GSBC

Business Context and Reporting Period

Company: Great Southern Bancorp, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2003
Business Overview: The Company operates primarily through its subsidiary, Great Southern Bank, engaging in originating residential and commercial real estate loans, commercial business loans, and consumer loans. Funding is derived from public deposits, brokered deposits, and borrowings from the Federal Home Loan Bank (FHLBank). Non-banking segments include insurance, travel, and discount brokerage services.

Key Financial Metrics

Capital Ratios (March 31, 2003): The Bank and Company are classified as "well capitalized." Tier 1 risk-based capital ratios were 10.65% (Bank) and 11.02% (Company). Total risk-based capital ratios were 11.91% (Bank) and 12.28% (Company).

Material Changes vs. Prior Period

• Net Income: Increased 1.0% to $5.46 million, driven by higher net interest income and non-interest income, partially offset by increased operating expenses.
• Net Interest Income: Rose 5.7% to $12.33 million. The net interest margin improved to 3.74% from 3.69% due to a faster decline in interest rates paid on liabilities compared to yields earned on assets.
• Interest Expense: Decreased 23.0% to $6.25 million, primarily due to lower rates on time deposits and FHLBank advances.
• Non-Interest Income: Increased 5.5% to $4.70 million, led by a 32.0% rise in service charges and ATM fees. This was partially offset by a decrease in gains from the sale of available-for-sale securities.
• Non-Interest Expense: Increased 15.0% to $7.63 million, driven by higher salaries (10.9%) and occupancy/equipment costs (25.1%).
• Asset Quality: Non-performing loans decreased 58.6% to $6.0 million, while foreclosed assets increased 181% to $12.2 million due to the transfer of significant loan relationships into foreclosure.

Outlook, Risks, and Management Commentary

• Interest Rate Risk: The Company's primary market risk is interest rate sensitivity. Management utilizes interest rate swaps to hedge fixed-rate brokered certificates of deposit. As of March 31, 2003, the one-year interest rate sensitivity gap was slightly positive.
• Loan Portfolio: Management notes that a large portion of the loan portfolio adjusts with the prime rate. The allowance for loan losses was deemed adequate at 1.96% of total loans, though management warns that deteriorating economic conditions could necessitate additional provisions.
• Liquidity: The Company maintains sufficient liquidity through cash, investment securities, and access to FHLBank advances. Commitments to fund loan originations and lines of credit totaled approximately $151 million.
• Dividends: Dividends declared were $0.15 per share, representing 19% of net income per share, down from 34% in the prior year period.
• Accounting Changes: The Company adopted SFAS 146 (Exit Costs), SFAS 148 (Stock-Based Compensation), FIN 45 (Guarantees), and FIN 46 (Variable Interest Entities). None had a material effect on the financial statements for this period.

Investor Verification Checklist

• Foreclosed Assets: Verify the valuation and sale progress of the $12.2 million in foreclosed assets, specifically the $6.7 million condominium/land relationship and the $2.8 million motel relationship.
• Non-Performing Loans: Review the status of the remaining $6.0 million in non-performing loans, including the restaurant, rental property, and office equipment relationships.
• Interest Rate Swaps: Assess the impact of the $281.4 million notional amount of interest rate swaps on future earnings if market rates rise significantly.
• Expense Growth: Monitor the sustainability of the 15% increase in non-interest expenses, particularly occupancy and salary costs.
• Brokered Deposits: Evaluate the reliance on $335 million in brokered deposits and the cost differential compared to retail deposits.