2010 ANNUAL REPORT FOR SHAREHOLDERS
A PLACE OF STRENGTH
ANNUAL MEETING
The 22nd Annual Meeting of Shareholders will be
held at 10:00 a.m. CDT on Wednesday, May 11,
2011, at the Great Southern Operations Center,
218 S. Glenstone, Springfield, Missouri.
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 relation-
ships 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 compa-
ny’s strength, prosperity and future rest.
CORPORATE PROFILE
Great Southern Bank was founded
in 1923 with a $5,000 investment, four
employees and 936 customers. Today, it has
grown to $3.4 billion in total assets, with
nearly 1,100 dedicated associates serving over
223,000 customers.
Headquartered in Springfield, Mo., the
Company operates 75 retail banking centers
in Missouri, Arkansas, Kansas, Iowa and
Nebraska. Great Southern offers one-stop
shopping with a comprehensive line-up of
financial products and services. With the un-
derstanding that convenient access to bank-
ing services is a top priority, customers can
access the bank when, where and how they
prefer, whether it’s through a banking center
that will have the longest banking hours in
town, through an ATM, by telephone or
through the Internet. Beyond traditional
banking services, customers can also look to
Great Southern for help with investment,
insurance and travel services.
Great Southern Bancorp, Inc., the hold-
ing company for Great Southern Bank, is
a public company and its common stock
(ticker: GSBC) is listed on the NASDAQ
Global Select Stock Exchange.
STOCK
INFORMATION
The Company’s Common
Stock is listed on The NASDAQ
Global Select Market under the
symbol “GSBC”.
As of December 31, 2010,
there were 13,454,000 to-
tal 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, 2010 was $23.59.
HIGH/LOW STOCK PRICE
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
DIVIDEND DECLARATIONS
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended
December 31, 2010
LOW
HIGH
$20.35
$24.50
20.30
26.32
19.37
22.22
21.05
24.60
Year Ended
December 31, 2010
$.180
.180
.180
.180
Year Ended
December 31, 2009
LOW
HIGH
$9.04
$15.26
13.16
22.96
18.33
24.47
20.68
24.60
Year Ended
December 31, 2009
$.180
.180
.180
.180
C2
GENERAL INFORMATION
CORPORATE HEADQUARTERS
1451 E. Battlefield
Springfield, MO 65804
(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:
(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 website 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
A PLACE OF STRENGTH
To our shareholders
Just three years ago, as the
magnitude of the financial crisis was
becoming more evident, our Company
resolved that we would emerge from
the economic downturn a stronger
and more capable company – a place
of strength. Great Southern has long
operated from places of strength: our
people – the best in the business, our
88-year history, our strong customer
relationships, our diverse markets, and
our solid financial position. Perhaps
one of our greatest strengths is our
belief that we can always find ways
to be a better and stronger company.
Today, with the fast pace of our
industry and how quickly things can
change, this attitude of continual
improvement is a must.
While the negative economic cycle is
not yet behind us and more uncertainty
is likely on the horizon, we believe we
are succeeding in coming through this
cycle in a position of greater strength.
Getting to where we are today didn’t
happen by chance. Back in 2008,
we knew we could not alter the
economy, but we could control how
we responded to it and what actions we
would need to take to manage through
the most serious financial crisis since
the Great Depression. Our efforts and
financial strength enabled us to change
the course of our Company. Operating
from a place of strength can create
extraordinary opportunities. The most
significant change came in 2009 with
two FDIC-assisted acquisitions.
These two acquisitions, along with
de novo growth in new markets, began
a dramatic change in the profile of our
Company. In a short period of time,
we grew from a company with business
prospects primarily in Springfield and
southwest Missouri to a company with
the opportunity to also serve customers
in other parts of Missouri and four
other states including markets in Des
Moines and Sioux City, Iowa; St.
Louis; Kansas City; Omaha, Neb.; and
Rogers, Ark., located in the Northwest
Arkansas region.
2010 Results
Overall, we are pleased with the
progress we made in 2010, but there’s
more work to be done in managing
problem assets and containing
operational expenses. We developed
new and deepened existing customer
relationships, posted a profit in all
four quarters, and ended the year with
stronger capital levels than in 2009.
Considerable time was spent on further
integrating the two FDIC-assisted
acquisitions while we maintained our
focus on serving and meeting the needs
of our customers.
Much of the credit for a successful
2010 goes to our talented and
dedicated team of nearly 1,100
associates. Day-in and day-out, our
associates are fulfilling our mission
to build winning relationships with
our customers, our shareholders, our
communities and each other. We are
extremely proud of the team we have
assembled.
1
Joseph W. Turner
President and Chief Executive Officer
William V. Turner
Chairman of the Board
The Company ended the year
with assets of $3.4 billion. Total
stockholders’ equity was $304.0
million (8.9% of total assets).
Common stockholders’ equity was
$247.5 million (7.3% of total assets),
equivalent to a book value of $18.40
per common share. Net income
available to common shareholders was
$20.5 million, or $1.46 per diluted
common share. Common shareholders
received a total dividend of $.72 per
common share in 2010. We’re pleased
that we have paid 84 consecutive
quarterly dividends to common
shareholders since 1990.
The capital position of the
Company continued to grow in 2010,
significantly exceeding the “well
capitalized” thresholds established by
regulators. The Company’s capital
ratios increased during the year
primarily due to growth in equity and
lower total and risk-weighted assets.
As expected, we experienced a
reduction in our overall loan portfolio
in 2010. Total gross loans, including
FDIC-covered loans, decreased $204.0
million, or 9.6%, from the end of
2009. Contributing to the decline
in total gross loans were significant
decreases in the FDIC-covered loan
portfolios. The Company’s loan
portfolio excluding FDIC-covered
loans was down $69.4 million, or
4.1%, from Dec. 31, 2009, mainly
due to decreases in construction
loans. While loan demand was weak
throughout 2010, we saw some
increased activity in single-family
residential loans and commercial real
estate loans, especially towards the end
of 2010.
Credit quality and the resolution of
non-performing assets were a priority
in 2010. Non-performing assets were
elevated in 2010, but at manageable
levels. Non-performing assets excluding
FDIC-covered non-performing assets
at Dec. 31, 2010, were $78.3 million,
an increase of $13.3 million from
Dec. 31, 2009. Non-performing loans
were $29.4 million and foreclosed
assets were $48.9 million at Dec. 31,
2010, as compared to $26.5 million
and $38.5 million, respectively, at
the end of 2009. At Dec. 31, 2010,
the Company’s allowance for loan
losses was $41.5 million, an increase
of $1.4 million from Dec. 31, 2009.
The allowance for loan losses as a
percentage of total loans, excluding
FDIC-covered loans, was 2.48% at
Dec. 31, 2010, as compared to 2.35%
at Dec. 31, 2009.
What may be the most compelling
story of 2010 was our impressive core
deposit growth. While total deposits
declined $118.1 million, or 4.4%, from
Dec. 31, 2009, the decline was mainly
due to a managed decrease in higher-
cost CDARS deposits and brokered
certificates of deposit totaling $317.5
million. Offsetting this decline was an
increase in checking account deposits of
$216.5 million from the end of 2009.
Throughout 2010, the Company’s
deposit mix continued a favorable
Five Year Cumulative Total Return*
Great Southern
Bancorp
NASDAQ
Financial
NASDAQ
Composite
$
160
140
120
100
80
60
40
20
$102.33
0
DEC 05
DEC 06
DEC 07
DEC 08
DEC 09
DEC 10
Net Income**
(per share of common stock)
$1.46
Total Assets
in billions
$3.41
Total Deposits
in billions
$2.60
Total Loans
in billions
$1.90
Total Capital
in millions
$304
1.6
1.2
0.8
0.4
0.0
NASDAQ FINANCIAL
NASDAQ COMPOSITE
GREAT SOUTHERN BANCORP, INC.
JUN
’90†
JUN
’95
DEC
’00
DEC
’05
DEC
’10
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2.5
2.0
1.5
1.0
0.5
0.0
1.8
1.5
1.2
0.9
0.6
0.3
0.0
300
250
200
150
100
50
0
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’10
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’10
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’10
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’10
* 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, 2005 through December 31, 2010. The graph assumes that $100 was invested in
GSBC Common Stock on December 31, 2005 and that all dividends were reinvested.
† Figure stated is as if the Company was publicly traded for all of the fiscal year
1990 (conversion was in Dec. 1989).
2
shift to lower cost core funding with
transaction accounts making up 49.9%
of the deposit portfolio and retail
certificates of deposit making up 36.1%
of the portfolio as compared to 39.8%
and 37.1%, respectively, at the end of
2009.
Adding to our Strength
In 2010, we opened three banking
centers as part of our long-term
strategy to open two to three banking
centers a year as market conditions
warrant. In May 2010, our first
Northwest Arkansas banking center
was opened in Rogers, Ark. In
September 2010, a banking center was
opened in Des Peres, Mo., marking
the second banking center location in
the St. Louis metro area. Finally, in
December 2010, we opened a banking
center in Forsyth, Mo., adding to the
four banking centers that we operate
in the Branson/Tri-Lakes area. Great
Southern Travel, a subsidiary of Great
Southern Bank, acquired two agencies
in 2010 – one in Olathe, Kan., and the
other in West Des Moines, Iowa.
revenue from overdraft fees has been
adversely affected.
Significant Events in the Banking
Industry in 2010
A recap of 2010 would be
incomplete without at least a summary
of the avalanche of new, transformative
regulations affecting the banking
industry. While our earnings will
likely be negatively impacted by many
of these actions, we are prepared to
address the challenges that lie ahead.
New overdraft regulations on ATM
and certain debit card transactions
went into effect for new and existing
customers in the third quarter of
2010. The regulations prohibit banks
from processing one-time debit card
and ATM transactions and charging
an overdraft fee in accounts that lack
sufficient funds unless the customer
has “opted in” to the Company’s
overdraft service. A significant number
of customers chose to continue their
overdraft coverage with us; however,
On July 21, 2010, sweeping
financial regulatory reform legislation
entitled the “Dodd-Frank Wall Street
Reform and Consumer Protection
Act” (the “Dodd-Frank Act”) was
signed into law. The Dodd-Frank Act
implements far-reaching changes across
the financial regulatory landscape.
Many aspects of the Dodd-Frank Act
are subject to rulemaking and will
take effect over the next several years,
making it difficult to anticipate the
overall financial impact on the financial
services industry and the Company.
New capital proposals were another
focal point of financial reform for
2010. Both the Dodd-Frank Act and
Basel III (an international capital
standard proposed by the Basel
Committee on Banking Supervision)
include provisions to establish future
guidelines regarding the minimum
amounts and types of capital we may
be required to maintain.
Net Income**
$1.46
(per share of common stock)
Total Assets
in billions
$3.41
Total Deposits
in billions
$2.60
Total Loans
in billions
$1.90
Total Capital
in millions
$304
1.6
1.2
0.8
0.4
0.0
JUN
’90†
JUN
’95
DEC
’00
DEC
’05
DEC
’10
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
’10
2.5
2.0
1.5
1.0
0.5
0.0
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’10
1.8
1.5
1.2
0.9
0.6
0.3
0.0
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’10
300
250
200
150
100
50
0
DEC
’90
DEC
’95
DEC
’00
DEC
’05
DEC
’10
** All per share amounts have been adjusted to reflect stock splits. The Company converted to a calendar year in December 1998; therefore prior years’ net income numbers will reflect a June 30 fiscal year end.
3
2011 and Beyond – Building on
Our Strengths
We expect that 2011 will bring
both opportunities and challenges.
There are some signs pointing to
an economic recovery; however,
uncertainty continues in the economy
and we anticipate that it will take
some time before we see meaningful
sustained economic growth. We are
poised to respond to opportunities that
may be presented and we are up to the
challenges we’ll face in 2011.
Our strategic direction for 2011
is basic and fundamental. We’ll
work as hard as ever as a united team
across all business lines to attract new
customers and deepen relationships
with our current customers. Customer
preferences and expectations continue
to evolve and we will work to ensure
that our products and service meet
or exceed their changing needs.
Headwinds to revenue growth caused
by weak loan demand and regulatory
pressures will place a premium on
efficiency and expense containment.
We will continue to aggressively work
to reduce our problem assets. We’ll
also focus on net interest margin
improvement through disciplined
asset/liability management. Of course,
capital and liquidity management will
also remain top of mind.
Several initiatives and projects
are about to begin or are already in
progress at the time of this writing. In
February 2011, the Great Southern
Residential Lending team moved
to a stand-alone building in south
Springfield. The facility, named the
Great Southern Home Loan Center,
now houses our residential lending
originators and support staff. The
Home Loan Center creates greater
visibility for the lending team and
provides needed space in light of
the Company’s recent market area
expansion and anticipated growth in
our five-state region.
In 2011, the Company plans to
open two to three banking centers
as a part of our long-term strategy.
Two locations for banking centers
have been selected and approved.
The first banking center is located in
Clayton, Mo., a major business center
of metro St. Louis and the seat of St.
Louis County. The banking center
is expected to open in May 2011.
The Company’s Creve Coeur loan
production office will also relocate to
this location.
The second location is in
Springfield, Mo. The Company is
constructing a new full-service banking
center on South Campbell Avenue in
southwest Springfield. The banking
center will replace a current office,
which is less than a mile from the
new site. The new, larger office will
offer better access for customers and
is expected to open during the third
quarter of 2011.
Expansion of the Company’s
Operation Center in Springfield was
completed at the end of the March
2011 quarter. A 20,000 sq. ft. addition
was constructed to accommodate the
Company’s growth and provide for
potential future growth.
At the time of this writing, the
Company is considering participation
in the U.S. Treasury’s Small Business
Lending Fund (SBLF). Enacted into
law in 2010 as part of the Small
4
Business Jobs Act, the SBLF is a $30
billion fund designed to encourage
lending to small businesses by
providing Tier 1 capital to qualified
community banks with assets of less
than $10 billion. The SBLF provides
an option for Great Southern to
refinance the preferred stock issued
to the Treasury through the Capital
Purchase Program (see related
Company filings). If Capital Purchase
Program funds were transferred to
the SBLF, the 5% Capital Purchase
Program dividend rate could
potentially be reduced for a period of
time, depending on the level of small
business lending. Great Southern
submitted an application to participate;
however, there is no obligation to
participate upon acceptance. More
information about SBLF can be found
on the U.S. Treasury’s website,
www.treasury.gov.
No doubt, 2011 will be a
challenging year. Challenges are a
constant and how a company deals
with challenges is a great determinant
of ultimate success. Our strong
foundation of doing what is right for
our shareholders, our customers, our
associates and our communities is at
the center of how we go about dealing
with daily challenges.
As we stated earlier, we resolved
three years ago to emerge from
the financial crisis in a position of
considerable strength with high
levels of capital and liquidity. We are
achieving this objective, but still have
progress to make. Operating from such
a place of strength will present many
opportunities for our Company.
Our greatest strength of course is
our team of associates. Our confidence
in the future is grounded on the belief
in our team of associates and their
ability to get the job done for our
customers. We thank each and every
associate for their hard work and
commitment to serve our customers
and communities.
We would also like to thank our
customers. We understand that you
have plenty of choices for your banking
business. We will strive to deliver the
best products with exceptional service
when, how and where you desire.
Your trust and confidence are greatly
appreciated.
To the Great Southern Board of
Directors, we appreciate your guidance
and wisdom throughout 2010. Your
knowledge, management expertise
and thoughtful questions and advice
guided us well. A special welcome to
Grant Haden, who joined our Board in
September 2010.
And finally, we thank our
shareholders for their 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
unwavering.
As always, we welcome your
thoughts and suggestions.
Sincerely,
William V. Turner
Joseph W. Turner
SELECTED CONSOLIDATED FINANCIAL DATA
Summary Statement of
Condition Information:
Assets
Loans receivable, net
Allowance for loan losses
Available-for-sale securities
Foreclosed assets held for sale, net
Deposits
Total borrowings
Stockholders' equity (retained
earnings substantially restricted)
Common stockholders' equity
Average loans receivable
Average total assets
Average deposits
Average stockholders' equity
Number of deposit accounts
Number of full-service offices
2010
2009
December 31,
2008
(Dollars in thousands)
2007
2006
$3,411,505
1,899,386
41,487
769,546
60,262
2,595,893
495,554
304,009
247,529
2,019,361
3,528,043
2,661,164
309,558
171,278
75
$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
The tables on pages 5, 6 and 7 set forth selected consolidated financial information and other financial data of the Company. The selected
balance sheet and statement of operations data, insofar as they relate to the years ended December 31, 2010, 2009, 2008, 2007 and 2006, 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.
5
SELECTED CONSOLIDATED FINANCIAL DATA
2010
For the Year Ended December 31,
2008
(In Thousands)
2009
2007
2006
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
Gain recognized on business acquisitions
Accretion (amortization) of income/expense 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
$ 145,832 $ 123,463 $ 119,829 $ 142,719 $ 133,094
27,359 32,405 24,985 21,152 16,987
173,191 155,868 144,814 163,871 150,081
5,516
3,329
578
5,352
6,393
773
38,427 54,087 60,876 76,232 65,733
8,138
5,648
1,335
47,850 66,605 73,231 92,466 80,854
125,341 89,263 71,583 71,405 69,227
35,630 35,800 52,200
5,450
89,711 53,463 19,383 65,930 63,777
6,964
7,356
1,914
5,001
5,892
1,462
5,475
8,284
9,166
18,652 17,669 15,352 15,153 14,611
944
1,415
8,724
9,933
1,037
6,775
2,889
3,765
8,787
---
767
2,787
(4,308)
672
44
(7,386 )
819
13
(1,140 )
962
(1)
---
1,567
---
---
1,184
89,795
6,981
---
1,632
---
1,498
---
(10,427)
---
1,847
31,952 122,784 28,144 29,419 29,632
---
2,195
---
1,829
2,733
2,588
2,124
44,842 40,450 31,081 30,161 28,285
7,645
14,341 12,506
2,178
2,789
876
5,716
1,201
1,488
931
1,195
1,387
1,828
1,127
2,778
119
4,959
8,281
2,240
2,223
1,073
820
1,396
1,739
3,431
7,927
2,230
1,473
1,446
879
1,363
1,247
608
3,303
4,562
1,932
1,522
2,333
2,867
4,914
---
8,288
---
4,486
---
4,373
---
3,422
783
4,275
88,904 78,195 55,706 51,707 48,807
32,759 98,052
(8,179 ) 43,642 44,602
8,894 33,005
(3,751 ) 14,343 13,859
$ 23,865 $ 65,047 $
(4,428 ) $ 29,299 $ 30,743
---
3,403 $ 3,353 $
$
$ 20,462 $ 61,694 $
(4,670 ) $ 29,299 $ 30,743
242 $
--- $
6
SELECTED CONSOLIDATED FINANCIAL DATA
Per Common Share Data:
Basic earnings (loss) per common share
Diluted earnings (loss) per common share
Cash dividends declared
Book value per common share
Average shares outstanding
Year-end actual shares outstanding
Average 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
of average interest-bearing liabilities
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
2010
At or For the Year Ended December 31,
2007
2008
(Number of shares in thousands)
2009
2006
$
1.52
1.46
0.72
18.40
13,434
13,454
14,046
$ 2.16
$ (0.35)
$ 4.61
4.44
2.15
(0.35)
0.72 0.72 0.68
18.12 13.34 14.17
13,390 13,381 13,566
13,406 13,381 13,400
13,382 13,381 13,654
$ 2.24
2.22
0.60
12.84
13,697
13,677
13,825
0.68% 1.91% (0.18)% 1.25% 1.41%
18.54
9.42
1.36
0.91
2.24
2.52
2.83
3.81
2.95
3.81
3.39
3.93
49.37
56.52
0.88
27.03
15.78
(2.47)
29.72
3.61 1.12 1.25
2.30 2.21 2.21
2.98 2.74 2.71
3.56 3.02 3.00
3.03 3.01 3.24
36.88 55.86 51.28
(1.31)
1.09 0.95
15.35 N/A 31.63
42.35
1.61
2.48% 2.35% 1.66% 1.38% 1.54%
1.46
3.93
129.71
141.02
0.23
2.05
1.12
2.30
1.19
1.52
2.99 3.69 2.99
151.38 87.84 71.77
1.44 2.63 0.35
1.79 2.48 2.30
1.24 1.90 1.92
73.17% 77.06% 90.23% 103.23% 98.29%
108.22
102.17
108.98
112.71
114.26
7.2%
7.1
6.4%
6.5
7.1%
6.7
7.9%
7.7
7.6%
7.8
16.8
18.0
9.5
15.0 13.8 10.6
16.3 15.1 11.9
9.1
8.6 10.1
10.7
11.9
9.2
14.6
15.8
8.3
12.9 10.7 10.4
14.2 11.9 11.7
9.0
7.4
7.8
10.2
11.5
8.9
1.53x 2.30x 0.88x 1.47x 1.55x
2.99x 6.29x 0.33x 3.69x 3.95x
(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 average total assets.
(7) 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.
7
Great Southern Leadership Team
Debbie Flowers
Director of Credit Risk
Administration
Steve Mitchem*
Chief Lending Officer
Kris Conley
Director of Retail
Services
Tammy Baurichter
Controller
Lin Thomason*
Director of Information
Services
Joe Turner*
President and Chief
Executive Officer
Bryan Tiede
Director of Risk
Management
8
Rex Copeland*
Chief Financial Officer
Kelly Polonus
Director of Corporate
Communications
Doug Marrs*
Director of Operations
Teresa Chasteen-Calhoun
Director of Marketing
Shannon Thomason
Compliance Officer
Matt Snyder
Director of Human Resources
*Denotes Executive Officer
9
Directors of Great Southern Bancorp, Inc. and Great Southern Bank
Back row
Earl A. Steinert, Jr.
Board Member
Co-owner, EAS Investment
Enterprises, Inc./CPA
Larry D. Frazier
Board Member
Retired – Hollister, Mo.
Grant Q. Haden
Board Member
Attorney and Managing Partner,
Haden, Cowherd and Bullock LLC
Thomas J. Carlson
Board Member
President, Mid America
Management, Inc.
Front row
William E. Barclay
Board Member
Retired – Springfield, Mo.
Joseph W. Turner
President and
Chief Executive Officer
William V. Turner
Chairman of the Board
Julie T. Brown
Board Member
Shareholder, Carnahan, Evans,
Cantwell & Brown, P.C.
10
2010 Financial Information
Contents
12 Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
50 Report of Independent Registered Public Accounting Firm.
51 Consolidated Statements of Financial Condition.
53 Consolidated Statements of Operations.
54 Consolidated Statements of Stockholders’ Equity.
56 Consolidated Statements of Cash Flows.
59 Notes to Consolidated Financial Statements.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
When used in this Annual Report and in other 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, including, without limitation, the recently enacted Dodd-Frank
Wall Street Reform and Consumer Protection Act and its implementing regulations, and the new overdraft protection regulations
and customers’ responses thereto; (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 the Bank
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 December 2010.
12
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, 2010, under the section titled "Item 1. Business - Allowances for Losses on Loans and Foreclosed Assets." Inherent in
this process is the evaluation of individual significant credit relationships. From time to time certain credit relationships may
deteriorate due to payment performance, cash flow of the borrower, value of collateral, or other factors. In these instances,
management may have to revise its loss estimates and assumptions for these specific credits due to changing circumstances. In some
cases, additional losses may be realized; in other instances, the factors that led to the deterioration may improve or the credit may be
refinanced elsewhere and allocated allowances may be released from the particular credit. For the periods included in these financial
statements, management's overall methodology for evaluating the allowance for loan losses has not changed significantly.
In addition, the Company considers that the determination of the valuations of foreclosed assets held for sale involves a high degree of
judgment and complexity. The carrying value of foreclosed assets reflects management’s best estimate of the amount to be realized
from the sales of the assets. While the estimate is generally based on a valuation by an independent appraiser or recent sales of similar
properties, the amount that the Company realizes from the sales of the assets could differ materially from the carrying value reflected
in these financial statements, resulting in losses that could adversely impact earnings in future periods.
Carrying Value of FDIC-covered Loans and Indemnification Asset
The Company considers that the determination of the carrying value of loans acquired in the March 20, 2009 and September 4, 2009,
FDIC-assisted transactions and the carrying 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 ongoing
estimates of the amounts to be realized on each of these assets. The Company determined initial 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 of the accompanying audited
financial statements for additional information.
Goodwill and Intangible Assets
Goodwill and intangible 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,
2010, 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, 2010,
goodwill consisted of $379,000 at the Bank reporting unit and $876,000 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, 2010, the amortizable intangible assets consisted of core deposit intangibles of $4.1 million at the Bank reporting unit
and $29,000 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 of the accompanying
audited 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, 2010. While the Company believes no impairment existed at December 31, 2010, 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.
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, 2010, Great Southern's net loans decreased $205.2 million, or 9.9%, from $2.08 billion at December
31, 2009, to $1.88 billion at December 31, 2010. A portion of the decrease in net loans was due to a $120.9 million, or 28.4%,
decrease in the loan portfolios acquired through the 2009 FDIC-assisted transactions, primarily because of loan repayments. Excluding
the reductions in these acquired portfolios, loans decreased by approximately $84.3 million, primarily due to a decrease in outstanding
construction loans (net of the undisbursed portion) of $75.2 million, or 23.4%, and a decrease in outstanding commercial real estate
loans of $32.8 million, or 5.8%. These loan types decreased due to reduced activity in the market caused by the downturn in the
economy. Partially offsetting these decreases was a $18.4 million, or 12.7%, increase in other commercial loans. 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 and the
loan portfolio may continue to shrink due to net loan repayments. The Company's strategy continues to be focused on maintaining
credit risk and interest rate risk at appropriate levels in 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 did
not have an overall high level of charge-offs on our non-performing loans prior to 2008, we generally do not accrue interest income on
these loans and do not recognize interest income until the loans are 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 the loan loss provision, non-performing assets and foreclosed assets to
remain elevated. In addition, expenses related to the credit resolution process could also remain elevated.
In the year ended December 31, 2010, available-for-sale securities increased $5.2 million, or 0.7%, from $764.3 million at December
31, 2009, to $769.5 million at December 31, 2010. The increase was primarily due to purchases of municipal securities and Small
Business Administration (SBA) loan pools, offset by sales of virtually all of the securities (primarily mortgage-backed securities)
acquired through the 2009 FDIC-assisted transactions.
Cash and cash equivalents totaled $430.0 million at December 31, 2010 compared to $444.6 million at December 31, 2009. Cash and
cash equivalents increased significantly during 2009 as a result of the two FDIC-assisted transactions completed by the Company.
During 2010, cash and cash equivalents remained at a higher level because of net loan repayments and lower overall loan demand.
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 or otherwise fund its activities. In the year ended December 31, 2010, total deposit balances
decreased $118.1 million, or 4.4%. The addition of the TeamBank and Vantus Bank core deposits during 2009 provided a relatively
lower cost funding source, which allowed the Company to reduce some of its higher cost funds. Beginning in the latter quarters of
2009, the Company redeemed brokered deposits as it experienced growth in transaction deposit accounts. In addition, as retail
certificates of deposit matured they were renewed or replaced with certificates of deposit with lower market rates of interest.
Customer preference to transition from time deposits to transaction deposits continued into 2010 as lower-cost checking accounts
increased while higher-cost CDARS accounts decreased. Interest-bearing transaction accounts increased $217.7 million and non-
interest-bearing checking accounts decreased $1.2 million. Retail certificates of deposit decreased $69.7 million while total brokered
14
deposits decreased $265.0 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.
Included in total brokered deposits at December 31, 2010 and December 31, 2009, were Great Southern Bank customer deposits
totaling $218.8 million and $359.1 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 customer accounts discussed above, were $144.5 million at December 31, 2010, down
from $273.5 million at December 31, 2009. As previously mentioned, in the latter quarters of 2009, the Company began redeeming
brokered deposits, including CDARS purchased funds, as it experienced growth in transaction deposit accounts. The addition of the
TeamBank and Vantus Bank deposits created additional liquidity and reduced the need for brokered deposits. No interest rate swaps
were associated with the Company’s brokered certificates at December 31, 2010. The majority of the Company’s brokered certificates
of deposit have fixed rates of interest and mature in 2011.
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" of interest and adjusts immediately when this rate adjusts (subject to the effect of loan interest rate floors,
which are discussed below). We monitor our sensitivity to interest rate changes on an ongoing basis (see "Quantitative and
Qualitative Disclosures About Market Risk"). In addition, our net interest income may be impacted by changes in the cash flows
expected to be received from acquired loan pools. As described in Note 5 of the accompanying audited financial statements, the
Company’s evaluation of cash flows expected to be received from acquired loan pools is on-going and increases in cash flow
expectations are recognized as increases in accretable yield through interest income. Decreases in cash flow expectations are
recognized as impairments through the allowance for loan losses.
The current level and shape of the interest rate yield curve poses challenges for interest rate risk management. The FRB 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 “Great Southern prime rate” of interest at 5.00%. 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 significantly in the current environment, although interest rates on
assets may decline further. Conversely, interest rate increases would normally result in increased interest rates on our prime-based
loans. The interest rate floors in effect may limit the immediate increase in interest rates on these loans, until such time as rates rise
above the floors. However, the Company may have to increase rates paid on deposits to maintain deposit balances.
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, 2010, the Company had a portfolio (excluding the loans acquired in the FDIC-assisted
transactions) of prime-based loans totaling approximately $691 million with rates that change immediately with changes to the prime
rate of interest. Of this total, $619 million also had interest rate floors. These floors were at varying rates, with $108 million of these
loans having floor rates of 7.0% or greater and another $467 million of these loans having floor rates between 5.0% and 7.0%. In
addition, there were $44 million of these loans with floor rates between 3.25% and 5.0%. At December 31, 2010, all $619 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 subsequent periods, as the "prime rate of interest" decreased, the Company's loan portfolio again had loans with rate floors
that went into effect and established a loan rate which was higher than the contractual rate would have otherwise been. This
15
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 increased to levels that were approximately 278, 300 and 310 basis points higher
than the national "prime rate of interest" at December 31, 2010, 2009 and 2008, respectively. While interest rate floors have had an
overall positive effect on the Company’s results during this period, they do subject the Company to the risk that borrowers will elect to
refinance their loans with other lenders. To the extent economic conditions improve, the risk that borrowers will seek to refinance
their loans increases.
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, accretion
income (net of amortization) related to the FDIC-assisted acquisitions, 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. In 2010, increases in the cash flows expected to be collected from the FDIC-
covered loan portfolios resulted in amortization (expense) recorded relating to reductions of expected reimbursements under the loss
sharing agreements with the FDIC, which are recorded as indemnification assets. Non-interest income may also be affected by the
Company's interest rate hedging activities, if the Company chooses to implement hedges.
On July 1, 2010, a federal rule went into effect that 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.
As expected, this recent federal rule has had an adverse affect on 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 2010 decreased $90.8 million primarily as a result of the one-time initial gains recorded in 2009 of $43.9
million related to the TeamBank transaction and $45.9 million related to the Vantus Bank transaction. During the 2010 period, no
such one-time gains were recorded. Other types of non-interest income such as gains on sales of securities, securities impairments in
the 2009 periods, commission income, deposit account charges, changes in estimated cash flows and projected losses related to the
FDIC-assisted acquisitions, also contributed to the change for the year. Details of the change in non-interest income are provided in
the “Results of Operations and Comparison for the Years Ended December 31, 2010 and 2009” section of this Report.
Total non-interest expense increased in 2010 compared to 2009 due primarily to the overall increased cost of the Company’s expanded
operations. The 2009 FDIC-assisted transactions, along with continued internal growth through new banking centers, contributed to
increased salaries and benefits and occupancy and equipment expenses in particular. In 2009, the Company opened banking centers in
Creve Coeur, Mo. and Lee’s Summit Mo., and in 2010, the Company opened banking centers in Rogers, Ark., De Peres, Mo. and
Forsyth, Mo.
Business Initiatives
In 2010, Great Southern opened three banking centers as part of its long-term strategic plan to open two to three banking centers a
year as market conditions warrant. In May 2010, the Company opened its first Northwest Arkansas banking center in Rogers, Ark.
This banking center operates in the same building as the Company’s loan production office and travel agency. In September 2010, a
banking center was opened in Des Peres, Mo., marking the second banking center location in the St. Louis metro market. The Des
Peres office complements the Creve Coeur banking center opened in 2009. Finally, in December 2010, the Company opened a
banking center in Forsyth, Mo., adding to the four banking centers that operate in the Branson/Lakes area.
Great Southern Travel acquired two agencies in 2010. Pathfinder Travel and Cruises in Olathe, Kan., was acquired in July. In
November, Great Southern Travel purchased Travel World in West Des Moines, Iowa. The Company also operates banking centers in
both of these markets.
In 2011, the Company anticipates opening two to three banking centers as a part of its long-term strategic plan. Two locations for
banking centers have been selected, with regulatory approval pending. The first banking center is located at 8235 Forsyth Boulevard
in Clayton, Mo. The banking center is expected to open in April 2011. In addition, the Company’s Creve Coeur loan production office
plans to relocate to the same office complex in May 2011. Clayton is a major business center of metropolitan St. Louis and the seat of
St. Louis County.
The second location is in Springfield, Mo. Pending regulatory approval, the Company will construct a new full-service banking center
on South Campbell Avenue in Springfield. The banking center will replace a current office on South Campbell, which is less than a
mile from the new site. The new, larger office will offer better access for customers and is expected to open during the third quarter of
2011.
Expansion of the Company’s Operation Center in Springfield is expected to be complete during the first quarter of 2011. A 20,000 sq.
ft. addition is under construction to accommodate the Company’s growth and provide for potential future growth.
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At the end of February 2011, the Great Southern Residential Lending team moved into a stand-alone building the Company purchased
in south Springfield. The facility, named the Great Southern Home Loan Center, houses residential lending originators and support
staff. The Home Loan Center creates greater visibility for the lending team and provides needed space in light of the Company’s
recent expansion and anticipated growth.
Effect of Federal Laws and Regulations
General. Federal legislation and regulation significantly affect the banking operations of the Company and the Bank, and have
increased competition among commercial banks, savings institutions, mortgage banking enterprises and other financial institutions. In
particular, the capital requirements and operations of regulated depository institutions such as the Company and the Bank have been
and will be subject to changes in applicable statutes and regulations from time to time, which changes could, under certain
circumstances, adversely affect the Company or the Bank.
Recent Legislation Impacting the Financial Services Industry. On July 21, 2010, sweeping financial regulatory reform legislation
entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (the “Dodd-Frank Act”) was signed into law. The Dodd-
Frank Act implements far-reaching changes across the financial regulatory landscape, including provisions that, among other things,
will provide increased consumer financial protection, amend capital requirements for financial institutions, change the assessment
base for federal deposit insurance, repeal the federal prohibitions on the payment of interest on demand deposits, amend the account
balance limit for federal deposit insurance protection, and increase the authority of the Federal Reserve Board.
Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate
the overall financial impact on the Company and the financial services industry more generally. Provisions in the legislation that affect
deposit insurance assessments, and payment of interest on demand deposits could increase the costs associated with deposits.
Provisions in the legislation that require revisions to the capital requirements of the Company and the Bank could require the
Company and the Bank to seek additional sources of capital in the future.
In December 2010 and January 2011, the Basel Committee on Banking Supervision published the final texts of reforms on capital and
liquidity generally referred to as “Basel III.” Although Basel III is intended to be implemented by participating countries for large,
internationally active banks, its provisions are likely to be considered by United States banking regulators in developing new
regulations applicable to other banks in the United States, including Great Southern. For banks in the United States, among the
provisions concerning capital are: (i) a minimum ratio of common equity to risk-weighted assets reaching 4.5%, plus an additional
2.5% as a capital conservation buffer, by 2019 after a phase-in period; (ii) a minimum ratio of Tier 1 capital to risk-weighted assets
reaching 6.0% by 2019 after a phase-in period; (iii) a minimum ratio of total capital to risk-weighted assets, plus the additional 2.5%
capital conservation buffer, reaching 10.5% by 2019 after a phase -in period; (iv) an additional countercyclical capital buffer to be
imposed by applicable national banking regulators periodically at their discretion, with advance notice; and (v) restrictions on capital
distributions and discretionary bonuses applicable when capital ratios fall within the buffer zone.
Although Basel III is described as a “final text,” it is subject to the resolution of certain issues and to further guidance and
modification, as well as to adoption by United States banking regulators, including decisions as to whether and to what extent it will
apply to United States banks that are not large, internationally active banks.
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Recent Accounting Pronouncements
See Note 1 to the accompanying audited financial statements for a description of recent accounting pronouncements including the
respective dates of adoption and expected effects on the Company’s financial position and results of operations.
Comparison of Financial Condition at December 31, 2010 and December 31, 2009
During the year ended December 31, 2010, total assets decreased by $229.6 million to $3.4 billion. Most of the decrease was due to
the repayment of loans and reductions in payments expected to be received from the FDIC through the loss sharing agreements
recorded as the FDIC indemnification asset. Net loans decreased $205.2 million to $1.9 billion at December 31, 2010, due in part to a
$120.9 million decrease in the acquired loan portfolios. Excluding loans covered in FDIC-assisted transactions, outstanding
construction loans (net of the undisbursed portion) and commercial real estate loans decreased $75.2 million and $32.8 million,
respectively. 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. Aside from any potential future acquisitions, of which none are currently
contemplated, 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 indemnification asset which represents payments expected to be received from
the FDIC through loss sharing agreements. During the year ended December 31, 2010, the FDIC indemnification asset decreased
$40.6 million to $100.9 million due to actual payments received from the FDIC as well as expected improved cash flows to be
collected from the loan obligors, resulting in reductions in payments expected to be received from the FDIC. The expected improved
cash flows are further discussed in the “Interest Income – Loans” section below. During the year ended December 31, 2010, cash and
cash equivalents decreased $14.6 million but still remain historically high at $430.0 million, as liquidity was used to purchase
available-for-sale securities for pledging and to allow some brokered deposits to mature without replacement. During the year ended
December 31, 2010, available-for-sale securities increased $5.2 million to $769.5 million. The increase was primarily due to
purchases of municipal securities and SBA loans pools. In the year ended December 31, 2010, municipal securities increased $33.1
million and SBA loan pools purchased totaled $60.9 million at December 31, 2010. The Company began purchasing SBA loan pools
during 2010 for their variable interest rate characteristics and guarantee by the federal government, which makes them relatively low-
risk investments. During 2010, the Company sold virtually all of the securities acquired through the 2009 FDIC-assisted transactions
to eliminate securities with lower yields and blocks of smaller securities and to realize the gain positions of the securities which
permanently increased common stockholders’ equity. The sale of these acquired securities offset the purchases previously mentioned
and was the primary reason mortgage-backed securities decreased $33.0 million, or 5.2%, and collateralized mortgage obligations
decreased $44.1 million, or 85.2%, from December 31, 2009. These sales, in addition to other sales of mortgage-backed securities
during 2010 resulted in gains of $8.8 million recorded in non-interest income for the year ended December 31, 2010. While there is
no specifically stated goal, the available-for-sale securities portfolio has in recent periods been approximately 15% to 25% of total
assets. The available-for-sale securities portfolio was 22.6% and 21.0% of total assets at December 31, 2010 and December 31, 2009,
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 $18.6 million during the year ended December 31, 2010. See “Non-performing Assets –
Foreclosed Assets” for additional information on the Company’s foreclosed assets.
Total liabilities decreased $234.7 million from December 31, 2009 to $3.11 billion at December 31, 2010. The decrease was primarily
attributable to decreases in deposits, securities sold under repurchase agreements with customers and FHLBank advances. Deposits
decreased $118.1 million from December 31, 2009. Checking account balances totaled $1.30 billion at December 31, 2010, up from
$1.08 billion at December 31, 2009. Interest-bearing checking accounts (mainly money market accounts) increased $217.7 million and
non-interest bearing checking accounts decreased $1.2 million. Total brokered deposits (excluding CDARS customer account
balances) were $144.5 million at December 31, 2010, compared to $273.5 million at December 31, 2009. CDARS purchased funds
and retail certificates of deposit decreased $92.5 million and $69.7 million, respectively, from December 31, 2009. In addition, at
December 31, 2010 and December 31, 2009, Great Southern Bank customer deposits totaling $218.8 million and $359.1 million,
respectively, 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. Securities sold under reverse repurchase agreements with customers decreased $78.7
million from December 31, 2009 as these balances fluctuate over time and rates paid on these accounts decreased. FHLBank advances
decreased $18.1 million from the December 31, 2009 level. The level of FHLBank advances also fluctuates depending on growth in
the Company's loan portfolio and other funding needs and sources available to the Company. Most of the Company’s FHLBank
advances are fixed-rate advances that cannot be repaid prior to maturity without incurring significant penalties.
Total stockholders' equity increased $5.1 million from $298.9 million at December 31, 2009 to $304.0 million at December 31, 2010.
The Company recorded net income of $23.9 million for the year ended December 31, 2010, common and preferred dividends declared
were $12.6 million and accumulated other comprehensive income decreased $7.3 million. The decrease in accumulated other
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comprehensive income resulted from decreases in the fair value of the Company's available-for-sale investment securities. In addition,
total stockholders’ equity increased $1.1 million due to stock option exercises.
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. The Company has historically utilized stock buy-back programs from time to time as long as it believed
that 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, 2010 and 2009
General
Net income decreased $41.1 million during the year ended December 31, 2010, compared to the year ended December 31, 2009. Net
income was $23.9 million for the year ended December 31, 2010 compared to $65.0 million for the year ended December 31, 2009.
This decrease was primarily due to a decrease in non-interest income of $90.8 million, or 74.0%, and an increase in non-interest
expense of $10.7 million, or 13.7%, partially offset by an increase in net interest income of $36.1 million, or 40.4%, and a decrease in
provision for income taxes of $24.1 million or 73.0%. Non-interest income for the year ended December 31, 2009 included gains
recognized on business acquisitions of $89.8 million. Net income available to common shareholders was $20.5 million for the year
ended December 31, 2010 compared to $61.7 million for the year ended December 31, 2009.
Total Interest Income
Total interest income increased $17.3 million, or 11.1%, during the year ended December 31, 2010 compared to the year ended
December 31, 2009. The increase was due to a $22.4 million, or 18.1%, increase in interest income on loans, offset in part by a $5.0
million, or 15.6%, decrease in interest income on investments and other interest-earning assets. Interest income on loans increased
primarily due to increases in expected cash flows to be received from the FDIC-acquired loan pools and the resulting adjustments to
accretable yield as discussed below in “Interest Income – Loans” and in Note 5 of the Notes to Consolidated Financial Statements.
Interest income from investment securities and other interest-earning assets decreased due to lower average rates of interest, partially
offset by higher average balances. The lower average investment yields were primarily a result of lower yields on mortgage-backed
securities as interest rates reset downward. Prepayments on the mortgages underlying these securities resulted in amortization of
premiums which also reduced yields. An increase in the amount of SBA loan pools held, which earn lower average rates than the
overall securities portfolio, contributed to lower investment yields as well. SBA loan pools are held for their variable interest rate
characteristics and guarantee by the federal government, which makes them relatively low-risk investments.
Interest Income - Loans
During the year ended December 31, 2010 compared to the year ended December 31, 2009, interest income on loans increased due to
higher average interest rates, partially offset by slightly lower average balances. Interest income increased $22.9 million as the result
of higher average interest rates on loans. The average yield on loans increased from 6.09% during the year ended December 31, 2009
to 7.22% during the year ended December 31, 2010. This increase was due to additional yield accretion recognized in conjunction
with the fair value of the loan pools acquired in the 2009 FDIC-assisted transactions. On an on-going basis the Company estimates the
cash flows expected to be collected from the acquired loan pools. This cash flows estimate increased during the third and fourth
quarters of 2010 based on the payment histories and reduced loss expectations of the loan pools, resulting in a total of $58.9 million of
adjustments to be spread on a level-yield basis over the remaining expected lives of the loan pools. The increases in expected cash
flows also reduced the amount of expected reimbursements under the loss sharing agreements with the FDIC, which are recorded as
indemnification assets. Therefore, the expected indemnification assets were also reduced during the third and fourth quarters of 2010
resulting in a total of $51.9 million of adjustments to be amortized on a comparable basis over the remainder of the loss sharing
agreements or the remaining expected life of the loan pools, whichever is shorter. The adjustments increased interest income by $19.5
million and decreased non-interest income by $17.1 million during the year ended December 31, 2010, for a net impact of $2.3 million
to pre-tax income. Because the adjustments will be recognized over the estimated remaining lives of the loan pools and the remainder
of the loss sharing agreements, respectively, they will impact future periods as well. The majority of the remaining $39.4 million of
accretable yield adjustment affecting interest income and $34.7 million of adjustment to the indemnification assets affecting non-
interest income is expected to be recognized over the next year, with $32.1 million of interest income and $(28.6) million of non-
interest income (expense) expected to be recognized in the next year. For further discussion about these adjustments, see Note 5 of the
accompanying audited financial statements.
Apart from the yield accretion discussed above, average loan rates were very similar in 2009 compared to 2010, as a result of market
rates of interest, primarily the "prime rate" of interest, remaining flat during this period. During 2008, the “prime rate” decreased
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4.00% to a rate of 3.25% at December 31, 2008, where the prime rate has remained. 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.
Beginning in 2008, the declining interest rates 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, 2010,
the average yield on loans was 7.22% versus an average prime rate for the period of 3.25%, or a difference of a positive 397 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.
Interest income decreased $532,000 as a result of lower average loan balances which decreased from $2.03 billion during the year
ended December 31, 2009 to $2.02 billion during the year ended December 31, 2010. The lower average balance resulted primarily
from decreases in outstanding construction loans as many projects were completed in the past 12 to 18 months and demand for new
construction loans has declined.
Interest Income - Investments and Other Interest-earning Assets
Interest income on investments and other interest-earning assets decreased as a result of lower average interest rates during the year
ended December 31, 2010, when compared to the year ended December 31, 2009. Interest income decreased $6.2 million as a result of
a decrease in average interest rates from 3.53% during the year ended December 31, 2009, to 2.34% during the year ended December
31, 2010. The majority of the Company’s securities in 2009 and 2010 were mortgage-backed securities which are backed by hybrid
ARMs that have fixed rates of interest for a period of time (generally one to ten years) and then adjust annually. The actual amount of
securities that reprice and the actual interest rate changes on these securities are 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). Mortgage-backed securities are
also subject to reduced yields due to more rapid prepayments in the underlying mortgages. As a result, premiums on these securities
may be amortized against interest income more quickly, thereby reducing the yield recorded. An increase in SBA loan pools during
2010 also contributed to the decrease in average interest rates because these securities earn lower yields than the overall securities
portfolio. Interest income increased $1.1 million as a result of an increase in average balances from $918 million during the year
ended December 31, 2009, to $1.17 billion during the year ended December 31, 2010. This increase was primarily in interest-earning
deposits as a result of the 2009 FDIC-assisted transactions and because of net loan repayments and lower overall loan demand.
Available-for-sale SBA loan pools also contributed to the increase, where securities were needed for liquidity and pledging against
deposit accounts under customer repurchase agreements.
In 2009 and 2010, the Company had increased interest-earning deposits and non-interest-earning cash equivalents, as additional
liquidity was maintained due to uncertainty in the economy and low loan demand. These deposits and cash equivalents earn very low
(or no) yield and therefore negatively impact the Company’s net interest margin. At December 31, 2010, the Company had cash and
cash equivalents of $430.0 million compared to $444.6 million at December 31, 2009.
Total Interest Expense
Total interest expense decreased $18.8 million, or 28.2%, during the year ended December 31, 2010, when compared with the year
ended December 31, 2009, due to a decrease in interest expense on deposits of $15.7 million, or 29.0%, a decrease in interest expense
on short-term and structured repo borrowings of $3.1 million, or 47.9%, and a decrease in interest expense on subordinated debentures
issued to capital trust of $195,000, or 25.2%, partially offset by an increase in interest expense on FHLBank advances of $164,000, or
3.1%.
Interest Expense - Deposits
Interest on demand deposits increased $3.0 million due to an increase in average balances from $611 million during the year ended
December 31, 2009, to $923 million during the year ended December 31, 2010. The increase in average balances of demand deposits
was primarily a result of the FDIC-assisted transactions completed in 2009, as well as organic growth in the Company’s deposit base,
particularly in interest-bearing checking accounts. Also contributing to the increase was the transition in the Company’s overall
deposit mix from time deposits to demand deposits during the end of 2009 and throughout 2010. Average noninterest-bearing demand
balances increased from $221 million for the year ended December 31, 2009, to $254 million for the year ended December 31, 2010.
Interest on demand deposits decreased $1.1 million due to a decrease in average rates from 1.08% during the year ended December 31,
2009, to 0.92% during the year ended December 31, 2010. The average interest rates decreased due to lower overall market rates of
interest throughout 2009 and 2010. Market rates of interest on checking and money market accounts have been decreasing since late
2007 when the FRB began reducing short-term interest rates.
Interest expense on time deposits decreased $13.1 million as a result of a decrease in average rates of interest from 2.88% during the
year ended December 31, 2009, to 2.02% during the year ended December 31, 2010. A large portion of the Company’s certificate of
20
deposit portfolio matures within one year and so it reprices fairly quickly; this is consistent with the portfolio over the past several
years. Interest expense on deposits decreased $4.4 million due to a decrease in average balances of time deposits from $1.65 billion
during the year ended December 31, 2009, to $1.48 billion during the year ended December 31, 2010. The decrease in average
balances of time deposits was primarily a result of decreases in brokered certificates, CDARS customer deposits and CDARS
purchased funds as the Company began redeeming them or replacing them with lower rate deposits in the latter quarters of 2009. In
2010, in some cases, the Company elected not to replace these funds as they matured due to growth in lower-cost demand deposits.
Included in the brokered deposits total at December 31, 2010, was $222.2 million which is part of CDARS. This total includes $218.8
million in CDARS customer deposit accounts and $3.4 million in CDARS purchased funds. Included in the brokered deposits total at
December 31, 2009, was $455.0 million which was part of CDARS. This total includes $359.1 million in CDARS customer deposit
accounts and $95.9 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.
The recently-enacted Dodd-Frank Act repealed the federal prohibitions on the payment of interest on demand deposits, thereby
permitting depository institutions to pay interest on business transaction and other accounts beginning July 21, 2011. Although the
ultimate impact of this legislation on the Company has not yet been determined, the Company expects interest costs associated with
demand deposits may increase as a result of competitor responses to this change.
Interest Expense - FHLBank Advances, Short-term Borrowings and Structured Repurchase Agreements and Subordinated
Debentures Issued to Capital Trust
During the year ended December 31, 2010 compared to the year ended December 31, 2009, interest expense on FHLBank advances
increased due to higher average interest rates, partially offset by lower average balances. Interest expense on FHLBank advances
increased $1.0 million due to an increase in average interest rates from 2.80% in the year ended December 31, 2009, to 3.40% in the
year ended December 31, 2010. Interest expense on FHLBank advances decreased $870,000 due to a decrease in average balances
from $191 million during the year ended December 31, 2009, to $162 million during the year ended December 31, 2010. Average
rates on advances increased because of the addition of advances assumed in the FDIC-assisted transaction completed in March of
2009. Certain of the advances assumed were paid off toward the end of 2009, causing the decrease in average balances while most of
the remaining advances are fixed-rate and are subject to penalty if paid off prior to maturity.
Interest expense on short-term borrowings and structured repurchase agreements decreased $2.3 million due to a decrease in average
rates on short-term borrowings and structured repurchase agreements from 1.60% in the year ended December 31, 2009, to 0.97% in
the year ended December 31, 2010. The average interest rates decreased due to lower overall market rates of interest in 2010
compared to 2009. Interest expense on short-term borrowings and structured repurchase agreements decreased $786,000 due to a
decrease in average balances from $400 million during the year ended December 31, 2009, to $345 million during the year ended
December 31, 2010. The decrease in balances of short-term borrowings was primarily due to decreases in securities sold under
repurchase agreements with the Company's deposit customers which tend to fluctuate.
Interest expense on subordinated debentures issued to capital trust decreased $195,000 due to decreases in average rates from 2.50%
in the year ended December 31, 2009, to 1.87% in the year ended December 31, 2010. 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
2010 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
Net interest income for the year ended December 31, 2010 increased $36.0 million to $125.3 million compared to $89.3 million for
the year ended December 31, 2009. Net interest margin was 3.93% for the year ended December 31, 2010, compared to 3.03% in 2009,
an increase of 90 basis points. The Company’s margin was positively impacted primarily by the increase in expected cash flows to be
received from the FDIC-acquired loan pools and the resulting increase to accretable yield which was discussed previously in “Interest
Income – Loans” and is discussed in Note 5 of the Notes to Consolidated Financial Statements. The impact of this change on the year
ended December 31, 2010 was an increase in interest income of $19.5 million and an increase in net interest margin of 61 basis points.
Also contributing to the increase in net interest income was a change in the deposit mix and the ability to reduce interest rates on
maturing time deposits. The addition of the TeamBank and Vantus Bank core deposits during 2009 provided a relatively lower-cost
funding source, which allowed the Company to reduce some of its higher-cost funds. In the latter quarters of 2009, the Company
redeemed brokered deposits or replaced them with lower rate deposits and as retail certificates of deposit matured they were renewed
or replaced with retail certificates of deposit with lower market rates of interest. The transition from time deposits to transaction
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deposits continued into 2010 as lower-cost checking accounts increased while the Company reduced its higher-cost CDARS accounts.
The Company has reduced rates paid on repurchase agreements which also contributed to the decrease in interest expense. Partially
offsetting the reduced cost of funds, yields earned on investment securities are down over the last year because the majority of the
Company’s portfolio is made up of adjustable-rate mortgage-backed securities which both repriced downward and experienced higher
prepayments resulting in increased amortization of related premiums that offset interest earned. Excluding the income recorded from
the accretable yield adjustment mentioned above, the yield on loans increased 17 basis points when compared to the year ended
December 31, 2009, primarily due to increased average balances on residential and commercial real estate loans.
The Company's overall interest rate spread increased 83 basis points, or 27.9%, from 2.98% during the year ended December 31, 2009,
to 3.81% during the year ended December 31, 2010. The increase was due to a 69 basis point decrease in the weighted average rate
paid on interest-bearing liabilities and a 14 basis point increase in the weighted average yield on interest-earning assets. The
Company's overall net interest margin increased 90 basis points, or 29.7%, from 3.03% for the year ended December 31, 2009, to
3.93% for the year ended December 31, 2010. In comparing the two years, the yield on loans increased 113 basis points while the
yield on investment securities and other interest-earning assets decreased 119 basis points. The rate paid on deposits decreased 79
basis points, the rate paid on FHLBank advances increased 60 basis points, the rate paid on short-term borrowings decreased 63 basis
points, and the rate paid on subordinated debentures issued to capital trust decreased 63 basis points.
For additional information on net interest income components, refer to the "Average Balances, Interest Rates and Yields" table in this
Annual Report.
Provision for Loan Losses and Allowance for Loan Losses
The provision for loan losses decreased $170,000, from $35.8 million during the year ended December 31, 2009, to $35.6
million during the year ended December 31, 2010. The allowance for loan losses increased $1.4 million, or 3.5%, to $41.5 million at
December 31, 2010, compared to $40.1 million at December 31, 2009. Net charge-offs were $34.2 million in the year ended
December 31, 2010, versus $24.9 million in the year ended December 31, 2009. Eight relationships made up $22.0 million of the net
charge-off total for the year ended December 31, 2010. General market conditions, and more specifically, housing supply, absorption
rates and unique circumstances related to individual borrowers and projects also contributed to the level of provisions and charge-offs
in both 2009 and 2010. As properties were categorized as potential problem loans, non-performing loans or 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.
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. At December 31, 2010, allowances for loan losses were established for two loan pools exhibiting risks
of loss totaling $830,000. These loan pools were acquired through the Vantus Bank FDIC-assisted transaction and because of the loss
sharing agreement, only 20% of the anticipated $830,000 loss would be ultimately borne by the Bank.
The Bank's allowance for loan losses as a percentage of total loans, excluding loans supported by the FDIC loss sharing agreements,
was 2.48% and 2.35% at December 31, 2010 and 2009, respectively. Management considers the allowance for loan losses adequate to
cover losses inherent in the Company's loan portfolio at December 31, 2010, based on recent reviews of the Company's loan portfolio
22
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.
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, 2010 were $78.3 million, an increase of $13.3 million from December 31, 2009. Non-performing
assets, excluding FDIC-covered assets, as a percentage of total assets were 2.30% at December 31, 2010, compared to 1.79% at
December 31, 2009. Compared to December 31, 2009, non-performing loans increased $2.9 million to $29.4 million while foreclosed
assets increased $10.4 million to $48.9 million. Construction loans comprised $8.1 million, or 27.6%, of the total $29.4 million of
non-performing loans at December 31, 2010. Commercial real estate loans comprised $6.1 million, or 20.6%, of the total $29.4
million of non-performing loans at December 31, 2010.
Non-performing Loans. Activity in the non-performing loans category during the year ended December 31, 2010, was as follows:
Beginning
Balance,
Removed
Transfers to
Transfers to
from Non-
Potential
Foreclosed
Ending
Balance,
January 1
Additions
Performing
Problem Loans
Assets
Charge-Offs
Payments
December 31
(In Thousands)
One- to four-family construction
$
374 $
1,065 $
-- $
-- $
(124) $
(643) $
(94) $
Subdivision construction
Land development
Commercial construction
One- to four-family residential
Other residential
Commercial real estate
Other commercial
Consumer
2,328
5,982
--
6,237
479
8,575
1,240
2,583
11,431
--
10,552
6,405
11,068
6,242
1,275
1,645
--
--
--
(692)
(221)
(256)
--
--
(6)
--
--
(468)
--
(383)
(71)
(96)
(1,810)
(5,883)
--
(7,023)
(1,959)
(3,735)
(5)
(77)
(1,108)
(5,195)
--
(1,623)
(361)
(3,227)
(2,291)
(286)
(127)
(667)
--
(1,428)
(140)
(5,968)
(1,283)
(811)
578
1,860
5,668
--
5,555
4,203
6,074
3,832
1,650
Total
$
26,490 $
50,991 $
(1,169) $
(1,024) $
(20,616) $
(14,734) $
(10,518) $
29,420
At December 31, 2010, the commercial real estate category of non-performing loans included 14 loans. The largest two loans in this
category were added during the year and were $1.4 million and $1.0 million, respectively, making up 40.4% of the total. The land
development category of non-performing loans included 11 loans, the largest of which had a balance of $2.0 million or 35.3% of the
total.
23
Foreclosed Assets. Of the total $60.3 million of foreclosed assets at December 31, 2010, $11.4 million represents the fair value of
foreclosed assets acquired in the FDIC-assisted transactions in 2009. These acquired foreclosed assets are subject to the loss sharing
agreements with the FDIC and, therefore, are not included in the following table and discussion of foreclosed assets. Activity in
foreclosed assets during the year ended December 31, 2010, was as follows:
Beginning
Balance,
January 1
Additions
Proceeds
from Sales
Capitalized
Costs
(In Thousands)
ORE Expense
Write-Downs
Ending
Balance,
December 31
One- to four-family construction
Subdivision construction
Land development
Commercial construction
One- to four-family residential
Other residential
Commercial real estate
Consumer
$
1,214 $
20,208
3,010
5,526
5,633
703
1,440
777
1,765 $
1,924
14,476
7,192
8,173
7,254
4,094
1,263
(439) $
(2,128)
(6,997)
(8,979)
(9,894)
(2,979)
(639)
(1,712)
176 $
796
131
296
7
--
--
--
(206) $
(984)
--
(38)
(1,023)
(800)
(330)
(10)
2,510
19,816
10,620
3,997
2,896
4,178
4,565
318
Total
$
38,511
$
46,141 $
(33,767) $
1,406 $
(3,391) $
48,900
The subdivision construction category of foreclosed assets included 53 properties, the largest of which had a balance of $5.4 million or
27.2% of the total at December 31, 2010. The land development category of foreclosed assets included 15 loans, the largest of which
was added during the period and had a balance of $4.3 million or 40.4%.
Potential Problem Loans. Potential problem loans increased $5.1 million during the year ended December 31, 2010 from $50.5
million at December 31, 2009 to $55.6 million at December 31, 2010. 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, but are considered in determining the
adequacy of the allowance for loan losses. Activity in the potential problem loans category during the year ended December 31, 2010,
was as follows:
Beginning
Balance,
Removed
Transfers to
Transfers to
from Potential
Non-
Foreclosed
Ending
Balance,
January 1
Additions
Problem
Performing
Assets
Charge-Offs
Payments
December 31
(In Thousands)
One- to four-family construction
$
2,122 $
3,657 $
(958) $
(963) $
(762) $
(609) $
(1,773) $
Subdivision construction
Land development
Commercial construction
One- to four-family residential
Other residential
Commercial real estate
Other commercial
Consumer
4,624
17,608
2,160
6,750
11,188
3,652
2,408
--
11,355
16,990
1,851
8,194
11,308
18,862
6,774
12
(195)
(100)
--
(1,532)
(5,565)
--
(93)
--
(1,245)
(9,096)
--
(2,585)
(4,558)
(5,378)
(2,200)
--
(235)
(8,308)
(1,555)
(1,199)
(5,167)
(366)
(54)
--
(173)
(4,577)
(605)
(619)
(514)
(663)
(163)
--
(7,658)
(1,041)
--
(223)
(1,018)
(1,378)
(738)
--
714
6,473
11,476
1,851
8,786
5,674
14,729
5,934
12
Total
$
50,512 $
79,003 $
(8,443) $
(26,025) $
(17,646) $
(7,923) $
(13,829) $
55,649
At December 31, 2010, the commercial real estate category of potential problem loans included 11 loans, three of which were added
during the year, with balances totaling $10.4 million or 70.4% of the total. The three loans added were collateralized by a
retail/apartment building in St. Louis, Mo., a hotel in Kansas City, Mo. and a warehouse/office building in Springfield, Mo. The land
development category of potential problem loans included 10 loans, the largest of which was added during the year and had a balance
of $3.8 million or 33.3% of the total.
24
Non-Interest Income
Non-interest income for the year ended December 31, 2010 was $32.0 million compared with $122.8 million for the year ended
December 31, 2009. The $90.8 million decrease was primarily the result of the following items:
FDIC-assisted transactions: A total of $89.8 million of one-time pre-tax gains was recorded during 2009 related to the fair value
accounting estimates of the assets acquired and liabilities assumed in the FDIC-assisted transactions involving TeamBank and Vantus
Bank.
Amortization of indemnification asset: As previously described, due to the increase in cash flows expected to be collected from the
FDIC-covered loan portfolios, $17.1 million of amortization (expense) was recorded in the 2010 period relating to a reduction of
expected reimbursements under the FDIC loss sharing agreements, which are recorded as indemnification assets.
Partially offsetting the above decreases in non-interest income for 2010 as compared with 2009 were the following items:
Securities impairments: During 2009, a $4.3 million loss was recorded as a result of an impairment write-down in the value of certain
available-for-sale equity investments, investments in bank trust preferred securities and an investment in a non-agency CMO. The
Company continues to hold a majority of these securities in the available-for-sale category. Based on analyses of the securities
portfolio during 2010, no additional impairment write-downs were necessary.
Gains on securities: Gains of $8.8 million were recorded during 2010 due to sales of securities, an increase of $6.0 million over 2009.
Service charges and ATM fees: An increase of $980,000 was recorded during 2010 compared to 2009, primarily due to customers
added in the FDIC-assisted transactions in 2009.
Gains on sales of single-family loans: An increase of $880,000 in gains was recorded due to an increased number of fixed-rate loans
originated and then sold in the secondary market during 2010 compared to 2009.
Commissions: Commission income increased $1.5 million during the year ended December 31, 2010, compared to 2009, primarily
due to increased activity for Great Southern Travel. Approximately 20% of the increase was a non-recurring incentive commission
related to airline ticket sales.
Non-Interest Expense
Total non-interest expense increased $10.7 million, or 13.7%, from $78.2 million in the year ended December 31, 2009, to $88.9
million in the year ended December 31, 2010. The Company’s efficiency ratio for the year ended December 31, 2010, was 56.52%
compared to 36.88% in 2009. The difference in the ratios from the current year to the prior year was primarily due to the TeamBank
and Vantus Bank-related one-time gains recorded in 2009. The Company’s ratio of non-interest expense to average assets increased
from 2.30% for the year ended December 31, 2009, to 2.52% for the year ended December 31, 2010. The following were key items
related to the increase in non-interest expense for the year ended December 31, 2010 as compared to the year ended December 31,
2009:
Vantus Bank FDIC-assisted transaction: The Company’s increase in non-interest expense in 2010 compared to 2009 included
expenses related to the September 2009 FDIC-assisted acquisition of the assets and liabilities of Vantus Bank and its ongoing
operation. In the year ended December 31, 2010, non-interest expense associated with Vantus Bank increased $3.6 million from the
same period in 2009. The largest expense increases were in the areas of salaries and benefits and occupancy and equipment expenses.
In addition, other non-interest expenses related to the operation of other areas of the former Vantus Bank, such as lending and certain
support functions, were absorbed in other pre-existing areas of the Company, resulting in increased non-interest expense.
New banking centers: The Company’s increase in non-interest expense during 2010 compared to 2009 was also related to the
continued internal growth of the Company. The Company opened its second banking center in Lee’s Summit, Mo., in late September
2009 and its first retail banking center in Rogers, Ark., in May 2010. New banking centers were also opened in Des Peres, Mo. in
September 2010 and in Forsyth, Mo. in December 2010, both of which complement existing banking centers in their respective market
areas. In the year ended December 31, 2010, non-interest expenses associated with the operation of these locations increased
$920,000 over the same period in 2009. For additional information on the Company’s growth, see the “Business Initiatives” section
of this report.
25
Salaries and benefits: As a result of integrating the operations of TeamBank and Vantus Bank and the administration of the loss
sharing portfolios as well as overall growth, the number of associates employed by the Company in operational and lending areas
increased 12.8% over 2009. This in turn increased salaries and benefits paid by $3.2 million in 2010 compared to 2009.
Amortization of low-income housing tax credits: The Company has invested in certain federal low-income housing tax credits. These
credits are typically purchased at 80-90% of the amount of the credit and are generally utilized to offset taxes payable over a ten-year
period. A portion of these credits totaling $1.3 million were used in 2010 to reduce the Company’s tax expense which resulted in
corresponding amortization of $1.1 million to reduce the investment in these credits. The net result of these transactions was an
increase to non-interest expense and a decrease to income tax expense, which positively impacted the Company’s effective tax rate.
FDIC settlements for real estate, furniture and fixtures: During the three months ended December 31, 2010, the Company completed
its final settlements with the FDIC for the purchase of the real estate, furniture and fixtures of the branch locations currently being
operated as a result of the FDIC-assisted transactions which took place during 2009. The net settlement expenses recorded as a result
of these and other outstanding operating items were $660,000.
Net occupancy expense: As the Company’s operations expanded in the last year, so did the costs incurred to use and maintain
buildings and equipment. Excluding the occupancy expenses mentioned above, net occupancy expenses increased $239,000 during
2010 compared to 2009.
Partially offsetting the above increases in non-interest expense was an FDIC-imposed special 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 during 2009
related to the special assessment. No special assessment was imposed in 2010.
Provision for Income Taxes
Provision for income taxes as a percentage of pre-tax income was 27.1% for the year ended December 31, 2010. The effective tax rate
(as compared to the statutory federal tax rate of 35.0%) was primarily affected by the tax credits noted above and by higher balances
and rates of tax-exempt investment securities and loans which reduce the Company’s effective tax rate. The Company’s effective tax
rate 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 balances and rates of tax-exempt investment securities and loans. For future periods, the Company expects
the effective tax rate to be approximately 30% of pre-tax net income. The Company’s effective tax rate may fluctuate as it is impacted
by the level and timing of its utilization of tax credits.
Average Balances, Interest Rates and Yields
The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets
and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and
the net interest margin. Average balances of loans receivable include the average balances of non-accrual loans for each period.
Interest income on loans includes interest received on non-accrual loans on a cash basis. Interest income on loans includes the
amortization of net loan fees which were deferred in accordance with accounting standards. Fees included in interest income were
$2.0 million, $1.8 million and $2.5 million for 2010, 2009 and 2008, respectively. Tax-exempt income was not calculated on a tax
equivalent basis. The table does not reflect any effect of income taxes.
26
Dec. 31,
2010(2)
Yield/
Rate
5.48%
5.57
6.05
5.60
5.59
7.28
6.10
6.03
3.60
0.20
Year Ended
December 31, 2010
Year Ended
December 31, 2009
Year Ended
December 31, 2008
Average
Balance
Interest
Yield/
Rate
Average
Balance
Interest
Yield/
Rate
Average
Balance
Interest
Yield/
Rate
(Dollars In Thousands)
$ 336,418
219,983
677,760
320,500
173,837
223,101
67,762
$ 22,156
13,036
49,301
26,101
15,250
16,096
3,892
6.59%
5.93
7.27
8.77
8.14
7.21
5.74
$ 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
2,019,361
145,832
7.22
2,028,067
123,463
6.09
1,842,002
119,829
6.51
760,924
407,377
26,858
501
3.53
0.12
743,334
174,509
31,914
491
4.29
0.28
491,450
42,117
24,956
29
5.08
0.07
4.77
3,187,662
173,191
5.43
2,945,910 155,868
5.29
2,375,569 144,814
6.10
77,074
263,307
$3,528,043
250,422
206,727
$3,403,059
71,989
74,446
$2,522,004
0.83
1.85
1.39
0.96
1.85
3.62
$ 922,885
1,484,580
2,407,465
8,468
29,959
38,427
0.92
2.02
1.60
$ 611,136
1,650,913
2,262,049
6,600
47,487
54,087
1.08
2.88
2.39
$ 484,490
1,268,941
1,753,431
8,370
52,506
60,876
1.73
4.14
3.47
344,861
3,329
0.97
399,587
6,393
1.60
262,004
5,892
2.25
30,929
162,378
578
5,516
1.87
3.40
30,929
190,903
773
5,352
2.50
2.80
30,929
133,477
1,462
5,001
4.73
3.75
1.47
2,945,633
47,850
1.62
2,883,468
66,605
2.31
2,179,841
73,231
3.36
253,699
19,153
3,218,485
309,558
$3,528,043
221,215
23,692
3,128,375
274,684
$3,403,059
147,665
10,873
2,338,379
183,625
$2,522,004
3.30%
$125,341
3.81%
3.93%
$89,263
2.98%
3.03%
$71,583
2.74%
3.01%
108.2%
102.2%
109.0%
Interest-earning assets:
Loans receivable:
One- to four-family
residential
Other residential
Commercial real estate
Construction
Commercial business
Other loans
Industrial revenue bonds (1)
Total loans receivable
Investment securities (1)
Other interest-earning assets
Total interest-earning
assets
Non-interest-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 and
repurchase agreements
Subordinated debentures
issued to capital trust
FHLB advances
Total interest-bearing
liabilities
Non-interest-bearing
liabilities:
Demand deposits
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and
stockholders’ equity
Net interest income:
Interest rate spread
Net interest margin*
Average interest-earning
assets to average interest-
bearing liabilities
* Defined as the Com
(1)
pany's net interest income divided by total interest-earning assets.
Of the total average balances of investment securities, average tax-exempt investment securities were $70.3 million, $68.3 million and $62.4 million for 2010,
2009 and 2008, respectively. In addition, average tax-exempt industrial revenue bonds were $46.0 million, $38.0 million and $33.1 million in 2010, 2009 and
2008, respectively. Interest income on tax-exempt assets included in this table was $5.3 million $3.8 million and $4.7 million for 2010, 2009 and 2008,
respectively. Interest income net of disallowed interest expense related to tax-exempt assets was $4.7 million, $3.0 million and $3.6 million for 2010, 2009 and
2008, respectively.
(2) The yield/rate on loans at December 31, 2010 does not include the impact of the accretable yield (income) on loans acquired in the 2009 FDIC-assisted
transactions. See “Net Interest Income” for a discussion of the effect on 2010 results of operations.
27
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, 2010 vs.
December 31, 2009
Year Ended
December 31, 2009 vs.
December 31, 2008
Increase (Decrease)
Due to
Rate
Volume
Total
Increase
(Decrease)
Increase (Decrease)
Due to
Rate
Volume
Total
Increase
(Decrease)
(In Thousands)
Interest-earning assets:
Loans receivable
Investment securities
Other interest-earning assets
Total interest-earning assets
Interest-bearing liabilities:
Demand deposits
Time deposits
Total deposits
Short-term borrowings and
structured repo
Subordinated debentures
issued to capital trust
FHLBank advances
Total interest-bearing
liabilities
Net interest income
$
$
22,901
(5,795)
(386)
16,720
(532)
739
396
603
$
22,369
(5,056)
10
17,323
$
(7,995)
(7,503)
229
(15,269)
$
(1,108)
(13,104)
(14,212)
2,976
(4,424)
(1,448)
1,868
(17,528)
(15,660)
(3,621)
(18,431)
(22,052)
(2,278)
(195)
1,034
(786)
--
(870)
(3,064)
(2,017)
(195)
164
(689)
(1,459)
11,629
14,461
233
26,323
1,851
13,412
15,263
2,518
--
1,810
$
3,634
6,958
462
11,054
(1,770)
(5,019)
(6,789)
501
(689)
351
(15,651)
32,371
$
(3,104)
3,707
(18,755)
36,078
$
(26,217)
10,948
$
19,591
6,732
$
(6,626)
17,680
$
$
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 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.
28
The information presented in the table below and elsewhere in this report excluding hedge accounting entries recorded (for the 2009
and 2008 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 and 2008 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
Earnings Per
Diluted Share
2008
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
Total Interest Income
256
(770)
2,022
(4,534)
$ 61,180
$
(7,182)
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 had decreased significantly as
many projects have been completed in the preceding 12-18 months and demand for new construction loans had declined.
29
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 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.
30
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 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 certificate 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
31
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.
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.
32
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 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
393
.01
3,111
.13
Net interest income/margin excluding impact of
hedge accounting entries
$
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. This table is prepared including the impact of the accounting changes for interest rate swaps.
33
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.
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 agreement,
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.
34
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.
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.
35
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 $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.
36
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.
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 low
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.
37
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.
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.
38
Non-GAAP Reconciliation
(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
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.
39
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.
Non-GAAP Reconciliation:
(Dollars In Thousands)
Year Ended December 31,
Non-Interest
Expense
2009
Revenue
Dollars*
%
Non-Interest
Expense
2008
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
*Net interest income plus non-interest income.
Provision for Income Taxes
---
---
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%
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.
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, 2010, the Company had commitments of approximately $94.8 million to fund loan originations, $163.3 million of
unused lines of credit and unadvanced loans, and $16.7 million of outstanding letters of credit.
40
The following table summarizes the Company's fixed and determinable contractual obligations by payment date as of December 31,
2010. Additional information regarding these contractual obligations is discussed further in Notes 9, 10, 11, 12, 13, 14 and 17 of the
accompanying audited financial statements.
Deposits without a stated maturity
Time and brokered certificates of deposit
Federal Home Loan Bank advances
Short-term borrowings
Structured repurchase agreements
Subordinated debentures
Operating leases
Dividends declared but not paid
One Year or
Less
$ 1,296,189
1,002,613
32,293
257,958
---
---
1,202
2,849
Payments Due In:
Over One to
Five
Years
(In Thousands)
Over Five
Years
$ ---
295,296
34,727
---
53,142
---
2,722
---
$ ---
1,795
86,505
---
---
30,929
857
---
Total
$ 1,296,189
1,299,704
153,525
257,958
53,142
30,929
4,781
2,849
$2,593,104
$385,887
$120,086
$3,099,077
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, 2010, the Company's total stockholders' equity was $304.0 million, or 8.9% of total assets. At December 31, 2010,
common stockholders' equity was $247.5 million, or 7.3% of total assets, equivalent to a book value of $18.40 per common share.
Total stockholders’ equity at December 31, 2009, 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.
At December 31, 2010, the Company’s tangible common equity to total assets ratio was 7.1% as compared to 6.5% at December 31,
2009. The Company’s tangible common equity to total risk-weighted assets ratio was 12.5% at December 31, 2010, compared to
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, 2010, the Bank's Tier 1 risk-based capital ratio was 14.6%, total risk-based capital ratio was 15.8%
and the Tier 1 leverage ratio was 8.3%. As of December 31, 2010, 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, 2010, the Company's Tier 1 risk-based capital ratio was 16.8%, total risk-based
capital ratio was 18.0% and the Tier 1 leverage ratio was 9.5%. As of December 31, 2010, 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, was 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 the time of this filing, the Company is reviewing and considering participation in the U.S. Treasury’s Small Business Lending Fund
(SBLF). Enacted into law in 2010 as part of the Small Business Jobs Act, the SBLF is a $30 billion fund that encourages lending to
41
small businesses by providing Tier 1 capital to qualified community banks with assets of less than $10 billion. Banks with assets of
more than a $1 billion, but less than $10 billion, may apply for SBLF funding that equals up to 3% of risk-weighted assets.
The SBLF provides an option for eligible community banks to refinance preferred stock issued to the Treasury through the Capital
Purchase Program. As noted in this filing, the Company through its participation in the Capital Purchase Program received $58.0
million from the Treasury through the sale of preferred stock. The Treasury receives a cumulative dividend of 5% per year for the first
five years, and 9% per year thereafter beginning in late 2013. If Capital Purchase Program funds were transferred to the SBLF, the 5%
Capital Purchase Program dividend rate could potentially be reduced. Under the SBLF, the interest rate is variable for the first nine
quarters. The initial rate is 5%, but could be as low as 1% depending on the level of small business lending. If lending does not
increase in the first two years, however, the rate will increase to 7%. After 4.5 years (late 2015), the rate will increase to 9% if the
bank has not repaid the SBLF funding.
Applications for the SBLF are due March 31, 2011, and there is no obligation to participate.
At December 31, 2010, the held-to-maturity investment portfolio included no gross unrealized losses and $175,000 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.
At December 31, 2010 and 2009, 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, 2010
December 31, 2009
$243.9 million
$271.0 million
$430.0 million
$22.6 million
$239.3 million
$254.4 million
$444.6 million
$2.0 million
Statements of Cash Flows. During the years ended December 31, 2010, 2009 and 2008, the Company had positive cash flows from
operating activities. The Company experienced positive cash flows from investing activities during 2010 and 2009 and negative cash
flows from investing activities during 2008. The Company experienced negative cash flows from financing activities during 2010 and
2009 and positive cash flows from financing activities during 2008.
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 $85.0 million, $38.8 million and $43.5 million during the
years ended December 31, 2010, 2009 and 2008, respectively.
During the year ended December 31, 2010, investing activities provided cash of $123.7 million primarily due to the repayment of
loans. During the year ended December 31, 2009, investing activities provided cash of $382.0 million primarily due to the cash
received from the FDIC-assisted acquisitions and the repayment of loans. During the year ended December 31, 2008, investing
activities used cash of $195.5 million, primarily due to net purchases of investment securities.
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 $223.2 million during the year ended December 31,
2010, primarily due to reductions in customer repurchase agreements, reductions of brokered deposit balances and reductions of
CDARS purchased funds and CDARS customer accounts. Financing activities used cash flows of $144.2 million during the year
ended December 31, 2009, primarily due to the repayment of advances from the FHLBank and reduction of brokered deposit balances.
42
Financing activities provided cash flows of $239.4 million for the year ended December 31, 2008, primarily due to increases in
brokered deposit balances and CDARS customer accounts, increases in customer repurchase agreements and proceeds from the
issuance of preferred stock to the U.S. Treasury. 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, 2010, the Company declared and paid common stock cash dividends of $0.72 per
share (49.3% of net income per common share). 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). 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, 2010, was paid to stockholders
on January 12, 2011. As a result of the issuance of preferred stock to the U.S. Treasury in December 2008, the Company paid
preferred dividends totaling $2.9 million and $2.7 million during the years ended December 31, 2010 and 2009, respectively.
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 preferred stock cash dividends of $725,000 on each of February 16, 2010, May 17, 2010, August 16, 2010, and
November 15, 2010. Quarterly payments of $725,000 will be due for the next three 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 years ended
December 31, 2010 and 2009, the Company did not repurchase any shares of its common stock.
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 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
43
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, 2010, Great Southern's internal interest rate risk models indicate a one-year interest rate sensitivity gap that is
slightly positive. 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%. If rates remain generally
unchanged in the short-term, we expect that our cost of funds will continue to decrease somewhat as we continue to redeem some of
our wholesale funds. 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 somewhat 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.
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 may enter 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
44
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 $-0- and $(98,000) of ineffectiveness was recorded in income in the non-interest income caption
for the years ended December 31, 2010 and 2009, 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 may enter 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.
45
The following tables illustrate the expected maturities and repricing, respectively, of the Bank's financial instruments at December 31,
2010. These schedules do not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. The tables are based
on information prepared in accordance with generally accepted accounting principles.
Maturities
December 31,
2011
2012
2013
2014
(Dollars I Thousands)
2015
n
Thereafter
Total
2010
Fair Value
Financial Assets:
Interest bearing deposits
Weighted average rate
Available-for-sale equity securities
Weighted average rate
Available-for-sale deb securities(1)
t
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
$
$
$
$
360,215
0.20
---
---
16,338
4.72
---
---
489,533
5.85
289,329
6.13
---
---
%
%
%
%
---
---
---
---
10,433
$
---
---
---
---
5,801
---
---
---
---
8,169
$
$
---
---
---
---
9,385
$
6.10%
---
---
$ 116,749
6.20%
---
---
$ 120,694
6.08%
---
---
$ 34,943
5.98%
---
---
$ 29,909
5.21%
4.88%
5.67%
5.46%
$ 125,679
$ 116,393
$ 68,533
$ 86,375
6.41%
---
---
6.59%
---
---
6.90%
---
---
6.11%
---
---
$
$
$
$
$
$
---
---
2,123
0.18%
717,297
3.46%
1,125
7.31%
328,374
5.10%
259,476
7.19%
11,572
3.54%
$
$
$
$
$
$
$
360,215
2,123
767,423
1,125
$
0.20%
$
0.18%
$
3.60%
$
7.31%
$
5.44%
$
6.57%
$
3.54%
945,785
11,572
1,120,202
Total financial assets
$ 1,155,415
$ 252,861
$ 242,888
$ 111,645
$ 125,669
$ 1,319,967
$
3,208,445
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 debentur se
Weighted average rate
$
$
$
$
$
1,002,613
1.70
1,038,620
0.83
257,569
---
33,015
4.28
257,958
%
%
$
%
0.26 %
---
---
---
---
$ 198,669
$
41,919
$ 33,703
$ 21,005
$
2.25%
---
---
---
---
23,188
4.41%
---
---
---
---
---
---
$
$
2.25%
---
---
---
---
315
5.68%
---
---
3,142
4.68%
$
---
---
2.43%
---
---
---
---
365
5.47%
---
---
---
---
---
---
2.76%
---
---
---
---
$ 10,091
3.87%
---
---
$ 50,000
$
4.34%
$
---
---
1,795
3.84%
---
---
---
---
86,551
3.72%
---
---
---
---
30,929
1.85%
$
$
$
$
$
$
$
1,299,704
1,038,620
$
1.85%
$
0.83%
$
257,569
---
153,525
257,958
$
3.96%
$
0.26%
$
4.36%
$
1.85%
53,142
30,929
360,215
2,123
767,423
1,300
1,120,242
947,203
11,572
1,307,251
1,038,620
257,569
158,052
257,958
61,007
30,929
Total financial liabilities
$ 2,589,775
$ 221,857
$
45,376
$ 34,068
$ 81,096
$
119,275
$
3,091,447
_______________
(1)
Available-for-sale debt securities include approximately $668 million of mortgage-backed securities and collateralized mortgage obligations which pay
interest and principal monthly to the Company. Of this total, $596 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.
46
Repricing
December 31,
2011
2012
2013
2014
T
(Dollars In housands)
2015
Thereafter
Total
2010
Fair Value
Financial Assets:
Interest bearing deposits
Weighted average rate
Available-for-sale equity securities
Weighted average rate
Available-for-sale deb securities(1)
t
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
$
$
$
$
$
360,215
0.20%
---
---
102,037
2.81%
---
---
1,042,501
5.42%
289,329
6.13%
11,572
3.54%
$
$
$
---
---
---
---
42,902
2.51%
---
---
18,184
6.45%
125,679
6.41%
---
---
$
$
$
---
---
---
---
180,083
3.04%
---
---
30,430
5.72%
116,393
6.59%
---
---
$
$
$
---
---
---
---
43,092
4.16%
---
---
14,218
5.29%
68,533
6.90%
---
---
$
$
$
---
---
---
---
190,954
2.94%
---
---
12,162
4.81%
86,375
6.12%
---
---
$
$
$
$
$
---
---
2,123
0.18%
%
%
%
%
208,355
5.20
1,125
7. 31
2,707
5.49
259,476
7.19
---
---
$
$
$
$
$
$
$
360,215
0.20%
2,123
0.18%
767,423
3.60%
1,125
7.31%
1,120,202
5.44%
945,785
6.57%
$
$
$
$
$
$
11,572
$
3.54%
360,215
2,123
767,423
1,300
1,120,242
947,203
11,572
Total financial assets
$
1,805,654
$
186,765
$
326,906
$
125,843
$
289,491
$
473,786
$
3,208,445
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 debentur se
Weighted average rate
$
$
$
$
$
$
1.71%
1,038,620
0.83%
---
---
118,016
3.85%
257,958
0.26%
50,000
4.34%
30,929
1.85%
Total financial liabilities
$
2,511,689
Periodic repricing GAP
Cumulative repricing GAP
$
$
(706,035)
$
$
$
1,016,166
$
198,669
$
41,919
$
20,150
$
21,005
$
2.25%
---
---
---
---
23,188
4.41%
---
---
---
---
---
---
$
$
$
2.25%
---
---
---
---
315
5.68%
---
---
3,142
4.68%
---
---
$
2.72%
---
---
---
---
365
5.47%
---
---
---
---
---
---
2.76%
---
---
---
---
10,091
$
$
3.87%
---
---
---
---
---
---
%
%
1,795
3.84
---
---
257,569
---
1,550
5.40
---
---
---
---
---
---
$
$
$
$
$
$
$
1,299,704
1.85%
1,038,620
0.83%
257,569
---
153,525
3.96%
257,958
0.26%
53,142
4.36%
30,929
1.85%
$
$
$
$
$
$
$
1,307,251
1,038,620
257,569
158,052
257,958
61,007
30,929
221,857
$
45,376
$
20,515
$
31,096
$
260,914
$
3,091,447
(35,092) $
281,530
$
105,328
$
258,395
$
212,872
$
116,998
(706,035)
$ (741,127)
$ (459,597)
$ (354,269)
$
(95,874)
$
116,998
_______________
(1) Available-for-sale debt securities include approximately $668 million of mortgage-backed securities, collateralized mortgage obligations and SBA loan pools
which pay interest and principal monthly to the Company. Of this total, $596 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
48
49
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Great Southern Bancorp, Inc.
Springfield, Missouri
We have audited the accompanying consolidated statements of financial condition of Great Southern
Bancorp, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the years in the three-year period ended December 31,
2010. The Company’s management is responsible for these financial statements. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. Our audits included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management and evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Great Southern Bancorp, Inc. as of December 31, 2010 and 2009, and
the results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2010, in conformity with accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Great Southern Bancorp, Inc.’s internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated
March 4, 2011, expressed an unqualified opinion on the effectiveness of the Company’s internal control
over financial reporting.
Springfield, Missouri
March 4, 2011
BKD, LLP
50
Great Southern Bancorp, Inc.
Consolidated Statements of Financial Condition
December 31, 2010 and 2009
(In Thousands, Except Per Share Data)
Assets
Cash
2010
2009
$
69,756
$
242,723
Interest-bearing deposits in other financial institutions
360,215
201,853
Cash and cash equivalents
429,971
444,576
Available-for-sale securities
769,546
764,291
Held-to-maturity securities
Mortgage loans held for sale
1,125
16,290
22,499
9,269
Loans receivable, net of allowance for loan losses of
$41,487 and $40,101 at December 31, 2010 and
2009, respectively
1,876,887
2,082,125
FDIC indemnification asset
100,878
141,484
Interest receivable
Prepaid expenses and other assets
Foreclosed assets held for sale, net
Premises and equipment, net
Goodwill and other intangible assets
12,628
52,390
60,262
68,352
5,395
15,582
66,020
41,660
42,383
6,216
Federal Home Loan Bank stock
11,572
11,223
Total assets
$ 3,411,505
$ 3,641,119
See Notes to Consolidated Financial Statements
51
Liabilities and Stockholdersʼ 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
2010
2009
$ 2,595,893
153,525
$ 2,713,961
171,603
257,180
778
53,142
30,929
3,765
1,019
10,395
870
3,107,496
335,893
289
53,194
30,929
6,283
1,268
9,423
19,368
3,342,211
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
2010 – 13,454,000 shares, 2009 – 13,406,403
shares
Common stock warrants; 909,091 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive gain
Unrealized gain on available-for-sale securities,
net of income taxes of $2,273 and $6,192 at
December 31, 2010 and 2009, respectively
Total stockholders’ equity
56,480
56,017
134
2,452
20,701
220,021
134
2,452
20,180
208,625
4,221
304,009
11,500
298,908
Total liabilities and stockholders’ equity
$ 3,411,505
$ 3,641,119
52
2
Great Southern Bancorp, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2010, 2009 and 2008
(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
Gain recognized on business acquisitions
Accretion (amortization) of income/expense 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
53
2010
2009
2008
$
$
145,832
27,359
173,191
$
123,463
32,405
155,868
119,829
24,985
144,814
38,427
5,516
3,329
578
47,850
125,341
35,630
89,711
8,284
18,652
3,765
8,787
—
767
—
—
(10,427)
2,124
31,952
44,842
14,341
3,303
4,562
1,932
1,522
2,333
2,867
4,914
8,288
88,904
32,759
8,894
23,865
3,403
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
$
$
$
20,462
$
61,694
$
(4,670)
1.52
1.46
$
$
4.61
4.44
$
$
(.35)
(.35)
3
Great Southern Bancorp, Inc.
Consolidated Statements of Stockholdersʼ Equity
Years Ended December 31, 2010, 2009 and 2008
(In Thousands, Except Per Share Data)
Balance, January 1, 2008
$
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
Balance, December 31, 2009
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 $(3,919)
Reclassification of treasury stock per Maryland law
Income
(Loss)
Preferred
Stock
Common
Stock
$
$
—
(4,428)
—
—
—
—
—
—
401
—
—
(4,027)
—
65,047
—
—
—
—
11,637
—
76,684
—
23,865
—
—
—
—
(7,279)
—
—
—
55,548
—
—
—
32
—
—
—
—
55,580
—
—
—
437
—
—
—
56,017
—
—
—
463
—
—
—
134
—
—
—
—
—
—
—
—
—
—
134
—
—
—
—
—
—
—
134
—
—
—
—
—
—
—
Balance, December 31, 2010
$
16,586
$
56,480
$
134
See Notes to Consolidated Financial Statements
54
Common
Stock
Warrants
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Loss)
Treasury
Stock
Total
$
$
$
—
—
—
2,452
—
—
—
—
19,342
—
—
—
469
—
—
—
—
—
—
—
—
—
2,452
—
—
—
—
—
19,811
—
369
—
—
—
—
—
—
—
2,452
—
—
—
—
—
20,180
—
521
—
—
—
—
—
—
—
170,933
(4,428)
—
—
—
(9,633)
(32)
(210)
—
—
(383)
156,247
65,047
—
(9,642)
(437)
(2,916)
—
326
208,625
23,865
—
(9,676)
(463)
(2,940)
—
610
$
$
(538)
—
—
—
—
—
—
—
401
—
—
(137)
—
—
—
—
—
11,637
—
11,500
—
—
—
—
—
(7,279)
—
$
—
—
—
—
25
—
—
—
—
(408)
383
—
—
326
—
—
—
—
(326)
—
—
610
—
—
—
—
(610)
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
—
298,908
23,865
1,131
(9,676)
—
(2,940)
(7,279)
—
$
2,452
$
20,701
$
220,021
$
4,221
$
0
$
304,009
55
4
Great Southern Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2010, 2009 and 2008
(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 (gains) losses and impairment
on available-for-sale securities
Gain on sale of premises and equipment
Loss on sale of foreclosed assets
Gain on purchase of additional business
units
Amortization (accretion) 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
2010
2009
2008
$
23,865
179,472
(189,269)
$
65,047
194,599
(196,726)
$
(4,428)
94,935
(91,914)
3,571
2,087
461
35,630
(3,765)
(8,787)
(44)
588
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)
—
15,063
(6,626)
(1,960)
—
(5,451)
2,954
39,303
(1,595)
(9,128)
(1,184)
24,875
1,916
923
(4,584)
9,267
(6,983)
(5,562)
2,154
(2,698)
2,626
(5,347)
Net cash provided by operating
activities
84,955
38,768
43,512
See Notes to Consolidated Financial Statements
56
5
Great Southern Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2010, 2009 and 2008
(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
2010
2009
2008
$
$
110,669
(12,164)
22,291
103,995
(23,252)
9,407
$
34,189
(12,030)
634
—
(26)
(29,850)
354
31,791
(1,669)
45,165
296,829
199,113
(508,464)
(30,000)
265,769
—
(15,121)
266
18,155
(502)
70
110,739
—
—
(4,686)
434
11,183
(567)
60
85,242
229,069
(283,453)
(40,000)
206,902
(522,071)
—
(349)
6,924
5,224
Net cash provided by (used in) investing
activities
123,690
382,066
(195,486)
See Notes to Consolidated Financial Statements
57
6
Great Southern Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2010, 2009 and 2008
(In Thousands)
Financing Activities
Net increase (decrease) in certificates of deposit
Net increase (decrease) in checking and savings
accounts
Proceeds from Federal Home Loan Bank advances
Repayments of Federal Home Loan Bank advances
Net increase (decrease) in short-term borrowings
Proceeds from issuance of structured repurchase
agreement
Proceeds from issuance of preferred stock and
related common stock warrants to U.S. Treasury
Advances to borrowers for taxes and insurance
Company stock purchased
Dividends paid
Stock options exercised
2010
2009
2008
$
(332,387) $
(277,165) $
285,044
216,535
—
(17,028)
(78,224)
224,577
—
(103,148)
23,679
(132,125)
503,000
(596,395)
81,908
—
—
50,000
—
(249)
—
(12,567)
670
—
(103)
—
(12,376)
358
58,000
(44)
(408)
(9,637)
26
Net cash provided by (used in) financing
activities
(223,250)
(144,178)
239,369
Increase (Decrease) in Cash and Cash
Equivalents
(14,605)
276,656
87,395
Cash and Cash Equivalents, Beginning of Year
444,576
167,920
80,525
Cash and Cash Equivalents, End of Year
$
429,971
$
444,576
$
167,920
See Notes to Consolidated Financial Statements
58
7
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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 wholly
owned subsidiaries of the Bank, to customers primarily located in Missouri, Iowa, Kansas,
Nebraska and 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.
59
8
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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
Company, LLC, (including its wholly owned subsidiary, Great Southern CDE, LLC), 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 2010 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.
For debt securities with fair value below carrying value 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.
60
9
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
The Company’s consolidated statements of operations as of and subsequent to 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.
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.
61
10
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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 loans for impairment disclosures.
62
11
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Loans Acquired in Business Combinations
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 flows of the acquired loans.
For purposes of applying ASC 310-30, loans acquired in business combinations are aggregated into
pools of loans with common risk characteristics.
The expected cash flows of the acquired loan pools in excess of the fair values recorded is referred
to as the accretable yield and is recognized in interest income over the remaining estimated lives of
the loan pools. The Company continues to evaluate the fair value of the loans including cash flows
expected to be collected. Increases in the Company’s cash flow expectations are recognized as
increases to the accretable yield while decreases are recognized as impairments through the
allowance for loan losses.
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 terms 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.
63
12
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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.
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, 2010, 2009 and 2008.
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.
64
13
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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,
2010
2009
(In Thousands)
$
$
379
876
138
2,210
1,763
29
379
875
226
2,631
2,074
31
$
5,395
$
6,216
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 $637,000 and $1.1 million at December 31, 2010 and 2009,
respectively. 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.
65
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Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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, 2010 and 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
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
reflect 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 are computed based on the weighted average number of shares
outstanding during each year. Diluted earnings per share are computed using the weighted average
common shares and all potential dilutive common shares outstanding during the period.
66
15
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Earnings per share (EPS) were computed as follows:
2010
2009
(In Thousands, Except Per Share Data)
2008
Net income (loss)
Net income (loss) available-to-common
shareholders
$
$
23,865
$
65,047
$
(4,428)
20,462
$
61,694
$
(4,670)
Average common shares outstanding
13,434
13,390
13,381
Average common share stock options
and warrants outstanding
612
492
N/A
Average diluted common shares
14,046
13,882
13,381
Earnings (loss) per common share – basic
Earnings (loss) per common share – diluted
$
$
1.52
1.46
$
$
4.61
4.44
$
$
(0.35)
(0.35)
Options to purchase 498,674 and 573,393 shares of common stock were outstanding during the
years ended December 31, 2010 and 2009, 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 22. 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
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, 2010, 2009 and 2008, share-based
compensation expense totaling $461,000, $337,000 and $468,000, respectively, has been included
in salaries and employee benefits expense in the consolidated statements of operations.
67
16
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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 2008, 2009 and 2010 was
reduced by approximately $267,000, $238,000 and $103,000, respectively. On December 31,
2005, the accelerated Options represented 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, 2010 and 2009, cash equivalents consisted of interest-bearing
deposits in other financial institutions. At December 31, 2010, 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
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.
68
17
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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, 2010 and 2009, 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.
69
18
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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, 2010 and 2009, respectively, was $79,549,000 and
$72,055,000.
Recent Accounting Pronouncements
In January 2011, the FASB issued Accounting Standards Update No. (ASU) 2011-01, Receivables
(Topic 310): Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in
Update No. 2010-20. The update temporarily delays the effective date for disclosures on troubled
debt restructurings required by ASU 2010-20. The guidance is anticipated to be effective for
interim and annual reporting periods beginning after June 15, 2011, and is not expected to have a
material impact on the Company’s financial position or results of operations.
In December 2010, the FASB issued ASU 2010-28, Intangibles – Goodwill and Other (Topic 350):
When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative
Carrying Amounts. The update modifies step one of the impairment test for reporting units with
zero or negative carrying amounts. Entities with such reporting units must now perform step two of
the impairment test when qualitative factors indicate it is more likely than not that impairment
exists. The amendment will be effective for the Company January 1, 2011. The adoption of this
Update is not expected to have a material impact on the Company’s financial position or results of
operations.
In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the
Credit Quality of Financing Receivables and the Allowances for Credit Losses. This Update
requires expanded disclosures to help financial statement users understand the nature of credit risks
inherent in a 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. The disclosures should be prepared on a
disaggregated basis and provide a roll-forward schedule of the allowance for credit losses and
detailed information on financing receivables including, among other things, recorded balances,
nonaccrual status, impairments, credit quality indicators, details for troubled debt restructurings and
an aging of past due financing receivables. Disclosures required as of the end of a reporting period
were effective for the Company December 31, 2010, and did not have a material impact on the
Company’s financial position or results of operations. Disclosures required for activity occurring
during a reporting period are effective for the Company January 1, 2011. This portion of the
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 ASU 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
70
19
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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 were effective January 1, 2010. 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 the Company January 1, 2011. 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 ASU 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 were effective
January 1, 2010, and were applied on a retrospective basis. The adoption of the amendments did
not have a material impact on the Company’s financial position or results of operations.
In December 2009, the FASB issued ASU 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 was effective for the Company January 1,
2010. The adoption of this guidance did not have a material impact on the Company’s financial
position or results of operations.
In December 2009, the FASB issued ASU 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 was effective for the Company January 1,
71
20
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
2010. The adoption of this guidance did not have a material impact on the Company’s financial
position or results of operations.
In October 2009, the FASB issued ASU 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 was
effective for the Company on January 1, 2010, for arrangements outstanding as of that date,
including retrospective application. Adoption of this Update did not have a material impact 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, 2010
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair
Value
U.S. government agencies
Collateralized mortgage obligations
Mortgage-backed securities
Small Business Administration loan
pools
States and political subdivisions
Corporate bonds
Equity securities
U.S. government agencies
Collateralized mortgage obligations
Mortgage-backed securities
States and political subdivisions
Corporate bonds
Equity securities
$
$
$
$
$
$
$
$
4,000
8,311
590,085
60,063
99,314
49
1,230
763,052
Amortized
Cost
15,931
51,221
614,338
63,686
49
1,374
746,599
72
—
183
10,879
851
378
—
893
13,184
$
$
$
20
814
1,753
—
4,075
28
—
$
6,690
3,980
7,680
599,211
60,914
95,617
21
2,123
769,546
December 31, 2009
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
28
1,042
18,508
705
21
504
20,808
$
$
$
—
527
672
1,904
13
—
$
3,116
Fair
Value
15,959
51,736
632,174
62,487
57
1,878
764,291
21
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Additional details of the Company’s collateralized mortgage obligations and mortgage-backed
securities at December 31, 2010, are described as follows:
Collateralized mortgage obligations
FHLMC fixed
GNMA fixed
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
$
$
$
$
$
$
$
$
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair
Value
602
1,421
2,023
2,201
4,087
6,288
8,311
4,224
4,087
$
$
$
$
$
$
7
7
14
23
146
169
183
37
146
—
$
—
—
—
814
814
814
—
814
$
$
609
1,428
2,037
2,224
3,419
5,643
7,680
4,261
3,419
8,311
$
183
$
814
$
7,680
28,153
72,358
$
100,511
29,333
54,660
83,993
6,753
398,828
405,581
590,085
64,239
525,846
$
1,573
3,782
5,355
1,246
2,766
4,012
220
1,292
1,512
$
$
10,879
3,039
7,840
$
$
$
—
3
3
55
—
55
—
1,695
1,695
1,753
55
1,698
$
$
29,726
76,137
105,863
30,524
57,426
87,950
6,973
398,425
405,398
599,211
67,223
531,988
590,085
$
10,879
$
1,753
$
599,211
73
22
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
The amortized cost and fair value of available-for-sale securities at December 31, 2010, 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)
$
$
265
6,029
8,813
148,319
598,396
1,230
271
6,045
8,874
145,342
606,891
2,123
$
763,052
$
769,546
The amortized cost and fair values of securities classified as held to maturity were as follows:
Amortized
Cost
December 31, 2010
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair
Value
States and political
subdivisions
$
1,125
$
175
$
—
$
1,300
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
$
16,290
$
140
140
—
1,430
$
365
$
16,065
74
23
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
The held-to-maturity securities at December 31, 2010, 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.
Amortized
Cost
Fair
Value
(In Thousands)
After five through ten years
$
1,125
$
1,300
The amortized cost and fair values of securities pledged as collateral was as follows at
December 31, 2010 and 2009:
Public deposits
Collateralized borrowing
accounts
Structured repurchase
agreements
Federal Reserve Bank
borrowings
Treasury, tax and loan
accounts
2010
Amortized
Cost
Fair
Value
Amortized
Cost
(In Thousands)
2009
Fair
Value
$
388,456
$
393,261
$
315,459
$
322,995
263,778
264,450
309,447
315,590
66,755
68,202
—
5,527
—
5,621
66,571
11,452
5,610
68,603
11,544
5,746
$
724,516
$
731,534
$
708,539
$
724,478
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,
2010 and 2009, respectively, was approximately $298,813,000 and $139,985,000 which is
approximately 38.77% and 17.93% 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.
75
24
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
During 2010, no securities were determined to have impairment that had become other than
temporary. 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.
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, 2010 and 2009:
Description of Securities Fair Value
Less than 12 Months
Unrealized
Losses
2010
12 Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(In Thousands)
$
3,980
$
(20)
$
—
$
—
$
3,980
$
(20)
U.S. government agencies
Collateralized mortgage
obligations
Mortgage-backed securities
State and political subdivisions
Corporate bonds
—
231,524
56,221
8
—
(1,753)
(2,328)
(24)
1,809
—
5,257
14
(814)
—
(1,747)
(4)
1,809
231,524
61,478
22
(814)
(1,753)
(4,075)
(28)
$ 291,733
$
(4,125)
$
7,080
$
(2,565)
$ 298,813
$
(6,690)
Description of Securities Fair Value
Less than 12 Months
Unrealized
Losses
2009
12 Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(In Thousands)
$
14,635
$
(365)
$
—
$
—
$
14,635
$
(365)
U.S. government agencies
Collateralized mortgage
obligations
Mortgage-backed securities
State and political subdivisions
Corporate bonds
1,993
102,796
9,876
5
(385)
(672)
(156)
(13)
2,464
—
8,216
—
(142)
—
(1,748)
—
4,457
102,796
18,092
5
(527)
(672)
(1,904)
(13)
$ 129,305
$
(1,591)
$
10,680
$
(1,890)
$ 139,985
$
(3,481)
76
25
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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 the 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.
77
26
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Credit losses on debt securities held
Beginning of year
Additions related to other-than-temporary losses
not previously recognized
Reductions due to sales
Accumulated Credit Losses
2010
2009
(In Thousands)
$
2,983 $
—
—
—
3,304
(321)
End of year
$
2,983 $
2,983
Note 3: Other Comprehensive Income (Loss)
2010
2009
(In Thousands)
2008
Net unrealized gain (loss) on available-for-sale
securities
$
(2,000)
$
24,307
$
(6,725)
Net unrealized 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 (loss), before tax
effect
Tax expense (benefit)
(411)
(4,150)
—
8,787
2,254
(7,342)
(11,198)
17,903
(3,919)
6,266
617
216
Change in unrealized gain (loss) on available-for-
sale securities, net of income taxes
$
(7,279)
$
11,637
$
401
78
27
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
The components of accumulated other comprehensive income, included in stockholders’ equity, are
as follows:
Net unrealized gain on available-for-sale securities
Net unrealized loss on available-for-sale debt securities
for which a portion of an other-than-temporary
impairment has been recognized in income
Tax expense
2010
2009
(In Thousands)
$
7,279 $
18,067
(785)
6,494
2,273
(375)
17,692
6,192
Net-of-tax amount
$
4,221 $
11,500
Note 4: Loans and Allowance for Loan Losses
Categories of loans at December 31, 2010 and 2009, included:
One- to four-family residential construction
Subdivision construction
Land development
Commercial construction
Owner occupied one- to four-family residential
Non-owner occupied one- to four-family residential
Commercial real estate
Other residential
Commercial business
Industrial revenue bonds
Consumer auto
Consumer other
Home equity lines of credit
FDIC-supported loans, net of discounts (TeamBank)
FDIC-supported loans, net of discounts (Vantus Bank)
Undisbursed portion of loans in process
Allowance for loan losses
Deferred loan fees and gains, net
2010
2009
(In Thousands)
$
29,102
86,649
51,014
112,577
98,099
136,984
530,277
210,846
185,865
64,641
48,992
77,331
46,852
144,633
160,163
1,984,025
(63,108)
(41,487)
(2,543)
$
32,966
104,425
127,265
87,220
102,421
137,577
564,621
190,552
151,250
60,969
47,734
92,008
46,578
199,774
225,950
2,171,310
(46,920)
(40,101)
(2,164)
$ 1,876,887
$ 2,082,125
79
28
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Classes of loans by aging at December 31, 2010, were as follows:
30-59
Days Past
Due
60-89
Days Past
Due
Over 90
Days
Total
Past Due
(In Thousands)
Current
Total
Loans
Receivable
Total Loans >
90 Days and
Still Accruing
$
One- to four-family
residential construction
Subdivision construction
Land development
Commercial construction
Owner occupied one- to
four-family residential
Non-owner occupied one- to
four-family residential
Commercial real estate
Other residential
Commercial business
Industrial revenue bonds
Consumer auto
Consumer other
Home equity lines of credit
FDIC-supported loans, net of
261
281
2,730
—
4,856
2,085
2,749
—
350
—
427
1,331
152
$
—
1,015
—
—
$
578 $
1,860
5,668
—
839 $ 28,263
83,493
42,616
112,577
3,156
8,398
—
$ 29,102
86,649
51,014
112,577
$
914
2,724
8,494
89,605
98,099
2,130
8,546
4,011
355
—
35
318
160
2,831
6,074
4,202
1,642
2,190
94
1,417
140
7,046
17,369
8,213
2,347
2,190
556
3,066
452
129,938
512,908
202,633
183,518
62,451
48,436
74,265
46,400
136,984
530,277
210,846
185,865
64,641
48,992
77,331
46,852
discounts (TeamBank)
2,719
3,731
13,285
19,735
124,898
144,633
FDIC-supported loans, net of
discounts (Vantus Bank)
Less FDIC-supported loans,
net of discounts
2,277
20,218
1,414
22,629
9,399
52,104
13,090
147,073
94,951 1,889,074
160,163
1,984,025
$
4,996
5,145
22,684
32,825
271,971
304,796
—
—
—
—
—
—
—
—
—
22
565
—
—
—
587
Total
$ 15,222
$ 17,484
$ 29,420 $ 62,126 $ 1,617,103 $ 1,679,229
80
29
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Nonaccruing loans are summarized as follows:
One- to four-family residential construction
Subdivision construction
Land development
Commercial construction
Owner occupied one- to four-family residential
Non-owner occupied one- to four-family
$
residential
Commercial real estate
Other residential
Commercial business
Industrial revenue bonds
Consumer auto
Consumer other
Home equity lines of credit
December 31,
2010
2009
(In Thousands)
$
578
1,860
5,668
—
2,724
2,831
6,074
4,202
1,642
2,190
72
852
140
374
2,328
5,982
—
1,629
4,810
8,850
479
743
—
74
514
217
Total
$
28,833
$
26,000
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 $5,804 for 2010, $5,577 for 2009
and $4,531 for 2008
2010
2009
(In Thousands)
2008
$
40,101
35,630
$
29,163
35,800
$
25,459
52,200
(34,244)
(24,862)
(48,496)
Balance, end of year
$
41,487
$
40,101
$
29,163
81
30
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
The following table presents the balance in the allowance for loan losses and the recorded investment
in loans based on portfolio segment and impairment method as of December 31, 2010:
One- to Four-
Family
Residential
and
Construction
Other
Residential
and
Construction
Commercial
Real Estate
Commercial
Construction
(In Thousands)
Other
Commercial Consumer
Total
Allowance for loan losses
Individually evaluated for
impairment
Collectively evaluated for
impairment
Loans acquired and
$
$
accounted for under ASC
310-30
$
Loans
Individually evaluated for
4,353
$
1,714 $
3,089
$
2,083
$
784
$
37 $
12,060
7,100
$
2,152 $
11,247
$
3,769
$
1,697
$
2,632 $
28,597
— $
— $
— $
30
$
800
$
— $
830
impairment
$
40,562
$
25,246 $
72,379
$
45,334
$
8,340
$
622 $ 192,483
Collectively evaluated for
impairment
Loans acquired and
accounted for under ASC
310-30
$
310,272
$
185,600 $ 522,539
$
118,257
$
177,525
$
172,553 $ 1,486,746
$
75,727
$
23,277 $ 128,704
$
22,858
$
15,215
$
39,015 $ 304,796
The weighted average interest rate on loans receivable at December 31, 2010 and 2009, was 6.03%
and 6.25%, 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 $207,546,000 and
$264,825,000 at December 31, 2010 and 2009, respectively. In addition, available lines of credit on
these loans were $5,008,000 and $21,375,000 at December 31, 2010 and 2009, respectively.
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.
82
31
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
The following summarizes impaired loans at December 31, 2010:
Recorded
Balance
Unpaid
Principal
Balance
Average
Investment
in Impaired
Loans
Specific
Allowance
(In Thousands)
Interest
Income
Recognized
One- to four-family residential
construction
Subdivision construction
Land development
Commercial construction
Owner occupied one- to four-family
residential
Non-owner occupied one- to four-family
$
$
1,947 $
9,894
17,957
1,851
2,371
10,560
21,006
1,851
5,205
5,620
residential
Commercial real estate
Other residential
Commercial business
Consumer auto
Consumer other
Home equity lines of credit
11,785
25,782
9,768
9,722
125
429
148
12,267
26,392
9,869
12,495
137
481
166
258
2,326
1,925
158
542
1,227
3,045
1,714
828
4
14
19
$
1,724 $
7,850
18,760
458
3,612
8,182
10,615
8,123
2,630
30
93
109
83
415
534
31
69
386
603
140
114
1
4
1
Total
$
94,613
$ 103,215
$
12,060
$
62,186
$
2,381
At December 31, 2010, all impaired loans had specific valuation allowances. Interest of
approximately $388,000 and $1,122,000 was received on average impaired loans of approximately
$23,544,000 and $33,596,000 for the years ended December 31, 2009 and 2008, respectively. For
impaired loans which were nonaccruing, interest of approximately $1,993,000, $1,858,000 and
$2,874,000 would have been recognized on an accrual basis during the years ended December 31,
2010, 2009 and 2008, respectively.
Included in certain loan categories in the impaired loans are troubled debt restructurings that were
classified as impaired. At December 31, 2010, the Company had $6.5 million of construction loans,
$5.5 million of residential mortgage loans, $8.2 million of commercial real estate loans, $57,000 of
other commercial loans and $150,000 of consumer loans that were modified in troubled debt
restructurings and 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.
83
32
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
The Company reviews the credit quality of its loan portfolio using an internal grading system as
shown as of December 31, 2010, below:
One- to four-family residential
construction
Subdivision construction
Land development
Commercial construction
Owner occupied one- to four-family
residential
Non-owner occupied one- to four-family
residential
Commercial real estate
Other residential
Commercial business
Industrial revenue bonds
Consumer auto
Consumer other
Home equity lines of credit
FDIC-supported loans, net of discounts
(TeamBank)
FDIC-supported loans, net of discounts
(Vantus Bank)
Grand total
Satisfactory
Watch
Special
Mention
Substandard
Total
(In Thousands)
$
27,620 $
69,907
12,927
105,329
549 $
8,408
20,834
5,397
— $
—
—
—
933 $
8,334
17,253
1,851
29,102
86,649
51,014
112,577
92,385
766
120,360
460,088
185,600
177,525
62,451
48,883
76,966
46,704
6,471
46,805
15,478
812
—
—
—
—
—
—
2,574
—
—
—
—
—
—
4,948
98,099
10,153
20,810
9,768
7,528
2,190
109
365
148
136,984
530,277
210,846
185,865
64,641
48,992
77,331
46,852
144,633
160,163
—
—
—
—
—
144,633
—
160,163
$ 1,791,541 $ 105,520 $
2,574
$
84,390
$ 1,984,025
The FDIC-supported loans are evaluated using the internal grading system shown above.
However, since the loans are accounted for in pools and are currently substantially covered through
loss sharing agreements with the FDIC, all of the loan pools were considered satisfactory at
December 31, 2010. See Note 5 for further discussion of the acquired loan pools and loss sharing
agreements.
Certain of the Bank’s real estate loans are pledged as collateral for borrowings as set forth in
Notes 10 and 12.
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, 2010
and 2009, loans outstanding to these directors and executive officers are summarized as follows:
84
33
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Balance, beginning of year
New loans
Payments
December 31,
2010
2009
(In Thousands)
$
$
14,892
2,293
(4,252)
28,718
4,699
(18,525)
Balance, end of year
$
12,933
$
14,892
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
85
34
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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 $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 2010 and 2009 was $2.4 million and $966,000, respectively.
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
86
35
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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 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.
During 2010, the Company continued to analyze its estimates of the fair values of the loans
acquired and the indemnification asset recorded. The Company finalized its analysis of these assets
without adjustments to the initial fair value estimates. The Bank recorded the fair value of the
acquired loans at their estimated fair value of $247.0 million and the related FDIC indemnification
asset was recorded at its estimated fair value of $62.2 million. A discount was recorded in
conjunction with the fair value of the acquired loans and the amount accreted to yield during 2010
and 2009 was $1.2 million and $0, respectively.
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.
Fair Value and Expected Cash Flows
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.
87
36
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
The amount of the estimated cash flows expected to be received from the acquired loan pools in
excess of the fair values recorded for the loan pools is referred to as the accretable yield. The
accretable yield is recognized as interest income over the estimated lives of the loans. The
Company continues to evaluate the fair value of the loans including cash flows expected to be
collected. Increases in the Company’s cash flow expectations are recognized as increases to the
accretable yield while decreases are recognized as impairments through the allowance for loan
losses. During the year ended December 31, 2010, increases in expected cash flows related to both
acquired loan portfolios resulted in adjustments totaling $58.9 million to the accretable yield to be
spread over the estimated remaining lives of the loans on a level-yield basis. The impact of the
adjustments on the year ended December 31, 2010, was increased interest income of $19.5 million.
The increase in expected cash flows also reduced the amount of expected reimbursements under the
loss sharing agreements. This resulted in corresponding adjustments totaling $51.8 million to the
indemnification assets to be amortized on a level-yield basis over the remainder of the loss sharing
agreements or the remaining expected lives of the loan pools, whichever is shorter. The amount of
the adjustments impacting the year ended December 31, 2010, was $17.1 million of amortization
expense recorded in non-interest income as a reduction in income. The net impact of the
adjustments was an increase of $2.3 million to pre-tax income. At December 31, 2009, the
Company’s estimate of cash flows expected to be received from the acquired loan pools had not
materially changed, other than the adjustment of the provisional fair value measurements of the
former TeamBank loan portfolio.
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.
TeamBank FDIC Indemnification Asset
The following tables present the balances of the FDIC indemnification asset related to the
TeamBank transaction at December 31, 2010 and 2009. Gross loan balances (due from the
borrower) were reduced approximately $216.5 million since the transaction date through
repayments by the borrower or charge-downs to customer loan balances.
88
37
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Initial basis for loss sharing determination, net of activity
since acquisition date
Noncredit premium/(discount)
Reclassification from nonaccretable discount to accretable
discount due to change in expected losses (net of accretion
to date)
Book value of assets
Anticipated realized loss
Assumed loss sharing recovery percentage
Estimated loss sharing value
Indemnification asset to be amortized resulting from change
in expected losses
Accretable discount on FDIC indemnification asset
December 31, 2010
Loans
Foreclosed
Assets
(In Thousands)
$
219,289
(3,875)
$
15,921
—
(21,071)
(144,633)
—
(5,463)
49,710
85%
10,458
78%
42,275
20,011
(6,077)
8,204
—
—
FDIC indemnification asset
$
56,209
$
8,204
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
FDIC indemnification asset
$
94,648
$
89
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
38
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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, 2010 and 2009. Gross loan balances (due from the borrower)
were reduced approximately $123.5 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)
Reclassification from nonaccretable discount to accretable
discount due to change in expected losses (net of accretion
to date)
Book value of assets
Anticipated realized loss
Assumed loss sharing recovery percentage
Estimated loss sharing value
Indemnification asset to be amortized resulting from change
in expected losses
Accretable discount on FDIC indemnification asset
December 31, 2010
Loans
Foreclosed
Assets
(In Thousands)
$
208,080
(1,431)
$
9,944
—
(18,428)
(160,163)
28,058
80%
22,445
14,743
(3,850)
—
(5,899)
4,045
80%
3,236
—
(109)
FDIC indemnification asset
$
33,338
$
3,127
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
90
39
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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
(In Thousands)
$
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.
91
40
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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:
FASB
ASC
310-30
Loans
FASB ASC
310-30
by
Policy
Loans
Other
Total
(In Thousands)
$
17,006 $
—
230,043 $
—
— $
2,249
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.
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.
A majority of these loans were valued as of their acquisition dates 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.
92
41
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Changes in the accretable yield for acquired loan pools were as follows for the years ending
December 31, 2010 and 2009:
Balance, January 1, 2009
Additions
Accretion
Balance, December 31, 2009
Accretion
Reclassification from nonaccretable difference(1)
TeamBank
Vantus Bank
(In Thousands)
$
— $
44,221
(12,921)
31,300
(24,250)
29,715
—
45,022
(5,999)
39,023
(23,848)
20,621
Balance, December 31, 2010
$
36,765
$
35,796
(1) Represents increases in estimated cash flows expected to be received from the acquired
loan pools, primarily due to lower estimated credit losses. The increases were partially
offset by decreases in expected accretion based on reductions in estimated lives of the
loan pools totaling $1.8 million and $6.8 million for TeamBank and Vantus Bank,
respectively.
Note 6: Foreclosed Assets Held for Sale
Major classifications of foreclosed assets were as follows:
One-to four-family construction
Subdivision construction
Land development
Commercial construction
One-to four-family residential
Other residential
Commercial real estate
Consumer
FDIC-supported foreclosed assets, net of discounts
$
December 31,
2010
2009
(In Thousands)
$
2,510
19,816
10,620
3,997
2,896
4,178
4,565
318
48,900
11,362
1,214
20,208
3,010
5,526
5,633
703
1,440
777
38,511
3,149
$
60,262
$
41,660
93
42
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Expenses applicable to foreclosed assets at December 31 include the following:
Net loss on sales of real estate
Operating expenses, net of rental
income
2010
2009
(In Thousands)
2008
$
2,124
$
1,979
$
1,759
2,790
2,980
$
4,914 $
4,959
$
1,672
3,431
Note 7: Premises and Equipment
Major classifications of premises and equipment, stated at cost, were as follows:
Land
Buildings and improvements
Furniture, fixtures and equipment
Less accumulated depreciation
December 31,
2010
2009
(In Thousands)
$
$
20,026
46,055
32,796
98,877
30,525
12,757
30,170
28,061
70,988
28,605
$
68,352
$
42,383
Note 8:
Investments in Affordable Housing Partnerships
The Company has invested in certain limited partnerships that were formed to develop and operate
apartments and single-family houses designed as high-quality affordable housing for lower income
tenants throughout Missouri and contiguous states. At December 31, 2010, the Company had nine
investments, with a net carrying value of $12.4 million. Due to the Company’s inability to exercise
any significant influence over any of the nine investments, all investments in Affordable Housing
Partnerships are accounted for using the cost method. Each of the partnerships must meet the
regulatory requirements for affordable housing for a minimum 15-year compliance period to fully
utilize the tax credits. If the partnerships ceased to qualify during the compliance period, the credits
may be denied for any period in which the projects are not in compliance and a portion of the
credits previously taken may be subject to recapture with interest.
94
43
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
The remaining federal tax credits to be utilized over a maximum of 15 years are $43.3 million as of
December 31, 2010. Amortization of the investments in partnerships will be approximately $31.6
million. The Company’s usage of federal tax credits approximated $1.3 million, $351,000 and
$161,000 during 2010, 2009 and 2008, respectively. Investment amortization amounted to $1.2
million, $160,000 and $0 for the years ended December 31, 2010, 2009 and 2008, respectively.
Note 9: Deposits
Deposits are summarized as follows:
Weighted Average
Interest Rate
December 31,
2009
2010
(In Thousands, Except
Interest Rates)
Noninterest-bearing accounts
Interest-bearing checking and
savings accounts
—
$
257,569 $
258,792
0.83% - 1.00%
1,038,620
820,862
Certificate accounts
0% - 1.99%
2% - 2.99%
3% - 3.99%
4% - 4.99%
5% - 5.99%
6% - 6.99%
7% and above
1,296,189
1,079,654
838,619
298,029
28,398
126,001
8,346
311
—
781,565
513,837
103,217
222,142
12,927
586
33
1,299,704
1,634,307
$
2,595,893 $
2,713,961
The weighted average interest rate on certificates of deposit was 1.85% and 2.33% at December 31,
2010 and 2009, respectively.
The aggregate amount of certificates of deposit originated by the Bank in denominations greater
than $100,000 was approximately $395,763,000 and $386,804,000 at December 31, 2010 and
2009, 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 $363,337,000 and $628,287,000 at December 31, 2010 and 2009, respectively.
95
44
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
At December 31, 2010, scheduled maturities of certificates of deposit were as follows:
2011
2012
2013
2014
2015
Thereafter
Retail
Brokered
(In Thousands)
Total
$
$
705,168
147,334
40,915
20,150
21,005
1,795
297,445
51,335
1,004
13,553
—
—
$ 1,002,613
198,669
41,919
33,703
21,005
1,795
$
936,367
$
363,337
$ 1,299,704
A summary of interest expense on deposits is as follows:
2010
2009
(In Thousands)
2008
Checking and savings accounts
Certificate accounts
Early withdrawal penalties
$
$
8,468
30,065
(106)
$
6,600
47,592
(105)
8,370
52,616
(110)
$
38,427
$
54,087
$
60,876
Note 10: Advances From Federal Home Loan Bank
Advances from the Federal Home Loan Bank consisted of the following:
December 31, 2010
December 31, 2009
Due In
Amount
Weighted
Average
Interest
Rate
Amount
Weighted
Average
Interest
Rate
(In Thousands, Except Interest Rates)
2010
2011
2012
2013
2014
2015
2016 and thereafter
Unamortized fair value adjustment
$
$
—
32,293
22,993
281
335
10,065
86,505
152,472
1,053
153,525
96
—%
$
4.28
4.41
5.68
5.47
3.87
3.72
3.96
$
17,028
32,293
22,993
281
335
10,065
86,505
169,500
2,103
171,603
4.40%
4.28
4.41
5.68
5.47
3.87
3.72
4.00
45
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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.
The Bank has pledged FHLB stock, investment securities and first mortgage loans free of pledges,
liens and encumbrances as collateral for outstanding advances. No investment securities were
specifically pledged as collateral for advances at December 31, 2010 and 2009. Loans with
carrying values of approximately $636,416,000 and $644,654,000 were pledged as collateral for
outstanding advances at December 31, 2010 and 2009, respectively. The Bank has potentially
available $243,863,000 remaining on its line of credit under a borrowing arrangement with the
FHLB of Des Moines at December 31, 2010.
97
46
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Note 11: Short-Term Borrowings
Short-term borrowings are summarized as follows:
Note payable – Community Development
Equity Funds
Securities sold under reverse repurchase agreements
December 31,
2010
2009
(In Thousands)
$
778
257,180
$
289
335,893
$
257,958
$
336,182
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 0.26% and 0.70% at December 31,
2010 and 2009, respectively. Short-term borrowings averaged approximately $291,692,000 and
$348,509,000 for the years ended December 31, 2010 and 2009, respectively. The maximum
amounts outstanding at any month end were $328,567,000 and $396,467,000, respectively, during
those same periods.
Note 12: Federal Reserve Bank Borrowings
The Bank has a potentially available $271,006,000 line of credit under a borrowing arrangement
with the Federal Reserve Bank at December 31, 2010. The line is secured primarily by commercial
loans.
Note 13: 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.
98
47
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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, 2010 and 2009, the book value of these repurchase agreements was $3,142,000
and $3,194,000, respectively.
Note 14: 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 and
bearing an interest rate identical to the distribution rate on the Trust II securities. The initial
interest rate on the Trust II debentures was 6.98%. The interest rate was 1.89% and 1.88% at
December 31, 2010 and 2009, 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 and bearing an interest rate
identical to the distribution rate on the Trust III securities. The initial interest rate on the Trust III
debentures was 6.76%. The interest rate was 1.69% at both December 31, 2010 and 2009.
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.
99
48
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Subordinated debentures issued to capital trusts are summarized as follows:
December 31,
2010
2009
(In Thousands)
Subordinated debentures
$
30,929 $
30,929
Note 15:
Income Taxes
The Company files a consolidated federal income tax return. As of December 31, 2010 and 2009,
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, 2010 and 2009.
The provision (credit) for income taxes included these components:
2010
2009
(In Thousands)
2008
Taxes currently payable
Deferred income taxes
Income tax expense (credit)
$
$
14,345
(5,451)
8,894
$
$
8,130
24,875
33,005
$
$
1,811
(5,562)
(3,751)
100
49
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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
Realized impairment on available-for-sale securities
Write-down of foreclosed assets
Other
$
Deferred tax liabilities
Tax depreciation in excess of book depreciation
FHLB stock dividends
Partnership tax credits
Prepaid expenses
Unrealized gain on available-for-sale securities
Difference in basis for acquired assets and liabilities
Other
December 31,
2010
2009
(In Thousands)
$
14,521
454
867
190
1,873
3,004
—
20,909
(871)
(138)
(1,287)
(524)
(2,273)
(18,511)
(353)
(23,957)
14,036
952
587
202
—
480
1
16,258
(171)
(138)
(1,774)
(262)
(4,195)
(20,210)
(527)
(27,277)
Net deferred tax liability
$
(3,048) $
(11,019)
Reconciliations of the Company’s effective tax rates to the statutory corporate tax rates were as
follows:
Tax at statutory rate
Nontaxable interest and dividends
Tax credits
State taxes
Other
2010
35.0%
(5.0)
(3.9)
0.8
0.2
2009
35.0%
(1.6)
—
—
0.3
2008
(35.0)%
(15.4)
—
—
4.5
27.1%
33.7%
(45.9)%
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 2007.
101
50
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Note 16: 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,
2010 and 2009, 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
51
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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 both December 31, 2010 and 2009.
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.
U.S. government agencies
Collateralized mortgage
obligations
Mortgage-backed securities
Small Business Administration loan
pools
States and political subdivisions
Corporate bonds
Equity securities
Mortgage servicing rights
2010
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)
(In Thousands)
Fair Value
—
—
—
—
—
—
630
—
$
3,980
$
7,680
599,211
60,914
95,617
21
1,493
—
$
3,980
$
7,680
599,211
60,914
95,617
21
2,123
637
103
—
—
—
—
—
—
—
637
52
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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
(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
—
—
—
—
—
—
—
1,132
U.S. government agencies
Collateralized mortgage
obligations
Mortgage-backed securities
States and political subdivisions
Corporate bonds
Equity securities
Mortgage servicing rights
The following is a reconciliation of activity for available-for-sale securities measured at fair value
based on significant unobservable (Level 3) information. 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, 2009
$
445
$
Additions
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
Additions
Amortization
—
—
(471)
55
(29)
0
—
—
Balance, December 31, 2010
$
0
$
104
24
67
(61)
1,102
—
—
—
1,132
50
(545)
637
53
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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.
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.
105
54
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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, 2010 and 2009:
2010
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
$
22,499 $
80,407
10,360
— $
—
—
2009
22,499 $
—
—
80,407
—
10,360
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
— $
—
—
9,269 $
—
—
48,750
—
9,342
The following disclosure relates to financial assets for which it is not practicable for the Company
to estimate the fair value at December 31, 2010 and 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.
106
55
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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, 2010 and 2009, the carrying value of the FDIC indemnification asset was $64.4
million and $94.9 million, respectively. 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.
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, 2010 and 2009, the carrying value of the FDIC indemnification asset was $36.5
million and $46.6 million, respectively. 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.
107
56
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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.
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 approximates 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.
108
57
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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.
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
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
December 31, 2010
Fair
Value
Carrying
Amount
December 31, 2009
Fair
Value
Carrying
Amount
(In Thousands)
$ 429,971
769,546
1,125
22,499
1,876,887
12,628
11,572
637
$ 429,971
769,546
1,300
22,499
1,878,345
12,628
11,572
637
$ 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
2,595,893
153,525
257,958
53,142
30,929
3,765
2,603,440
158,052
257,958
61,007
30,929
3,765
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
—
50
—
109
—
50
—
—
42
—
—
42
—
58
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Note 17: 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, 2010, future minimum lease payments were as follows (in thousands):
2011
2012
2013
2014
2015
Thereafter
$
1,202
1,049
750
660
263
857
$
4,781
Rental expense was $1,185,000, $1,053,000 and $934,000 for the years ended December 31, 2010,
2009 and 2008, respectively.
Note 18:
Interest Rate Swaps
In the normal course of business, the Company may use 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.
110
59
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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.
At December 31, 2010 and 2009, the Company had no derivative financial instruments. The net
gains recognized in earnings on fair value hedges were $0, $1.2 million and $7.0 million for the
years ended December 31, 2010, 2009 and 2008, respectively.
Note 19: Commitments and Credit Risk
Commitments to Originate Loans
Commitments to extend credit are agreements to lend to a customer as long as there is no violation
of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since a significant portion of the
commitments may expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each customer’s
creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based on management’s credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable, inventory, property and
equipment, commercial real estate and residential real estate.
At December 31, 2010 and 2009, the Bank had outstanding commitments to originate loans and
fund commercial construction loans aggregating approximately $79,004,000 and $26,028,000,
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
$15,758,000 and $3,340,000 at December 31, 2010 and 2009, respectively.
Letters of Credit
Standby letters of credit are irrevocable conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party. Financial standby letters of credit are primarily
issued to support public and private borrowing arrangements, including commercial paper, bond
financing and similar transactions. Performance standby letters of credit are issued to guarantee
performance of certain customers under nonfinancial contractual obligations. The credit risk
involved in issuing standby letters of credit is essentially the same as that involved in extending
111
60
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
loans to customers. Fees for letters of credit issued are initially recorded by the Bank as deferred
revenue and are included in earnings at the termination of the respective agreements. Should the
Bank be obligated to perform under the standby letters of credit, the Bank may seek recourse from
the customer for reimbursement of amounts paid.
The Company had total outstanding standby letters of credit amounting to approximately
$16,718,000 and $16,194,000 at December 31, 2010 and 2009, respectively, with $12,970,000 and
$12,037,000, respectively, of the letters of credit having terms up to five years. The remaining
$3,748,000 and $4,157,000 at December 31, 2010 and 2009, 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, 2010, the Bank had granted unused lines of credit to borrowers aggregating
approximately $102,116,000 and $61,199,000 for commercial lines and open-end consumer lines,
respectively. 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.
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 $191,410,000 and $206,989,000 at December 31, 2010 and 2009,
respectively, are secured by motels, restaurants, recreational facilities, other commercial properties
and residential mortgages in the Branson, Missouri, area. Residential mortgages account for
approximately $68,657,000 and $77,827,000 of this total at December 31, 2010 and 2009,
respectively.
In addition, loans aggregating approximately $210,062,000 and $230,698,000 at December 31,
2010 and 2009, 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.
112
61
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Note 20: 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
2010
2009
(In Thousands)
2008
$71,347
$20,523
—
$2,849
$50,368
$17,595
$25
$39,767
$15,317
$100
$2,800
$69,547
$3,165
$3,389
$31,600
$7,268
—
$2,618
$70,155
$4,590
$172
Note 21: 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, 2010, 2009 and 2008, were approximately $835,000, $719,000 and $1.2
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, 2010, 2009 and 2008, were approximately $1.0 million, $759,000 and $673,000,
respectively.
Note 22: 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, 2010, there were no options outstanding under this plan.
113
62
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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, 2010, there were 58,024 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,
2010, there were 685,772 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, 2008
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)
Balance, December 31, 2009
Granted
Exercised
Forfeited from terminated plan(s)
Forfeited from current plan(s)
Available to
Grant
Shares Under
Option
627,658
(72,030)
—
—
30,560
586,188
(72,425)
—
—
10,747
524,510
(88,190)
—
—
26,133
670,293
72,030
(1,972)
(9,394)
(30,560)
700,397
72,425
(25,434)
(6,455)
(10,747)
730,186
88,190
(47,597)
(850)
(26,133)
Weighted
Average
Exercise
Price
$
24.423
8.516
(13.233)
(16.229)
(26.794)
23.003
21.367
14.066
11.910
25.397
23.215
22.105
14.088
7.785
25.916
Balance, December 31, 2010
462,453
743,796
$
23.592
114
63
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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,
2009
2008
2010
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
1.52%
5 years
37.69%
$0.72
2.19%
5 years
69.16%
$0.72
2.05%
5 years
46.93%
$5.60
$9.90
$1.72
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, 2010.
Options outstanding, January 1, 2010
Granted
Exercised
Forfeited
Options outstanding, December 31, 2010
Options
730,186
88,190
(47,597)
(26,983)
743,796
Options exercisable, December 31, 2010
477,236
115
Weighted
Average
Exercise
Price
$23.215
22.105
14.088
25.346
23.592
25.299
Weighted
Average
Remaining
Contractual
Term
5.75
—
—
—
5.59
3.98
64
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
For the years ended December 31, 2010, 2009 and 2008, options granted were 88,190, 72,425 and
72,030, 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, 2010, 2009 and 2008, was $388,000, $196,000 and $7,000, respectively.
Cash received from the exercise of options for the years ended December 31, 2010, 2009 and 2008,
was $671,000, $358,000 and $26,000, respectively. The actual tax benefit realized for the tax
deductions from option exercises totaled $309,000, $183,000 and $182 for the years ended
December 31, 2010, 2009 and 2008, respectively.
The following table presents the activity related to nonvested options under all plans for the year
ended December 31, 2010.
Nonvested options, January 1, 2010
Granted
Vested this period
Nonvested options forfeited
Options
253,603
88,190
(63,237)
(11,996)
Nonvested options, December 31, 2010
266,560
Weighted
Average
Exercise
Price
Weighted
Average
Grant Date
Fair Value
$20.624
22.105
23.129
20.395
20.535
$5.951
5.601
5.185
5.670
6.029
At December 31, 2010, 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 2015, with the majority of this expense recognized in 2011 and 2012.
The following table further summarizes information about stock options outstanding at
December 31, 2010:
Range of
Exercise Prices
$7.688 to $12.898
$18.188 to $25.000
$25.480 to $36.390
Options Outstanding
Weighted
Average
Remaining
Contractual
Life
Number
Outstanding
85,472
325,790
332,534
5.97 years
5.91 years
5.19 years
743,796
5.59 years
116
Options Exercisable
Weighted
Average
Exercise
Price
$9.64
$20.96
$29.76
$23.59
Number
Exercisable
36,427
167,007
273,802
477,236
Weighted
Average
Exercise
Price
$11.24
$20.14
$30.32
$25.30
65
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Note 23: 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 significant credit quality problems,
including severe volatility in the valuation of real estate and other collateral supporting loans. The
financial statements have been prepared using values and information currently available to the
Company.
Given the volatility of current economic conditions, the values of assets and liabilities recorded in
the financial statements could change rapidly, resulting in material future adjustments in asset
values, the allowance for loan losses or capital that could negatively impact the Company’s ability
to meet regulatory capital requirements and maintain sufficient liquidity.
Note 24: 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.
117
66
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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, 2010, that the
Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2010, 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, 2010
Total risk-based capital
Great Southern Bancorp, Inc.
Great Southern Bank
$348,825
$305,976
18.0%
15.8%
$154,666
$154,515
8.0%
8.0%
N/A
$193,144
N/A
10.0%
Tier I risk-based capital
Great Southern Bancorp, Inc.
Great Southern Bank
Tier I leverage capital
Great Southern Bancorp, Inc.
Great Southern Bank
As of December 31, 2009
Total risk-based capital
$324,445
$281,619
16.8%
14.6%
$77,333
$77,257
4.0%
4.0%
N/A
$115,886
N/A
6.0%
$324,445
$281,619
9.5%
8.3%
$136,120
$135,985
4.0%
4.0%
N/A
$169,982
N/A
5.0%
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
Great Southern Bancorp, Inc.
Great Southern Bank
$311,245
$267,756
15.0%
12.9%
$83,010
$82,907
4.0%
4.0%
N/A
$124,361
N/A
6.0%
$311,245
$267,756
8.6%
7.4%
$145,297
$145,680
4.0%
4.0%
N/A
$182,101
N/A
5.0%
118
67
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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, 2010 and 2009, 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 25: 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,
except as noted below, 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.
On November 22, 2010, a suit was filed against the Bank in Missouri state court in Springfield by a
customer alleging that the fees associated with the Bank’s automated overdraft program in
connection with its debit card and ATM cards constitute unlawful interest in violation of
Missouri’s usury laws. The suit seeks class-action status for Bank customers who have paid
overdraft fees on their checking accounts. The Bank has filed a motion to dismiss the suit. At this
early stage of the litigation, it is not possible for management of the Bank to determine the
probability of a material adverse outcome or reasonably estimate the amount of any potential loss.
119
68
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Note 26: Summary of Unaudited Quarterly Operating Results
Following is a summary of unaudited quarterly operating results for the years 2010, 2009 and
2008:
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
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
2010
Three Months Ended
March 31
June 30
September 30 December 31
(In Thousands, Except Per Share Data)
$39,754
13,183
5,500
$39,612
12,488
12,000
$41,535
11,341
10,800
$52,290
10,838
7,330
—
8,997
22,143
2,387
5,538
4,699
0.34
3,465
14,139
20,808
2,631
5,824
4,976
0.35
5,441
12,232
22,602
2,862
6,162
5,305
0.38
(119)
(3,416)
23,351
1,014
6,341
5,482
0.39
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
120
322
9,150
20,875
1,874
5,280
4,443
0.32
69
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Interest income
Interest expense
Provision for loan losses
Net realized gains (losses) and
impairment on available-for-sale
securities
Noninterest income
Noninterest expense
Provision (credit) for income taxes
Net income (loss)
Net income (loss) available to
common shareholders
Earnings (loss) per common share –
diluted
2008
Three Months Ended
March 31
June 30
September 30 December 31
(In Thousands, Except Per Share Data)
$38,340
20,497
37,750
$35,664
17,533
4,950
$35,024
16,657
4,500
$35,786
18,544
5,000
6
10,182
14,116
(8,688)
(15,153)
(15,153)
(1.13)
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
121
70
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Note 27: Condensed Parent Company Statements
The condensed statements of financial condition at December 31, 2010 and 2009, and statements of
operations and cash flows for the years ended December 31, 2010, 2009 and 2008, 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
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 on available-for-sale securities, net
December 31,
2010
2009
(In Thousands)
$
$
44,442
2,123
290,603
44
1,149
44,818
1,878
285,092
45
1,168
$
338,361
$
333,001
$
3,111 $
312
30,929
56,480
134
2,452
20,701
220,021
4,221
2,988
176
30,929
56,017
134
2,452
20,180
208,625
11,500
$
338,361 $
333,001
122
71
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Statements of Operations
Income
Dividends from subsidiary bank
Interest and dividend income
Net realized gains on sales of
available-for-sale securities
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
2010
2009
(In Thousands)
2008
$
12,000 $
16
11,750
34
$
15
—
40,000
114
—
—
(11)
(533)
(4)
(1,718)
145
12,020
11,247
38,541
—
1,121
578
—
972
773
29,579
1,091
1,462
1,699
1,745
32,132
10,321
(502)
9,502
(601)
6,409
(11,716)
10,823
10,103
18,125
13,042
54,944
(22,553)
Net income (loss)
$
23,865 $
65,047 $
(4,428)
123
72
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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
Compensation expense for stock option grants
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 available-for-sale securities
Proceeds from sale of fixed assets
Purchase of loans
Net change in loans
Purchase of available-for-sale securities
Net cash provided by (used in) investing
activities
Financing Activities
Proceeds from issuance of preferred stock and related
common stock warrants
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
2010
2009
(In Thousands)
2008
$
23,865
$
65,047
$
(4,428)
(13,042)
—
—
461
—
—
(5)
8
75
1
11,363
—
—
—
158
—
—
—
—
158
—
(12,567)
670
—
(11,897)
(376)
44,818
(54,944)
1
—
337
(5)
533
9
(10)
(212)
611
11,367
(15,000)
10
—
—
16
—
—
(500)
(15,474)
—
(12,376)
358
—
(12,018)
(16,125)
60,943
22,553
7
29,579
468
(151)
1,718
8
5
(134)
(565)
49,060
(10,500)
—
(34)
—
300
(30,000)
421
(620)
(40,433)
58,000
(9,637)
26
(408)
47,981
56,608
4,335
$
44,442
$
44,818
$
60,943
$577
$937
$1,559
124
73
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
Note 28: 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 qualifies as Tier 1 capital and pays 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 it 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.
125
74
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
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.
126
75
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