
12 Months or More
Fair Value
Unrealized
Losses
(In Thousands)
Total
Fair Value
Unrealized
Losses
$
$
—
—
—
—
$
14,635
102,796
$
(365)
(672)
2,464
8,216
—
(142)
(1,748)
—
4,457
18,092
5
(527)
(1,904)
(13)
$ 129,305
$
(1,591)
$
10,680
$
(1,890)
$ 139,985
$
(3,481)
Description of Securities Fair Value
Less than 12 Months
Unrealized
Losses
2008
12 Months or More
Fair Value
Unrealized
Losses
(In Thousands)
Total
Fair Value
Unrealized
Losses
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)
82
83
28
$ 200,344
$
(3,285)
$
21,884
$
(3,680)
$ 222,228
$
(6,965)
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Other-than-Temporary Impairment
Upon acquisition of a security, the Company decides whether it is within the scope of the
accounting guidance for beneficial interests in securitized financial assets or will be evaluated for
impairment under the accounting guidance for investments in debt and equity securities.
The accounting guidance for beneficial interests in securitized financial assets provides incremental
impairment guidance for a subset of the debt securities within the scope of the guidance for
investments in debt and equity securities. For securities where the security is a beneficial interest
in securitized financial assets, the Company uses the beneficial interests in securitized financial
asset impairment model. For securities where the security is not a beneficial interest in securitized
financial assets, the Company uses debt and equity securities impairment model. The Company
does not currently have securities within the scope of this guidance for beneficial interests in
securitized financial assets.
The Company routinely conducts periodic reviews to identify and evaluate each investment security
to determine whether an other-than-temporary impairment has occurred. The Company considers
the length of time a security has been in an unrealized loss position, the relative amount of the
unrealized loss compared to the carrying value of the security, the type of security and other factors.
If certain criteria are met, the Company performs additional review and evaluation using observable
market values or various inputs in economic models to determine if an unrealized loss is other than
temporary. The Company uses quoted market prices for marketable equity securities and uses
broker pricing quotes based on observable inputs for equity investments that are not traded on a
stock exchange. For nonagency collateralized mortgage obligations, to determine if the unrealized
loss is other than temporary, the Company projects total estimated defaults of the underlying assets
(mortgages) and multiplies that calculated amount by an estimate of realizable value upon sale in the
marketplace (severity) in order to determine the projected collateral loss. The Company also
evaluates any current credit enhancement underlying these securities to determine the impact on
cash flows. If the Company determines that a given security position will be subject to a write-
down or loss, the Company records the expected credit loss as a charge to earnings.
Credit Losses Recognized on Investments
Certain debt securities have experienced fair value deterioration due to credit losses, as well as due
to other market factors, but are not otherwise other than temporarily impaired.
The following table provides information about debt securities for which only a credit loss was
recognized in income and other losses are recorded in other comprehensive income.
Credit losses on debt securities held
January 1, 2009
Additions related to other-than-temporary losses not
previously recognized
Reductions due to sales
December 31, 2009
Accumulated
Credit Losses
$
$
—
3,304
(321)
2,983
84
29
85
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Note 3: Other Comprehensive Income
2009
2008
(In Thousands)
2007
Net unrealized gain (loss) on available-for-sale
securities
$
24,307
$
(6,725)
$
845
Net unrealized gain (loss) on available-for-sale
debt securities for which a portion of an other-
than-temporary impairment has been recognized
Less reclassification adjustment for gain (loss)
included in net income
Other comprehensive income, before tax effect
Tax expense
(4,150)
—
—
2,254
17,903
6,266
(7,342)
(1,127)
617
216
1,972
690
Change in unrealized gain on available-for-sale
securities, net of income taxes
$
11,637
$
401
$
1,282
The components of accumulated other comprehensive income (loss), included in stockholders’
equity, are as follows:
2009
2008
$
18,067 $
(211)
Net unrealized gain (loss) on available-for-sale securities
Net unrealized gain (loss) on available-for-sale debt
securities for which a portion of an other-than-
temporary impairment has been recognized in income
Tax expense (benefit)
(375)
17,692
6,192
Net-of-tax amount
$
11,500 $
84
85
—
(211)
(74)
(137)
30
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Note 4: Loans and Allowance for Loan Losses
Categories of loans at December 31, 2009 and 2008, 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
FDIC-supported loans, net of discounts (TeamBank)
FDIC-supported loans, net of discounts (Vantus Bank)
Discounts on loans purchased
Undisbursed portion of loans in process
Allowance for loan losses
Deferred loan fees and gains, net
$
2009
2008
(In Thousands)
$
239,624
185,757
572,404
151,278
60,969
357,041
172,655
13,664
199,774
225,950
(4)
(54,729)
(40,101)
(2,157)
222,100
127,122
477,551
139,591
59,413
604,965
177,480
13,917
—
—
(4)
(73,855)
(29,163)
(2,121)
$ 2,082,125
$ 1,716,996
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 $5,577 for 2009, $4,531 for 2008
and $2,595 for 2007
2009
2008
(In Thousands)
2007
$
29,163
35,800
$
25,459
52,200
$
26,258
5,475
(24,862)
(48,496)
(6,274)
Balance, end of year
$
40,101
$
29,163
$
25,459
The weighted average interest rate on loans receivable at December 31, 2009 and 2008, was 6.25%
and 6.35%, 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 $264,825,000
and $87,104,000 at December 31, 2009 and 2008, respectively. In addition, available lines of
credit on these loans were $21,375,000 and $9,715,000 at December 31, 2009 and 2008,
respectively.
86
31
87
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-
10-35-16), when based on current information and events, it is probable the Company will be
unable to collect all amounts due from the borrower in accordance with the contractual terms of the
loan. Impaired loans include nonperforming commercial loans but also include loans modified in
troubled debt restructurings where concessions have been granted to borrowers experiencing
financial difficulties. These concessions could include a reduction in the interest rate on the loan,
payment extensions, forgiveness of principal, forbearance or other actions intended to maximize
collection.
Gross impaired loans, excluding performing troubled debt restructurings, totaled approximately
$61,872,000 and $45,569,000 at December 31, 2009 and 2008, respectively. An allowance for
loan losses of $9,760,000 and $3,720,000 relates to impaired loans of $58,509,000 and
$34,263,000 at December 31, 2009 and 2008, respectively. There were $3,363,000 of impaired
loans at December 31, 2009, and $11,306,000 of impaired loans at December 31, 2008, without a
related allowance for loan losses assigned.
Included in certain loan categories in the impaired loans are troubled debt restructurings that were
classified as impaired. At December 31, 2009, the Company had commercial business loans of
$180,000 that were modified in troubled debt restructurings and impaired. In addition to this
amount, the Company had troubled debt restructurings that were performing in accordance with
their modified terms of $9.7 million of commercial real estate loans and $1.7 million of other loans
at December 31, 2009.
Interest of approximately $388,000, $1,122,000 and $1,097,000 was received on average impaired
loans of approximately $23,544,000, $33,596,000 and $31,757,000 for the years ended
December 31, 2009, 2008 and 2007, respectively. Interest of approximately $1,858,000,
$2,874,000 and $2,659,000 would have been recognized on an accrual basis during the years ended
December 31, 2009, 2008 and 2007, respectively.
At December 31, 2009 and 2008, accruing loans delinquent 90 days or more totaled approximately
$490,000 and $318,000, respectively. Nonaccruing loans at December 31, 2009 and 2008, were
approximately $26,000,000 and $32,884,000, respectively.
Certain of the Bank’s real estate loans are pledged as collateral for borrowings as set forth in
Notes 8 and 10.
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, 2009
and 2008, loans outstanding to these directors and executive officers are summarized as follows:
86
87
32
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Balance, beginning of year
New loans
Payments
December 31,
2009
2008
(In Thousands)
$
$
28,718
4,699
(18,525)
28,879
21,465
(21,626)
Balance, end of year
$
14,892
$
28,718
Note 5: Acquired Loans, Loss Sharing Agreements and FDIC Indemnification
Assets
TeamBank
On March 20, 2009, Great Southern Bank entered into a purchase and assumption agreement with
loss share with the Federal Deposit Insurance Corporation (FDIC) to assume all of the deposits
(excluding brokered deposits) and acquire certain assets of TeamBank, N.A., a full service
commercial bank headquartered in Paola, Kansas.
The loans, commitments and foreclosed assets purchased in the TeamBank transaction are covered
by a loss sharing agreement between the FDIC and Great Southern Bank which affords the Bank
significant protection. Under the loss sharing agreement, the Bank will share in the losses on assets
covered under the agreement (referred to as covered assets). On losses up to $115.0 million, the
FDIC has agreed to reimburse the Bank for 80% of the losses. On losses exceeding $115.0 million,
the FDIC has agreed to reimburse the Bank for 95% of the losses. Realized losses covered by the
loss sharing agreement include loan contractual balances (and related unfunded commitments that
were acquired), accrued interest on loans for up to 90 days, the book value of foreclosed real estate
acquired, and certain direct costs, less cash or other consideration received by Great Southern. This
agreement extends for ten years for 1-4 family real estate loans and for five years for other loans.
The value of this loss sharing agreement was considered in determining fair values of loans and
foreclosed assets acquired. The loss sharing agreement is subject to the Bank following servicing
procedures as specified in the agreement with the FDIC. The expected reimbursements under the
loss sharing agreement were recorded as an indemnification asset at their preliminary estimated fair
value on the acquisition date.
The Bank recorded a preliminary one-time gain of $27.8 million (pre-tax) based upon the initial
estimated fair value of the assets acquired and liabilities assumed in accordance with FASB ASC
805 (SFAS No. 141(R), Business Combinations). FASB ASC 805 allows a measurement period of
up to one year to adjust initial fair value estimates as of the acquisition date. Subsequent to the
initial fair value estimate calculations in the first quarter of 2009, additional information was
obtained about the fair value of assets acquired and liabilities assumed as of March 20, 2009, which
resulted in adjustments to the initial fair value estimates. Most significantly, additional information
was obtained on the credit quality of certain loans as of the acquisition date which
88
33
89
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
resulted in increased fair value estimates of the acquired loan pools. The fair values of these loan
pools were adjusted and the provisional fair values finalized. These adjustments resulted in a $16.1
million increase to the initial one-time gain of $27.8 million. Thus, the final gain was $43.9 million
related to the fair value of the acquired assets and assumed liabilities. This gain was included in
Noninterest Income in the Company’s Consolidated Statement of Operations for the year ended
December 31, 2009.
The Bank originally recorded the fair value of the acquired loans at their preliminary fair value of
$222.8 million and the related FDIC indemnification asset was originally recorded at its
preliminary fair value of $153.6 million. As discussed above, these initial fair values were adjusted
during the measurement period, resulting in a final fair value at the acquisition date of $264.4
million for acquired loans and $128.3 million for the FDIC indemnification asset. A discount was
recorded in conjunction with the fair value of the acquired loans and the amount accreted to yield
during 2009 since acquisition was $966,000. No reclassifications were made in 2009 from
nonaccretable discount to accretable discount.
In addition to the loan and FDIC indemnification assets noted above, the acquisition consisted of
assets with a fair value of approximately $628.2 million, including $111.8 million of investment
securities, $83.4 million of cash and cash equivalents, $2.9 million of foreclosed assets and $3.9
million of FHLB stock. Liabilities with a fair value of $610.2 million were also assumed, including
$515.7 million of deposits, $80.9 million of FHLB advances and $2.3 million of repurchase
agreements with a commercial bank. A customer-related core deposit intangible asset of $2.9
million was also recorded. In addition to the excess of liabilities over assets, the Bank received
approximately $42.4 million in cash from the FDIC and entered into a loss sharing agreement with
the FDIC.
Vantus Bank
On September 4, 2009, Great Southern Bank entered into a purchase and assumption agreement
with loss share with the FDIC to assume all of the deposits and acquire certain assets of Vantus
Bank, a full service thrift headquartered in Sioux City, Iowa.
The loans, commitments and foreclosed assets purchased in the Vantus Bank transaction are
covered by a loss sharing agreement between the FDIC and Great Southern Bank which affords the
Bank significant protection. Under the loss sharing agreement, the Bank will share in the losses on
assets covered under the agreement (referred to as covered assets). On losses up to $102.0 million,
the FDIC has agreed to reimburse the Bank for 80% of the losses. On losses exceeding $102.0
million, the FDIC has agreed to reimburse the Bank for 95% of the losses. Realized losses covered
by the loss sharing agreement include loan contractual balances (and related unfunded
commitments that were acquired), accrued interest on loans for up to 90 days, the book value of
foreclosed real estate acquired, and certain direct costs, less cash or other consideration received by
Great Southern. This agreement extends for ten years for 1-4 family real estate loans and for five
years for other loans. The value of this loss sharing agreement was considered in determining fair
88
89
34
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
values of loans and foreclosed assets acquired. The loss sharing agreement is subject to the Bank
following servicing procedures as specified in the agreement with the FDIC. The expected
reimbursements under the loss sharing agreement were recorded as an indemnification asset at their
preliminary estimated fair value of $62.2 million on the acquisition date. Based upon the
acquisition date fair values of the net assets acquired, no goodwill was recorded. The transaction
resulted in an initial preliminary gain of $45.9 million, which was included in Noninterest Income
in the Company’s Consolidated Statement of Operations for the year ended December 31, 2009.
The Company continues to analyze its estimates of the fair values of the loans acquired and the
indemnification asset recorded. The Company has not yet finalized its analysis of these assets and,
therefore, adjustments to the recorded carrying values may occur.
The acquisition consisted of assets with a fair value of approximately $294.2 million, including
$247.0 million of loans, $23.1 million of investment securities, $12.8 million of cash and cash
equivalents, $2.2 million of foreclosed assets and $5.9 million of FHLB stock. Liabilities with a
fair value of $444.0 million were also assumed, including $352.7 million of deposits, $74.6 million
of FHLB advances, $10.0 million of borrowings from the Federal Reserve Bank and $3.2 million
of repurchase agreements with a commercial bank. A customer-related core deposit intangible
asset of $2.2 million was also recorded. In addition to the excess of liabilities over assets, the Bank
received approximately $131.3 million in cash from the FDIC and entered into a loss sharing
agreement with the FDIC.
At the time of these acquisitions, the Company determined the fair value of the loan portfolios
based on several assumptions. Factors considered in the valuations were projected cash flows for
the loans, type of loan and related collateral, classification status, fixed or variable interest rate,
term of loan, current discount rates and whether or not the loan was amortizing. Loans were
grouped together according to similar characteristics and were treated in the aggregate when
applying various valuation techniques. Management also estimated the amount of credit losses that
were expected to be realized for the loan portfolios. The discounted cash flow approach was used
to value each pool of loans. For nonperforming loans, fair value was estimated by calculating the
present value of the recoverable cash flows using a discount rate based on comparable corporate
bond rates. This valuation of the acquired loans is a significant component leading to the valuation
of the loss sharing assets recorded.
The loss sharing asset is measured separately from the loan portfolio because it is not contractually
embedded in the loans and is not transferable with the loans should the Bank choose to dispose of
them. Fair value was estimated using projected cash flows available for loss sharing based on the
credit adjustments estimated for each loan pool (as discussed above) and the loss sharing
percentages outlined in the Purchase and Assumption Agreement with the FDIC. These cash flows
were discounted to reflect the uncertainty of the timing and receipt of the loss sharing
reimbursement from the FDIC. The loss sharing asset is also separately measured from the related
foreclosed real estate.
90
35
91
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
TeamBank FDIC Indemnification Asset
The following tables present the balances of the FDIC indemnification asset related to the
TeamBank transaction at December 31, 2009, and March 20, 2009 (the transaction date). At
December 31, 2009, the Company concluded that there had been no material changes in the
assumptions utilized to determine the fair value of loans, foreclosed assets and the FDIC
indemnification asset, other than the adjustment of the provisional fair value measurements of the
former TeamBank loan portfolio. Expected cash flows and the present value of future cash flows
related to these assets have not changed materially since this updated analysis was performed.
Gross loan balances (due from the borrower) were reduced approximately $109.0 million since the
transaction date through repayments by the borrower or charge-downs to customer loan balances.
Initial basis for loss sharing determination, net of activity
since acquisition date
Noncredit premium/(discount)
Book value of assets
Anticipated realized loss
Assumed loss sharing recovery percentage
Estimated loss sharing value
Accretable discount on FDIC indemnification asset
December 31, 2009
Loans
Foreclosed
Assets
(In Thousands)
$
326,768
(6,313)
(199,774)
$
2,817
—
(2,467)
120,681
86%
104,295
(9,647)
350
80%
280
(43)
237
FDIC indemnification asset
$
94,648
$
Initial basis for loss sharing determination
Non-credit premium/(discount)
Estimated fair value of assets
Anticipated realized loss
Assumed loss sharing recovery percentage
Estimated loss sharing value
Accretable discount on FDIC indemnification asset
March 20, 2009 (as Revised)
Foreclosed
Assets
Loans
(In Thousands)
$
435,782
(7,279)
(264,343)
$
5,742
—
(2,871)
164,160
83%
137,062
(12,375)
2,871
80%
2,297
(48)
90
FDIC indemnification asset
$
124,687
$
2,249
91
36
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Vantus Bank FDIC Indemnification Asset
The following tables present the balances of the FDIC indemnification asset related to the Vantus
Bank transaction at December 31, 2009, and September 4, 2009 (the transaction date). At
December 31, 2009, the Company concluded that there had been no material changes in the
assumptions utilized to determine the preliminary fair value of loans, foreclosed assets and the
FDIC indemnification asset. Expected cash flows and the present value of future cash flows related
to these assets have not changed materially since the analysis performed at acquisition on
September 4, 2009. Gross loan balances (due from the borrower) were reduced approximately
$40.6 million since the transaction date through repayments by the borrower or charge-downs to
customer loan balances.
Initial basis for loss sharing determination, net of activity
since acquisition date
Non-credit premium/(discount)
Book value of assets
Anticipated realized loss
Assumed loss sharing recovery percentage
Estimated loss sharing value
Accretable discount on FDIC indemnification asset
December 31, 2009
Loans
Foreclosed
Assets
(In Thousands)
$
290,936
(2,623)
(225,950)
$
62,363
80%
49,891
(6,383)
4,682
—
(682)
4,000
80%
3,200
(109)
FDIC indemnification asset
$
43,508
$
3,091
Initial basis for loss sharing determination
Non-credit premium/(discount)
Estimated fair value of assets
Anticipated realized loss
Assumed loss sharing recovery percentage
Estimated loss sharing value
Accretable discount on FDIC indemnification asset
September 4, 2009
Loans
Foreclosed
Assets
(In Thousands)
$
331,551
(2,623)
(247,049)
$
6,249
—
(2,249)
81,879
80%
65,503
(6,383)
4,000
80%
3,200
(109)
FDIC indemnification asset
$
59,120
$
3,091
92
37
93
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
The carrying amount of assets covered by the loss sharing agreement (related to the TeamBank
transaction) at March 20, 2009 (the acquisition date), consisted of impaired loans required to be
accounted for in accordance with FASB ASC 310-30, other loans not subject to the specific criteria
of FASB ASC 310-30, but accounted for under the guidance of FASB ASC 310-30 (FASB ASC
310-30 by Policy Loans) and other assets as shown in the following table:
FASB
ASC
310-30
Loans
FASB ASC
310-30
by
Policy
Loans
Other
Total
$
31,216 $
—
233,127 $
—
— $
2,871
264,343
2,871
—
—
126,936
126,936
Loans
Foreclosed assets
Estimated loss
reimbursement
from the FDIC
Total covered
assets
$
31,216 $
233,127 $
129,807 $
394,150
On the acquisition date, the preliminary estimate of the contractually required payments receivable
for all FASB ASC 310-30 loans acquired was $118.9 million, the cash flows expected to be
collected were $37.8 million including interest, and the estimated fair value of the loans was $31.2
million. These amounts were determined based upon the estimated remaining life of the underlying
loans, which include the effects of estimated prepayments. At March 20, 2009, a majority of these
loans were valued based on the liquidation value of the underlying collateral, because the expected
cash flows were primarily based on the liquidation of underlying collateral and the timing and
amount of the cash flows could not be reasonably estimated.
On the acquisition date, the preliminary estimate of the contractually required payments receivable
for all FASB ASC 310-30 by Policy Loans acquired in the acquisition was $317.0 million, of which
$82.4 million of cash flows were not expected to be collected, and the estimated fair value of the
loans was $233.1 million.
The carrying amount of assets covered by the loss sharing agreement (related to the Vantus Bank
transaction) at September 4, 2009 (the acquisition date), consisted of impaired loans required to be
accounted for in accordance with FASB ASC 310-30, other loans not subject to the specific criteria
of FASB ASC 310-30, but accounted for under the guidance of FASB ASC 310-30 (FASB ASC
310-30 by Policy Loans) and other assets as shown in the following table:
92
93
38
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
FASB
ASC
310-30
Loans
FASB ASC
310-30
by
Policy
Loans
Other
$
17,006 $
—
230,043 $
—
— $
2,249
Total
247,049
2,249
—
—
62,211
62,211
Loans
Foreclosed assets
Estimated loss
reimbursement
from the FDIC
Total covered
assets
$
17,006 $
230,043 $
64,460 $
311,509
On the acquisition date, the preliminary estimate of the contractually required payments receivable
for all FASB ASC 310-30 loans acquired was $41.8 million, the cash flows expected to be
collected were $19.5 million including interest, and the estimated fair value of the loans was $17.0
million. These amounts were determined based upon the estimated remaining life of the
underlying loans, which include the effects of estimated prepayments. At September 4, 2009, a
majority of these loans were valued based on the liquidation value of the underlying collateral,
because the expected cash flows were primarily based on the liquidation of underlying collateral
and the timing and amount of the cash flows could not be reasonably estimated. Because of the
short time period between the closing of the transaction and December 31, 2009, certain amounts
related to the FASB ASC 310-30 loans are preliminary estimates and changes in the carrying
amount and accretable yield for FASB ASC 310-30 loans from the acquisition date and
December 31, 2009, were not material. The Company has not yet finalized its analysis of these
loans and, therefore, adjustments to the estimated recorded carrying values may occur.
On the acquisition date, the preliminary estimate of the contractually required payments receivable
for all FASB ASC 310-30 by Policy Loans acquired in the acquisition was $289.7 million, of which
$58.1 million of cash flows were not expected to be collected, and the estimated fair value of the
loans was $230.0 million.
Note 6: 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
94
December 31,
2009
2008
(In Thousands)
$
$
12,757
30,170
28,061
70,988
28,605
42,383
$
$
10,933
21,490
23,650
56,073
26,043
30,030
39
95
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Note 7: Deposits
Deposits are summarized as follows:
Noninterest-bearing accounts
Interest-bearing checking and
savings accounts
Certificate accounts
Interest rate swap fair value
adjustment
Weighted Average
Interest Rate
December 31,
2008
2009
(In Thousands, Except
Interest Rates)
—
$
258,792
$
138,701
1.00% - 1.18%
0% - 1.99%
2% - 2.99%
3% - 3.99%
4% - 4.99%
5% - 5.99%
6% - 6.99%
7% and above
820,862
1,079,654
781,565
513,837
103,217
222,142
12,927
586
33
386,540
525,241
38,987
205,426
446,799
646,458
42,847
869
186
1,634,307
1,381,572
—
1,215
$
2,713,961
$
1,908,028
The weighted average interest rate on certificates of deposit was 2.33% and 3.67% at December 31,
2009 and 2008, respectively.
The aggregate amount of certificates of deposit originated by the Bank in denominations greater
than $100,000 was approximately $386,804,000 and $152,745,000 at December 31, 2009 and
2008, 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 $628,287,000 and $974,490,000 at December 31, 2009 and 2008, respectively.
94
95
40
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
At December 31, 2009, scheduled maturities of certificates of deposit were as follows (in
thousands):
2010
2011
2012
2013
2014
Thereafter
Retail
Brokered
Total
$
$
871,152
91,399
25,520
9,462
7,387
1,100
484,980
100,384
42,923
—
—
—
$ 1,356,132
191,783
68,443
9,462
7,387
1,100
$ 1,006,020
$
628,287
$ 1,634,307
A summary of interest expense on deposits is as follows:
2009
2008
(In Thousands)
2007
Checking and savings accounts
Certificate accounts
Early withdrawal penalties
$
$
6,600
47,592
(105)
$
8,370
52,616
(110)
16,043
60,295
(106)
$
54,087
$
60,876
$
76,232
Note 8: Advances From Federal Home Loan Bank
Advances from the Federal Home Loan Bank consisted of the following:
December 31, 2009
December 31, 2008
Due In
Amount
Weighted
Average
Interest
Rate
Amount
Weighted
Average
Interest
Rate
(In Thousands, Except Interest Rates)
2009
2010
2011
2012
2013
2014
2015 and thereafter
Unamortized fair value adjustment
$
$
—
17,028
32,293
22,993
281
335
96,570
169,500
2,103
171,603
96
—%
$
4.40
4.28
4.41
5.68
5.47
3.73
4.00
$
24,821
4,978
2,239
2,934
225
275
85,000
120,472
—
120,472
1.29%
3.63
6.29
6.04
5.81
5.54
3.69
3.30
41
97
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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.
Included in the Bank’s FHLB advances is a $20,000,000 advance with a maturity date of July 12,
2012. The interest rate on this advance is 4.17%. The advance has a call provision that allows the
Federal Home Loan Bank of Topeka to call the advance quarterly.
Included in the Bank’s FHLB advances is a $15,000,000 advance with a maturity date of
October 31, 2011. The interest rate on this advance is 4.09%. The advance has a call provision
that allows the Federal Home Loan Bank of Topeka to call the advance quarterly.
Included in the Bank’s FHLB advances is a $15,000,000 advance with a maturity date of
October 19, 2011. The interest rate on this advance is 4.17%. The advance has a call provision
that allows the Federal Home Loan Bank of Topeka to call the advance quarterly.
Included in the Bank’s FHLB advances is a $10,000,000 advance with a maturity date of
October 26, 2015. The interest rate on this advance is 3.86%. The advance has a call provision
that allows the Federal Home Loan Bank of Topeka to call the advance quarterly.
Included in the Bank’s FHLB advances is a $7,000,000 advance with a maturity date of August 2,
2010. The interest rate on this advance is 4.58%. The advance has a call provision that allows the
Federal Home Loan Bank of Topeka to call the advance quarterly.
Included in the Bank’s FHLB advances is a $5,000,000 advance with a maturity date of August 31,
2010. The interest rate on this advance is 5.87%. The advance has a call provision that allows the
Federal Home Loan Bank of Topeka 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 $0 and $2,893,000, respectively, were specifically pledged as
collateral for advances at December 31, 2009 and 2008. Loans with carrying values of
approximately $644,654,000 and $606,362,000 were pledged as collateral for outstanding advances
at December 31, 2009 and 2008, respectively. The Bank has potentially available $239,342,000
remaining on its line of credit under a borrowing arrangement with the FHLB of Des Moines at
December 31, 2009.
96
97
42
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Note 9: Short-Term Borrowings
Short-term borrowings are summarized as follows:
December 31,
2009
2008
(In Thousands)
Federal Reserve Term Auction Facility (see Note 10)
Note payable – Kansas City Equity Fund
Short-term borrowings
Securities sold under reverse repurchase agreements
$
$
—
289
289
335,893
83,000
368
83,368
215,261
$
336,182
$
298,629
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.
Short-term borrowings had weighted average interest rates of 0.70% and 1.35% at December 31,
2009 and 2008, respectively. Short-term borrowings averaged approximately $348,509,000 and
$234,250,000 for the years ended December 31, 2009 and 2008, respectively. The maximum
amounts outstanding at any month end were $396,467,000 and $298,262,000, respectively, during
those same periods.
Note 10: Federal Reserve Bank Borrowings
The Bank has a potentially available $254,408,000 line of credit under a borrowing arrangement
with the Federal Reserve Bank at December 31, 2009. 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.
98
43
99
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
TAF borrowing arrangements are summarized as follows:
TAF maturing 1/29/09 – rate .60%
TAF maturing 2/26/09 – rate .42%
December 31,
2009
2008
(In Thousands)
$
$
—
$
58,000
—
25,000
0
$
83,000
Note 11: Structured 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). This borrowing matures September 15, 2015, and has a call
provision that allows the repo counterparty to call the borrowing quarterly beginning
September 15, 2011. The Company pledges investment securities to collateralize this borrowing.
As part of the September 4, 2009, FDIC-assisted transaction involving Vantus Bank, the Company
assumed $3,000,000 in repurchase agreements with commercial banks. These agreements were
recorded at their estimated fair value which was derived using a discounted cash flow calculation
that applies interest rates currently being offered on similar borrowings to the scheduled contractual
maturity on the outstanding borrowing. As of September 4, 2009, the fair value of the repurchase
agreements was $3,211,000 with an effective interest rate of 2.84%. These borrowings bear
interest at a fixed rate of 4.68% and are due in 2013. The Company pledges investment securities
to collateralize the borrowings in an amount of at least 110% of the total borrowings outstanding.
At December 31, 2009, the book value of these repurchase agreements was $3,194,000.
Note 12: Subordinated Debentures Issued to Capital Trusts
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
98
99
44
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
initial interest rate on the Trust II debentures was 6.98%. The interest rate was 1.88% and 4.79% at
December 31, 2009 and 2008, respectively.
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 1.69% and 5.28% at December 31, 2009
and 2008, respectively.
Under the terms of the securities purchase agreement between the Company and the U.S. Treasury
pursuant to which the Company issued its Series A Preferred Stock in connection with the TARP
Capital Purchase Program, prior to the earlier of (i) December 5, 2011, and (ii) the date on which
all of the shares of the Series A Preferred Stock have been redeemed by the Company or
transferred by Treasury to third parties, the Company may not redeem its trust preferred securities
(or the related Junior Subordinated Debentures), without the consent of Treasury.
Subordinated debentures issued to capital trusts are summarized as follows:
December 31,
2009
2008
(In Thousands)
Subordinated debentures
$
30,929
$
30,929
Note 13:
Income Taxes
The Company files a consolidated federal income tax return. As of December 31, 2009 and 2008,
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, 2009 and 2008.
The provision (credit) for income taxes included these components:
Taxes currently payable
Deferred income taxes
Income tax expense (credit)
2009
8,130
24,875
33,005
$
$
100
2008
(In Thousands)
$
1,811
(5,562)
(3,751)
$
2007
$
$
11,365
2,978
14,343
45
101
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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
Unrealized gain and realized impairment on available-
for-sale securities
Difference in basis for acquired assets and liabilities
Other
December 31,
2009
2008
(In Thousands)
$
14,036
952
587
202
—
—
480
1
16,258
(171)
(138)
—
(1,774)
(262)
—
(4,195)
(20,210)
(527)
(27,277)
10,207
1,146
457
181
2,659
414
527
1
15,592
(254)
(227)
(28)
(157)
(576)
(137)
—
—
(162)
(1,541)
Net deferred tax asset
$
(11,019) $
14,051
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
Other
2009
35.0%
(1.6)
0.3
2008
(35.0)%
(15.4)
4.5
2007
35.0%
(2.5)
.4
33.7%
(45.9)%
32.9%
With a few exceptions, the Company is no longer subject to U.S. federal, state and local or non-
U.S. income tax examinations by tax authorities for years before 2006.
100
101
46
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Note 14: Disclosures About Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. Topic 820 also specifies a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that may be used to measure
fair value:
• 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 significant 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.
The following is a description of inputs and valuation methodologies used for assets recorded at
fair value on a recurring basis and recognized in the accompanying balance sheets at December 31,
2009 and 2008, as well as the general classification of such assets pursuant to the valuation
hierarchy.
Available-for-Sale Securities
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, corporate debt
102
47
103
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
securities, collateralized mortgage obligations, state and municipal bonds and U.S. government
agency equity securities. Inputs used for valuing Level 2 securities include observable data that
may include dealer quotes, benchmark yields, market spreads, live trading levels and market
consensus prepayment speeds, among other things. Additional inputs include indicative values
derived from the independent pricing service’s proprietary computerized models. There were no
Recurring Level 3 securities at December 31, 2009. Recurring Level 3 securities include one
corporate debt security as of December 31, 2008. Inputs used for valuing Level 3 securities
include indicative values derived from the independent pricing service’s proprietary computerized
models and are influenced by unobservable data.
Mortgage Servicing Rights
Mortgage servicing rights do not trade in an active, open market with readily observable prices.
Accordingly, fair value is estimated using discounted cash flow models. Due to the nature of the
valuation inputs, mortgage servicing rights are classified within Level 3 of the hierarchy.
2009
Fair Value Measurements Using
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
U.S. government agencies
Collateralized mortgage
obligations
Mortgage-backed securities
States and political subdivisions
Corporate bonds
Equity securities
Mortgage servicing rights
(In Thousands)
$
15,959
$
—
$
15,959
$
51,736
632,174
62,487
57
1,878
1,132
—
—
—
—
476
—
51,736
632,174
62,487
57
1,402
—
102
103
—
—
—
—
—
—
1,132
48
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
2008
Fair Value Measurements Using
Quoted
Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
U.S. government agencies
Collateralized mortgage
obligations
Mortgage-backed securities
Corporate bonds
States and political subdivisions
Equity securities
Mortgage servicing rights
$
34,756
$
(In Thousands)
$
—
34,756
$
71,914
485,196
1,205
53,103
1,504
24
—
—
760
—
716
—
71,914
485,196
—
53,103
788
—
—
—
—
445
—
—
24
The following is a reconciliation of activity for available-for-sale securities measured at fair value
based on significant unobservable (Level 3) information. In 2008, $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. In 2009, a corporate debt security (pool of
bank trust preferred issues) totaling $411,000 was reclassified from Level 3 to Level 2 due to the
availability of third-party vendor valuations that were heavily influenced by observable inputs –
either quoted prices for similar securities or other inputs which provide a reasonable basis for the
fair value determination.
Investment
Securities
Mortgage
Servicing
Rights
(In Thousands)
Balance, January 1, 2008
$
10,450
$
Additions, net of amortization
Unrealized loss included in comprehensive income
Transfer from Level 3 to Level 2
Balance, December 31, 2008
(5)
(10,000)
445
Additions, net of amortization
Servicing rights acquired in FDIC-assisted transactions
Realized loss included in non-interest income
Unrealized loss included in comprehensive income
Transfer from Level 3 to Level 2
Balance, December 31, 2009
(471)
55
(29)
$
0
$
104
36
(12)
—
—
24
6
1,102
—
—
—
1,132
49
105
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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, 2009, the Company did not have any outstanding interest rate swap
positions. 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.
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
Interest rate swap
agreements
$
31 $
—
$
31 $
—
Following is a description of the valuation methodologies used for assets measured at fair value on
a nonrecurring basis and recognized in the accompanying balance sheets, as well as the general
classification of such assets pursuant to the valuation hierarchy.
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 FASB ASC Topic 310, Receivables, (SFAS No.
105
50
104
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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.
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 for the
portion of the loan that exceeds the fair value or establishes a reserve within the allowance for loan
losses specific to the loan. Loans for which such charge-offs or reserves have been recorded are
shown in the table below (net of reserves).
Foreclosed Assets Held for Sale
Foreclosed assets held for sale are initially recorded at fair value less estimated cost to sell at the
date of foreclosure. 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. Foreclosed assets held for sale are classified within Level 3 of the fair value hierarchy.
The foreclosed assets represented in the table below have been re-measured subsequent to their
initial transfer to foreclosed assets.
The following tables present the fair value measurement of assets measured at fair value on a
nonrecurring basis and the level within the fair value hierarchy in which the fair value
measurements fall at December 31, 2009 and 2008:
2009
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
Loans held for sale
Impaired loans
Foreclosed assets
held for sale
$
9,269 $
48,750
9,342
106
— $
—
—
9,269 $
—
—
48,750
—
9,342
51
107
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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
Loans held for sale
Impaired loans
Foreclosed assets
held for sale
$
4,695 $
30,543
6,434
— $
—
—
4,695 $
—
—
30,543
—
6,434
The following disclosure relates to financial assets for which it is not practicable for the Company
to estimate the fair value at December 31, 2009.
FDIC Indemnification Asset
As part of the Purchase and Assumption Agreements, the Bank and the FDIC entered into loss
sharing agreements. These agreements cover realized losses on loans and foreclosed real estate.
Under the first agreement (TeamBank), the FDIC will reimburse the Bank for 80% of the first
$115 million in realized losses. The FDIC will reimburse the Bank 95% on realized losses that
exceed $115 million. This agreement extends for ten years for 1-4 family real estate loans and for
five years for other loans. This loss sharing asset is measured separately from the loan portfolio
because it is not contractually embedded in the loans and is not transferable with the loans should
the Bank choose to dispose of them. Fair value at the acquisition date (March 20, 2009) was
estimated using projected cash flows available for loss sharing based on the credit adjustments
estimated for each loan pool and the loss sharing percentages. These cash flows were discounted to
reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC.
This loss sharing asset is also separately measured from the related foreclosed real estate. At
December 31, 2009, the carrying value of the FDIC indemnification asset was $94.9 million.
Although this asset is a contractual receivable from the FDIC, there is no effective interest rate. The
Bank will collect this asset over the next several years. The amount ultimately collected will
depend on the timing and amount of collections and charge-offs on the acquired assets covered by
the loss sharing agreement. While this asset was recorded at its estimated fair value at March 20,
2009, it is not practicable to complete a fair value analysis on a quarterly or annual basis. This
would involve preparing a fair value analysis of the entire portfolio of loans and foreclosed assets
covered by the loss sharing agreement on a quarterly or annual basis in order to estimate the fair
value of the FDIC indemnification asset.
106
107
52
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Under the second agreement (Vantus Bank), the FDIC will reimburse the Bank for 80% of the first
$102 million in realized losses. The FDIC will reimburse the Bank 95% on realized losses that
exceed $102 million. This agreement extends for ten years for 1-4 family real estate loans and for
five years for other loans. This loss sharing asset is measured separately from the loan portfolio
because it is not contractually embedded in the loans and is not transferable with the loans should
the Bank choose to dispose of them. Fair value at the acquisition date (September 4, 2009) was
estimated using projected cash flows available for loss sharing based on the credit adjustments
estimated for each loan pool and the loss sharing percentages. These cash flows were discounted to
reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC.
This loss sharing asset is also separately measured from the related foreclosed real estate. At
December 31, 2009, the carrying value of the FDIC indemnification asset was $46.6 million.
Although this asset is a contractual receivable from the FDIC, there is no effective interest rate. The
Bank will collect this asset over the next several years. The amount ultimately collected will
depend on the timing and amount of collections and charge-offs on the acquired assets covered by
the loss sharing agreement. While this asset was recorded at its estimated fair value at
September 4, 2009, it is not practicable to complete a fair value analysis on a quarterly or annual
basis. This would involve preparing a fair value analysis of the entire portfolio of loans and
foreclosed assets covered by the loss sharing agreement on a quarterly or annual basis in order to
estimate the fair value of the FDIC indemnification asset.
The following methods were used to estimate the fair value of all other financial instruments
recognized in the accompanying balance sheets at amounts other than fair value.
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.
108
53
109
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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.
108
109
54
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
December 31, 2009
Fair
Value
Carrying
Amount
December 31, 2008
Fair
Value
Carrying
Amount
(In Thousands)
$ 444,576
764,291
16,290
9,269
2,082,125
15,582
11,223
—
1,132
$ 444,576
764,291
16,065
9,269
2,088,103
15,582
11,223
—
1,132
$ 167,920
647,678
1,360
4,695
1,716,996
13,287
8,333
31
24
$ 167,920
647,678
1,422
4,695
1,732,758
13,287
8,333
31
24
2,713,961
171,603
336,182
53,194
30,929
6,283
2,716,841
177,725
336,182
59,092
30,929
6,283
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
—
42
—
—
42
—
—
45
—
—
45
—
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
Mortgage servicing rights
Financial liabilities
Deposits
FHLB advances
Short-term borrowings
Structured repurchase agreements
Subordinated debentures
Accrued interest payable
Unrecognized financial instruments
(net of contractual value)
Commitments to originate loans
Letters of credit
Lines of credit
Note 15: 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, 2009, future minimum lease payments were as follows (in thousands):
2010
2011
2012
2013
2014
Thereafter
$
1,096
974
960
697
523
219
$
4,469
Rental expense was $1,053,000, $934,000 and $866,000 for the years ended December 31, 2009,
2008 and 2007, respectively.
110
55
111
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Note 16:
Interest Rate Swaps
In the normal course of business, the Company uses derivative financial instruments (primarily
interest rate swaps) from time to time to assist in its interest rate risk management. In accordance
with FASB ASC Topic 815, Derivatives and Hedging, 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 FASB ASC 815 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.
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.
111
56
110
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
At December 31, 2009, the Company had no derivative financial instruments. At December 31,
2008, 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 amount of the liabilities being hedged was
$11.5 million at December 31, 2008. 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. The net
gains recognized in earnings on fair value hedges were $1.2 million, $7.0 million and $1.6 million
for the years ended December 31, 2009, 2008 and 2007, respectively.
The maturities of interest rate swaps outstanding at December 31, 2008, in terms of notional
amounts and their average pay and receive rates were as follows:
Interest Rate Swaps(1)
Expected Maturity Date
2011(2)
2017(2)
Fixed
to
Variable
Average
Pay
Rate
(In Millions)
Average
Receive
Rate
$ 4.6
6.9
$ 11.5
1.77%
1.77
2.10
4.00%
4.00
5.00
(1)
Interest rate swaps with Lehman Brothers Special Financing, Inc. are not included in this table.
At December 31, 2008, the company had three FASB ASC 815 designated swaps with Lehman
Brothers Special Financing, Inc. (Lehman). 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 deposits) through September 15, 2008,
was not material.
(2) This interest rate swap and the related deposit account were terminated subsequent to
December 31, 2008.
Note 17: 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
112
57
113
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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.
At December 31, 2009 and 2008, the Bank had outstanding commitments to originate loans and
fund commercial construction loans aggregating approximately $26,028,000 and $900,000,
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 $3,340,000
and $7,516,000 at December 31, 2009 and 2008, respectively.
Commitments to Purchase Bank Buildings and Equipment from FDIC
At December 31, 2009, the Bank had formalized its commitment to purchase certain bank buildings
and equipment from the FDIC related to its FDIC-assisted transaction involving the former
TeamBank. However, settlement with the FDIC on this purchase has not yet occurred. Acquisition
costs of the real estate, furniture and equipment are based on current appraisals and are expected to
be $9.2 million.
Subsequent to December 31, 2009, the Bank formalized its commitment to purchase certain bank
buildings and equipment from the FDIC related to its FDIC-assisted transaction involving the
former Vantus Bank. Settlement with the FDIC on this purchase has not yet occurred. Acquisition
costs of the real estate, furniture and equipment are based on current appraisals and are expected to
be $12.1 million.
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.
112
113
58
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
The Company had total outstanding standby letters of credit amounting to approximately
$16,194,000 and $16,335,000 at December 31, 2009 and 2008, respectively, with $12,037,000 and
$11,769,000, respectively, of the letters of credit having terms up to five years. The remaining
$4,157,000 and $4,566,000 at December 31, 2009 and 2008, 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.
At December 31, 2009, the Bank had granted unused lines of credit to borrowers aggregating
approximately $86,902,000 and $44,768,000 for commercial lines and open-end consumer lines,
respectively. 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.
Credit Risk
The Bank grants collateralized commercial, real estate and consumer loans primarily to customers
in the southwest and central portions of Missouri, the greater Kansas City, Missouri, area and the
western and central portions of Iowa. Although the Bank has a diversified portfolio, loans
aggregating approximately $206,989,000 and $214,042,000 at December 31, 2009 and 2008,
respectively, are secured by motels, restaurants, recreational facilities, other commercial properties
and residential mortgages in the Branson, Missouri, area. Residential mortgages account for
approximately $77,827,000 and $85,843,000 of this total at December 31, 2009 and 2008,
respectively.
In addition, loans aggregating approximately $230,698,000 and $218,529,000 at December 31,
2009 and 2008, 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.
114
59
115
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Note 18: 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
2009
2008
(In Thousands)
2007
$39,767
$15,317
$100
$2,800
$69,547
$3,165
$3,389
$31,600
$7,268
—
$2,618
$70,155
$4,590
$172
$24,615
$5,759
$300
$2,412
$92,127
$8,044
—
Note 19: 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, 2009, 2008 and 2007, were approximately $719,000, $1.2 million and $1.1
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. 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, 2009, 2008 and 2007, were approximately $759,000, $673,000 and $642,000,
respectively.
Note 20: 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
expired; therefore, no new stock options or other awards may be granted under this plan. At
December 31, 2009, there were no options outstanding under this plan.
114
115
60
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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, 2009, there were 90,123 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,
2009, there were 640,063 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.
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:
Balance, January 1, 2007
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
Granted
Exercised
Forfeited from terminated plan(s)
Forfeited from current plan(s)
Available to
Grant
Shares Under
Option
685,828
(99,710)
—
—
41,540
627,658
(72,030)
—
—
30,560
586,188
(72,425)
—
—
10,747
680,357
99,710
(65,609)
(2,625)
(41,540)
670,293
72,030
(1,972)
(9,394)
(30,560)
700,397
72,425
(25,434)
(6,455)
(10,747)
$
Weighted
Average
Exercise
Price
24.048
25.459
(17.618)
(16.457)
(29.010)
24.423
8.516
(13.233)
(16.229)
(26.794)
23.003
21.367
14.066
11.910
25.397
Balance, December 31, 2009
524,510
730,186
$
23.215
116
61
117
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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 FASB ASC Topic 718, 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, Topic 718 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 Topic 718.
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,
2008
2007
2009
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
2.19%
5 years
69.16%
$0.72
2.05%
5 years
46.93%
$0.68
4.21%
5 years
21.89%
$9.90
$1.72
$5.01
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, 2009.
Options outstanding, January 1, 2009
Granted
Exercised
Forfeited
Options outstanding, December 31, 2009
Options
700,397
72,425
(25,434)
(17,202)
730,186
Options exercisable, December 31, 2009
476,583
116
117
Weighted
Average
Exercise
Price
$23.003
21.367
14.066
20.337
23.215
24.593
Weighted
Average
Remaining
Contractual
Term
6.21
—
—
—
5.75
4.32
62
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
For the years ended December 31, 2009, 2008 and 2007, options granted were 72,425, 72,030 and
99,710, 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, 2009, 2008 and 2007, was $196,000, $7,000 and $605,000, respectively.
Cash received from the exercise of options for the years ended December 31, 2009, 2008 and 2007,
was $358,000, $26,000 and $1.2 million, respectively. The actual tax benefit realized for the tax
deductions from option exercises totaled $183,000, $182 and $238,000 for the years ended
December 31, 2009, 2008 and 2007, respectively.
The following table presents the activity related to nonvested options under all plans for the year
ended December 31, 2009.
Nonvested options, January 1, 2009
Granted
Vested this period
Nonvested options forfeited
Options
246,923
72,425
(58,848)
(6,897)
Nonvested options, December 31, 2009
253,603
Weighted
Average
Exercise
Price
Weighted
Average
Grant Date
Fair Value
$19.968
21.637
28.358
24.287
20.624
$4.354
9.897
6.192
5.389
5.951
At December 31, 2009, there was $1.4 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 2014, with the majority of this expense recognized in 2010 and 2011.
The following table further summarizes information about stock options outstanding at
December 31, 2009:
Range of
Exercise Prices
$7.688 to $8.360
$10.110 to $12.898
$18.188 to $25.000
$25.480 to $36.390
Options Outstanding
Weighted
Average
Remaining
Contractual
Life
Number
Outstanding
82,255
31,973
264,290
351,668
7.20 years
2.41 years
5.26 years
6.09 years
730,186
5.75 years
118
Options Exercisable
Weighted
Average
Exercise
Price
$ 8.25
$12.60
$20.44
$29.77
$23.21
Number
Exercisable
17,015
28,443
189,144
241,981
476,583
Weighted
Average
Exercise
Price
$ 7.84
$12.90
$20.04
$30.70
$24.59
63
119
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Note 21: 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. Estimates
used in valuing acquired loans, loss sharing agreements and FDIC indemnification assets and in
continuing to monitor related cash flows of acquired loans are discussed in Note 5. 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 22: 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.
118
119
64
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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, 2009, that the
Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2009, 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, 2009
Total risk-based capital
Great Southern Bancorp, Inc.
Great Southern Bank
$337,361
$293,840
16.3%
14.2%
≥$166,021
≥$165,815
≥ 8.0%
≥ 8.0%
N/A
≥ $207,268
N/A
≥ 10.0%
Tier I risk-based capital
Great Southern Bancorp, Inc.
Great Southern Bank
Tier I leverage capital
$311,245
$267,756
15.0%
12.9%
≥$83,010
≥$82,907
≥ 4.0%
≥ 4.0%
N/A
≥ $124,361
N/A
≥ 6.0%
Great Southern Bancorp, Inc.
Great Southern Bank
$311,245
$267,756
8.6%
7.4%
≥$145,297
≥$145,680
≥ 4.0%
≥ 4.0%
N/A
≥ $182,101
N/A
≥ 5.0%
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
Tier I leverage capital
$262,545
$202,345
13.8%
10.7%
≥$75,903
≥$75,772
≥ 4.0%
≥ 4.0%
N/A
≥$113,657
N/A
≥ 6.0%
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%
120
65
121
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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, 2009 and 2008, 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 23: 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 24: Summary of Unaudited Quarterly Operating Results
Following is a summary of unaudited quarterly operating results for the years 2009, 2008 and
2007:
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
Net income available to common
shareholders
Earnings per common share – diluted
2009
Three Months Ended
March 31
June 30
September 30 December 31
(In Thousands, Except Per Share Data)
$34,300
16,770
5,000
$39,971
18,442
6,800
$39,736
15,911
16,500
$41,861
15,482
7,500
(3,985)
47,546
14,655
16,246
29,175
28,351
2.10
176
9,333
20,008
897
3,157
2,316
0.17
1,966
56,755
22,657
13,988
27,435
26,584
1.90
322
9,150
20,875
1,874
5,280
4,443
0.32
66
120
121
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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
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
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)
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
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
122
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123
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Note 25: Condensed Parent Company Statements
The condensed statements of financial condition at December 31, 2009 and 2008, and statements of
operations and cash flows for the years ended December 31, 2009, 2008 and 2007, 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 and other assets
Liabilities and Stockholders’ Equity
Accounts payable and accrued expenses
Deferred income taxes
Subordinated debentures issued to capital trust
Preferred stock
Common stock
Common stock warrants
Additional paid-in capital
Retained earnings
Unrealized gain (loss) on available-for-sale
securities, net
December 31,
2009
2008
(In Thousands)
$
$
44,818
1,878
285,092
45
—
—
1,168
60,943
1,359
203,870
656
17
12
1,177
$
333,001
$
268,034
$
$
2,988
176
30,929
56,017
134
2,452
20,180
208,625
11,500
3,018
—
30,929
55,580
134
2,452
19,811
156,247
(137)
$
333,001
$
268,034
122
123
68
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Statements of Operations
Income
Dividends from subsidiary bank
Interest and dividend income
Net realized losses on
impairments of available-for-
sale securities
Other income (loss)
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
2009
2008
(In Thousands)
2007
$
11,750 $
34
40,000
114
$
(533)
(4)
11,247
(1,718)
145
38,541
—
972
773
1,745
29,579
1,091
1,462
32,132
10,000
8
—
1
10,009
—
1,109
1,914
3,023
9,502
(601)
6,409
(11,716)
6,986
(972)
10,103
18,125
7,958
54,944
(22,553)
21,341
Net income (loss)
$
65,047 $
(4,428) $
29,299
124
69
125
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Statements of Cash Flows
Operating Activities
Net income (loss)
Items not requiring (providing) cash
Equity in undistributed earnings of subsidiary
Depreciation
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 payable and accrued expenses
Income taxes
Net cash provided by operating activities
Investing Activities
Investment in subsidiaries
Return of principal - other investments
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
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
2009
2008
(In Thousands)
2007
$
65,047
$
(4,428)
$
29,299
(54,944)
1
—
(5)
533
9
(10)
(212)
611
11,030
(15,000)
10
—
16
—
—
(500)
(15,474)
—
—
(12,376)
695
—
(11,681)
(16,125)
60,943
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
$
44,818
$
60,943
$
(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
4,335
$937
$1,559
$1,751
125
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124
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
Note 26: 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. Subject to Treasury’s consultation with 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.
The exercise price of and number of shares of Common Stock underlying the Warrant are subject
to customary anti-dilution adjustments. Treasury has agreed not to exercise voting power with
respect to any shares of Common Stock issued to it upon exercise of the Warrant. Upon
redemption of the Series A Preferred Stock, the warrant may be repurchased by the Company from
Treasury at its fair market value as agreed-upon by the Company and Treasury.
The securities purchase agreement between the Company and Treasury provides that prior to the
earlier of (i) December 5, 2011, and (ii) the date on which all of the shares of the Series A Preferred
Stock have been redeemed by the Company or transferred by Treasury to third parties, the
Company may not, without the consent of Treasury, (a) pay a cash dividend on the Company’s
common stock of more than $0.18 per share or (b) subject to limited exceptions, redeem,
repurchase or otherwise acquire shares of the Company’s common stock or preferred stock, other
than the Series A Preferred Stock, or trust preferred securities. In addition, under the terms of the
Series A Preferred Stock, the Company may not pay dividends on its common stock unless its is
current in its dividend payments on the Series A Preferred Stock.
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.
126
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127
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
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 27: Acquisitions
On March 20, 2009, the Bank entered into a purchase and assumption agreement with loss share
with the FDIC to assume all of the deposits (excluding brokered deposits) and acquire certain
assets of TeamBank, N.A., a full service commercial bank headquartered in Paola, Kansas.
TeamBank operated 17 locations in Kansas, Missouri and Nebraska. The Bank assumed
approximately $511 million of the deposits of TeamBank at a premium of $4.9 million.
Additionally, the Bank purchased approximately $436 million in loans, additional loan
commitments and $6 million of foreclosed assets held for sale at a discount of $100 million. The
loans, commitments and foreclosed assets held for sale purchased are covered by a loss sharing
agreement between the FDIC and the Bank which affords the Bank significant protection as
discussed in Note 5. In addition, the Bank purchased cash and cash equivalents and investment
securities of TeamBank valued at $195 million, and assumed $80 million in Federal Home Loan
Bank advances. The Bank has agreed to buy substantially all primary banking center buildings
available for purchase from the FDIC as discussed in Note 17.
The Bank recorded a preliminary one-time gain of $27.8 million based upon the initial estimated
fair value of the assets acquired and liabilities assumed in accordance with FASB ASC 805 (SFAS
No. 141(R), Business Combinations). FASB ASC 805 allows a measurement period of up to one
year to adjust initial fair value estimates as of the acquisition date. Subsequent to the initial fair
value estimate calculations in the first quarter of 2009, additional information was obtained about
the fair value of assets acquired and liabilities assumed as of March 20, 2009, which resulted in
adjustments to the initial fair value estimates. Most significantly, additional information (as of the
acquisition date) was obtained on the credit quality of certain loans as of the acquisition date which
resulted in increased fair value estimates of the acquired loan pools. The fair values of these loan
pools were adjusted and the provisional fair values finalized. These adjustments resulted in a $16.1
million increase to the first quarter 2009 initial one-time gain of $27.8 million. Thus, the final first
quarter 2009 gain was $43.9 million related to the fair value of the acquired assets and assumed
liabilities. Based upon the acquisition date fair values of the net assets acquired, no goodwill was
recorded.
On September 4, 2009, the Bank entered into a purchase and assumption agreement with loss share
with the FDIC to assume all of the deposits and acquire certain assets of Vantus Bank, a full
service thrift headquartered in Sioux City, Iowa.
Vantus Bank operated 15 locations in Iowa and Nebraska. The Bank assumed approximately $350
million of the deposits of Vantus Bank at a premium of $1.7 million. Additionally, the Bank
purchased approximately $332 million in loans, additional loan commitments and $6 million of
127
72
126
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
foreclosed assets held for sale at a discount of $75 million. The loans, commitments and foreclosed
assets held for sale purchased are covered by a loss sharing agreement between the FDIC and the
Bank which affords the Bank significant protection as discussed in Note 5. In addition, the Bank
also purchased cash and cash equivalents and investment securities of Vantus Bank valued at $36
million, and assumed $84 million in borrowings from the Federal Home Loan Bank and the Federal
Reserve Bank. The Bank anticipates buying all primary banking center buildings available for
purchase from the FDIC as discussed in Note 17.
The Bank determined the acquisition of the net assets of Vantus Bank constitutes a business
acquisition in accordance with FASB ASC 805. Therefore, assets acquired and liabilities assumed
were recorded on a preliminary basis at fair value on the date of acquisition, after adjustment for
expected loss recoveries under the loss sharing agreement described in Note 5. Based upon the
preliminary acquisition date fair values of the net assets acquired, no goodwill was recorded. The
transaction resulted in a gain of $45.9 million for the year ended December 31, 2009.
Both TeamBank and Vantus Bank presented attractive franchises for the Company to acquire
because they provided immediate core deposit growth at a low cost of funds. Also attractive were
the opportunities they presented for expansion into nonoverlapping yet complementary markets
through banking centers which, for the most part, held strong market positions. The Company also
benefits from significant reductions of credit risk due to the loss sharing agreements with the FDIC
which are part of these transactions.
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Cov 3 Officers 4/6/10 4:39 PM Page C3
DIRECTORS
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
President, Mid America
Management, 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
GREAT SOUTHERN LEADERSHIP TEAM
Left to right
Joe Turner*
President and
Steve Mitchem*
Chief Executive Officer
Chief Lending Officer
Tammy Baurichter
Kelly Polonus
Controller
Director of Corporate Communications
Kris Conley
Doug Marrs*
Director of Business Line
Director of Operations/Secretary
Development
Teresa Chasteen-Calhoun
Director of Marketing
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
*Executive Officer
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
128