annual
meeting
The 26th Annual Meeting of Shareholders will be held
at 10:00 a.m. CDT on Wednesday, May 6, 2015, at the
Great Southern Operations Center, 218 S. Glenstone,
Springfield, Missouri.
corporate
profile
In 1923, Great Southern Bank was started with a $5,000
investment and has since grown to the company it is
today. Our footprint spans eight states and we serve
more than 163,000 households by providing them
with a comprehensive line of products and services.
With nearly 1,300 dedicated associates we provide
exceptional service to our customers and it is our goal
to understand what matters most in every interaction
we have with them.
With $4.0 billion in total assets, we are headquartered
in Springfield, Mo. and operate 111 offices in eight
states with 108 retail banking centers in Missouri,
Arkansas, Kansas, Iowa, Nebraska and Minnesota,
commercial lending offices in Dallas, Texas, Tulsa,
Okla. and Overland Park, Kansas, and a home loan
center in Springfield, Mo. Customers can expect
the most convenient services possible, including the
longest banking hours in town, mobile, online and
telephone banking, plus a large ATM network.
Great Southern Bancorp, Inc., the holding
company for Great Southern Bank, is a public
company and its common stock (ticker: GSBC) is
listed on the NASDAQ Global Select Market.
As of December 31, 2014, there were 13,754,806
total shares of common stock outstanding and
approximately 2,000 shareholders of record.
The last sale price of the Company’s Common
Stock on December 31, 2014 was $39.67.
stock
information
HigH/Low Stock Price
2014
2013
2012
High
Low
High
Low
High
Low
First Quarter
$31.00
Second Quarter 32.25
Third Quarter
33.77
Fourth Quarter 40.28
$26.95
28.00
29.53
29.80
$27.34
28.00
31.00
31.23
$23.31
22.60
25.71
25.87
$25.18
27.71
31.81
31.49
$20.60
21.25
27.22
24.25
DiviDenD Declarations
2014
2013
2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$.20
.20
.20
.20
$.18
.18
.18
.18
$.18
.18
.18
.18
C2
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 Computershare at
(800) 368-5948 or visit computershare.com.
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,
GreatSouthernBank.com, the SEC website or
without charge by request to:
Kelly Polonus
Great Southern Bancorp, Inc.
P.O. Box 9009
Springfield, MO 65808
INVestor reLatIoNs
Kelly Polonus
Great Southern Bank
P.O. Box 9009
Springfield, MO 65808
audItors
BKD, L.L.P.
P.O. Box 1190
Springfield, MO 65801-1190
LeGaL CouNseL
Silver, Freedman, Taff and Tiernan, L.L.P.
3299 K St., N.W., Suite 100
Washington, DC 20007
Carnahan, Evans, Cantwell & Brown, P.C.
P.O. Box 10009
Springfield, MO 65808
traNsFer aGeNt aNd reGIstrar
Computershare Trust Company, N. A.
P.O. Box 30170
College Station, TX 77843-3170
to our shareholders
Making It
Count
As we look back at 2014, we are pleased to report that Great Southern
recorded strong financial results and significantly enhanced the
franchise. Our team of nearly 1,300 associates enthusiastically executed
our objectives and maximized opportunities that came our way.
Headlines for 2014 included growth and expansion, improved credit
quality and enhanced service. We grew through strategic acquisitions,
but also grew significantly by taking advantage of the expansive multi-
state franchise that we’ve built over the last few years. Credit quality
continued to improve bringing credit quality ratios to pre-financial crisis
levels. Efforts to improve service never cease and we made great strides
last year.
expanding
our Markets
In March 2014, we completed the acquisition of two Neosho, Mo.,
branches and certain customer accounts in St. Louis, which were
acquired from Neosho-based Boulevard Bank. This acquisition enabled
us to considerably increase our customer base and footprint in
Neosho and the chance to serve more St. Louis customers through our
existing banking center network. The combined Neosho and St. Louis
transactions represented approximately $92 million in deposits and $11
million in loans. The Neosho transaction did allow for elimination of
redundant expenses. In June 2014, we consolidated our legacy Great
Southern Neosho office into the former Boulevard Bank branch directly
across the street, leaving two banking centers to serve this community.
In June 2014, we participated in our fifth FDIC-assisted transaction
since 2009. Great Southern entered into a purchase and assumption
agreement with the FDIC to acquire certain loans and other assets
and assume all of the deposits of Valley Bank, a full-service bank
headquartered in Moline, Ill., with significant operations in Iowa. Assets
1
Joseph W. turner
President and
chief executive officer
William V. turner
chairman of the Board
total assets
$3.95 billion
2010 2011 2012 2013 2014
with a fair value of approximately $379 million were acquired and
liabilities with a fair value of approximately $368 million, including an
impressive non-time deposit base of $187 million, were assumed. This
transaction, unlike our previous FDIC-assisted transactions, did not
provide loss share coverage for the loans acquired and resulted in a
bargain purchase gain of $10.8 million.
Valley Bank operated 13 locations – six locations in the Quad Cities
market area and seven in central Iowa, primarily in the Des Moines
market area. This strategic acquisition provided the Company a new
entry into the attractive Quad Cities market and expanded our presence
in the Des Moines region. In September 2014, two underutilized Valley
Bank locations were closed – one in Moline, Ill., and one in Altoona,
Iowa. Operational systems conversion was completed in October
2014, enabling all Great Southern and former Valley Bank customers
to conduct business at any banking center throughout our footprint.
Customer retention has been exceptional thanks to the hard work and
commitment of our team of associates.
New and expanding
Loan relationships
We had a stellar year in serving the loan needs of commercial and
consumer customers throughout our franchise. Total gross loans,
excluding acquired covered loans, acquired non-covered loans and
mortgage loans held for sale, increased $525.5 million, or 25.1%, from
December 31, 2013, to December 31, 2014. Our loan portfolio mix
continues to change favorably and is more diversified by loan type
and geography than ever before. Nearly every major metropolitan
market in our footprint is now staffed with a commercial lending team
and we’re tapping into the business opportunities we knew existed
when we initially entered these markets. While we have ramped up our
2
production, our lenders have received a clear
message as to our lending approach with
expectations of non-speculative projects with
appropriate equity. Despite pricing pressures
and other competitive forces, our underwriting
criteria remains conservative and is primarily
centralized.
2014
2010 2011 2012
2013
total capital
$420 million
Loan production is coming from the majority
of our markets, including our new commercial
loan production offices in Tulsa, Okla., and
Dallas, Texas, which were both opened in
February 2014. In our legacy portfolio in 2014,
we experienced the largest growth in St. Louis,
Dallas, Minneapolis, Tulsa, Springfield and
Kansas City. We saw loan portfolio growth
in nearly every loan type with the largest
increases in the areas of commercial real estate
loans, consumer loans and construction loans.
Our consumer lending division had another
record-breaking year as we focused on
leveraging our geographic footprint. The
consumer lending portfolio increased by
nearly $192.3 million, or 70%, from December
31, 2013, to December 31, 2014. Indirect
lending was the primary driver of the uptick
in production as our Indirect Lending team,
Business Bankers and banking center staff
fostered relationships with established new
car dealers that also sell used cars. Direct
consumer loans, those originated through
our banking center network, also increased in
record numbers.
Improved
Credit quality
We are pleased with the progress we made in
2014 in improving our credit quality. Since the
end of 2013, overall credit quality improved
with a $20.3 million, or 23%, decrease in
non-performing assets and potential problem
loans, excluding those acquired from the
FDIC. Non-performing assets were 1.11% of
total assets at December 31, 2014, compared
to 1.74% of total assets at December 31, 2013.
As a comparative, at December 31, 2014, SNL-
followed U.S. Banks with assets of $1 to $5
billion had an average non-performing assets
to assets ratio of 1.26%.
The provision for loan losses for the year
ended December 31, 2014, decreased $13.2
million to $4.2 million when compared with the
year ended December 31, 2013. At December
31, 2014, the allowance for loan losses was
$38.4 million, a decrease of $1.7 million from
December 31, 2013. Total net charge-offs
were $5.8 million and $17.9 million for the
years ended December 31, 2014, and 2013,
respectively. The decrease in net charge-offs
2010
2011
2012
2013
2014
total deposits
$2.99 billion
total loans
$3.04 billion
2010
2011
2012
2013 2014
and provision for loan losses in the year ended December 31, 2014, were
consistent with our expectations.
our Network
access for Customers at the right time and place
Serving our customers how, when and where they prefer and doing
so efficiently is vital to our ongoing success. Customer preferences
continually change; products and services evolve, as well as how to
access them. The challenge is how to address these preferences when
individual customer desires change at varying degrees and speeds.
It’s a balancing act, especially with the fast pace of technological
developments. One size does not fit all.
For years, the future role of the banking center has been a topic of
much discussion in the industry. Many banks are trimming their banking
center network and hours of operation in light of the predominance of
self-service channels, like mobile banking and online banking. Like the
rest of the banking industry, a large number of our customers enjoy the
convenience of mobile and online banking and we are seeing steady
increases in adoption. However, we do not believe that electronic
banking will be the demise of the banking center altogether; albeit
transactions such as account deposits and cashing checks in the banking
center are steadily decreasing. We find that most customers still prefer
to utilize a banking center for their more complex financial needs.
The number of banking centers we operate will change over time as
we regularly analyze utilization, performance, profitability and market
potential. In 2014, besides expanding our banking center network
through acquisitions, we opened two new offices to enhance our
presence in two key markets and closed two facilities. Our first full-
service banking center was opened in Fayetteville, Ark., located in the
burgeoning Northwest Arkansas corridor and home of the University
3
of Arkansas. This office represents our second location in Northwest
Arkansas, with the other located in nearby Rogers, Ark. In the St. Louis
metropolitan area, we opened a full-service banking center in Ferguson,
Mo., in June 2014. This office is located in the northern region of
the metropolitan area where we lacked a presence. Two leased and
underutilized banking centers were closed after careful consideration–
one in Lamar, Mo., and another in Johnston, Iowa.
Looking ahead, two new offices are expected to be opened in 2015. At
the time of this writing, construction of a full-service banking center at
3200 S. Providence Road in Columbia, Mo., is nearing completion and
should open for business in April 2015. The home of the University of
Missouri, Columbia is a strong and dynamic market serving as a regional
medical hub and home to several large corporations. The University
of Missouri draws students from cities and towns from all Missouri and
beyond. With our Company’s extensive footprint in Missouri, many
households with college-aged students will find it advantageous to use
Great Southern at home and away at school in Columbia.
In mid-2014, the Company purchased a 20,000-square-foot former
bank office building in Leawood, Johnson County, Kan., a suburb of
the Kansas City metropolitan market area. Scheduled to be open for
business in mid-2015, the office will house the Kansas City commercial
lending group, currently located in nearby Overland Park, Kan., and
a retail banking center. Additional space in the building is leased to
tenants unrelated to the Company.
To improve customer service in our banking centers, we made getting
a debit card much faster and easier. Instead of waiting seven to 10
days for a card to arrive in the mail, customers can now walk out of any
banking center with a fully-activated debit card. “Instant issue” debit
card technology was deployed at all 108 banking centers and gives us a
competitive advantage in many of our markets.
total
net income
$42.95 million
2010
2011
2012
2013 2014
4
Book Value
per common share
$26.30
2010 2011 2012 2013 2014
Research began in 2014 on the feasibility of
utilizing technologically-advanced ATMs,
commonly called interactive teller machines
(ITMs). An ITM looks similar to a traditional
ATM, but it gives the customer the choice of
self-service or connecting with a remote live
teller in a highly personalized, two-way audio/
video interaction. The machines work like
any other ATM unless the customer pushes
a button to request a live teller on a video
monitor. The teller on the screen controls that
machine and all of its functions. For example,
if a customer loses or forgets his ATM card, he
can prove his identity by showing the teller a
driver’s license and get cash. Customers can
also cash a check to the penny and receive
bills in any denomination they request. A pilot
study is on tap for 2015. We expect to deploy
three ITMs at selected sites to gain a better
understanding of this technology and gauge
customer acceptance.
the
end result
Our focus on executing our strategy
culminated in our solid financial performance
in 2014. Earnings and capital remained strong.
Our core net interest margin (excluding
loss share accretion) was relatively stable at
3.83% for the year ended 2014, as compared
to 3.66% for 2013. Net income available to
common shareholders for 2014 was $43.0
million, or $3.10 per diluted common share,
compared to $33.2 million, or $2.42 per diluted
common share for the year ended 2013. The
Company ended the year with assets of $4.0
billion. Total stockholders’ equity increased to
$419.7 million at December 31, 2014, or 10.6%
of total assets. Common stockholders’ equity
was $361.8 million, or 9.2% of total assets,
equivalent to a book value of $26.30 per
common share at the end of 2014. Shareholder
dividends of $0.20 per common share were
declared in each of the four quarters of 2014.
Consecutive quarterly dividends have been
paid to common shareholders since 1990.
One additional capital item to note relates
to the U.S. Treasury’s Small Business Lending
Fund (SBLF) preferred stock we have
outstanding, which totals approximately $58
million. The Company has participated in the
SBLF since 2011. We are currently paying a
dividend to the Treasury of 1%, the lowest
rate possible in the program and a very
favorable cost of capital. Our Bank earnings
have afforded us the ability to distribute
cash in the form of dividends to the holding
company such that we now have enough
cash there to fully repay the SBLF funds. We
currently anticipate repaying these funds prior
to the first quarter of 2016, at which time the
dividend rate on any unpaid balance would
increase from 1% to 9%.
Making it count
in 2015
In 2015, our strategic direction is deliberate
and straightforward. We are optimistic about
our prospects in 2015, as we see tremendous
opportunity in our expanded franchise. Key
priorities in 2015 include attracting new
customers and deepening relationships with
existing customers, managing interest rate
risk, sustaining a strong credit discipline,
maintaining strong capital and appropriate
liquidity levels, and investing in our
communities. We remain open to growing
by acquisition; however, the number of
FDIC-assisted deals available has diminished
significantly over the last several years. We will
only consider open bank deals that provide an
acceptable return to our shareholders.
Total return*
5 year cumulative
$215
Great Southern Bancorp, Inc.
NASDAQ Composite
NASDAQ Financial
$215
$100
2009
2010
2011
2012
2013 2014
* 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, 2009
through December 31, 2014. The graph assumes that $100 was invested in GSBC
Common Stock on December 31, 2009 and that all dividends were reinvested.
Opportunities abound to better serve our customers, mentor our
associates, add value to our shareholders’ investment, or make our
communities better places to live. It’s our job to take advantage of these
opportunities, or even create them, and make what we do count.
As we move ahead, we pledge to keep the long-term success of the
Company and the long-term interests of our shareholders in mind in
every decision we make. We want to thank our associates for their
tremendous focus and effort over the past year; our customers for giving
us the opportunity to serve their needs; and our shareholders for your
continued confidence in the bright future of our Company. We also owe
a debt of gratitude to our Board of Directors for their guidance and
leadership, and we welcome our newest Board member, Mr. Doug Pitt.
Sincerely yours,
William V. Turner
Joseph W. Turner
5
putting our
resources
where it counts
In 2014, one of our major focuses was on growing our loan portfolio.
To do this, we knew we had to invest in new markets to facilitate this
growth, while continuing to take advantage of the network we’ve worked
hard to establish. One step we took to help accomplish our goals was
the opening of our loan production offices (LPOs) in Dallas, Texas, and
Tulsa, Okla., attractive markets that have impressive growth potential.
We hired experienced bankers with deep market knowledge to manage
these offices. We are pleased with our progress in these markets thus far,
and expect our success to continue.
Overall, our loan portfolio grew by more than 25%, or more than
$525 million, in 2014. This is primarily due to significant increases in
commercial real estate loans, consumer loans and construction loans,
and is a testament to how we’ve invested our resources where it counts.
Our consumer lending division had yet another record-breaking year in
2014. In 2013, we were focused on leveraging our geographic footprint,
and that continued to be our strategy last year. We certainly reaped
the benefits of this strategy, too, seeing total loan production from this
segment surge to more than $321 million, an increase of more than $182
million from 2013 production levels. This is a direct result of significant
gains in our indirect lending portfolio. This growth was made possible
by continued expansion of our existing relationships with car dealerships
and adding new ones, while taking advantage of the full power of our
geographic footprint.
2012 2013 2014
$468 million+
total
Consumer
loan portfolio
commercial
loan
projects
With every loan we fund, there is an
idea, a vision or a story. Our lending
efforts often give us the opportunity
to provide funding for projects that
help revitalize a neighborhood, spur
economic development or simply
enhance the quality of life. We’ve been
involved with historic renovations, low-
income housing projects, a development
serving our nation’s veterans and much
more. Here are but a few of the many,
many projects that make us proud.
Market Lofts davenport, Iowa
We worked with a company out of St. Louis, Mo. called Restoration St.
Louis, Inc. to provide financing for the renovation of this historic four-
story building that was built in 1905. Market Lofts in Davenport, Iowa
features hotel-style living centered in Davenport’s Loft District.
Catoosa Hills Catoosa, okla.
Catoosa Hills is a 66-acre shopping center stretching along I-44 in
Catoosa, Okla. The center is located across the street from the Cherokee
Hard Rock Casino and includes several restaurants, a movie theater and
brought nearly 1,000 new jobs to the area.
6
6
A
B
C
D
E
F
Bissinger’s st. Louis, Mo.
Bissinger’s Handcrafted Chocolatier is a high-end chocolate company
that has been based in St. Louis since 1927. They recently relocated
their headquarters to just north of the Arch in downtown St. Louis.
The new location is near the riverfront and the building, which is
on the National Register of Historic Places, underwent significant
renovations to house the company’s operations.
union station st. Louis, Mo.
Our participation in this project helped our borrower not only acquire
this historic landmark property, but perform renovations that turned
it into a luxury hotel in downtown St. Louis. As you can see, this is
a beautiful site and a project with which we are very proud to be
associated.
Freedom place
st. Louis, Mo.
Freedom Place is a
permanent housing
project for formerly
homeless veterans
located in St. Louis, Mo.,
providing affordable
apartments for America’s
heroes. It is a 100%
special needs housing
development that
provides homeless
veterans a permanent
home, as well as the
supportive services
necessary to maintain it.
C
power and Light Building Kansas City, Mo.
The Historic Power and Light Building is located in the heart of
downtown Kansas City. The renovation of this building turned it from
a once-mostly vacant office building to luxury lofts. The location
puts tenants mere steps away from premier entertainment venues,
restaurants and shops the area has to offer.
Cambria suites plano, texas
Cambria Suites Hotel in Plano, Texas is a luxury hotel located within
walking distance of Shops at Legacy, an urban lifestyle center in the
area, and close to offices of several large corporations.
Frisco Lofts springfield, Mo.
Frisco Lofts is a beautiful, new multi-family housing development in
downtown Springfield. The historic Frisco building underwent the
necessary renovations to turn the former office building into low-
income housing in Springfield.
77
a
B
D
E
F
improving our
efficiency,
convenience
and cost
savings
with technology
Mobile Check
deposit
Great Southern Bank
Mobile Check Deposit,
our service that allows
customers to deposit
checks directly from their
smartphone using the
Mobile Banking App,
continues to grow in
customer use. In 2014, this
service averaged more
than $1 million deposited
per month and grew by an
average of more than 100
new users per month.
Mobile app
We continue to see active
use for the Great Southern
Mobile Banking App.
As trends in technology
move forward, we update
our Mobile App to
ensure a high-quality user
experience. Services like
Mobile Check Deposit,
which is accessed through
the Mobile App, enhance
the customer experience.
For 2015, we’re working on
a feature known as “Secure
Swipe,” which allows
customers the ability to turn
their debit cards on and
off, helping to increase the
security of their accounts.
check
balance
text Banking
Great Southern Bank
Text Banking, our service
that allows customers to
manage their accounts
utilizing text messages,
continued to see increased
use in 2014. Each month,
we saw an increase in
active users and we
currently have more than
3,300 customers who use
the product on a regular
basis. The service not
only allows customers to
manage their accounts, but
also helps them keep track
of their account activity
with Text Alerts.
atM Network
We constantly evaluate our
ATM network to ensure
it remains as convenient
for our customers as
possible. In the last year,
we’ve added deposit
taking ATMs in certain
areas where they are most
beneficial. We’re also in
the process of evaluating
Interactive Teller Machines
for areas where we know
we have customers who
would benefit.
Instant Issue debit Cards
The service we were most excited about rolling out in
2014 was Instant Issue Debit Cards. Now our customers
can come to any of our banking centers and leave
within minutes with a new debit card activated and
ready for use. This service enhances the customer
experience for new customers and current customers
alike. It also helps maintain customer convenience levels
in times of mass debit card reissues, which continue to
be prevalent in our industry for a variety of reasons.
8
serving our customers
In 2014, we continued to make investments in our products and services to make them more
efficient and convenient for our customers and the Company. The newest service we rolled
out in 2014, and the one about which we are most excited, is Instant Issue Debit Cards.
This service now allows our customers to walk out of the banking center with their debit
card in hand after opening their account. You can read more about this great service below.
Additionally, we continue to make improvements to services like our website, Mobile Banking
App, ATM network and more.
While we are working to bring our customers the self-service channels they desire, we
continue to focus on ensuring our banking centers remain relevant and viable options. As we
move forward with new products and services, we must continue to be mindful of existing
products and services to ensure they remain effective and efficient.
Go
team!
Website
We continue to make
improvements to our
website as they are
needed. Our website is
viewed as not only an
extension of our brand, but
as another banking center.
Customers have the ability
to open accounts, manage
their accounts through
Great Southern Online
Banking, apply for loans
and learn more about our
Company.
social Media
Our social media presence
is a constant focus. The
importance of being able
to provide our customers
with a two-way channel for
communication cannot be
overstated. Additionally,
social media channels
such as Facebook give
us an avenue for cost-
effective advertising and
public relations. Sites like
Google+ help improve
search engine optimization
for the Company.
partnerships
Our sports partnerships
continue to grow with
our franchise. In 2014, we
added a few new faces
to our family of sports
relationships. We began
relationships with the Iowa
Cubs and the University
of Iowa. Both of these
great organizations allow
us to be active members
in our communities and
create important brand
awareness.
Marketing
Taking advantage of both
traditional and digital
marketing allows us to
target our efforts in unique
ways. Our Olympics
campaign included TV,
radio and Facebook ads,
along with a Facebook
contest and giveaways.
We’ve also had great
response rates to our
Pandora radio and Yahoo
mobile ads. With our
expanding footprint, we
can use multiple channels
to get the best return on
our advertising dollars in
each market.
expanding our
reach &
relationships
with our customers
through multiple
channels
9
we
doubled
our presence
in iowa
central iowa
& quad Cities
2014 was another year of aggressive growth
for our Company, headlined by the acquisition
of the former Valley Bank in an FDIC-assisted
transaction that helped to heighten our
presence in Iowa.
This acquisition supported our long-term
strategy of strengthening our presence across
the state of Iowa. Our footprint grew by
12 banking centers in the Des Moines and
Quad Cities markets of Iowa, the Quad Cities
market representing a community we hadn’t
previously served.
Entering the Quad Cities market represents
a great opportunity for the Company as it
is home to more than 27,000 businesses
including the John Deere world headquarters,
Alcoa and Kraft. It’s located in the heart of
the Midwest along the Mississippi River,
and is surrounded by 40 colleges and
universities within a 90-mile radius, including
12 community colleges, two public four-year
universities, two public satellite campuses and
24 private colleges. The region’s surroundings
and commitment to education, art and culture
make it a great place to do business.
10
expanding our
presence
where it counts
9 new
communities
23,000+
total new
households
sW Missouri
In January 2014, we entered into an agreement with Boulevard
Bank to purchase two of their branches in Neosho, Mo.,
and acquire certain deposit and loan relationships from its
branch in the St. Louis, Mo., area. The acquisition represented
approximately $92 million in deposits and $11 million in loans.
Neosho is a market our company has served for more than
20 years and this transaction allowed us to strengthen our
presence in this great community.
st. Louis metro
In June 2014, we opened our eighth full-service banking
center in the St. Louis metro market in the community of
Ferguson, Mo. The new facility serves customers six days a
week and is located in the northern region of the metropolitan
area where we lacked a presence. To lead the banking center,
we assembled a team of experienced, local bankers who
understand the needs of the community.
Go
hogs!
NW arkansas
Also in June 2014, we opened our second full-service
banking center in the burgeoning Northwest Arkansas
market. This banking center, located in Fayetteville
right down the road from the University of Arkansas,
serves customers six days a week. It, too, is led by a
team of local banking veterans.
11
do
Volunteerism comes in many forms and everyone’s role is
important in making a meaningful impact. Our bankers
are more than bankers. They’re mentors, board members,
advisors, committee members, educators and so much
more. We’re proud of our associates and the time and
energy they give to their community.
8,400+
volunteer hours
Walking dogs
at anmimal shelters
• organizing clothes
for foster children
• cleaning homes for
the elderly • being on
call for victims centers
• chaperoning prom for
special needs students •
preparing meals for the
homeless • hosting pajama
party for women’s shelter •
filling backpacks for kids
in need • serving breakfast
to veterans • donating
blood • walking to
fight cancer • serving
on nonprofit boards •
distributing clothes and
food to the homeless
• mentoring at risk
students • supporting
the local arts •
giving families a
bright holiday •
teaching
kids to
save
GIVING
BaCK
in ways that count
In early 2014, we created our Community Matters Program, a program
designed to serve as the foundation for our Company’s philosophy
of how we strengthen our communities by leading, doing, giving and
teaching.
These four initiatives represent the best ways in which we can effectively
serve all of our communities. It is our goal to make a meaningful impact
on these communities. We accomplish this by being active leaders in
improving our local economies, assisting our community partners in
meeting the needs of these communities through nonprofit donations,
encouraging our associates to volunteer in meaningful projects and
teaching financial education to children, teens, adults and seniors.
Banks play a vital role in the life of their communities. The engagement
of bankers at all levels is crucial to the strength and growth of vibrant
communities. After all, a bank can only be as strong as the communities
it serves.
2014 was a great year for our associates and the investments they made
into our communities. Our associates gave more than 8,400 hours of
documented volunteer time at more than 700 volunteer service events.
We also had more than 220 associates serve a nonprofit in a leadership
capacity and more than 430 different nonprofit organizations were
served by our volunteers. Our associates also donated more than
$51,000 to local and national nonprofits through our Community Matters
Casual Days, days in which associates are allowed to wear jeans for a
small donation.
Collectively, Great Southern Bank and its associates gave more than
$1,000,000 to local and national nonprofits in 2014, further solidifying our
focus on giving back in ways that count.
1212
220+
associates in
non-profit
leadership
roles
lead
We share a common goal
with other members of our
communities – the desire for
a strong, thriving economy.
Therefore, it makes sense to
invest in our communities to
bring more resources and
opportunities to impact local
people. We’re committed
to fostering growth and
long-term success, because
a thriving, strong economy
means more success for
everyone.
Inspiring others
As part of our Community Matters Program, we also introduced the Bill and Ann
Turner Distinguished Community Service Award. This annual award was named after
our chairman, Bill Turner, and his wife Ann, who have been instrumental in creating
a community-minded culture since joining the Company in 1974. Developed by our
associate-led Community Matters Team, the award emphasizes the importance placed
on volunteerism at Great Southern Bank by honoring one outstanding associate who
demonstrates excellence in volunteer service to their community.
Andrea Brady, the recipient of our inaugural Bill and Ann Turner Distinguished
Community Service Award, is pictured above being presented the award by our
Chairman, Bill Turner. Andrea’s relentless commitment to her community is truly
inspiring and the quality that impressed our judges the most. She is willing to do
anything for anyone, regardless of their circumstances or stature.
give
Through our Community
Matters Charitable Giving
Program, our company
donates hundreds of
thousands of dollars annually
to nonprofit organizations,
focusing primarily in areas
of education, health and
human services, community
and economic development,
arts and culture and our
partnership with United Way.
$85,000+
donated by our
associates
$1,000,000+
donated by
Great southern Bank
3,500+
students
learned to save
teach
We believe that banking and education go hand in
hand. From the first connection with our customers,
we are their financial educators. We listen to
their needs and guide them through options to
determine what works best for their financial lifestyle
and financial security. This education goes outside
the banking walls and into the community. Our
associates are lending their talents and expertise
in the community by volunteering to help children,
teens, adults, seniors and small businesses learn
about finance and money management.
13
directors
of Great southern
Bancorp, Inc. and
Great southern Bank
Back Row
douGlas M. pitt
Board Member
Business Owner and
Care To Learn Founder
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.
tammy
Baurichter
Controller
Kris Conley
Director of
Retail Banking
rex Copeland*
Chief Financial
Officer
debbie Flowers
Director of Credit
Risk Administration
doug Marrs*
Director of
Operations
Lin thomason*
Director of
Information Services
steve Mitchem*
Chief Lending
Officer
Bryan tiede
Director of Risk
Management
Kelly polonus
Director of
Communications
and Marketing
Matt snyder
Director of Human
Resources
Joe turner*
President and
Chief Executive
Officer
*Denotes Executive Officer
14
leadership
team
marking
an important
year
In 2014, we celebrated
our 25th year on
the NASDAQ Stock
Exchange. We’d like to
thank our shareholders,
associates, customers
and communities for
our continued growth
and success.
15
selected
Consolidated
Financial
data
Summary Statement of
Condition Information:
Assets
Loans receivable, net
Allowance for loan losses
Available-for-sale securities
Other real estate owned, 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
2014
2013
December 31,
2012
(Dollars in Thousands)
2011
2010
$3,951,334
3,053,427
38,435
365,506
45,838
2,990,840
514,014
419,745
361,802
2,784,106
3,824,493
3,007,588
402,670
217,877
108
$3,560,250
2,446,769
40,116
555,281
53,514
2,808,626
343,795
380,698
322,755
2,403,544
3,789,876
2,996,941
378,650
192,323
96
$3,955,182
2,346,467
40,649
807,010
68,874
3,153,193
391,114
369,874
311,931
2,326,273
4,005,613
3,199,683
352,282
197,733
107
$3,790,012
2,153,081
41,232
875,411
67,621
2,963,539
485,853
324,587
266,644
2,007,914
3,496,860
2,671,710
316,486
189,288
104
$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
The tables on pages 16, 17, and 18 set forth selected consolidated financial information
and other financial data of the Company. The selected statement of condition and
statement of operations data, insofar as they relate to the years ended December
31, 2014, 2013, 2012, 2011 and 2010, 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.
16
selected
Consolidated
Financial
data
2014
2013
2012
2011
2010
December 31,
(Dollars in Thousands)
Summary Statement of
Condition Information:
Assets
Loans receivable, net
Allowance for loan losses
Available-for-sale securities
Other real estate owned, 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
$3,951,334
3,053,427
38,435
365,506
45,838
2,990,840
514,014
419,745
361,802
2,784,106
3,824,493
3,007,588
402,670
217,877
108
$3,560,250
2,446,769
40,116
555,281
53,514
2,808,626
343,795
380,698
322,755
2,403,544
3,789,876
2,996,941
378,650
192,323
96
$3,955,182
2,346,467
40,649
807,010
68,874
3,153,193
391,114
369,874
311,931
2,326,273
4,005,613
3,199,683
352,282
197,733
107
$3,790,012
2,153,081
41,232
875,411
67,621
2,963,539
485,853
324,587
266,644
2,007,914
3,496,860
2,671,710
316,486
189,288
104
$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
The tables on pages 16, 17, and 18 set forth selected consolidated financial information
and other financial data of the Company. The selected statement of condition and
statement of operations data, insofar as they relate to the years ended December
31, 2014, 2013, 2012, 2011 and 2010, 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.
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 on sales of
available-for-sale securities
Recognized impairment of available-for-sale securities
Late charges and fees on loans
Gain (loss) on derivative interest rate products
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
Partnership tax credit
Other operating expenses
Income from continuing operations
before income taxes
Provision for income taxes
Net income from continuing operations
Discontinued Operations
2014
For the Year Ended December 31,
2012
2011
(In Thousands)
2013
2010
$ 172,569 $ 163,903
14,892
178,795
10,793
183,362
$ 170,163
23,345
193,508
$ 171,201 $ 145,832
27,359
173,191
27,466
198,667
11,225
2,910
1,099
567
15,801
167,561
4,151
163,410
12,346
3,972
2,324
561
19,203
159,592
17,386
142,206
20,720
4,430
2,610
617
28,377
165,131
43,863
121,268
26,370
5,242
2,965
569
35,146
163,521
35,336
128,185
38,427
5,516
3,329
578
47,850
125,341
35,630
89,711
1,163
19,075
4,133
2,139
–
1,400
(345)
10,805
1,065
18,227
4,915
243
–
1,264
295
–
1,036
19,087
5,505
2,666
(680)
1,028
(38)
31,312
(27,868)
4,229
14,731
(25,260)
4,566
5,315
(18,693)
4,779
46,002
56,032
23,541
3,578
3,837
2,404
1,464
2,866
3,957
5,636
1,720
15,824
120,859
52,468
20,658
3,315
4,189
2,165
1,303
2,868
4,348
4,068
2,108
8,128
105,618
51,262
20,179
3,301
4,476
1,572
1,389
2,768
4,323
8,748
1,825
8,760
108,603
57,282
13,753
43,529
41,903
8,174
33,729
58,667
14,580
44,087
896
18,063
3,524
483
(615)
651
(10)
16,486
(37,797)
2,450
4,131
43,606
15,220
3,096
4,840
1,316
1,268
2,270
3,803
11,846
2,035
6,226
95,526
36,790
7,133
29,657
767
18,652
3,765
8,787
–
767
–
–
(10,427)
2,018
24,329
39,908
13,480
3,231
4,463
1,754
1,447
2,158
2,832
4,914
161
6,723
81,071
32,969
9,669
23,300
Income from discontinued operations, net of income taxes
Net income
Preferred stock dividends and discount accretion
Non-cash deemed preferred stock dividend
Net income available to common shareholders
–
43,529
579
–
–
33,729
579
–
$ 42,950 $ 33,150
4,619
48,706
608
–
$ 48,098
612
30,269
2,798
1,212
565
23,865
3,403
–
$ 26,259 $ 20,462
16
17
selected
Consolidated
Financial
data
2014
Per Common Share Data:
Basic earnings per common share
Diluted earnings per common share
Diluted earnings from continuing operations 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(7)
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 (9):
Including deposit interest
Excluding deposit interest
At and For the Year Ended December 31,
2012
2011
(Number of shares in thousands)
2013
$ 3.14
3.10
$ 2.43
2.42
$ 3.55
3.54
3.10
0.80
26.30
13,700
13,755
13,876
2.42
0.72
23.60
13,635
13,674
13,715
3.20
0.72
22.94
13,534
13,596
13,592
$ 1.95
1.93
1.89
0.72
19.78
13,462
13,480
13,626
1.14%
0.89%
1.22%
0.87%
12.63
0.39
3.16
4.74
3.86
4.84
66.30
2.77
25.81
10.52
0.14
2.79
4.60
3.88
4.70
64.05
2.66
29.75
16.55
1.49
2.71
4.53
3.57
4.61
51.44
1.56
20.34
11.67
0.35
2.73
5.06
3.68
5.17
56.98
2.61
37.31
1.34%
1.39
471.77
0.24
1.11
0.26
1.92%
2.46
201.53
0.91
1.74
0.80
2.21%
2.98
180.84
2.43
1.84
0.94
2.33%
3.31
149.95
2.09
1.96
1.25
2010
$ 1.52
1.46
1.42
0.72
18.40
13,434
13,454
14,046
0.68%
9.42
0.91
2.30
3.81
3.81
3.93
54.17
1.61
49.32
2.48%
3.93
141.02
2.05
2.30
1.52
102.09%
87.12%
74.42%
72.65%
73.17%
120.95
116.03
110.12
110.55
108.22
9.0%
9.0
8.5%
8.9
7.4%
7.7
7.4%
6.9
7.2%
7.1
13.3
14.5
11.1
11.4
12.6
9.5
15.6
16.9
11.3
14.2
15.4
10.2
15.7
16.9
9.5
14.7
15.9
8.9
14.8
16.1
9.2
14.1
15.3
8.6
16.8
18.0
9.5
14.6
15.8
8.3
4.41x
11.59x
3.07x
6.44x
3.22x
8.66x
1.82x
3.38x
1.55x
3.04x
(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) Cash dividends per common share divided by earnings per common
share.
(8) Excludes assets covered by FDIC loss sharing agreements.
(9) 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.
18
2014 Financial Information
201
1 Financial Information
Contents
20 Management’s Discussion and Analysis of Financial Condition
4
1 Management’s Discussion and Analysis of Financial Condition
and Results of Operation.
and Results of Operations.
56 Report of Independent Registered Public Accounting Firm.
50 Report of Independent Registered Public Accounting Firm.
57 Consolidated Statements of Financial Condition.
51 Consolidated Statements of Financial Condition.
59 Consolidated Statements of Income.
53 Consolidated Statements of Income.
61 Consolidated Statements of Comprehensive Income.
54 Consolidated Statements of Stockholders’ Equity.
56 Consolidated Statements of Cash Flows.
62 Consolidated Statements of Stockholders’ Equity.
59 Notes to Consolidated Financial Statements.
64 Consolidated Statements of Cash Flows.
67 Notes to Consolidated Financial Statements.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Forward-looking Statements
When used in this Annual Report and in other documents filed or furnished 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) non-interest expense reductions from Great Southern’s banking center consolidations might be less
than anticipated and the costs of the consolidation and impairment of the value of the affected premises might be greater than
expected; (ii) expected cost savings, synergies and other benefits from the Company’s merger and acquisition activities, including but
not limited to the recently completed Valley Bank FDIC-assisted transaction, 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; (iii) changes in economic conditions, either nationally or in the Company’s market areas; (iv) fluctuations in
interest rates; (v) 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; (vi) the possibility of other-than-temporary
impairments of securities held in the Company’s securities portfolio; (vii) the Company’s ability to access cost-effective funding;
(viii) fluctuations in real estate values and both residential and commercial real estate market conditions; (ix) demand for loans and
deposits in the Company’s market areas; (x) legislative or regulatory changes that adversely affect the Company’s business, including,
without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act and its implementing regulations, and the
overdraft protection regulations and customers’ responses thereto; (xi) monetary and fiscal policies of the Board of Governors of the
Federal Reserve System (the “Federal Reserve Board or the FRB”) and the U.S. Government and other governmental initiatives
affecting the financial services industry; (xii) results of examinations of the Company and Great Southern by their regulators,
including the possibility that the regulators may, among other things, require the Company to increase its allowance for loan losses or
to write-down assets; (xiii) the uncertainties arising from the Company’s participation in the Small Business Lending Fund program,
including uncertainties concerning the potential future 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; (xiv) costs and effects of
litigation, including settlements and judgments; and (xv) competition. The Company wishes to advise readers that the factors listed
above and other risks described from time to time in documents filed or furnished by the Company with the SEC 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, among other things, 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 which 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.
20
Additional discussion of the allowance for loan losses is included in the Company’s 2014 Annual Report on Form 10-K under "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. In the fourth quarter of 2014, the Company began using a three-year average of historical losses for the
general component of the allowance for loan loss calculation. The Company had previously used a five-year average. The Company
believes that the three-year average provides a better representation of the current risks in the loan portfolio. This change was made
after consultation with our regulators and third-party consultants, as well as a review of the practices used by the Company’s peers.
No other significant changes were made to management's overall methodology for evaluating the allowance for loan losses during the
periods presented in the financial statements of this report.
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 the financial statements, resulting in losses that could adversely impact earnings in future periods.
Carrying Value of Loans Acquired in FDIC-assisted Transactions and Indemnification Asset
The Company considers that the determination of the carrying value of loans acquired in the 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, 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 certain of these assets, the Company should not incur any
significant losses related to these assets. 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 4 of the accompanying audited financial statements
for additional information regarding the TeamBank, Vantus Bank, Sun Security Bank, InterBank and Valley Bank FDIC-assisted
transactions.
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,
2014, the Company has one reporting unit to which goodwill has been allocated – 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 of those assets to their carrying values. At December 31, 2014, goodwill consisted of $1.2 million at the Bank reporting unit.
Goodwill increased $790,000 during 2014, due to the acquisition of certain loans, deposits and other assets of Boulevard Bank. Other
identifiable intangible assets that are subject to amortization are amortized on a straight-line basis over a period of seven years. At
December 31, 2014, the amortizable intangible assets consisted of core deposit intangibles of $6.3 million, including $2.6 million
related to the Valley Bank transaction in June 2014 and $763,000 related to the Boulevard Bank transaction in March 2014. 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 unit. 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.
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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, 2014. While the Company believes no impairment existed at December 31, 2014, different conditions or
assumptions used to measure fair value of the reporting unit, or changes in cash flows or profitability, if significantly negative or
unfavorable, could have a material adverse effect on the outcome of the Company’s impairment evaluation in the future.
Current Economic Conditions
Changes in economic conditions could cause the values of assets and liabilities recorded in the financial statements to 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.
The previous economic downturn elevated unemployment levels and negatively impacted consumer confidence. It also had a
detrimental impact on industry-wide performance nationally as well as the Company's Midwest market areas. Since 2012,
improvement in several economic indicators have been noted, including increasing consumer confidence levels, increased economic
activity and a continued decline in unemployment levels.
The national unemployment rate declined from 6.7% as of December 2013 to 5.6% in December 2014. In 2014, job growth averaged
246,000 per month, compared to an average monthly gain of 194,000 in 2013. Unemployment levels in our market areas decreased
during 2014 in all states in which the Company has offices, with all but one state at unemployment levels lower than the National
unemployment rate. Unemployment rates at December 31, 2014 were: Missouri at 5.4%, Arkansas at 5.7%, Kansas at 4.2%, Iowa at
4.1%, Nebraska at 2.9%, Minnesota at 3.6%, Oklahoma at 4.2% and Texas at 4.6%. Three out of these eight states had unemployment
rates among the ten lowest in the country. Of the metropolitan areas in which Great Southern Bank does business, the St. Louis
market area continues to carry the highest level of unemployment at 5.6%, which is an improvement over the 6.5% rate reported as of
December 2013. The unemployment rate at 4.3% for the Springfield market area was below the national and state average for
December 2014. Metropolitan areas in Iowa, Nebraska and Minneapolis boasted unemployment levels ranging from 3.2% - 4.2%,
ranking them among the lowest unemployment levels in the nation.
Sales of newly built, single-family homes were at a seasonally adjusted annual rate of 481,000 units in December 2014, according to
the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. This level compares favorably to the level at
December 2013. The median sales price of new houses sold in December 2014 was $298,100, with an average sale price of $377,800.
The seasonally adjusted estimate of new houses for sale at the end of December 2014 was 219,000, which represented a supply of 5.5
months at the sales rate at that time. An estimated 435,000 new homes were sold in 2014, which is 1.2% above the 2013 level of
429,000. Foreclosure filings have decreased to their lowest level since 2007. Building permits have increased across our market areas.
However, builders continue to be constrained by tighter credit conditions for home buyers and a limited supply of labor and buildable
lots.
The performance of commercial real estate markets also improved substantially in the Company’s market areas as shown by increased
real estate sales activity and financing of those activities. According to real estate services firm CoStar Group, retail, office and
industrial types of commercial real estate properties continue to show improvement in occupancy, absorption and rental income both
nationally and in our market areas.
While current economic indicators for the Midwest show improvement in employment, housing starts and prices, commercial real
estate occupancy, absorption and rental income, Bank management will continue to closely monitor regional, national and global
economic conditions as these could have significant impacts on our market areas.
General
The profitability of the Company and, more specifically, the profitability of its primary subsidiary, 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, 2014, Great Southern's total assets increased $391.1 million, or 11.0%, from $3.56 billion at
December 31, 2013, to $3.95 billion at December 31, 2014. Full details of the current year changes in total assets are provided in the
“Comparison of Financial Condition at December 31, 2014 and December 31, 2013” section of this Annual Report.
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Loans. In the year ended December 31, 2014, Great Southern's net loans increased $599.3 million, or 24.6%, from $2.44 billion at
December 31, 2013, to $3.04 billion at December 31, 2014. Partially offsetting the increases in loans were decreases of $49.6 million
in the FDIC-covered loan portfolios. The net carrying value of the loans acquired in the Valley Bank transaction (acquired non-
covered loans) was $122.0 million at December 31, 2014, down from $165.1 million at the acquisition date of June 20, 2014.
Excluding acquired covered loans, acquired non-covered loans and mortgage loans held for sale, total loans increased $525.5 million
from December 31, 2013 to December 31, 2014, with increases in almost all loan types. The increase was primarily due to loan
growth in our existing banking center network, as well as loans originated through our new commercial loan production offices in
Tulsa, Okla., and Dallas, Texas. As loan demand is affected by a variety of factors, including general economic conditions, and
because of the competition we face and our focus on pricing discipline and credit quality, we cannot be assured that our loan growth
will match or exceed the level of increases achieved in 2014 or prior years. The Company's strategy continues to be focused on
maintaining credit risk and interest rate risk at appropriate levels.
Loan growth has occurred in most loan types and has come from most of Great Southern’s primary lending locations, including
Springfield, St. Louis, Kansas City, Des Moines, Omaha and Minneapolis. The lending offices in Dallas and Tulsa have now been
open for several months and are generating new loans as well. Net loan balances have increased primarily in the areas of commercial
real estate, commercial construction and consumer loans. Generally, the Company considers these types of loans to involve a higher
degree of risk compared to some other types of loans, such as first mortgage loans on one- to four-family, owner-occupied residential
properties, and has established certain minimum underwriting standards to help assure portfolio quality. For commercial real estate
and construction loans, these standards and procedures include, but are not limited to, an analysis of the borrower’s financial condition,
collateral, repayment ability, verification of liquid assets and credit history as required by loan type. In addition, geographic diversity
of collateral, lower loan-to-value ratios and limitations on speculative construction projects help to mitigate overall risk in these loans.
It has been, and continues to be, Great Southern’s practice to verify information from potential borrowers regarding assets, income or
payment ability and credit ratings as applicable and as required by the authority approving the loan. Underwriting standards also
include loan-to-value ratios which vary depending on collateral type, debt service coverage ratios or debt payment to income ratios,
where applicable, credit histories, use of guaranties and other recommended terms relating to equity requirements, amortization, and
maturity. Great Southern’s loan committee reviews and approves all new loan originations in excess of lender approval authorities.
Consumer loans are primarily secured by new and used motor vehicles and these loans are also subject to certain minimum
underwriting standards to assure portfolio quality. Great Southern’s consumer underwriting and pricing standards have been fairly
consistent over the past several years. The underwriting standards employed by Great Southern for consumer loans include a
determination of the applicant's payment history on other debts, credit scores, employment history and an assessment of ability to meet
existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is of primary consideration, the
underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount.
Of the total loan portfolio at December 31, 2014 and 2013, 74.1% and 76.0%, respectively, was secured by real estate, as this is the
Bank’s primary focus in its lending efforts. At December 31, 2014 and 2013, commercial real estate and commercial construction
loans were 40.7% and 39.5% of the Bank’s total loan portfolio (excluding loans acquired through FDIC-assisted transactions),
respectively. Commercial real estate and commercial construction loans generally afford the Bank an opportunity to increase the yield
on, and the proportion of interest rate sensitive loans in its portfolio. They do, however, present somewhat greater risk to the Bank
because they may be more adversely affected by conditions in the real estate markets or in the economy generally. At December 31,
2014 and 2013, loans made in the Springfield, Mo. metropolitan statistical area (Springfield MSA) were 17% and 20% of the Bank’s
total loan portfolio (excluding loans acquired through FDIC-assisted transactions), respectively. The Company’s headquarters are
located in Springfield and we have operated in this market since 1923. Because of our large presence and experience in the
Springfield MSA, many lending opportunities exist. However, if the economic conditions of the Springfield MSA were worse than
those of other market areas in which we operate or the national economy overall, the performance of these loans could decline
comparatively. At December 31, 2014 and 2013, loans made in the St. Louis, Mo. metropolitan statistical area (St. Louis MSA) were
20% and 20% of the Bank’s total loan portfolio (excluding loans acquired through FDIC-assisted transactions), respectively. The
Company’s expansion into the St. Louis MSA beginning in May 2009 provided an opportunity to not only expand its markets and
provide diversification from the Springfield MSA, but also provided access to a larger economy with increased lending opportunities
despite higher levels of competition. Loans made in the St. Louis MSA are primarily commercial real estate, commercial business and
multi-family residential loans which are less likely to be impacted by the higher levels of unemployment rates, as mentioned above
under “Current Economic Conditions,” than if the focus were on one- to four-family residential and consumer loans. For further
discussions of the Bank’s loan portfolio, and specifically, commercial real estate and commercial construction loans, see “Item 1.
Business – Lending Activities” in the Company’s 2014 Annual Report on Form 10-K.
The percentage of fixed-rate loans in our loan portfolio has increased from 44% as of December 31, 2010 to 55% as of December 31,
2014 due to customer preference for fixed rate loans during this period of low interest rates. Of the total amount of fixed rate loans in
our portfolio as of December 31, 2014, 99% mature within one to five years and therefore are not considered to create significant
long-term interest rate risk for the Company. Fixed rate loans make up only a portion of our balance sheet and our overall interest rate
risk strategy. As of December 31, 2014, our interest rate risk models indicated a one-year interest rate earnings sensitivity position
that is fairly neutral. For further discussion of our interest rate sensitivity gap and the processes used to manage our exposure to
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interest rate risk, see “Quantitative and Qualitative Disclosures About Market Risk – How We Measure the Risks to Us Associated
with Interest Rate Changes” section of this Annual Report. For discussion of the risk factors associated with interest rate changes, see
“Item 1A. Risk Factors – Risks Relating to the Company and the Bank – We may be adversely affected by interest rate changes”
included in the Company’s 2014 Annual Report on Form 10-K.
While our policy allows us to lend up to 95% of the appraised value on one-to four-family residential properties, originations of loans
with loan-to-value ratios at that level are minimal. When they are made at those levels, private mortgage insurance is typically
required for loan amounts above the 80% level unless our analyses determined minimal risk to be involved, and therefore these loans
are not considered to have more risk to us than other residential loans. We consider these lending practices to be consistent with or
more conservative than what we believe to be the norm for banks our size. At December 31, 2014 and December 31, 2013, an
estimated 0.3% and 0.4%, respectively, of total owner occupied one- to four-family residential loans had loan-to-value ratios above
100% at origination. At December 31, 2014 and December 31, 2013, an estimated 1.8% and 0.5%, respectively, of total non-owner
occupied one- to four-family residential loans had loan-to-value ratios above 100% at origination.
At December 31, 2014, troubled debt restructurings totaled $47.6 million, or 1.5% of total loans, down $6.5 million from $54.1
million, or 2.3% of total loans, at December 31, 2013. The amount of troubled debt restructurings has remained relatively stable since
2011. Concessions granted to borrowers experiencing financial difficulties may include a reduction in the interest rate on the loan,
payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. During the year ended
December 31, 2014, five loans totaling $1.7 million were each restructured into multiple new loans. During the year ended December
31, 2013, four loans totaling $3.5 million were each restructured into multiple new loans. For further information on troubled debt
restructurings, see Note 3 of the accompanying audited financial statements.
The loss sharing agreements with the FDIC are subject to limitations on the types of losses covered and the length of time losses are
covered, and are conditioned upon the Bank complying with its requirements in the agreements with the FDIC, including requirements
regarding servicing and other loan administration matters. The loss sharing agreements extend for ten years for single family real
estate loans and for five years for other loans. At December 31, 2014, approximately four years remained on the loss sharing
agreement for single family real estate loans acquired from TeamBank and the remaining loans had an estimated average life of two to
ten years. At December 31, 2014, approximately four and one half years remained on the loss sharing agreement for single family real
estate loans acquired from Vantus Bank and the remaining loans had an estimated average life of three to twelve years. At December
31, 2014, approximately seven years remained on the loss sharing agreement for single family real estate loans acquired from Sun
Security Bank and the remaining loans had an estimated average life of five to twelve years. At December 31, 2014, approximately
seven and one half years remained on the loss sharing agreement for single family real estate loans acquired from InterBank and the
remaining loans had an estimated average life of six to thirteen years. The loss sharing agreement for non-single-family loans
acquired from TeamBank ended on March 31, 2014. Any additional losses in the non-single-family TeamBank portfolio are not
eligible for loss sharing coverage. The remaining loans in the portfolio had an estimated average life of two to seven years and had a
carrying value of $26.9 million at December 31, 2014. The loss sharing agreement for non-single-family loans acquired from Vantus
Bank ended on September 30, 2014. Any additional losses in the non-single-family Vantus Bank portfolio are not eligible for loss
sharing coverage. The remaining loans in the portfolio had an estimated average life of one to seven years and had a carrying value of
$23.1 million at December 31, 2014. At December 31, 2014, approximately two years remained on the loss sharing agreement for
non-single-family loans acquired from Sun Security Bank and the remaining loans had an estimated average life of two years. At
December 31, 2014, approximately two and one half years remained on the loss sharing agreement for non-single-family loans
acquired from InterBank and the remaining loans had an estimated average life of one to three years. While the expected repayments
for certain of the acquired loans extend beyond the terms of the loss sharing agreements, the Bank has identified and will continue to
identify problem loans and will make every effort to resolve them within the time limits of the agreements. The Company may sell
any loans remaining at the end of the loss sharing agreement subject to the approval of the FDIC. Loans that were acquired through
FDIC-assisted transactions, which are accounted for in pools, are currently included in the analysis and estimation of the allowance for
loan losses. If expected cash flows to be received on any given pool of loans decreases from previous estimates, then a determination
is made as to whether the loan pool should be charged down or the allowance for loan losses should be increased (through a provision
for loan losses). This is true of all acquired loan pools regardless of whether or not they are covered by loss sharing agreements. If a
charge down occurs to a loan pool that is covered by a loss sharing agreement, the full amount of the charge down will be reflected in
the allowance for loan losses and a separate asset will be recorded for the amount to be recovered from the FDIC. The loss sharing
agreements and their related limitations are described in detail in Note 4 of the accompanying audited financial statements. For
acquired loan pools that currently are not covered by loss sharing agreements, the Company may allocate, and at December 31, 2014,
has allocated, a portion of its allowance for loan losses related to these loan pools in a manner similar to how it allocates its allowance
for loan losses to those loans which are collectively evaluated for impairment.
The level of non-performing loans and foreclosed assets affects our net interest income and net income. 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.
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Available-for-sale Securities. In the year ended December 31, 2014, available-for-sale securities decreased $189.8 million, or 34.2%,
from $555.3 million at December 31, 2013, to $365.5 million at December 31, 2014. The decrease was primarily due to the sale of the
Company’s Small Business Administration loan pool securities, other mortgage-backed securities and certain municipal securities
during the period, and normal monthly payments received related to the portfolio of mortgage-backed securities. The Small Business
Administration securities were sold at a gain of $569,000. The Valley Bank securities acquired in June 2014 were sold in July 2014 at
a gain of approximately $175,000.
Cash and Cash Equivalents. Cash and cash equivalents totaled $218.6 million at December 31, 2014, a decrease of $9.3 million, or
4.1%, from $227.9 million at December 31, 2013. The decrease in cash and cash equivalents was primarily due to the repayment of
$130 million of FHLBank advances and structured repurchase agreements and the origination of new loans. Offsetting these decreases
were increases of $109 million of cash and cash equivalents received in the Valley Bank FDIC-assisted acquisition in June 2014, $80
million of cash received related to the Boulevard Bank transaction in March 2014, and proceeds received from the sale of certain of
the Company’s investment securities.
Other Real Estate Owned. Other real estate owned totaled $45.8 million at December 31, 2014, a decrease of $7.7 million, or 14.3%,
from $53.5 million at December 31, 2013. Of the total at December 31, 2014, $42.9 million was foreclosed assets and $2.9 million
was other real estate owned not acquired through foreclosure, which is made up 13 properties. Eleven of these properties were branch
locations that have been closed and are held for sale and two of these are land which was acquired for potential branch locations.
Foreclosed assets, excluding those related to assets that are part of FDIC-assisted transactions, decreased from $42.1 million, or 1.2%
of total assets, at December 31, 2013 to $35.5 million, or 0.9% of total assets, at December 31, 2014. The Company’s foreclosed
assets began increasing as the United States economy slowed due to a severe economic recession in 2008 and 2009, and continued to
increase through 2012. During 2014, the Company’s foreclosed assets decreased primarily in the areas of subdivision and commercial
construction, multi-family residential and commercial real estate, partially offset by increases in one- to four-family residential. See
“Non-performing Assets – Foreclosed Assets” for additional information on the Company’s foreclosed assets.
Deposits. 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 FHLBank advances and other borrowings, to
meet loan demand or otherwise fund its activities. In the year ended December 31, 2014, total deposit balances increased $182.2
million, or 6.5%. Approximately $366 million of deposits were acquired in the FDIC-assisted acquisition of Valley Bank in June
2014. Approximately $92 million of deposits were acquired in the Boulevard Bank transaction in March 2014. Transaction account
balances increased $78.7 million, while retail certificates of deposit increased $56.3 million. Great Southern Bank customer deposits
totaling $23.7 million and $76.3 million, at December 31, 2014 and December 31, 2013, 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. Brokered deposits were $150.0 million at December 31, 2014, an increase of $100.0 million from $50.0 million at
December 31, 2013. The Company elected to increase brokered deposits to fund a portion of its loan growth during the period.
Our deposit balances may fluctuate from time to time depending on customer preferences and our relative need for funding. We do
not consider our retail certificates of deposit to be guaranteed long-term funding because customers can withdraw their funds at any
time with minimal interest penalty. When loan demand trends upward, we can increase rates paid on deposits to increase deposit
balances and utilize brokered deposits to provide additional funding. Because the Federal Funds rate is already very low, there may 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 low interest rate environment, although interest rates on assets may decline further. The level of competition for deposits in
our markets is high. While it is our goal to gain deposit market share, particularly checking accounts, in our branch footprint, we
cannot be assured of this in future periods. In addition, while we have been generally lowering our deposit rates over the past several
years, increasing rates paid on deposits can attract deposits if needed. However, this could negatively impact the Company’s net
interest margin.
Our ability to fund growth in future periods may also depend 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 either fixed or
variable rate funding, as desired, which more closely matches the interest 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 could have a material adverse effect on our business, financial condition and results
of operations.
Net Interest Income and Interest Rate Risk Management. Our net interest income may be affected positively or negatively by
changes in market interest rates. A portion of our loan portfolio is tied to the "prime rate" 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
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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 4 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 changed
interest rates on December 16, 2008. Great Southern has a significant portfolio of loans which are tied to a "prime rate" of interest.
Most of these loans are tied to some national index of "prime," while some 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 and pay higher
rates on borrowings. The impact of the low rate environment on our net interest margin in future periods is expected to be fairly
neutral. As our time deposits mature in future periods, we may be able to reduce rates somewhat as they renew. However, any margin
gained by these rate reductions is likely to be offset by reduced yields from our investment securities and our existing loan portfolio as
payments are made and the proceeds are potentially reinvested at lower rates. Interest rates on adjustable rate loans may reset lower
according to their contractual terms and new loans may be originated at lower market rates. For further discussion of the processes
used to manage our exposure to interest rate risk, see “Quantitative and Qualitative Disclosures About Market Risk – How We
Measure the Risks to Us Associated with Interest Rate Changes.”
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, 2014, the Company had a portfolio (excluding the loans acquired in the FDIC-assisted
transactions) of prime-based loans totaling approximately $534 million with rates that change immediately with changes to the prime
rate of interest. Of this total, $484 million also had interest rate floors. These floors were at varying rates, with $15 million of these
loans having floor rates of 7.0% or greater and another $229 million of these loans having floor rates between 5.0% and 7.0%. In
addition, $240 million of these loans have floor rates between 2.75% and 5.0%. At December 31, 2014, all of these loans were at their
floor rates. The loan yield for the total loan portfolio was approximately 141 basis points, 185 basis points and 214 basis points higher
than the national "prime rate of interest" at December 31, 2014, 2013 and 2012, respectively, partly because of these interest rate
floors. 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.
Non-Interest Income and Operating Expenses. 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, 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 2014, 2012, 2011 and 2009, non-interest income was also
affected by the gains recognized on the FDIC-assisted transactions. In 2014, 2013 and 2012, 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 derivative activities, if the Company chooses to implement derivatives. 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. Details of the current period changes in non-interest income and non-interest expense are provided under
“Results of Operations and Comparison for the Years Ended December 31, 2014 and 2013.”
Business Initiatives
The Company completed several initiatives to expand and enhance the franchise in 2014.
Commercial loan production offices were opened in Tulsa, Okla., and Dallas, Texas, in February 2014. The Tulsa office is located in
southeast Tulsa at 4200 E. Skelly Dr. and the Dallas office is in Preston Center (north Dallas) at 8201 Preston Rd. Managed by
experienced lenders with local market knowledge, the offices provide a wide variety of commercial lending services including fixed
26
and variable-rate commercial real estate loans for new and existing property. Competitive commercial construction and portfolio
financing are also available.
In March 2014, Great Southern completed the acquisitions of certain loan and depository accounts and two branches in Neosho, Mo.,
and certain depository and loan customers serviced in St. Louis, Mo., from Neosho, Mo.-based Boulevard Bank. The combined
Neosho and St. Louis transactions represented approximately $92 million in deposits and $11 million in loans. In June 2014, the loan
and deposit accounts of the affected former Boulevard Bank customers were converted to Great Southern’s operating systems,
allowing these customers to bank at any of Great Southern Bank’s retail banking centers or through Great Southern’s various
electronic channels. Related to this acquisition, the Bank consolidated its legacy Great Southern Neosho office into the former
Boulevard Bank branch directly across the street.
In June 2014, Great Southern Bank entered into a purchase and assumption agreement (with no loss sharing agreement) with the
Federal Deposit Insurance Corporation to acquire certain loans and other assets and assume all of the deposits of Valley Bank, a full-
service bank headquartered in Moline, Ill., with significant operations in Iowa. At the time of this acquisition, Valley Bank operated
13 locations – six locations in the Quad Cities market area and seven in central Iowa, primarily in the Des Moines market area. The
acquisition provided the Company a new entry into the Quad Cities market and enhanced its presence in the Des Moines region. In
September 2014, two former Valley Bank locations were closed – one in Moline, Ill., and one in Altoona, Iowa. A new banking center
in Ames, Iowa, opened for business in October 2014, replacing the leased former Valley Banking office in that market. The Company
converted the Valley Bank operational systems into Great Southern’s systems on October 24, 2014, enabling all Great Southern and
former Valley Bank customers to conduct business at any banking center throughout the Great Southern six-state retail franchise.
Upon completion of the operational conversion, back office operations were consolidated.
Also in June 2014, two new banking centers were opened. A banking center began operating in Fayetteville, Ark., a part of the
Northwest Arkansas region and home to the University of Arkansas. This opening represented the second office in Northwest
Arkansas, the other being located in nearby Rogers, Ark. A new full-service office was also opened in Ferguson, Mo., representing
the eighth banking center in the St. Louis metropolitan area.
In September 2014, the Company closed two banking centers - one each in Lamar, Mo., and Johnston, Iowa. Both of these offices
were leased and were underutilized. Customer accounts have been moved to other Great Southern locations.
Construction of a full-service banking center in Columbia, Mo., home of the University of Missouri, is underway. The new banking
center site is located at 3200 S. Providence Road and is expected to be open late in the first quarter of 2015.
In mid-2014, the Company purchased a 20,000-square-foot former bank office building in Leawood, Johnson County, Kan., a suburb
of the Kansas City metropolitan market area. Scheduled to be open for business in mid-2015, the office will house the Kansas City
commercial lending group, currently located in nearby Overland Park, Kan., and a retail banking center. Additional space in the
building is leased to tenants unrelated to the Company.
To enhance customer service, the Company completed the implementation of “instant issue” debit card technology in its banking
center network in the fourth quarter of 2014. Customers can now conveniently receive a fully-activated debit card at the time of their
visit at all 108 banking centers.
Effect of Federal Laws and Regulations
General. Federal legislation and regulation significantly affect the 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 banking organizations 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.
Significant 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,
centralize responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, with
broad rulemaking authority for a wide range of consumer protection laws that apply to all banks, require new capital rules (discussed
below), 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 to examine the Company and its non-bank subsidiaries.
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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.
A provision of the Dodd-Frank Act, commonly referred to as the “Durbin Amendment,” directed the FRB to analyze the debit card
payments system and fix the interchange rates based upon their estimate of actual costs. The FRB has established the interchange rate
for all debit transactions for issuers with over $10 billion in assets at $0.21 per transaction. An additional five basis points of the
transaction amount and an additional $0.01 may be collected by the issuer for fraud prevention and recovery, provided the issuer
performs certain actions. Although the Bank is currently exempt from the provisions of the rule on the basis of asset size, there is
some uncertainty about the long-term impact there will be on the interchange rates for issuers below the $10 billion level of assets.
New Capital Rules. The federal banking agencies have adopted new regulatory capital rules that substantially amend the risk-based
capital rules applicable to the Bank and the Company. The new rules implement the “Basel III” regulatory capital reforms and changes
required by the Dodd-Frank Act. “Basel III” refers to various documents released by the Basel Committee on Banking Supervision.
For the Company and the Bank, the general effective date of the new rules is January 1, 2015, and, for certain provisions, various
phase-in periods and later effective dates apply. The chief features of the new rules are summarized below.
The new rules refine the definitions of what constitutes regulatory capital and add a new regulatory capital element, common equity
Tier 1 capital. The minimum capital ratios are (i) a common equity Tier 1 risk-based capital ratio of 4.5%; (ii) a Tier 1 risk-based
capital ratio of 6%; (iii) a total risk-based capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. In addition to the minimum
capital ratios, the new rules include a capital conservation buffer, under which a banking organization must have capital more than
2.5% above each of its minimum risk-based capital ratios in order to avoid restrictions on paying dividends, repurchasing shares, and
paying certain discretionary bonuses.
Effective January 1, 2015, the new rules also revised the prompt corrective action framework, which is designed to place restrictions
on insured depository institutions if their capital levels show signs of weakness. Under the new prompt corrective action requirements,
insured depository institutions are required to meet the following in order to qualify as “well capitalized:” (i) a common equity Tier 1
risk-based capital ratio of at least 6.5%; (ii) a Tier 1 risk-based capital ratio of at least 8%; (iii) a total risk-based capital ratio of at
least 10%; and (iv) a Tier 1 leverage ratio of 5%.
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, 2014 and December 31, 2013
During the year ended December 31, 2014, total assets increased by $391.1 million to $3.95 billion. The increase was primarily
attributable to an increase in loans, with smaller increases in premises and equipment and FHLBank stock. These increases were due
to growth of the Company’s loan portfolio through significant loan originations in 2014 as well as the FDIC-assisted acquisition of
Valley Bank, which accounted for a portion of the increase in loans and most of the increase in premises and equipment. The
Company’s required FHLBank stock holdings increased as a result of its higher usage of FHLBank advances. Partially offsetting
these increases were declines in the balances of available-for-sale-securities and the FDIC indemnification asset. The Company chose
to sell certain investment securities during 2014 and also elected to not reinvest the monthly repayments received on mortgage-backed
securities in new investment securities. Some of the proceeds were used to fund loan growth, including acquisitions.
Net loans increased $599.3 million to $3.04 billion at December 31, 2014. Outstanding balances of commercial real estate loans
increased $165.2 million, or 21.2%, multi-family residential loans increased $66.8 million, or 20.5%, commercial business loans
increased $38.7 million, or 12.3%, consumer auto loans increased $188.6 million, or 140%, and construction loans (primarily
commercial construction) increased $197.0 million, or 62.2%. Net loans also increased $122.0 million as a result of the FDIC-assisted
acquisition of Valley Bank in 2014. Partially offsetting these increases was a decrease in net loans acquired through the FDIC-
assisted transactions prior to 2014 of $49.6 million, or 12.8%, primarily because of loan repayments. The increase in loans during
2014 was primarily due to financing loans which had been previously financed by other lenders and increased business activity. 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.
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Related to the loans purchased in the 2012, 2011 and 2009 FDIC-assisted transactions, the Company recorded indemnification assets
which represent payments expected to be received from the FDIC through loss sharing agreements. The total balance of the FDIC
indemnification asset decreased $28.4 million to $44.3 million at December 31, 2014. The decrease was primarily due to the billing
and collection of realized losses from the FDIC as well as estimated 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
under “Interest Income – Loans.” The 2014 Valley Bank acquisition did not include a loss sharing agreement with the FDIC;
therefore, no indemnification asset was recorded as part of the transaction.
Securities available for sale decreased $189.8 million, or 34.2%, as compared to December 31, 2013. The decrease was primarily due
to paydowns on mortgage-backed securities, which decreased $109.8 million from $367.6 million at December 31, 2013 to $257.8
million at December 31, 2014, and calls, maturities and sales of securities with proceeds used to fund new loans and pay off maturing
deposits. The Company elected to sell its remaining investment in Small Business Administration loan pools, which decreased
investments by $44.9 million, and also sold some of its municipal securities portfolio, which decreased by $37.7 million. The
available-for-sale securities portfolio was 9.3% and 15.6% of total assets at December 31, 2014 and December 31, 2013, respectively.
Total liabilities increased $352.0 million from $3.18 billion at December 31, 2013 to $3.53 billion at December 31, 2014. The increase
was primarily attributable to increases in deposits, FHLBank advances, securities sold under reverse repurchase agreements with
customers, and short term borrowings. In the year ended December 31, 2014, total deposit balances increased $182.2 million, or 6.5%.
This increase was primarily related to the FDIC-assisted acquisition of Valley Bank in 2014. Interest-bearing checking and savings
accounts increased $83.2 million and retail certificates of deposit increased $56.3 million. At December 31, 2014 and December 31,
2013, Great Southern Bank customer deposits totaling $23.7 million and $76.3 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. The Company did not actively try to grow CDARS customer deposits during the current period and decreased interest
rates offered on these deposits during the year ended December 31, 2014. Traditional brokered deposits increased from $50.0 million
at December 31, 2013, to $149.8 million at December 31, 2014.
FHLBank advances increased $144.9 million, or 114.3%, from December 31, 2013. These advances were used as a supplemental
source to fund the Company’s growth in loans. The increase in short term borrowings also related to overnight funds borrowed from
the FHLBank ($41 million on December 31, 2014).
Securities sold under reverse repurchase agreements with customers increased $34.0 million, or 25.2%, from December 31, 2013 as
these balances fluctuate over time.
Total stockholders' equity increased $39.0 million from $380.7 million at December 31, 2013 to $419.7 million at December 31, 2014.
The Company recorded net income of $43.5 million for the year ended December 31, 2014, common and preferred dividends declared
were $11.5 million and accumulated other comprehensive income increased $4.6 million. The increase in accumulated other
comprehensive income resulted from increases in the fair value of the Company's available-for-sale investment securities. In addition,
total stockholders’ equity increased $3.0 million due to stock option exercises and decreased $512,000 due to the Company’s purchase
of its common stock.
Results of Operations and Comparison for the Years Ended December 31, 2014 and 2013
General
Net income increased $9.8 million, or 29.1%, during the year ended December 31, 2014, compared to the year ended December 31,
2013. Net income was $43.5 million for the year ended December 31, 2014 compared to $33.7 million for the year ended December
31, 2013. This increase was due to an increase in net interest income of $8.0 million, or 5.0%, an increase in non-interest income of
$9.4 million, or 177.2%, and a decrease in the provision for loan losses of $13.2 million, or 76.1%, partially offset by an increase in
non-interest expense of $15.2 million, or 14.4%, and an increase in provision for income taxes of $5.6 million, or 68.3%. Non-interest
income for the year ended December 31, 2014 included a gain recognized on business acquisition of $10.8 million. Net income
available to common shareholders was $43.0 million for the year ended December 31, 2014 compared to $33.2 million for the year
ended December 31, 2013.
Total Interest Income
Total interest income increased $4.6 million, or 2.6%, during the year ended December 31, 2014 compared to the year ended
December 31, 2013. The increase was due to an $8.7 million, or 5.3%, increase in interest income on loans, partially offset by a $4.1
million, or 27.5%, decrease in interest income on investments and other interest-earning assets. Interest income on loans increased in
2014, due to higher average balances on loans, partially offset by lower average rates of interest. Interest income from investment
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securities and other interest-earning assets decreased during 2014 compared to 2013 primarily due to lower average balances. The
lower average balances of investments were primarily due to the sale of the Company’s Small Business Administration loan pool
securities and the sale of certain mortgage-backed securities, and as a result of management’s decision to not reinvest mortgage-
backed securities’ monthly cash flows back into investments, but to utilize the proceeds to fund loan growth. Prepayments on the
mortgages underlying these securities resulted in amortization of premiums which also reduced yields. Interest income on loans is
affected by variations in the adjustments to accretable yield due to increases in expected cash flows to be received from the FDIC-
acquired loan pools as discussed in “Interest Income – Loans” and in Note 4 of the accompanying audited financial statements. In
2014, many higher yielding loans matured or were repaid. These loans were replaced with new loans that were generally at rates
lower than those that repaid during the year, resulting in lower overall yields in the loan portfolio. Higher average balances of loans
more than offset the lower interest income on loans.
Interest Income - Loans
During the year ended December 31, 2014 compared to the year ended December 31, 2013, interest income on loans increased due to
higher average balances, partially offset by lower average interest rates. Interest income increased $24.5 million as a result of higher
average loan balances which increased from $2.40 billion during the year ended December 31, 2013 to $2.78 billion during the year
ended December 31, 2014. The higher average balances were primarily due to increases in commercial real estate loans, commercial
business loans, construction loans, other residential loans and consumer loans categories. A portion of this loan growth resulted from
the Company acquiring $165.1 million in loans as part of the Valley FDIC-assisted transaction in June 2014, the balance of which
were $122.0 million at December 31, 2014.
In the three months ended December 31, 2014, the Company collected $1.9 million from customers with loans which had previously
not been expected to be collectible. In accordance with the Company’s accounting methodology, these collections were accounted for
as increases in estimated cash flows and were recorded as interest income, thereby increasing net interest income and net interest
margin. These collections related to acquired loans which were subject to loss sharing agreements with the FDIC; therefore, 80% of
the amounts collected, or $1.5 million, is owed to the FDIC. This $1.5 million of expense is included in non-interest income under
“accretion (amortization) of income related to business acquisitions.”
Interest income decreased $15.8 million as the result of lower average interest rates on loans. The average yield on loans decreased
from 6.82% during the year ended December 31, 2013 to 6.20% during the year ended December 31, 2014. This decrease was due to
lower overall loan rates, and a slightly lower amount of accretion income in the current year in conjunction with the fair value of the
loan pools acquired in the FDIC-assisted transactions, as the additional yield accretion was $35.0 million in 2014 and was $35.2
million in 2013. On an on-going basis the Company estimates the cash flows expected to be collected from the acquired loan pools.
This cash flows estimate has increased, based on the payment histories and reduced loss expectations of the loan pools, resulting in a
total of $201.0 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 have also been reduced, resulting
in a total of $165.5 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. For the years ended December 31, 2014 and 2013, the adjustments
increased interest income by $35.0 million and $35.2 million, respectively, and decreased non-interest income by $28.7 million and
$29.5 million, respectively. The net impact to pre-tax income was $6.2 million and $5.8 million, respectively, for the years ended
December 31, 2014 and 2013. As of December 31, 2014, the remaining accretable yield adjustment that will affect interest income is
$26.9 million and the remaining adjustment to the indemnification assets, including the effects of the clawback liability related to
InterBank, that will affect non-interest income (expense) is $(22.6) million. Of the remaining adjustments, we expect to recognize
$20.4 million of interest income and $(16.5) million of non-interest income (expense) during 2015. Additional adjustments may be
recorded in future periods from the FDIC-assisted transactions, as the Company continues to estimate expected cash flows from the
acquired loan pools. Excluding the yield accretion, the average yield on loans was 4.94% for the year ended December 31, 2014,
down from 5.35% for the year ended December 31, 2013, as a result of normal amortization of higher-rate loans and new loans that
were made at current lower market rates.
Interest Income - Investments and Other Interest-earning Assets
Interest income on investments decreased $4.7 million as a result of a decrease in average balances from $717.8 million during the
year ended December 31, 2013, to $495.2 million during the year ended December 31, 2014. Average balances of securities
decreased due primarily to the normal monthly payments received on the portfolio of mortgage-backed securities and the sale of
securities during 2014, with proceeds being used to fund new loan originations and deposit outflows. Interest income on other
interest-earning assets decreased $156,000 mainly due to lower average balances from $276.4 million during the year ended
December 31, 2013, to $185.1 million during the year ended December 31, 2014. Interest income on investments increased $684,000
as a result of an increase in average interest rates from 2.01% during the year ended December 31, 2013 to 2.11% during the year
ended December 31, 2014. The majority of the Company’s securities in 2013 and 2014 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
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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.
Average balances of interest-earning deposits decreased primarily due to decreases in the Bank’s customer deposit balances. The
Company’s interest-earning deposits and non-interest-earning cash equivalents currently earn very low or no yield and therefore
negatively impact the Company’s net interest margin. At December 31, 2014, the Company had cash and cash equivalents of $218.6
million compared to $227.9 million at December 31, 2013. See "Net Interest Income" for additional information on the impact of this
interest activity.
Total Interest Expense
Total interest expense decreased $3.4 million, or 17.7%, during the year ended December 31, 2014, when compared with the year
ended December 31, 2013, due to a decrease in interest expense on deposits of $1.1 million, or 9.1%, a decrease in interest expense on
FHLBank advances of $1.1 million, or 26.7%, and a decrease in interest expense on short-term and structured repo borrowings of $1.2
million, or 52.7%.
Interest Expense - Deposits
Interest on demand deposits decreased $382,000 due to a decrease in average rates from 0.24% during the year ended December 31,
2013, to 0.22% during the year ended December 31, 2014. The average interest rates decreased due to lower overall market rates of
interest since 2012 and because the Company chose to pay lower rates during 2014 and 2013. Market rates of interest on checking
and money market accounts have been decreasing since late 2008 when the FRB began reducing short-term interest rates. Interest on
demand deposits decreased $81,000 due to a small decrease in average balances from $1.46 billion in the year ended December 31,
2013, to $1.43 billion in the year ended December 31, 2014. Average noninterest-bearing demand balances increased from $460
million for the year ended December 31, 2013, to $535 million for the year ended December 31, 2014.
Interest expense on time deposits decreased $246,000 due to a decrease in average balances of time deposits from $1.07 billion during
the year ended December 31, 2013, to $1.04 billion during the year ended December 31, 2014. The decrease in average balances of
time deposits was primarily due to some customers choosing not to renew their deposits with us upon maturity. Also contributing to
the decrease was the decrease in CDARS deposits from December 31, 2013 to December 31, 2014, partially offset by the increase in
brokered deposits from December 31, 2013 to December 31, 2014. Interest expense on time deposits decreased $412,000 as a result
of a decrease in average rates of interest from 0.82% during the year ended December 31, 2013, to 0.78% during the year ended
December 31, 2014. A large portion of the Company’s certificate of deposit portfolio matures within one to two years and so it
reprices fairly quickly; this is consistent with the portfolio over the past several years.
Interest Expense - FHLBank Advances, Short-term Borrowings and Structured Repurchase Agreements and Subordinated
Debentures Issued to Capital Trust
During the year ended December 31, 2014 compared to the year ended December 31, 2013, interest expense on FHLBank advances
decreased due to lower average rates of interest, partially offset by higher average balances. Interest expense on FHLBank advances
decreased $2.2 million due to a decrease in average interest rates from 3.11% in the year ended December 31, 2013, to 1.69% in the
year ended December 31, 2014. The significant decrease in the average rate was due to the repayment of $80 million of the
Company’s long-term higher-rate FHLBank advances in June 2014. As of December 31, 2014, $230 million of the Company’s $272
million of total FHLBank advances are short-term advances with very low interest rates. Most of the remaining advances are fixed-
rate and are subject to penalty if paid off prior to maturity. Partially offsetting this decrease was an increase in interest expense on
FHLBank advances of $1.1 million due to an increase in average balances from $127.6 million in the year ended December 31, 2013,
to $172.0 million in the year ended December 31, 2014. This increase was primarily due to additional short-term FHLBank advances
obtained by the Company during 2014, to fund loan growth and for other short term funding needs.
Interest expense on short-term borrowings and structured repurchase agreements decreased $380,000 due to a decrease in average
balances from $233 million during the year ended December 31, 2013, to $189 million during the year ended December 31, 2014.
Interest expense on short-term and structured repo borrowings decreased $845,000 due to a decrease in average rates on short-term
borrowings from 1.00% in the year ended December 31, 2013, to 0.58% in the year ended December 31, 2014. The decrease in
balances of short-term borrowings in 2014 was primarily due to the repayment by the Company of $50 million of structured
repurchase agreements in June 2014. As there were none of the higher-rate structured repurchase agreements during the latter half of
2014, the average rate went down because the interest expense was all related to the lower-rate securities sold under repurchase
agreements with customers.
Interest expense on subordinated debentures issued to capital trusts increased $6,000 due to an increase in average rates from 1.81% in
the year ended December 31, 2013, to 1.83% in the year ended December 31, 2014. These are variable-rate debentures which bear
interest at an average rate of three-month LIBOR plus 1.57%, adjusting quarterly.
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Net Interest Income
Net interest income for the year ended December 31, 2014 increased $8.0 million to $167.6 million compared to $159.6 million for
the year ended December 31, 2013. Net interest margin was 4.84% for the year ended December 31, 2014, compared to 4.70% in 2013,
an increase of 14 basis points. The Company’s margin was positively impacted in both years by the increases in expected cash flows
to be received from the loan pools acquired in the FDIC-assisted transactions and the resulting increases to accretable yield which was
discussed previously in “Interest Income – Loans” and is discussed in Note 4 of the accompanying audited financial statements. The
impact of these changes on the years ended December 31, 2014 and 2013 were increases in interest income of $35.0 million and $35.2
million, respectively, and increases in net interest margin of 101 basis points and 104 basis points, respectively. Excluding the
positive impact of the additional yield accretion, net interest margin increased 17 basis points during the year ended December 31,
2014. The increase in net interest margin is primarily due to a decrease in interest expense on FHLB advances and short-term
borrowings, due to the payoff of FHLB advances and structured repurchase agreements. In addition, the mix of assets has continued
to change through an increase in the average balance of loans and a decrease in the average balance of investment securities and other
interest-earning assets. Our average yield on loans is higher than our average yield on investments. During 2013 and 2014, market
rates on checking and savings deposits decreased slightly and retail time deposits renewed at somewhat lower rates of interest. The
Company has also experienced decreases in yields on loans and investments, excluding the yield accretion income discussed above,
when compared to the previous year. Existing loans continue to repay, and in many cases new loans are originated at rates which are
lower than the rates on those repaying loans and may be lower than existing average portfolio rates.
The Company's overall interest rate spread increased 14 basis points, or 3.0%, from 4.60% during the year ended December 31, 2013,
to 4.74% during the year ended December 31, 2014. The increase was due to an 11 basis point decrease in the weighted average rate
paid on interest-bearing liabilities and a three basis point increase in the weighted average yield on interest-earning assets. The
Company's overall net interest margin increased 14 basis points, or 3.0%, from 4.70% for the year ended December 31, 2013, to
4.84% for the year ended December 31, 2014. In comparing the two years, the yield on loans decreased 62 basis points while the
yield on investment securities and other interest-earning assets increased 10 basis points. The rate paid on deposits decreased four
basis points, the rate paid on FHLBank advances decreased 142 basis points, the rate paid on short-term borrowings decreased 42
basis points and the rate paid on subordinated debentures issued to capital trust increased two basis points.
The Company’s net interest income and margin has been significantly impacted by additional yield accretion recognized in
conjunction with updated estimates of the fair value of the loan pools acquired in the 2009, 2011 and 2012 FDIC-assisted transactions.
On an on-going basis, the Company estimates the cash flows expected to be collected from the acquired loan pools. For each of the
loan portfolios acquired, the cash flow estimates have increased, based on payment histories and reduced loss expectations of the loan
pools. This resulted in increased income that was 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 have also been reduced each
quarter since the fourth quarter of 2010, resulting in adjustments to be amortized on a comparable basis over the remainder of the loss
sharing agreements or the remaining expected lives of the loan pools, whichever is shorter. Additional estimated cash flows, primarily
related to the InterBank loan portfolios, were recorded in 2014.
In addition, beginning in the three months ended December 31, 2014, the Company’s net interest income and margin has been
impacted by additional yield accretion recognized in conjunction with updated estimates of the fair value of the loan pools acquired in
the June 2014 Valley Bank FDIC-assisted transaction. Beginning with the three months ended December 31, 2014, the cash flow
estimates have increased for certain of the Valley Bank loan pools primarily based on significant loan repayments and also due to
collection of certain loans, thereby reducing loss expectations on certain of the loan pools. This resulted in increased income that was
spread on a level-yield basis over the remaining expected lives of these loan pools. The Valley Bank transaction does not include a
loss sharing agreement with the FDIC. Therefore, there is no related indemnification asset. The entire amount of the discount
adjustment will be accreted to interest income over time with no offsetting impact to non-interest income. The amount of the Valley
Bank discount adjustment accreted to interest income in 2014 was $981,000.
For additional information on net interest income components, refer to the "Average Balances, Interest Rates and Yields" table in this
Report.
Provision for Loan Losses and Allowance for Loan Losses
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, and internal as well as external reviews. However, the
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levels of non-performing assets, potential problem loans, loan loss provisions and net charge-offs fluctuate from period to period and
are difficult to predict.
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 maintains 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. Additional procedures provide for frequent management review of the loan
portfolio based on loan size, loan type, delinquencies, on-going correspondence with borrowers and problem loan work-outs.
Management determines which loans are potentially uncollectible, or represent a greater risk of loss, and makes additional provisions
to expense, if necessary, to maintain the allowance at a satisfactory level.
The provision for loan losses decreased $13.2 million to $4.2 million during the year ended December 31, 2014 when compared with
the year ended December 31, 2013. At December 31, 2014, the allowance for loan losses was $38.4 million, a decrease of $1.7
million from December 31, 2013. Total net charge-offs were $5.8 million and $17.9 million for the years ended December 31, 2014
and 2013, respectively. Nine relationships made up $5.1 million of the gross charge-off total ($7.8 million excluding consumer loans
and overdrafts) for the year ended December 31, 2014, and one relationship made up $2.5 million of the gross recoveries ($4.0 million
excluding consumer loans and overdrafts) for the year, which are included in the net charge-off total above. The decrease in net
charge-offs and provision for loan losses in 2014 were consistent with our expectations, as indicated in previous filings. General
market conditions, and more specifically, real estate absorption rates and unique circumstances related to individual borrowers and
projects also contributed to the level of provisions and charge-offs. As properties were categorized as potential problem loans, non-
performing loans or foreclosed assets, evaluations were made of the values of these assets with corresponding charge-offs as
appropriate.
Loans acquired in the 2009, 2011 and 2012 FDIC-assisted transactions are, or were, covered by loss sharing agreements between the
FDIC and Great Southern Bank which afford Great Southern Bank at least 80% protection from losses in the acquired portfolio of
loans. The FDIC loss sharing agreements are subject to limitations on the types of losses covered and the length of time losses are
covered and are conditioned upon the Bank complying with its requirements in the agreements with the FDIC. These limitations are
described in detail in Note 4 of the accompanying audited financial statements. 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 those used to determine the risk of loss for 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. Former Valley
Bank loans are accounted for in pools and were recorded at their fair value at the time of the acquisition as of June 20, 2014; therefore,
these loan pools are analyzed rather than the individual loans.
The Bank's allowance for loan losses as a percentage of total loans, excluding loans covered by the FDIC loss sharing agreements, was
1.34% and 1.92% at December 31, 2014 and 2013, respectively. Management considers the allowance for loan losses adequate to
cover losses inherent in the Company's loan portfolio at December 31, 2014, based on recent reviews of the Company's loan portfolio
and current economic conditions. If economic conditions were to deteriorate or management’s assessment of the loan portfolio were
to change, 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, Vantus Bank, Sun Security Bank and InterBank non-performing assets, including foreclosed assets, are not
included in the totals or in the discussion of non-performing loans, potential problem loans and foreclosed assets below as they are, or
were subject to loss sharing agreements with the FDIC, which cover at least 80% of principal losses that may be incurred in these
portfolios for the applicable terms under the agreements. At December 31, 2014, there were no material non-performing assets that
were previously covered, and are now not covered, under the TeamBank or Vantus Bank non-single-family loss sharing agreements.
In addition, FDIC-supported TeamBank, Vantus Bank, Sun Security Bank and InterBank assets were initially recorded at their
estimated fair values as of their acquisition dates of March 20, 2009, September 4, 2009, October 7, 2011, and April 27, 2012,
respectively. The overall performance of the FDIC-covered loan pools acquired in 2009, 2011 and 2012 has been better than original
expectations as of the acquisition dates. Former Valley Bank loans are also excluded from the totals and the discussion of non-
performing loans, potential problem loans and foreclosed assets below, although they are not covered by a loss sharing agreement.
Former Valley Bank loans are accounted for in pools and were recorded at their fair value at the time of the acquisition as of June 20,
2014; therefore, these loan pools are analyzed rather than the individual loans.
33
The loss sharing agreement for the non-single-family portion of the loans acquired in the TeamBank transaction ended on March 31,
2014. Any additional losses in that non-single-family portfolio will not be eligible for loss sharing coverage. At this time, the
Company does not expect any material losses in this non-single-family loan portfolio, which totaled $28.3 million at December 31,
2014.
The loss sharing agreement for the non-single-family portion of the loans acquired in the Vantus Bank transaction ended on
September 30, 2014. Any additional losses in that non-single-family portfolio will not be eligible for loss sharing coverage. At this
time, the Company does not expect any material losses in this non-single-family loan portfolio, which totaled $23.2 million, at
December 31, 2014.
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, excluding FDIC-covered non-performing assets and other FDIC-assisted acquired assets, at December 31, 2014
were $43.7 million, a decrease of $18.4 million from $62.1 million at December 31, 2013. Non-performing assets, excluding FDIC-
covered non-performing assets and other FDIC-assisted acquired assets, as a percentage of total assets were 1.11% at December 31,
2014, compared to 1.74% at December 31, 2013.
Compared to December 31, 2013, non-performing loans decreased $11.8 million to $8.1 million and foreclosed assets decreased $6.6
million to $35.5 million. Commercial real estate loans comprised $4.7 million, or 57.7%, of the total of $8.1 million of non-
performing loans at December 31, 2014. Non-performing one-to four-family residential loans comprised $1.7 million, or 20.4%, of
the total non-performing loans at December 31, 2014. Non-performing consumer loans were $1.1 million, or 13.7%, of total non-
performing loans at December 31, 2014. Non-performing commercial business loans were $411,000, or 5.0%, of total non-
performing loans at December 31, 2014. Non-performing construction and land development loans were $255,000, or 3.1%, of total
non-performing loans at December 31, 2014.
Non-performing Loans. Activity in the non-performing loans category during the year ended December 31, 2014, 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
$
— $
— $
Subdivision construction
Land development
Commercial construction
One- to four-family residential
Other residential
Commercial real estate
Other commercial
Consumer
871
338
—
4,361
—
6,205
7,231
900
3,231
102
—
5,489
—
5,884
342
1,193
— $
—
—
—
— $
—
—
—
(76)
—
(1,577)
(3,118)
(273)
(1,088)
—
—
—
(52)
(2,367)
(1,136)
(67)
—
(4,657)
—
—
—
(42)
(80)
—
(1,129)
—
(1,363)
(2,417)
(206)
(599)
(38)
—
—
—
255
—
(1,235) 1,665
—
—
(4,450)
(1,627)
(403)
4,699
411
1,117
— $
— $
— $
Total
$
19,906 $
16,241 $
(5,044) $
(1,140) $
(7,133) $
(6,331) $
(8,352) $
8,147
At December 31, 2014, the non-performing commercial real estate category included eight loans, one of which was transferred from
potential problem loans during the current year. The largest relationship in this category, which was added in the current year, totaled
$2.0 million, or 43.3% of the total category, and is collateralized by office buildings in Southeast Missouri. The second largest
relationship in this category, which was added in a previous year, totaled $1.9 million, or 40.9%, of the total category, and is
collateralized by a theater property in Branson, Mo. The non-performing one- to four-family residential category included 37 loans,
20 of which were added during the year. There were 34 properties in the one-to four-family category which were transferred to
foreclosed assets during the year. Of those, 15 properties, totaling $2.1 million, related to two borrowers. The non-performing
consumer category included 74 loans, 58 of which were added during the year. The non-performing commercial business category
included eight loans, four of which were added during the year. The subdivision construction category of non-performing loans had a
balance of $-0- at December 31, 2014, and had $2.4 million transferred to foreclosed assets during the year. The total $2.4 million of
transfers to foreclosed assets was related to two borrowers, and $688,000 of the total $1.1 million of charge-offs for the subdivision
construction category was related to those two borrowers.
34
Foreclosed Assets. Of the total $45.8 million of other real estate owned at December 31, 2014, $5.7 million represents the fair value of
foreclosed assets covered by FDIC loss sharing agreements, $879,000 represents the fair value of foreclosed assets previously covered
by FDIC loss sharing agreements, $778,000 represents foreclosed assets related to Valley Bank and not covered by loss sharing
agreements, $87,000 represents other assets related to acquired loans, and $2.9 million represents properties which were not acquired
through foreclosure. The foreclosed assets and other assets related to acquired loans and the properties not acquired through
foreclosure are not included in the following table and discussion of foreclosed assets. Because sales of foreclosed properties
exceeded additions, total foreclosed assets decreased. Activity in foreclosed assets during the year ended December 31, 2014, was as
follows:
Beginning
Balance,
January 1
$
—
11,652
18,920
—
744
5,900
4,135
79
715
Additions
Proceeds
from Sales
Capitalized
Costs
ORE Expense
Write-Downs
(In Thousands)
Ending
Balance,
December 31
$
223 $
— $
2,144
76
—
4,800
—
417
—
3,051
(3,079)
(333)
—
(1,989)
(3,060)
(2,773)
(3)
(3,101)
— $
—
—
—
—
96
—
—
—
— $
(860)
(1,495)
—
(202)
(311)
(147)
(17)
(41)
223
9,857
17,168
—
3,353
2,625
1,632
59
624
One- to four-family construction
Subdivision construction
Land development
Commercial construction
One- to four-family residential
Other residential
Commercial real estate
Commercial business
Consumer
Total
$
42,145
$
10,711 $
(14,338) $
96 $
(3,073) $
35,541
At December 31, 2014, the land development category of foreclosed assets included 33 properties, the largest of which was located in
northwest Arkansas and had a balance of $2.3 million, or 13.3% of the total category. Of the total dollar amount in the land
development category of foreclosed assets, 41.4% and 34.7% was located in northwest Arkansas and in the Branson, Mo., area,
respectively, including the largest property previously mentioned. The subdivision construction category of foreclosed assets included
31 properties, the largest of which was located in the St. Louis, Mo. metropolitan area and had a balance of $1.7 million, or 17.7% of
the total category. One relationship, which was originated in 2006, made up $1.3 million of the $2.1 million of additions in the
subdivision construction category, and is collateralized by property near the Kansas City, Mo. metropolitan area. Of the total dollar
amount in the subdivision construction category of foreclosed assets, 18.2% and 15.5% is located in Branson, Mo. and Springfield,
Mo., respectively. The one-to four-family residential category of foreclosed assets included 24 properties, of which the largest
relationship, with nine properties in the southwest Missouri area, had a balance of $1.2 million, or 34.8% of the total category. These
properties were all added in 2014. In addition, six properties totaling $936,000 to one borrower were added in 2014. These properties
were collateralized by property in the Branson, Mo., area. All of the properties discussed above which were added during 2014 in the
one-to four-family category were originally financed by the Bank prior to 2008. Of the total dollar amount in the one-to- four-family
category of foreclosed assets, 40.4% is located in Branson, Mo. The other residential category of foreclosed assets included 12
properties, 10 of which were all part of the same condominium community, which was located in Branson, Mo. and had a balance of
$1.8 million, or 68.1% of the total category. Of the total dollar amount in the other residential category of foreclosed assets, 86.7%
was located in the Branson, Mo., area, including the largest properties previously mentioned.
Potential Problem Loans. Potential problem loans decreased $2.0 million during the year ended December 31, 2014 from $27.0
million at December 31, 2013 to $25.0 million at December 31, 2014. This decrease was due to $7.9 million in loans transferred to the
non-performing category, $7.2 million in loans removed from potential problem loans due to improvements in the credits, $907,000 in
charge-offs, $419,000 in loans transferred to foreclosed assets, and $835,000 in payments on potential problem loans, partially offset
by the addition of $15.3 million of loans to potential problem loans. 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, 2014,
was as follows:
35
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
$
— $
1,312 $
Subdivision construction
Land development
Commercial construction
One- to four-family residential
Other residential
Commercial real estate
Other commercial
Consumer
2,201
10,857
—
2,193
1,956
8,737
860
183
4,392
—
—
2,749
—
5,805
849
145
— $
—
(5,000)
—
(250)
—
(1,905)
(43)
—
— $
— $
— $
— $
(1,806)
—
—
(2,412)
—
(3,456)
(225)
(6)
(2)
—
—
—
—
(417)
—
—
(500)
—
—
—
—
(381)
—
(26)
(33)
—
—
(374)
—
(340)
(6)
(82)
1,312
4,252
5,857
—
1,906
1,956
8,043
1,435
214
Total
$
26,987 $
15,252 $
(7,198) $
(7,905) $
(419) $
(907) $
(835) $
24,975
At December 31, 2014, the commercial real estate category of potential problem loans included eight loans, six of which were added
during the current year. The largest relationship in this category, which was added during a previous year, had a balance of $4.9
million, or 60.2% of the total category. The relationship is collateralized by properties located near Branson, Mo. The land
development category of potential problem loans included three loans, all of which were added during previous years. The largest
relationship in this category totaled $3.8 million, or 65.6% of the total category, and is collateralized by property in the Branson, Mo.,
area. The subdivision construction category of potential problem loans included eight loans, six of which were added during the
current year. The largest relationship in this category, which is made up of four loans which were added during the current year, had a
balance totaling $3.5 million, or 83.0% of the total category, and is collateralized by property in southwest Missouri. The loans in this
relationship which were added during the current year were all originated prior to 2008. The other residential category of potential
problem loans included one loan which was added in a previous year, and is collateralized by properties located in the Branson, Mo.,
area. The one- to four-family residential category of potential problem loans included 23 loans, nine of which were added during the
current year. Of the total $2.7 million of loans added during the year in this category, $1.1 million were transfers from non-
performing loans due to the improved condition of the borrower. The commercial business category of potential problem loans
included nine loans, six of which were added in the current year, of which three were part of the same relationship. The largest
relationship in this category had a balance of $660,000, or 46.0% of the total category, and is collateralized primarily by automobiles.
The one-to four-family construction category of potential problem loans included three loans, all of which were to the same borrower,
and all of which were added during the current year. These loans were collateralized by property in southwest Missouri and were all
originated prior to 2008. These loans are part of the same borrower relationship as the $3.5 million relationship added in the
subdivision construction category discussed above.
Non-Interest Income
Non-interest income for the year ended December 31, 2014 was $14.7 million compared with $5.3 million for the year ended
December 31, 2013. The increase of $9.4 million, or 177.2%, was primarily the result of the following increases and decreases:
Initial gain recognized on business acquisition: The Company recognized a one-time gain of $10.8 million (pre-tax) on the FDIC-
assisted acquisition of Valley Bank, which occurred on June 20, 2014.
Net realized gains on sales of available-for-sale securities: Gains on sales of available-for-sale securities increased $1.9 million
compared to the prior year. This was due to the sale of all of the Company’s Small Business Administration securities in June 2014,
which produced a gain of $569,000; the sale of the acquired Valley Bank securities in July 2014, which produced a gain of $121,000;
and the sale of the taxable municipal securities acquired in the Sun Security Bank transaction in October 2014, resulting in a gain of
$1.2 million.
Service charges and ATM fees: Service charges and ATM fees increased $848,000 compared to the prior year, primarily due to an
increase in fee income from the additional accounts acquired in the Valley Bank transaction in June 2014.
36
Partially offsetting the increase in non-interest income were the following items:
Amortization of income related to business acquisitions: The net amortization expense related to business acquisitions was $27.9
million for the year ended December 31, 2014, compared to $25.3 million for the year ended December 31, 2013. The amortization
expense for the year ended December 31, 2014, was made up of the following items: $27.5 million of amortization expense related to
the changes in cash flows expected to be collected from the FDIC-covered loan portfolios, $1.7 million of amortization of the
clawback liability and $152,000 of impairment of the indemnification asset for Vantus Bank. The impairment was recorded because
the Company did not expect, and did not receive, resolution of certain items related to commercial foreclosed assets prior to the
expiration of the non-single-family loss sharing agreement for Vantus Bank. In addition, the Company collected amounts on various
problem assets acquired from the FDIC totaling $1.9 million. Under the loss sharing agreements, 80% of these collected amounts
must be remitted to the FDIC; therefore, the Company recorded a liability and related expense of $1.5 million. Offsetting the expense
was income from the accretion of the discount related to the indemnification assets for all of the acquisitions of $2.4 million and
$600,000 of other loss share income items.
Gains on sales of single-family loans: Gains on sales of single-family loans decreased $782,000 compared to the prior year. This was
due to a decrease in originations of fixed-rate loans due to higher fixed rates on these loans during most of 2014 which resulted in
fewer loans being originated to refinance existing debt. Fixed rate single-family loans originated are subsequently sold in the
secondary market. The decrease occurred in the first six months of the year and was partially offset by an increase in gains on sales of
single-family loans during the last six months of the year ended December 31, 2014, which included additional loan originations in the
operations acquired in the Valley Bank transaction in June 2014.
Change in interest rate swap fair value: The Company recorded expense of $(345,000) during 2014 due to the decrease in the interest
rate swap fair value related to its matched book interest rate derivatives program. This compares to income of $295,000 recorded
during the year ended December 31, 2013.
Non-Interest Expense
Total non-interest expense increased $15.3 million, or 14.4%, from $105.6 million in the year ended December 31, 2013, to $120.9
million in the year ended December 31, 2014. The Company’s efficiency ratio for the year ended December 31, 2014, was 66.3%, up
from 64.1% in 2013. The 2014 ratio was negatively affected by the early repayment of certain borrowings in June 2014 and the
increase in non-interest expense related to the June 2014 Valley acquisition and other items as discussed above, partially offset by
increases in non-interest income resulting from the initial gain recognized on the Valley acquisition. The Company’s ratio of non-
interest expense to average assets increased from 2.79% for the year ended December 31, 2013, to 3.16% for the year ended
December 31, 2014. The increase in the current year ratio was primarily due to the increase in other operating expenses in the 2014
year compared to the 2013 year due to the penalties paid for prepayment of borrowings, write-downs related to certain foreclosed
assets and other non-interest expenses related to the Valley acquisition. Average assets for the year ended December 31, 2014,
increased $34.6 million, or 0.9%, from the year ended December 31, 2013. The following were key items related to the increase in
non-interest expense for the year ended December 31, 2014 as compared to the year ended December 31, 2013:
Other Operating Expenses: Other operating expenses increased $7.7 million, to $15.8 million for the year ended December 31, 2014
compared to the prior year period primarily due to $7.4 million in prepayment penalties paid as the Company elected in June 2014, to
repay $130 million of its FHLBank advances and structured repo borrowings prior to their maturity.
Valley Bank acquisition expenses: The Company incurred approximately $5.6 million of additional non-interest expenses during the
year ended December 31, 2014 related to the operations of Valley Bank, which was acquired through the FDIC in June 2014. Those
expenses included approximately $2.3 million of compensation expense, approximately $1.2 million of computer and equipment
expense, approximately $718,000 of net occupancy expense, approximately $241,000 of legal, audit and other professional fees
expense, approximately $333,000 of travel, meals and other expenses related to due diligence for the transaction and integration issues
and various other expenses. Approximately $2.6 million of these expenses are not expected to recur in future periods.
Expense on foreclosed assets: Expense on foreclosed assets increased $1.6 million for the year ended December 31, 2014 compared
to the prior year due to write-downs on foreclosed assets of approximately $2.0 million in 2014.
Provision for Income Taxes
In 2014, the Company elected to early-adopt FASB ASU No. 2014-01, which amends FASB ASC Topic 323, Investments – Equity
Method and Joint Ventures. This Update impacts the Company’s accounting for investments in flow-through limited liability entities
which manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The amendments in the
Update permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing
projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an
37
entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net
investment performance in the income statement as a component of income tax expense (benefit). The Company has significant
investments in such qualified affordable housing projects that meet the required conditions. The Company’s adoption of this Update
did not materially affect the Company’s financial position or results of operations, except that the investment amortization expense,
which previously was included in Other Non-interest Expense in the Consolidated Statements of Income, is now included in Provision
for Income Taxes in the Consolidated Statements of Income presented. As a result, there was no change in Net Income for the periods
covered in this release. In addition, there was no cumulative effect adjustment to Retained Earnings.
Provision for income taxes as a percentage of pre-tax income was 24.0% and 19.5% for the years ended December 31, 2014 and 2013,
respectively, which was lower than the statutory federal tax rate of 35%, due primarily to the effects of the tax credits utilized and to
tax-exempt investments and tax-exempt loans which reduced the Company’s effective tax rate. In future periods, the Company
expects its effective tax rate typically will be 20-25% of pre-tax net income, assuming it continues to maintain or increase its use of
investment tax credits. The Company’s effective tax rate may fluctuate as it is impacted by the level and timing of the Company’s
utilization of tax credits and the level of tax-exempt investments and loans and the overall level of pretax income. At this time, the
Company expects to continue to utilize a significant amount of tax credits in 2015.
Average Balances, Interest Rates and Yields
The following table presents, for the periods indicated, the total dollar amount of interest income from average interest-earning assets
and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates, and
the net interest margin. Average balances of loans receivable include the average balances of non-accrual loans for each period.
Interest income on loans includes interest received on non-accrual loans on a cash basis. Interest income on loans includes the
amortization of net loan fees which were deferred in accordance with accounting standards. Fees included in interest income were
$3.2 million, $3.4 million and $3.2 million for 2014, 2013 and 2012, respectively. Tax-exempt income was not calculated on a tax
equivalent basis. The table does not reflect any effect of income taxes.
38
Dec. 31,
2014(2)
Yield/
Rate
4.57%
4.56
4.34
4.11
4.68
5.09
5.22
4.66
2.81
0.21
Year Ended
December 31, 2014
Year Ended
December 31, 2013
Year Ended
December 31, 2012
Average
Balance
Interest
Yield/
Rate
Average
Balance
Interest
Yield/
Rate
Average
Balance
Interest
Yield/
Rate
(Dollars In Thousands)
$ 480,827
375,754
920,340
259,993
296,318
404,375
46,499
$ 41,343
21,268
47,724
13,330
17,722
28,593
2,589
8.60%
5.66
5.19
5.13
5.98
7.07
5.57
$ 472,127
312,362
813,147
208,254
249,647
297,852
$ 35,072
23,963
51,175
14,413
14,505
21,947
50,155 2,828
7.43%
7.67
6.29
6.92
5.81
7.37
5.64
$ 463,096
314,630
785,181
219,309
228,109
259,684
56,264
$ 31,643
18,807
56,428
20,802
19,439
19,739
3,305
6.83%
5.98
7.19
9.49
8.52
7.60
5.87
2,784,106
172,569
6.20
2,403,544
163,903
6.82
2,326,273
170,163
7.31
495,155
185,072
10,467
326
2.11
0.18
717,806
14,459
276,394 433
2.01
0.16
846,197
413,092
22,674
671
2.68
0.16
4.33
3,464,333
183,362
5.29
3,397,744
178,795
5.26
3,585,562
193,508
5.40
96,665
263,495
$3,824,493
88,678
303,454
$3,789,876
84,035
336,016
$4,005,613
0.19
0.78
0.45
0.08
1.80
0.75
$1,429,893
1,042,563
2,472,456
3,088
8,137
11,225
0.22
0.78
0.45
3,551
$1,464,029
1,073,110 8,795
12,346
2,537,139
0.24
0.82
0.49
$1,456,172
1,357,741
2,813,913
7,087
13,633
20,720
0.49
1.00
0.74
188,906
1,099
0.58
232,598
2,324
1.00
265,718
2,610
0.98
30,929
171,997
567
2,910
1.83
1.69
30,929
561
127,561 3,972
1.81
3.11
30,929
145,464
617
4,430
1.99
3.05
0.47
2,864,288
15,801
0.55
2,928,227
19,203
0.66
3,256,024
28,377
0.87
535,132
22,403
3,421,823
402,670
$3,824,493
459,802
23,197
3,411,226
378,650
$3,789,876
385,770
11,537
3,653,331
352,282
$4,005,613
3.86%
$167,561
4.74%
4.84%
$159,592
4.60%
4.70%
$165,131
4.53%
4.61%
120.9%
116.0%
110.1%
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 Company's net interest income divided by total interest-earning assets.
(1) Of the total average balances of investment securities, average tax-exempt investment securities were $87.9 million, $80.9 million and $134.7 million for 2014,
2013 and 2012, respectively. In addition, average tax-exempt industrial revenue bonds were $38.5 million, $38.3 million and $22.1 million in 2014, 2013 and
2012, respectively. Interest income on tax-exempt assets included in this table was $5.2 million, $5.1 million and $5.8 million for 2014, 2013 and 2012,
respectively. Interest income net of disallowed interest expense related to tax-exempt assets was $5.0 million, $4.9 million and $5.5 million for 2014, 2013 and
2012, respectively.
(2) The yield/rate on loans at December 31, 2014 does not include the impact of the accretable yield (income) on loans acquired in the FDIC-assisted transactions. See
“Net Interest Income” for a discussion of the effect on 2014 results of operations.
39
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, 2014 vs.
December 31, 2013
Year Ended
December 31, 2013 vs.
December 31, 2012
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
$ (15,785) $
$ (11,786) $
$
24,451
(4,676)
(156)
8,666
(3,992)
(107)
4,567
(5,099)
(23)
(16,908)
$
5,526
(3,116)
(215)
2,195
(6,260)
(8,215)
(238)
(14,713)
(15,052)
19,619
684
49
(382)
(412)
(794)
(81)
(246)
(327)
(463)
(658)
(1,121)
(3,574)
(2,260)
(5,834)
38
(2,578)
(2,540)
(3,536)
(4,838)
(8,374)
(845)
(380)
(1,225)
6
(2,172)
—
1,110
6
(1,062)
44
(56)
98
(330)
—
(556)
(286)
(56)
(458)
(3,805)
$ (11,247) $
403
19,216
$
(3,402)
7,969
(5,748)
$ (11,160) $
(3,426)
5,621
$
(9,174)
(5,539)
Results of Operations and Comparison for the Years Ended December 31, 2013 and 2012
General
Net income decreased $15.0 million, or 30.8%, during the year ended December 31, 2013, compared to the year ended December 31,
2012. Net income from continuing operations decreased $10.4 million, or 23.5%, during the year ended December 31, 2013,
compared to the year ended December 31, 2012. Net income was $33.7 million for the year ended December 31, 2013 compared to
$48.7 million for the year ended December 31, 2012. Net income from continuing operations was $33.7 million for the year ended
December 31, 2013 compared to $44.1 million for the year ended December 31, 2012. This decrease was due to a decrease in non-
interest income of $40.7 million, or 88.5%, and a decrease in net interest income of $5.5 million, or 3.4%, partially offset by a
decrease in the provision for loan losses of $26.5 million, or 60.4%, a decrease in provision for income taxes of $7.2 million, or 68.0%,
and a decrease in non-interest expense of $2.2 million, or 1.9%. Non-interest income for the year ended December 31, 2012 included a
gain recognized on business acquisition of $31.3 million. Net income available to common shareholders was $33.2 million for the
year ended December 31, 2013 compared to $48.1 million for the year ended December 31, 2012.
Total Interest Income
Total interest income decreased $14.7 million, or 7.6%, during the year ended December 31, 2013 compared to the year ended
December 31, 2012. The decrease was due to an $8.4 million, or 36.2%, decrease in interest income on investments and other interest-
earning assets, and a decrease in interest income on loans of $6.3 million, or 3.7%. Interest income from investment securities and
other interest-earning assets decreased during the year ended December 31, 2013 due to lower average rates of interest and lower
average balances. The lower average investment yields were primarily a result of lower yields on mortgage-backed securities as
40
interest rates reset downward. Prepayments on the mortgages underlying these securities resulted in amortization of premiums which
also reduced yields. In addition, investments had lower average balances in 2013 as a result of increased prepayments and normal
monthly payments on mortgage-backed securities. Cash flows from investments were used to fund loans and reduce certain deposit
types. In 2013, few investment securities were purchased to offset these reductions. Interest income on loans is affected by variations
in the adjustments to accretable yield due to increases in expected cash flows to be received from the FDIC-acquired loan pools as
discussed in “Interest Income – Loans” and in Note 4 of the accompanying audited financial statements. In 2013, many higher
yielding loans matured or were repaid. These loans were replaced with new loans that were generally at rates lower than those that
repaid during the year, resulting in lower overall yields in the loan portfolio. Higher average balances of loans partially offset the
lower interest income on loans.
Interest Income - Loans
During the year ended December 31, 2013 compared to the year ended December 31, 2012, interest income on loans decreased due to
lower average interest rates, partially offset by higher average balances. Interest income decreased $11.8 million as the result of lower
average interest rates on loans. The average yield on loans decreased from 7.31% during the year ended December 31, 2012 to 6.82%
during the year ended December 31, 2013. This decrease was due to lower overall loan rates, and a lower amount of accretion income
in the current year in conjunction with the fair value of the loan pools acquired in the FDIC-assisted transactions, as the additional
yield accretion was less in 2013 than in 2012. 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 2013, based on the payment histories and reduced loss
expectations of the loan pools, resulting in a total of $169.6 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 also were reduced during 2013, resulting in a total of $142.4 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. For the years ended December 31, 2013 and 2012, the adjustments increased interest income by $35.2 million and $36.2
million, respectively, and decreased non-interest income by $29.5 million and $29.9 million, respectively. The net impact to pre-tax
income was $5.8 million and $6.3 million, respectively, for the years ended December 31, 2013 and 2012. As of December 31, 2013,
the remaining accretable yield adjustment that will affect interest income is $30.4 million and the remaining adjustment to the
indemnification assets, including the effects of the clawback liability related to InterBank, that will affect non-interest income
(expense) is $(24.6) million. Additional adjustments may be recorded in future periods from the FDIC-assisted transactions, as the
Company continues to estimate expected cash flows from the acquired loan pools. Excluding the yield accretion, the average yield on
loans was 5.35% for the year ended December 31, 2013, down from 5.76% for the year ended December 31, 2012, as a result of
normal amortization of higher-rate loans and new loans that were made at current lower market rates.
Interest income increased $5.5 million as a result of higher average loan balances which increased from $2.33 billion during the year
ended December 31, 2012 to $2.40 billion during the year ended December 31, 2013. The higher average balances were primarily due
to increases in commercial real estate loans, commercial business loans, and other consumer loans, partially offset by decreases in
construction and other residential loans.
Interest Income - Investments and Other Interest-earning Assets
Interest income on investments decreased $5.1 million as a result of a decrease in average interest rates from 2.68% during the year
ended December 31, 2012 to 2.01% during the year ended December 31, 2013. The majority of the Company’s securities in 2012 and
2013 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. Interest income on investments decreased $3.1 million as a result of a decrease in
average balances from $846.2 million during the year ended December 31, 2012, to $717.8 million during the year ended December
31, 2013. Average balances of securities decreased due primarily to the normal monthly payments received on the portfolio of
mortgage-backed securities and the sale of securities during 2013, with proceeds being used to fund new loan originations and deposit
outflows, while average interest-earning deposits decreased due to decreases in the Bank’s customer deposits. Interest income on
other interest-earning assets decreased $238,000 mainly due to lower average balances.
Average balances of interest-earning deposits decreased primarily due to decreases in the Bank’s customer deposit balances. The
Company’s interest-earning deposits and non-interest-earning cash equivalents currently earn very low or no yield and therefore
negatively impact the Company’s net interest margin. At December 31, 2013, the Company had cash and cash equivalents of $227.9
million compared to $404.1 million at December 31, 2012. See "Net Interest Income" for additional information on the impact of this
interest activity.
41
Total Interest Expense
Total interest expense decreased $9.2 million, or 32.3%, during the year ended December 31, 2013, when compared with the year
ended December 31, 2012, due to a decrease in interest expense on deposits of $8.4 million, or 40.4%, a decrease in interest expense
on FHLBank advances of $458,000, or 10.3%, a decrease in interest expense on short-term and structured repo borrowings of
$286,000, or 11.0% and a decrease in interest expense on subordinated debentures issued to capital trust of $56,000, or 9.1%.
Interest Expense - Deposits
Interest on demand deposits decreased $3.5 million due to a decrease in average rates from 0.49% during the year ended December 31,
2012, to 0.24% during the year ended December 31, 2013. The average interest rates decreased due to lower overall market rates of
interest since 2012 and because the Company chose to pay lower rates during 2013 when compared to 2012. Market rates of interest
on checking and money market accounts have been decreasing since late 2008 when the FRB began reducing short-term interest rates.
Interest on demand deposits increased $38,000 due to a small increase in average balances from the year ended December 31, 2012, to
the year ended December 31, 2013. The small increase in average balances of demand deposits was primarily a result of the
InterBank acquisition in April of 2012, and customer preference to transition from time deposits to demand deposits. Average
noninterest-bearing demand balances increased from $386 million for the year ended December 31, 2012, to $460 million for the year
ended December 31, 2013.
Interest expense on time deposits decreased $2.6 million due to a decrease in average balances of time deposits from $1.36 billion
during the year ended December 31, 2012, to $1.07 billion during the year ended December 31, 2013. The decrease in average
balances of time deposits was primarily due to some customers choosing not to renew their deposits with us upon maturity. Also
contributing to the decrease was the decrease in CDARS deposits of $32.8 million from December 31, 2012 to December 31, 2013.
Interest expense on time deposits decreased $2.3 million as a result of a decrease in average rates of interest from 1.00% during the
year ended December 31, 2012, to 0.82% during the year ended December 31, 2013. A large portion of the Company’s certificate of
deposit portfolio matures within one to two years and so it reprices fairly quickly; this is consistent with the portfolio over the past
several years.
Interest Expense - FHLBank Advances, Short-term Borrowings and Structured Repurchase Agreements and Subordinated
Debentures Issued to Capital Trust
During the year ended December 31, 2013 compared to the year ended December 31, 2012, interest expense on FHLBank advances
decreased due to lower average balances. Interest expense on FHLBank advances decreased $556,000 due to a decrease in average
balances from $145 million during the year ended December 31, 2012, to $128 million during the year ended December 31, 2013.
This decrease was primarily due to repayments of maturing advances. Interest expense on FHLBank advances increased $98,000 due
to an increase in average interest rates from 3.05% in the year ended December 31, 2012, to 3.11% in the year ended December 31,
2013. Advances in the 2012 period included some short-term advances which carried very low rates of interest. 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 $330,000 due to a decrease in average
balances from $266 million during the year ended December 31, 2012, to $233 million during the year ended December 31, 2013.
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 short-term borrowings and structured repurchase
agreements increased $44,000 due to a slight increase in average rates on short-term borrowings and structured repurchase agreements
from the year ended December 31, 2012, to the year ended December 31, 2013.
Interest expense on subordinated debentures issued to capital trusts decreased $56,000 due to a decrease in average rates from 1.99%
in the year ended December 31, 2012, to 1.81% in the year ended December 31, 2013. These are variable-rate debentures which 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, 2013 decreased $5.5 million to $159.6 million compared to $165.1 million for
the year ended December 31, 2012. Net interest margin was 4.70% for the year ended December 31, 2013, compared to 4.61% in 2012,
an increase of nine basis points. The Company’s margin was positively impacted in both years by the increases in expected cash
flows to be received from the loan pools acquired in the FDIC-assisted transactions and the resulting increases to accretable yield
which was discussed previously in “Interest Income – Loans” and is discussed in Note 4 of the accompanying audited financial
statements. The impact of these changes on the years ended December 31, 2013 and 2012 were increases in interest income of $35.2
million and $36.2 million, respectively, and increases in net interest margin of 104 basis points and 101 basis points, respectively.
Excluding the positive impact of the additional yield accretion, net interest margin increased six basis points during the year ended
December 31, 2013. During 2012 and 2013, market rates on checking and savings deposits decreased and retail time deposits
renewed at lower rates of interest. The Company also experienced decreases in yields on loans and investments, excluding the yield
accretion income discussed above, when comparing 2013 to 2012. Existing loans continue to repay, and in many cases new loans are
42
originated at rates which are lower than the rates on those repaying loans and may be lower than existing average portfolio rates. In
addition, premium amortization on the Company’s mortgage-backed securities investments was higher in 2013 compared to 2012.
The Company's overall interest rate spread increased seven basis points, or 1.8%, from 4.53% during the year ended December 31,
2012, to 4.60% during the year ended December 31, 2013. The increase was due to a 21 basis point decrease in the weighted average
rate paid on interest-bearing liabilities, partially offset by a 14 basis point decrease in the weighted average yield on interest-earning
assets. The Company's overall net interest margin increased nine basis points, or 2.0%, from 4.61% for the year ended December 31,
2012, to 4.70% for the year ended December 31, 2013. In comparing the two years, the yield on loans decreased 49 basis points while
the yield on investment securities and other interest-earning assets decreased 67 basis points. The rate paid on deposits decreased 25
basis points, the rate paid on FHLBank advances increased six basis points, the rate paid on short-term borrowings increased two basis
points and the rate paid on subordinated debentures issued to capital trust decreased 18 basis points.
For additional information on net interest income components, refer to the "Average Balances, Interest Rates and Yields" table in this
Report.
Provision for Loan Losses and Allowance for Loan Losses
The provision for loan losses decreased $26.5 million to $17.4 million during the year ended December 31, 2013 when compared with
the year ended December 31, 2012. At December 31, 2013, the allowance for loan losses was $40.1 million, a decrease of $533,000
from December 31, 2012. Total net charge-offs were $17.9 million and $44.5 million for the years ended December 31, 2013 and
2012, respectively. Ten relationships made up $12.7 million of the net charge-off total for the year ended December 31, 2013. The
decrease in net charge-offs and provision for loan losses in 2013 were consistent with our expectations, as indicated in previous filings.
General market conditions, and more specifically, real estate absorption rates and unique circumstances related to individual
borrowers and projects also contributed to the level of provisions and charge-offs. As properties were categorized as potential
problem loans, non-performing loans or foreclosed assets, evaluations were made of the values of these assets with corresponding
charge-offs as appropriate.
Loans acquired in the 2009, 2011 and 2012 FDIC-assisted transactions are covered by loss sharing agreements between the FDIC and
Great Southern Bank which afford Great Southern Bank at least 80% protection from losses in the acquired portfolio of loans. The
FDIC loss sharing agreements are subject to limitations on the types of losses covered and the length of time losses are covered and
are conditioned upon the Bank complying with its requirements in the agreements with the FDIC. These limitations are described in
detail in Note 4 of the accompanying audited financial statements. 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 those used to determine the risk of loss for 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. Included in the
net charge-off total for the year ended December 31, 2013, were charge-offs of $2.2 million and net recoveries of $1.1 million related
to loans covered by the loss sharing agreements with the FDIC. In the three months ended March 31, 2013, the Bank recorded $2.2
million in net charge-offs (with a corresponding provision for loan losses) related to the covered loans. Under these agreements, the
FDIC will reimburse the Bank for 80% of the losses, so the Bank expected reimbursement of $1.8 million of this charge-off and
recorded income of this amount in the three months ended March 31, 2013. During the three months ended June 30, 2013, these
covered loans were resolved more favorably than originally anticipated, with the Bank experiencing a recovery of $1.1 million of the
previously recorded charge-off. The Bank expected to reimburse, and has reimbursed, the FDIC $0.9 million of this recovery and
recorded expense of this amount in the three months ended June 30, 2013.
The Bank's allowance for loan losses as a percentage of total loans, excluding loans covered by the FDIC loss sharing agreements, was
1.92% and 2.21% at December 31, 2013 and 2012, respectively. Management considered the allowance for loan losses adequate to
cover losses inherent in the Company's loan portfolio at December 31, 2013, based on reviews of the Company's loan portfolio and
then-current economic conditions.
Non-performing Assets
Former TeamBank, Vantus Bank, Sun Security Bank and InterBank non-performing assets, including foreclosed assets, are not
included in the totals or 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 cover at least 80% of principal losses that may be incurred in these portfolios
for the applicable terms under the agreement. In addition, FDIC-supported TeamBank, Vantus Bank, Sun Security Bank and
InterBank assets were initially recorded at their estimated fair values as of their acquisition dates of March 20, 2009, September 4,
43
2009, October 7, 2011, and April 27, 2012, respectively. The overall performance of the FDIC-covered loan pools has been better
than original expectations as of the acquisition dates.
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, excluding FDIC-covered non-performing assets, at December 31, 2013 were $62.3 million, a decrease of $10.3
million from $72.6 million at December 31, 2012. Non-performing assets as a percentage of total assets were 1.75% at December 31,
2013, compared to 1.84% at December 31, 2012.
Compared to December 31, 2012, non-performing loans decreased $2.6 million to $19.9 million and foreclosed assets decreased $7.7
million to $42.4 million. Other commercial loans comprised $7.2 million, or 36.3%, of the total $19.9 million of non-performing
loans at December 31, 2013. Commercial real estate loans comprised $6.2 million, or 31.2%, of the total $19.9 million of non-
performing loans at December 31, 2013. One-to four-family residential loans comprised $4.4 million, or 21.9% of the total $19.9
million of non-performing loans at December 31, 2013.
Non-performing Loans. Activity in the non-performing loans category during the year ended December 31, 2013, 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
$
— $
— $
Subdivision construction
Land development
Commercial construction
One- to four-family residential
Other residential
Commercial real estate
Other commercial
Consumer
2
2,471
—
4,581
—
8,324
6,248
852
1,293
525
—
4,792
4,535
12,158
7,272
1,238
— $
—
—
—
—
—
—
—
(399)
(2)
—
—
(705)
—
(92)
—
(35)
(281)
(2,236)
—
(1,683)
(350)
(5,389)
(126)
(43)
(133)
(288)
—
(1,419)
(866)
(4,179)
(2,725)
(166)
(8)
(134)
—
—
871
338
—
(1,205) 4,361
—
(3,319)
(4,617)
(3,438)
(547)
6,205
7,231
900
Total
$
22,478 $
31,813 $
(399) $
(834) $
(10,108) $
(9,776) $
(13,268) $
19,906
At December 31, 2013, the non-performing other commercial category included nine loans, seven of which were added during 2013.
The largest relationship in this category is comprised of three loans totaling $2.7 million, or 37.2% of the total category, and is
collateralized by inventory and assets of a business. The non-performing commercial real estate category included five loans, three of
which were added during the year, and were collateralized by hotel buildings and a theater in Branson, Mo. $9.6 million of the $12.2
million of additions to non-performing commercial real estate were loans transferred from potential problem loans to non-performing
loans during the year. The largest relationship in this category is comprised of two loans totaling $4.1 million, or 66.0% of the total
category, a portion of which was added during the year, and is collateralized by two hotel buildings. The non-performing one- to four-
family residential category included 58 loans, 42 of which were added during the year.
Foreclosed Assets. Of the total $53.5 million of other real estate owned at December 31, 2013, $9.0 million represents the fair value of
foreclosed assets covered by FDIC loss sharing agreements and $2.1 million represents properties which were not acquired through
foreclosure. The foreclosed assets covered by FDIC loss sharing agreements and the properties not acquired through foreclosure are
not included in the following table and discussion of foreclosed assets. Foreclosed assets have increased since the economic recession
began in 2008. During the year, economic growth was slow and the market for land development properties did not experience a
recovery. Because of this, we experienced continued higher levels of additions to foreclosed assets during 2013. Because sales of
foreclosed properties exceeded additions, total foreclosed assets decreased. Certain beginning balance amounts in the activity below
have been reclassified to conform to the December 31, 2014 classifications. Activity in foreclosed assets during the year ended
December 31, 2013, was as follows:
44
Beginning
Balance,
January 1
Additions
Proceeds
from Sales
Capitalized
Costs
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
Commercial business
Consumer
$
$
627
17,146
14,284
6,511
975
7,232
2,738
160
471
600 $
832
4,353
113
2,550
350
8,995
—
3,410
(In Thousands)
(627) $
(5,659)
(1,935)
(4,254)
(2,693)
(1,864)
(8,518)
(81)
(3,166)
— $
— $
26
45
—
—
387
—
—
—
(193)
(59)
(238)
(88)
(205)
(80)
—
—
600
12,152
16,688
2,132
744
5,900
3,135
79
715
Total
$
50,144
$
21,203 $
(28,797) $
458 $
(863) $
42,145
At December 31, 2013, the land development category of foreclosed assets included 29 properties, the largest of which was located in
northwest Arkansas and had a balance of $2.3 million, or 13.7% of the total category. Of the total dollar amount in the land
development category of foreclosed assets, 35.1% and 36.9% was located in northwest Arkansas and in the Branson, Mo., area,
respectively, including the largest property previously mentioned. The subdivision construction category of foreclosed assets included
35 properties, the largest of which was located in the St. Louis, Mo. metropolitan area and had a balance of $3.2 million, or 26.5% of
the total category. Of the total dollar amount in the subdivision construction category of foreclosed assets, 16.4% and 14.9% is
located in Branson, Mo., and Springfield, Mo., respectively. The other residential category of foreclosed assets included 17 properties,
13 of which were all part of the same condominium community, which was located in Branson, Mo. and had a balance of $2.4 million,
or 40.7% of the total category. Of the total dollar amount in the other residential category of foreclosed assets, 88.1% was located in
the Branson, Mo., area, including the largest related group of properties previously mentioned.
Potential Problem Loans. Potential problem loans decreased $22.4 million during the year ended December 31, 2013 from $49.4
million at December 31, 2012 to $27.0 million at December 31, 2013. This decrease was due to $16.2 million in loans transferred to
the non-performing category, $9.3 million in loans removed from potential problem loans due to improvements in the credits, $7.2
million in charge-offs, $7.5 million in loans transferred to foreclosed assets, and $3.9 million in payments on potential problem loans,
partially offset by the addition of $21.7 million of loans to potential problem loans. 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, 2013, 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
$
— $
— $
— $
— $
— $
— $
— $
—
Subdivision construction
Land development
Commercial construction
One- to four-family residential
Other residential
Commercial real estate
Other commercial
Consumer
1,652
9,458
—
5,386
8,487
21,913
2,398
129
1,894
5,025
—
1,150
1,347
8,736
3,267
283
(76)
—
—
(1,136)
(4,414)
(3,535)
(73)
(77)
(765)
(158)
—
(503)
(713)
(9,639)
(4,426)
(18)
(36)
(2,081)
—
(754)
—
(4,605)
—
—
(149)
(1,089)
—
(965)
(2,181)
(2,352)
(431)
(4)
(319)
(298)
—
(985)
(570)
(1,638)
(18)
(130)
2,201
10,857
—
2,193
1,956
8,880
717
183
Total
$
49,423 $
21,702 $
(9,311) $
(16,222) $
(7,476) $
(7,171) $
(3,958) $
26,987
45
At December 31, 2013, the land development category included four loans, the largest of which was added during the current year.
This relationship totaled $5.0 million, or 46.1% of the total category, and was collateralized by property located in the Lake of the
Ozarks, Mo. area. The second largest relationship in this category totaled $3.8 million, or 35.4% of the total category, and was
collateralized by property in the Branson, Mo. area. The commercial real estate category of potential problem loans included 11 loans,
10 of which were added during the current year. The largest addition during the year totaled $1.9 million and was collateralized by a
hotel. The largest relationship in this category, which was added during a previous year, had a balance of $5.0 million, or 55.8% of
the total category. The relationship was collateralized by properties located near Branson, Missouri. The one- to four-family
residential category of potential problem loans included 21 loans, nine of which were added during the current year. The subdivision
construction category of potential problem loans included six loans, four of which were added during the current year. The largest
relationship in this category, which was added during the current year, had a balance of $1.8 million, or 80.2% of the total category,
and was collateralized by properties in the Branson, Mo., area. The other residential category of potential problem loans included one
loan which was added in a previous year, and was collateralized by properties located in the Branson, Mo., area. The other commercial
category of potential problem loans included four loans, one of which was added in the current year. The largest relationship in this
category, which was added during a previous year, had a balance of $660,000, or 92.1% of the total category, and was collateralized
by collector automobiles.
Non-Interest Income
Non-interest income for the year ended December 31, 2013 was $5.3 million compared with $46.0 million for the year ended
December 31, 2012. The decrease of $40.7 million, or 88.5%, was primarily the result of the following items:
InterBank FDIC-assisted acquisition: During the year ended December 31, 2012, the Bank recognized a one-time gain on the FDIC-
assisted acquisition of InterBank of $31.3 million (pre-tax).
Amortization of income related to business acquisitions: The net amortization expense related to business acquisitions was $25.3
million for the year ended December 31, 2013, compared to $18.7 million for the year ended December 31, 2012. The amortization
expense for the year ended December 31, 2013 was made up of the following items: $29.5 million of amortization expense related to
the changes in cash flows expected to be collected from the FDIC-covered loan portfolios and $712,000 of amortization of the
clawback liability related to InterBank. Offsetting the expense was income from the accretion of the discount related to the
indemnification assets for all of the acquisitions of $2.7 million and $2.2 million of other loss share items. The amortization expense
for the year ended December 31, 2012 was made up of the following items: $29.9 million of amortization expense related to the
changes in cash flows expected to be collected from the FDIC-covered loan portfolios and $103,000 of amortization of the clawback
liability related to InterBank. Offsetting the expense was income from the accretion of the discount related to the indemnification
assets for all of the acquisitions of $9.5 million and $1.8 million of income from other loss share items.
Net realized gains on sales of available-for-sale securities: Net realized gains on sales of available-for-sale securities decreased $2.4
million for the year ended December 31, 2013, when compared to the year ended December 31, 2012, partially offset by a decrease in
recognized impairment of available-for-sale securities of $680,000. No impairment loss was recognized during the 2013 period. The
Company realized significant gains on the sale of $78 million of certain mortgage-backed and municipal securities in the 2012 period.
Service charges and ATM fees: Service charges and ATM fees decreased $860,000 in the year ended December 31, 2013, when
compared to the year ended December 31, 2012, primarily due to a decrease in overdraft activity, and therefore overdraft charges, in
the current period compared to the prior period.
Non-Interest Expense
Total non-interest expense decreased $2.2 million, or 1.9%, from $112.6 million in the year ended December 31, 2012, to $110.4
million in the year ended December 31, 2013. The Company’s efficiency ratio for the year ended December 31, 2013, was 66.9%, up
from 53.0% in 2012. The increase in the ratio in 2013 compared to 2012 was primarily due to decreases in net interest income and
decreases in non-interest income resulting from decreased gains on sales of single-family loans and increased amortization expense
related to business acquisitions, as well as decreases in non-interest income resulting from the acquisition gain in 2012. The
Company’s ratio of non-interest expense to average assets decreased from 2.98% for the year ended December 31, 2012, to 2.91% for
the year ended December 31, 2013. The decrease in this ratio was due to a decrease in non-interest expense in the 2013 period
compared to the 2012 period. Average assets for the year ended December 31, 2013, decreased $216 million, or 5.4%, from the year
ended December 31, 2012. The following were key items related to the decrease in non-interest expense for the year ended December
31, 2013 as compared to the year ended December 31, 2012:
46
Foreclosure-related expenses: Expenses on foreclosed assets decreased $4.7 million for the year ended December 31, 2013, when
compared to the year ended December 31, 2012, due primarily to large write-downs of carrying values of foreclosed assets and losses
on sales of assets in 2012.
Other non-interest expense: Other non-interest expense decreased $632,000 for the year ended December 31, 2013, when compared
to the year ended December 31, 2012, due primarily to InterBank one-time acquisition related expenses incurred in 2012.
Partially offsetting the decrease in non-interest expense was an increase in the following items:
Salaries and employee benefits: Salaries and employee benefits increased $1.2 million for the year ended December 31, 2013, when
compared to the year ended December 31, 2012, primarily due to the internal growth of the Company and the increased number of
employees, and salary increases for existing employees.
Partnership tax credit: The partnership tax credit expense increased $1.1 million from the prior year period. The Company has
invested in certain federal low-income housing tax credits and federal new market tax credits. These credits are typically purchased at
70-90% of the amount of the credit and are generally utilized to offset taxes payable over ten-year and seven-year periods,
respectively. During the year ended December 31, 2013, tax credits used to reduce the Company’s tax expense totaled $9.5 million,
up $2.1 million from $7.4 million for the year ended December 31, 2012. These tax credits resulted in corresponding amortization
expense of $6.9 million during the year ended December 31, 2013, up $1.1 million from $5.8 million for the year ended December 31,
2012. 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, but negatively impacted the Company’s non-interest expense and efficiency
ratio.
Advertising: Advertising expense increased $593,000 for the year ended December 31, 2013, when compared to the year ended
December 31, 2012, due to additional marketing campaigns across the franchise in the current year period, including business banking
and mobile banking promotions, and loan campaigns.
Provision for Income Taxes
Provision for income taxes as a percentage of pre-tax income (from continuing operations) was 19.5% and 24.9% for the years ended
December 31, 2013 and 2012, respectively. The effective tax rates (as compared to the statutory federal tax rate of 35.0%) were
primarily affected by the tax credits noted above and tax-exempt investment securities and loans which reduce the Company’s
effective tax rate. The Company’s effective tax rate may fluctuate as it is impacted by the level and timing of the Company’s
utilization of tax credits and the level of tax-exempt investments and loans and the overall level of pretax income.
Liquidity
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, 2014, the Company had commitments of approximately $142.7 million to fund loan originations, $478.7 million of
unused lines of credit and unadvanced loans, and $24.2 million of outstanding letters of credit.
47
The following table summarizes the Company's fixed and determinable contractual obligations by payment date as of December 31,
2014. Additional information regarding these contractual obligations is discussed further in Notes 8, 9, 10, 11, 12, 13, 16 and 19 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
Subordinated debentures
Operating leases
Dividends declared but not paid
Payments Due In:
One Year or
Less
Over One to
Five
Years
Over Five
Years
Total
(In Thousands)
$1,893,366
713,263
240,136
211,444
—
1,042
2,896
$ —
378,379
31,005
—
—
2,779
—
$ —
5,832
500
—
30,929
526
—
$1,893,366
1,097,474
271,641
211,444
30,929
4,347
2,896
$3,062,147
$412,163
$37,787
$3,512,097
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, 2014 and 2013, 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, 2014
$395.3 million
563.2 million
December 31, 2013
$407.4 million
418.9 million
218.6 million
63.7 million
227.9 million
91.7 million
Statements of Cash Flows. During the years ended December 31, 2014, 2013 and 2012, the Company had positive cash flows from
operating activities and investing activities. The Company experienced negative cash flows from financing activities during the years
ended December 31, 2014, 2013 and 2012.
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, realized gains on the sale of investment
securities and loans, depreciation and amortization, 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 $67.4 million, $93.9
million and $146.9 million during the years ended December 31, 2014, 2013 and 2012, respectively.
During the years ended December 31, 2014, 2013 and 2012, investing activities provided cash of $35.9 million, $124.7 million and
$241.4 million, primarily due to the cash received from the FDIC-assisted acquisitions (2014 and 2012) and the net repayment or sales
of investment securities, partially offset by increases in loans.
Changes in cash flows from financing activities during the periods covered by the Statements of Cash Flows are primarily due to
changes in deposits after interest credited, changes in FHLBank advances, changes in short-term borrowings and structured repurchase
agreements, and dividend payments to stockholders. Financing activities used cash flows of $112.6 million, $394.8 million and
$364.4 million during the years ended December 31, 2014, 2013 and 2012, respectively, primarily due to reduction of customer
deposit balances, net increases or decreases in various borrowings and dividend payments to stockholders.
48
Capital Resources
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.
Total stockholders’ equity at December 31, 2014, was $419.7 million, or 10.6% of total assets. At December 31, 2014, common
stockholders' equity was $361.8 million, or 9.2% of total assets, equivalent to a book value of $26.30 per common share. At
December 31, 2013, the Company's total stockholders' equity was $380.7 million, or 10.7% of total assets. At December 31, 2013,
common stockholders' equity was $322.8 million, or 9.1% of total assets, equivalent to a book value of $23.60 per common share.
At December 31, 2014, the Company’s tangible common equity to total assets ratio was 9.0% as compared to 8.9% at December 31,
2013. The Company’s tangible common equity to total risk-weighted assets ratio was 10.9% at December 31, 2014, compared to
12.3% at December 31, 2013.
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. Through December 31, 2014, guidelines required
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, 2014, the Bank's Tier 1 risk-based capital ratio was 11.4%, total risk-based
capital ratio was 12.6% and the Tier 1 leverage ratio was 9.5%. As of December 31, 2014, the Bank was "well capitalized" as defined
by the Federal banking agencies' capital-related regulations then in effect. The FRB has established capital regulations for bank
holding companies that generally parallel the capital regulations for banks. On December 31, 2014, the Company's Tier 1 risk-based
capital ratio was 13.3%, total risk-based capital ratio was 14.5% and the Tier 1 leverage ratio was 11.1%. As of December 31, 2014,
the Company was "well capitalized" under the capital ratios described above. These ratios were the current capital requirements as of
December 31, 2014. As discussed in “Effect of Federal Laws and Regulations,” the Company and the Bank are subject to new capital
requirements due to the changes from “Basel III,” and the Dodd-Frank Act for which the provisions generally became effective
January 1, 2015.
On August 18, 2011, the Company entered into a Small Business Lending Fund-Securities Purchase Agreement (“Purchase
Agreement”) with the Secretary of the Treasury, pursuant to which the Company sold 57,943 shares of the Company’s Senior Non-
Cumulative Perpetual Preferred Stock, Series A (the “SBLF Preferred Stock”) to the Secretary of the Treasury for a purchase price of
$57,943,000. The SBLF Preferred Stock was issued pursuant to Treasury’s SBLF program, a $30 billion fund established under the
Small Business Jobs Act of 2010 that was created to encourage lending to small businesses by providing Tier 1 capital to qualified
community banks and holding companies with assets of less than $10 billion. As required by the Purchase Agreement, the proceeds
from the sale of the SBLF Preferred Stock were used to redeem the 58,000 shares of preferred stock, previously issued to the Treasury
pursuant to the CPP, at a redemption price of $58.0 million plus the accrued dividends owed on the preferred shares.
The SBLF Preferred Stock qualifies as Tier 1 capital. The holder of the SBLF Preferred Stock is entitled to receive non-cumulative
dividends, payable quarterly, on each January 1, April 1, July 1 and October 1. The dividend rate, as a percentage of the liquidation
amount, can fluctuate between one percent (1%) and five percent (5%) per annum on a quarterly basis during the first 10 quarters
during which the SBLF Preferred Stock is outstanding, based upon changes in the level of “Qualified Small Business Lending” or
“QSBL” (as defined in the Purchase Agreement) by the Bank over the adjusted baseline level calculated under the terms of the SBLF
Preferred Stock ($249.7 million). Based upon the increase in the Bank’s level of QSBL over the adjusted baseline level, the dividend
rate for all of 2014 and 2013 was 1.0%. For the tenth calendar quarter through four and one half years after issuance, the dividend rate
will be fixed at between one percent (1%) and seven percent (7%) based upon the level of qualifying loans. The Company has
reached the tenth calendar quarter and the dividend rate will be 1.0% until four and one half years after the issuance, which is March
2016. After four and one half years from issuance, the dividend rate will increase to 9% (including a quarterly lending incentive fee of
0.5%).
The SBLF Preferred Stock is non-voting, except in limited circumstances. In the event that the Company misses five dividend
payments, whether or not consecutive, the holder of the SBLF Preferred Stock will have the right, but not the obligation, to appoint a
representative as an observer on the Company’s Board of Directors. In the event that the Company misses six dividend payments,
whether or not consecutive, and if the then outstanding aggregate liquidation amount of the SBLF Preferred Stock is at least
$25,000,000, then the holder of the SBLF Preferred Stock will have the right to designate two directors to the Board of Directors of
the Company.
The SBLF Preferred Stock may be redeemed at any time at the Company’s option, at a redemption price of 100% of the liquidation
amount plus accrued but unpaid dividends to the date of redemption for the current period, subject to the approval of its federal
banking regulator. Our Bank earnings have afforded us the ability to distribute cash in the form of dividends to the holding company
such that we now have enough cash there to fully repay the SBLF funds. We currently anticipate repaying these funds prior to the
first quarter of 2016, at which time the dividend rate on any unpaid balance would increase from 1% to 9%.
49
Dividends. During the year ended December 31, 2014, the Company declared common stock cash dividends of $0.80 per share
(25.8% of net income per common share) and paid common stock cash dividends of $0.78 per share. During the year ended December
31, 2013, the Company declared common stock cash dividends of $0.72 per share (29.8% of net income per common share) and paid
common stock cash dividends of $0.54 per share. The quarterly dividend that would normally have been paid in January 2013 was
paid in December 2012. The Board of Directors meets regularly to consider the level and the timing of dividend payments. The $0.20
per share dividend declared but unpaid as of December 31, 2014, was paid to stockholders on January 12, 2015. In addition, the
Company paid preferred dividends as described below.
The terms of the SBLF Preferred Stock impose limits on the ability of the Company to pay dividends and repurchase shares of
common stock. Under the terms of the SBLF Preferred Stock, no repurchases may be effected, and no dividends may be declared or
paid on preferred shares ranking pari passu with the SBLF Preferred Stock, junior preferred shares, or other junior securities
(including the common stock) during the current quarter and for the next three quarters following the failure to declare and pay
dividends on the SBLF Preferred Stock, except that, in any such quarter in which the dividend is paid, dividend payments on shares
ranking pari passu may be paid to the extent necessary to avoid any resulting material covenant breach.
Under the terms of the SBLF Preferred Stock, the Company may only declare and pay a dividend on the common stock or other stock
junior to the SBLF Preferred Stock, or repurchase shares of any such class or series of stock, if, after payment of such dividend, or
after giving effect to such repurchase, (i) the dollar amount of the Company’s Tier 1 Capital would be at least equal to the “Tier 1
Dividend Threshold” and (ii) full dividends on all outstanding shares of SBLF Preferred Stock for the most recently completed
dividend period have been or are contemporaneously declared and paid. As of December 31, 2014, we satisfied this condition.
The “Tier 1 Dividend Threshold” means 90% of $272.7 million, which was the Company’s consolidated Tier 1 capital as of June 30,
2011, less the $58 million in TARP preferred stock then-outstanding and repaid on August 18, 2011, plus the $58 million in SBLF
Preferred Stock issued and minus the net loan charge-offs by the Bank since August 18, 2011. The Tier 1 Dividend Threshold is
subject to reduction, beginning on the first day of the eleventh dividend period following the date of issuance of the SBLF Preferred
Stock, by $5.8 million (ten percent of the aggregate liquidation amount of the SBLF Preferred Stock initially issued, without regard to
any subsequent partial redemptions) for each one percent increase in qualified small business lending from the adjusted baseline level
under the terms of the SBLF preferred stock (i.e., $249.7 million) to the ninth dividend period.
Common Stock Repurchases and Issuances. The Company has been in various buy-back programs since May 1990. Our ability to
repurchase common stock is currently limited, but allowed, under the terms of the SBLF preferred stock as noted above, under “-
Dividends” and was previously generally precluded due to our participation in the CPP beginning in December 2008. During the year
ended December 31, 2014, the Company repurchased 18,000 shares of its common stock at an average price of $28.45 per share.
During the year ended December 31, 2013, the Company did not repurchase any shares of its common stock. During the years ended
December 31, 2014 and 2013, the Company issued 99,097 shares of stock at an average price of $27.45 per share and 106,367 shares
of stock at an average price of $19.69 per share, respectively, to cover stock option exercises.
Management has historically utilized stock buy-back programs from time to time as long as management believed that repurchasing
the stock would contribute to the overall growth of shareholder value. The number of shares of stock that will be repurchased at any
particular time and the prices that will be paid are subject to 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, the price of the stock
within the market as determined by the market and the projected impact on the Company’s earnings per share and capital.
50
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.
Our Risk When Interest Rates Change
The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market
interest rates change over time. Accordingly, our results of operations, like those of other financial institutions, are impacted by
changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates
and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk.
How We Measure the Risk to Us Associated with Interest Rate Changes
In an attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor Great Southern's
interest rate risk. In monitoring interest rate risk we regularly analyze and manage assets and liabilities based on their payment streams
and interest rates, the timing of their maturities and their sensitivity to actual or potential changes in market interest rates.
The ability to maximize net interest income is largely dependent upon the achievement of a positive interest rate spread that can be
sustained despite fluctuations in prevailing interest rates. Interest rate sensitivity is a measure of the difference between amounts of
interest-earning assets and interest-bearing liabilities which either reprice or mature within a given period of time. The difference, or
the interest rate repricing "gap," provides an indication of the extent to which an institution's interest rate spread will be affected by
changes in interest rates. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-
rate sensitive liabilities repricing during the same period, and is considered negative when the amount of interest-rate sensitive
liabilities exceeds the amount of interest-rate sensitive assets during the same period. Generally, during a period of rising interest rates,
a negative gap within shorter repricing periods would adversely affect net interest income, while a positive gap within shorter
repricing periods would result in an increase in net interest income. During a period of falling interest rates, the opposite would be
true. As of December 31, 2014, Great Southern's internal interest rate risk models indicate that, generally, rising interest rates are
expected to have a positive impact on the Company’s net interest income, while declining interest rates would have a negative impact
on net interest income. We model various interest rate scenarios for rising and falling rates, including both parallel and non-parallel
shifts in rates. The results of our modeling indicate that net interest income is not likely to be materially affected either positively or
negatively in the first twelve months following a rate change, regardless of any changes in interest rates, because our portfolios are
relatively well matched in a twelve-month horizon. The effects of interest rate changes, if any, are expected to be more impacting to
net interest income in the 12 to 36 months following a rate change. In June 2014, $130 million of fixed rate borrowings were repaid.
Excess liquidity and proceeds from the sale of certain investment securities were used to fund these repayments. The results of our net
interest income modeling were not materially affected by these transactions. 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.
As discussed under “General-Net Interest Income and Interest Rate Risk Management,” at December 31, 2014 and 2013, there were
$484 million and $502 million, respectively, of adjustable rate loans which were tied to a national prime rate of interest which had
interest rate floors. 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 a national prime rate of interest. At December 31, 2014 and 2013, there were $200
million and $248 million, respectively, of loans indexed to “Great Southern Prime.” While these interest rate floors and, to a lesser
extent, the utilization of the “Great Southern Prime” rate 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. Also, a significant portion of
our retail certificates of deposit mature in the next twelve months and we expect that they will be replaced with new certificates of
deposit at similar interest rates to those that are maturing.
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
51
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.
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 the fourth quarter of 2011, the Company began executing interest rate swaps with
commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously
hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk
exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the strict hedge
accounting requirements, changes in the fair value of both the customer swaps and the offsetting swaps are recognized directly in
earnings. These interest rate derivatives result from a service provided to certain qualifying customers and, therefore, are not used to
manage interest rate risk in the Company’s assets or liabilities. The Company manages a matched book with respect to its derivative
instruments in order to minimize its net risk exposure resulting from such transactions.
In 2013, the Company entered into two interest rate cap agreements related to its floating rate debt associated with its trust preferred
securities. The agreements provide that the counterparty will reimburse the Company if interest rates rise above a certain threshold,
thus creating a cap on the effective interest rate paid by the Company. These agreements are classified as hedging instruments, and the
effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into
earnings in the same period or periods during which the hedged transaction affects earnings.
The Company’s interest rate derivatives and hedging activities are discussed further in Note 17 of the Notes to the Consolidated
Financial Statements.
52
The following tables illustrate the expected maturities and repricing, respectively, of the Bank's financial instruments at December 31,
2014. These schedules do not reflect the effects of possible prepayments or enforcement of due-on-sale clauses. The tables are based
on information prepared in accordance with generally accepted accounting principles.
Maturities
Financial Assets:
Interest bearing deposits
Weighted average rate
Available-for-sale equity securities
Weighted average rate
Available-for-sale debt securities(1)
Weighted average rate
Held-to-maturity securities
Weighted average rate
Adjustable rate loans
Weighted average rate
Fixed rate loans
Weighted average rate
Federal Home Loan Bank stock
Weighted average rate
December 31,
2015
2016
2017
2018
2019
Thereafter
Total
(Dollars In Thousands)
$ 109,595
0.21%
—
—
$ 26,272
3.12%
—
—
$ 324,907
—
—
—
—
7,923
5.99%
—
—
$ 147,664
$
—
—
—
—
12,261
6.23%
$
$
— $
—
$ 227,122
—
—
—
—
5,552
0.05%
450
7.37%
—
—
— $
—
$ 15,568
$
5.67%
—
—
$ 139,560
$ 127,729
4.57%
4.12%
4.25%
4.14%
4.31%
$ 245,975
$ 166,388
$ 259,730
$ 271,536
$ 306,913
5.08%
—
—
5.24%
—
—
5.10%
—
—
4.86%
—
—
4.79%
— $
—
$
$
— $
—
3,154
—
294,776
$
$
2.39%
— $
—
550,618
$
4.08%
404,893
6.08%
16,893
2.66%
$
$
109,595
0.21%
3,154
—
362,352
2.82%
450
7.37%
1,517,600
4.02%
1,655,435
5.25%
16,893
2.66%
Total financial assets
$ 706,749
$ 321,975
$ 499,113
$ 405,267
$ 462,041
$ 1,270,334
$
3,665,479
Financial Liabilities:
Time deposits
Weighted average rate
Interest-bearing demand
Weighted average rate
Non-interest-bearing demand
Weighted average rate
Federal Home Loan Bank
Weighted average rate
Short-term borrowings
Weighted average rate
Subordinated debentures
Weighted average rate
$ 713,263
0.65%
$1,375,100
0.19%
$ 518,266
—
$ 240,092
0.41%
$ 211,444
0.08%
—
—
$ 237,169
$
92,392
$ 39,739
$
$
1.00%
—
—
—
—
82
5.06%
—
—
—
—
$
1.46%
—
—
—
—
30,854
3.26%
—
—
—
—
$
1.53%
—
—
—
—
84
5.06%
—
—
—
—
$
$
9,079
1.33%
—
—
—
—
29
5.06%
—
—
— $
—
$
$
1,097,474
5,832
2.57%
— $
—
— $
—
500
5.54%
$
— $
—
30,929
$
1.80%
0.84%
1,375,100
0.19%
518,266
—
271,641
0.75%
211,444
0.08%
30,929
1.80%
2014
Fair Value
$
$
$
$
$
$
$
$
$
$
$
$
$
109,595
3,154
362,352
499
1,518,438
1,663,490
16,893
1,102,860
1,375,100
518,266
273,568
211,444
30,929
Total financial liabilities
$3,058,165
$ 237,251
$ 123,246
$ 39,823
$
9,108
$
37,261
$
3,504,854
_______________
(1)
Available-for-sale debt securities include approximately $257.8 million of mortgage-backed securities which pay interest and principal monthly to the
Company. Of this total, $238.1 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.
53
Repricing
Financial Assets:
Interest bearing deposits
Weighted average rate
Available-for-sale equity securities
Weighted average rate
Available-for-sale debt securities(1)
Weighted average rate
Held-to-maturity securities
Weighted average rate
Adjustable rate loans
Weighted average rate
Fixed rate loans
Weighted average rate
Federal Home Loan Bank stock
Weighted average rate
December 31,
2015
2016
2017
2018
2019
Thereafter Total
(Dollars In Thousands)
2014
Fair Value
$
109,595
$
0.21 %
—
—
166,325
1.90 %
—
—
$ 1,323,998
$
3.99 %
$
$
245,975
5.08 %
16,893
2.66 %
$
—
—
—
—
45,857 $
2.62 %
—
—
68,805 $
4.35 %
—
—
—
—
24,544 $
4.04 %
— $
—
24,088 $
4.31 %
—
—
— $
—
49,796 $
2.93 %
—
—
48,039 $
4.32 %
$ 166,388 $ 259,730 $ 271,536 $ 306,913 $
4.79 %
—
—
—
—
—
—
19,086 $
4.62 %
450
7.37 %
40,122 $
4.14 %
5.24 %
—
—
4.86 %
—
—
5.10 %
—
—
109,595
— $
—
3,154 $
—
56,744 $
4.60 %
— $
—
$
0.21 %
3,154
$
—
362,352
2.82 %
450
7.37 %
12,548 $ 1,517,600
$
$
109,595
3,154
362,352
499
404,893 $ 1,655,435
4.08 %
6.08 %
— $
—
$ 1,518,438
$ 1,663,490
16,893
4.02 %
16,893
5.25 %
$
2.66 %
Total financial assets
$ 1,862,786
$ 281,050 $ 308,362 $ 331,194 $ 404,748 $
477,339 $ 3,665,479
Financial Liabilities:
Time deposits
Weighted average rate
Interest-bearing demand
Weighted average rate
Non-interest-bearing demand(2)
Weighted average rate
Federal Home Loan Bank advances
Weighted average rate
Short-term borrowings
Weighted average rate
Structured repurchase agreements
Weighted average rate
Subordinated debentures
Weighted average rate
$
713,263
0.65 %
$ 1,375,100
$ 237,169 $
1.00 %
—
—
—
—
82 $
5.06 %
—
—
—
—
—
—
0.19 %
—
—
240,092
$
0.41 %
211,444
0.08 %
—
—
30,929
1.80 %
$
$
$
92,392 $
1.46 %
—
—
—
—
30,854 $
3.26 %
—
—
—
—
—
—
39,739 $
1.53 %
—
—
—
—
84 $
5.06 %
—
—
—
—
—
—
9,079 $
1.33 %
—
—
— $
—
29 $
5.06 %
—
—
—
—
—
—
0.84 %
518,266
—
271,641
5,832 $ 1,097,474
2.57 %
— $ 1,375,100
—
518,266 $
—
500 $
5.54 %
— $
—
—
—
— $
—
211,444
0.08 %
—
—
30,929
0.19 %
$
$
0.75 %
$
$
1.80 %
$ 1,102,860
$ 1,375,100
518,266
273,568
211,444
—
—
30,929
Total financial liabilities
$ 2,570,828
$ 237,251 $ 123,246 $
39,823 $
9,108 $
524,598 $ 3,504,854
Periodic repricing GAP
Cumulative repricing GAP
$
$
(708,042 )
$
43,799
$ 185,116 $ 291,371 $ 395,640 $
(47,259 ) $
160,625
(708,042 )
$ (664,243 ) $ (479,127 ) $ (187,756 ) $ 207,884
$
160,625
_______________
(1) Available-for-sale debt securities include approximately $257.8 million of mortgage-backed securities which pay interest and principal monthly to the Company.
Of this total, $238.1 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.
54
Great Southern Bancorp, Inc.
Auditor’s Report and Consolidated Financial Statements
December 31, 2014 and 2013
55
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Great Southern Bancorp, Inc.
Springfield, Missouri
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, 2014 and 2013, and the related consolidated statements of income,
comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period
We have audited the accompanying consolidated statements of financial condition of Great Southern
ended December 31, 2014. The Company’s management is responsible for these financial statements.
Bancorp, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of income,
Our responsibility is to express an opinion on these financial statements based on our audits.
comprehensive income, stockholders’ equity and cash flows for each of the years in the three-year period
ended December 31, 2014. The Company’s management is responsible for these financial statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Our responsibility is to express an opinion on these financial statements based on our audits.
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
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assessing the accounting principles used and significant estimates made by management and evaluating
assurance about whether the financial statements are free of material misstatement. Our audits included
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
opinion.
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
In our opinion, the consolidated financial statements referred to above present fairly, in all material
opinion.
respects, the financial position of Great Southern Bancorp, Inc. as of December 31, 2014 and 2013, and
the results of its operations and its cash flows for each of the years in the three-year period ended
In our opinion, the consolidated financial statements referred to above present fairly, in all material
December 31, 2014, in conformity with accounting principles generally accepted in the United States of
respects, the financial position of Great Southern Bancorp, Inc. as of December 31, 2014 and 2013, and
America.
the results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2014, in conformity with accounting principles generally accepted in the United States of
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
America.
Board (United States), Great Southern Bancorp, Inc.’s internal control over financial reporting as of
December 31, 2014, based on criteria established in Internal Control-Integrated Framework (1992)
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
Board (United States), Great Southern Bancorp, Inc.’s internal control over financial reporting as of
report dated March 6, 2015, expressed an unqualified opinion on the effectiveness of the Company’s
December 31, 2014, based on criteria established in Internal Control-Integrated Framework (1992)
internal control over financial reporting.
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated March 6, 2015, expressed an unqualified opinion on the effectiveness of the Company’s
BKD, LLP
internal control over financial reporting.
BKD, LLP
Springfield, Missouri
March 6, 2015
Springfield, Missouri
March 6, 2015
56
Great Southern Bancorp, Inc.
Consolidated Statements of Financial Condition
December 31, 2014 and 2013
(In Thousands, Except Per Share Data)
Assets
Cash
2014
2013
$
109,052
$
96,167
Interest-bearing deposits in other financial institutions
109,595
131,758
Cash and cash equivalents
218,647
227,925
Available-for-sale securities
Held-to-maturity securities
Mortgage loans held for sale
365,506
555,281
450
14,579
805
7,239
Loans receivable, net of allowance for loan losses of $38,435
and $40,116 at December 31, 2014 and 2013, respectively
3,038,848
2,439,530
FDIC indemnification asset
Interest receivable
Prepaid expenses and other assets
Other real estate owned, net
Premises and equipment, net
Goodwill and other intangible assets
Federal Home Loan Bank stock
Current and deferred income taxes
44,334
11,219
60,452
45,838
72,705
11,408
72,904
53,514
124,841
104,534
7,508
16,893
2,219
4,583
9,822
—
Total assets
$
3,951,334
$
3,560,250
See Notes to Consolidated Financial Statements
57
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Federal Home Loan Bank advances
Securities sold under reverse repurchase agreements with
customers
Short-term borrowings
Structured repurchase agreements
Subordinated debentures issued to capital trust
Accrued interest payable
Advances from borrowers for taxes and insurance
Accrued expenses and other liabilities
Current and deferred income taxes
2014
2013
$ 2,990,840
271,641
$ 2,808,626
126,757
168,993
42,451
—
30,929
1,067
4,929
20,739
—
134,981
1,128
50,000
30,929
1,099
3,721
18,502
3,809
Total liabilities
3,531,589
3,179,552
Commitments and Contingencies
—
—
Stockholders’ Equity
Capital stock
Serial preferred stock – SBLF, $.01 par value; authorized
1,000,000 shares; issued and outstanding 2014 and 2013
– 57,943 shares
Common stock, $.01 par value; authorized 20,000,000
shares; issued and outstanding
2014 – 13,754,806 shares, 2013 – 13,673,709 shares
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net of income
taxes of $3,789 and $1,326 at December 31, 2014 and
2013, respectively
57,943
57,943
138
22,345
332,283
137
19,567
300,589
7,036
2,462
Total stockholders’ equity
419,745
380,698
Total liabilities and stockholders’ equity
$ 3,951,334
$ 3,560,250
58
Great Southern Bancorp, Inc.
Consolidated Statements of Income
Years Ended December 31, 2014, 2013 and 2012
(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
Recognized impairment of available-for-sale securities
Late charges and fees on loans
Gain (loss) on derivative interest rate products
Gain recognized on business acquisitions
Accretion (amortization) of income/expense related to
business acquisitions
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
Partnership tax credit
Other operating expenses
2014
2013
2012
$
$
172,569
10,793
183,362
$
163,903
14,892
178,795
170,163
23,345
193,508
11,225
2,910
1,099
567
15,801
167,561
4,151
163,410
1,163
19,075
4,133
2,139
—
1,400
(345)
10,805
(27,868)
4,229
14,731
56,032
23,541
3,578
3,837
2,404
1,464
2,866
3,957
5,636
1,720
15,824
120,859
12,346
3,972
2,324
561
19,203
159,592
17,386
142,206
1,065
18,227
4,915
243
—
1,264
295
—
(25,260)
4,566
5,315
52,468
20,658
3,315
4,189
2,165
1,303
2,868
4,348
4,068
2,108
8,128
105,618
20,720
4,430
2,610
617
28,377
165,131
43,863
121,268
1,036
19,087
5,505
2,666
(680)
1,028
(38)
31,312
(18,693)
4,779
46,002
51,262
20,179
3,301
4,476
1,572
1,389
2,768
4,323
8,748
1,825
8,760
108,603
See Notes to Consolidated Financial Statements
59
Great Southern Bancorp, Inc.
Consolidated Statements of Income
Years Ended December 31, 2014, 2013 and 2012
(In Thousands, Except Per Share Data)
2014
2013
2012
Income from Continuing Operations Before Income Taxes
$
57,282
$
41,903
$
58,667
Provision for Income Taxes
Net Income from Continuing Operations
13,753
43,529
8,174
33,729
14,580
44,087
Discontinued Operations
Income from discontinued operations (including gain on
disposal in 2012 of $6,114), net of income taxes of
$2,487 for the year ended December 31, 2012
—
—
4,619
Net Income
43,529
33,729
48,706
Preferred stock dividends and discount accretion
579
579
608
Net Income Available to Common Shareholders
Earnings Per Common Share
Basic
Diluted
Earnings from Continuing Operations Per Common Share
Basic
Diluted
$
$
$
$
$
42,950
$
33,150
$
48,098
3.14
3.10
3.14
3.10
$
$
$
$
2.43
2.42
2.43
2.42
$
$
$
$
3.55
3.54
3.21
3.20
See Notes to Consolidated Financial Statements
60
Great Southern Bancorp, Inc.
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2014, 2013 and 2012
(In Thousands)
Net Income
$
43,529
$
33,729
$
48,706
2014
2013
2012
Unrealized appreciation (depreciation) on
available-for-sale securities, net of taxes (credit)
of $3,301, $(7,516) and $3,444 for 2014, 2013
and 2012, respectively
Noncredit component of unrealized gain (loss) on
available-for-sale debt securities for which a
portion of an other-than-temporary impairment
has been recognized, net of taxes (credit) of $0,
$(20) and $8 for 2014, 2013 and 2012,
respectively
Other-than-temporary impairment loss recognized
in earnings on available for sale securities, net of
taxes (credit) of $0, $0 and $(238) for 2014,
2013 and 2012, respectively
Less: reclassification adjustment for gains
included in net income, net of taxes of $(749),
$(85) and $(933) for 2014, 2013 and 2012,
respectively
Change in fair value of cash flow hedge, net of
taxes (credit) of $(88), $(19) and $0 for 2014,
2013 and 2012, respectively
6,128
(13,959)
6,398
—
(37)
14
—
—
(442)
(1,390)
(158)
(1,733)
(164)
(34)
—
Other comprehensive income (loss)
4,574
(14,188)
4,237
Comprehensive Income
$
48,103
$
19,541
$
52,943
See Notes to Consolidated Financial Statements
61
Great Southern Bancorp, Inc.
Consolidated Statements of Stockholders’ Equity
Years Ended December 31, 2014, 2013 and 2012
(In Thousands, Except Per Share Data)
SBLF
Preferred
Stock
Common
Stock
Balance, January 1, 2012
$
Net income
Stock issued under Stock Option Plan
Common dividends declared, $.72 per share
SBLF preferred stock dividends accrued (1.0%)
Other comprehensive income
Reclassification of treasury stock per Maryland law
Balance, December 31, 2012
Net income
Stock issued under Stock Option Plan
Common dividends declared, $.72 per share
SBLF preferred stock dividends accrued (1.0%)
Other comprehensive loss
Reclassification of treasury stock per Maryland law
Balance, December 31, 2013
Net income
Stock issued under Stock Option Plan
Common dividends declared, $.80 per share
SBLF preferred stock dividends accrued (1.0%)
Other comprehensive income
Reclassification of treasury stock per Maryland law
Purchase of the Company’s common stock
$
57,943
—
—
—
—
—
—
57,943
—
—
—
—
—
—
57,943
—
—
—
—
—
—
—
Balance, December 31, 2014
$
57,943
$
134
—
—
—
—
—
2
136
—
—
—
—
—
1
137
—
—
—
—
—
1
—
138
See Notes to Consolidated Financial Statements
62
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Loss)
Treasury
Stock
Total
$
$
17,183
—
1,211
—
—
—
—
18,394
—
1,173
—
—
—
—
19,567
—
2,778
—
—
—
—
—
$
236,914
48,706
—
(9,753)
(607)
—
1,491
276,751
33,729
—
(9,823)
(579)
—
511
300,589
43,529
—
(10,968)
(579)
—
(288)
—
12,413
—
—
—
—
4,237
—
16,650
—
—
—
—
(14,188)
—
2,462
—
—
—
—
4,574
—
—
$
$
—
—
1,493
—
—
—
(1,493)
—
—
512
—
—
—
(512)
—
—
225
—
—
—
287
(512)
324,587
48,706
2,704
(9,753)
(607)
4,237
—
369,874
33,729
1,685
(9,823)
(579)
(14,188)
—
380,698
43,529
3,003
(10,968)
(579)
4,574
—
(512)
$
22,345
$
332,283
$
7,036
$
—
$
419,745
63
Great Southern Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2014, 2013 and 2012
(In Thousands)
Operating Activities
Net income
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) loss on sale of premises and
equipment
Loss on sale/write-down of foreclosed
assets
Gain on purchase of additional business
units
Gain on sale of business units
Amortization of deferred income,
premiums and discounts
(Gain) loss on derivative interest rate
products
Deferred income taxes
Changes in
Interest receivable
Prepaid expenses and other assets
Accrued expenses and other liabilities
Income taxes refundable/payable
Net cash provided by operating
activities
2014
2013
2012
$
43,529
156,632
(160,074)
$
33,729
215,744
(198,910)
$
48,706
269,817
(264,179)
8,747
3,242
565
4,151
(4,133)
(2,139)
8,036
8,107
443
17,386
(4,915)
7,159
7,039
435
43,863
(5,505)
(243)
(1,986)
18
(60)
2,996
1,259
264
4,968
(10,805)
—
—
—
(31,312)
(6,114)
22,692
29,510
18,004
345
(6,260)
1,227
8,430
502
(2,232)
(295)
(8,839)
1,347
(7,529)
4,260
(5,109)
38
13,252
2,765
31,413
(3,124)
11,413
67,433
93,921
146,916
See Notes to Consolidated Financial Statements
64
Great Southern Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2014, 2013 and 2012
(In Thousands)
Investing Activities
Net change in loans
Purchase of loans
Cash received from purchase of additional
business units
Cash received from FDIC loss sharing
reimbursements
Proceeds from sale of business units
Purchase of premises and equipment
Proceeds from sale of premises and equipment
Proceeds from sale of foreclosed assets
Capitalized costs on foreclosed assets
Proceeds from maturities, calls and repayments of
held-to-maturity securities
Proceeds from sale of available-for-sale securities
Proceeds from maturities, calls and repayments of
available-for-sale securities
Purchase of available-for-sale securities
(Purchase) redemption of Federal Home Loan
Bank stock
2014
2013
2012
$
(340,135) $
(101,832)
(33,180) $
(129,422)
(1,425)
(23,457)
189,437
—
75,328
8,377
—
28,511
—
49,369
7,800
(27,825)
1,728
51,225
(510)
945
78,094
(13,853)
1,518
48,900
(457)
115
108,487
(17,954)
203
21,706
(199)
355
220,169
103,475
(40,661)
210,798
(97,000)
182,900
(155,339)
(7,071)
273
2,578
Net cash provided by investing activities
35,870
124,690
241,411
See Notes to Consolidated Financial Statements
65
Great Southern Bancorp, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2014, 2013 and 2012
(In Thousands)
2014
2013
2012
Financing Activities
Net 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
Repayments of reverse repurchase borrowings
Repayments of structured repurchase borrowings
Advances to borrowers for taxes and insurance
Dividends paid
Purchase of the Company’s common stock
Stock options exercised
$
(116,139) $
(208,702) $
(421,977)
(160,144)
4,231,000
(4,083,315)
74,768
—
(50,000)
580
(11,257)
(512)
2,438
(134,562)
1,980
(1,081)
(44,307)
(3,000)
—
1,567
(7,964)
—
1,242
156,867
800
(52,993)
(36,981)
—
—
571
(12,991)
—
2,269
Net cash used in financing activities
(112,581)
(394,827)
(364,435)
Increase (Decrease) in Cash and Cash
Equivalents
(9,278)
(176,216)
23,892
Cash and Cash Equivalents, Beginning of Year
227,925
404,141
380,249
Cash and Cash Equivalents, End of Year
$
218,647
$
227,925
$
404,141
See Notes to Consolidated Financial Statements
66
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
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 to customers primarily located in
Missouri, Iowa, Kansas, Minnesota, 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.
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.
Effective November 30, 2012, Great Southern Bank sold its Great Southern Travel and Great
Southern Insurance divisions. The 2012 operations of the two divisions have been reclassified to
include all revenues and expenses in discontinued operations. The discontinued operations are
discussed further in Note 29.
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 loans acquired with indication of
impairment, 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.
67
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
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), GS-RE Holding II, LLC, GS-RE Holding III, LLC, VFP Conclusion Holding, LLC and VFP
Conclusion 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 2014 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.
68
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
The Company’s consolidated statements of income 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. Past due status is
based on the contractual terms of a loan. 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. Payments received on nonaccrual loans are applied to principal until the loans are
returned to accrual status. Loans are returned to accrual status when all payments contractually
due are brought current, payment performance is sustained for a period of time, generally six
months, and future payments are reasonably assured. With the exception of consumer loans,
charge-offs on loans are recorded when available information indicates a loan is not fully
collectible and the loss is reasonably quantifiable. Consumer loans are charged-off at specified
delinquency dates consistent with regulatory guidelines.
69
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
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. The Company determines which loans
are reviewed for impairment based on various analyses including annual reviews of large loan
relationships, calculations of loan debt coverage ratios as financial information is obtained, weekly
past-due meetings, quarterly reviews of all loans over $1.0 million and quarterly reviews of watch
list credits by management. In accordance with regulatory guidelines, impairment in the consumer
loan portfolio is primarily identified by past-due status. 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. Payments made on impaired loans are
treated in accordance with the accrual status of the loan. If loans are performing in accordance
with their contractual terms but the ultimate collectability of principal and interest is questionable,
payments are applied to principal only. 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.
70
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Large groups of smaller balance homogenous loans are collectively evaluated for impairment.
Accordingly, the Bank does not separately identify consumer loans for impairment disclosures
unless they have been specifically identified through the classification process.
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 (FASB 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 FASB 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 FASB 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, one during 2011 and one during 2012, 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 acquisitions, 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 4.
71
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
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, 2014, 2013 and 2012.
Goodwill and Intangible Assets
Goodwill is evaluated annually for impairment or more frequently if impairment indicators are
present. A qualitative assessment is performed to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not the fair value is less than the
carrying amount, including goodwill. If, based on the evaluation, it is determined to be more likely
than not that the fair value is less than the carrying value, then goodwill is tested further 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.
72
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
A summary of goodwill and intangible assets is as follows:
Goodwill – Branch acquisitions
Deposit intangibles
TeamBank
Vantus Bank
Sun Security Bank
InterBank
Boulevard Bank
Valley Bank
December 31,
2014
2013
(In Thousands)
$
1,169
$
379
526
519
1,314
617
763
2,600
947
829
1,665
763
—
—
$
7,508
$
4,583
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 $185,000 and $211,000 at December 31, 2014 and 2013,
respectively. The Company has elected to measure the mortgage servicing rights for 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.
73
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
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, 2014 and 2013, 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 cost of shares purchased by the Company has been allocated
to common stock and retained earnings balances.
Earnings Per Common Share
Basic earnings per common share are computed based on the weighted average number of common
shares outstanding during each year. Diluted earnings per common share are computed using the
weighted average common shares and all potential dilutive common shares outstanding during the
period.
74
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Earnings per common share (EPS) were computed as follows:
2014
2013
(In Thousands, Except Per Share Data)
2012
Net income
Net income available to common
shareholders
Net income from continuing operations
Net income from continuing operations
available to common shareholders
$
$
$
$
43,529
$
33,729
$
48,706
42,950
43,529
$
$
33,150
33,729
$
$
48,098
44,087
42,950
$
33,150
$
43,479
Average common shares outstanding
13,700
13,635
13,534
Average common share stock options
and warrants outstanding
176
80
58
Average diluted common shares
13,876
13,715
13,592
Earnings per common share – basic
Earnings per common share – diluted
Earnings from continuing operations per
common share – basic
Earnings from continuing operations per
common share – diluted
Earnings from discontinued operations per
common share, net of tax – basic
Earnings from discontinued operations per
common share, net of tax – diluted
$
$
$
$
$
$
3.14
3.10
$
$
2.43
2.42
$
$
3.55
3.54
3.14
$
2.43
$
3.21
3.10
$
2.42
$
3.20
—
$
—
$
0.34
—
$
—
$
0.34
Options to purchase 500, 243,510 and 444,770 shares of common stock were outstanding at
December 31, 2014, 2013 and 2012, 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 for the years ended December 31, 2014, 2013 and
2012, respectively.
75
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Stock Option Plans
The Company has stock-based employee compensation plans, which are described more fully in
Note 21. In accordance with FASB ASC 718, Compensation – Stock Compensation, compensation
cost related to share-based payment transactions is recognized in the Company’s consolidated
financial statements based on the grant-date fair value of the award using the modified prospective
transition method. For the years ended December 31, 2014, 2013 and 2012, share-based
compensation expense totaling $565,000, $443,000 and $435,000, respectively, was included in
salaries and employee benefits expense in the consolidated statements of income.
Cash Equivalents
The Company considers all liquid investments with original maturities of three months or less to be
cash equivalents. At December 31, 2014 and 2013, cash equivalents consisted of interest-bearing
deposits in other financial institutions. At December 31, 2014, 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.
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, 2014 and 2013, no valuation allowance
was established.
76
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
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.
Derivatives and Hedging Activities
FASB ASC 815, Derivatives and Hedging, provides the disclosure requirements for derivatives
and hedging activities with the intent to provide users of financial statements with an enhanced
understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity
accounts for derivative instruments and related hedged items and (c) how derivative instruments
and related hedged items affect an entity’s financial position, financial performance and cash
flows. Further, qualitative disclosures are required that explain the Company’s objectives and
strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains
and losses on derivative instruments, and disclosures about credit-risk-related contingent features
in derivative instruments. For detailed disclosures on derivatives and hedging activities, see
Note 17.
As required by FASB ASC 815, the Company records all derivatives in the statement of financial
condition at fair value. The accounting for changes in the fair value of derivatives depends on the
intended use of the derivative, whether the Company has elected to designate a derivative in a
hedging relationship and apply hedge accounting and whether the hedging relationship has
satisfied the criteria necessary to apply hedge accounting.
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, 2014 and 2013, respectively, was $72.3 million and
$71.0 million.
Recent Accounting Pronouncements
In January 2014, the FASB issued ASU No. 2014-01 to amend FASB ASC Topic 323, Investments
– Equity Method and Joint Ventures. The objective of this Update is to provide guidance on
accounting for investments by a reporting entity in flow-through limited liability entities that
manage or invest in affordable housing projects that qualify for the low-income housing tax credit.
The amendments in the Update permit reporting entities to make an accounting policy election to
account for their investments in qualified affordable housing projects using the proportional
amortization method if certain conditions are met. Under the proportional amortization method, an
entity amortizes the initial cost of the investment in proportion to the tax credits and other tax
benefits received and recognizes the net investment performance in the income statement as a
component of income tax expense (benefit). The Update would be effective for the Company
beginning January 1, 2015; however, early adoption was permitted. The Company elected to adopt
this Update early, adopting it during the three months ended March 31, 2014. There was no
material impact on the Company’s financial position or results of operations, except that the
investment amortization expense which was previously included in Other Noninterest Expense in
the Consolidated Statements of Income was moved from Other Noninterest Expense to Provision
for Income Taxes in the Consolidated Statements of Income. For the years ended December 31,
77
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
2013 and 2012, respectively, $4.8 million and $4.0 million was moved from Other Noninterest
Expense to Provision for Income Taxes. This had the effect of reducing Noninterest Expense and
increasing Provision for Income Taxes, but did not have any impact on Net Income.
In January 2014, the FASB issued ASU No. 2014-04 to amend FASB ASC Topic 310, Receivables
– Troubled Debt Restructurings by Creditors. The objective of the amendments in this Update is
to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is,
when a creditor should be considered to have received physical possession of residential real estate
property collateralizing a consumer mortgage loan such that the loan receivable should be
derecognized and the real estate property recognized. The amendments in this Update clarify that
an in substance repossession or foreclosure occurs, and a creditor is considered to have received
physical possession of residential real estate property collateralizing a consumer mortgage loan,
upon either (1) the creditor obtaining legal title to the residential real estate property upon
completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate
property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or
through a similar legal agreement. Additionally, the amendments require interim and annual
disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor
and (2) the recorded investment in consumer mortgage loans collateralized by residential real
estate property that are in the process of foreclosure according to local requirements of the
applicable jurisdiction. The Update will be effective for the Company beginning January 1, 2015,
and is not expected to have a material impact on the Company’s financial position or results of
operations.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic
660): Summary and Amendments that Create Revenue from Contracts with Customers (Topic 606)
and Other Assets and Deferred Costs—Contracts with Customers (Subtopic 340-40). The guidance
in this update supersedes the revenue recognition requirements in ASC Topic 605, Revenue
Recognition, and most industry-specific guidance throughout the industry topics of the
codification. For public companies, this update will be effective for interim and annual periods
beginning after December 15, 2016 and early application is not permitted. The Company is
currently assessing the impact that this guidance will have on its consolidated financial statements.
78
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Note 2:
Investments in Debt and Equity Securities
The amortized cost and fair values of securities classified as available-for-sale were as follows:
U.S. government agencies
Mortgage-backed securities
States and political subdivisions
Equity securities
U.S. government agencies
Mortgage-backed securities
Small Business Administration
loan pools
States and political subdivisions
Equity securities
Amortized
Cost
$
20,000
254,294
79,237
847
December 31, 2014
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
Fair
Value
$
$
—
4,325
5,810
2,307
$
486
821
7
—
19,514
257,798
85,040
3,154
$
354,378
$
12,442
$
1,314
$
365,506
Amortized
Cost
$
20,000
365,020
43,461
122,113
847
December 31, 2013
Gross
Unrealized
Gains
Gross
Unrealized
Losses
(In Thousands)
$
$
—
4,824
1,394
2,549
2,022
$
2,745
2,266
—
1,938
—
Fair
Value
17,255
367,578
44,855
122,724
2,869
$
551,441
$
10,789
$
6,949
$
555,281
At December 31, 2014, the Company’s mortgage-backed securities portfolio consisted of GNMA
securities totaling $186.4 million, FNMA securities totaling $37.1 million and FHLMC securities
totaling $34.3 million. At December 31, 2014, $238.1 million of the Company’s mortgage-backed
securities had variable rates of interest and $19.7 million had fixed rates of interest.
79
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
The amortized cost and fair value of available-for-sale securities at December 31, 2014, 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 five through ten years
After ten years
Securities not due on a single maturity date
Equity securities
Amortized
Cost
Fair
Value
(In Thousands)
$
110
4,770
94,357
254,294
847
$
110
5,042
99,402
257,798
3,154
$
354,378
$
365,506
The amortized cost and fair values of securities classified as held to maturity were as follows:
December 31, 2014
Gross
Gross
Amortized
Cost
Unrealized
Unrealized
Gains
Losses
Fair
Value
(In Thousands)
States and political
subdivisions
$
450
$
49
$
—
$
499
December 31, 2013
Gross
Gross
Amortized
Cost
Unrealized
Unrealized
Gains
Losses
Fair
Value
(In Thousands)
States and political
subdivisions
$
805
$
107
$
—
$
912
80
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
The held-to-maturity securities at December 31, 2014, 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 one through five years
$
450
$
499
The amortized cost and fair values of securities pledged as collateral was as follows at
December 31, 2014 and 2013:
2014
2013
Amortized
Cost
Fair
Value
Amortized
Cost
(In Thousands)
Fair
Value
$
130,760
$
133,940
$
228,776
$
230,318
160,130
161,145
171,071
168,813
—
3,965
—
4,053
60,352
1,403
61,026
1,437
$
294,855
$
299,138
$
461,602
$
461,594
Public deposits
Collateralized borrowing
accounts
Structured repurchase
agreements
Other
Certain investments in debt securities are reported in the financial statements at an amount less
than their historical cost. Total fair value of these investments at December 31, 2014 and 2013,
was approximately $106.0 million and $237.6 million, respectively, which is approximately 29.0%
and 42.7% 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.
81
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
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, 2014 and 2013:
Description of Securities
U.S. government agencies
Mortgage-backed securities
States and political
subdivisions
Description of Securities
U.S. government agencies
Mortgage-backed securities
States and political
subdivisions
Less than 12 Months
Fair
Value
Unrealized
Losses
2014
12 Months or More
Fair
Value
Unrealized
Losses
(In Thousands)
Total
Fair
Value
Unrealized
Losses
$
—
40,042
$
$
—
(328)
20,000
45,056
$
(486)
(493)
$
20,000
85,098
$
(486)
(821)
—
—
925
(7)
925
(7)
$
40,042
$
(328)
$
65,981
$
(986)
$ 106,023
$
(1,314)
Less than 12 Months
Fair
Value
Unrealized
Losses
2013
12 Months or More
Fair
Value
Unrealized
Losses
(In Thousands)
Total
Fair
Value
Unrealized
Losses
$
20,000
127,901
$
(2,745)
(1,871)
$
—
39,255
$
—
(395)
$
20,000
167,156
$
(2,745)
(2,266)
50,401
(1,938)
—
—
50,401
(1,938)
$ 198,302
$
(6,554)
$
39,255
$
(395)
$ 237,557
$
(6,949)
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
82
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
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.
During 2014 and 2013, no securities were determined to have impairment that had become other
than temporary. During 2012, the Company determined that the impairment of a nonagency
collateralized mortgage obligation with a book value of $680,000 had become other than temporary.
Consequently, the Company recorded a total of $680,000 of pre-tax charges to income.
Credit Losses Recognized on Investments
Certain debt securities have experienced fair value deterioration due to credit losses, as well as due
to other market factors, but are not otherwise other-than-temporarily impaired.
The following table provides information about debt securities for which only a credit loss was
recognized in income and other losses are recorded in other comprehensive income.
Credit losses on debt securities held
Beginning of year
Reductions due to final principal payments
Additions related to increases in credit losses on debt
securities for which other-than-temporary
impairment losses were previously recognized
Reductions due to sales
End of year
Accumulated Credit Losses
2014
2013
(In Thousands)
$
$
$
—
—
4,176
(4,176)
—
—
—
$
—
—
—
83
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Note 3: Loans and Allowance for Loan Losses
Classes of loans at December 31, 2014 and 2013, 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
Acquired FDIC-covered loans, net of discounts
Acquired loans no longer covered by FDIC loss sharing
agreements, net of discounts
Acquired non-covered loans, net of discounts
Undisbursed portion of loans in process
Allowance for loan losses
Deferred loan fees and gains, net
2014
2013
(In Thousands)
$
40,361
28,593
52,096
392,929
87,549
143,051
945,876
392,414
354,012
41,061
323,353
78,029
66,272
286,608
$
34,662
40,409
57,841
184,019
89,133
145,908
780,690
325,599
315,269
42,230
134,717
82,260
58,283
386,164
49,945
121,982
3,404,131
(323,572)
(38,435)
(3,276)
$ 3,038,848
—
—
2,677,184
(194,544)
(40,116)
(2,994)
$ 2,439,530
84
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Classes of loans by aging were as follows:
December 31, 2014
30-59 Days 60-89 Days Over 90 Total Past
Past Due Past Due
Days
Due
Total
Loans
Total Loans
> 90 Days Past
Due and
Current Receivable Still Accruing
(In Thousands)
—
—
—
—
170
—
187
—
—
—
—
397
22
194
—
—
970
194
776
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
Acquired FDIC-covered
loans, net of discounts
Acquired loans no longer
covered by FDIC loss
sharing agreements,
net of discounts
Acquired non-covered loans,
net of discounts
Less FDIC-supported loans,
and acquired non-covered
loans, net of discounts
$
—
109
110
—
2,037
583
6,887
—
59
—
1,801
1,301
89
$
$
—
—
—
—
$
—
—
255
—
—
109
365
—
$
40,361 $
28,484
51,731
392,929
40,361 $
28,593
52,096
392,929
441
1,029
3,507
84,042
87,549
—
—
—
—
—
244
260
—
296
4,699
—
411
—
316
801
340
879
11,586
—
470
—
2,361
2,362
429
142,172
934,290
392,414
353,542
41,061
320,992
75,667
65,843
143,051
945,876
392,414
354,012
41,061
323,353
78,029
66,272
6,236
1,062
16,419
23,717
262,891
286,608
754
46
243
1,043
48,902
49,945
2,638
22,604
640
2,693
11,248
36,057
14,526
61,354
107,456
3,342,777
121,982
3,404,131
9,628
1,748
27,910
39,286
419,249
458,535
Total
$ 12,976
$
945
$ 8,147
$ 22,068
$ 2,923,528 $ 2,945,596 $
85
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
December 31, 2013
30-59 Days 60-89 Days Over 90 Total Past
Past Due Past Due
Days
Due
Total Loans
> 90 Days
Past
Due and
Total
Loans
Current Receivable Still Accruing
(In Thousands)
—
—
—
—
211
140
—
—
—
—
—
257
—
215
—
—
823
215
608
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
Acquired FDIC-covered
loans, net of discounts
Acquired loans no longer
covered by FDIC loss
sharing agreements, net
of discounts
Acquired non-covered loans,
net of discounts
Less FDIC-supported loans,
net of discounts
—
—
145
—
1,233
1,562
2,856
—
17
—
955
1,258
168
$
$
—
—
38
—
$
—
871
338
—
—
871
521
—
$
34,662 $
39,538
57,320
184,019
34,662 $
40,409
57,841
184,019
344
3,014
4,591
84,542
89,133
171
131
—
19
—
127
333
16
843
6,205
—
5,208
2,023
168
732
504
2,576
9,192
—
5,244
2,023
1,250
2,323
688
143,332
771,498
325,599
310,025
40,207
133,467
79,937
57,595
145,908
780,690
325,599
315,269
42,230
134,717
82,260
58,283
7,623
1,849
24,761
34,233
351,931
386,164
—
—
—
—
—
—
—
15,817
—
3,028
—
44,667
—
63,512
—
2,613,672
—
2,677,184
7,623
1,849
24,761
34,233
351,931
386,164
Total legacy loans
$
8,194
$
1,179
$ 19,906
$ 29,279
$ 2,261,741 $ 2,291,020 $
86
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
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,
2014
2013
(In Thousands)
$
—
—
255
—
859
296
4,512
—
411
—
316
404
318
—
871
338
—
2,803
703
6,205
—
5,208
2,023
168
475
504
Total
$
7,371
$
19,298
The following table presents the activity in the allowance for loan losses by portfolio segment for the
year ended December 31, 2014. Also presented are 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, 2014:
87
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
One- to Four-
Family
Residential
and
Other
Commercial Commercial Commercial
Construction Residential Real Estate Construction Business
Consumer
Total
(In Thousands)
$
6,235
$
2,678
$
16,939
$
4,464
$
6,451
$
3,349
$ 40,116
(1,025)
(2,251)
496
227
(1)
37
1,855
(2,160)
3,139
(957)
(126)
181
409
(3,286)
105
3,642
(4,005)
2,039
4,151
(11,829)
5,997
$
3,455
$
2,941
$
19,773
$
3,562
$
3,679
$
5,025
$ 38,435
Allowance for Loan Losses
Balance, January 1, 2014
Provision charged to
expense
Losses charged off
Recoveries
Balance,
December 31, 2014
Ending balance:
Individually evaluated
for impairment
Collectively evaluated
for impairment
Loans acquired and
accounted for under
ASC 310-30
$
$
$
829
$
—
$
1,751
$
1,507
$
823
$
232
$
5,142
2,532
$
2,923
$
16,671
$
1,905
$
2,805
$
4,321
$ 31,157
94
$
18
$
1,351
$
150
$
51
$
472
$
2,136
Loans
Individually evaluated
for impairment
Collectively evaluated
for impairment
Loans acquired and
accounted for under
ASC 310-30
$
11,488
$
9,804
$
28,641
$
7,601
$
2,725
$
1,480
$ 61,739
$
288,066
$ 382,610
$
917,235
$
437,424
$
392,348
$
466,174
$2,883,857
$
234,158
$ 48,470
$
107,278
$
1,937
$
17,789
$
48,903
$ 458,535
88
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
The following table presents the activity in the allowance for loan losses by portfolio segment for the
year ended December 31, 2013. Also presented are 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, 2013:
One- to Four-
Family
Residential
and
Other
Commercial Commercial Commercial
Construction Residential Real Estate Construction
(In Thousands)
Business
Consumer
Total
$
6,822
$
4,327
$
17,441
$
3,938
$
5,096
$
3,025
$ 40,649
1,496
(2,196)
113
1,556
(3,248)
43
6,922
(9,836)
2,412
1,142
(788)
172
4,404
(4,072)
1,023
1,866
(3,312)
1,770
17,386
(23,452)
5,533
$
6,235
$
2,678
$
16,939
$
4,464
$
6,451
$
3,349
$ 40,116
$
$
$
2,501
$
—
$
90
$
473
3,734
$
2,678
$
16,845
$
3,991
$
$
4,162
$
218
$
7,444
2,287
$
3,131
$ 32,666
—
$
—
$
4
$
—
$
2
$
—
$
6
$
13,055
$ 10,983
$
31,591
$
12,628
$
8,755
$
1,389
$ 78,401
$
297,057
$ 314,616
$
791,329
$
229,232
$
306,514
$
273,871
$2,212,619
$
206,964
$ 35,095
$
84,591
$
6,989
$
4,883
$
47,642
$ 386,164
Allowance for Loan Losses
Balance, January 1, 2013
Provision charged to
expense
Losses charged off
Recoveries
Balance,
December 31, 2013
Ending balance:
Individually evaluated
for impairment
Collectively evaluated
for impairment
Loans acquired and
accounted for under
ASC 310-30
Loans
Individually evaluated
for impairment
Collectively evaluated
for impairment
Loans acquired and
accounted for under
ASC 310-30
The following table presents the activity in the allowance for loan losses by portfolio segment for the
year ended December 31, 2012. Also presented are 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, 2012:
89
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
One- to
Four-
Family
Residential
and
Other
Commercial Commercial Commercial
Construction Residential Real Estate Construction Business
Consumer
Total
(In Thousands)
$
11,424
$
3,088
$
18,390
$
2,982
$
2,974
$
2,374
$
41,232
(1,626)
(3,203)
227
4,471
(3,579)
347
16,360
(18,010)
701
18,101
(18,027)
882
4,897
(3,082)
307
1,660
(2,390)
1,381
43,863
(48,291)
3,845
$
6,822
$
4,327
$
17,441
$
3,938
$
5,096
$
3,025
$
40,649
$
$
$
2,288
$
1,089
4,533
$
3,238
$
$
4,990
$
96
$
2,778
$
156
$
11,397
12,442
$
3,842
$
2,314
$
2,866
$
29,235
1
$
—
$
9
$
—
$
4
$
3
$
17
$
14,691
$ 16,405
$
48,476
$
12,009
$
10,064
$
980
$ 102,625
$
279,502
$ 251,113
$
687,663
$
201,065
$
254,567
$ 219,670
$ 1,893,580
$
278,889
$ 53,280
$
129,128
$
7,997
$
14,939
$
39,616
$ 523,849
Allowance for Loan Losses
Balance, January 1, 2012
Provision charged to
expense
Losses charged off
Recoveries
Balance,
December 31, 2012
Ending balance:
Individually evaluated
for impairment
Collectively evaluated
for impairment
Loans acquired and
accounted for under
ASC 310-30
Loans
Individually evaluated
for impairment
Collectively evaluated
for impairment
Loans acquired and
accounted for under
ASC 310-30
The portfolio segments used in the preceding three tables correspond to the loan classes used in all
other tables in Note 3 as follows:
• The one- to four-family residential and construction segment includes the one- to four-
family residential construction, subdivision construction, owner occupied one- to four-
family residential and non-owner occupied one- to four-family residential classes.
• The other residential segment corresponds to the other residential class.
• The commercial real estate segment includes the commercial real estate and industrial
revenue bonds classes.
• The commercial construction segment includes the land development and commercial
construction classes.
• The commercial business segment corresponds to the commercial business class.
90
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
• The consumer segment includes the consumer auto, consumer other and home equity lines
of credit classes.
The weighted average interest rate on loans receivable at December 31, 2014 and 2013, was 4.66%
and 5.10%, 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 $266.4 million and
$166.2 million at December 31, 2014 and 2013, respectively. In addition, available lines of credit on
these loans were $33.0 million and $15.7 million at December 31, 2014 and 2013, respectively.
A loan is considered impaired, in accordance with the impairment accounting guidance (FASB 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 not only nonperforming loans but also include loans modified in
troubled debt restructurings where concessions have been granted to borrowers experiencing
financial difficulties.
The following summarizes information regarding impaired loans at and during the years ended
December 31, 2014, 2013 and 2012:
December 31, 2014
Year Ended
December 31, 2014
Average
Recorded
Balance
Unpaid
Principal
Balance
Specific
Allowance
(In Thousands)
Investment
in Impaired
Loans
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
residential
Commercial real estate
Other residential
Commercial business
Industrial revenue bonds
Consumer auto
Consumer other
Home equity lines of credit
$
1,312
4,540
7,601
—
3,747
1,889
28,641
9,804
2,725
—
420
629
431
$
1,312
4,540
8,044
—
4,094
2,113
30,781
9,804
2,750
—
507
765
476
—
344
1,507
—
407
78
1,751
—
823
—
63
94
75
$
$
173
2,593
9,691
—
4,808
4,010
29,808
10,469
2,579
2,644
219
676
461
76
226
292
—
212
94
1,253
407
158
—
37
71
25
Total
$
61,739
$
65,186
$
5,142
$
68,131
$
2,851
91
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
December 31, 2013
Year Ended
December 31, 2013
Average
Recorded
Balance
Unpaid
Principal
Balance
Specific
Allowance
(In Thousands)
Investment
in Impaired
Loans
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
$
$
—
3,502
12,628
—
$
—
3,531
13,042
—
5,802
6,117
residential
Commercial real estate
Other residential
Commercial business
Industrial revenue bonds
Consumer auto
Consumer other
Home equity lines of credit
3,751
31,591
10,983
6,057
2,698
216
604
569
4,003
34,032
10,983
6,077
2,778
231
700
706
—
1,659
473
—
593
249
90
—
4,162
—
32
91
95
$
$
36
3,315
13,389
—
5,101
4,797
42,242
13,837
6,821
2,700
145
630
391
—
163
560
—
251
195
1,632
434
179
27
16
63
38
Total
$
78,401
$
82,200
$
7,444
$
93,404
$
3,558
December 31, 2012
Year Ended
December 31, 2012
Average
Recorded
Balance
Unpaid
Principal
Balance
Specific
Allowance
(In Thousands)
Investment
in Impaired
Loans
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
$
$
410
2,577
12,009
—
$
410
2,580
13,204
—
5,627
6,037
residential
Commercial real estate
Other residential
Commercial business
Industrial revenue bonds
Consumer auto
Consumer other
Home equity lines of credit
6,077
48,476
16,405
7,279
2,785
143
602
235
6,290
49,779
16,405
8,615
2,865
170
682
248
239
688
96
—
550
811
4,990
1,089
2,778
—
22
89
45
$
$
679
8,399
12,614
383
5,174
10,045
45,181
16,951
4,851
3,034
157
654
162
22
143
656
—
295
330
2,176
836
329
5
17
65
15
Total
$ 102,625
$ 107,285 $ 11,397
$ 108,284
$
4,889
92
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
At December 31, 2014, $20.0 million of impaired loans had specific valuation allowances totaling
$5.1 million. At December 31, 2013, $18.0 million of impaired loans had specific valuation
allowances totaling $7.4 million. At December 31, 2012, $43.4 million of impaired loans had
specific valuation allowances totaling $11.4 million. For impaired loans which were nonaccruing,
interest of approximately $1.1 million, $1.6 million and $1.8 million would have been recognized
on an accrual basis during the years ended December 31, 2014, 2013 and 2012, respectively.
Included in certain loan categories in the impaired loans are troubled debt restructurings that were
classified as impaired. Troubled debt restructurings are loans that are modified by granting
concessions 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. The types of concessions made are factored into
the estimation of the allowance for loan losses for troubled debt restructurings primarily using a
discounted cash flows or collateral adequacy approach.
The following table presents newly restructured loans during 2014 and 2013 by type of
modification:
2014
Interest Only
Term
Combination
(In Thousands)
Total
Modification
Mortgage loans on real estate:
One- to four-family
residential construction
$
Subdivision construction
Residential one-to-four family
Commercial
Commercial
Industrial revenue bonds
Consumer
$
—
—
308
506
—
—
—
$
—
250
426
1,928
1,881
1,150
145
$
223
—
—
—
—
—
—
223
250
734
2,434
1,881
1,150
145
$
814
$
5,780
$
223
$
6,817
93
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
2013
Interest Only
Term
Combination
(In Thousands)
Total
Modification
Mortgage loans on real estate:
One- to four-family
residential construction
$
Subdivision construction
Land development
Residential one-to-four family
Commercial
Other residential
Commercial
Consumer
$
—
—
3,842
—
2,120
1,956
660
—
$
286
2,067
2,078
1,499
2,212
1,874
34
241
$
—
568
—
—
—
—
—
—
286
2,635
5,920
1,499
4,332
3,830
694
241
$
8,578
$
10,291
$
568
$
19,437
At December 31, 2014, the Company had $47.6 million of loans that were modified in troubled
debt restructurings and impaired, as follows: $8.3 million of construction and land development
loans, $13.8 million of single family and multi-family residential mortgage loans, $23.3 million of
commercial real estate loans, $1.9 million of commercial business loans and $324,000 of consumer
loans. Of the total troubled debt restructurings at December 31, 2014, $39.2 million were accruing
interest and $18.3 million were classified as substandard using the Company’s internal grading
system which is described below. The Company had troubled debt restructurings which were
modified in the previous 12 months and subsequently defaulted during the year ended
December 31, 2014, of approximately $62,000, one owner occupied residential mortgage loan
totaling $56,000 and two consumer loans totaling $6,000. When loans modified as troubled debt
restructuring have subsequent payment defaults, the defaults are factored into the determination of
the allowance for loan losses to ensure specific valuation allowances reflect amounts considered
uncollectible. At December 31, 2013, the Company had $54.1 million of loans that were modified
in troubled debt restructurings and impaired, as follows: $10.9 million of construction and land
development loans, $16.6 million of single family and multi-family residential mortgage loans,
$24.8 million of commercial real estate loans, $1.5 million of commercial business loans and
$310,000 of consumer loans. Of the total troubled debt restructurings at December 31, 2013,
$49.6 million were accruing interest and $22.1 million were classified as substandard using the
Company’s internal grading system.
During the year ended December 31, 2014, borrowers with loans designated as troubled debt
restructurings totaling $2.3 million met the criteria for placement back on accrual status. The $2.3
million was made up of $1.6 million of commercial real estate loans, $696,000 of residential
mortgage loans and $6,000 of consumer loans. This criteria is a minimum of six months of
payment performance under existing or modified terms.
The Company reviews the credit quality of its loan portfolio using an internal grading system that
classifies loans as “Satisfactory,” “Watch,” “Special Mention,” “Substandard” and “Doubtful.”
94
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss
if certain deficiencies are not corrected. Doubtful loans are those having all the weaknesses
inherent to those classified Substandard with the added characteristics that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts, conditions and values,
highly questionable and improbable. Special mention loans possess potential weaknesses that
deserve management’s close attention but do not expose the Bank to a degree of risk that warrants
substandard classification. Loans classified as watch are being monitored because of indications
of potential weaknesses or deficiencies that may require future classification as special mention or
substandard. Loans not meeting any of the criteria previously described are considered
satisfactory. The FDIC-covered loans are evaluated using this internal grading system. These
loans are accounted for in pools and are currently substantially covered through loss sharing
agreements with the FDIC. Minimal adverse classification in the loan pools was identified as of
December 31, 2014 and 2013, respectively. The acquired non-covered loans are also evaluated
using this internal grading system. These loans are accounted for in pools and minimal adverse
classification in the loan pools was identified as of December 31, 2014. See Note 4 for further
discussion of the acquired loan pools and loss sharing agreements.
The Company evaluates the loan risk internal grading system definitions and allowance for loan
loss methodology on an ongoing basis. In the fourth quarter of 2014, the Company began using a
three-year average of historical losses for the general component of the allowance for loan loss
calculation. The Company had previously used a five-year average. The Company believes that
the three-year average provides a better representation of the current risks in the loan portfolio.
This change was made after consultation with our regulators and other third-party consultants, as
well as a review of the practices used by the Company’s peers. This change did not materially
affect the level of the allowance for loan losses. The general component of the allowance for loan
losses is affected by several factors, including, but not limited to, average historical losses, the
current composition of the loan portfolio, current and expected economic conditions, collateral
values and internal risk ratings. Management considers all these factors in determining the
adequacy of its allowance for loan losses. No other significant changes were made to the loan risk
grading system definitions and allowance for loan loss methodology during the past year.
95
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
The loan grading system is presented by loan class below:
Satisfactory
Watch
December 31, 2014
Special
Mention Substandard Doubtful
(In Thousands)
Total
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
Acquired FDIC-covered loans,
net of discounts
Acquired loans no longer covered
by FDIC loss sharing
agreements, net of discounts
Acquired non-covered loans,
net of discounts
141,198
901,167
380,811
351,744
40,037
323,002
77,507
65,841
286,049
48,592
121,982
$
39,049
24,269
41,035
392,929
$
—
21
5,000
—
$ —
—
—
—
85,041
745
—
580
32,155
9,647
423
1,024
—
3
—
—
—
—
—
—
—
—
—
$
1,312
4,303
6,061
—
1,763
1,273
12,554
1,956
1,845
—
351
519
431
— $
—
—
—
40,361
28,593
52,096
392,929
—
—
—
—
—
—
—
—
—
87,549
143,051
945,876
392,414
354,012
41,061
323,353
78,029
66,272
—
—
559
—
286,608
—
—
1,353
—
49,945
—
—
—
—
121,982
Total
$ 3,320,253
$
49,598
$
—
$
34,280
$
— $ 3,404,131
96
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Satisfactory
Watch
December 31, 2013
Special
Mention Substandard Doubtful
(In Thousands)
Total
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
Acquired FDIC-covered loans,
net of discounts
Acquired loans no longer covered
by FDIC loss sharing
agreements, net of discounts
Acquired non-covered loans,
net of discounts
$
34,364
36,524
45,606
184,019
$
298
706
1,148
—
$ —
—
—
—
—
3,179
11,087
—
$
— $
—
—
—
34,662
40,409
57,841
184,019
84,931
503
—
3,699
—
89,133
137,003
727,668
311,320
307,540
39,532
134,516
81,769
57,713
383,891
—
—
6,718
37,937
12,323
1,803
675
—
6
—
—
—
—
—
—
—
—
—
2,187
15,085
1,956
3,528
2,023
201
485
570
—
—
—
2,398
—
—
—
—
145,908
780,690
325,599
315,269
42,230
134,717
82,260
58,283
—
—
2,273
—
386,164
—
—
—
—
—
—
—
—
—
—
Total
$ 2,566,396
$
62,117
$
—
$
46,273
$
2,398 $ 2,677,184
Certain of the Bank’s real estate loans are pledged as collateral for borrowings as set forth in
Notes 9 and 11.
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, 2014
and 2013, loans outstanding to these directors and executive officers are summarized as follows:
97
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Balance, beginning of year
New loans
Payments
December 31,
2014
2013
(In Thousands)
$
7,093
10,427
(1,492)
$
4,295
4,835
(2,037)
Balance, end of year
$
16,028
$
7,093
Note 4: 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 were
covered by a loss sharing agreement between the FDIC and Great Southern Bank. Under the loss
sharing agreement, the Bank shares in the losses on assets covered under the agreement (referred to
as covered assets). On losses up to $115.0 million, the FDIC agreed to reimburse the Bank for
80% of the losses. On losses exceeding $115.0 million, the FDIC 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, which five-year period ended March 31,
2014. 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. Based upon the acquisition date fair values of the net
assets acquired, no goodwill was recorded.
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, Business Combinations. FASB ASC 805 allows a measurement period of up to one year to
adjust initial fair value estimates as of the acquisition date. Subsequent to the initial fair value
estimate calculations in the first quarter of 2009, additional information was obtained about the fair
value of assets acquired and liabilities assumed as of March 20, 2009, which resulted in
adjustments to the initial fair value estimates. Most significantly, additional information was
obtained on the credit quality of certain loans as of the acquisition date which resulted in increased
98
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
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 Income 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 2014, 2013 and 2012 was $-0-, $134,000 and $1.2 million, respectively.
In addition to the loan and FDIC indemnification assets noted above, the acquisition consisted of
other assets with a fair value of approximately $235.5 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 the 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 were covered
by a loss sharing agreement between the FDIC and Great Southern Bank. Under the loss sharing
agreement, the Bank shares in the losses on assets covered under the agreement (referred to as covered
assets). On losses up to $102.0 million, the FDIC agreed to reimburse the Bank for 80% of the losses.
On losses exceeding $102.0 million, the FDIC 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, which five-year period ended September 30, 2014. 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 a preliminary one-time gain of $45.9 million,
which was included in Noninterest Income in the Company’s Consolidated Statement of Income for
the year ended December 31, 2009. During 2010, the Company continued to analyze its estimates of
99
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
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 2014, 2013 and 2012 was $-0-, $104,000 and $399,000, respectively.
In addition to the loan and FDIC indemnification assets noted above, the acquisition consisted of
other assets with a fair value of approximately $47.2 million, including $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 the loss sharing agreement with the FDIC.
Sun Security Bank
On October 7, 2011, 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 Sun Security
Bank, a full service bank headquartered in Ellington, Missouri.
The loans and foreclosed assets purchased in the Sun Security Bank transaction are covered by a
loss sharing agreement between the FDIC and Great Southern Bank. Under the loss sharing
agreement, the FDIC has agreed to cover 80% of the losses on the loans (excluding approximately
$4 million of consumer loans) and foreclosed assets purchased subject to certain limitations.
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 of $67.4 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 a preliminary one-time gain of $16.5 million, which was
included in Noninterest Income in the Company’s Consolidated Statement of Income for the year
ended December 31, 2011. During 2012, 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 $163.7 million and the
related FDIC indemnification asset was recorded at its estimated fair value of $67.4 million. A
discount was recorded in conjunction with the fair value of the acquired loans and the amount
accreted to yield during 2014, 2013 and 2012 was $105,000, $974,000 and $1.6 million,
respectively.
100
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
In addition to the loan and FDIC indemnification assets noted above, the acquisition consisted of
other assets with a fair value of approximately $85.2 million, including $45.3 million of investment
securities, $26.1 million of cash and cash equivalents, $9.1 million of foreclosed assets, $3.0 million
of FHLB stock and $1.8 million of other assets. Liabilities with a fair value of $345.8 million were
also assumed, including $280.9 million of deposits, $64.3 million of FHLB advances and $632,000
of other liabilities. A customer-related core deposit intangible asset of $2.5 million was also
recorded. Net of the excess of assets over liabilities, the Bank received approximately $40.8 million
in cash from the FDIC and entered into the loss sharing agreement with the FDIC.
InterBank
On April 27, 2012, 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 Inter Savings
Bank, FSB (“InterBank”), a full service bank headquartered in Maple Grove, Minnesota.
The loans and foreclosed assets purchased in the InterBank transaction are covered by a loss
sharing agreement between the FDIC and Great Southern Bank. Under the loss sharing agreement,
the FDIC has agreed to cover 80% of the losses on the loans (excluding approximately $60,000 of
consumer loans) and foreclosed assets purchased subject to certain limitations. 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 of $84.0 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 a preliminary one-time gain of $31.3 million, which was included in Noninterest
Income in the Company’s Consolidated Statement of Income for the year ended December 31,
2012. During 2012, 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 $285.5 million and the related FDIC
indemnification asset was recorded at its estimated fair value of $84.0 million. A premium was
recorded in conjunction with the fair value of the acquired loans and the amount amortized to yield
during 2014, 2013 and 2012 was $544,000, $636,000 and $564,000, respectively.
101
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
In addition to the loan and FDIC indemnification assets noted above, the acquisition consisted of
other assets with a fair value of approximately $79.8 million, including $34.9 million of investment
securities, $34.5 million of cash and cash equivalents, $6.2 million of foreclosed assets, $585,000
of FHLB stock and $2.6 million of other assets. Liabilities with a fair value of $458.7 million were
also assumed, including $456.3 million of deposits and $2.4 million of other liabilities. A
customer-related core deposit intangible asset of $1.0 million was also recorded. Net of the excess
of assets over liabilities, the Bank received approximately $40.8 million in cash from the FDIC and
entered into the loss sharing agreement with the FDIC.
Valley Bank
On June 20, 2014, Great Southern Bank entered into a purchase and assumption agreement with
the FDIC to purchase a substantial portion of the loans and investment securities, as well as certain
other assets, and assume all of the deposits, as well as certain other liabilities, of Valley Bank
(“Valley”), a full-service bank headquartered in Moline, Illinois, with significant operations in
Iowa. This transaction did not include a loss sharing agreement.
Based upon the acquisition date fair values of the net assets acquired, no goodwill was recorded.
The transaction resulted in a preliminary one-time gain of $10.8 million, which was included in
Noninterest Income in the Company’s Consolidated Statement of Income for the year ended
December 31, 2014. During 2014, the Company continued to analyze its estimates of the fair
values of the assets acquired and liabilities assumed. The Company finalized its analysis of these
assets and liabilities without adjustments to the initial fair value estimates. The Bank recorded the
fair value of the acquired loans at their estimated fair value of $165.1 million. A premium was
recorded in conjunction with the fair value of the acquired loans and the amount amortized to yield
during 2014 was $501,000. See Note 31 for further analysis of this acquisition.
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 non-performing loans, fair value was estimated by
calculating the present value of the recoverable cash flows using a discount rate based on
comparable corporate bond rates. This valuation of the acquired loans is a significant component
leading to the valuation of the loss sharing assets recorded.
The 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
102
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
accretable yield while decreases are recognized as impairments through the allowance for loan
losses. During the years ended December 31, 2014, 2013 and 2012, increases in expected cash
flows related to the acquired loan portfolios resulted in adjustments to the accretable yield to be
spread over the estimated remaining lives of the loans on a level-yield basis. The increases in
expected cash flows also reduced the amount of expected reimbursements under the loss sharing
agreements. This resulted in corresponding adjustments during the years ended December 31,
2014, 2013 and 2012, 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 amounts of these adjustments were as follows:
Year Ended December 31,
2014
2013
2012
(In Thousands)
Increase in accretable yield due to increased
cash flow expectations
$
31,461
$
40,947
$
42,567
Decrease in FDIC indemnification asset
as a result of accretable yield increase
(23,129)
(32,597)
(34,054)
The adjustments, along with those made in previous years, impacted the Company’s Consolidated
Statements of Income as follows:
Interest income
Noninterest income
Year Ended December 31,
2014
2013
2012
(In Thousands)
$
34,974
(28,740)
$
35,211
(29,451)
$
36,186
(29,864)
Net impact to pre-tax income
$
6,234
$
5,760
$
6,322
Prior to January 1, 2010, the Company’s estimate of cash flows expected to be received from the
acquired loan pools related to TeamBank and Vantus Bank had not materially changed, other than
the adjustment of the provisional fair value measurements of the former TeamBank loan portfolio.
On an on-going basis the Company estimates the cash flows expected to be collected from the
acquired loan pools. For the loan pools acquired in 2009, the cash flow estimates have increased,
beginning with the fourth quarter of 2010, based on payment histories and reduced loss
expectations of the loan pools. For the loan pools acquired in 2012 and 2011, the cash flow
estimates have increased, beginning in 2012. This resulted in increased income that was spread on
a level-yield basis over the remaining expected lives of the loan pools.
Because these adjustments will be recognized over the remaining lives of the loan pools and the
remainder of the loss sharing agreements, respectively, they will impact future periods as well. The
remaining accretable yield adjustment that will affect interest income is $26.9 million and the
remaining adjustment to the indemnification assets, including the effects of the clawback liability
related to Interbank, that will affect non-interest income (expense) is $(22.6) million. Of the
remaining adjustments, we expect to recognize $20.4 million of interest income and $(16.5)
103
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
million of non-interest income (expense) during 2015. Additional adjustments may be recorded in
future periods from the FDIC-assisted acquisitions, as the Company continues to estimate expected
cash flows from the acquired loan pools.
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.
The loss sharing agreement on the InterBank transaction includes a clawback provision whereby if
credit loss performance is better than certain pre-established thresholds, then a portion of the
monetary benefit is shared with the FDIC. The pre-established threshold for credit losses is $115.7
million for this transaction. The monetary benefit required to be paid to the FDIC under the
clawback provision, if any, will occur shortly after the termination of the loss sharing agreement,
which in the case of InterBank is 10 years from the acquisition date.
At December 31, 2014 and 2013, the Bank’s internal estimate of credit performance is expected to
be better than the threshold set by the FDIC in the loss sharing agreement. Therefore, a separate
clawback liability totaling $6.1 million and $3.7 million was recorded at December 31, 2014 and
2013, respectively. As changes in the fair values of the loans and foreclosed assets are determined
due to changes in expected cash flows, changes in the amount of the clawback liability will occur.
In addition, beginning in the three months ended December 31, 2014, the Company's net interest
margin has been impacted by additional yield accretion recognized in conjunction with updated
estimates of the fair value of the loan pools acquired in the June 2014 Valley Bank FDIC-assisted
transaction. Beginning with the three months ended December 31, 2014, the cash flow estimates
have increased for certain of the Valley Bank loan pools primarily based on significant loan
repayments and also due to collection of certain loans, thereby reducing loss expectations on
certain of the loan pools. This resulted in increased income that was spread on a level-yield basis
over the remaining expected lives of these loan pools. The Valley Bank transaction does not
include a loss sharing agreement with the FDIC. Therefore, there is no related indemnification
asset. The entire amount of the discount adjustment will be accreted to interest income over time
with no offsetting impact to non-interest income.
TeamBank Loans, Foreclosed Assets and Indemnification Asset
The following tables present the balances of the loans, discount and FDIC indemnification asset
related to the TeamBank transaction at December 31, 2014 and 2013. Gross loan balances (due
from the borrower) were reduced approximately $392.3 million since the transaction date because
of $258.6 million of repayments by the borrower, $61.6 million of transfers to foreclosed assets
and $72.1 million of charge-downs to customer loan balances. Based upon the collectability
analyses performed during the acquisition, we expected certain levels of foreclosures and charge-
offs and actual results have been better than our expectations. As a result, cash flows expected to
104
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
be received from the acquired loan pools have increased, resulting in adjustments that were made
to the related accretable yield as described above.
FDIC indemnification asset
$
674
$
Initial basis for loss sharing determination,
net of activity since acquisition date
Reclassification from nonaccretable discount
to accretable discount due to change in
expected losses (net of accretion to date)
Original estimated fair value of assets, net of
activity since acquisition date
Expected loss remaining
Assumed loss sharing recovery percentage
Expected loss sharing value
Indemnification asset to be amortized resulting from
change in expected losses
Initial basis for loss sharing determination,
net of activity since acquisition date
Reclassification from nonaccretable discount
to accretable discount due to change in
expected losses (net of accretion to date)
Original estimated fair value of assets, net of
activity since acquisition date
Expected loss remaining
Assumed loss sharing recovery percentage
Expected loss sharing value
Indemnification asset to be amortized resulting from
change in expected losses
Accretable discount on FDIC indemnification asset
December 31, 2014
Loans
Foreclosed
Assets
(In Thousands)
$
43,855
$
132
December 31, 2013
Loans
Foreclosed
Assets
(In Thousands)
$
53,553
$
664
(1,923)
(41,560)
372
85%
315
359
(2,882)
(49,862)
809
82%
665
593
(10)
—
(119)
13
77%
10
—
10
—
(647)
17
76%
13
—
—
13
FDIC indemnification asset
$
1,248
$
105
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Vantus Bank Loans, Foreclosed Assets and Indemnification Asset
The following tables present the balances of the loans, discount and FDIC indemnification asset
related to the Vantus Bank transaction at December 31, 2014 and 2013. Gross loan balances (due
from the borrower) were reduced approximately $289.4 million since the transaction date because
of $243.5 million of repayments by the borrower, $16.5 million of transfers to foreclosed assets
and $29.4 million of charge-downs to customer loan balances. Based upon the collectability
analyses performed during the acquisition, we expected certain levels of foreclosures and charge-
offs and actual results have been better than our expectations. As a result, cash flows expected to
be received from the acquired loan pools have increased, resulting in adjustments that were made
to the related accretable yield as described above.
Initial basis for loss sharing determination,
net of activity since acquisition date
Reclassification from nonaccretable discount
to accretable discount due to change in
expected losses (net of accretion to date)
Original estimated fair value of assets, net of
activity since acquisition date
Expected loss remaining
Assumed loss sharing recovery percentage
Expected loss sharing value
Indemnification asset to be amortized resulting from
change in expected losses
December 31, 2014
Loans
Foreclosed
Assets
(In Thousands)
$
42,138
$
1,084
(504)
(40,997)
637
72%
461
324
—
(894)
190
0%
—
—
—
FDIC indemnification asset
$
785
$
Initial basis for loss sharing determination,
net of activity since acquisition date
Reclassification from nonaccretable discount
to accretable discount due to change in
expected losses (net of accretion to date)
Original estimated fair value of assets, net of
activity since acquisition date
Expected loss remaining
Assumed loss sharing recovery percentage
Expected loss sharing value
Indemnification asset to be amortized resulting from
change in expected losses
106
December 31, 2013
Loans
Foreclosed
Assets
(In Thousands)
$
60,011
$
1,986
(1,202)
(57,920)
889
78%
690
919
—
(1,092)
894
80%
716
—
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Accretable discount on FDIC indemnification asset
(32)
FDIC indemnification asset
$
1,577
$
—
716
Sun Security Bank Loans, Foreclosed Assets and Indemnification Asset
The following tables present the balances of the loans, discount and FDIC indemnification asset
related to the Sun Security Bank transaction at December 31, 2014 and 2013. Gross loan balances
(due from the borrower) were reduced approximately $174.8 million since the transaction date
because of $117.5 million of repayments by the borrower, $27.7 million of transfers to foreclosed
assets and $29.6 million of charge-downs to customer loan balances. Based upon the collectability
analyses performed during the acquisition, we expected certain levels of foreclosures and charge-
offs and actual results have been better than our expectations. As a result, cash flows expected to
be received from the acquired loan pools have increased, resulting in adjustments that were made
to the related accretable yield as described above. Of the $4.1 million expected loss remaining,
$261,000 is non-loss share discount.
Initial basis for loss sharing determination,
net of activity since acquisition date
Reclassification from nonaccretable discount
to accretable discount due to change in
expected losses (net of accretion to date)
Original estimated fair value of assets, net of
activity since acquisition date
Expected loss remaining
Assumed loss sharing recovery percentage
Expected loss sharing value
Indemnification asset to be amortized resulting from
change in expected losses
Accretable discount on FDIC indemnification asset
December 31, 2014
Loans
Foreclosed
Assets
(In Thousands)
$
59,618
$
2,325
(3,341)
(52,166)
4,111
65%
2,676
2,662
(267)
—
(1,488)
837
80%
670
—
(64)
FDIC indemnification asset
$
5,071
$
606
107
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Initial basis for loss sharing determination,
net of activity since acquisition date
Noncredit premium/(discount), net of
activity since acquisition date
Reclassification from nonaccretable discount
to accretable discount due to change in
expected losses (net of accretion to date)
Original estimated fair value of assets, net of
activity since acquisition date
Expected loss remaining
Assumed loss sharing recovery percentage
Expected loss sharing value
Indemnification asset to be amortized resulting from
change in expected losses
Accretable discount on FDIC indemnification asset
December 31, 2013
Loans
Foreclosed
Assets
(In Thousands)
$
78,524
$
3,582
(105)
(5,062)
(64,843)
8,514
70%
5,974
4,049
(680)
—
—
(2,193)
1,389
80%
1,111
—
(93)
FDIC indemnification asset
$
9,343
$
1,018
InterBank Loans, Foreclosed Assets and Indemnification Asset
The following tables present the balances of the loans, discount and FDIC indemnification asset
related to the InterBank transaction at December 31, 2014 and 2013. Gross loan balances (due
from the borrower) were reduced approximately $148.3 million since the transaction date because
of $115.3 million of repayments by the borrower, $12.5 million of transfers to foreclosed assets
and $20.5 million of charge-offs to customer loan balances. Based upon the collectability analyses
performed during the acquisition, we expected certain levels of foreclosures and charge-offs and
actual results have been better than our expectations. As a result, cash flows expected to be
received from the acquired loan pools have increased, resulting in adjustments that were made to
the related accretable yield as described above.
108
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
December 31, 2014
Loans
Foreclosed
Assets
(In Thousands)
$
244,977
$
4,494
1,361
(19,566)
(201,830)
24,942
82%
20,509
3,620
—
—
(3,986)
508
80%
406
—
15,652
(2,967)
36,814
$
$
—
(33)
373
December 31, 2013
Loans
Foreclosed
Assets
(In Thousands)
$
284,975
$
6,543
1,905
(21,218)
(213,539)
52,123
82%
42,654
2,893
16,974
(4,874)
57,647
$
$
—
—
(5,073)
1,470
80%
1,176
—
—
(33)
1,143
Initial basis for loss sharing determination,
net of activity since acquisition date
Noncredit premium/(discount), net of
activity since acquisition date
Reclassification from nonaccretable discount
to accretable discount due to change in
expected losses (net of accretion to date)
Original estimated fair value of assets, net of
activity since acquisition date
Expected loss remaining
Assumed loss sharing recovery percentage
Expected loss sharing value
FDIC loss share clawback
Indemnification asset to be amortized resulting from
change in expected losses
Accretable discount on FDIC indemnification asset
FDIC indemnification asset
Initial basis for loss sharing determination,
net of activity since acquisition date
Noncredit premium/(discount), net of
activity since acquisition date
Reclassification from nonaccretable discount
to accretable discount due to change in
expected losses (net of accretion to date)
Original estimated fair value of assets, net of
activity since acquisition date
Expected loss remaining
Assumed loss sharing recovery percentage
Expected loss sharing value
FDIC loss share clawback
Indemnification asset to be amortized resulting from
change in expected losses
Accretable discount on FDIC indemnification asset
FDIC indemnification asset
109
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Valley Bank Loans and Foreclosed Assets
The following tables present the balances of the loans and discount related to the Valley Bank
transaction at December 31, 2014 and June 20, 2014 (the transaction date). Gross loan balances
(due from the borrower) were reduced approximately $47.3 million since the transaction date
because of $42.8 million of repayments by the borrower, $778,000 of transfers to foreclosed assets
and $3.7 million of charge-offs to customer loan balances. The Valley Bank transaction did not
include a loss sharing agreement; however, the loans were recorded at a discount, which is
accreted to yield over the life of the loans. Based upon the collectability analyses performed
during the acquisition, we expected certain levels of foreclosures and charge-offs and actual results
have been better than our expectations. As a result, cash flows expected to be received from the
acquired loan pools have increased, resulting in adjustments that were made to the related
accretable yield as described above.
December 31, 2014
Loans
Foreclosed
Assets
(In Thousands)
$
145,845
$
1,514
(1,519)
(121,982)
23,858
$
$
778
—
—
(778)
—
June 20, 2014
Loans
Foreclosed
Assets
(In Thousands)
$
$
193,186
2,015
(165,098)
30,103
$
$
—
—
—
—
Initial basis, net of activity
since acquisition date
Noncredit premium/(discount), net of
activity since acquisition date
Reclassification from nonaccretable discount
to accretable discount due to change in
expected losses (net of accretion to date)
Original estimated fair value of assets, net of
activity since acquisition date
Expected loss remaining
Initial basis
Noncredit premium/(discount)
Original estimated fair value of assets
Expected loss remaining
110
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Changes in the accretable yield for acquired loan pools were as follows for the years ended December
31, 2014, 2013 and 2012:
TeamBank
Vantus
Bank
Sun
Security
Bank
(In Thousands)
InterBank
Valley
Bank
$
14,662
—
(20,129)
$
21,967
—
(21,437)
$
12,769
—
(15,851)
$
—
46,078
(11,998)
$
17,595
13,008
14,341
8,494
12,128
(9,473)
13,538
(8,940)
11,259
(16,885)
42,574
(28,667)
4,747
1,127
16,739
26,188
—
—
—
—
—
—
—
7,402
—
(4,138)
5,725
—
(3,835)
11,113
—
(10,590)
40,095
—
(37,994)
—
22,976
(4,788)
3,601
2,563
7,429
33,991
(7,056)
Balance, January 1, 2012
Additions
Accretion
Reclassification from nonaccretable
difference(1)
Balance, December 31, 2012
Accretion
Reclassification from nonaccretable
difference(1)
Balance, December 31, 2013
Additions
Accretion
Reclassification from nonaccretable
difference(1)
Balance, December 31, 2014
$
6,865
$
4,453
$
7,952
$ 36,092
$ 11,132
(1) Represents increases in estimated cash flows expected to be received from the acquired loan
pools, primarily due to lower estimated credit losses. The numbers also include changes in
expected accretion of the loan pools for TeamBank, Vantus Bank, Sun Security Bank, InterBank
and Valley Bank for the year ended December 31, 2014, totaling $3.2 million, $2.4 million, $3.9
million, $9.2 million and $(9.6 million), respectively; for TeamBank, Vantus Bank, Sun
Security Bank and InterBank for the year ended December 31, 2013, totaling $2.3 million,
$611,000, $4.8 million and $146,000, respectively; and for TeamBank, Vantus Bank, Sun
Security Bank and InterBank for the year ended December 31, 2012, totaling $5.2 million, $4.4
million, $3.6 million and $2.4 million, respectively.
111
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Note 5: Other Real Estate Owned
Major classifications of foreclosed assets at December 31, 2014 and 2013, were as follows:
Foreclosed assets held for sale
One- to four-family construction
Subdivision construction
Land development
Commercial construction
One- to four-family residential
Other residential
Commercial real estate
Commercial business
Consumer
FDIC-supported foreclosed assets, net of discounts
Acquired foreclosed assets no longer covered by
FDIC loss sharing agreements, net of discounts
Acquired foreclosed assets not covered by FDIC
loss sharing agreements, net of discounts (Valley Bank)
2014
2013
(In Thousands)
$
223
9,857
17,168
—
3,353
2,625
1,632
59
624
35,541
5,695
879
778
$
600
12,152
16,688
2,132
744
5,900
3,135
79
715
42,145
9,258
—
—
Foreclosed assets held for sale, net
42,893
51,403
Other real estate owned not acquired through
foreclosure
2,945
2,111
Other real estate owned
$
45,838
$
53,514
As of December 31, 2014, other real estate owned not acquired through foreclosure includes 13
properties, 11 of which were branch locations that have been closed and are held for sale, and two
of which are land which was acquired for potential branch locations.
Expenses applicable to foreclosed assets for the years ended December 31, 2014, 2013 and 2012,
included the following:
2014
2013
(In Thousands)
2012
Net gain on sales of real estate
Valuation write-downs
Operating expenses, net of rental
income
$
(91) $
3,343
2,384
$
(231)
1,384
2,915
(1,603)
6,786
3,565
$
5,636
$
4,068
$
8,748
112
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Note 6: Premises and Equipment
Major classifications of premises and equipment at December 31, 2014 and 2013, stated at cost,
were as follows:
Land
Buildings and improvements
Furniture, fixtures and equipment
Less accumulated depreciation
2014
2013
(In Thousands)
$
35,577
85,128
50,311
171,016
46,175
$
29,348
71,026
44,143
144,517
39,983
$
124,841
$
104,534
Note 7:
Investments in Limited Partnerships
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, 2014, the Company had
thirteen investments, with a net carrying value of $29.6 million. At December 31, 2013, the
Company had fifteen investments, with a net carrying value of $34.2 million. Due to the
Company’s inability to exercise any significant influence over any of the investments in
Affordable Housing Partnerships, they all are accounted for using the proportional amortization
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 cease
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.
The remaining federal affordable housing tax credits to be utilized over a maximum of 15 years
were $38.7 million as of December 31, 2014, assuming no tax credit recapture events occur and all
projects currently under construction are completed as planned. Amortization of the investments
in partnerships is expected to be approximately $29.5 million, assuming all projects currently
under construction are completed and funded as planned. The Company’s usage of federal
affordable housing tax credits approximated $6.0 million, $7.1 million and $5.2 million during
2014, 2013 and 2012, respectively. Investment amortization amounted to $4.7 million, $5.0
million and $4.6 million for the years ended December 31, 2014, 2013 and 2012, respectively.
113
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Investments in Community Development Entities
The Company has invested in certain limited partnerships that were formed to develop and operate
business and real estate projects located in low-income communities. At December 31, 2014, the
Company had four investments, with a net carrying value of $5.1 million. At December 31, 2013,
the Company had four investments, with a net carrying value of $6.8 million. Due to the
Company’s inability to exercise any significant influence over any of the investments in qualified
Community Development Entities, they are all accounted for using the cost method. Each of the
partnerships provides federal New Market Tax Credits over a seven-year credit allowance period.
In each of the first three years, credits totaling five percent of the original investment are allowed
on the credit allowance dates and for the final four years, credits totaling six percent of the original
investment are allowed on the credit allowance dates. Each of the partnerships must be invested in
a qualified Community Development Entity on each of the credit allowance dates during the
seven-year period to utilize the tax credits. If the Community Development Entities cease to
qualify during the seven-year period, the credits may be denied for any credit allowance date and a
portion of the credits previously taken may be subject to recapture with interest. The investments
in the Community Development Entities cannot be redeemed before the end of the seven-year
period.
The remaining federal New Market Tax Credits to be utilized over a maximum of seven years were
$7.1 million as of December 31, 2014. Amortization of the investments in partnerships is expected
to be approximately $5.0 million. The Company’s usage of federal New Market Tax Credits
approximated $2.3 million, $2.3 million and $1.7 million during 2014, 2013 and 2012,
respectively. Investment amortization amounted to $1.7 million, $1.6 million and $1.1 million for
the years ended December 31, 2014, 2013 and 2012, respectively.
Investments in Limited Partnerships for Federal Rehabilitation/Historic Tax Credits
From time to time, the Company has invested in certain limited partnerships that were formed to
provide certain federal rehabilitation/historic tax credits. The Company utilizes these credits in
their entirety in the year the project is placed in service and the impact to the Consolidated
Statements of Income has not been material.
Investments in Limited Partnerships for State Tax Credits
From time to time, the Company has invested in certain limited partnerships that were formed to
provide certain state tax credits. The Company has primarily syndicated these tax credits and the
impact to the Consolidated Statements of Income has not been material.
114
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Note 8: Deposits
Deposits at December 31, 2014 and 2013, are summarized as follows:
Noninterest-bearing accounts
Interest-bearing checking and
savings accounts
Certificate accounts
Weighted Average
Interest Rate
2014
2013
(In Thousands, Except
Interest Rates)
—
$
518,266
$
522,805
0.19% - 0.20%
0% - 0.99%
1% - 1.99%
2% - 2.99%
3% - 3.99%
4% - 4.99%
5% and above
1,375,100
1,893,366
798,932
227,476
61,146
8,065
1,435
420
1,097,474
1,291,879
1,814,684
669,698
251,118
61,042
9,413
1,852
819
993,942
$
2,990,840
$
2,808,626
The weighted average interest rate on certificates of deposit was 0.78% and 0.69% at
December 31, 2014 and 2013, respectively.
The aggregate amount of certificates of deposit originated by the Bank in denominations greater
than $100,000 was approximately $402.0 million and $345.1 million at December 31, 2014 and
2013, respectively. The Bank utilizes brokered deposits as an additional funding source. The
aggregate amount of brokered deposits was approximately $173.5 million and $126.3 million at
December 31, 2014 and 2013, respectively.
At December 31, 2014, scheduled maturities of certificates of deposit were as follows:
2015
2016
2017
2018
2019
Thereafter
Retail
Brokered
(In Thousands)
Total
$
$
632,607
161,813
74,880
39,739
9,079
5,832
80,656
75,356
17,512
—
—
—
$
713,263
237,169
92,392
39,739
9,079
5,832
$
923,950
$
173,524
$ 1,097,474
115
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
A summary of interest expense on deposits for the years ended December 31, 2014, 2013 and
2012, is as follows:
2014
2013
(In Thousands)
2012
Checking and savings accounts
Certificate accounts
Early withdrawal penalties
$
$
3,088
8,264
(127)
$
3,551
8,871
(76)
7,087
13,715
(82)
$
11,225
$
12,346
$
20,720
Note 9: Advances From Federal Home Loan Bank
Advances from the Federal Home Loan Bank at December 31, 2014 and 2013, consisted of the
following:
December 31, 2014
December 31, 2013
Due In
Amount
Weighted
Average
Interest
Rate
Weighted
Average
Interest
Rate
Amount
2014
2015
2016
2017
2018
2019
2020 and thereafter
(In Thousands)
—%
0.41
5.14
3.26
5.14
5.14
5.54
0.75
2,315
10,065
25,070
85,825
81
29
500
1.02%
3.87
3.81
3.92
5.06
5.06
5.54
123,885
3.85
—
240,065
70
30,826
81
28
500
271,570
Unamortized fair value adjustment
71
2,872
$
271,641
$
126,757
Included in the Bank’s FHLB advances at December 31, 2014 and December 31, 2013, was a
$10.0 million advance with a maturity date of October 26, 2015. The interest rate on this advance
is 3.86%. The advance has a call provision that allows the Federal Home Loan Bank of Topeka to
call the advance quarterly.
Included in the Bank’s FHLB advances at December 31, 2014 and December 31, 2013, was a
$30.0 million 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.
116
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Included in the Bank’s FHLB advances at December 31, 2013, was a $25.0 million advance with a
maturity date of December 7, 2016. The interest rate on this advance was 3.81%. This advance
was repaid by the Bank in June 2014.
Included in the Bank’s FHLB advances at December 31, 2013, was a $30.0 million advance with a
maturity date of March 29, 2017. The interest rate on this advance was 4.07%. This advance was
repaid by the Bank in June 2014.
Included in the Bank’s FHLB advances at December 31, 2013, was a $25.0 million advance with a
maturity date of June 20, 2017. The interest rate on this advance was 4.57%. This advance was
repaid by the Bank in June 2014.
The Company prepaid a total of $80 million of its Federal Home Loan Bank advances and $50
million of structured repurchase agreements (see Note 12) during the year ended December 31,
2014 as part of a strategy to utilize the Bank’s liquidity and improve net interest margin. As a
result, the Company incurred one-time prepayment penalties totaling $7.4 million, which were
included in other operating expenses.
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, 2014 and 2013. Loans with
carrying values of approximately $1.10 billion and $878.5 million were pledged as collateral for
outstanding advances at December 31, 2014 and 2013, respectively. The Bank had potentially
available $395.3 million remaining on its line of credit under a borrowing arrangement with the
FHLB of Des Moines at December 31, 2014.
Note 10: Short-Term Borrowings
Short-term borrowings at December 31, 2014 and 2013, are summarized as follows:
Notes payable – Community Development
Equity Funds
Overnight borrowings from the Federal Home Loan
Bank
Securities sold under reverse repurchase agreements
2014
2013
(In Thousands)
$
1,451
$
1,128
41,000
168,993
—
134,981
$
211,444
$
136,109
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.
117
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Short-term borrowings had weighted average interest rates of 0.08% and 0.04% at December 31,
2014 and 2013, respectively. Short-term borrowings averaged approximately $165.2 million and
$180.4 million for the years ended December 31, 2014 and 2013, respectively. The maximum
amounts outstanding at any month end were $211.4 million and $220.1 million, respectively,
during those same periods.
Note 11: Federal Reserve Bank Borrowings
At December 31, 2014 and 2013, the Bank had $563.2 million and $418.9 million, respectively,
available under a line-of-credit borrowing arrangement with the Federal Reserve Bank. The line is
secured primarily by commercial loans. There were no amounts borrowed under this arrangement
at December 31, 2014 or 2013.
Note 12: Structured Repurchase Agreements
In September 2008, the Company entered into a structured repurchase borrowing transaction for
$50 million. This borrowing bore interest at a fixed rate of 4.34%, was scheduled to mature
September 15, 2015, and had a call provision that allowed the repurchase counterparty to call the
borrowing quarterly. The Company pledged investment securities to collateralize this borrowing.
In June 2014, the Company elected to repay this structured repurchase borrowing and incurred a
one-time prepayment penalty (see Note 9).
Note 13: 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 $25.0 million 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 $25.8 million 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 1.83% and 1.84% at December 31, 2014 and 2013,
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 $5.0 million 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
118
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Securities Act of 1933, as amended. The gross proceeds of the offering were used to purchase
Junior Subordinated Debentures from the Company totaling $5.2 million 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 1.64% and 1.65% at December 31, 2014 and
2013, respectively.
At December 31, 2014 and 2013, subordinated debentures issued to capital trusts are summarized
as follows:
2014
2013
(In Thousands)
Subordinated debentures
$
30,929
$
30,929
Note 14:
Income Taxes
The Company files a consolidated federal income tax return. As of December 31, 2014 and 2013,
retained earnings included approximately $17.5 million 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 $6.5 million at December 31, 2014 and 2013.
During the years ended December 31, 2014, 2013 and 2012, the provision for income taxes
included these components:
2014
2013
(In Thousands)
2012
Taxes currently payable
Deferred income taxes
$
Income taxes
Taxes attributable to
discontinued operations
Income tax expense attributable
20,013
(6,260)
13,753
—
$
17,013
(8,839)
$
8,174
—
3,815
13,252
17,067
(2,487)
to continuing operations
$
13,753
$
8,174
$
14,580
119
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
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
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,
2014
2013
(In Thousands)
13,452
317
1,527
3,970
350
19,616
(6,443)
(1,494)
(2,176)
(508)
(3,895)
(4,738)
(236)
(19,490)
$
14,041
210
599
3,697
—
18,547
(3,619)
(1,656)
(3,068)
(598)
(1,344)
(12,049)
(256)
(22,590)
Net deferred tax asset (liability)
$
126
$
(4,043)
Reconciliations of the Company’s effective tax rates from continuing operations to the statutory
corporate tax rates were as follows:
Tax at statutory rate
Nontaxable interest and
dividends
Tax credits
State taxes
Other
2014
35.0%
(3.0)
(9.5)
1.5
—
2013
35.0%
(4.6)
(12.5)
1.6
—
2012
35.0%
(3.5)
(7.0)
0.5
(0.1)
24.0%
19.5%
24.9%
The Company and its consolidated subsidiaries have not been audited recently by the Internal
Revenue Service (IRS) or the state taxing authorities with respect to income or franchise tax
returns, and as such, tax years through December 31, 2005, have been closed without audit. The
Company, through one of its subsidiaries, is a partner in two partnerships currently under IRS
examination for 2006 and 2007. As a result, the Company’s 2006 and subsequent tax years remain
open for examination. The IRS audits of the two partnerships are ongoing. The IRS has raised
120
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
questions about the validity of the allocation of a portion of the credits by one of the partnerships.
At this time, the Company believes that the partnership has sufficient technical support for its
allocation position regarding these credits and that it is more likely than not these allocations will
ultimately be sustained; therefore, a reserve for uncertain tax positions is not required.
Note 15: Disclosures About Fair Value of Financial Instruments
Fair value is 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. Fair value measurements
must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a
hierarchy of three levels of inputs that may be used to measure fair value:
Level 1
Quoted prices in active markets for identical assets or liabilities
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs
that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities
Level 3
Unobservable inputs supported by little or no market activity and are significant
to the fair value of the assets or liabilities
121
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Recurring Measurements
The following table presents the fair value measurements of assets recognized in the accompanying
balance sheets measured at fair value on a recurring basis and the level within the fair value
hierarchy in which the fair value measurements fall at December 31, 2014 and 2013:
Fair Value Measurements Using
Quoted Prices
in Active
Markets
for Identical
Assets
(Level 1)
Fair Value
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(In Thousands)
December 31, 2014
U.S. government agencies
Mortgage-backed securities
States and political subdivisions
Equity securities
Mortgage servicing rights
Interest rate derivative asset
Interest rate derivative liability
December 31, 2013
U.S. government agencies
Mortgage-backed securities
Small Business Administration loan pools
States and political subdivisions
Equity securities
Mortgage servicing rights
Interest rate derivative asset
Interest rate derivative liability
$
$
$
$
19,514
257,798
85,040
3,154
185
2,502
(2,187)
17,255
367,578
44,855
122,724
2,869
211
2,544
(1,613)
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
19,514
257,798
85,040
3,154
—
—
—
17,255
367,578
44,855
122,724
2,869
—
—
—
—
—
—
—
185
2,502
(2,187)
—
—
—
—
—
211
2,544
(1,613)
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 statements of financial
condition at December 31, 2014 and 2013, as well as the general classification of such assets
pursuant to the valuation hierarchy. There have been no significant changes in the valuation
techniques during the year ended December 31, 2014. For assets classified within Level 3 of the
fair value hierarchy, the process used to develop the reported fair value is described below.
122
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
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, state and
municipal bonds and certain 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, 2014 and 2013.
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.
Interest Rate Derivatives
The fair value is estimated using forward-looking interest rate curves and is calculated using
discounted cash flows that are observable or that can be corroborated by observable market data
and, therefore, are classified within Level 3 of the valuation hierarchy.
Level 3 Reconciliation
The following is a reconciliation of the beginning and ending balances of recurring fair value
measurements recognized in the accompanying statements of financial condition using significant
unobservable (Level 3) inputs.
$
Mortgage
Servicing
Rights
(In Thousands)
152
239
(180)
211
105
(131)
185
$
Balance, January 1, 2013
Additions
Amortization
Balance, December 31, 2013
Additions
Amortization
Balance, December 31, 2014
123
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Balance, January 1, 2013
Net change in fair value
Balance, December 31, 2013
Net change in fair value
Balance, December 31, 2014
Balance, January 1, 2013
Additions
Net change in fair value
Balance, December 31, 2013
Net change in fair value
Balance, December 31, 2014
Balance, January 1, 2013
Net change in fair value
Balance, December 31, 2013
Net change in fair value
Interest
Rate Derivative
Asset
(In Thousands)
$
2,112
(253)
1,859
228
$
2,087
Interest Rate
Cap Derivative
Asset
Designated
as Hedging
Instrument
(In Thousands)
$
$
—
738
(53)
685
(270)
415
Interest
Rate
Derivative
Liability
(In Thousands)
$
2,160
(547)
1,613
574
Balance, December 31, 2014
$
2,187
124
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Nonrecurring Measurements
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, 2014 and 2013:
Fair Value Measurements Using
Quoted
Prices
in Active
Markets
for Identical
Assets
(Level 1)
Fair Value
Other
Significant
Observable
Unobservable
Inputs
(Level 2)
Inputs
(Level 3)
(In Thousands)
December 31, 2014
Impaired loans
One- to four-family residential construction
Subdivision construction
Land development
Owner occupied one- to four-family residential
Non-owner occupied one- to four-family
residential
Commercial real estate
Other residential
Commercial business
Consumer auto
Consumer other
Home equity lines of credit
Total impaired loans
Foreclosed assets held for sale
December 31, 2013
Impaired loans
One- to four-family residential construction
Subdivision construction
Land development
Owner occupied one- to four-family residential
Non-owner occupied one- to four-family
residential
Commercial real estate
Other residential
Commercial business
Consumer auto
Consumer other
Home equity lines of credit
Total impaired loans
Foreclosed assets held for sale
$
$
$
$
$
$
$
$
$
$
$
$
—
274
3,946
862
288
5,333
—
320
38
399
198
11,658
6,975
—
145
1,474
349
388
5,224
1,440
61
19
275
70
9,445
2,169
125
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
$
$
$
$
—
274
3,946
862
288
5,333
—
320
38
399
198
11,658
6,975
—
145
1,474
349
388
5,224
1,440
61
19
275
70
9,445
2,169
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Following is a description of the valuation methodologies used for assets measured at fair value on
a nonrecurring basis and recognized in the accompanying statements of financial condition, as well
as the general classification of such assets pursuant to the valuation hierarchy. For assets
classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair
value is described below.
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. At December 31, 2014 and 2013, the aggregate fair value of mortgage loans held for sale
exceeded their cost. Accordingly, no mortgage loans held for sale were marked down and reported
at fair value.
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 310, Receivables, 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.
All appraised values are adjusted for market-related trends based on the Company’s experience in
sales and other appraisals of similar property types as well as estimated selling costs. Each quarter
management reviews all collateral dependent impaired loans on a loan-by-loan basis to determine
whether updated appraisals are necessary based on loan performance, collateral type and guarantor
support. At times, the Company measures the fair value of collateral dependent impaired loans
using appraisals with dates prior to one year from the date of review. These appraisals are
discounted by applying current, observable market data about similar property types such as sales
contracts, estimations of value by individuals familiar with the market, other appraisals, sales or
collateral assessments based on current market activity until updated appraisals are obtained.
Depending on the length of time since an appraisal was performed and the data provided through
our reviews, these appraisals are typically discounted 10-40%. The policy described above is the
same for all types of collateral dependent impaired loans.
126
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
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 were recorded during the
years ended December 31, 2014 and 2013, are shown in the table above (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 above have been re-measured during the
years ended December 31, 2014 and 2013, subsequent to their initial transfer to foreclosed assets.
The following disclosure relates to financial assets for which it is not practicable for the Company
to estimate the fair value at December 31, 2014 and 2013.
FDIC Indemnification Asset
As part of certain 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
subject to certain limitations which are more fully described in Note 4.
Under the TeamBank agreement, the FDIC agreed to reimburse the Bank for 80% of the first
$115 million in realized losses and 95% for realized losses that exceed $115 million. The
indemnification asset was originally recorded at fair value on the acquisition date (March 20,
2009) and at December 31, 2014 and 2013, the carrying value was $684,000 and $1.3 million,
respectively.
Under the Vantus Bank agreement, the FDIC agreed to reimburse the Bank for 80% of the first
$102 million in realized losses and 95% for realized losses that exceed $102 million. The
indemnification asset was originally recorded at fair value on the acquisition date (September 4,
2009) and at December 31, 2014 and 2013, the carrying value of the FDIC indemnification asset
was $785,000 and $2.3 million, respectively.
Under the Sun Security Bank agreement, the FDIC agreed to reimburse the Bank for 80% of
realized losses. The indemnification asset was originally recorded at fair value on the acquisition
date (October 7, 2011) and at December 31, 2014 and 2013, the carrying value of the FDIC
indemnification asset was $5.7 million and $10.4 million, respectively.
Under the InterBank agreement, the FDIC agreed to reimburse the Bank for 80% of realized losses.
The indemnification asset was originally recorded at fair value on the acquisition date (April 27,
2012) and at December 31, 2014 and 2013, the carrying value of the FDIC indemnification asset
was $37.2 million and $58.8 million, respectively.
127
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
From the dates of acquisition, each of the four agreements extends ten years for 1-4 family real
estate loans and five years for other loans. The loss sharing assets are measured separately from the
loan portfolios because they are not contractually embedded in the loans and are not transferable
with the loans should the Bank choose to dispose of them. Fair values on the acquisition dates were
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 reimbursements from the FDIC.
The loss sharing assets are also separately measured from the related foreclosed real estate.
Although the assets are contractual receivables from the FDIC, they do not have effective interest
rates. The Bank will collect the assets 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 agreements. While the assets were recorded at their estimated fair values on the
acquisition dates, it is not practicable to complete fair value analyses on a quarterly or annual basis.
Estimating the fair value of the FDIC indemnification asset would involve preparing fair value
analyses of the entire portfolios of loans and foreclosed assets covered by the loss sharing
agreements from all of these acquisitions on a quarterly or annual basis.
Fair Value of Financial Instruments
The following methods were used to estimate the fair value of all other financial instruments
recognized in the accompanying statements of financial condition at amounts other than fair value.
Cash and Cash Equivalents and Federal Home Loan Bank Stock
The carrying amount approximates fair value.
Loans and Interest Receivable
The fair value of loans is estimated by discounting the future cash flows using the current rates at
which similar loans would be made to borrowers with similar credit ratings and for the same
remaining maturities. Loans with similar characteristics are aggregated for purposes of the
calculations. The carrying amount of accrued interest receivable approximates its fair value.
Deposits and Accrued Interest Payable
The fair value of demand deposits and savings accounts is the amount payable on demand at the
reporting date, i.e., their carrying amounts. The fair value of fixed maturity certificates of deposit
is estimated using a discounted cash flow calculation that applies the rates currently offered for
deposits of similar remaining maturities. The carrying amount of accrued interest payable
approximates its fair value.
128
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
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 Trusts
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 reporting date.
Commitments to Originate Loans, Letters of Credit and Lines of Credit
The fair value of commitments is estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers
the difference between current levels of interest rates and the committed rates. The fair value of
letters of credit is based on fees currently charged for similar agreements or on the estimated cost
to terminate them or otherwise settle the obligations with the counterparties at the reporting date.
The following table presents estimated fair values of the Company’s financial instruments. The
fair values of certain of these instruments were calculated by discounting expected cash flows,
which method involves significant judgments by management and uncertainties. Fair value is the
estimated amount at which financial assets or liabilities could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale. Because no market
exists for certain of these financial instruments and because management does not intend to sell
these financial instruments, the Company does not know whether the fair values shown below
represent values at which the respective financial instruments could be sold individually or in the
aggregate.
129
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
December 31, 2014
Carrying
Amount
Fair
Value
Hierarchy
Level
Carrying
Amount
December 31, 2013
Fair
Value
Hierarchy
Level
Financial assets
Cash and cash equivalents
Held-to-maturity securities
Mortgage loans held for sale
Loans, net of allowance for loan
losses
Accrued interest receivable
Investment in FHLB stock
$ 218,647
450
14,579
$ 218,647
499
14,579
3,038,848
11,219
16,893
3,047,741
11,219
16,893
Financial liabilities
Deposits
FHLB advances
Short-term borrowings
Structured repurchase
agreements
Subordinated debentures
Accrued interest payable
Unrecognized financial
instruments (net of
contractual value)
2,990,840
271,641
211,444
2,996,226
273,568
211,444
—
30,929
1,067
—
30,929
1,067
Commitments to originate loans
Letters of credit
Lines of credit
—
92
—
—
92
—
Note 16: Operating Leases
1
2
2
3
3
3
3
3
3
3
3
3
3
3
3
$ 227,925
805
7,239
$ 227,925
912
7,239
2,439,530
11,408
9,822
2,442,917
11,408
9,822
2,808,626
126,757
136,109
2,813,779
131,281
136,109
50,000
30,929
1,099
53,485
30,929
1,099
—
76
—
—
76
—
1
2
2
3
3
3
3
3
3
3
3
3
3
3
3
The Company has entered into various operating leases at several of its locations. Some of the
leases have renewal options.
At December 31, 2014, future minimum lease payments were as follows (in thousands):
2015
2016
2017
2018
2019
Thereafter
$
1,042
920
820
617
422
526
$
4,347
Rental expense was $1.1 million, $1.0 million and $1.7 million for the years ended December 31,
2014, 2013 and 2012, respectively.
130
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Note 17: Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic
conditions. The Company principally manages its exposures to a wide variety of business and
operational risks through management of its core business activities. The Company manages
economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount,
sources and duration of its assets and liabilities. 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. The Company has interest rate derivatives that result from a
service provided to certain qualifying loan customers that are not used to manage interest rate risk
in the Company’s assets or liabilities and are not designated in a qualifying hedging relationship.
The Company manages a matched book with respect to its derivative instruments in order to
minimize its net risk exposure resulting from such transactions. In addition, the Company has
interest rate derivatives that are designated in a qualified hedging relationship.
Nondesignated Hedges
The Company has interest rate swaps that are not designated in qualifying hedging relationship.
Derivatives not designated as hedges are not speculative and result from a service the Company
provides to certain loan customers, which the Company began offering during 2011. The
Company executes interest rate swaps with commercial banking customers to facilitate their
respective risk management strategies. Those interest rate swaps are simultaneously hedged by
offsetting interest rate swaps that the Company executes with a third party, such that the Company
minimizes its net risk exposure resulting from such transactions. As the interest rate swaps
associated with this program do not meet the strict hedge accounting requirements, changes in the
fair value of both the customer swaps and the offsetting swaps are recognized directly in earnings.
As part of the Valley Bank FDIC-assisted acquisition, the Company acquired seven loans with
related interest rate swaps. Valley’s swap program differed from the Company’s in that Valley did
not have back to back swaps with the customer and a counterparty. Two of the seven acquired
loans with interest rate swaps have paid off. The notional amount of the five remaining Valley
swaps is $4.0 million at December 31, 2014. As of December 31, 2014, the Company had 28
interest rate swaps totaling $125.1 million in notional amount with commercial customers, and 28
interest rate swaps with the same notional amount with third parties related to its program. As of
December 31, 2013, the Company had 24 interest rate swaps totaling $114.0 million in notional
amount with commercial customers, and 24 interest rate swaps with the same notional amount with
third parties related to its program. During the years ended December 31, 2014 and 2013, the
Company recognized a net loss of $345,000 and a net gain of $295,000, respectively, in
noninterest income related to changes in the fair value of these swaps.
Cash Flow Hedges
As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flows
due to interest rate fluctuations, the Company entered into two interest rate cap agreements for a
portion of its floating rate debt associated with its trust preferred securities. The agreement with a
131
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
notional amount of $25 million states that the Company will pay interest on its trust preferred debt
in accordance with the original debt terms at a rate of 3-month LIBOR + 1.60%. Should interest
rates rise above a certain threshold, the counterparty will reimburse the Company for interest paid
such that the Company will have an effective interest rate on that portion of its trust preferred
securities no higher than 2.37%. The second agreement with a notional amount of $5 million
states that the Company will pay interest on its trust preferred debt in accordance with the original
debt terms at a rate of 3-month LIBOR + 1.40%. Should interest rates rise above a certain
threshold, the counterparty will reimburse the Company for interest paid such that the Company
will have an effective interest rate on that portion of its trust preferred securities no higher than
2.17%. The agreements were effective on August 1, 2013 and July 1, 2013, respectively, and have
a term of four years.
The effective portion of the gain or loss on the derivative is reported as a component of other
comprehensive income and reclassified into earnings in the same period or periods during which
the hedged transaction affects earnings. Gains and losses on the derivative representing either
hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are
recognized in current earnings. During the years ended December 31, 2014 and 2013, the
Company recognized $-0- in noninterest income related to changes in the fair value of
these derivatives. During the years ended December 31, 2014 and 2013, the Company
recognized $19,000 and $-0-, respectively, in interest expense related to the amortization of the
cost of these interest rate caps.
132
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
The table below presents the fair value of the Company’s derivative financial instruments as well
as their classification on the Consolidated Statements of Financial Condition:
Derivatives designated as
hedging instruments
Interest rate caps
Total derivatives designated
as hedging instruments
Derivatives not designated
as hedging instruments
Asset Derivatives
Derivatives not designated
as hedging instruments
Interest rate products
Total derivatives not
designated as hedging
instruments
Liability Derivatives
Derivatives not designated
as hedging instruments
Interest rate products
Total derivatives not
designated as hedging
instruments
Location in
Consolidated Statements
of Financial Condition
Fair Value
December 31,
December 31,
2014
2013
(In Thousands)
Prepaid expenses and other assets
$
415
$
685
$
415
$
685
Prepaid expenses and other assets
$
2,087
$
1,859
$
2,087
$
1,859
Accrued expenses and other liabilities
$
2,187
$
1,613
$
2,187
$
1,613
The following tables present the effect of derivative instruments on the statements of
comprehensive income:
Cash Flow Hedges
Year Ended December 31
Amount of Gain (Loss)
Recognized in AOCI
2014
2013
(In Thousands)
Interest rate cap, net of income taxes
$
(164)
$
(34)
133
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Agreements with Derivative Counterparties
The Company has agreements with its derivative counterparties. If the Company defaults on any
of its indebtedness, including a default where repayment of the indebtedness has not been
accelerated by the lender, then the Company could also be declared in default on its derivative
obligations. If the Bank fails to maintain its status as a well-capitalized institution, then the
counterparty could terminate the derivative positions and the Company would be required to settle
its obligations under the agreements. Similarly, the Company could be required to settle its
obligations under certain of its agreements if certain regulatory events occurred, such as the
issuance of a formal directive, or if the Company’s credit rating is downgraded below a specified
level.
As of December 31, 2014, the termination value of derivatives in a net liability position, which
included accrued interest but excluded any adjustment for nonperformance risk, related to these
agreements was $2.1 million. The Company has minimum collateral posting thresholds with its
derivative counterparties. At December 31, 2014, the Company’s activity with its derivative
counterparties had met the level at which the minimum collateral posting thresholds take effect and
the Company had posted $3.1 million of collateral to satisfy the agreement. As of December 31,
2013, the termination value of derivatives in a net liability position, which included accrued
interest but excluded any adjustment for nonperformance risk, related to these agreements was
$480,000. At December 31, 2013, the Company’s activity with its derivative counterparties had
met the level at which the minimum collateral posting thresholds take effect and the Company had
posted $778,000 of collateral to satisfy the agreement. If the Company had breached any of these
provisions at December 31, 2014 and 2013, it could have been required to settle its obligations
under the agreements at the termination value.
134
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Note 18: 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, 2014 and 2013, the Bank had outstanding commitments to originate loans and
fund commercial construction loans aggregating approximately $130.0 million and $84.4 million,
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 $12.7
million and $7.0 million at December 31, 2014 and 2013, respectively.
Letters of Credit
Standby letters of credit are irrevocable conditional commitments issued by the Bank to guarantee
the performance of a customer to a third party. Financial standby letters of credit are primarily
issued to support public and private borrowing arrangements, including commercial paper, bond
financing and similar transactions. Performance standby letters of credit are issued to guarantee
performance of certain customers under nonfinancial contractual obligations. The credit risk
involved in issuing standby letters of credit is essentially the same as that involved in extending
loans to customers. Fees for letters of credit issued 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 $24.2
million and $28.4 million at December 31, 2014 and 2013, respectively, with $21.7 million and
$25.4 million, respectively, of the letters of credit having terms up to five years and $3.5 million
and $3.0 million, respectively, of the letters of credit having terms over five years. Of the amount
having terms over five years, $2.5 million and $2.9 million at December 31, 2014 and 2013,
respectively, consisted of an outstanding letter of credit to guarantee the payment of principal and
interest on a Multifamily Housing Refunding Revenue Bond Issue.
135
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Purchased Letters of Credit
The Company has purchased letters of credit from the Federal Home Loan Bank as security for
certain public deposits. The amount of the letters of credit was $2.5 million and $14.9 million at
December 31, 2014 and 2013, respectively, and they expire in less than one year from issuance.
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, 2014, the Bank had granted unused lines of credit to borrowers aggregating
approximately $386.4 million and $92.3 million for commercial lines and open-end consumer
lines, respectively. At December 31, 2013, the Bank had granted unused lines of credit to
borrowers aggregating approximately $249.9 million and $84.0 million 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 its market areas. Although the Bank has a diversified portfolio, loans aggregating
approximately $136.1 million and $130.0 million at December 31, 2014 and 2013, respectively,
are secured by motels, restaurants, recreational facilities, other commercial properties and
residential mortgages in the Branson, Missouri, area. Residential mortgages account for
approximately $40.2 million and $44.8 million of this total at December 31, 2014 and 2013,
respectively.
In addition, loans (excluding those covered by loss sharing agreements) aggregating approximately
$524.7 million and $428.1 million at December 31, 2014 and 2013, respectively, are secured
primarily by apartments, condominiums, residential and commercial land developments, industrial
revenue bonds and other types of commercial properties in the St. Louis, Missouri, area.
136
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Note 19: Additional Cash Flow Information
Noncash Investing and Financing Activities
Real estate acquired in settlement of
loans
Sale and financing of foreclosed assets
Conversion of premises and equipment
to foreclosed assets
Dividends declared but not paid
Additional Cash Payment Information
Interest paid
Income taxes paid
Income taxes refunded
2014
2013
(In Thousands)
2012
$19,975
$1,805
$202
$2,896
$15,833
$8,510
—
$45,941
$11,303
$2,111
$2,606
$19,426
$17,351
—
$82,954
$11,855
—
$168
$29,332
$33
$11,646
Note 20: Employee Benefits
The Company participates in the Pentegra Defined Benefit Plan for Financial Institutions
(Pentegra DB Plan), 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 continue to accrue benefits. The Pentegra DB Plan’s
Employer Identification Number is 13-5645888 and the Plan Number is 333. The Company’s
policy is to fund pension cost accrued. Employer contributions charged to expense for the years
ended December 31, 2014, 2013 and 2012, were approximately $731,000, $744,000 and $895,000,
respectively. The Company’s contributions to the Pentegra DB Plan were not more than 5% of the
total contributions to the plan. The funded status of the plan as of July 1, 2014 and 2013, was
108.86% and 102.24%, respectively. The funded status was calculated by taking the market value
of plan assets, which reflected contributions received through June 30, 2014 and 2013,
respectively, divided by the funding target. No collective bargaining agreements are in place that
require contributions to the Pentegra DB Plan.
The Company has a defined contribution retirement plan covering substantially all employees.
The Company matches 100% of the employee’s contribution on the first 3% of the employee’s
compensation and also matches an additional 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, 2014, 2013 and 2012, were approximately $1.1 million, $870,000 and $1.2 million,
respectively.
137
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Note 21: Stock Option Plan
The Company established the 2003 Stock Option and Incentive Plan (the “2003 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 598,224 shares of common stock. On May 15, 2013,
the Company’s stockholders approved the Great Southern Bancorp, Inc. 2013 Equity Incentive
Plan (the “2013 Plan”). Upon the stockholders’ approval of the 2013 Plan, the Company’s 2003
Plan was frozen. As a result, no new stock options or other awards may be granted under the 2003
Plan; however, existing outstanding awards under the 2003 Plan were not affected. At
December 31, 2014, 407,898 options were outstanding under the 2003 Plan.
During 2013, the Company established the 2013 Plan, which provides for the grant from time to
time to directors, emeritus directors, officers, employees and advisory directors of stock options,
stock appreciation rights and restricted stock awards. The number of shares of Common Stock
available for awards under the 2013 Plan is 700,000, all of which may be utilized for stock options
and stock appreciation rights and no more than 100,000 of which may be utilized for restricted
stock awards. At December 31, 2014, 253,200 options were outstanding under the 2013 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 generally 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.
138
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
The table below summarizes transactions under the Company’s stock option plans:
Available to
Grant
Shares Under
Option
Weighted
Average
Exercise Price
Balance, January 1, 2012
Granted
Exercised
Forfeited from current plan(s)
Balance, December 31, 2012
Granted from 2003 plan
Exercised
Forfeited from terminated plan(s)
Termination of 2003 Plan
Available to grant from 2013 Plan
Granted from 2013 Plan
Balance, December 31, 2013
Granted from 2013 Plan
Exercised
Forfeited from terminated plan(s)
Forfeited from current plan(s)
367,340
(105,200)
—
64,482
326,622
(3,100)
—
46,818
(370,340)
—
700,000
(116,500)
583,500
(147,400)
—
—
10,700
809,053
105,200
(116,479)
(64,482)
733,292
3,100
(106,367)
(46,818)
—
583,207
—
116,500
699,707
147,400
(153,287)
(22,022)
(10,700)
$
23.391
24.759
19.488
23.168
24.227
23.957
19.687
27.202
29.515
25.597
32.450
27.088
27.387
30.204
Balance, December 31, 2014
446,800
661,098
$
26.560
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 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, ASC 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 ASC 718.
139
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
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,
2013
2012
2014
Expected dividends per share
Risk-free interest rate
Expected life of options
Expected volatility
Weighted average fair value of
options granted during year
$0.80
1.40%
5 years
18.95%
$0.72
1.53%
5 years
24.80%
$0.72
0.65%
5 years
28.83%
$4.20
$5.22
$4.55
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, 2014.
Weighted
Average
Exercise
Price
$25.597
32.450
27.088
28.308
26.560
Weighted
Average
Remaining
Contractual
Term
5.93 years
6.72 years
Options
699,707
147,400
(153,287)
(32,722)
661,098
Options outstanding, January 1, 2014
Granted
Exercised
Forfeited
Options outstanding, December 31, 2014
Options exercisable, December 31, 2014
271,051
24.275
3.90 years
140
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
For the years ended December 31, 2014, 2013 and 2012, options granted were 147,400, 119,600,
and 105,200, 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, 2014, 2013 and 2012, was $932,000, $858,000 and $1.0
million, respectively. Cash received from the exercise of options for the years ended
December 31, 2014, 2013 and 2012, was $2.4 million, $1.2 million and $2.3 million, respectively.
The actual tax benefit realized for the tax deductions from option exercises totaled $858,000,
$764,000 and $888,000 for the years ended December 31, 2014, 2013 and 2012, respectively.
The following table presents the activity related to nonvested options under all plans for the year
ended December 31, 2014.
Nonvested options, January 1, 2014
Granted
Vested this period
Nonvested options forfeited
Weighted
Average
Exercise
Price
$24.794
32.450
21.932
26.531
Options
339,958
147,400
(75,863)
(21,448)
Nonvested options, December 31, 2014
390,047
28.148
Weighted
Average
Grant Date
Fair Value
$4.768
4.196
5.146
4.737
4.480
At December 31, 2014, there was $1.6 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 2019, with the majority of this expense recognized in 2015 and 2016.
The following table further summarizes information about stock options outstanding at
December 31, 2014:
Range of
Exercise Prices
$8.360 to $19.960
$20.370 to $24.820
$25.480 to $29.880
$30.340 to $36.390
Options Outstanding
Weighted
Average
Remaining
Contractual
Term
Number
Outstanding
104,228
171,189
160,290
225,391
6.36 years
6.83 years
7.15 years
6.49 years
Weighted
Average
Exercise
Price
$17.412
23.484
28.428
31.799
Options Exercisable
Number
Exercisable
55,960
82,610
45,790
86,691
Weighted
Average
Exercise
Price
$15.818
22.624
25.721
30.543
661,098
6.72 years
26.560
271,051
24.275
141
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Note 22: 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 Note 3. 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 4. 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.
Note 23: Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income (AOCI), included in stockholders’
equity, are as follows:
2014
2013
(In Thousands)
Net unrealized gain on available-for-sale securities
$
11,129
$
3,841
Net unrealized loss on derivatives used for cash flow hedges
Tax effect
(304)
10,825
(53)
3,788
(3,789)
(1,326)
Net-of-tax amount
$
7,036
$
2,462
142
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
The changes in AOCI by component are shown below. Amounts reclassified from AOCI and the
affected line items in the statements of income during the years ended December 31, 2014, 2013
and 2012, were as follows:
Amounts Reclassified
from AOCI
2014
2013
(In Thousands)
2012
Unrealized gains on available-
for-sale securities
$
2,139 $
243 $
2,666
Affected Line Item in the
Statements of Income
Net realized gains on available-for-
sale securities (total reclassified
amount before tax)
Total reclassified amount before tax
Income taxes
(749)
(85)
(933) Tax (expense) benefit
Total reclassifications out of
AOCI
$
1,390 $
158 $
1,733
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.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios (set forth in the table below as of December 31, 2014) 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, 2014, that the Bank met all capital adequacy requirements to which it was then
subject.
As of December 31, 2014, 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 as of December 31, 2014, the Bank must have maintained 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.
143
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
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
(Dollars In Thousands)
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
As of December 31, 2014
Total risk-based capital
Great Southern Bancorp, Inc.
Great Southern Bank
$473,689
$410,291
14.5%
12.6%
≥ $261,062
≥ $260,919
≥ 8.0%
≥ 8.0%
N/A
≥ $326,149
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, 2013
Total risk-based capital
$435,254
$371,856
13.3%
11.4%
≥ $130,531
≥ $130,459
≥ 4.0%
≥ 4.0%
N/A
≥ $195,689
N/A
≥ 6.0%
$435,254
$371,856
11.1%
9.5%
≥ $156,395
≥ $156,197
≥ 4.0%
≥ 4.0%
N/A
≥ $195,247
N/A
≥ 5.0%
Great Southern Bancorp, Inc.
Great Southern Bank
$436,156
$398,292
16.9%
15.4%
≥ $207,075
≥ $206,850
≥ 8.0%
≥ 8.0%
N/A
≥ $258,562
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
$403,705
$365,876
15.6%
14.2%
≥ $103,538
≥ $103,425
≥ 4.0%
≥ 4.0%
N/A
≥ $155,137
N/A
≥ 6.0%
$403,705
$365,876
11.3%
10.2%
≥ $143,057
≥ $142,865
≥ 4.0%
≥ 4.0%
N/A
≥ $178,581
N/A
≥ 5.0%
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, 2014 and 2013, the Company and
the Bank exceeded their minimum capital requirements then in effect. The entities may not pay
dividends which would reduce capital below the minimum requirements shown above.
144
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Note 25: Litigation Matters
In the normal course of business, the Company and its subsidiaries are subject to pending and
threatened legal actions, some of which seek substantial relief or damages. While the ultimate
outcome of such legal proceedings cannot be predicted with certainty, 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 Company’s business,
financial condition or results of operations.
On November 22, 2010, a suit was filed against the Bank in the Circuit Court of Greene County,
Missouri by a customer alleging that the fees associated with the Bank’s automated overdraft
program in connection with its debit cards and ATM cards constitute unlawful interest in violation
of Missouri’s usury laws. The Court has certified a class of Bank customers who have paid
overdraft fees on their checking accounts pursuant to the Bank’s automated overdraft program.
The Bank intends to contest this case vigorously. At this 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.
Note 26: Summary of Unaudited Quarterly Operating Results
Following is a summary of unaudited quarterly operating results for the years 2014, 2013 and 2012:
2014
Three Months Ended
March 31
June 30
September 30 December 31
(In Thousands, Except Per Share Data)
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 from continuing operations
Discontinued operations
Net income
Net income available to common
shareholders
Earnings per common share – diluted
42,294
4,328
1,691
73
924
25,894
2,487
8,818
—
8,818
8,673
0.63
$
44,384
4,413
1,462
569
10,631
34,399
3,687
11,054
—
11,054
10,909
0.79
$
47,607
3,501
945
321
1,778
29,398
3,951
11,590
—
11,590
11,445
0.83
$
49,077
3,559
53
1,176
1,398
31,168
3,628
12,067
—
12,067
11,923
0.86
145
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
2013
Three Months Ended
March 31
June 30
September 30 December 31
(In Thousands, Except Per Share Data)
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 from continuing operations
Discontinued operations
Net income
Net income available to common
shareholders
Earnings per common share – diluted
47,356
5,224
8,225
34
2,924
25,920
2,517
8,394
—
8,394
8,249
0.60
$
43,481
4,980
3,671
97
2,327
26,712
2,221
8,224
—
8,224
8,079
0.59
$
43,019
4,555
2,677
110
929
26,156
2,121
8,439
—
8,439
8,294
0.61
$
44,939
4,444
2,813
2
(865)
26,830
1,315
8,672
—
8,672
8,528
0.62
2012
Three Months Ended
March 31
June 30
September 30 December 31
(In Thousands, Except Per Share Data)
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 from continuing operations
Discontinued operations
Net income
Net income available to common
shareholders
Earnings per common share – diluted
44,677
7,904
10,077
28
6,087
24,106
1,539
7,138
359
7,497
7,353
0.54
$
48,221
7,744
17,600
1,251
35,848
27,273
9,923
21,529
127
21,656
21,512
1.58
$
50,159
6,904
8,400
507
2,085
27,976
1,922
7,042
63
7,105
6,955
0.51
$
50,451
5,825
7,786
200
1,982
29,248
1,196
8,378
4,070
12,448
12,278
0.90
146
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Note 27: Condensed Parent Company Statements
The condensed statements of financial condition at December 31, 2014 and 2013, and statements
of income, comprehensive income and cash flows for the years ended December 31, 2014, 2013
and 2012, 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
Additional paid-in capital
Retained earnings
Accumulated other comprehensive gain
December 31,
2014
2013
(In Thousands)
$
$
64,836
3,154
385,046
—
1,466
38,965
2,869
371,590
31
1,752
$
454,502
$
415,207
$
$
3,126
702
30,929
57,943
138
22,345
332,283
7,036
2,891
689
30,929
57,943
137
19,567
300,589
2,462
$
454,502
$
415,207
147
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Statements of Income
Income
Dividends from subsidiary bank
Interest and dividend income
Net realized gains on sales of
available-for-sale securities
Other income (loss)
Expense
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
Net income
2014
2013
(In Thousands)
2012
$
36,000
22
$
24,000
20
$
12,000
33
—
(20)
—
13
280
(19)
36,002
24,033
12,294
1,198
567
1,765
1,132
560
1,692
1,297
617
1,914
34,237
(388)
22,341
(365)
10,380
(401)
34,625
22,706
10,781
8,904
11,023
37,925
$
43,529
$
33,729
$
48,706
148
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Statements of Cash Flows
Operating Activities
Net income
Items not requiring (providing) cash
Equity in undistributed earnings of subsidiary
Compensation expense for stock option grants
Net realized gains on sales of available-for-sale
securities
Amortization of interest rate derivative
Changes in
Prepaid expenses and other assets
Accounts payable and accrued expenses
Income taxes
Net cash provided by operating activities
Investing Activities
(Investment)/Return of principal - other investments
Proceeds from sale of available-for-sale securities
Proceeds from maturity of held-to-maturity securities
Net cash provided by (used in) investing
activities
Financing Activities
Purchase of interest rate derivative
Purchases of the Company’s common stock
Dividends paid
Stock options exercised
Net cash used in financing activities
Increase in Cash
Cash, Beginning of Year
Cash, End of Year
Additional Cash Payment Information
Interest paid
2014
2013
(In Thousands)
2012
$
43,529
$
33,729
$
48,706
(8,904)
565
—
19
(3)
(67)
43
35,182
20
—
—
20
—
(512)
(11,257)
2,438
(9,331)
25,871
38,965
64,836
570
(11,023)
443
—
—
4
(146)
1
23,008
(13)
—
—
(13)
(738)
—
(7,964)
1,242
(7,460)
15,535
23,430
38,965
565
(37,925)
435
(280)
—
(19)
226
10
11,153
49
664
840
1,553
—
—
(12,991)
2,269
(10,722)
1,984
21,446
23,430
620
$
$
$
$
$
$
149
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Statements of Comprehensive Income
2014
2013
(In Thousands)
2012
Net Income
$
43,529
$
33,729
$
48,706
Unrealized appreciation on available-for-sale securities,
net of taxes of $100, $302 and 195, for 2014, 2013
and 2012, respectively
Less: reclassification adjustment for gains included in
net income, net of taxes of $0, $0 and $98 for 2014,
2013 and 2012, respectively
Change in fair value of cash flow hedge, net of taxes
(credit) of $(88), $(19) and $0 for 2014, 2013 and
2012, respectively
Comprehensive income (loss) of subsidiaries
185
—
(164)
4,553
561
363
—
(182)
(34)
(14,715)
—
4,056
Comprehensive Income
$
48,103
$
19,541
$
52,943
Note 28: Preferred Stock and Common Stock Warrant
CPP 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 “CPP 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 “CPP 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. As noted below under “SBLF Preferred Stock,”
the Company redeemed all of the CPP Preferred Stock on August 18, 2011, in connection with the
issuance of the SBLF Preferred Stock. The Company also repurchased the Warrant on September
21, 2011.
The CPP 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 CPP Purchase Agreement, the Company subsequently registered the
CPP Preferred Stock, the Warrant and the shares of Common Stock underlying the Warrant under
the Securities Act.
150
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
SBLF Preferred Stock
On August 18, 2011, the Company entered into a Small Business Lending Fund-Securities
Purchase Agreement (the “SBLF Purchase Agreement”) with the Secretary of the Treasury,
pursuant to which the Company sold 57,943 shares of the Company’s Senior Non-Cumulative
Perpetual Preferred Stock, Series A (the “SBLF Preferred Stock”) to the Secretary of the Treasury
for a purchase price of $57.9 million. The SBLF Preferred Stock was issued pursuant to
Treasury’s SBLF program, a $30 billion fund established under the Small Business Jobs Act of
2010 that was created to encourage lending to small businesses by providing Tier 1 capital to
qualified community banks and holding companies with assets of less than $10 billion. As
required by the SBLF Purchase Agreement, the proceeds from the sale of the SBLF Preferred
Stock were used in connection with the redemption of the 58,000 shares of CPP Preferred Stock,
issued to the Treasury pursuant to the CPP, at a redemption price of $58.0 million plus the accrued
dividends owed on the preferred shares.
The SBLF Preferred Stock qualifies as Tier 1 capital. The holders of SBLF Preferred Stock are
entitled to receive noncumulative dividends, payable quarterly, on each January 1, April 1, July 1
and October 1. The dividend rate, as a percentage of the liquidation amount, can fluctuate between
one percent (1%) and five percent (5%) per annum on a quarterly basis during the first 10 quarters
during which the SBLF Preferred Stock is outstanding, based upon changes in the level of
“Qualified Small Business Lending” or “QSBL” (as defined in the SBLF Purchase Agreement) by
the Bank over the adjusted baseline level calculated under the terms of the SBLF Preferred Stock
$(249.7 million). Based upon the increase in the Bank’s level of QSBL over the adjusted baseline
level, the dividend rate has been 1.0%. For the tenth calendar quarter through four and one-half
years after issuance, the dividend rate will be fixed at between one percent (1%) and seven percent
(7%) based upon the level of qualifying loans. The Company has now reached the tenth calendar
quarter and the dividend rate will be 1.0% until four and one half years after the issuance, which is
March 2016. After four and one half years from issuance, the dividend rate will increase to 9%
(including a quarterly lending incentive fee of 0.5%).
The SBLF Preferred Stock is nonvoting, except in limited circumstances. In the event that the
Company misses five dividend payments, whether or not consecutive, the holder of the SBLF
Preferred Stock will have the right, but not the obligation, to appoint a representative as an
observer on the Company’s Board of Directors. In the event that the Company misses six dividend
payments, whether or not consecutive, and if the then outstanding aggregate liquidation amount of
the SBLF Preferred Stock is at least $25.0 million, then the holder of the SBLF Preferred Stock
will have the right to designate two directors to the Board of Directors of the Company.
The SBLF Preferred Stock may be redeemed at any time at the Company’s option, at a redemption
price of 100% of the liquidation amount plus accrued but unpaid dividends to the date of
redemption for the current period, subject to the approval of its federal banking regulator.
151
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Note 29: Discontinued Operations
Effective November 30, 2012, Great Southern Bank sold Great Southern Travel and Great
Southern Insurance divisions. The 2012 operations of the two divisions have been reclassified to
include all revenues and expenses in discontinued operations. Revenues from the two divisions,
excluding the gain on sale, totaled $8.2 million for the year ended December 31, 2012, and are
included in the income from discontinued operations. In 2012, the Company recognized gains on
the sales totaling $6.1 million, which are included in the income from discontinued operations.
Note 30: Acquisition of Certain Assets and Liabilities of Boulevard Bank
On March 21, 2014, Great Southern Bank completed the acquisition of certain loan and depository
accounts and two branches in Neosho, Mo., and certain loan and depository accounts in St. Louis,
Mo., from Neosho, Mo.-based Boulevard Bank. The fair values of the assets acquired and
liabilities assumed in the transaction were as follows:
March 21,
2014
(In Thousands)
Assets
Cash and cash equivalents
Loans receivable, net of discount on loans purchased of $-0-
Premises and equipment
Accrued interest receivable
Core deposit intangible
Total assets acquired
$
Liabilities
Total deposits
Accrued interest payable
Total liabilities assumed
80,028
10,940
668
34
854
92,524
93,223
93
93,316
Goodwill recognized on business acquisition
$
792
152
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
This acquisition was determined to constitute a business acquisition in accordance with FASB
ASC 805. FASB ASC 805 allows a measurement period of up to one year to adjust initial fair
value estimates as of the acquisition date. Therefore, provisional measurements of assets acquired
and liabilities assumed were recorded on a preliminary basis at fair value on the date of
acquisition, March 21, 2014. Based upon the preliminary acquisition date fair values of the net
liabilities acquired, goodwill of $792,000 was recorded. Details related to the purchase accounting
adjustments are as follows:
March 21,
2014
(In Thousands)
Deposit premium per Purchase and Assumption Agreement
$
(976)
Purchase accounting adjustments
Deposits
Core deposit intangible
Goodwill recognized on business acquisition
$
(670)
854
792
At December 31, 2014, the Company has finalized its initial analysis of these assets and
liabilities without adjustments to the preliminary estimated recorded carrying values.
Note 31: FDIC-Assisted Acquisition of Certain Assets and Liabilities of Valley
Bank
On June 20, 2014, Great Southern Bank entered into a purchase and assumption agreement with
the FDIC to purchase a substantial portion of the loans and investment securities, as well as certain
other assets, and assume all of the deposits, as well as certain other liabilities, of Valley Bank
(“Valley”), a full-service bank headquartered in Moline, IL, with significant operations in Iowa.
The provisional fair values of the assets acquired and liabilities assumed in the transaction were as
follows:
Cash
Due from banks
Cash and cash equivalents
Investment securities
Loans receivable, net of discount on loans purchased of $30,103
Accrued interest receivable
Premises
Core deposit intangible
153
June 20,
2014
(In Thousands)
$
2,729
106,680
109,409
88,513
165,098
1,004
10,850
2,800
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
Other assets
Total assets acquired
Liabilities
Demand and savings deposits
Time deposits
Total deposits
Securities sold under reverse repurchase agreements with
customers
Accounts payable
Accrued interest payable
Advances from borrowers for taxes and insurance
Total liabilities assumed
1,060
378,734
186,902
179,125
366,027
567
561
182
592
367,929
Gain recognized on business acquisition
$
10,805
Under the terms of the Purchase and Assumption Agreement, the FDIC agreed to transfer net assets
to Great Southern at a discount of $37.5 million to compensate Great Southern for estimated losses
related to the loans acquired. No premium was paid to the FDIC for the deposits, resulting in a net
purchase discount of $37.5 million. Details related to the transfer are as follows:
Net liabilities as determined by the FDIC
Cash transferred by the FDIC
Discount per Purchase and Assumption Agreement
Purchase accounting adjustments
Loans
Deposits
Investments
Core deposit intangible
June 20,
2014
(In Thousands)
$
(21,897)
59,394
37,497
(28,088)
(399)
(1,005)
2,800
Gain recognized on business acquisition
$
10,805
The acquisition of the net assets of Valley was determined to constitute a business acquisition in
accordance with FASB ASC 805. FASB ASC 805 allows a measurement period of up to one year
to adjust initial fair value estimates as of the acquisition date. Therefore, provisional measurements
of assets acquired and liabilities assumed were recorded on a preliminary basis at fair value on the
date of acquisition. Based upon the preliminary acquisition date fair values of the net assets
acquired, no goodwill was recorded. The transaction resulted in a preliminary bargain purchase
gain of $10.8 million for the year ended June 30, 2014. The transaction also resulted in the
recording of a deferred tax liability in the initial amount of $3.6 million.
154
Great Southern Bancorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2014, 2013 and 2012
The carrying amount of assets related to the Valley Bank transaction at June 20, 2014 (the
acquisition date), consisted of impaired loans required to be accounted for in accordance with
FASB ASC 310-30 and 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) as
shown in the following table:
FASB
ASC
310-30
Loans
FASB ASC
310-30
by Policy
Loans
(In Thousands)
Total
Loans
$
3,920
$
161,178 $
165,098
On the acquisition date, the preliminary estimate of the contractually required payments receivable
for all FASB ASC 310-30 loans acquired was $5.7 million, the cash flows expected to be collected
were $4.0 million including interest, and the estimated fair value of the loans was $3.9 million.
These amounts were determined based upon the estimated remaining life of the underlying loans,
which include the effects of estimated prepayments. At June 20, 2014, 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 $187.4 million, of
which $28.4 million of cash flows were not expected to be collected, and the estimated fair value
of the loans was $161.2 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.
At December 31, 2014, the Company has finalized its initial analysis of these assets and liabilities
without adjustments to the preliminary estimated recorded carrying values.
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 initial
accretable yield recorded for Valley was $23.0 million.
155
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greatsouthernbank.com