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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the fiscal year ended June 30, 1996, or
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
------------------------------
Commission File Number 0-18082
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Great Southern Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State of jurisdiction of incorporation or organization)
43-1524856
(IRS Employer Identification Number)
1451 E. Battlefield
Springfield, Missouri
(Address of principal executive offices)
65804
(Zip Code)
(417) 887-4400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock of the Registrant
held by non-affiliates of the Registrant on September 17, 1996,
computed by reference to the closing price of such shares, was
$131,354,220. At September 17, 1996, 4,378,474 shares of Common
Stock, par value $.01 per share, were outstanding.
2
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Security Holders
for the fiscal year ended June 30, 1996 (the "Annual Report"),
which was electronically filed on September 18, 1996, are
incorporated by reference into Parts I, II and IV. With the
exception of the information explicitly incorporated by reference
in this Form 10-K, the 1996 Annual Report to Security Holders is
not to be deemed filed as part of this Form 10-K.
Portions of the Registrant's Definitive Proxy Statement prepared
in connection with the 1996 annual meeting of stockholders (the
"Definitive Proxy Statement"), which was electronically filed on
September 18, 1996, are incorporated by reference into Part III.
TABLE OF CONTENTS
Item Page
Part I
1. Business . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . 66
3. Legal Proceedings . . . . . . . . . . . . . . . . . . 68
4. Submission of Matters to a Vote of Security Holders . 68
Part II
5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . 70
6. Selected Financial Data . . . . . . . . . . . . . . . 71
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 73
8. Financial Statements and Supplementary Data . . . . . 73
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures . . . . . . . 73
Part III
10. Directors and Executive Officers of the Registrant. . 73
11. Executive Compensation . . . . . . . . . . . . . . . 73
12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . 74
13. Certain Relationship and Related Transactions . . . . 74
Part IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . 74
Signatures . . . . . . . . . . . . . . . . . . . . . . . 77
Index to Exhibits . . . . . . . . . . . . . . . . . . . . 78
3
PART I
ITEM 1. BUSINESS.
Great Southern Bancorp, Inc.
Great Southern Bancorp, Inc. (the "Holding Company", "Bancorp" or
"Company") was incorporated under the laws of the State of Delaware
in July 1989, by authorization of the Board of Directors of Great
Southern Bank FSB ("Great Southern" or the "Bank"), for the purpose
of becoming a holding company that would own all of the outstanding
stock of Great Southern issued upon the conversion (the
"Conversion") of Great Southern from a mutual savings and loan to a
stock savings and loan. After receiving the approval of the Office
of Thrift Supervision, Department of Treasury (the "OTS"), the
Holding Company acquired all of the common stock of Great Southern
issued in connection with the completion of the Conversion in
December 1989.
As a Delaware corporation, the Holding Company is authorized to
engage in any activity that is permitted by the Delaware General
Corporation Law and is not prohibited by law or regulatory policy.
The Holding Company currently conducts its business as a savings
and loan holding company. Through the holding company structure,
it is possible to expand the size and scope of the financial
services offered by the Holding Company beyond those offered by the
Bank prior to the Conversion. The holding company structure
provides the Holding Company with greater flexibility than the Bank
would have to diversify its business activities, through existing
or newly formed subsidiaries, or through acquisitions or mergers of
both mutual and stock thrift institutions as well as other
companies. The assets of the Holding Company consist of the stock
of Great Southern, the stock of other subsidiaries, interest in
housing related partnerships, loans receivable and cash. Through
subsidiaries, the Holding Company offers insurance, appraisal,
travel, discount brokerage and related services, which are
discussed further below. The activities of the Holding Company
have been funded by retained proceeds of the Conversion and through
dividends from Great Southern and borrowings from third parties.
See "Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters" and "Regulation - Holding Company Regulation"
and "Federal and State Taxation." Activities of the Holding
Company may also be funded through sales of additional securities
or through income generated by other activities of the Holding
Company. At this time, there are no plans regarding such
activities.
The executive offices of the Holding Company are located at 1451
East Battlefield, Springfield, Missouri 65804, and its telephone
number at that address is (417) 887-4400.
4
Great Southern Bank
Great Southern was incorporated as a Missouri-chartered mutual
savings and loan association in 1923 and in 1989 was converted to a
Missouri-chartered stock savings and loan association. In 1994,
Great Southern changed to a new charter as a federal savings bank.
Headquartered in Springfield, Missouri, Great Southern offers a
broad range of banking services through its 25 branches located in
southwestern and central Missouri. At June 30, 1996, the Bank had
total assets of $663 million, deposits of $398 million and
stockholders' equity of $57 million, or 8.6% of total assets. Its
deposits are insured by the Savings Association Insurance Fund
("SAIF") to the maximum levels permitted by the Federal Deposit
Insurance Corporation ("FDIC").
Great Southern is principally engaged in the business of attracting
deposits from the general public and using such deposits, together
with borrowings and other funds, to originate residential and
commercial real estate loans and commercial business and consumer
loans. Great Southern originates a variety of conventional,
residential real estate mortgage loans, principally in compliance
with Federal Home Loan Mortgage Corporation ("FHLMC") and Federal
National Mortgage Association ("FNMA") standards for resale in the
secondary market. Great Southern promptly sells most of the fixed-
rate residential mortgage loans that it originates, with servicing
retained prior to fiscal 1996 and servicing primarily released
beginning in fiscal 1996, and retains for its portfolio
substantially all of the adjustable-rate mortgage loans. Great
Southern also originates commercial real estate and construction
loans, primarily on properties located in its southwestern and
central Missouri market area, or, in the case of loans secured by
properties outside of its market area, primarily to borrowers
residing or doing business in southwestern and central Missouri.
Great Southern originates commercial business loans and is also an
issuer of letters of credit. See "-- Commercial Business Lending,"
"- Classified Assets," and "- Loan Delinquencies and Defaults"
below and Note 13 of Notes to Consolidated Financial Statements in
the Annual Report to Stockholders, which portions are incorporated
herein by reference. Letters of credit are contingent obligations
and are not included in the Bank's loan and mortgage-backed
securities portfolio.
In recent years, Great Southern has followed a strategy of
emphasizing quality loan origination through residential,
commercial and consumer lending activities in its local market
area. The goal of this strategy has been to maintain its position
as one of the leading providers of financial services in its market
area, while simultaneously diversifying assets and reducing
interest rate risk by originating and holding adjustable-rate loans
in its portfolio and selling fixed-rate loans in the secondary
market. The Bank continues to place primary emphasis on
residential mortgage lending.
The main office of the Bank is located at 1451 East Battlefield,
Springfield, Missouri 65804 and its telephone number at that
address is (417) 887-4400.
5
Market Area
Great Southern's primary market area encompasses 15 counties in
southwestern and central Missouri. Deposit and lending activities
are supported by the Bank's branches and ATMs throughout the
region, serving such diversified markets as Springfield, Joplin,
the resort areas of Branson Lakes and Lake of the Ozarks, and
various smaller communities in the Bank's market area. The
management of the Bank believes that its share of the savings and
lending markets in its market area is less than 10% and their
affiliates an even smaller percent with the exception of the travel
agency, which may have a larger percent.
Great Southern's largest concentration of loans and deposits is in
the Greater Springfield area. With a population of approximately
295,000, the Greater Springfield area is the third largest
metropolitan area in Missouri. Employment in this area is
diversified, including small and medium-sized manufacturing
concerns, service industries, especially in the resort and leisure
activities sectors, agriculture, the federal government, and a
major state university. Springfield is also a regional health care
center. The unemployment rate in this area is, and has
consistently been, below the national average.
The next largest concentration of loans is in the Branson Lakes
area which is located approximately 35 miles south of Springfield
and is one of the fastest growing areas in Missouri. The region is
a vacation and entertainment center attracting an estimated 5.8
million tourists annually to its theme parks, resorts, country
music shows and other recreational facilities. As a result of the
rapid growth of the Branson Lakes area, property values have
increased at unusually high rates in recent years. This has also
provided for increased loan demand and a more volatile lending
market than has previously been present in the Branson Lakes area.
Property values have started experiencing downward pressure, partly
as a result of this rapid increase.
During the past few years, a significant portion of the Bank's loan
originations has been secured by properties in the Branson Lakes
area. Approximately $128 million, or 21.8%, of the total loan
portfolio at June 30, 1996 was secured by properties in this area.
Of this amount, $58 million are loans secured by commercial real
estate, commercial construction and other residential properties
and $69 million are loans secured by one- to four-family
residential and one- to four-family construction properties. In
addition, the Bank`s commercial business and consumer loan
portfolio includes approximately $1.5 million of loans to customers
in the Branson Lakes area. See "- Commercial Real Estate and
Construction Lending", "- Commercial Business Lending", "-
Classified Assets" and "- Loan Delinquencies and Defaults".
6
Lending Activities-General
The principal lending activity of Great Southern is the origination
of fixed and adjustable-rate conventional residential real estate
loans to enable borrowers to purchase or refinance owner-occupied
homes. In addition, the Bank makes commercial real estate loans,
commercial business loans (i.e., commercial loans not secured by
real estate), consumer loans and residential and commercial
construction loans. Although Great Southern is permitted under
applicable regulations to originate or purchase loans and loan
participations secured by real estate located in any part of the
United States, the Bank has concentrated its lending efforts in
Missouri, with the largest concentration of its lending activity
being in southwestern and central Missouri.
Great Southern has a policy of obtaining collateral for
substantially all real estate loans and other loans, with the
exception of certain loans. The percentage of collateral value
Great Southern will loan on real estate and other property varies
based on factors including, but not limited to, the type of
property and its location and the borrower's credit history. As a
general rule, Great Southern will loan up to 80% of the appraised
value on one- to four-family residential property and will loan up
to an additional 15% with private mortgage insurance for the loan
amount above the 80% level. For commercial real estate and other
residential real property loans, Great Southern generally loans up
to a maximum of 75% of the appraised value. The origination of
loans secured by other property are considered and determined on an
individual basis by management with the assistance of any industry
guides and other information which may be available.
Historically, Great Southern primarily made long-term, fixed-rate
real estate loans that it retained in its loan portfolio.
Substantially all of the fixed-rate loans in Great Southern's
portfolio were originated by Great Southern prior to 1980. Great
Southern has since the early 1980's increased its efforts to
originate short-term and adjustable-rate loans. Substantially all
of the adjustable-rate mortgage loans originated by Great Southern
are held for its own portfolio. As a result, adjustable-rate real
estate loans as a percentage of Great Southern's total loan
portfolio increased from 71% at June 30, 1992, to 81% at June 30,
1996. See the discussion on interest rate sensitivity in
Management's Discussion and Analysis of Financial Condition and
Results of Operations in the Annual Report to Stockholders, which
portions are incorporated herein by reference.
7
During the fiscal years 1993 and 1994, Great Southern experienced
increased levels of adjustable-rate residential loans refinancing
into fixed-rate residential loans, as well as stronger competition
in the residential lending market. As a result of the shift in
loan demand to fixed-rate residential loans, which the Bank does
not retain in its portfolio, Great Southern increased its
originations of commercial real estate loans to help maintain the
desired size of the loan portfolio as well as the overall Company
size and profit levels. During the last half of fiscal 1994 and
during fiscal 1995, Great Southern experienced an increase in
levels of adjustable-rate residential lending and a decrease in
levels of fixed-rate residential lending as a result of increasing
interest rates. Then in fiscal 1996, Great Southern experienced an
increase in levels of fixed-rate residential lending and a decrease
in levels of adjustable-rate residential lending as a result of
leveling or slightly declining interest rates. Great Southern will
continue to place strong emphasis on the origination of one- to
four-family residential loans subject to market conditions.
Loan applications are approved at various levels of authority,
depending on the type, amount and loan-to-value ratio of the loan.
Loan commitments of more than $100,000 ($203,450 in the case of
fixed-rate one-to four-family residential loans for resale) must be
approved by Great Southern's loan committee, comprised of the
President of the Bank, as chairman of the committee, and other
senior officers of the Bank involved in lending activities.
8
Loan Portfolio Composition
The following table sets forth information concerning the
composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees
and discounts and allowance for loan losses) as of the dates
indicated. The table is based on information prepared in
accordance with generally accepted accounting principles and is
qualified by reference to financial statements and the notes
thereto.
June 30,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
Amount % Amount % Amount % Amount % Amount %
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(Dollars in thousands)
Real Estate Loans:
Residential
One- to four- family $249,348 42.5% $243,771 43.5% $203,157 40.9% $205,980 43.5% $199,563 54.7%
Other Residential 81,191 13.8 77,744 13.9 65,906 13.2 45,413 9.6 34,332 9.4
Commercial 172,478 29.4 133,244 23.8 105,977 21.3 93,318 19.7 70,303 19.3
Residential Construction:
One- to four-family 13,455 2.3 13,319 2.4 18,338 3.7 17,433 3.7 10,223 2.8
Other residential 13,533 2.3 23,804 4.2 37,588 7.6 38,675 8.2 10,552 2.9
Commercial construction 16,518 2.8 27,273 4.9 30,894 6.2 41,798 8.8 11,194 3.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans 546,523 93.1 519,155 92.7 461,860 92.9 442,617 93.5 336,167 92.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Other Loans:
Consumer loans:
Guaranteed student loans 11,256 1.9 11,822 2.1 9,445 1.9 6,692 1.4 4,482 1.2
Automobile 6,062 1.1 5,651 1.0 4,814 1.0 2,777 0.6 2,662 0.7
Home equity and improvement 3,688 0.6 3,518 0.6 2,618 0.5 3,192 0.7 3,096 0.9
Other 5,921 1.0 5,272 1.0 4,513 0.9 3,681 0.8 3,479 1.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total Consumer loans 26,927 4.6 26,263 4.7 21,390 4.3 16,342 3.5 13,719 3.8
Commercial business loans 13,737 2.3 14,515 2.6 13,907 2.8 14,162 3.0 14,613 4.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total other loans 40,664 6.9 40,778 7.3 35,297 7.1 30,504 6.5 28,332 7.8
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans 587,187 100.0% 559,933 100.0% 497,157 100.0% 473,121 100.0% 364,499 100.0%
===== ===== ===== =====
Less:
Loans in process 22,383 22,316 35,739 38,879 3,722
Deferred fees and discounts 3,689 3,761 4,032 4,125 2,732
Allowance for loan losses 14,356 14,601 13,636 10,590 6,029
------- ------- ------- ------- -------
Total loans receivable, net $546,759 $519,255 $443,750 $419,527 $352,016
======= ======= ======= ======= =======
9
The following table shows the fixed- and adjustable-rate composition
of the Bank's loan portfolio at the dates indicated. The table is
based on information prepared in accordance with generally accepted
accounting principles.
June 30,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
Amount % Amount % Amount % Amount % Amount %
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(Dollars in thousands)
Fixed-Rate Loans:
Real Estate Loans
Residential
One- to four- family $ 13,212 2.2% $ 14,260 2.5% $ 15,488 3.1% $ 25,231 5.3% $ 28,742 7.9%
Other Residential 34,413 5.9 32,515 5.8 30,250 6.1 21,233 4.5 15,734 4.3
Commercial 25,374 4.3 12,774 2.3 14,438 2.9 25,314 5.4 32,680 9.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans 72,999 12.4 59,549 10.6 60,176 12.1 71,778 15.2 77,156 21.2
Consumer loans 12,844 2.2 11,706 2.1 9,282 1.8 6,260 1.3 5,944 1.6
Commercial business loans 415 0.1 994 0.2 864 0.2 522 0.1 1,620 0.4
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total fixed-rate loans 86,258 14.7 72,249 12.9 70,322 14.1 78,560 16.6 84,720 23.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Adjustable-Rate Loans:
Real Estate Loans
Residential
One- to four- family 236,136 40.2 229,510 41.0 187,670 37.7 180,749 38.2 $170,821 46.9
Other Residential 46,778 8.0 45,228 8.1 37,675 7.6 24,180 5.1 18,598 5.1
Commercial 147,104 25.0 120,470 21.5 91,689 18.4 68,004 14.4 37,623 10.3
Residential construction:
One- to four-family 13,455 2.3 13,319 2.4 18,338 3.7 17,433 3.7 10,223 2.8
Other residential 13,533 2.3 23,804 4.2 35,568 7.2 38,675 8.2 10,552 2.9
Commercial construction 16,518 2.8 27,273 4.9 30,744 6.2 41,798 8.8 11,194 3.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans 473,524 80.6 459,604 82.1 401,684 80.8 370,839 78.4 259,011 71.1
Consumer loans 14,083 2.4 14,559 2.6 12,108 2.5 10,082 2.1 7,775 2.1
Commercial business loans 13,322 2.3 13,521 2.4 13,043 2.6 13,640 2.9 12,993 3.6
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Total adjustable-rate loans 500,929 85.3 487,684 87.1 426,835 85.9 394,561 83.4 279,779 76.8
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans 587,187 100.0% 559,933 100.0% 497,157 100.0% 473,121 100.0% 364,499 100.0%
===== ===== ===== ===== =====
Less:
Loans in process 22,383 22,316 35,739 38,879 3,722
Deferred fees and discounts 3,689 3,761 4,032 4,125 2,732
Allowance for loan losses 14,356 14,601 13,636 10,590 6,029
------- ------- ------- ------- -------
Total loans receivable, net $546,759 $519,255 $443,750 $419,527 $352,016
======= ======= ======= ======= =======
10
The following schedule illustrates the contractual maturities of the
Bank's loan portfolio at June 30, 1996. Loans which have adjustable
interest rates are shown as maturing in the period during which the
loan is contractually due. This schedule does not reflect the effects
of possible prepayments or enforcement of due-on-sale clauses. The
table is based on information prepared in accordance with generally
accepted accounting principles.
Other Residential
One- to Four-Family and Other Commercial and
Residential Real Residential Commercial One- to Four-Family
Estate Loans Construction Construction Construction
Due During Weighted Weighted Weighted Weighted
Years Ended Average Average Average Average
June 30, Amount Rate Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
1997(1) $ 7,682 9.31% $ 21,534 8.97% $ 48,130 9.47% $13,455 9.33%
1998 545 8.80 6,648 8.99 17,526 9.66 -- 0.00
1999 1,204 9.03 7,766 8.61 22,771 9.49 -- 0.00
2000 and 2001 1,780 8.71 16,591 8.70 54,029 9.43 -- 0.00
2002 to 2006 10,974 8.34 4,059 8.88 21,014 9.71 -- 0.00
2007 to 2011 30,529 7.98 22,801 9.37 13,864 9.45 -- 0.00
2012 to 2022 77,281 8.03 15,328 8.56 11,647 8.98 -- 0.00
2023 and Following 119,353 7.51 -- -- 15 8.62 -- 0.00
------- ------- ------- ------
$249,348 $ 94,724 $188,996 $13,455
======= ======= ======= ======
Commercial
Consumer Business Total (2)
Due During Weighted Weighted Weighted
Years Ended Average Average Average
June 30, Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
1997 (1) $ 9,310 8.29% $ 8,733 9.67% $108,844 10.31%
1998 4,483 9.19 1,927 9.91 31,126 9.85
1999 3,573 9.29 977 8.98 36,291 9.99
2000 and 2001 6,030 9.76 898 9.88 79,328 9.92
2002 to 2006 3,531 9.44 1,020 9.95 40,598 9.40
2007 to 2011 -- 0.00 182 10.50 67,376 8.83
2012 to 2022 -- 0.00 -- 0.00 104,256 8.21
2023 and Following -- 0.00 -- 0.00 119,368 7.05
------ ------ -------
$26,927 $13,737 $587,187
====== ====== =======
_____________________________
(1) Includes demand loans, loans having no stated maturity and
overdraft loans.
(2) Of the $478 million of loans due after June 30, 1997, $70
million, or 15%, have fixed rates of interest and $408 million, or
85%, have adjustable rates of interest.
11
Lending Activities-Environmental Issues
Loans secured with real property, whether commercial, residential
or other, may have a material, negative effect on the financial
position and results of operation of the lender if the collateral
is environmentally contaminated. The effect can be a result of,
but is not necessarily limited to, liability for the cost of
cleaning up the contamination imposed on the lender by certain
federal and state laws, a reduction in the borrower's ability to
pay because of the liability imposed upon it for any clean up
costs, a reduction in the value of the collateral because of the
presence of contamination or a subordination of security interests
in the collateral to a super priority lien securing the clean up
costs by certain state laws.
Management of the Bank is aware of the risk that the Bank may be
negatively affected by environmentally contaminated collateral and
attempts to control such risk through commercially reasonable
methods, consistent with guidelines arising from applicable
government or regulatory rules and regulations, and to a more
limited extent publications of the lending industry. Management
currently is unaware (without, in many circumstances specific
inquiry or investigation of existing collateral, some of which was
accepted as collateral before risk controlling measures were
implemented) of any environmental contamination of real property
securing loans in the Bank's portfolio that would subject the Bank
to any material risk. No assurance can be made, however, that the
Bank will not be adversely affected by environmental contamination.
Lending Activities - Residential Real Estate Lending
At June 30, 1996 and 1995, loans secured by residential real estate
totaled $331 million and $322 million, respectively, and
represented approximately 56% and 57%, respectively, of the Bank's
total loan portfolio. In fiscal 1996 and 1995, Great Southern
originated $55 million and $77 million, respectively, of
adjustable-rate mortgages. Fixed-rate mortgages are originated at
interest rates and on terms agreed to by investors in the secondary
market (generally the FHLMC or Fleet Mortgage Corp.) and promptly
sold, primarily with servicing released (primarily with servicing
retained prior to fiscal 1996) and without recourse, in order to
generate fee income and reduce the Bank's exposure to changes in
interest rates. In fiscal year 1996 and 1995, Great Southern
originated $34.9 million and $8.9 million, respectively, of fixed-
rate loans and sold $36.6 million and $8.7 million, respectively,
into the secondary market.
The Bank currently is originating adjustable-rate residential
mortgage loans primarily with one-year adjustment periods. Rate
adjustments are based upon changes in prevailing rates for one-year
U.S. Treasury securities, and are generally limited to 2% maximum
annual adjustments as well as a maximum aggregate adjustment over
the life of the loan. Accordingly, the interest rates on these
loans typically may not be as rate sensitive as is the Bank's cost
of funds. Generally, the Bank's adjustable-rate mortgage loans are
not convertible into fixed-rate loans, do not permit negative
amortization of principal and carry no prepayment penalty.
12
The Bank's portfolio of adjustable-rate mortgage loans also
includes a number of loans with different adjustment periods,
without limitations on periodic rate increases and rate increases
over the life of the loans or which are tied to other short-term
market indices. These loans were originated prior to the
standardization of adjustable-rate loan product criteria by large
secondary market purchasers. Due to the unseasoned nature of
adjustable-rate mortgage loans in the industry (i.e., such loans
have not been subject to an interest rate environment which causes
them to adjust to the maximum), such loans entail unquantifiable
risks resulting from potential increased payment obligations on the
borrower as a result of upward repricing. Further, the adjustable-
rate mortgages offered by Great Southern, as well as by many other
financial institutions, sometimes provide for initial rates of
interest below the rates which would prevail were the index used
for pricing applied initially. Compared to fixed-rate mortgage
loans, these loans are subject to increased risk of delinquency or
default as the higher, fully-indexed rate of interest subsequently
comes into effect in replacement of the lower initial rate. The
Bank has not experienced an increase in delinquencies in
adjustable-rate mortgage loans due to a relatively low interest
rate environment in recent years.
In underwriting one- to four-family residential real estate loans,
Great Southern evaluates both the borrower's ability to make
monthly payments and the value of the property securing the loan.
It is Great Southern's policy that all loans in excess of 80% of
the appraised value of the property be insured by a private
mortgage insurance company approved by Great Southern for the
amount of the loan in excess of 80% of the appraised value. In
addition, Great Southern requires borrowers to obtain title and
fire and casualty insurance in an amount not less than the amount
of the loan. Real estate loans originated by the Bank generally
contain a "due on sale" clause allowing the Bank to declare the
unpaid principal balance due and payable upon the sale of the
property securing the loan. In the case of fixed-rate loans, the
Bank generally enforces these due on sale clauses to the extent
permitted by law.
Lending Activities-Commercial Real Estate and Construction Lending
Commercial real estate lending has traditionally been a part of
Great Southern's business activities. Beginning in fiscal 1986,
Great Southern expanded its commercial real estate lending in order
to increase the yield on, and the proportion of interest rate
sensitive loans in, its portfolio. Starting early in fiscal 1988,
Great Southern reduced its originations of commercial real estate
loans due to the lower spreads available and the Bank's increased
levels of problem loans in this area. In addition, the Financial
Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") further limited the Bank's commercial real estate
lending, due to limits imposed on the amounts and types of loans
the Bank would be permitted to originate. See "Regulation".
Starting in fiscal 1992, Great Southern increased its originations
of commercial real estate and commercial business loans.
13
Great Southern expects to continue to maintain the current
percentage of commercial real estate and commercial business loans
in its total loan portfolio by originating loans secured by
commercial real estate and other commercial business assets,
subject to commercial real estate and other market conditions and
to applicable regulatory restrictions. See "Regulation" and "-
Qualified Thrift Lender Test" below.
At June 30, 1996 and 1995, loans secured by commercial real estate
totaled $172 million and $133 million, respectively, or
approximately 29.4% and 23.8%, respectively, of the Bank's total
loan portfolio. At June 30, 1996 and 1995, construction loans
secured by projects under construction and the land on which the
projects are located aggregated $43.5 million and $64.4 million,
respectively, or 7.4% and 11.5%, respectively, of the Bank's total
loan portfolio. Substantially all of the Bank's commercial real
estate loans have been originated with adjustable rates of
interest, a majority of which are tied to the Bank's prime rate.
At the date of origination, the amounts of the loan commitments
with respect to substantially all of these loans did not exceed 75%
of the appraised value of the properties securing the loans.
The Bank's construction loans generally have terms of one year or
less. The construction loan agreements for one- to four-family and
other residential projects generally provide that principal
payments are required as individual condominium units or single
family houses are built and sold to a third party in order that the
remaining loan balance as a proportion to the value of the
remaining security does not increase. Loan proceeds are disbursed
in increments as construction progresses. Generally, the amount of
each disbursement is based on the construction cost estimate of an
independent architect, engineer or qualified fee inspector who
inspects the project in connection with each disbursement request.
Normally, Great Southern's construction loans are made either as
the initial stage of a combination loan (i.e., with a commitment
from the Bank to provide permanent financing upon completion of the
project) or with a takeout obligation (i.e., with a commitment to
provide permanent financing) by a third party.
The Bank's commercial real estate and construction loans generally
involve larger principal balances than do its residential loans.
At June 30, 1996, 58 of the Bank's commercial real estate and
construction loans had net principal balances in excess of $1.0
million, with the largest being $6.2 million. The aggregate net
principal balance of all such loans having net principal balances
in excess of $1.0 million was $105 million at that date. Current
law subjects savings associations to the same loans-to-one borrower
restrictions that are applicable to national banks with limited
provisions for exceptions. In general, the national bank standard
restricts loans to a single borrower to no more than 15% of a
bank's unimpaired capital and unimpaired surplus, plus an
additional 10% if the loan is collateralized by certain readily
marketable collateral. (Real estate is not included in the
definition of "readily marketable collateral.") As computed on the
basis of the Bank's unimpaired capital and surplus at June 30,
1996, this limit was approximately $10.5 million. See "Regulation"
At June 30, 1996 the Bank was in compliance with the loans to one
borrower limit.
14
The table below sets forth, by type of security property, the
number and amount of Great Southern's commercial real estate and
construction loans at June 30, 1996. The amounts shown do not
reflect allowances for losses. See "- Classified Assets" and "-
Loan Delinquencies and Defaults" for a discussion of the Bank's
largest non-performing assets and items of concern. The table is
based on information prepared in accordance with generally accepted
accounting principles.
Number Original Outstanding Amount
of Loan Principal Undisbursed Non-
Loans Commitment Balance Amount Performing
----- ---------- ----------- ------------ ----------
(Dollars in thousands)
Commercial Real Estate Loans
Hotels/Motels 44 $ 50,894 $ 43,136 $ 131 $ --
Medical and long term care 24 22,026 21,564 4 --
Golf courses and recreational 30 25,962 22,819 3,506 --
Shopping centers 48 19,519 17,772 -- --
Commercial land development 104 44,802 23,334 238 --
Office buildings 48 23,292 18,694 231 --
Industrial real estate 33 8,919 7,300 97 --
Restaurants 35 14,431 12,832 144 1,407
Other 39 6,669 5,027 747 --
--- ------- ------- ----- -----
Total commercial real estate loans 405 216,514 172,478 5,098 1,407
--- ------- ------- ----- -----
Construction Loans
One- to four-family residential 130 13,455 6,682 6,064 121
Other residential 8 13,533 9,789 3,744 --
Commercial real estate:
Hotels/Motels 7 7,164 3,953 3,210 --
Commercial land development 15 3,518 3,036 482 851
Restaurants 2 2,650 1,422 1,228 --
Office buildings 1 1,412 -- 1,412 --
Medical and long term care 1 725 8 717 --
Other 10 1,759 1,331 428 --
--- ------- ------- ------ -----
Total construction loans 174 44,216 26,221 17,285 972
--- ------- ------- ------ -----
Total 579 $260,730 $198,699 $22,383 $2,379
=== ======= ======= ====== =====
15
Commercial real estate and construction lending generally affords
the Bank an opportunity to receive interest at rates higher than
those obtainable from residential lending and to receive higher
origination and other loan fees. In addition, commercial real
estate and construction loans are generally made with adjustable
rates of interest or, if made on a fixed-rate basis, for relatively
short terms. Nevertheless, commercial real estate lending entails
significant additional risks as compared with residential mortgage
lending. Commercial real estate loans typically involve large loan
balances to single borrowers or groups of related borrowers and
generally involve lower loan-to-value ratios. In addition, the
payment experience on loans secured by commercial properties is
typically dependent on the successful operation of the related real
estate project and thus may be subject, to a greater extent, to
adverse conditions in the real estate market or in the economy
generally.
Construction loans also involve additional risks attributable to
the fact that loan funds are advanced upon the security of the
project under construction, which is of uncertain value prior to
the completion of construction. Moreover, because of the
uncertainties inherent in estimating construction costs, delays
arising from labor problems, material shortages, and other
unpredictable contingencies, it is relatively difficult to evaluate
accurately the total loan funds required to complete a project, and
the related loan-to-value ratios. See also the discussion under
the headings "- Classified Assets" and "- Loan Delinquencies and
Defaults" below.
Lending Activities - Commercial Business Lending
Great Southern is authorized to make secured or unsecured loans for
commercial, corporate, business and agricultural purposes and to
engage in commercial leasing activities up to a maximum of 10% of
the institution's assets. At June 30, 1996 and 1995, respectively,
Great Southern had $13.7 million and $14.5 million in commercial
business loans outstanding, or 2.3% and 2.6%, respectively, of the
Bank's total loan portfolio. The largest amount of commercial
business loans outstanding to any one borrower or group of
affiliated borrowers at June 30, 1996, had a principal balance of
$1.7 million. Great Southern's commercial business lending
activities encompass loans with a variety of purposes and security,
including loans to finance accounts receivable, inventory and
equipment.
16
The following table sets forth information regarding the number and
amount of the Bank's commercial business loans as of June 30, 1996.
The amounts shown do not reflect allowances for losses. See "-
Classified Assets" and "- Loan Delinquencies and Defaults" for a
discussion of the Bank's largest non-performing assets and related
items. The table is based on information prepared in accordance
with generally accepted accounting principles.
Outstanding Amount
Number Principal Non-
of Loans Balance Performing
-------- ----------- ----------
(Dollars in thousands)
Secured Loans:
Accounts receivable,
inventory and equipment 78 $ 7,942 $ 144
Stocks and bonds 25 2,636 --
Deposit accounts and
promissory notes 26 1,630 --
Other 8 642 600
--- ------ ---
Total secured loans 137 12,850 744
Unsecured Loans 23 887 --
--- ------ ---
Total Commercial Business Loans 160 $13,737 $744
=== ====== ===
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her
employment and other income and which are secured by real property
whose value tends to be more easily ascertainable, commercial
business loans are of higher risk and typically are made on the
basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. Commercial business loans are
generally secured by business assets, such as accounts receivable,
equipment and inventory. As a result, the availability of funds
for the repayment of commercial business loans may be substantially
dependent on the success of the business itself. Further, the
collateral securing the loans may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the
success of the business. At June 30, 1996, approximately $876,000
in principal balance of commercial business loans, or 0.15%, of
Great Southern's total loan portfolio was 30 days or more
delinquent.
17
The Bank's management recognizes the generally increased risks
associated with commercial business lending. Great Southern's
commercial business lending policy emphasizes complete credit file
documentation and analysis of the borrower's character, capacity to
repay the loan, the adequacy of the borrower's capital and
collateral as well as an evaluation of the industry conditions
affecting the borrower. Analysis of the borrower's past, present
and future cash flows is also an important aspect of Great
Southern's credit analysis. The majority of Great Southern's
commercial business loans have been to borrowers in southwestern
and central Missouri. Great Southern intends to continue its
commercial business lending in this geographic area.
As part of its commercial business lending activities, Great
Southern issues letters of credit and receives fees averaging
approximately 1% of the amount of the letter of credit per year.
At June 30, 1996, Great Southern had 34 letters of credit
outstanding in the aggregate amount of $8.9 million. Approximately
99% of the aggregate amount of these letters of credit were
secured, including one $8.2 million letter of credit, secured by
real estate, which was issued to enhance the issuance of housing
revenue refunding bonds.
Lending Activities - Consumer Lending
Great Southern management views consumer lending as an important
component of its business strategy. Specifically, consumer loans
generally have short terms to maturity, adjustable rates or both,
thus reducing Great Southern's exposure to changes in interest
rates, and carry higher rates of interest than do residential
mortgage loans. In addition, Great Southern believes that the
offering of consumer loan products helps to expand and create
stronger ties to its existing customer base.
Great Southern offers a variety of secured consumer loans,
including automobile loans, home equity loans and loans secured by
savings deposits. In addition, Great Southern also offers home
improvement loans, guaranteed student loans and unsecured consumer
loans. Consumer loans totaled $26.9 million and $26.3 million at
June 30, 1996 and 1995, respectively, or 4.6% and 4.7%,
respectively, of the Bank's total loan portfolio.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other
debts 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.
18
Student loans are underwritten in compliance with the regulations
of the US Department of Education for the Federal Family Education
Loan Programs (FFELP). The FFELP loans are administered and
guaranteed by the Missouri Coordinating Board for Higher Education
as long as the Bank complies with the regulations. The Bank has
contracted with the Missouri Higher Education Loan Authority (the
"MOHELA") to originate and service these loans and to purchase
these loans during the grace period immediately prior to the loans
beginning their repayment period. This repayment period is
generally at the time the student graduates or does not maintain
the required hours of enrollment.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are
unsecured or secured by rapidly depreciable assets such as
automobiles. In such cases, any repossessed collateral for a
defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the
greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, consumer loan
collections are dependent on the borrower's continuing financial
strength, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal
and state consumer bankruptcy and insolvency laws, may limit the
amount which can be recovered on such loans. Such loans may also
give rise to claims and defenses by a consumer loan borrower
against an assignee of such loan such as the Bank, and a borrower
may be able to assert against such assignee claims and defenses
which it has against the seller of the underlying collateral.
Applicable laws and regulations permit institutions to make secured
and unsecured consumer loans (which, together with any commercial
paper or corporate debt securities held by the Bank as permitted by
the OTS, may not exceed a maximum of 35% of the institution's
assets). Loans in excess of 30% of the assets may be invested only
in loans which are made by the institution directly to the original
obligor and with respect to which the institution does not pay any
finder, referral or other fee, directly or indirectly, to any third
party.
Originations, Purchases, Sales and Servicing of Loans
The Bank originates loans through internal loan production
personnel located in the Bank's main bank and branch offices.
Walk-in customers and referrals from real estate brokers and
builders are also important sources of loan originations. The
table below shows the dollar volume of loan originations for the
periods indicated. For the fiscal years ended June 30, 1996, 1995
and 1994, the table reflects approximately $31.5 million, $7.5
million, and $27 million of loans refinanced which were previously
included in the loan portfolio or were loans owned by investors and
serviced by the Bank. Due to the high level of adjustable-rate
loans refinanced into fixed-rate loans and the higher fixed-rate
19
loans refinanced into lower fixed-rates, management has included
the refinanced amounts in the origination table to more accurately
reflect the amount of originations and sales during all fiscal
years except June 30, 1992.
During the fiscal year ended June 30, 1996 the Bank originated $189
million adjustable-rate loans and $52 million fixed-rate loans
compared to $195 million adjustable-rate loans and $30 million
fixed-rate loans during the fiscal year ended June 30, 1995.
Management does not expect the high growth of originations
experienced during the past four years to continue. However, as
long as the lower interest rate environment continues, there is a
higher level of financing and refinancing expected than would exist
in a higher rate environment.
Great Southern also purchases whole real estate loans and
participation interests in real estate loans from the FHLMC as well
as private investors, such as other thrift institutions, banks and
life insurance companies. Great Southern may limit its ability to
control its credit risk when it purchases participations in such
loans. The terms of participation agreements vary; however,
generally Great Southern may not have direct access to the borrower
or information about the borrower, and the institution
administering the loan may have some discretion in the
administration of performing loans and the collection of non-
performing loans.
In fiscal 1996, 1995 and 1994, there were no loan purchases by the
Bank. In fiscal 1993, the Bank purchased 2 loans from another
financial institution, totaling $2.4 million in total principal
balance, secured by commercial real estate. In fiscal 1992, the
Bank purchased 26 loans from the Resolution Trust Corporation,
totaling $16.9 million in total principal balance, secured mainly
by other residential real estate and commercial real estate. At
June 30, 1996 and 1995, approximately $12.5 million, or 2.1% and
$14.8 million, or 2.6%, respectively, of the Bank's total loan
portfolio consisted of purchased loans.
Great Southern also sells whole real estate loans and participation
interests in real estate loans to the FHLMC as well as private
investors, such as other thrifts, banks and life insurance
companies. These loans and loan participations are generally sold
without recourse and for cash in amounts equal to the unpaid
principal amount of the loans or loan participations determined
using present value yields to the buyer, that generally produce
gains to the Bank upon sale and allow a margin for servicing
income. Loan participations are generally sold with Great Southern
retaining control of the administration of the loan. The Bank sold
whole real estate loans and loan participations in aggregate
amounts of $36.6 million, $8.7 million and $53.5 million during the
years ended June 30, 1996, 1995 and 1994, respectively. Sales of
whole real estate loans and participations in real estate loans
generally can be beneficial to the Bank since these sales may
generate income at the time of sale, produce future servicing
income, provide funds for additional lending and other investments,
and increase liquidity.
20
Great Southern also sells guaranteed student loans to the MOHELA at
the time the borrower is scheduled to begin making repayments on
the loans. In the past, these loans were generally sold with
limited recourse and for cash in amounts equal to the unpaid
principal amount of the loans. Beginning in July 1995, Great
Southern re-negotiated its agreement with the MOHELA and these
loans will generally be sold with limited recourse and for cash in
amounts equal to the unpaid principal amount of the loans and a
transfer fee based on average borrower indebtedness. The fee is
based on a sliding scale with a higher fee paid for a higher
average borrower indebtedness and a lower fee paid for a lower
average borrower indebtedness. The Bank sold guaranteed student
loans in aggregate amounts of $8.6 million, $5.0 million and $3.9
million during the years ended June 30, 1996, 1995 and 1994,
respectively. Sales of guaranteed student loans generally can be
beneficial to the Bank since these sales remove the burdensome
servicing requirements of these types of loans once the borrower
begins repayment.
Gains, losses and transfer fees on sales of loans and loan
participations are recognized at the time of the sale. When real
estate loans and loan participations sold have an average
contractual interest rate that differs from the agreed upon yield
to the purchaser (less the agreed upon servicing fee), resulting
gains or losses are recognized in an amount equal to the present
value of the differential over the estimated remaining life of the
loans. Any resulting discount or premium is accreted or amortized
over the same estimated life using a method approximating the level
yield interest method. When real estate loans and loan
participations are sold with servicing released, as the Bank did
beginning in fiscal 1996, an additional fee is received for the
servicing rights. Net gains and transfer fees on sales of loans
for the years ended June 30, 1996, 1995 and 1994 were $540,000
$91,300 and $565,000, respectively.
Prior to fiscal 1996, when whole real estate loans were sold, the
Bank typically retained the responsibility for servicing the loans.
The Bank receives a servicing fee for performing these services.
The Bank had the servicing rights for approximately $80 million,
$88.3 million and $94.8 million at June 30, 1996, 1995 and 1994,
respectively, of loans owned by others. The servicing of these
loans generated net servicing fees to the Bank for the years ended
June 30, 1996, 1995 and 1994 of $316,000, $347,000 and $338,000,
respectively. When guaranteed student loans are sold, the Bank
typically releases the responsibility for servicing the loans to
the MOHELA.
21
In addition to interest earned on loans and loan origination fees,
the Bank receives fees for loan commitments, letters of credit,
prepayments, modifications, late payments, transfers of loans due
to changes of property ownership and other miscellaneous services.
The fees vary from time to time, generally depending on the supply
of funds and other competitive conditions in the market. Fees from
prepayments, commitments, letters of credit and late payments
totaled $487,000, $470,000 and $566,000 for the years ended June
30, 1996, 1995 and 1994, respectively. Loan origination fees, net
of related costs, are accounted for in accordance with Statement of
Financial Accounting Standards No. 91 "Accounting for Nonrefundable
Fees and Costs Associated With Originating or Acquiring Loans and
Initial Direct Costs of Leases." Loan fees and certain direct loan
origination costs are deferred, and the net fee or cost is
recognized in interest income using the level-yield method over
the contractual life of the loan. For further discussion of this
issue see Note 1 of Notes to Consolidated Financial Statements in
the Annual Report to Stockholders, which portions are incorporated
herein by reference.
The table on the following page shows the loan origination,
purchase, sale and repayment activities of the Bank for the periods
indicated. The table is based on information prepared in
accordance with generally accepted accounting principles.
22
Year Ended June 30,
---------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(Dollars in thousands)
Loans Originated:
Adjustable-Rate Loans:
Real Estate:
One- to four-family residential $ 54,699 $ 76,753 $ 53,077 $ 51,912 $ 31,968
Other Residential 28,977 27,324 38,315 47,597 10,734
Commercial 70,812 49,473 38,141 68,677 14,832
Construction 20,237 21,253 28,524 22,645 4,153
Non-real Estate:
Consumer loans 8,383 7,848 8,519 6,744 6,113
Commercial business loans 9,742 12,741 6,044 7,228 9,653
------- ------- ------- ------ ------
Total adjustable-rate 192,850 195,392 155,582 204,803 77,453
------- ------- ------- ------ ------
Fixed-Rate Loans:
Real Estate:
One- to four-family residential 34,855 8,927 49,288 44,554 20,911
Other Residential 5,499 0 7,044 3,692 7,403
Commercial 1,787 2,031 3,787 3,595 4,273
Non-real Estate:
Consumer loans 9,863 10,112 8,944 3,923 2,647
Commercial business loans 92 9,039 2,295 199 347
------- ------- ------- ------- ------
Total fixed-rate 52,096 30,109 71,358 55,963 35,581
------- ------- ------- ------- ------
Total loans originated 244,946 225,501 243,978 260,766 113,034
Loans Purchased:
Real Estate loans (1) 0 0 0 2,395 16,883
------- ------- ------- ------- ------
Total additions 244,946 225,501 243,978 263,161 129,917
------- ------- ------- ------- ------
Loans Sold:
Real Estate loans (2) 36,643 8,686 53,544 40,487 20,072
Consumer loans (3) 8,566 5,036 3,887 2,289 1,761
------- ------- ------- ------- -------
Total sales 45,209 13,722 57,431 42,776 21,833
Principal repayments 169,658 143,020 160,206 113,156 57,428
Decrease (increase) other items, net 2,825 5,983 2,306 (1,393) 29,829
------- ------- ------- ------- ------
Total reductions 217,692 162,725 219,943 154,539 109,090
------- ------- ------- ------- ------
Net increase $ 27,254 $ 62,776 $ 24,035 $108,622 $ 20,827
======= ======= ======= ======= ======
(1) Substantially all of the loans for June 30, 1992 are multifamily residential or health care loans.
Substantially all of the loans for June 30, 1993 are commercial real estate loans.
(2) Substantially all of these loans are fixed-rate, one- to four-family residential loans.
(3) Substantially all of these loans are guaranteed student loans where the borrowers graduated and the loans
were sold prior to the beginning of repayment.
23
Allowance for Losses on Loans and Foreclosed Assets
Management periodically reviews Great Southern's allowance for loan
losses, considering numerous factors, including, but not
necessarily limited to, general economic conditions, loan portfolio
composition, prior loss experience, and independent appraisals.
Further allowances are established when management determines that
the value of the collateral is less than the amount of the unpaid
principal of the related loan plus estimated costs of the
acquisition and sale or when management determines a borrower of an
unsecured loan will be unable to make full repayment. Allowances
for estimated losses on foreclosed assets (real estate and other
assets acquired through foreclosure) are charged to expense, when,
in the opinion of management, any significant and permanent decline
in the market value of the underlying collateral reduces such
market value to less than the carrying value of the asset.
The Bank has increased its lending in the Branson Lakes area during
recent years primarily due to the substantial growth in the area.
While management believes the loans it has funded have been
originated pursuant to sound underwriting standards, and
individually have no unusual credit risk, the short period of time
in which the Branson Lakes area has grown and the lower than
expected increase in tourists visiting the area during recent years
causes some concern as to the credit risk associated with the
Branson Lakes area as a whole. Due to this concern and the overall
growth of the commercial real estate and other residential real
estate loan portfolios, management provided increased levels of
loan loss allowances in recent years.
The allowances for losses on loans and foreclosed assets are
maintained at an amount management considers adequate to provide
for potential losses. Although management believes that it uses
the best information available to make such determinations, future
adjustments to the allowances for losses on loans and foreclosed
assets may be necessary, and net income could be significantly
affected, if circumstances differ substantially from the
assumptions used in making the initial determinations.
At June 30, 1996 and 1995, Great Southern had an allowance for
losses on loans and foreclosed assets of $15.4 million and $15.5
million, respectively, of which $1.6 million and $2.0 million,
respectively, had been allocated as an allowance for specific
loans, $1.1 million and $900,000, respectively, had been allocated
for foreclosed assets and $800,000 and $0, respectively, had been
allocated for impaired loans. The allowances are discussed further
in Notes 3 and 4 of the Notes to Consolidated Financial Statements
and Management's Discussion and Analysis of Financial Condition and
Results of Operations in the Annual Report to Stockholders, which
portions are incorporated herein by reference.
24
The following table sets forth an analysis of the Bank's allowance
for losses on loans showing the details of the allowance by types
of loans and the allowance balance by loan type. The table is
based on information prepared in accordance with generally accepted
accounting principles.
Year Ended June 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of period $14,601 $13,636 $10,590 $ 6,029 $ 4,732
------ ------ ------ ------ ------
Charge-offs:
One- to four-family residential 189 13 85 189 189
Other residential 1,072 474 101 25 0
Commercial real estate 509 227 33 70 1,582
Consumer 198 48 33 28 272
Commercial business 25 120 32 106 18
------ ------ ------ ------ ------
Total charge-offs 1,993 882 284 418 2,061
------ ------ ------ ------ ------
Recoveries:
One- to four-family residential 33 0 8 0 13
Commercial real estate 136 442 181 183 142
Consumer 48 22 59 53 74
Commercial business 80 64 57 66 272
------ ------ ------ ------ ------
Total recoveries 297 528 307 302 501
------ ------ ------ ------ ------
Net charge-offs (recoveries) 1,696 354 (23) 116 1,560
Provision for losses on loans
(charged to expense) 1,451 1,319 3,023 4,677 2,857
------ ------ ------ ------ ------
Balance at end of period $14,356 $14,601 $13,636 $10,590 $ 6,029
====== ====== ====== ====== ======
Ratio of net charge-offs to
average loans outstanding 0.32% 0.07% (0.01%) 0.03% 0.46%
==== ==== ==== ==== ====
25
The allowance for losses on loans at the date indicated is summarized as follows. The table is based on
information prepared in accordance with generally accepted accounting principles.
June 30,
-----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ----------------- ----------------
% of % of % of % of % of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
One- to four-family
residential and
construction $ 757 44.8% $ 670 45.9% $ 363 44.6% $ 320 47.2% $ 104 57.5%
Other residential
and construction 503 16.1 480 8.1 668 20.8 557 17.8 121 12.3
Commercial real estate
and construction
and commercial
business 7,875 34.5 7,596 31.3 7,394 30.3 3,995 31.5 1,901 26.4
Consumer 488 4.6 546 4.7 414 4.3 359 3.5 411 3.8
Unallocated 4,733 0.0 5,309 0.0 4,797 0.0 5,359 0.0 3,492 0.0
------ ----- ------ ----- ------ ----- ----- ----- ----- -----
Total $14,356 100.0% $14,601 100.0% $13,636 100.0% $10,590 100.0% $6,029 100.0%
====== ===== ====== ===== ====== ===== ===== ===== ===== =====
Loan Delinquencies and Defaults
When a borrower fails to make a required payment on a loan, the
Bank attempts to cause the delinquency to be cured by contacting
the borrower. In the case of loans secured by residential real
estate, a late notice is sent 15 days after the due date. If the
delinquency is not cured by the 30th day, a delinquent notice is
sent to the borrower. Additional written contacts are made with
the borrower 45 and 60 days after the due date. If the delinquency
continues for a period of 65 days, the Bank usually institutes
appropriate action to foreclose on the collateral. The actual time
it takes to foreclose on the collateral varies depending on the
particular circumstances and the applicable governing law. If
foreclosed, the property is sold at public auction and may be
purchased by the Bank. Delinquent consumer loans are handled in a
generally similar manner, except that initial contacts are made
when the payment is five days past due and appropriate action may
be taken to collect any loan payment that is delinquent for more
than 15 days. The Bank's procedures for repossession and sale of
consumer collateral are subject to various requirements under the
applicable consumer protection laws as well as other applicable
laws and the determination by the Bank that it would be beneficial
from a cost basis.
26
Delinquent commercial business loans and loans secured by
commercial real estate are initially handled by the loan officer in
charge of the loan, who is responsible for contacting the borrower.
The Senior Vice President in charge of commercial lending also
works with the commercial loan officers to see that necessary steps
are taken to collect such delinquent loans. In addition, the Bank
has a Problem Loan Committee which meets at least monthly which
reviews all commercial loans 30 days or more delinquent as well as
other loans not 30 days delinquent which management feels may
present possible collection problems. If an acceptable work out of
a delinquent commercial loan cannot be agreed upon, the Bank may
initiate foreclosure on any collateral securing the loan. However,
in all cases, whether a commercial or other loan, the prevailing
circumstances may be such that management may determine it is in
the best interest of the Bank not to foreclose on the collateral.
Delinquent loans at June 30, 1996 were $12.1 million compared to
$11.7 million at June 30, 1995. This increase is mainly
attributable to an increase in the 60-89 day and 90 days and over
delinquent categories offset by a decrease in the 30-59 day
category. The increase in total delinquencies mainly occurred in
the one- to four-family real estate and other residential real
estate, offset by a decrease in the commercial real estate. For
loans that Great Southern is servicing, the owners generally
prescribe the collection procedures. Great Southern may act on the
owners behalf in the collection process.
The table on the following page sets forth information concerning
delinquent mortgage and other loans held in the Bank's portfolio at
June 30, 1996, as well as comparative information for June 30,
1995, in dollar amount and as a percentage of the Bank's total loan
portfolio. The amounts presented represent the total outstanding
principal balances of the related loans rather than the actual
payment amounts which are overdue. For related information, see
the discussion under the heading "- Allowance for Losses on Loans
and Foreclosed Assets" above. The table is based on information
prepared in accordance with generally accepted accounting
principles.
27
Loans Delinquent for
---------------------------------------
90 Days Total
30-59 60-89 and Delinquent
Days Days Over Loans
------- ------- ------- ----------
(Dollars in thousands)
One- to four-family
residential real estate:
Number of loans 23 15 15 53
Amount $1,665 $1,437 $1,195 $ 4,297
Percent 0.28% 0.25% 0.20% 0.73%
Other residential:
Number of loans 1 1 2 4
Amount $ 675 $ 259 $ 934 $ 1,868
Percent 0.12% 0.04% 0.16% 0.32%
Commercial real estate:
Number of loans 2 5 4 11
Amount $ 238 $1,839 $1,407 $ 3,484
Percent 0.04% 0.31% 0.24% 0.59%
Construction:
Number of loans 1 2 3 6
Amount $ 11 $ 30 $ 972 $1,013
Percent 0.00% 0.01% 0.16% 0.17%
Consumer:
Number of loans 73 30 59 162
Amount $ 235 $ 76 $ 202 $ 513
Percent 0.04% 0.01% 0.04% 0.09%
Commercial business:
Number of loans 2 3 5 10
Amount $ 106 $ 26 $ 744 $ 876
Percent 0.02% 0.00% 0.13% 0.15%
Total June 30, 1996:
Number of loans 102 56 88 246
Amount $2,930 $3,667 $5,454 $12,051
Percent 0.50% 0.62% 0.93% 2.05%
Total June 30, 1995:
Number of loans 102 29 95 226
Amount $7,144 $1,476 $3,065 $11,685
Percent 1.28% 0.26% 0.55% 2.09%
28
Classified Assets
Federal regulations provide for the classification of loans and
other assets such as debt and equity securities considered to be of
lesser quality as "substandard," "doubtful" or "loss" assets. The
regulations require insured institutions to classify their own
assets and to establish prudent general allowances for losses from
assets classified "substandard" or "doubtful." For the portion of
assets classified as "loss," an institution is required to either
establish specific allowances of 100% of the amount classified or
charge such amount off its books. Assets which do not currently
expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess
potential weaknesses are required to be designated "special
mention" by management. In addition, the OTS may require the
establishment of a general allowance for losses based on assets
classified as "substandard" and "doubtful" or based on the general
quality of the asset portfolio of an institution. Following are
the total classified assets per the Bank's internal asset
classification list. There were no significant off-balance sheet
items classified at June 30, 1996. The Bank's significant
classified assets are discussed individually below.
Total Allowance
Asset Category Substandard Doubtful Loss Classified for Losses
----------------------- ----------- -------- ---- ---------- ----------
(Dollars in thousands)
Loans and off-balance
sheet risks $10,037 $ 0 $142 $10,179 $14,356
Foreclosed assets 10,755 0 0 10,755 1,086
------ ----- --- ------ ------
Total $20,792 $ 0 $142 $20,934 $15,442
====== ===== === ====== ======
The table below sets forth the amounts and categories of non-
performing assets (classified loans which are not performing under
regulatory guidelines and all foreclosed assets, including assets
acquired in settlement of loans) in the Bank's loan portfolio at
the times indicated. Loans are placed on non-accrual status when
the loan becomes 90 days delinquent or when the collection of
principal, interest, or both, otherwise becomes doubtful. For all
years presented, the Bank has not had any (i) accruing loans
delinquent more than 90 days or (ii) troubled debt restructurings,
which involve forgiving a portion of interest or principal on any
loans or making loans at a rate materially less than that of market
rates. It has been the Bank's practice to sell its foreclosed
assets to new borrowers and originate loans with higher loan-to-
value ratios than those generally required for the Bank's one- to
four-family residential loans. Starting in fiscal 1993, the Bank
adopted a policy of presenting such loans in the non-performing
assets category until sufficient payments of principal and interest
are received or the loan has a 90% loan-to-value ratio.
Substantially all of the loans presented in this category are
performing and the Bank is accounting for the interest on these
loans on the accrual method.
29
June 30,
-------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(Dollars in thousands)
Non-accruing loans:
One- to four-family residential $ 1,195 $ 149 $ 341 $ 739 $ 1,212
Other residential 934 -- 200 198 202
Commercial real estate 1,407 2,004 4,500 766 2,928
One- to four-family construction 121 -- -- 99 --
Consumer 202 260 195 52 44
Commercial business 744 652 786 64 220
Commercial construction 851 -- -- -- --
------ ------ ------ ------ ------
Total non-accruing loans 5,454 3,065 6,022 1,918 4,606
Loans in connection with sales of
foreclosed assets 453 775 1,321 2,541 --
------ ------ ------ ------ ------
Total non-performing loans 5,907 3,840 7,343 4,459 4,606
------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family residential 517 695 1,440 650 921
Other residential 7,121 3,359 1,709 198 --
Commercial real estate 3,309 4,878 6,180 9,451 12,582
Construction -- -- -- -- --
Commercial business -- -- -- -- --
------ ------ ------ ------ ------
Total foreclosed assets 10,947 8,932 7,620 10,101 13,503
------ ------ ------ ------ ------
Total non-performing assets $16,854 $12,772 $14,963 $14,560 $18,109
====== ====== ====== ====== ======
Total non-performing assets as a
percentage of average total assets 2.45% 2.18% 2.83% 3.04% 3.89%
==== ==== ==== ==== ====
For fiscal 1996 and 1995, approximately $135,000 and $185,000,
respectfully, was included in interest income with respect to the
above non-accruing loans. If the loans had been current in
accordance with their original loan terms, interest income for
fiscal 1996 and 1995 of approximately $444,000 and $735,000,
respectfully, would have been recorded with respect to the above
non-accruing loans. In addition, there was one loan that is being
accounted for under the cost recovery method that has no principal
balance which interest income of $604,000 and $19,000 was received
and reported in fiscal 1996 and 1995, respectively.
30
The level of non-performing assets are primarily attributable to
the Bank's commercial real estate, other residential, construction
and commercial business lending activities. These activities
generally involve significantly greater credit risks than single-
family residential lending. The level of non-performing assets
increased at a rate greater than that of the Bank's commercial
lending portfolio in fiscal 1996, and at a rate less than that of
the Bank's commercial lending portfolio in fiscal 1992, 1993, 1994
and 1995. For a discussion of the risks associated with these
activities, see the discussions under the heading "- Commercial
Real Estate and Construction Lending" and "- Commercial Business
Lending" above.
As of June 30, 1996, the Bank had approximately $5.5 million of
non-accruing loans compared to $3.1 million at June 30, 1995 and
$6 million at June 30, 1994. The following is a summary of each
non-accruing loan of $750,000 or more in principal balance at June
30, 1996. Where there is more than one loan to the same borrower
on the same project, these loans are combined for this discussion.
1. Taney County, Missouri - Residential single-family
development. In June 1993, the Bank originated a $1.2 million loan
for development of 100 residential single-family lots on 204 acres
and additional loans from August 1993 to September 1995 totaling
$3.4 million for construction of 49 single-family homes. 43 of
these homes were sold throughout the two year period, but at a
slower pace than anticipated. The Bank began foreclosure
proceedings and the borrower declared bankruptcy. The Bank is in
the process of reaching an agreement with the borrower to sell one
house by the 15th of each month starting in December 1996 for four
months, with the remaining two houses to be sold by June 15, 1997,
and a complete auction of the remaining property in July 1997. If
the borrower does not comply with these terms, they will be
required to have a complete auction within 30 days of the first
violation of the agreement or allow the Bank to foreclose on the
property. The principal balance at June 30, 1996 was $1.3 million.
2. Branson, Missouri - Restaurant. In June 1993, the Bank
originated two loans totaling $1 million for the construction and
equipping of a 1950's diner-style restaurant located in Branson,
Missouri. An additional $30,000 was originated in September 1994
to complete the equipping of the restaurant and provide temporary
operating cash. The borrower experienced lower than anticipated
revenues in the beginning and was unable to make the required
payments due to the lack of adequate cash flows. The borrower has
experienced increased business during the 1996 season and has paid
the majority of the delinquent payments on these loans. If the
borrower continues with the scheduled payments for the remainder of
the 1996 season, the loans will have been brought current. The
principal balance was $984,000 at June 30, 1996 compared to
$998,000 at June 30, 1995.
31
3. Lake Ozark, Missouri - Residential development. In 1990,
the Bank originated a $2.3 million loan for the purpose of land
development and construction of condominiums and related amenities
located adjacent to an 18 hole Arnold Palmer designed golf course
located at the Lake of the Ozarks, near Osage Beach, Missouri. The
Bank subsequently provided additional loans totaling $2.3 million
in 1992 to refinance existing debt on the golf course and for the
construction of a club house and additional loans totaling $675,000
in 1993 to provide working capital and Tax Increment Financing
("TIF") of various development costs. Repayment was to come from
development and sale of condominium units, operating income of the
golf course which opened in late summer of 1992 and collection of
taxes assigned to the TIF credit. The Company foreclosed on the
golf course and club house in July 1995 and sold these properties
in March 1996.
The residential development portion of this project, which was a
loan to a separate borrower of $1.1 million, was still recorded as
a loan at June 30, 1996 as the borrower was in chapter 11
bankruptcy. Subsequent to June 30, 1996, the property securing
this loan was auctioned at a bankruptcy court sponsored sale and
purchased by independent third parties for approximately $1.1
million. The borrower has repaid this loan in full. At June 30,
1996, the principal balance was $934,000 compared to a carrying
value as an in-substance foreclosure in foreclosed assets of
$960,000 at June 30, 1995.
The above balances do not include the TIF loan of approximately
$600,000 at both June 30, 1996 and 1995 which is included in the
non-accrual loans. Subsequent to June 30, 1996, all delinquent
payments on the TIF loan were received and the loan was brought
current.
As of June 30, 1996, the Company had approximately $9.9 million in
book value (net of $1,086,000 in reserves) of foreclosed assets
compared to $8 million (net of $933,000 in reserves) at June 30,
1995. The following is a summary of the foreclosed assets with a
carrying value of $500,000 or more at June 30, 1996.
1. Branson, Missouri - The Woodlands Condominium Units . In
August 1993, the Bank originated loans totaling $1.7 million for
the refinancing of a 30 acre acquisition loan, for development
costs of infrastructure, and construction of one 10-unit
condominium building overlooking Lake Taneycomo. In June 1994, the
Bank originated an additional $5.4 million for refinancing of the
club house, development of an additional 5 acres, and construction
of five condominium buildings with a total of 52 units. The
borrower presented contracts showing several of these units as pre-
sold at the time of obtaining the financing, however, these
contracts did not materialize once the units were complete. Due to
the overbuilding of the market, the borrower was unable to sell the
units and make the required payments on these loans. The Bank
began foreclosure proceedings and the borrower filed bankruptcy.
32
After a short period of negotiation, the Bank and the borrower
worked out an agreement and the Bank took a deed-in-lieu of
foreclosure on the property. Subsequent to June 30, 1996, the Bank
sold this property for $4.7 million with 100% financing. The new
owner has already sold two units and has an additional 9 units
under contract or with contracts pending. At June 30, 1996, the
carrying value was $4.3 million, compared to a loan balance at June
30, 1995 of $5.6 million. The decrease was the result of a charge
down of $1.4 million at the time of foreclosure.
2. Branson, Missouri - Brighton Place Motel. The Bank
originated a $1.6 million loan in April 1986 to provide
construction and permanent loan financing on a 77-unit motel. In
1988, the motel was sold and the Bank's loan was assumed by the
purchaser. The borrower went through chapter 11 bankruptcy and the
property was foreclosed in October 1995. The Bank has operated the
property since foreclosure and will continue to do so until the
property is ultimately sold. The carrying value of the property
was approximately $1.6 million at June 30, 1996 compared to a
principal balance on the loan of an equal amount at June 30, 1995.
3. Branson, Missouri - Suncrest Condominium Units. In August
1992, the Bank originated an $800,000 loan for the construction of
15 condominium units, a club house and swimming pool. In May 1993,
the Bank originated an additional $1.4 million loan to construct an
additional 18 condominium units. The borrower was unable to
perform on the loans and the Bank repossessed the property along
with an additional 6.2 acres. The carrying value at June 30, 1996
was $1.2 million compared to $1.5 million at June 30, 1995. The
reduction was due to additional reserves allocated to this
property.
4. Taney County, Missouri - Brotherton residential development.
In November 1993, the Bank originated loans totaling $1.5 million
for the development of a 62 lot residential development and the
construction of 20 homes. In September 1994, an additional
$500,000 was originated to construct another 7 homes and three
foundations. Due to an overbuilding in the market, only 13 homes
were sold and these sales were inadequate to make the required
payments. The Bank foreclosed and currently has 13 completed
houses, 15 undeveloped acres, one single-family lot, one commercial
lot, one patio home lot and four lots with foundations. The
principal balance was $1.3 million at June 30, 1996.
5. Branson, Missouri - Clevenger Cove campground. In 1984, the
Bank originated a $1.3 million loan, secured by a 53-acre vacation
camp resort near Branson, Missouri. The Bank subsequently provided
additional loans totaling approximately $200,000 for working
capital purposes. These additional loans have been charged off by
the Bank. The Bank foreclosed on the property in June 1988. In
February 1991, the Bank sold the property with 100% financing, with
the property as collateral. The borrower has struggled with this
project and the Bank is in the process of taking back the property
by way of a deed-in-lieu of foreclosure. At June 30, 1996, the
carrying value of the property was approximately $600,000 compared
to $967,000 at June 30, 1995. This decrease was due to an
additional allocation of reserves on the property.
33
6. Springfield, Missouri - Ellis Trucking terminal. In 1989,
the Bank originated a loan for the construction and permanent loan
financing of a truck terminal and office building and for
additional working capital needs. The business closed in late 1991
and the loan was modified to allow acceptance of lease payments for
a two year period to allow the borrower to market the property for
sale. The property was later determined to have little or no
equity above the loan balance and was recorded as an in-substance
foreclosure. The Bank accepted a deed in lieu of foreclosure in
fiscal year 1996.
The property has two underground storage tanks, one for fuel
storage and one for waste oil storage. Both tanks are currently
empty and not in use. The tanks were installed new in 1989 with
all applicable Department of Natural Resources ("DNR") permits in
place. They are fiberglass lined tanks and were installed
according to Underground Storage Tank ("UST") standards with a
computerized leak detection system and a guarantee by the installer
of compliance with all DNR and UST standards until the year 2001.
There has also been storage in the past of 50 gallon drums of waste
oil on the property. While there appears to be no material
environmental problems with the location, an environmental study on
the property has not been prepared. Accordingly, the environmental
exposure to the Company, if any, has not been determined.
The property is currently leased with right of first refusal
options held by the tenants. Subsequent to June 30, 1996, the Bank
entered into a contract with an independent third party to sell
this property, subject to the tenants' right of first refusal, for
$675,000 with approximately 25% cash down payment and financing of
the balance at market terms. The property had a carrying value of
$550,000 at both June 30, 1996 and 1995.
The Bank encounters certain environmental risks in its lending and
related activities. Under federal and state environmental laws,
lenders may become liable for the costs of cleaning up hazardous
materials found on property held as collateral as well as property
acquired at foreclosure on defaulted loans. This issue is
discussed in more detail under the heading "Lending Activities-
Environmental Issues" above.
34
Investment Activities
Federally-chartered thrift institutions have authority to invest in
various types of liquid assets, including U. S. Treasury
obligations and securities of various federal agencies,
certificates of deposit at insured institutions, obligations issued
by a State (with a 10% limit on obligations of a single issuer)
that qualify as liquid assets (see "Liquidity") and certain other
assets. The Bank's authority to invest in commercial paper and
corporate debt securities is subject to its overall 35% consumer
loan limit. See "Lending Activities -- Consumer Lending" above.
Great Southern must maintain minimum levels of investments that are
liquid assets as specified by the OTS as discussed under the
heading "Regulation-Liquidity" below. Liquidity may increase or
decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans.
Historically, the Bank has maintained its liquid assets above the
minimum requirements imposed by the regulations and at a level
believed adequate to meet requirements of normal daily activities,
repayment of maturing debt and potential deposit outflows. Cash
flow projections are regularly reviewed and updated to assure that
adequate liquidity is maintained. For further discussion, see the
discussion under the heading "Regulation-Liquidity" below and Note
1 of Notes to Consolidated Financial Statements included in the
Annual Report to Stockholders, which portions are incorporated
herein by reference.
The Bank's investment securities portfolio at June 30, 1996 and
1995 contained no securities (tax exempt or of any issuer) with an
aggregate book value in excess of 10% of the Bank's retained
earnings, excluding those issued by the United States Government,
or its agencies.
On August 15, 1995, the OTS adopted its final rule on regulatory
capital-stockholders' equity. This rule requires investment and
equity securities to be segregated into the following three
categories: trading, held-to-maturity and available-for-sale.
Trading securities are purchased and held principally for the
purpose of reselling them within a short period of time. The
unrealized gains and losses are included in earnings.
Investments classified as held-to-maturity are accounted for at
amortized cost, but an institution must have both positive intent
and the ability to hold those securities to maturity. There are
very limited circumstances under which securities held-to-maturity
can be sold without jeopardizing the cost basis accounting for the
remainder of the securities in this category. These circumstances
include a significant deterioration of the issuer's
creditworthiness; changes in the tax law that reduce the tax-exempt
status of interest on the debt securities; major business
combinations that require a significant disposition of assets to
maintain the institutions' existing interest rate risk or credit
risk policy; and certain changes in statutory or regulatory
investment authority or capital requirements. Any security that
might be sold in response to changes in the market interest rates,
changes in the security's prepayment risk, increases in loan demand
or general liquidity needs or similar factors would not be
classified as held-to-maturity.
35
Securities not classified as either trading or held-to-maturity are
considered available-for-sale. Unrealized gains and losses on the
available-for-sale securities are excluded from earnings and
reported as a net amount in a separate component of stockholders'
equity until realized.
As of June 30, 1996 and 1995, the Bank held approximately $49.2
million and $47 million, respectively, in principal amount of
investment securities which the Bank intends to hold until
maturity. As of such dates, these securities had a market value of
approximately $49.3 million and $47.3 million, respectively. In
addition, as of June 30, 1996 and 1995, the Company held
approximately $4.7 million and $3.1 million, respectively, in
principal amount of investment securities which the Company
classified as available-for-sale. The implementation of the OTS
policy statement has not had a material impact on the Bank's
financial condition or results of operations since management has
historically purchased securities with the intent of holding until
maturity. This issue is discussed further under the heading
"Regulation-Accounting" below and in Notes 1 and 2 of Notes to
Consolidated Financial Statements in the Annual Report to
Stockholders, which portions are incorporated herein by reference.
The amortized cost and approximate fair values of, and gross
unrealized gains and losses on, investment securities at the dates
indicated are summarized as follows. The table is based on
information prepared in accordance with generally accepted
accounting principles.
June 30, 1996
--------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----------
(Dollars in thousands)
AVAILABLE-FOR-SALE SECURITIES:
Equity securities $4,498 $259 $102 $4,656
===== === === =====
HELD-TO-MATURITY SECURITIES:
U.S. Treasury $ 6,902 $ 7 $ 22 $ 6,887
U.S. government
agencies and corporations 41,831 159 35 41,955
States and political subdivisions 449 0 0 449
------ --- --- ------
Total held-to-maturity securities $49,182 $166 $ 57 $49,291
====== === === ======
36
June 30, 1995
--------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----------
(Dollars in thousands)
AVAILABLE-FOR-SALE SECURITIES:
Equity securities $2,498 $593 $ 0 $3,091
===== === === =====
HELD-TO-MATURITY SECURITIES:
U.S. Treasury $ 1,267 $ 20 $ 0 $ 1,287
U.S. government agencies and corporations 45,247 334 59 45,522
States and political subdivisions 456 0 0 456
------ --- --- ------
Total held-to-maturity securities $46,970 $354 $ 59 $47,265
====== === === ======
June 30, 1994
--------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----------
(Dollars in thousands)
HELD-TO-MATURITY SECURITIES:
U.S. Treasury $ 8,018 $ 0 $ 42 $ 7,976
U.S. government agencies and corporations 39,730 1 274 39,457
States and political subdivisions 463 0 0 463
Equity securities 6 0 0 6
------ --- --- ------
Total held-to-maturity securities $48,217 $ 1 $316 $47,902
====== === === ======
(1) See "Regulation-Federal Home Loan Bank System" and Note 2 of
Notes to Consolidated Financial Statements in the Annual Report to
Stockholders, which portions are incorporated herein by reference.
The following table presents the contractual maturities and
weighted average yields of held-to-maturity securities at June 30,
1996. The table is based on information prepared in accordance
with generally accepted accounting principles.
Amortized Approximate
Cost Yield Fair Value
------- --------- -----------
(Dollars in thousands)
In one year or less $39,087 6.55% $39,236
After one through five years 9,646 5.70% 9,606
Other securities, not
due on a single maturity date (1) 449 8.00% 449
------ ------
Total $49,182 $49,291
====== ======
(1) These are tax exempt securities. The yields on these
securities have not been computed on a tax equivalent basis.
37
Sources of Funds
General. Deposit accounts have traditionally been the principal
source of the Bank's funds for use in lending and for other general
business purposes. In addition to deposits, the Bank obtains funds
through advances from the Federal Home Loan Bank of Des Moines,
Iowa ("FHLBank"), collateralized short-term borrowings under
repurchase agreements, loan repayments, loan sales, and cash flows
generated from operations. Scheduled loan payments are a
relatively stable source of funds, while deposit inflows and
outflows and the related costs of such funds have varied widely.
Borrowings such as FHLBank advances may be used on a short-term
basis to compensate for seasonal reductions in deposits or deposit
inflows at less than projected levels and may be used on a longer
term basis to support expanded lending activities. The
availability of funds from loan sales is influenced by general
interest rates as well as the volume of originations.
Deposits. The Bank attracts both short-term and long-term deposits
from the general public by offering a wide variety of accounts and
rates. In recent years, the Bank has been required by market
conditions to rely increasingly on short-term accounts and other
deposit alternatives that are more responsive to market interest
rates than the passbook accounts and regulated fixed-interest-rate,
fixed-term certificates that were the Bank's primary source of
deposits prior to 1978. The Bank offers regular passbook accounts,
checking accounts, various money market accounts, fixed-interest-
rate certificates with varying maturities, certificates of deposit
in minimum amounts of $100,000 ("Jumbo" accounts), brokered
certificates and individual retirement accounts. The composition
of the Bank's deposits at the end of recent periods is set forth in
Note 6 of Notes to Consolidated Financial Statements included in
the Annual Report to Stockholders, which portions are incorporated
herein by reference.
38
The following table sets forth the dollar amount of deposits, by
interest rate range, in the various types of deposit programs
offered by the Bank at the dates indicated. The table is based on
information prepared in accordance with generally accepted
accounting principles.
June 30,
-----------------------------------------------------------------
1996 1995 1994
------------------ ------------------- ------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- --------- -------- -------- --------
(Dollars in thousands)
Time deposits:
0.00% - 3.99% $ 2,376 0.60 $ 3,746 0.97% $ 83,940 23.38%
4.00% - 4.99% 14,472 3.65 30,873 8.03 65,272 18.18
5.00% - 5.99% 169,905 42.79 84,499 21.99 20,795 5.79
6.00% - 6.99% 32,596 8.21 89,817 23.37 11,677 3.25
7.00% - 7.99% 17,123 4.31 20,105 5.23 13,584 3.79
8.00% - 10.25% 646 0.16 3,801 0.99 4,869 1.36
------- ------ ------- ------ ------- ------
Total Time deposits 237,118 59.72 232,841 60.58 200,137 55.75
Non-interest-bearing demand deposits 8,886 2.24 8,182 2.13 5,330 1.48
Savings deposits (2.50%-2.52%-2.50%) 37,010 9.32 38,285 9.96 43,460 12.11
Interest-bearing demand
deposits (2.41%-2.51%-2.35%) 112,224 28.26 103,335 26.89 109,053 30.38
Accrued Interest 1,817 .46 1,684 0.44 1,007 0.28
------- ------ ------- ------ ------- ------
Total Deposits $397,055 100.00% $384,327 100.00% $358,987 100.00%
======= ====== ======= ====== ======= ======
39
The following table sets forth the deposit flows of the Bank during
the periods indicated. Net increase refers to the amount of
deposits during a period less the amount of withdrawals during the
period. The net increase in deposits during the year ended June
30, 1996 was in interest-bearing deposits, while during the year
ended June 30, 1995 was an increase in time deposits and during the
year ended June 30, 1994 was due to an overall increase in all
dep