Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the fiscal year ended December 31, 1999
Commission File Number 0-18082
GREAT SOUTHERN BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 43-1524856
- --------------------------------------------------------------------------------
(State incorporation) (IRS Employer
Identification Number)
1451 E. Battlefield, Springfield, Missouri 65804
- --------------------------------------------------------------------------------
(Address of principal executive offices) (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. / /
The aggregate market value of the voting stock of the Registrant held by
non-affiliates of the Registrant on March 17, 2000, computed by reference to the
closing price of such shares, was $136,666,200. At March 17, 2000, 7,288,864
shares of Common Stock, par value $.01 per share, were outstanding.
TABLE OF CONTENTS
Page
PART I
ITEM 1. BUSINESS...............................................................................1
Great Southern Bancorp, Inc.....................................................................1
Great Southern Bank.............................................................................1
Forward-Looking Statements......................................................................2
Primary Market Area.............................................................................2
Lending Activities..............................................................................3
Loan Portfolio Composition......................................................................5
Originations, Purchases, Sales and Servicing of Loans..........................................11
Allowance for Losses on Loans and Foreclosed Assets............................................13
Loan Delinquencies and Defaults................................................................15
Classified Assets..............................................................................17
Investment Activities..........................................................................19
Sources of Funds...............................................................................21
Subsidiaries...................................................................................24
Competition....................................................................................25
Employees......................................................................................26
Government Supervision and Regulation..........................................................26
Federal and State Taxation.....................................................................32
ITEM 2. PROPERTIES............................................................................34
ITEM 3. LEGAL PROCEEDINGS.....................................................................35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................35
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT..................................................35
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..................................................................36
ITEM 6. SELECTED FINANCIAL DATA...............................................................37
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION.........................................39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
INFORMATION .........................................................................56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..................................................104
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................................104
ITEM 11. EXECUTIVE COMPENSATION...............................................................105
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..........................................................................108
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................................110
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.................................................................110
SIGNATURES
INDEX TO EXHIBITS
PART I
ITEM 1. BUSINESS.
THE COMPANY
GREAT SOUTHERN BANCORP, INC.
Great Southern Bancorp, Inc. ("Bancorp" or "Company") is a bank holding
company which, as of December 31, 1999, owned directly all of the stock of Great
Southern Bank ("Great Southern" or the "Bank") and other non-banking
subsidiaries. Bancorp was incorporated under the laws of the State of Delaware
in July 1989 as a unitary savings and loan holding company. After receiving the
approval of the Federal Reserve Bank of St. Louis (the "Federal Reserve" or
"FRB"), the Company became a one-bank holding company on June 30, 1998, upon the
conversion on June 30, 1998, of Great Southern to a Missouri-chartered trust
company.
As a Delaware corporation, the 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 Company currently conducts its
business as a bank holding company. Through the bank holding company structure,
it is possible to expand the size and scope of the financial services offered by
the Company beyond those offered by the Bank. The bank holding company structure
provides the 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 other financial institutions
as well as other companies. At December 31, 1999, Bancorp's consolidated assets
were $965 million, consolidated net loans were $767 million, consolidated
deposits were $626 million and consolidated stockholders' equity was $69
million. The assets of the Company consist of the stock of Great Southern, the
stock of other financial services companies, interest in a local trust company
and cash.
Through subsidiaries of the Bank, the Company offers insurance, appraisal,
travel, discount brokerage and related services, which are discussed further
below. The activities of the Company are funded by retained earnings and through
dividends from Great Southern and borrowings from third parties. Activities of
the Company may also be funded through sales of additional securities or through
income generated by other activities of the Company. At this time, there are no
plans regarding such activities.
The executive offices of the Company are located at 1451 East Battlefield,
Springfield, Missouri 65804, and its telephone number at that address is (417)
887-4400.
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 federal
savings bank charter and then on June 30, 1998, changed to a Missouri-chartered
trust company (the equivalent of a commercial bank charter). Headquartered in
Springfield, Missouri, Great Southern offers a broad range of banking services
through its 27 branches located in southwestern and central Missouri. At
December 31, 1999, the Bank had total assets of $958 million, deposits of $627
million and stockholders' equity of $69 million, or 7.3% 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").
1
Great Southern is principally engaged in the business of originating
residential and commercial real estate loans, other commercial and consumer
loans and funding these loans through attracting deposits from the general
public, originating brokered deposits and borrowing from the Federal Home Loan
Bank of Des Moines (the "FHLBank") and others.
For many 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 and other real estate lending while
also expanding and increasing its originations of commercial business and
consumer loans.
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.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-K and in future filings by the Company with the
Securities and Exchange Commission (the "SEC"), in the Company's press releases
or other public or shareholder communications, and in oral statements made with
the approval of an authorized executive officer, the words or phrases "will
likely result" "are expected to," "will continue," "is anticipated," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties,
including, among other things, changes in economic conditions in the Company's
market area, changes in policies by regulatory agencies, fluctuations in
interest rates, demand for loans in the Company's market area and competition,
that could cause actual results to differ materially from historical earnings
and those presently anticipated or projected. The Company wishes to advise
readers that the factors listed above could affect the Company's financial
performance and could cause the Company's actual results for future periods to
differ materially from any opinions or statements expressed with respect to
future periods in any current statements.
The Company does not undertake-and specifically declines any obligation- to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
PRIMARY MARKET AREA
Great Southern's primary market area encompasses 15 counties in
southwestern and central Missouri. The Bank's branches and ATMs support deposit
and lending activities throughout the region, serving such diversified markets
as Springfield, Joplin, the resort areas of Branson and Lake of the Ozarks, and
various smaller communities in the Bank's market area. Management believes that
the Bank's share of the deposit and lending markets in its market area is less
than 10% and its affiliates have 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 306,000, 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,
2
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 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 6 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 area, property values increased at unusually high rates in
the early 1990s. This has also provided for increased loan demand and a more
volatile lending market than has previously been present in the Branson area.
Property values have experienced downward pressure during the past few years,
partly as a result of this rapid increase.
A significant portion of the Bank's loan originations have been secured by
properties in the two county region that includes the Branson area.
Approximately $141 million, or 17%, of the total loan portfolio at December 31,
1999, was secured by commercial real estate, commercial construction, other
residential properties, one- to four-family residential properties, one- to
four-family construction properties, and consumer loans.
LENDING ACTIVITIES
GENERAL
From its beginnings in 1923 through the early 1980s, Great Southern
primarily made long-term, fixed-rate residential real estate loans that it
retained in its loan portfolio. Beginning in the early 1980s, Great Southern
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 and substantially all of the long-term
fixed-rate residential mortgage loans originated by Great Southern are sold
immediately in the secondary market.
Beginning in the mid-1990s, Great Southern increased its efforts to
originate commercial real estate and other residential loans, primarily with
adjustable rates or shorter-term fixed rates. During the past 24 months, some
competitor banking organizations have merged with larger institutions and
changed their business practices or moved operations away from the local area,
and others have consolidated operations from the local area to larger cities.
This has provided Great Southern expanded opportunity in these areas as well as
in the origination of commercial business and consumer loans, primarily the
indirect automobile area. In addition to origination of these loans, the Bank
has expanded and enlarged its relationships with smaller banks to purchase
participations (at par, with no servicing costs) in loans the smaller banks
originate but are unable to retain in their portfolios due to capital
limitations. The Bank uses the same underwriting guidelines in evaluating these
participations as it does in its direct loan originations.
One of the principal historical lending activities 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. Great
Southern originates a variety of conventional, residential real estate mortgage
loans, principally in compliance with Freddie Mac and Fannie Mae standards for
resale in the secondary market. Great Southern promptly sells most of the
fixed-rate residential mortgage loans that it originates. Depending on market
conditions, the ongoing servicing of these loans is at times retained by Great
Southern and at other times released to the purchaser of the loan. Great
Southern retains substantially all of the adjustable-rate mortgage loans in its
portfolio.
Another principal lending activity of Great Southern, which has become more
prevalent in recent years, is the origination of commercial real estate and
construction loans. Since the early 1990s, this area
3
of lending has been an increasing percentage of the loan portfolio and accounts
for approximately 38% of the portfolio at December 31, 1999.
In addition, Great Southern in recent years has increased its emphasis on
the origination of other commercial loans, home equity loans, consumer loans and
student loans, and is also an issuer of letters of credit. See "-- Other
Commercial Lending," "- Classified Assets," and "Loan Delinquencies and
Defaults" below. Letters of credit are contingent obligations and are not
included in the Bank's loan portfolio.
Great Southern has a policy of obtaining collateral for substantially all
real estate 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 80% 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.
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 $500,000 ($350,000 in the case of fixed-rate one-to four-family residential
loans for resale) must be approved by Great Southern's loan committee. The loan
committee is comprised of the Chairman of the Bank, as chairman of the
committee, and other senior officers of the Bank involved in lending activities.
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 and Northern Arkansas, with the largest concentration of its
lending activity being in southwestern and central Missouri.
4
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.
December 31, June 30,
-----------------------------------------------------------------------------------------------
1999 1998 1998 1997 1996
-----------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
Real Estate Loans:
Residential
One- to four- family $208,466 25.3% $217,120 29.2% $217,688 31.0% $243,006 39.2% $247,294 42.3%
Other residential 76,926 9.4 85,828 11.5 89,141 12.7 95,886 15.5 81,191 13.9
Commercial 251,338 30.5 261,201 35.1 244,016 34.8 191,556 30.9 172,478 29.5
Residential Construction:
One- to four-family 39,795 4.8 33,292 4.4 16,032 2.3 9,529 1.5 13,455 2.3
Other residential 7,106 .9 6,553 .9 5,993 .9 4,243 .7 13,533 2.3
Commercial construction 63,722 7.8 19,952 2.7 27,156 3.9 21,932 3.5 16,518 2.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans 647,353 78.7 623,946 83.8 600,026 85.6 566,152 91.3 544,469 93.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Other Loans:
Consumer loans:
Guaranteed student loans 4,067 .5 15,931 2.1 12,736 1.8 11,592 1.9 11,256 1.9
Automobile 55,625 6.8 37,152 5.0 23,120 3.3 6,006 1.0 6,062 1.1
Home equity and improvement 14,431 1.8 9,292 1.3 5,849 .8 4,183 .7 3,688 0.6
Other 255 --- 992 .1 4,862 .7 5,885 .9 5,921 1.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total Consumer loans 74,378 9.1 63,367 8.5 46,567 6.6 27,666 4.5 26,927 4.6
Other commercial loans 100,419 12.2 57,179 7.7 54,722 7.8 25,959 4.2 13,737 2.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total other loans 174,797 21.3 120,546 16.2 101,290 14.4 53,625 8.7 40,664 6.9
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans 822,150 100.0% 744,492 100.0% 701,316 100.0% 619,777 100.0% 585,133 100.0%
===== ===== ===== ===== =====
Less:
Loans in process 36,048 28,823 28,497 18,812 22,383
Deferred fees and discounts 2,002 1,779 2,774 3,493 3,689
Allowance for loan losses 17,293 16,928 16,373 15,524 14,356
-------- -------- -------- -------- --------
Total loans receivable, net $766,807 $696,962 $653,672 $581,948 $544,705
======== ======== ======== ======== ========
5
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.
December 31, June 30,
-----------------------------------------------------------------------------------------------
1999 1998 1998 1997 1996
-----------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
Fixed-Rate Loans:
Real Estate Loans
Residential
One- to four- family $ 5,960 .7% $ 11,659 1.6 $ 11,245 1.6% $ 10,544 1.7% $ 11,158 1.9%
Other Residential 37,079 4.5 39,661 5.3 34,757 5.0 34,467 5.6 34,413 5.9
Commercial 37,636 4.6 60,757 8.2 28,004 4.0 5,865 1.0 25,374 4.3
-------- ----- -------- ----- -------- ----- --------- ----- -------- ---
Total real estate loans 80,675 9.8 112,077 15.1 74,006 10.6 50,876 8.3 70,945 12.1
Consumer loans 54,829 6.7 37,080 5.0 27,319 3.9 10,769 1.7 12,844 2.2
Other commercial loans 4,266 .5 11,956 1.6 1,645 .2 502 .1 415 0.1
-------- ----- -------- ----- -------- ----- --------- ----- -------- ---
Total fixed-rate loans 139,770 17.0 161,113 21.7 102,970 14.7 62,147 10.1 84,204 14.4
-------- ----- -------- ----- -------- ----- --------- ----- -------- -----
Adjustable-Rate Loans:
Real Estate Loans
Residential
One- to four- family 202,506 24.6 205,461 27.6 206,443 29.4 232,462 37.5 236,136 40.4
Other Residential 39,847 4.9 46,167 6.2 54,384 7.8 61,419 9.9 46,778 8.0
Commercial 213,702 26.0 200,444 26.9 216,013 30.8 185,691 30.0 147,104 25.1
Residential construction:
One- to four-family 39,795 4.8 33,292 4.4 16,032 2.3 9,529 1.5 13,455 2.3
Other residential 7,106 .9 6,553 .9 5,993 .9 4,243 .7 13,533 2.3
Commercial construction 63,722 7.7 19,952 2.7 27,156 3.9 21,932 3.5 16,518 2.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans 566,678 68.9 511,869 68.7 526,021 75.1 515,276 83.1 473,524 80.9
Consumer loans 19,549 2.4 26,287 3.5 19,248 2.7 16,897 2.7 14,083 2.4
Other commercial loans 96,153 11.7 45,223 6.1 53,077 7.5 25,457 4.1 13,322 2.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- ---
Total adjustable-rate loans 682,380 83.0 583,339 78.3 598,346 85.3 557,630 89.9 500,929 85.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans 822,150 100.0% 744,492 100.0% 701,316 100.0% 619,777 100.0% 585,133 100.0%
===== ===== ===== ===== =====
Less:
Loans in process 36,048 28,823 28,497 18,812 22,383
Deferred fees and discounts 2,002 1,779 2,774 3,493 3,689
Allowance for loan losses 17,293 16,928 16,373 15,524 14,356
-------- -------- -------- -------- --------
Total loans receivable, net $766,807 $696,962 $653,672 $581,948 $544,705
======== ======== ======== ======== ========
6
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
operations of the lender if the collateral is environmentally contaminated. The
result can be, 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.
RESIDENTIAL REAL ESTATE LENDING
At December 31, 1999 and 1998, loans secured by residential real estate
totaled $285 million and $303 million, respectively, and represented
approximately 34.7% and 40.7%, respectively, of the Bank's total loan portfolio.
Compared to historical rate levels, fixed rates were low during the early
portion of the year ended December 31, 1999 and the short fiscal year ended
December 31, 1998. This caused a higher than normal level of refinancing of
adjustable-rate loans into fixed-rate loans during the two periods, and
accounted for the decline in the Bank's residential real estate loan portfolio
during these two periods.
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.
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 industry standardization of adjustable-rate loans. Since adjustable-rate
mortgage 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 a
significant increase in delinquencies in adjustable-rate mortgage loans due to a
relatively low interest rate environment in recent years.
7
In underwriting one- to four-family residential real estate loans, Great
Southern evaluates the borrower's ability to make monthly payments and the value
of the property securing the loan. It is the policy of Great Southern 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.
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 at that time 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 origination
of commercial real estate and commercial business loans and has accelerated the
rate of increase in recent years.
Great Southern expects to continue to maintain or increase the current
percentage of commercial real estate loans in its total loan portfolio by
originating loans secured by commercial real estate, subject to commercial real
estate and other market conditions and to applicable regulatory restrictions.
See "Regulation" below.
At December 31, 1999 and 1998, loans secured by commercial real estate
totaled $251 million and $261 million, respectively, or approximately 30.5% and
35.1%, respectively, of the Bank's total loan portfolio. At December 31, 1999
and 1998, construction loans secured by projects under construction and the land
on which the projects are located aggregated $111 million and $60 million,
respectively, or 13.5% and 8.0%, respectively, of the Bank's total loan
portfolio. The majority of the Bank's commercial real estate loans have been
originated with adjustable rates of interest, the 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 80%
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 projects generally provide
that principal payments are required as individual condominium units or
single-family houses are built and sold to a third party. This insures 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 commercial real estate and other residential
construction loans are made either as the initial stage of a combination loan
(i.e., with a
8
commitment from the Bank to provide permanent financing upon completion of the
project) or with a commitment from a third party to provide permanent financing.
The Bank's commercial real estate and construction loans generally involve
larger principal balances than do its residential loans. Current law subjects
state chartered banks 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 December 31, 1999, this limit was approximately $13.0 million. See
"Regulation." At December 31, 1999 the Bank was in compliance with the
loans-to-one borrower limit.
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 but 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.
OTHER COMMERCIAL LENDING
At December 31, 1999 and 1998, respectively, Great Southern had $100.4
million and $57.2 million in other commercial loans outstanding, or 12.2% and
7.7%, respectively, of the Bank's total loan portfolio. Great Southern's other
commercial lending activities encompass loans with a variety of purposes and
security, including loans to finance accounts receivable, inventory and
equipment.
Great Southern expects to continue to maintain or increase the current
percentage of other commercial loans in its total loan portfolio by originating
loans, subject to market conditions and to applicable regulatory restrictions.
See "Supervision and Regulation" below.
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, other commercial 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 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 other commercial loans
9
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.
The Bank's management recognizes the generally increased risks associated
with other commercial lending. Great Southern's commercial 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 loans have been to borrowers in southwestern and central
Missouri. Great Southern intends to continue its commercial lending in this
geographic area.
As part of its commercial 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 December 31, 1999, Great Southern had 68 letters
of credit outstanding in the aggregate amount of $13.6 million. Approximately
94% 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.
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 $74.4 million and
$63.4 million at December 31, 1999 and 1998, respectively, or 9.1% and 8.5%,
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.
Beginning in fiscal year June 30, 1998, the Bank implemented indirect
lending relationships, primarily with automobile dealerships. Through these
dealer relationships, the dealer completes the application with the consumer and
then submits it to the Bank for credit approval. While the Bank's initial
concentrated effort has been on automobiles, the program is available for use
with most tangible products where financing of the product is provided through
the seller.
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
10
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 that 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.
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.
Management does not expect the high growth of originations experienced
during the past five 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 may also purchases whole real estate loans and participation
interests in real estate loans from private investors, such as other banks,
thrift institutions 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.
Beginning in fiscal June 30, 1998, Great Southern increased the number and
amount of commercial real estate and commercial business loan participations.
Due to changes in the financial institutions market locally, there have been
several experienced bank executives start up new banks. These banks do not have
the capital to handle larger commercial credits. Great Southern subjects these
loans to the normal underwriting standards used for originated loans and rejects
any credits that do not meet those guidelines. The originating bank retains the
servicing of these loans. The bank purchased $3.1 million of these loans in the
fiscal year ended December 31, 1999 and $5.8 million in the six months ended
December 31, 1998.
There have been no whole loan purchases by the Bank in the last five years.
At December 31, 1999 and 1998, approximately $7.0 million, or .9% and $7.5
million, or 1.0%, respectively, of the Bank's total loan portfolio consisted of
purchased whole loans.
Great Southern also sells whole real estate loans and participation
interests in real estate loans to Freddie Mac as well as private investors, such
as other banks, thrift institutions 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
11
buyer. The sale amounts generally produce gains to the Bank and allow a margin
for servicing income on loans when the servicing is retained by the Bank.
However, loan participations sold in recent years have primarily been with Great
Southern releasing control of the servicing of the loan.
The Bank sold one- to four-family whole real estate loans and loan
participations in aggregate amounts of $32.2 million, $26.1 million and $72.6
million during 1999, the short fiscal year ended December 31, 1998 and the
fiscal year ended June 30, 1998, respectively. Sales of whole real estate loans
and participations in real estate loans generally can be beneficial to the Bank
since these sales generally generate income at the time of sale, produce future
servicing income on loans where servicing is retained, provide funds for
additional lending and other investments, and increase liquidity.
Great Southern also sells guaranteed student loans to the MOHELA at the
time the borrower is scheduled to begin making repayments on the loans. These
loans are generally sold with limited recourse and for cash in amounts equal to
the unpaid principal amount of the loans and a premium based on average borrower
indebtedness. The premium is based on a sliding scale with a higher premium paid
for a larger average borrower indebtedness and a lower premium paid for a
smaller average borrower indebtedness.
The Bank sold guaranteed student loans in aggregate amounts of $20.8
million, $3.1 million and $9.7 million during 1999, the short fiscal year ended
December 31, 1998 and the fiscal year ended June 30, 1998, 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 primarily does, an additional fee is received for the servicing rights. Net
gains and transfer fees on sales of loans for 1999, the short fiscal year ended
December 31, 1998 and fiscal year ended June 30, 1998 were $1,098,000, $386,000
and $1,125,000, respectively. Of these amounts, $268,000, $31,000 and $125,000,
respectively, were gains from the sale of guaranteed student loans and $830,000,
$355,000 and $1,000,000, respectively, were gains from the sale of fixed-rate
residential loans.
Prior to fiscal 1996, when whole real estate loans were sold, the Bank
primarily 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 $56 million, $57 million and $60 million at December 31, 1999
and 1998 and June 30, 1998, respectively, of loans owned by others. The
servicing of these loans generated net servicing fees to the Bank for the year
ended December 31, 1999, the short year ended December 31, 1998 and the fiscal
year ended June 30, 1998 of $181,000, $107,000 and $261,000, respectively.
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 $961,000, $301,000 and $502,000 for the year ended December 31,
1999, the short year ended December 31, 1998 and the fiscal year ended June 30,
1998,
12
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.
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 the market
value to less than the carrying value of the asset.
The Bank has maintained a strong lending presence in the Branson 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 area has grown, the reduction in
values of real estate 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 area as a whole. Due to this concern and the overall
growth of the loan portfolio, and more specifically the growth of the commercial
business, consumer and commercial real estate loan portfolios, management
provided increased levels of loan loss allowances over the past few years.
The allowance 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 allowance 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 December 31, 1999 and 1998, Great Southern had an allowance for losses
on loans of $17.3 million and $16.9 million, respectively, of which $2.7 million
and $3.3 million, respectively, had been allocated as an allowance for specific
loans and $0.8 million and $0.7 million, 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.
13
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.
December 31, June 30,
-------------------------------- --------------------------------------------------
1999 1998 1998 1997 1996
------------------------------------------------------------------------------------
% 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)
(Dollars in thousands)
Fixed-Rate Loans:
One- to four-family residential and
construction $ 798 30.1% $ 1,254 33.4% $ 811 33.5% $ 1,039 41.0% $ 757 44.8%
Other residential and construction 375 10.3 613 12.4 615 13.5 35 16.1 503 16.1
Commercial real estate and construction
and other commercial 12,003 50.5 9,719 45.7 11,348 46.4 9,699 38.5 7,875 34.5
Consumer 1,567 9.1 1,211 8.5 743 6.6 502 4.4 488 4.6
Unallocated 2,550 -- 4,131 -- 2,586 -- 4,249 -- 4,733 --
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total $17,293 100.0% $16,928 100.0% $16,373 100.0% $15,524 100.0% $14,356 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
14
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.
December 31, June 30,
------------------ -----------------------------
1999 1998 1998 1997 1996
-------- ------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of period $16,928 $16,373 $15,524 $14,356 $14,601
------- ------- ------- ------- -------
Charge-offs:
One- to four-family residential 114 -- 45 185 189
Other residential -- 187 67 34 1,072
Commercial real estate 131 185 529 364 509
Construction 375 -- 82 14 --
Consumer 1,870 1,077 287 70 198
Other commercial 316 50 133 9 25
------- ------- ------- ------- -------
Total charge-offs 2,806 1,499 1,143 676 1,993
------- ------- ------- ------- -------
Recoveries:
One- to four-family residential 33 147 22 -- 33
Other residential -- -- 1 11 --
Commercial real estate and construction 64 -- 68 88 136
Consumer 793 552 10 9 48
Other commercial 219 64 38 30 80
------- ------- ------- ------- -------
Total recoveries 1,109 763 139 138 297
------- ------- ------- ------- -------
Net charge-offs 1,697 736 1,004 538 1,696
Provision for losses on loans 2,062 1,291 1,853 1,706 1,451
------- ------- ------- ------- -------
Balance at end of period $17,293 $16,928 $16,373 $15,524 $14,356
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans
outstanding 0.23% 0.23% 0.16% 0.09% 0.32%
======= ======= ======= ======= =======
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
15
consumer protection laws as well as other applicable laws and the determination
by the Bank that it would be beneficial from a cost basis.
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 President and Senior Lending
Officer also work 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 and 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
workout 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.
The following table sets forth our loans delinquent 30 - 89 days by type,
number, amount and percentage of type at December 31, 1999.
Loans Delinquent for 30-89 Days
---------------------------------------------------------
Percent of
Total
Delinquent
Number Amount Loans
---------------------------------------------------------
Real Estate:
One- to four-family 49 $ 2,732 20%
Other residential 3 390 3
Commercial 17 6,480 47
Construction or development 12 2,190 16
Consumer 175 1,403 10
Other commercial 11 493 4
----- ------- ----
Total 267 $13,688 100%
===== ======= ====
16
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 that do not currently expose the insured
institution to sufficient risk to warrant classification in one of the
aforementioned categories but possess a potential weakness, are required to be
designated "special mention" by management. In addition, a bank's regulators 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 the bank. Following are the total classified assets per
the Bank's internal asset classification list. There were no significant off-
balance sheet items classified at December 31, 1999.
Total Allowance
Asset Category Substandard Doubtful Loss Classified Losses
- --------------------------------- ----------------- ----------------- -----------------------------------------------------
(Dollars in thousands)
Loans $15,687 $--- $--- $15,687 $17,293
Foreclosed assets 747 --- 14 761 ---
------- ----- ---- ------- -------
Total $16,434 $--- $14 $16,448 $17,293
======= ==== === ======= =======
The table below sets forth the amounts and categories of gross
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
generally 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 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 allowed for the Bank's one- to four-family residential loans. For such
loans originated in fiscal 1993 or fiscal 1994, 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. The majority of the loans presented in this category are
performing and the Bank is accounting for the interest on these loans on the
accrual method.
17
December 31, June 30,
----------------------------------------------------------------------------
1999 1998 1998 1997 1996
----------------------------------------------------------------------------
(Dollars in thousands)
Non-accruing loans:
One- to four-family residential $ 880 $ 137 $ 522 $ 2,018 $ 1,195
Other residential 1,002 2,554 4,535 3,826 934
Commercial real estate 4,371 2,496 1,687 316 1,407
One- to four-family construction 1 --- 91 655 121
Consumer 146 33 147 219 202
Other commercial 444 1,061 80 600 744
Commercial construction 2,377 1,137 --- --- 851
------- ------- ------- ------- -------
Total gross non-accruing loans 9,221 7,418 7,062 7,634 5,454
------- ------- ------- ------- -------
Loans over 90 days delinquent still accruing interest:
One- to four-family residential 49 2,243 --- --- ---
Consumer --- 244 --- --- ---
Other commercial --- 241 --- --- ---
------- ------- ------- ------- -------
Total over 90 days accruing loans 49 2,728 --- --- ---
------- ------- ------- ------- -------
Other impaired loans --- --- 2,278 --- ---
------- ------- ------- ------- -------
Loans in connection with sales of
foreclosed assets --- --- 145 246 453
------- ------- ------- ------- -------
Total gross non-performing loans 9,270 10,146 9,485 7,880 5,907
------- ------- ------- ------- -------
Foreclosed assets:
One- to four-family residential 167 438 400 544 517
Other residential --- 1,075 175 1,150 7,121
Commercial real estate 650 1,297 4,176 4,276 3,309
------- ------- ------- ------- -------
Total foreclosed assets 817 2,810 4,751 5,970 10,947
------- ------- ------- ------- -------
Total gross non-performing assets $10,087 $12,956 $14,236 $13,850 $16,854
======= ======= ======= ======= =======
Total gross non-performing assets as a
percentage of average total assets 1.09% 1.61% 1.90% 2.07% 2.45%
====== ====== ====== ====== ======
Gross impaired loans totaled $9,270,000 at December 31, 1999 and
$10,146,000 at December 31, 1998.
For the year ended December 31, 1999, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $645,000. The amount that was included in
interest income on such loans was $487,000 for the year ended December 31, 1999.
The level of non-performing assets is primarily attributable to the Bank's
commercial real estate, other residential, commercial construction and
commercial business lending activities. These activities
18
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 June 30,
1996, and at a rate less than that of the Bank's commercial lending portfolio in
the year ended December 31, 1999, in the six months ended December 31, 1998 and
in fiscal years ended June 30, 1998 and 1997. For a discussion of the risks
associated with these activities, see the discussions under the heading "-
Commercial Real Estate and Construction Lending" and "- Other Commercial
Lending" above.
INVESTMENT ACTIVITIES
The Bank's investment securities portfolio at December 31, 1999 and 1998
contained one security 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. This security was issued by The Missouri
Development Finance Board and has an aggregate book and market value of
approximately $9,960,000 at December 31, 1999.
As of December 31, 1999 and 1998, the Bank held approximately $37.6 million
and $60.4 million, respectively, in principal amount of investment securities
which the Bank intends to hold until maturity. As of such dates, these
securities had market values of approximately $37.4 million and $60.6 million,
respectively. In addition, as of December 31, 1999 and 1998, the Company held
approximately $79.9 million and $6.5 million, respectively, in principal amount
of investment securities which the Company classified as available-for-sale.
This issue is discussed further in Notes 1 and 2 of Notes to Consolidated
Financial Statements.
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. Yields on tax exempt obligations have
not been computed on a tax equivalent basis.
December 31, 1999
-----------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- ----------- ------------------
(Dollars in thousands)
AVAILABLE-FOR-SALE SECURITIES:
U.S. government agencies $72,714 $ 65 $ 134 $72,645
Equity securities 8,153 --- 907 7,246
------- ----- ------ -------
Total available-for-sale securities $80,867 $ 65 $1,041 $79,891
======= ===== ====== =======
HELD-TO-MATURITY SECURITIES:
U.S. Treasury $ 100 $ --- $ --- $ 100
U.S. government agencies 24,242 --- 141 24,101
States and political subdivisions 11,470 --- 89 11,381
Corporate bonds 800 --- --- 800
Mortgage-backed securities 1,034 --- --- 1,034
------- ----- ------ -------
Total held-to-maturity securities $37,646 $ --- $ 230 $37,416
======= ===== ====== =======
19
December 31, 1998
-----------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- ----------- ------------------
(Dollars in thousands)
AVAILABLE-FOR-SALE SECURITIES:
Equity securities $ 5,926 $550 $ --- $ 6,476
======== ==== ===== =======
HELD-TO-MATURITY SECURITIES:
U.S. Treasury $ 602 $ 2 $ --- $ 604
U.S. government agencies 46,966 177 10 47,133
States and political subdivisions 11,470 7 --- 11,477
Mortgage-backed securities 1,357 --- --- 1,357
-------- ---- ---- -------
Total held-to-maturity securities $60,395 $186 $ 10 $60,571
======= ==== ==== =======
June 30, 1998
-----------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------- -------------- ----------- ------------------
(Dollars in thousands)
AVAILABLE-FOR-SALE SECURITIES:
Equity securities $ 4,645 $1,718 $ --- $ 6,363
======= ====== ===== =======
HELD-TO-MATURITY SECURITIES:
U.S. Treasury $ 2,103 $ 4 $ --- $ 2,107
U.S. government agencies 48,260 174 --- 48,434
Mortgage-backed securities 1,554 --- --- 1,554
------- ------ ----- -------
Total held-to-maturity securities $51,917 $ 178 $ --- $52,095
======= ====== ===== =======
The following table presents the contractual maturities and weighted
average yields of available - for-sale debt securities at December 31, 1999. 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 $54,545 5.52% $54,558
After one through five years 18,169 5.68% 18,087
-------- -------
Total $72,714 $72,645
======= =======
20
The following table presents the contractual maturities and weighted
average yields of held-to-maturity securities at December 31, 1999. 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 $14,971 5.30% $14,901
After one through five years 19,331 5.51% 19,260
After five through ten years 1,510 5.00% 1,421
After ten years 800 9.40% 800
Securities not due on a single
maturity date 1,034 7.90% 1,034
------- -------
Total $37,646 $37,416
======= =======
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"), 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.
BROKERED DEPOSITS. Brokered deposits are marketed through national
brokerage firms to their customers in $1,000 increments. The average investor is
estimated to have a balance of less than $20,000. The Bank maintains only one
account for the total deposit amount while the records of detailed owners are
maintained by the Depository Trust Company under the name of CEDE & Co. The
deposits are transferable just like a stock or bond investment and the customer
can open the account with only a phone call, just like buying a stock or bond.
This provides a large deposit for the Bank at a lower operating cost since the
Bank only has one account to maintain versus several accounts with multiple
interest and maturity checks.
Unlike non-brokered deposits where the deposit amount can be withdrawn with
a penalty for any reason, including increasing interest rates, a brokered
deposit can only be withdrawn in the event of the
21
death, or court declared mental incompetence, of the depositor. This allows the
Bank to better manage the maturity of its deposits.
The following table sets forth the dollar amount of deposits, by interest
rate range, in the various types of deposit programs offered by the Company at
the dates indicated. The table is based on information prepared in accordance
with generally accepted accounting principles.
December 31,
--------------------------------------
1999 1998 June 30, 1998
------------------ ------------------ -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- ------- -------- -------- --------
(Dollars in thousands)
Time deposits:
0.00% - 3.99% $ 1,153 .18% $ 435 .07% $ 62 .01%
4.00% - 4.99% 79,429 12.69 69,178 11.58 17,476 3.18
5.00% - 5.99% 280,688 44.85 259,844 43.48 257,704 46.87
6.00% - 6.99% 69,525 11.11 32,262 5.40 51,064 9.29
7.00% - 7.99% 3,527 .56 3,845 .64 3,711 .68
8.00% - 10.25% 30 -- 240 .04 251 .05
-------- ------ -------- ------ -------- ------
Total Time deposits 434,352 69.39 365,804 61.21 330,268 60.08
Non-interest-bearing demand deposits 47,360 7.57 43,211 7.23 29,375 5.34
Savings deposits (2.50%-2.50%-2.51%) 29,613 4.73 32,190 15.39 34,644 6.30
Interest-bearing demand deposits
(1.86%-2.39%-2.25%) 114,575 18.31 156,420 26.17 155,485 28.28
-------- ------ -------- ------ -------- ------
Total Deposits $625,900 100.00% $597,625 100.00% $549,772 100.00%
======== ====== ======== ====== ======== ======
A table showing rate and maturity information for the Bank's time deposits
as of December 31, 1999 is presented in Note 6 of Notes to Consolidated
Financial Statements.
The variety of deposit accounts offered by the Bank has allowed it to be
competitive in obtaining funds and has allowed it to respond with flexibility to
changes in consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. Based on its
experience, management believes that its passbook and certificate accounts are
relatively stable sources of deposits, while its checking accounts have proven
to be more volatile. However, the ability of the Bank to attract and maintain
deposits, and the rates paid on these deposits, has been and will continue to be
significantly affected by money market conditions.
22
The following table sets forth the time remaining until maturity of the
Bank's time deposits as of December 31, 1999. The table is based on information
prepared in accordance with generally accepted accounting principles.
Maturity
---------------------------------------------------------------------------------------------
3 Over 3 Over Over
Months or Months to 6 to 12 12
Less 6 Months Months Months Total
---------------------------------------------------------------------------------------------
(Dollars in thousands)
Time deposits:
Less than $100,000 $51,667 $37,288 $33,757 $ 37,871 $160,583
$100,000 or more 21,117 13,033 13,508 9,921 57,579
Brokered 15,965 19,052 39,117 135,608 209,742
Public funds(1) 6,143 137 162 6 6,448
------- ------- ------- -------- --------
Total $94,892 $69,510 $86,544 $183,406 $434,352
======= ======= ======= ======== ========
- --------------
(1) Deposits from governmental and other public entities.
BORROWINGS. Great Southern's other sources of funds include advances from
the FHLBank, Qualified Loan Review arrangement and treasury tax & loan note
option with the Federal Reserve Bank and other borrowngs.
As a member of the FHLBank, the Bank is required to own capital stock in
the FHLBank and is authorized to apply for advances from the FHLBank. FIRREA
requires that all long-term FHLBank advances be for the purpose of financing
residential housing. Pursuant to FIRREA, the Federal Housing Finance Board has
promulgated regulations that establish standards of community investment for
FHLBank members to maintain continued access to long-term advances. Each FHLBank
credit program has its own interest rate, which may be fixed or variable, and
range of maturities. The FHLBank may prescribe the acceptable uses for these
advances, as well as other risks on availability, limitations on the size of the
advances and repayment provisions. The Bank has a $50 million revolving line of
credit with the FHLBank, which provides for immediately available funds. At
December 31, 1999, none of the revolving line was in use with $50 million
remaining available. The Bank can draw these funds for lending or other
liquidity needs with some limitations.
The Federal Reserve Bank ("FRB") has a Qualified Loan Review ("QLR")
program where the Bank can borrow on a temporary basis using commercial loans
pledged to the FRB. Under the QLR program, the Bank can borrow any amount up to
a calculated collateral value of the commercial loans pledged, for virtually any
reason that creates a temporary cash need. Examples of this could be; (i) the
need to disburse one or several loans but the permanent source of funds will not
be available for a few days; (ii) a temporary spike in interest rates on other
fund sources that are being used; or (iii) the need to purchase a security for
collateral pledging purposes a few days prior to the funds becoming available on
an existing security that is maturing. The Bank had commercial loans pledged to
the FRB at December 31, 1999 that would have allowed approximately $155.3
million to be borrowed under the above arrangement.
The Company has borrowing arrangements in place with the brokerage firms it
conducts business with to borrow on margin against its available-for-sale
securities. Theses borrowings are limited to a percent of the market value of
the collateral, generally 50%, and are used by the Company for short-term cash
needs including the purchase of available-for-sale securities and the purchase
of the Company's stock.
23
The following table sets forth the maximum month-end balances and average
daily balances of FHLBank advances and other borrowings during the periods
indicated. The table is based on information prepared in accordance with
generally accepted accounting principles.
Short Period
Year Ended Ended
December 31, December 31, Year Ended
1999 1998 June 30, 1998
-------------------- -------------------- --------------------
(Dollars in thousands)
Maximum Balance:
FHLBank advances $200,531 $169,593 $211,270
Other borrowings 61,111 2,387 41,176
Average Balances:
FHLBank advances $165,192 $147,839 $161,913
Other borrowings 19,680 770 32,234
The following table sets forth certain information as to the Company's
FHLBank advances and other borrowings at the dates indicated. The table is based
on information prepared in accordance with generally accepted accounting
principles.
December 31,
-------------------------------------------------------------
1999 1998 June 30, 1998
-------------------------------------------------------------
(Dollars in thousands)
FHLBank advances $200,531 $158,452 $169,509
Other borrowings 61,111 798 ---
-------- -------- --------
Total borrowings $261,642 $159,250 $169,509
======== ======== ========
Weighted average interest
rate of FHLBank advances 6.23% 5.60% 6.00%
==== ==== ====
Weighted average interest 5.03% 7.20% N/A
rate of other borrowings ==== ====
SUBSIDIARIES
GREAT SOUTHERN. As a Missouri-chartered trust company, Great Southern may
invest up to 3% of its assets in service corporations. At December 31, 1999, the
Bank's total investment in Great Southern Financial Corporation ("GSFC") was
$1.3 million. GSFC is incorporated under the laws of the State of Missouri. This
subsidiary is primarily engaged in the following activities:
APPRAISAL SERVICES. Appraisal Services, Inc., incorporated in 1976, is a
wholly-owned subsidiary of GSFC and performs primarily residential real estate
appraisals for a number of clients, the majority of which is for the Bank and
its loan customers. Appraisal Services, Inc. had net income (loss) of $(12,000)
in the year ended December 31, 1999 and $6,000 and $3,000 in the six months
ended December 31, 1998 and 1997, respectively.
24
GENERAL INSURANCE AGENCY. Great Southern Insurance, a division of GSFC, was
organized in 1974. It acts as a general property, casualty and life insurance
agency for a number of clients, including the Bank. Great Southern Insurance had
net income of $113,000 in the year ended December 31, 1999 and $58,000 and
$65,000 in the six months ended December 31, 1998 and 1997, respectively.
TRAVEL AGENCY. Great Southern Travel, a division of GSFC, was organized in
1976. At December 31, 1999, it was the largest travel agency based in
southwestern Missouri and estimated to be in the top 5% (based on gross revenue)
of travel agencies nation-wide. Great Southern Travel operates from 24 full-time
locations, including a facility at the Springfield-Branson Regional Airport, and
additional part-time locations. It engages in personal, commercial and group
travel services. Great Southern Travel had net income of $365,000 in the year
ended December 31, 1999 and$119,000 and $57,000 in the six months ended December
31, 1998 and 1997, respectively.
GSB ONE, L.L.C. At December 31, 1999 the Bank's total investment in GSB
One, L.L.C. ("GSB One") and GSB Two, L.L.C. ("GSB Two") was $264 million. The
capital contribution was made by transferring participations in loans to GSB
Two. GSB One is a Missouri limited liability company that was incorporated in
March of 1998. Currently the only activity of this company is the ownership of
GSB Two.
GSB TWO, L.L.C. This is a Missouri limited liability company that was
incorporated in March of 1998. GSB Two is a Real Estate Investment Trust
("REIT"). It holds participations in real estate mortgages from the Bank. The
Bank continues to service the loans in return for a management and servicing fee
from GSB Two. GSB Two had net income of $22.7 million in the year ended December
31, 1999 and $8.2 million in the six months ended December 31, 1998.
Great Southern Capital Management, Inc. At December 31, 1999, the Bank's
total investment in Great Southern Capital Management ("Capital Management") was
$257,000. Capital Management was incorporated and organized in 1988 under the
laws of the state of Missouri. Capital Management is a registered broker/dealer
and a member of the National Association of Securities Dealers, Inc. ("NASD")
and the Securities Investors Protection Corporation ("SIPC"). Capital Management
offers a full line of financial consultation, investment counseling and discount
brokerage services including execution of transactions involving stocks, bonds,
options, mutual funds and other securities. In addition, Capital Management is
registered as a municipal securities dealer. Capital Management operates through
Great Southern's branch office network. Capital Management had net income of
$295,000 in the year ended December 31, 1999 and $36,000 and $153,000 in the six
months ended December 31, 1998 and 1997, respectively.
COMPETITION
Great Southern faces strong competition both in originating real estate and
other loans and in attracting deposits. Competition in originating real estate
loans comes primarily from other commercial banks, savings institutions and
mortgage bankers making loans secured by real estate located in the Bank's
market area. Commercial banks and finance companies provide vigorous competition
in commercial and consumer lending. The Bank competes for real estate and other
loans principally on the basis of the interest rates and loan fees it charges,
the types of loans it originates and the quality of services it provides to
borrowers. The other lines of business of the Bank, including loan servicing and
loan sales, as well as the Bank and Company subsidiaries, face significant
competition in their markets.
The Bank faces substantial competition in attracting deposits from other
commercial banks, savings institutions, money market and mutual funds, credit
unions and other investment vehicles. The Bank attracts a significant amount of
deposits through its branch offices primarily from the communities in which
those
25
branch offices are located; therefore, competition for those deposits is
principally from other commercial banks and savings institutions located in the
same communities. The Bank competes for these deposits by offering a variety of
deposit accounts at competitive rates, convenient business hours, and convenient
branch and ATM locations with inter-branch deposit and withdrawal privileges at
each branch location.
EMPLOYEES
At December 31, 1999, the Bank and its affiliates had a total of 833
employees, including 245 part-time employees. None of the Bank's employees is
represented by any collective bargaining agreement. Management considers its
employee relations to be good.
GOVERNMENT SUPERVISION AND REGULATION
GENERAL
On June 30, 1998, the Bank converted from a federal savings bank to a
Missouri-chartered trust company, with the approval of the Missouri Division of
Finance ("MDF") and the FRB. By converting, the Bank was able to expand its
consumer and commercial lending authority.
Bancorp and its subsidiaries are subject to supervision and examination by
applicable federal and state banking agencies. The earnings of the Bank's
subsidiaries, and therefore the earnings of Bancorp, are affected by general
economic conditions, management policies and the legislative and governmental
actions of various regulatory authorities, including the FRB, the Federal
Deposit Insurance Corporation ("FDIC") and the MDF. In addition, there are
numerous governmental requirements and regulations that affect the activities of
the Company and its subsidiaries. The following is a brief summary of certain
aspects of the regulation of the Company and Great Southern and does not purport
to fully discuss such regulation.
BANK HOLDING COMPANY REGULATION
As a result of the conversion, the Company became a bank holding company,
subject to comprehensive regulation by the FRB under the Bank Holding Company
Act of 1956, as amended (the "BHCA"), and the regulations of the FRB. As a bank
holding company, the Company is required to file reports with the FRB and such
additional information as the FRB may require, and is subject to regular
inspections by the FRB. The FRB also has extensive enforcement authority over
bank holding companies, including, among others things, the ability to assess
civil money penalties, to issue cease and desist or removal orders and to
require that a holding company divest subsidiaries (including its bank
subsidiaries). In general, enforcement actions may be initiated for violations
of law and regulation as well as unsafe or unsound practices.
Under FRB policy, a bank holding company must serve as a source of strength
for its subsidiary banks. Under this policy the FRB may require, and has
required in the past, bank holding companies to contribute additional capital to
undercapitalized subsidiary banks. Under the BHCA, a bank holding company must
obtain FRB approval before, among other matters: (i) acquiring, directly or
indirectly, ownership or control of any voting shares of another bank or bank
holding company if, after such acquisition, it would own or control more than 5%
of such shares (unless it already owns or controls the majority of such shares);
(ii) acquiring all or substantially all of the assets of another bank or bank
holding company; or (iii) merging or consolidating with another bank holding
company
26
The BHCA prohibits a bank holding company, with certain exceptions, from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank or bank holding company, or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by FRB regulation or order, have been identified as
activities closely related to the business of banking or managing or controlling
banks. The list of activities permitted by the FRB includes, among other things,
operating a savings institution, mortgage company, finance company, credit card
company or factoring company; performing certain data processing operations;
providing certain investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; leasing property
on a full-payout, non-operating basis; selling money orders, travelers' checks
and United States Savings Bonds; real estate and personal property appraising;
providing tax planning and preparation services; and providing securities
brokerage services for customers. The scope of permissible activities may be
expanded from time to time by the FRB. Such activities may also be affected by
federal legislation.
INTERSTATE BANKING AND BRANCHING
In 1994, the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 (the "Riegle-Neal Act") was enacted to ease restrictions on interstate
banking. Effective September 29, 1995, the Riegle-Neal Act allows the FRB to
approve an application of an adequately capitalized and adequately managed bank
holding company to acquire control of, or acquire all or substantially all of
the assets of, a bank located in a state other than such holding company's home
state, without regard to whether the transaction is prohibited by the laws of
any state. The FRB may not approve the acquisition of a bank that has not been
in existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state. The Riegle-Neal Act also prohibits the FRB
from approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. The Riegle-Neal Act
does not affect the authority of states to limit the percentage of total insured
deposits in the state which may be held or controlled by a bank or bank holding
company to the extent such limitation does not discriminate against out-of-state
banks or bank holding companies. Individual states may also waive the 30%
state-wide concentration limit contained in the Riegle-Neal Act.
Additionally, the federal banking agencies are authorized to approve
interstate merger transactions without regard to whether such transactions are
prohibited by the law of any state, unless the home state of one of the banks
opted out of the Riegle-Neal Act by adopting a law after the date of enactment
of the Riegle-Neal Act and prior to June 1, 1997 which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Texas and Montana have opted out. Interstate acquisitions of
branches are permitted only if the law of the state in which the branch is
located permits such acquisitions. Interstate mergers and branch acquisitions
are also subject to the nationwide and statewide insured deposit concentration
amounts described above.
The Riegle-Neal Act authorizes the OCC and the FDIC to approve interstate
branching de novo by national and state banks, respectively, only in states
which specifically allow for such branching. As required by the Riegle-Neal Act,
the OCC, FDIC and FRB have prescribed regulations which prohibit any
out-of-state bank from using the interstate branching authority primarily for
the purpose of deposit production, including guidelines to ensure that
interstate branches operated by an out-of-state bank in a host state reasonably
help to meet the credit needs of the communities which they serve.
27
CERTAIN TRANSACTIONS WITH AFFILIATES AND OTHER PERSONS
Transactions involving a bank and its affiliates are subject to sections
23A and 23B of the Federal Reserve Act. Generally, these requirements and limits
restrict certain of these transactions to a percentage of the Bank's capital and
require all such transactions to be on terms at least as favorable to the Bank
as are available in transactions with non-affiliates. In addition, a bank
generally may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire shares of an affiliate. These provisions
currently apply to transactions between the Bank and the Company or the Bank and
the Holding Company's non-bank subsidiary. Affiliates of Great Southern include,
without limitation, any company whose management is under a common controlling
influence with the management of the Bank, any company controlled by controlling
stockholders of the Bank, any company with a majority of interlocking directors
with the Bank, and any company sponsored and advised on a contractual basis by
the Bank or any of its affiliates.
Prior to the enactment of the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") on August 9, 1989, Great Southern, like many
financial institutions, followed a policy of granting loans to certain of its
officers, directors and employees, generally for the financing of their personal
residences at favorable interest rates. Generally, residential loans were
granted at interest rates 1% above the Bank's cost of funds, subject to annual
adjustments. These loans were made in the ordinary course of business, on
substantially the same terms and collateral as those of comparable transactions
prevailing at the time, and did not involve more than the normal risk of
collectibility or present other unfavorable features. All loans by Great
Southern to its directors and executive officers are subject to FRB regulations
restricting loans and other transactions with affiliated persons of Great
Southern. FIRREA required that all such transactions be on terms and conditions
comparable to those for similar transactions with non-affiliates and also
provided that the Company could have a policy allowing favorable rate loans to
employees as long as it is an employee benefit available to a broad group of
employees within guidelines defined by the policy. The Bank has such a policy in
place that allows for loans to full-time employees with at least two years of
service. The terms are the same as those used prior to FIRREA.
DIVIDENDS
The FRB has issued a policy statement on the payment of cash dividends by
bank holding companies, which expresses the FRB's view that a bank holding
company should pay cash dividends only to the extent that its net income for the
past year is sufficient to cover both the cash dividends and a rate of earning
retention that is consistent with the holding company's capital needs, asset
quality and overall financial condition. The FRB also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the FRB, the FRB may prohibit a bank holding company from
paying any dividends if the holding company's bank subsidiary is classified as
"undercapitalized."
Bank holding companies are required to give the FRB prior written notice of
any purchase or redemption of its outstanding equity securities if the gross