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, 2001
Commission File Number 0-18082
GREAT SOUTHERN BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 43-1524856
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(State of Incorporation) (IRS Employer Identification Number)
1451 E. Battlefield, Springfield, Missouri 65804
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(Address of Principal Executive Offices) (Zip Code)
(417) 887-4400
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(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 22, 2002, computed by reference to
the closing price of such shares, was $186,349,679. At March 22, 2002, 6,868,631
shares of Common Stock, par value $.01 per share, were outstanding.
TABLE OF CONTENTS
Page
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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
Loan Delinquencies and Defaults 13
Classified Assets 14
Investment Activities 18
Sources of Funds 20
Subsidiaries 24
Competition 25
Employees 25
Government Supervision and Regulation 25
Federal and State Taxation 30
ITEM 2. PROPERTIES 31
ITEM 3. LEGAL PROCEEDINGS 33
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 33
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT 33
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 34
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 35
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION 38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION 58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 99
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 99
ITEM 11. EXECUTIVE COMPENSATION 101
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 105
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 106
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 107
SIGNATURES
INDEX TO EXHIBITS
PART I
ITEM 1. BUSINESS.
THE COMPANY
Great Southern Bancorp, Inc.
Great Southern Bancorp, Inc. ("Bancorp" or "Company") is a financial
holding company which, as of December 31, 2001, 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 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 financial holding company. Through the financial 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 financial 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, 2001, Bancorp's
consolidated assets were $1.32 billion, consolidated net loans were $965
million, consolidated deposits were $887 million and consolidated stockholders'
equity was $85 million. The assets of the Company consist primarily of the stock
of Great Southern, the stock of other financial services companies, interests in
a local trust company and a merchant banking company and cash.
Through subsidiaries of the Bank, the Company offers insurance, 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. The Company expects to finance its
future activities in a similar manner.
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 28 branches located in southwestern and
central Missouri. At December 31, 2001, the Bank had total assets of $1.31
billion, deposits of $887 million and stockholders' equity of $92 million, or
7.0% 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 borrowings 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 single-family mortgage 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 corporate 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 and deposits 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 308,000, 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. The
region is a vacation and entertainment center, attracting tourists to its theme
parks, resorts, country music and novelty shows and other recreational
facilities. As a result of the rapid growth of the Branson area in the early
1990's, property values increased at unusually high rates. This growth also
provided for increased loan demand and a more volatile lending market than had
previously been present in that area. Due to overbuilding of commercial
properties during the mid-1990's, property values have experienced downward
pressure during the past few years. Reduced demand for residential properties
has similarly created downward pressure on one- to four- family and
multi-family, primary and vacation residences in this area.
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 $156 million, or 15%, of the total loan portfolio at December 31,
2001, was secured by commercial real estate, commercial construction, other
residential properties, one- to four-family residential properties, and one- to
four-family construction properties, and consumer loans in the Branson area.
Residential mortgages account for approximately $68 million of this total.
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 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. In recent years, 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. At December 31, 2001, the balance of
participation loans purchased was $64.1 million, or 6.2% of the total loan
portfolio. None of these participation loans were non-performing loans at
December 31, 2001.
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
3
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 of lending has been an
increasing percentage of the loan portfolio and accounts for approximately 46%
of the portfolio at December 31, 2001.
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 is 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. In addition, the
Bank has made some loans, secured primarily by commercial real estate, in other
states, primarily Oklahoma, Kansas and Iowa.
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,
--------------------------------------------------------------------------------- ------------------
2001 2000 1999 1998 1998
-------------------- ------------------- ------------------- -------------------- ------------------
Amount % Amount % Amount % Amount % Amount %
---------- --------- ---------- -------- ---------- -------- ----------- -------- ---------- -------
(Dollars in thousands)
Real Estate Loans:
Residential
One- to four- family $ 190,556 18.4% $226,136 23.6% $208,466 25.3% $217,120 29.2% $217,688 31.0%
Other residential 88,274 8.5 81,143 8.5 76,926 9.4 85,828 11.5 89,141 12.7
Commercial 351,037 34.0 328,432 34.3 251,338 30.5 261,201 35.1 244,016 34.8
Residential Construction:
One- to four-family 49,306 4.8 47,241 4.9 39,795 4.8 33,292 4.4 16,032 2.3
Other residential 30,408 2.9 23,703 2.5 7,106 .9 6,553 .9 5,993 .9
Commercial construction 127,171 12.3 73,398 7.7 63,722 7.8 19,952 2.7 27,156 3.9
--------- ------ --------- ------- ---------- ------- ---------- ------- ---------- ------
Total real estate loans 836,752 80.9 780,053 81.5 647,353 78.7 623,946 83.8 600,026 85.6
--------- ------ -------- ------ --------- ------- --------- ------- --------- ------
Other Loans:
Consumer loans:
Guaranteed student loans 3,818 .4 3,892 .5 4,067 .5 15,931 2.1 12,736 1.8
Automobile 67,909 6.6 67,356 7.0 55,625 6.8 37,152 5.0 23,120 3.3
Home equity and improvement 27,198 2.6 19,460 2.0 14,431 1.8 9,292 1.3 5,849 .8
Other 630 .1 491 .1 255 -- 992 .1 4,862 .7
--------- ------- ---------- ------- --------- ------- ---------- ------- --------- ------
Total Consumer loans 99,555 9.7 91,199 9.6 74,378 9.1 63,367 8.5 46,567 6.6
Other commercial loans 97,557 9.4 85,334 8.9 100,419 12.2 57,179 7.7 54,722 7.8
--------- ------- ------- ------ --------- ------- ---------- ------- --------- ------
Total other loans 197,112 19.1 176,533 18.5 174,797 21.3 120,546 16.2 101,290 14.4
--------- ------ -------- ------ --------- ----- ---------- ------ --------- ------
Total loans 1,033,864 100.0% 956,586 100.0% 822,150 100.0% 744,492 100.0% 701,316 100.0%
===== ===== ===== ===== =====
Less:
Loans in process 46,744 45,834 36,048 28,823 28,497
Deferred fees and discounts 906 1,274 2,002 1,779 2,774
Allowance for loan losses 21,328 18,694 17,293 16,928 16,373
--------- ---------- --------- ---------- ---------
Total loans receivable, net $ 964,886 $890,784 $766,807 $696,962 $653,672
========= ========== ========= ========== =========
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,
-------------------------------------------------------------------------------- -----------------
2001 2000 1999 1998 1998
--------------------- ------------------ ------------------ -------------------- -----------------
Amount % Amount % Amount % Amount % Amount %
----------- --------- ---------- ------- ---------- ------- ----------- -------- ---------- ------
(Dollars in thousands)
Fixed-Rate Loans:
Real Estate Loans
Residential
One- to four- family $ 10,477 1.0% $ 6,414 .7% $ 5,960 .7% $ 11,659 1.6% $ 11,245 1.6%
Other Residential 48,518 4.7 38,345 4.0 37,079 4.5 39,661 5.3 34,757 5.0
Residential construction:
One- to four- family 5,925 .6 1,130 .1 --- --- --- --- --- ---
Commercial 50,039 4.8 40,102 4.2 37,636 4.6 60,757 8.2 28,004 4.0
---------- ------- ---------- ------ --------- ------ ---------- ------- ---------- -------
Total real estate loans 114,959 11.1 85,991 9.0 80,675 9.8 112,077 15.1 74,006 10.6
Consumer loans 67,496 6.5 66,751 7.0 54,829 6.7 37,080 5.0 27,319 3.9
Other commercial loans 14,465 1.4 10,526 1.1 4,266 .5 11,956 1.6 1,645 .2
---------- ------- ---------- ------ --------- ------ ---------- ------- ---------- -------
Total fixed-rate loans 196,920 19.0 163,268 17.1 139,770 17.0 161,113 21.7 102,970 14.7
---------- -------- --------- ----- --------- ----- --------- ------ --------- ------
Adjustable-Rate Loans:
Real Estate Loans
Residential
One- to four- family 180,079 17.4 219,722 23.0 202,506 24.6 205,461 27.6 206,443 29.4
Other Residential 39,756 3.9 42,798 4.5 39,847 4.9 46,167 6.2 54,384 7.8
Commercial 300,998 29.1 288,330 30.1 213,702 26.0 200,444 26.9 216,013 30.8
Residential construction:
One- to four-family 43,381 4.2 46,111 4.8 39,795 4.8 33,292 4.4 16,032 2.3
Other residential 30,408 2.9 23,703 2.5 7,106 .9 6,553 .9 5,993 .9
Commercial construction 127,171 12.3 73,398 7.7 63,722 7.7 19,952 2.7 27,156 3.9
---------- ------ ---------- ------ ---------- ------ ---------- ------- ---------- -------
Total real estate loans 721,793 69.8 694,062 72.6 566,678 68.9 511,869 68.7 526,021 75.1
Consumer loans 32,059 3.1 24,448 2.5 19,549 2.4 26,287 3.5 19,248 2.7
Other commercial loans 83,092 8.1 74,808 7.8 96,153 11.7 45,223 6.1 53,077 7.5
---------- ------- ---------- ----- ---------- ------ ---------- ------- ---------- -------
Total adjustable-rate loans 836,944 81.0 793,318 82.9 682,380 83.0 583,339 78.3 598,346 85.3
---------- ------ --------- ------ --------- ------ -------- ------ --------- ------
Total loans 1,033,864 100.0% 956,586 100.0% 822,150 100.0% 744,492 100.0% 701,316 100.0%
===== ===== ===== ===== =====
Less:
Loans in process 46,744 45,834 36,048 28,823 28,497
Deferred fees and discounts 906 1,274 2,002 1,779 2,774
Allowance for loan losses 21,328 18,694 17,293 16,928 16,373
---------- ---------- ---------- ---------- ----------
Total loans receivable, net $ 964,886 $890,784 $766,807 $696,962 $653,672
========== ======== ======== ======== ========
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, 2001 and 2000, loans secured by residential real estate
totaled $279 million and $307 million, respectively, and represented
approximately 26.9% and 32.1%, respectively, of the Bank's total loan portfolio.
Compared to historical levels, market rates for fixed rate mortgages were low
during the year ended December 31, 2001 and were high during the year ended
December 31, 2000. This caused a higher than normal level of refinancing of
adjustable-rate loans into fixed-rate loans during 2001, most of which were sold
in the secondary market, and accounted for a decline in the Bank's residential
real estate loan portfolio during 2001. The rising interest rate environment in
2000 had the opposite effect, causing the generation of more adjustable-rate
loans, which the Bank generally retains in its portfolio.
The Bank currently is originating adjustable-rate residential mortgage
loans primarily with one-year adjustment periods. Rate adjustments on loans
originated prior to July 2001 are based upon changes in prevailing rates for
one-year U.S. Treasury securities. Rate adjustments on loans originated since
July 2001 are based upon changes in the average of interbank offered rates for
twelve months U.S. Dollar-denominated deposits in the London Market. Rate
adjustments 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, these 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
7
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.
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
generally 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 may
enforce 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. Since fiscal 1986, Great Southern has expanded
its commercial real estate lending in order to increase the yield on, and the
proportion of interest rate sensitive loans in, its portfolio. 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 "Government
Supervision and Regulation" below.
At December 31, 2001 and 2000, loans secured by commercial real estate
totaled $351 million and $328 million, respectively, or approximately 34.0% and
34.3%, respectively, of the Bank's total loan portfolio. In addition, at
December 31, 2001 and 2000, construction loans secured by projects under
construction and the land on which the projects are located aggregated $207
million and $144 million, respectively, or 20.0% and 15.1%, 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, most of which are
tied to the Bank's prime rate. Substantially all of these loans were originated
with loan commitments which 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 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 loan portfolio
consists of loans with diverse collateral types. The following table sets forth
loans that are secured by certain types of collateral at December 31, 2001.
These collateral types represent the three highest percentage concentrations of
commercial real estate and construction loan types to the total loan portfolio.
8
Average
Loan to Value
Percentage of Ratio Based on Non Performing
Loan Total Loan Internal Loans at
Collateral Type Balance Portfolio Calculations December 31, 2001
- ---------------------------------- ---------------- -------------------- ------------------- ------------------------
(Dollars in thousands)
Motels $ 103,251 10.0% 43% $ 1,270
Health Care Facilities $ 59,532 5.8% 59% $ ---
Recreational Facilities $ 40,674 3.9% 42% $ 408
The Bank's commercial real estate and construction loans generally
involve larger principal balances than do its residential loans. In general,
state banking laws restrict loans to a single borrower to no more than 25% 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, 2001,
this limit was approximately $28.3 million. See "Government Supervision and
Regulation." At December 31, 2001, the Bank was in compliance with the
loans-to-one borrower limit. At December 31, 2001, the Bank's largest
relationship totaled $18.6 million. All loans included in this relationship were
current at December 31, 2001.
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. 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, 2001 and 2000, respectively, Great Southern had $97.6
million and $85.3 million in other commercial loans outstanding, or 9.4% and
8.9%, 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.
9
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 applicable regulatory restrictions. See
"Government 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
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. In
addition, the Bank generally obtains personal guarantees from the borrowers on
these types of loans. 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, 2001, Great Southern had 79
letters of credit outstanding in the aggregate amount of $11.9 million.
Approximately 72% of the aggregate amount of these letters of credit were
secured, including one $7.8 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 $99.6 million and
$91.2 million at December 31, 2001 and 2000, respectively, or 9.7% and 9.6%,
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.
10
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. At December 31, 2001, the Bank
had $52.5 million of indirect auto loans in its portfolio. 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 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 these loans.
These loans may also give rise to claims and defenses by a consumer loan
borrower against an assignee of these loan such as the Bank, and a borrower may
be able to assert against the 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 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 level 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 purchase whole real estate loans and
participation interests in real estate loans from private investors, such as
other banks, thrift institutions and life insurance companies. This may limit
Great Southern's ability to control its credit risk when it purchases
participations in these loans. For instance, 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.
A number of banks, both locally and regionally, do not have the capital
to handle large commercial credits. In order to take advantage of this
situation, beginning in fiscal June 30, 1998, Great Southern increased the
number and amount of participations purchased in commercial real estate and
commercial business loans. Great Southern subjects these loans to its normal
underwriting standards used for originated loans and rejects any credits that do
not meet those guidelines. The originating bank retains the servicing
11
of these loans. The Bank purchased $34.3 million of these loans in the fiscal
year ended December 31, 2001 and $13.9 million in the fiscal year ended December
31, 2000. Of the total $64.1 million of purchased participation loans
outstanding at December 31, 2001, $30.1 million was purchased from one other
institution, all of which was secured by property located in northern Arkansas.
None of these loans were non-performing at December 31, 2001.
There have been no whole loan purchases by the Bank in the last five
years. At December 31, 2001 and 2000, approximately $1.9 million, or .2% and
$5.0 million, or .5%, 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 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 $103.4 million, $35.0 million and $32.5
million during fiscal 2001, 2000 and 1999, respectively. Sales of whole real
estate loans and participations in real estate loans 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 $11.7
million, $12.4 million and $20.8 million during fiscal 2001, 2000 and 1999,
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 fiscal 2001, 2000 and
1999 were $1.8 million, $570,000 and $1.1 million, respectively. Of these
amounts, $179,000, $103,000 and $268,000, respectively, were gains from the sale
of guaranteed student loans and $1.6 million, $467,000 and $830,000,
respectively, were gains from the sale of fixed-rate residential loans.
Although most loans currently sold by the Bank are sold with servicing
released, the Bank had the servicing rights for approximately $39.5 million and
$45.8 million at December 31, 2001 and 2000,
12
respectively, of loans owned by others. The servicing of these loans generated
net servicing fees to the Bank for the years ended December 31, 2001 and 2000,
of $164,000 and $180,000, 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 $784,000, $610,000 and $961,000 for the years ended December
31, 2001, 2000 and 1999, 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 matter see Note 1
of the Notes to Consolidated Financial Statements.
Loan Delinquencies and Defaults
When a borrower fails to make a required payment on a loan, the Bank
attempts to cause the delinquency to be cured by contacting the borrower. In the
case of loans secured by residential real estate, a late notice is sent 15 days
after the due date. If the delinquency is not cured by the 30th day, a
delinquent notice is sent to the borrower. Additional written contacts are made
with the borrower 45 and 60 days after the due date. If the delinquency
continues for a period of 65 days, the Bank usually institutes appropriate
action to foreclose on the collateral. The actual time it takes to foreclose on
the collateral varies depending on the particular circumstances and the
applicable governing law. If foreclosed, the property is sold at public auction
and may be purchased by the Bank. Delinquent consumer loans are handled in a
generally similar manner, except that initial contacts are made when the payment
is five days past due and appropriate action may be taken to collect any loan
payment that is delinquent for more than 15 days. The Bank's procedures for
repossession and sale of consumer collateral are subject to various requirements
under the applicable consumer protection laws as well as other applicable laws
and the determination by the Bank that it would be beneficial from a cost basis.
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 delinquent loans. In addition, the Bank has a Problem Loan
Committee which meets at least monthly and reviews all classified assets, as
well as other loans 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 proceedings 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.
13
The following table sets forth our loans delinquent 30 - 89 days by
type, number, amount and percentage of type at December 31, 2001.
Loans Delinquent for 30-89 Days
---------------------------------------------
Percent of
Total
Delinquent
Number Amount Loans
--------------- -------------- --------------
(Dollars in thousands)
Real Estate:
One- to four-family 85 $ 6,260 29%
Other residential 2 1,275 6
Commercial 12 8,242 39
Construction or development 15 1,295 6
Consumer and overdrafts 694 2,353 11
Other commercial 19 1,891 9
----- --------- -----
Total 827 $21,316 100%
==== ======= =====
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, 2001.
Total Allowance
Asset Category Substandard Doubtful Loss Classified for Losses
- ------------------------------ ---------- ------------ ----------- -------------- ------------
(Dollars in thousands)
Loans $27,669 $--- $--- $27,669 $21,328
Foreclosed assets 3,207 --- --- 3,207 150
---------- ----- ----- --------- ----------
Total $30,876 $--- $--- $30,876 $21,478
======= ==== ==== ======= =======
Non-Performing Assets
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
14
to new borrowers and occasionally to originate loans with higher loan-to-value
ratios than those generally allowed for the Bank's one- to four-family
residential loans.
December 31,
------------------------------------------------------------------ June 30,
2001 2000 1999 1998 1998
---- ---- ---- ---- ----
(Dollars in thousands)
Non-accruing loans:
One- to four-family residential $ 1,333 $ 2,171 $ 880 $ 137 $ 522
Other residential --- --- 1,002 2,554 4,535
Commercial real estate 3,407 4,112 4,371 2,496 1,687
One- to four-family construction --- --- 1 --- 91
Consumer 393 109 146 33 147
Other commercial 1,021 1,236 444 1,061 80
Commercial construction 2,844 4,858 2,377 1,137 ---
---------- ------------ ------------ ------------ ------------
Total gross non-accruing loans 8,998 12,486 9,221 7,418 7,062
---------- ------------ ------------ ------------ ------------
Loans over 90 days delinquent
still accruing interest:
One- to four-family residential --- --- 49 2,243 ---
Consumer --- --- --- 244 ---
Other commercial --- --- --- 241 ---
Commercial construction 59 --- --- --- ---
Commercial real estate 489 --- --- --- ---
---------- ------------ ------------ ------------ ------------
Total over 90 days accruing loans 548 --- 49 2,728 ---
---------- ------------ ------------ ------------ ------------
Other impaired loans --- --- --- --- 2,278
---------- ------------ ------------ ------------ ------------
Loans in connection with sales of
foreclosed assets --- --- --- --- 145
---------- ------------ ------------ ------------ ------------
Total gross non-performing loans 9,546 12,486 9,270 10,146 9,485
---------- ------------ ------------ ------------ ------------
Foreclosed assets:
One- to four-family residential 460 165 167 438 400
Other residential --- --- --- 1,075 175
One- to four-family construction 468 508 --- --- ---
Commercial real estate 1,280 1,645 650 1,297 4,176
---------- ------------ ------------ ------------ ------------
Total foreclosed assets 2,208 2,318 817 2,810 4,751
---------- ------------ ------------ ------------ ------------
Repossessions 849 370 --- --- ---
---------- ------------ ------------ ------------ ------------
Total gross non-performing assets $12,603 $15,174 $10,087 $12,956 $14,236
========== ============ ============ ============ ============
Total gross non-performing assets as a 1.06% 1.50% 1.09% 1.61% 1.90%
percentage of average total assets ========== ============ ============ ============ ============
Gross impaired loans totaled $9.0 million at December 31, 2001 and
$12.5 million at December 31, 2000.
For the year ended December 31, 2001, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $1.8 million. The amount that was included in
interest income on these loans was $1.3 million for the year ended December 31,
2001.
15
The level of non-performing assets is primarily attributable to the
Bank's commercial real estate, commercial construction, commercial business and
one- to four-family residential lending activities. Commercial activities
generally involve significantly greater credit risks than single-family
residential lending. The level of non-performing assets increased at a rate
greater than that of the Bank's commercial lending portfolio in fiscal December
31, 2000, and at a rate less than that of the Bank's commercial lending
portfolio in the year ended December 31, 2001 and 1999, in the six months ended
December 31, 1998 and in fiscal year ended June 30, 1998. For a discussion of
significant non- performing assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Allowances 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 asset 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
relatively 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 due more specifically to the
growth of the commercial business, consumer and commercial real estate loan
portfolios, and the related inherent risks, management provided increased levels
of loan loss allowances over the past few years.
The allowances for losses on loans and foreclosed assets are maintained
at an amount management considers adequate to provide for potential losses.
Although management believes that it uses the best information available to make
such determinations, future adjustments to the 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, 2001 and 2000, Great Southern had an allowance for
losses on loans of $21.3 million and $18.7 million, respectively, of which $4.0
million and $3.0 million, respectively, had been allocated as an allowance for
specific loans, and $1.2 million and $1.7 million, respectively, had been
allocated for impaired loans. The allowance is discussed further in Note 3 of
the Notes to Consolidated Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
16
The allowance for losses on loans at the dates indicated is summarized
as follows. The table is based on information prepared in accordance with
generally accepted accounting principles.
December 31, June 30,
-----------------------------------------------------------------------------------------------
2001 2000 1999 1998 1998
-------------------- ----------------- ------------------ -------------------- ----------------
% of % of % of % of % of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
One- to four-family residential and
construction $ 1,388 23.2% $ 1,164 28.5% $ 798 30.1% $ 1,254 33.4% $ 811 33.5%
Other residential and construction 182 11.4 444 11.0 375 10.3 613 12.4 615 13.5
Commercial real estate and construction
and other commercial 15,480 55.7 12,647 50.9 12,003 50.5 9,719 45.7 11,348 46.4
Consumer and overdrafts 2,335 9.7 2,236 9.6 1,567 9.1 1,211 8.5 743 6.6
Other 1,943 -- 2,203 -- 2,550 -- 4,131 -- 2,586 --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total $21,328 100.0% $18,694 100.0% $17,293 100.0% $16,928 100.0% $16,373 100.0%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
17
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,
------------------------------------------- -----------
2001 2000 1999 1998 1998
---------- ---------- ---------- ---------- -----------
(Dollars in thousands)
Balance at beginning of period $18,694 $17,293 $16,928 $16,373 $15,524
------- ------- ------- ------- -------
Charge-offs:
One- to four-family residential 338 254 114 -- 45
Other residential -- -- -- 187 67
Commercial real estate 961 260 131 185 529
Construction 171 218 375 -- 82
Consumer and overdrafts 2,473 2,116 1,870 1,077 287
Other commercial 958 303 316 50 133
------- ------- ------- ------- -------
Total charge-offs 4,901 3,151 2,806 1,499 1,143
------- ------- ------- ------- -------
Recoveries:
One- to four-family residential 30 66 33 147 22
Other residential -- -- -- -- 1
Commercial real estate and construction 692 166 64 -- 68
Consumer and overdrafts 1,270 1,019 793 552 10
Other commercial 343 195 219 64 38
------- ------- ------- ------- -------
Total recoveries 2,335 1,446 1,109 763 139
------- ------- ------- ------- -------
Net charge-offs 2,566 1,705 1,697 736 1,004
Provision for losses on loans 5,200 3,106 2,062 1,291 1,853
------- ------- ------- ------- -------
Balance at end of period $21,328 $18,694 $17,293 $16,928 $16,373
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans 0.27% 0.20% 0.23% 0.23% 0.16%
outstanding ======= ======= ======= ======= =======
Investment Activities
The Bank's investment securities portfolio at December 31, 2001 and
2000, 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 $10,000,000 and $9,986,000 at December 31, 2001 and 2000,
respectively.
As of December 31, 2001 and 2000, the Bank held approximately $37.5
million and $27.8 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 $40.7 million and $27.7
million, respectively. In addition, as of December 31, 2001 and 2000, the
Company held approximately $233.8 million and $126.4 million, respectively, in
principal amount of investment securities which the Company classified as
available-for-sale. See Notes 1 and 2 of the Notes to Consolidated Financial
Statements.
18
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, 2001
--------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(Dollars in thousands)
AVAILABLE-FOR-SALE SECURITIES:
U.S. government agencies $ 84,719 $ 669 $ --- $ 85,388
Collateralized mortgage obligations 5,188 --- 71 5,117
Mortgage-backed securities 120,544 28 1,147 119,425
Corporate bonds 8,311 417 --- 8,728
Equity securities 13,967 1,214 34 15,147
---------- ---------- ---------- ----------
Total available-for-sale securities $232,729 $2,328 $1,252 $233,805
========== ========== ========== ==========
HELD-TO-MATURITY SECURITIES:
States and political subdivisions and
industrial revenue bonds $ 37,465 $ 3,283 $ 45 $ 40,703
--------- ---------- ---------- ----------
Total held-to-maturity securities $ 37,465 $ 3,283 $ 45 $ 40,703
========= ========== ========== ==========
December 31, 2000
--------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(Dollars in thousands)
AVAILABLE-FOR-SALE SECURITIES:
U.S. government agencies $114,321 $ 553 $ 99 $ 114,775
Collateralized mortgage obligations 3,424 15 --- 3,439
Equity securities 8,080 115 --- 8,195
-------- ------- -------- ---------
Total available-for-sale securities $125,825 $ 683 $ 99 $ 126,409
======== ======= ======== =========
HELD-TO-MATURITY SECURITIES:
U.S. government agencies $ 6,999 $ --- $ 17 $ 6,982
States and political subdivisions
and industrial revenue bonds 17,101 17 107 17,011
Corporate bonds 2,805 95 25 2,875
Mortgage-backed securities 853 3 6 850
-------- --------- -------- ---------
Total held-to-maturity securities $27,758 $ 115 $ 155 $ 27,718
======= ========= ======== =========
19
The following table presents the contractual maturities and weighted
average yields of available-for- sale debt securities at December 31, 2001. 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 $ --- --- $ ---
After one through five years 58,107 5.79% 58,837
After five through ten years 26,612 5.88% 26,551
After ten years 8,311 8.98% 8,728
Securities not due on a single maturity date 125,732 5.49% 124,542
-------- --------
Total $218,762 $218,658
======== ========
The following table presents the contractual maturities and weighted
average yields of held-to-maturity securities at December 31, 2001. 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 $10,000 6.90% $ 10,455
After ten years 27,465 8.59% 30,248
------- --------
Total $37,465 $ 40,703
======= ========
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") and other borrowings,
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. The Bank offers regular savings 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.
20
The following table sets forth the dollar amount of deposits, by
interest rate range, in the various types of deposit programs offered by the
Bank at the dates indicated. The table is based on information prepared in
accordance with generally accepted accounting principles.
December 31,
-------------------------------------------------------------------------------------
2001 2000 1999
-------------------------------- -------------------------- -------------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Time deposits:
0.00% - 1.99% $ 7,538 .85% $ --- ---% $ --- ---%
2.00% - 2.99% 59,443 6.73 --- --- --- ---
3.00% - 3.99% 94,097 10.65 94 .01 1,153 .18
4.00% - 4.99% 145,515 16.47 14,847 1.98 79,429 12.69
5.00% - 5.99% 118,769 13.44 123,103 16.39 280,688 44.85
6.00% - 6.99% 212,617 24.06 360,825 48.04 69,525 11.11
7.00% - 7.99% 24,302 2.75 46,221 6.15 3,527 .56
8.00% and above 225 .02 225 .03 30 ---
----------- ------- --------- ------- --------- -------
Total Time deposits 662,506 74.97 545,316 72.60 434,352 69.39
Non-interest-bearing demand deposits 62,131 7.03 60,353 8.04 47,360 7.57
Savings deposits
(1.37%-2.51%-2.50%) 980 .11 20,400 2.72 29,613 4.73
Interest-bearing demand deposits
(1.02%-2.23%-1.86%) 158,067 17.89 124,973 16.64 114,575 18.31
--------- ------- --------- ------- --------- -----
883,684 100.00% 751,042 100.00% 625,900 100.00%
====== ====== ======
Interest rate swap fair value
adjustment 3,186 --- ---
----------- --------- ----------
Total Deposits $886,870 $751,042 $625,900
======== ======== ========
A table showing maturity information for the Bank's time deposits as of
December 31, 2001, is presented in Note 6 of the 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.
21
The following table sets forth the time remaining until maturity of the
Bank's time deposits as of December 31, 2001. 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 $ 83,291 $ 52,053 $ 57,863 $ 33,319 $226,526
$100,000 or more 25,508 19,363 18,650 8,925 72,446
Brokered 59,517 42,163 52,502 201,279 355,461
Public funds(1) 6,938 809 326 --- 8,073
---------- ------------ ------------ ------------ -----------
Total $175,254 $114,388 $129,341 $242,523 $662,506
======== ======== ======== ======== ========
- --------------
(1) Deposits from governmental and other public entities.
Brokered deposits. Brokered deposits are marketed through national
brokerage firms to their customers in $1,000 increments. 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. At December 31, 2001 and 2000, the Bank had
approximately $355.5 million and $286.7 million in brokered deposits,
respectively.
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 death, or court declared
mental incompetence, of the depositor. This allows the Bank to better manage the
maturity of its deposits.
In fiscal 2000, the Company began using interest rate swaps to manage
its interest rate risks from recorded financial liabilities. During fiscal 2001
and 2000, the Company entered into interest rate swap agreements with the
objective of hedging against the effects of changes in the fair value of its
liabilities for fixed rate brokered certificates of deposit caused by changes in
market interest rates. In fiscal 2001, the Company's interest rate swaps reduced
interest expense on deposits by approximately $4.2 million due to declining
interest rates.
Borrowings. Great Southern's other sources of funds include advances
from the FHLBank and a Qualified Loan Review ("QLR") arrangement with the FRB
and other borrowings.
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. 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 FRB has a 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
22
collateral value of the commercial loans pledged, for virtually any reason that
creates a temporary cash need. Examples of this could be: (1) the need to
disburse one or several loans but the permanent source of funds will not be
available for a few days; (2) a temporary spike in interest rates on other
funding sources that are being used; or (3) 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, 2001 that would have allowed approximately $96.9 million
to be borrowed under the above arrangement.
The Company has a line of credit available with a commercial bank. The
amount available under the line of credit is $12,000,000. At December 31, 2001,
the amount outstanding was $0.
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. These borrowings are limited to a percent of the
market value of the collateral, generally 40-50%, and are used by the Company
for short-term cash needs including the purchase of available-for-sale
securities and the repurchase of the Company's stock. At December 31, 2001, the
amount outstanding was $0.
During 2001 GSBCP, a newly-formed Delaware business trust subsidiary of
the Company, issued 1,725,000 shares of unsecured 9.00% Cumulative Trust
Preferred Securities at $10 per share in an underwritten public offering. The
gross proceeds of the offering were used to purchase a 9.00% Subordinated
Debenture from the Company. The Company's proceeds from the issuance of the
Subordinated Debentures to GSBCP, net of underwriting fees and offering
expenses, were $16.3 million. The Company records distributions payable on the
trust preferred securities as interest expense for financial reporting purposes.
The proceeds from the offering were used to reduce the Company's indebtedness
under the existing note payable to bank to $0. The trust preferred securities
mature in 2031 and are redeemable at the Company's option beginning in 2006. The
trust preferred securities qualify as Tier I capital for regulatory purposes.
During 2001 the Company entered into an interest rate swap agreement to
effectively convert this fixed rate debt to variable rates of interest. The
variable rate is three-month LIBOR plus 202 basis points, adjusting quarterly.
The initial rate was 6.25% and the rate at December 31, 2001, was 4.62%.
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.
Year Ended December 31,
---------------------------------------------------------
2001 2000 1999
------------------ -------------------- -----------------
(Dollars in thousands)
Maximum Balance:
FHLBank advances $265,321 $267,968 $200,531
Other borrowings 144,586 57,195 61,111
Average Balances:
FHLBank advances $214,325 $218,725 $165,192
Other borrowings 78,799 37,973 19,680
23
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,
-----------------------------------------------------
2001 2000 1999
---------------- -------------------- ---------------
(Dollars in thousands)
FHLBank advances $258,743 $234,378 $200,531
Other borrowings 74,923 57,195 61,111
--------- ---------- ----------
Total borrowings $333,666 $291,573 $261,642
======== ======== ========
Weighted average interest
rate of FHLBank advances 3.03% 6.41% 6.23%
==== ==== ====
Weighted average interest 2.32% 6.99% 5.03%
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, 2001,
the Bank's total investment in Great Southern Capital Management ("Capital
Management") was $764,000. Capital Management was incorporated and organized in
1988 under the laws of the state of Missouri. At December 31, 2001, the Bank's
total investment in Great Southern Financial Corporation ("GSFC") was $1.5
million. GSFC is incorporated under the laws of the State of Missouri, and does
business as Great Southern Insurance and Great Southern Travel. These
subsidiaries are primarily engaged in the activities described below.
Great Southern Capital Management, Inc. 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 $35,000 and $297,000 in the
years ended December 31, 2001 and 2000, respectively.
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 $149,000 and $141,000 in the years ended December
31, 2001 and 2000, respectively.
Travel Agency. Great Southern Travel, a division of GSFC, was organized
in 1976. At December 31, 2001, it was the largest travel agency based in
southwestern Missouri and was estimated to be in the top 5% (based on gross
revenue) of travel agencies nationwide. Great Southern Travel operates from 19
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 (loss) of
$(339,000) and $276,000 in the years ended December 31, 2001 and 2000,
respectively.
GSB One, L.L.C. At December 31, 2001 the Bank's total investment in GSB
One, L.L.C. ("GSB One") and GSB Two, L.L.C. ("GSB Two") was $299 million. The
capital contribution was made by
24
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 $27.3 million and $26.9 million in the
years ended December 31, 2001 and 2000, respectively.
Appraisal Services. Appraisal Services, Inc., incorporated in 1976, was
a wholly-owned subsidiary of GSFC and performed primarily residential real
estate appraisals for a number of clients, the majority of which were for the
Bank and its loan customers. The Company closed Appraisal Services, Inc. during
2001.
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 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, 2001, the Bank and its affiliates had a total of 508
employees, including 135 part-time employees. None of the Bank's employees are
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")
25
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
The Company is a bank holding company that has elected to be treated as
a financial holding company by the FRB. Financial holding companies are subject
to comprehensive regulation by the FRB under the Bank Holding Company Act, and
the regulations of the FRB. As a financial 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 examinations by the FRB. The FRB also has
extensive enforcement authority over financial holding companies, including,
among other 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 regulations and unsafe or unsound
practices.
Under FRB policy, a financial 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, a holding company to contribute additional capital to
an undercapitalized subsidiary bank.
Under the Bank Holding Company Act, a financial holding company must
obtain FRB approval before: (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 or financial holding
company; or (iii) merging or consolidating with another bank or financial
holding company.
The Bank Holding Company Act also prohibits a financial holding company
generally from engaging directly or indirectly in activities other than those
involving banking, activities closely related to banking that are permitted for
a bank holding company, securities, insurance or merchant banking.
Currently, the Company has permission from the FRB to hold up to 20% of
the common stock of an unaffiliated financial institution holding company. At
December 31, 2001, the Company owned approximately 18% of the outstanding common
shares of this financial institution holding company, with recent increases
having been the sole result of stock repurchases by that company. On December
10, 2001, the Company attempted to sell all its holdings of the common stock of
this publicly traded company at a price that would not have resulted in a loss
to the Company. On December 13, 2001, the counterparty refused to complete and
rescinded the transaction. As a result, the Company is still the owner of record
of and continues to hold the stock it attempted to sell, which it continues to
report as an equity security available for sale carried at fair value.
Management believes the attempted sale transaction is valid and enforceable and
is consulting with legal counsel to determine what, if any, course of action to
take in this matter.
Interstate Banking and Branching
Federal law 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.
Federal law also prohibits the FRB from approving an application if the
applicant (and
26
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. Federal law 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.
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. 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.
Federal law also authorizes the Office of the Comptroller of the
Currency ("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 federal law, 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.
Certain Transactions with Affiliates and Other Persons
Transactions involving the Bank and its affiliates are subject to
sections 23A and 23B of the Federal Reserve Act, which impose certain
quantitative limits and collateral requirements on such transactions, and
require all such transactions to be on terms at least as favorable to the Bank
as are available in transactions with non-affiliates.
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. Transactions involving such persons must
be on terms and conditions comparable to those for similar transactions with
non-affiliates. A company may 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.
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 tha