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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the fiscal year ended June 30, 1996, or
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
------------------------------
Commission File Number 0-18082
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Great Southern Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State of jurisdiction of incorporation or organization)
43-1524856
(IRS Employer Identification Number)
1451 E. Battlefield
Springfield, Missouri
(Address of principal executive offices)
65804
(Zip Code)
(417) 887-4400
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.01
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of the Registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock of the Registrant
held by non-affiliates of the Registrant on September 17, 1996,
computed by reference to the closing price of such shares, was
$131,354,220. At September 17, 1996, 4,378,474 shares of Common
Stock, par value $.01 per share, were outstanding.
2
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Security Holders
for the fiscal year ended June 30, 1996 (the "Annual Report"),
which was electronically filed on September 18, 1996, are
incorporated by reference into Parts I, II and IV. With the
exception of the information explicitly incorporated by reference
in this Form 10-K, the 1996 Annual Report to Security Holders is
not to be deemed filed as part of this Form 10-K.
Portions of the Registrant's Definitive Proxy Statement prepared
in connection with the 1996 annual meeting of stockholders (the
"Definitive Proxy Statement"), which was electronically filed on
September 18, 1996, are incorporated by reference into Part III.
TABLE OF CONTENTS
Item Page
Part I
1. Business . . . . . . . . . . . . . . . . . . . . . . 3
2. Properties . . . . . . . . . . . . . . . . . . . . . 66
3. Legal Proceedings . . . . . . . . . . . . . . . . . . 68
4. Submission of Matters to a Vote of Security Holders . 68
Part II
5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . 70
6. Selected Financial Data . . . . . . . . . . . . . . . 71
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . 73
8. Financial Statements and Supplementary Data . . . . . 73
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures . . . . . . . 73
Part III
10. Directors and Executive Officers of the Registrant. . 73
11. Executive Compensation . . . . . . . . . . . . . . . 73
12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . 74
13. Certain Relationship and Related Transactions . . . . 74
Part IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . 74
Signatures . . . . . . . . . . . . . . . . . . . . . . . 77
Index to Exhibits . . . . . . . . . . . . . . . . . . . . 78
3
PART I
ITEM 1. BUSINESS.
Great Southern Bancorp, Inc.
Great Southern Bancorp, Inc. (the "Holding Company", "Bancorp" or
"Company") was incorporated under the laws of the State of Delaware
in July 1989, by authorization of the Board of Directors of Great
Southern Bank FSB ("Great Southern" or the "Bank"), for the purpose
of becoming a holding company that would own all of the outstanding
stock of Great Southern issued upon the conversion (the
"Conversion") of Great Southern from a mutual savings and loan to a
stock savings and loan. After receiving the approval of the Office
of Thrift Supervision, Department of Treasury (the "OTS"), the
Holding Company acquired all of the common stock of Great Southern
issued in connection with the completion of the Conversion in
December 1989.
As a Delaware corporation, the Holding Company is authorized to
engage in any activity that is permitted by the Delaware General
Corporation Law and is not prohibited by law or regulatory policy.
The Holding Company currently conducts its business as a savings
and loan holding company. Through the holding company structure,
it is possible to expand the size and scope of the financial
services offered by the Holding Company beyond those offered by the
Bank prior to the Conversion. The holding company structure
provides the Holding Company with greater flexibility than the Bank
would have to diversify its business activities, through existing
or newly formed subsidiaries, or through acquisitions or mergers of
both mutual and stock thrift institutions as well as other
companies. The assets of the Holding Company consist of the stock
of Great Southern, the stock of other subsidiaries, interest in
housing related partnerships, loans receivable and cash. Through
subsidiaries, the Holding Company offers insurance, appraisal,
travel, discount brokerage and related services, which are
discussed further below. The activities of the Holding Company
have been funded by retained proceeds of the Conversion and through
dividends from Great Southern and borrowings from third parties.
See "Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters" and "Regulation - Holding Company Regulation"
and "Federal and State Taxation." Activities of the Holding
Company may also be funded through sales of additional securities
or through income generated by other activities of the Holding
Company. At this time, there are no plans regarding such
activities.
The executive offices of the Holding Company are located at 1451
East Battlefield, Springfield, Missouri 65804, and its telephone
number at that address is (417) 887-4400.
4
Great Southern Bank
Great Southern was incorporated as a Missouri-chartered mutual
savings and loan association in 1923 and in 1989 was converted to a
Missouri-chartered stock savings and loan association. In 1994,
Great Southern changed to a new charter as a federal savings bank.
Headquartered in Springfield, Missouri, Great Southern offers a
broad range of banking services through its 25 branches located in
southwestern and central Missouri. At June 30, 1996, the Bank had
total assets of $663 million, deposits of $398 million and
stockholders' equity of $57 million, or 8.6% of total assets. Its
deposits are insured by the Savings Association Insurance Fund
("SAIF") to the maximum levels permitted by the Federal Deposit
Insurance Corporation ("FDIC").
Great Southern is principally engaged in the business of attracting
deposits from the general public and using such deposits, together
with borrowings and other funds, to originate residential and
commercial real estate loans and commercial business and consumer
loans. Great Southern originates a variety of conventional,
residential real estate mortgage loans, principally in compliance
with Federal Home Loan Mortgage Corporation ("FHLMC") and Federal
National Mortgage Association ("FNMA") standards for resale in the
secondary market. Great Southern promptly sells most of the fixed-
rate residential mortgage loans that it originates, with servicing
retained prior to fiscal 1996 and servicing primarily released
beginning in fiscal 1996, and retains for its portfolio
substantially all of the adjustable-rate mortgage loans. Great
Southern also originates commercial real estate and construction
loans, primarily on properties located in its southwestern and
central Missouri market area, or, in the case of loans secured by
properties outside of its market area, primarily to borrowers
residing or doing business in southwestern and central Missouri.
Great Southern originates commercial business loans and is also an
issuer of letters of credit. See "-- Commercial Business Lending,"
"- Classified Assets," and "- Loan Delinquencies and Defaults"
below and Note 13 of Notes to Consolidated Financial Statements in
the Annual Report to Stockholders, which portions are incorporated
herein by reference. Letters of credit are contingent obligations
and are not included in the Bank's loan and mortgage-backed
securities portfolio.
In recent years, Great Southern has followed a strategy of
emphasizing quality loan origination through residential,
commercial and consumer lending activities in its local market
area. The goal of this strategy has been to maintain its position
as one of the leading providers of financial services in its market
area, while simultaneously diversifying assets and reducing
interest rate risk by originating and holding adjustable-rate loans
in its portfolio and selling fixed-rate loans in the secondary
market. The Bank continues to place primary emphasis on
residential mortgage lending.
The main office of the Bank is located at 1451 East Battlefield,
Springfield, Missouri 65804 and its telephone number at that
address is (417) 887-4400.
5
Market Area
Great Southern's primary market area encompasses 15 counties in
southwestern and central Missouri. Deposit and lending activities
are supported by the Bank's branches and ATMs throughout the
region, serving such diversified markets as Springfield, Joplin,
the resort areas of Branson Lakes and Lake of the Ozarks, and
various smaller communities in the Bank's market area. The
management of the Bank believes that its share of the savings and
lending markets in its market area is less than 10% and their
affiliates an even smaller percent with the exception of the travel
agency, which may have a larger percent.
Great Southern's largest concentration of loans and deposits is in
the Greater Springfield area. With a population of approximately
295,000, the Greater Springfield area is the third largest
metropolitan area in Missouri. Employment in this area is
diversified, including small and medium-sized manufacturing
concerns, service industries, especially in the resort and leisure
activities sectors, agriculture, the federal government, and a
major state university. Springfield is also a regional health care
center. The unemployment rate in this area is, and has
consistently been, below the national average.
The next largest concentration of loans is in the Branson Lakes
area which is located approximately 35 miles south of Springfield
and is one of the fastest growing areas in Missouri. The region is
a vacation and entertainment center attracting an estimated 5.8
million tourists annually to its theme parks, resorts, country
music shows and other recreational facilities. As a result of the
rapid growth of the Branson Lakes area, property values have
increased at unusually high rates in recent years. This has also
provided for increased loan demand and a more volatile lending
market than has previously been present in the Branson Lakes area.
Property values have started experiencing downward pressure, partly
as a result of this rapid increase.
During the past few years, a significant portion of the Bank's loan
originations has been secured by properties in the Branson Lakes
area. Approximately $128 million, or 21.8%, of the total loan
portfolio at June 30, 1996 was secured by properties in this area.
Of this amount, $58 million are loans secured by commercial real
estate, commercial construction and other residential properties
and $69 million are loans secured by one- to four-family
residential and one- to four-family construction properties. In
addition, the Bank`s commercial business and consumer loan
portfolio includes approximately $1.5 million of loans to customers
in the Branson Lakes area. See "- Commercial Real Estate and
Construction Lending", "- Commercial Business Lending", "-
Classified Assets" and "- Loan Delinquencies and Defaults".
6
Lending Activities-General
The principal lending activity of Great Southern is the origination
of fixed and adjustable-rate conventional residential real estate
loans to enable borrowers to purchase or refinance owner-occupied
homes. In addition, the Bank makes commercial real estate loans,
commercial business loans (i.e., commercial loans not secured by
real estate), consumer loans and residential and commercial
construction loans. Although Great Southern is permitted under
applicable regulations to originate or purchase loans and loan
participations secured by real estate located in any part of the
United States, the Bank has concentrated its lending efforts in
Missouri, with the largest concentration of its lending activity
being in southwestern and central Missouri.
Great Southern has a policy of obtaining collateral for
substantially all real estate loans and other loans, with the
exception of certain loans. The percentage of collateral value
Great Southern will loan on real estate and other property varies
based on factors including, but not limited to, the type of
property and its location and the borrower's credit history. As a
general rule, Great Southern will loan up to 80% of the appraised
value on one- to four-family residential property and will loan up
to an additional 15% with private mortgage insurance for the loan
amount above the 80% level. For commercial real estate and other
residential real property loans, Great Southern generally loans up
to a maximum of 75% of the appraised value. The origination of
loans secured by other property are considered and determined on an
individual basis by management with the assistance of any industry
guides and other information which may be available.
Historically, Great Southern primarily made long-term, fixed-rate
real estate loans that it retained in its loan portfolio.
Substantially all of the fixed-rate loans in Great Southern's
portfolio were originated by Great Southern prior to 1980. Great
Southern has since the early 1980's increased its efforts to
originate short-term and adjustable-rate loans. Substantially all
of the adjustable-rate mortgage loans originated by Great Southern
are held for its own portfolio. As a result, adjustable-rate real
estate loans as a percentage of Great Southern's total loan
portfolio increased from 71% at June 30, 1992, to 81% at June 30,
1996. See the discussion on interest rate sensitivity in
Management's Discussion and Analysis of Financial Condition and
Results of Operations in the Annual Report to Stockholders, which
portions are incorporated herein by reference.
7
During the fiscal years 1993 and 1994, Great Southern experienced
increased levels of adjustable-rate residential loans refinancing
into fixed-rate residential loans, as well as stronger competition
in the residential lending market. As a result of the shift in
loan demand to fixed-rate residential loans, which the Bank does
not retain in its portfolio, Great Southern increased its
originations of commercial real estate loans to help maintain the
desired size of the loan portfolio as well as the overall Company
size and profit levels. During the last half of fiscal 1994 and
during fiscal 1995, Great Southern experienced an increase in
levels of adjustable-rate residential lending and a decrease in
levels of fixed-rate residential lending as a result of increasing
interest rates. Then in fiscal 1996, Great Southern experienced an
increase in levels of fixed-rate residential lending and a decrease
in levels of adjustable-rate residential lending as a result of
leveling or slightly declining interest rates. Great Southern will
continue to place strong emphasis on the origination of one- to
four-family residential loans subject to market conditions.
Loan applications are approved at various levels of authority,
depending on the type, amount and loan-to-value ratio of the loan.
Loan commitments of more than $100,000 ($203,450 in the case of
fixed-rate one-to four-family residential loans for resale) must be
approved by Great Southern's loan committee, comprised of the
President of the Bank, as chairman of the committee, and other
senior officers of the Bank involved in lending activities.
8
Loan Portfolio Composition
The following table sets forth information concerning the
composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process, deferred fees
and discounts and allowance for loan losses) as of the dates
indicated. The table is based on information prepared in
accordance with generally accepted accounting principles and is
qualified by reference to financial statements and the notes
thereto.
June 30,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
Amount % Amount % Amount % Amount % Amount %
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(Dollars in thousands)
Real Estate Loans:
Residential
One- to four- family $249,348 42.5% $243,771 43.5% $203,157 40.9% $205,980 43.5% $199,563 54.7%
Other Residential 81,191 13.8 77,744 13.9 65,906 13.2 45,413 9.6 34,332 9.4
Commercial 172,478 29.4 133,244 23.8 105,977 21.3 93,318 19.7 70,303 19.3
Residential Construction:
One- to four-family 13,455 2.3 13,319 2.4 18,338 3.7 17,433 3.7 10,223 2.8
Other residential 13,533 2.3 23,804 4.2 37,588 7.6 38,675 8.2 10,552 2.9
Commercial construction 16,518 2.8 27,273 4.9 30,894 6.2 41,798 8.8 11,194 3.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans 546,523 93.1 519,155 92.7 461,860 92.9 442,617 93.5 336,167 92.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Other Loans:
Consumer loans:
Guaranteed student loans 11,256 1.9 11,822 2.1 9,445 1.9 6,692 1.4 4,482 1.2
Automobile 6,062 1.1 5,651 1.0 4,814 1.0 2,777 0.6 2,662 0.7
Home equity and improvement 3,688 0.6 3,518 0.6 2,618 0.5 3,192 0.7 3,096 0.9
Other 5,921 1.0 5,272 1.0 4,513 0.9 3,681 0.8 3,479 1.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total Consumer loans 26,927 4.6 26,263 4.7 21,390 4.3 16,342 3.5 13,719 3.8
Commercial business loans 13,737 2.3 14,515 2.6 13,907 2.8 14,162 3.0 14,613 4.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total other loans 40,664 6.9 40,778 7.3 35,297 7.1 30,504 6.5 28,332 7.8
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans 587,187 100.0% 559,933 100.0% 497,157 100.0% 473,121 100.0% 364,499 100.0%
===== ===== ===== =====
Less:
Loans in process 22,383 22,316 35,739 38,879 3,722
Deferred fees and discounts 3,689 3,761 4,032 4,125 2,732
Allowance for loan losses 14,356 14,601 13,636 10,590 6,029
------- ------- ------- ------- -------
Total loans receivable, net $546,759 $519,255 $443,750 $419,527 $352,016
======= ======= ======= ======= =======
9
The following table shows the fixed- and adjustable-rate composition
of the Bank's loan portfolio at the dates indicated. The table is
based on information prepared in accordance with generally accepted
accounting principles.
June 30,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
Amount % Amount % Amount % Amount % Amount %
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(Dollars in thousands)
Fixed-Rate Loans:
Real Estate Loans
Residential
One- to four- family $ 13,212 2.2% $ 14,260 2.5% $ 15,488 3.1% $ 25,231 5.3% $ 28,742 7.9%
Other Residential 34,413 5.9 32,515 5.8 30,250 6.1 21,233 4.5 15,734 4.3
Commercial 25,374 4.3 12,774 2.3 14,438 2.9 25,314 5.4 32,680 9.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans 72,999 12.4 59,549 10.6 60,176 12.1 71,778 15.2 77,156 21.2
Consumer loans 12,844 2.2 11,706 2.1 9,282 1.8 6,260 1.3 5,944 1.6
Commercial business loans 415 0.1 994 0.2 864 0.2 522 0.1 1,620 0.4
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total fixed-rate loans 86,258 14.7 72,249 12.9 70,322 14.1 78,560 16.6 84,720 23.2
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Adjustable-Rate Loans:
Real Estate Loans
Residential
One- to four- family 236,136 40.2 229,510 41.0 187,670 37.7 180,749 38.2 $170,821 46.9
Other Residential 46,778 8.0 45,228 8.1 37,675 7.6 24,180 5.1 18,598 5.1
Commercial 147,104 25.0 120,470 21.5 91,689 18.4 68,004 14.4 37,623 10.3
Residential construction:
One- to four-family 13,455 2.3 13,319 2.4 18,338 3.7 17,433 3.7 10,223 2.8
Other residential 13,533 2.3 23,804 4.2 35,568 7.2 38,675 8.2 10,552 2.9
Commercial construction 16,518 2.8 27,273 4.9 30,744 6.2 41,798 8.8 11,194 3.1
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans 473,524 80.6 459,604 82.1 401,684 80.8 370,839 78.4 259,011 71.1
Consumer loans 14,083 2.4 14,559 2.6 12,108 2.5 10,082 2.1 7,775 2.1
Commercial business loans 13,322 2.3 13,521 2.4 13,043 2.6 13,640 2.9 12,993 3.6
------ ----- ------- ----- ------- ----- ------- ----- ------- -----
Total adjustable-rate loans 500,929 85.3 487,684 87.1 426,835 85.9 394,561 83.4 279,779 76.8
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total loans 587,187 100.0% 559,933 100.0% 497,157 100.0% 473,121 100.0% 364,499 100.0%
===== ===== ===== ===== =====
Less:
Loans in process 22,383 22,316 35,739 38,879 3,722
Deferred fees and discounts 3,689 3,761 4,032 4,125 2,732
Allowance for loan losses 14,356 14,601 13,636 10,590 6,029
------- ------- ------- ------- -------
Total loans receivable, net $546,759 $519,255 $443,750 $419,527 $352,016
======= ======= ======= ======= =======
10
The following schedule illustrates the contractual maturities of the
Bank's loan portfolio at June 30, 1996. Loans which have adjustable
interest rates are shown as maturing in the period during which the
loan is contractually due. This schedule does not reflect the effects
of possible prepayments or enforcement of due-on-sale clauses. The
table is based on information prepared in accordance with generally
accepted accounting principles.
Other Residential
One- to Four-Family and Other Commercial and
Residential Real Residential Commercial One- to Four-Family
Estate Loans Construction Construction Construction
Due During Weighted Weighted Weighted Weighted
Years Ended Average Average Average Average
June 30, Amount Rate Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
1997(1) $ 7,682 9.31% $ 21,534 8.97% $ 48,130 9.47% $13,455 9.33%
1998 545 8.80 6,648 8.99 17,526 9.66 -- 0.00
1999 1,204 9.03 7,766 8.61 22,771 9.49 -- 0.00
2000 and 2001 1,780 8.71 16,591 8.70 54,029 9.43 -- 0.00
2002 to 2006 10,974 8.34 4,059 8.88 21,014 9.71 -- 0.00
2007 to 2011 30,529 7.98 22,801 9.37 13,864 9.45 -- 0.00
2012 to 2022 77,281 8.03 15,328 8.56 11,647 8.98 -- 0.00
2023 and Following 119,353 7.51 -- -- 15 8.62 -- 0.00
------- ------- ------- ------
$249,348 $ 94,724 $188,996 $13,455
======= ======= ======= ======
Commercial
Consumer Business Total (2)
Due During Weighted Weighted Weighted
Years Ended Average Average Average
June 30, Amount Rate Amount Rate Amount Rate
(Dollars in thousands)
1997 (1) $ 9,310 8.29% $ 8,733 9.67% $108,844 10.31%
1998 4,483 9.19 1,927 9.91 31,126 9.85
1999 3,573 9.29 977 8.98 36,291 9.99
2000 and 2001 6,030 9.76 898 9.88 79,328 9.92
2002 to 2006 3,531 9.44 1,020 9.95 40,598 9.40
2007 to 2011 -- 0.00 182 10.50 67,376 8.83
2012 to 2022 -- 0.00 -- 0.00 104,256 8.21
2023 and Following -- 0.00 -- 0.00 119,368 7.05
------ ------ -------
$26,927 $13,737 $587,187
====== ====== =======
_____________________________
(1) Includes demand loans, loans having no stated maturity and
overdraft loans.
(2) Of the $478 million of loans due after June 30, 1997, $70
million, or 15%, have fixed rates of interest and $408 million, or
85%, have adjustable rates of interest.
11
Lending Activities-Environmental Issues
Loans secured with real property, whether commercial, residential
or other, may have a material, negative effect on the financial
position and results of operation of the lender if the collateral
is environmentally contaminated. The effect can be a result of,
but is not necessarily limited to, liability for the cost of
cleaning up the contamination imposed on the lender by certain
federal and state laws, a reduction in the borrower's ability to
pay because of the liability imposed upon it for any clean up
costs, a reduction in the value of the collateral because of the
presence of contamination or a subordination of security interests
in the collateral to a super priority lien securing the clean up
costs by certain state laws.
Management of the Bank is aware of the risk that the Bank may be
negatively affected by environmentally contaminated collateral and
attempts to control such risk through commercially reasonable
methods, consistent with guidelines arising from applicable
government or regulatory rules and regulations, and to a more
limited extent publications of the lending industry. Management
currently is unaware (without, in many circumstances specific
inquiry or investigation of existing collateral, some of which was
accepted as collateral before risk controlling measures were
implemented) of any environmental contamination of real property
securing loans in the Bank's portfolio that would subject the Bank
to any material risk. No assurance can be made, however, that the
Bank will not be adversely affected by environmental contamination.
Lending Activities - Residential Real Estate Lending
At June 30, 1996 and 1995, loans secured by residential real estate
totaled $331 million and $322 million, respectively, and
represented approximately 56% and 57%, respectively, of the Bank's
total loan portfolio. In fiscal 1996 and 1995, Great Southern
originated $55 million and $77 million, respectively, of
adjustable-rate mortgages. Fixed-rate mortgages are originated at
interest rates and on terms agreed to by investors in the secondary
market (generally the FHLMC or Fleet Mortgage Corp.) and promptly
sold, primarily with servicing released (primarily with servicing
retained prior to fiscal 1996) and without recourse, in order to
generate fee income and reduce the Bank's exposure to changes in
interest rates. In fiscal year 1996 and 1995, Great Southern
originated $34.9 million and $8.9 million, respectively, of fixed-
rate loans and sold $36.6 million and $8.7 million, respectively,
into the secondary market.
The Bank currently is originating adjustable-rate residential
mortgage loans primarily with one-year adjustment periods. Rate
adjustments are based upon changes in prevailing rates for one-year
U.S. Treasury securities, and are generally limited to 2% maximum
annual adjustments as well as a maximum aggregate adjustment over
the life of the loan. Accordingly, the interest rates on these
loans typically may not be as rate sensitive as is the Bank's cost
of funds. Generally, the Bank's adjustable-rate mortgage loans are
not convertible into fixed-rate loans, do not permit negative
amortization of principal and carry no prepayment penalty.
12
The Bank's portfolio of adjustable-rate mortgage loans also
includes a number of loans with different adjustment periods,
without limitations on periodic rate increases and rate increases
over the life of the loans or which are tied to other short-term
market indices. These loans were originated prior to the
standardization of adjustable-rate loan product criteria by large
secondary market purchasers. Due to the unseasoned nature of
adjustable-rate mortgage loans in the industry (i.e., such loans
have not been subject to an interest rate environment which causes
them to adjust to the maximum), such loans entail unquantifiable
risks resulting from potential increased payment obligations on the
borrower as a result of upward repricing. Further, the adjustable-
rate mortgages offered by Great Southern, as well as by many other
financial institutions, sometimes provide for initial rates of
interest below the rates which would prevail were the index used
for pricing applied initially. Compared to fixed-rate mortgage
loans, these loans are subject to increased risk of delinquency or
default as the higher, fully-indexed rate of interest subsequently
comes into effect in replacement of the lower initial rate. The
Bank has not experienced an increase in delinquencies in
adjustable-rate mortgage loans due to a relatively low interest
rate environment in recent years.
In underwriting one- to four-family residential real estate loans,
Great Southern evaluates both the borrower's ability to make
monthly payments and the value of the property securing the loan.
It is Great Southern's policy that all loans in excess of 80% of
the appraised value of the property be insured by a private
mortgage insurance company approved by Great Southern for the
amount of the loan in excess of 80% of the appraised value. In
addition, Great Southern requires borrowers to obtain title and
fire and casualty insurance in an amount not less than the amount
of the loan. Real estate loans originated by the Bank generally
contain a "due on sale" clause allowing the Bank to declare the
unpaid principal balance due and payable upon the sale of the
property securing the loan. In the case of fixed-rate loans, the
Bank generally enforces these due on sale clauses to the extent
permitted by law.
Lending Activities-Commercial Real Estate and Construction Lending
Commercial real estate lending has traditionally been a part of
Great Southern's business activities. Beginning in fiscal 1986,
Great Southern expanded its commercial real estate lending in order
to increase the yield on, and the proportion of interest rate
sensitive loans in, its portfolio. Starting early in fiscal 1988,
Great Southern reduced its originations of commercial real estate
loans due to the lower spreads available and the Bank's increased
levels of problem loans in this area. In addition, the Financial
Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") further limited the Bank's commercial real estate
lending, due to limits imposed on the amounts and types of loans
the Bank would be permitted to originate. See "Regulation".
Starting in fiscal 1992, Great Southern increased its originations
of commercial real estate and commercial business loans.
13
Great Southern expects to continue to maintain the current
percentage of commercial real estate and commercial business loans
in its total loan portfolio by originating loans secured by
commercial real estate and other commercial business assets,
subject to commercial real estate and other market conditions and
to applicable regulatory restrictions. See "Regulation" and "-
Qualified Thrift Lender Test" below.
At June 30, 1996 and 1995, loans secured by commercial real estate
totaled $172 million and $133 million, respectively, or
approximately 29.4% and 23.8%, respectively, of the Bank's total
loan portfolio. At June 30, 1996 and 1995, construction loans
secured by projects under construction and the land on which the
projects are located aggregated $43.5 million and $64.4 million,
respectively, or 7.4% and 11.5%, respectively, of the Bank's total
loan portfolio. Substantially all of the Bank's commercial real
estate loans have been originated with adjustable rates of
interest, a majority of which are tied to the Bank's prime rate.
At the date of origination, the amounts of the loan commitments
with respect to substantially all of these loans did not exceed 75%
of the appraised value of the properties securing the loans.
The Bank's construction loans generally have terms of one year or
less. The construction loan agreements for one- to four-family and
other residential projects generally provide that principal
payments are required as individual condominium units or single
family houses are built and sold to a third party in order that the
remaining loan balance as a proportion to the value of the
remaining security does not increase. Loan proceeds are disbursed
in increments as construction progresses. Generally, the amount of
each disbursement is based on the construction cost estimate of an
independent architect, engineer or qualified fee inspector who
inspects the project in connection with each disbursement request.
Normally, Great Southern's construction loans are made either as
the initial stage of a combination loan (i.e., with a commitment
from the Bank to provide permanent financing upon completion of the
project) or with a takeout obligation (i.e., with a commitment to
provide permanent financing) by a third party.
The Bank's commercial real estate and construction loans generally
involve larger principal balances than do its residential loans.
At June 30, 1996, 58 of the Bank's commercial real estate and
construction loans had net principal balances in excess of $1.0
million, with the largest being $6.2 million. The aggregate net
principal balance of all such loans having net principal balances
in excess of $1.0 million was $105 million at that date. Current
law subjects savings associations to the same loans-to-one borrower
restrictions that are applicable to national banks with limited
provisions for exceptions. In general, the national bank standard
restricts loans to a single borrower to no more than 15% of a
bank's unimpaired capital and unimpaired surplus, plus an
additional 10% if the loan is collateralized by certain readily
marketable collateral. (Real estate is not included in the
definition of "readily marketable collateral.") As computed on the
basis of the Bank's unimpaired capital and surplus at June 30,
1996, this limit was approximately $10.5 million. See "Regulation"
At June 30, 1996 the Bank was in compliance with the loans to one
borrower limit.
14
The table below sets forth, by type of security property, the
number and amount of Great Southern's commercial real estate and
construction loans at June 30, 1996. The amounts shown do not
reflect allowances for losses. See "- Classified Assets" and "-
Loan Delinquencies and Defaults" for a discussion of the Bank's
largest non-performing assets and items of concern. The table is
based on information prepared in accordance with generally accepted
accounting principles.
Number Original Outstanding Amount
of Loan Principal Undisbursed Non-
Loans Commitment Balance Amount Performing
----- ---------- ----------- ------------ ----------
(Dollars in thousands)
Commercial Real Estate Loans
Hotels/Motels 44 $ 50,894 $ 43,136 $ 131 $ --
Medical and long term care 24 22,026 21,564 4 --
Golf courses and recreational 30 25,962 22,819 3,506 --
Shopping centers 48 19,519 17,772 -- --
Commercial land development 104 44,802 23,334 238 --
Office buildings 48 23,292 18,694 231 --
Industrial real estate 33 8,919 7,300 97 --
Restaurants 35 14,431 12,832 144 1,407
Other 39 6,669 5,027 747 --
--- ------- ------- ----- -----
Total commercial real estate loans 405 216,514 172,478 5,098 1,407
--- ------- ------- ----- -----
Construction Loans
One- to four-family residential 130 13,455 6,682 6,064 121
Other residential 8 13,533 9,789 3,744 --
Commercial real estate:
Hotels/Motels 7 7,164 3,953 3,210 --
Commercial land development 15 3,518 3,036 482 851
Restaurants 2 2,650 1,422 1,228 --
Office buildings 1 1,412 -- 1,412 --
Medical and long term care 1 725 8 717 --
Other 10 1,759 1,331 428 --
--- ------- ------- ------ -----
Total construction loans 174 44,216 26,221 17,285 972
--- ------- ------- ------ -----
Total 579 $260,730 $198,699 $22,383 $2,379
=== ======= ======= ====== =====
15
Commercial real estate and construction lending generally affords
the Bank an opportunity to receive interest at rates higher than
those obtainable from residential lending and to receive higher
origination and other loan fees. In addition, commercial real
estate and construction loans are generally made with adjustable
rates of interest or, if made on a fixed-rate basis, for relatively
short terms. Nevertheless, commercial real estate lending entails
significant additional risks as compared with residential mortgage
lending. Commercial real estate loans typically involve large loan
balances to single borrowers or groups of related borrowers and
generally involve lower loan-to-value ratios. In addition, the
payment experience on loans secured by commercial properties is
typically dependent on the successful operation of the related real
estate project and thus may be subject, to a greater extent, to
adverse conditions in the real estate market or in the economy
generally.
Construction loans also involve additional risks attributable to
the fact that loan funds are advanced upon the security of the
project under construction, which is of uncertain value prior to
the completion of construction. Moreover, because of the
uncertainties inherent in estimating construction costs, delays
arising from labor problems, material shortages, and other
unpredictable contingencies, it is relatively difficult to evaluate
accurately the total loan funds required to complete a project, and
the related loan-to-value ratios. See also the discussion under
the headings "- Classified Assets" and "- Loan Delinquencies and
Defaults" below.
Lending Activities - Commercial Business Lending
Great Southern is authorized to make secured or unsecured loans for
commercial, corporate, business and agricultural purposes and to
engage in commercial leasing activities up to a maximum of 10% of
the institution's assets. At June 30, 1996 and 1995, respectively,
Great Southern had $13.7 million and $14.5 million in commercial
business loans outstanding, or 2.3% and 2.6%, respectively, of the
Bank's total loan portfolio. The largest amount of commercial
business loans outstanding to any one borrower or group of
affiliated borrowers at June 30, 1996, had a principal balance of
$1.7 million. Great Southern's commercial business lending
activities encompass loans with a variety of purposes and security,
including loans to finance accounts receivable, inventory and
equipment.
16
The following table sets forth information regarding the number and
amount of the Bank's commercial business loans as of June 30, 1996.
The amounts shown do not reflect allowances for losses. See "-
Classified Assets" and "- Loan Delinquencies and Defaults" for a
discussion of the Bank's largest non-performing assets and related
items. The table is based on information prepared in accordance
with generally accepted accounting principles.
Outstanding Amount
Number Principal Non-
of Loans Balance Performing
-------- ----------- ----------
(Dollars in thousands)
Secured Loans:
Accounts receivable,
inventory and equipment 78 $ 7,942 $ 144
Stocks and bonds 25 2,636 --
Deposit accounts and
promissory notes 26 1,630 --
Other 8 642 600
--- ------ ---
Total secured loans 137 12,850 744
Unsecured Loans 23 887 --
--- ------ ---
Total Commercial Business Loans 160 $13,737 $744
=== ====== ===
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her
employment and other income and which are secured by real property
whose value tends to be more easily ascertainable, commercial
business loans are of higher risk and typically are made on the
basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. Commercial business loans are
generally secured by business assets, such as accounts receivable,
equipment and inventory. As a result, the availability of funds
for the repayment of commercial business loans may be substantially
dependent on the success of the business itself. Further, the
collateral securing the loans may depreciate over time, may be
difficult to appraise and may fluctuate in value based on the
success of the business. At June 30, 1996, approximately $876,000
in principal balance of commercial business loans, or 0.15%, of
Great Southern's total loan portfolio was 30 days or more
delinquent.
17
The Bank's management recognizes the generally increased risks
associated with commercial business lending. Great Southern's
commercial business lending policy emphasizes complete credit file
documentation and analysis of the borrower's character, capacity to
repay the loan, the adequacy of the borrower's capital and
collateral as well as an evaluation of the industry conditions
affecting the borrower. Analysis of the borrower's past, present
and future cash flows is also an important aspect of Great
Southern's credit analysis. The majority of Great Southern's
commercial business loans have been to borrowers in southwestern
and central Missouri. Great Southern intends to continue its
commercial business lending in this geographic area.
As part of its commercial business lending activities, Great
Southern issues letters of credit and receives fees averaging
approximately 1% of the amount of the letter of credit per year.
At June 30, 1996, Great Southern had 34 letters of credit
outstanding in the aggregate amount of $8.9 million. Approximately
99% of the aggregate amount of these letters of credit were
secured, including one $8.2 million letter of credit, secured by
real estate, which was issued to enhance the issuance of housing
revenue refunding bonds.
Lending Activities - Consumer Lending
Great Southern management views consumer lending as an important
component of its business strategy. Specifically, consumer loans
generally have short terms to maturity, adjustable rates or both,
thus reducing Great Southern's exposure to changes in interest
rates, and carry higher rates of interest than do residential
mortgage loans. In addition, Great Southern believes that the
offering of consumer loan products helps to expand and create
stronger ties to its existing customer base.
Great Southern offers a variety of secured consumer loans,
including automobile loans, home equity loans and loans secured by
savings deposits. In addition, Great Southern also offers home
improvement loans, guaranteed student loans and unsecured consumer
loans. Consumer loans totaled $26.9 million and $26.3 million at
June 30, 1996 and 1995, respectively, or 4.6% and 4.7%,
respectively, of the Bank's total loan portfolio.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other
debts and an assessment of ability to meet existing obligations and
payments on the proposed loan. Although creditworthiness of the
applicant is of primary consideration, the underwriting process
also includes a comparison of the value of the security, if any, in
relation to the proposed loan amount.
18
Student loans are underwritten in compliance with the regulations
of the US Department of Education for the Federal Family Education
Loan Programs (FFELP). The FFELP loans are administered and
guaranteed by the Missouri Coordinating Board for Higher Education
as long as the Bank complies with the regulations. The Bank has
contracted with the Missouri Higher Education Loan Authority (the
"MOHELA") to originate and service these loans and to purchase
these loans during the grace period immediately prior to the loans
beginning their repayment period. This repayment period is
generally at the time the student graduates or does not maintain
the required hours of enrollment.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are
unsecured or secured by rapidly depreciable assets such as
automobiles. In such cases, any repossessed collateral for a
defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the
greater likelihood of damage, loss or depreciation. The remaining
deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, consumer loan
collections are dependent on the borrower's continuing financial
strength, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal
and state consumer bankruptcy and insolvency laws, may limit the
amount which can be recovered on such loans. Such loans may also
give rise to claims and defenses by a consumer loan borrower
against an assignee of such loan such as the Bank, and a borrower
may be able to assert against such assignee claims and defenses
which it has against the seller of the underlying collateral.
Applicable laws and regulations permit institutions to make secured
and unsecured consumer loans (which, together with any commercial
paper or corporate debt securities held by the Bank as permitted by
the OTS, may not exceed a maximum of 35% of the institution's
assets). Loans in excess of 30% of the assets may be invested only
in loans which are made by the institution directly to the original
obligor and with respect to which the institution does not pay any
finder, referral or other fee, directly or indirectly, to any third
party.
Originations, Purchases, Sales and Servicing of Loans
The Bank originates loans through internal loan production
personnel located in the Bank's main bank and branch offices.
Walk-in customers and referrals from real estate brokers and
builders are also important sources of loan originations. The
table below shows the dollar volume of loan originations for the
periods indicated. For the fiscal years ended June 30, 1996, 1995
and 1994, the table reflects approximately $31.5 million, $7.5
million, and $27 million of loans refinanced which were previously
included in the loan portfolio or were loans owned by investors and
serviced by the Bank. Due to the high level of adjustable-rate
loans refinanced into fixed-rate loans and the higher fixed-rate
19
loans refinanced into lower fixed-rates, management has included
the refinanced amounts in the origination table to more accurately
reflect the amount of originations and sales during all fiscal
years except June 30, 1992.
During the fiscal year ended June 30, 1996 the Bank originated $189
million adjustable-rate loans and $52 million fixed-rate loans
compared to $195 million adjustable-rate loans and $30 million
fixed-rate loans during the fiscal year ended June 30, 1995.
Management does not expect the high growth of originations
experienced during the past four years to continue. However, as
long as the lower interest rate environment continues, there is a
higher level of financing and refinancing expected than would exist
in a higher rate environment.
Great Southern also purchases whole real estate loans and
participation interests in real estate loans from the FHLMC as well
as private investors, such as other thrift institutions, banks and
life insurance companies. Great Southern may limit its ability to
control its credit risk when it purchases participations in such
loans. The terms of participation agreements vary; however,
generally Great Southern may not have direct access to the borrower
or information about the borrower, and the institution
administering the loan may have some discretion in the
administration of performing loans and the collection of non-
performing loans.
In fiscal 1996, 1995 and 1994, there were no loan purchases by the
Bank. In fiscal 1993, the Bank purchased 2 loans from another
financial institution, totaling $2.4 million in total principal
balance, secured by commercial real estate. In fiscal 1992, the
Bank purchased 26 loans from the Resolution Trust Corporation,
totaling $16.9 million in total principal balance, secured mainly
by other residential real estate and commercial real estate. At
June 30, 1996 and 1995, approximately $12.5 million, or 2.1% and
$14.8 million, or 2.6%, respectively, of the Bank's total loan
portfolio consisted of purchased loans.
Great Southern also sells whole real estate loans and participation
interests in real estate loans to the FHLMC as well as private
investors, such as other thrifts, banks and life insurance
companies. These loans and loan participations are generally sold
without recourse and for cash in amounts equal to the unpaid
principal amount of the loans or loan participations determined
using present value yields to the buyer, that generally produce
gains to the Bank upon sale and allow a margin for servicing
income. Loan participations are generally sold with Great Southern
retaining control of the administration of the loan. The Bank sold
whole real estate loans and loan participations in aggregate
amounts of $36.6 million, $8.7 million and $53.5 million during the
years ended June 30, 1996, 1995 and 1994, respectively. Sales of
whole real estate loans and participations in real estate loans
generally can be beneficial to the Bank since these sales may
generate income at the time of sale, produce future servicing
income, provide funds for additional lending and other investments,
and increase liquidity.
20
Great Southern also sells guaranteed student loans to the MOHELA at
the time the borrower is scheduled to begin making repayments on
the loans. In the past, these loans were generally sold with
limited recourse and for cash in amounts equal to the unpaid
principal amount of the loans. Beginning in July 1995, Great
Southern re-negotiated its agreement with the MOHELA and these
loans will generally be sold with limited recourse and for cash in
amounts equal to the unpaid principal amount of the loans and a
transfer fee based on average borrower indebtedness. The fee is
based on a sliding scale with a higher fee paid for a higher
average borrower indebtedness and a lower fee paid for a lower
average borrower indebtedness. The Bank sold guaranteed student
loans in aggregate amounts of $8.6 million, $5.0 million and $3.9
million during the years ended June 30, 1996, 1995 and 1994,
respectively. Sales of guaranteed student loans generally can be
beneficial to the Bank since these sales remove the burdensome
servicing requirements of these types of loans once the borrower
begins repayment.
Gains, losses and transfer fees on sales of loans and loan
participations are recognized at the time of the sale. When real
estate loans and loan participations sold have an average
contractual interest rate that differs from the agreed upon yield
to the purchaser (less the agreed upon servicing fee), resulting
gains or losses are recognized in an amount equal to the present
value of the differential over the estimated remaining life of the
loans. Any resulting discount or premium is accreted or amortized
over the same estimated life using a method approximating the level
yield interest method. When real estate loans and loan
participations are sold with servicing released, as the Bank did
beginning in fiscal 1996, an additional fee is received for the
servicing rights. Net gains and transfer fees on sales of loans
for the years ended June 30, 1996, 1995 and 1994 were $540,000
$91,300 and $565,000, respectively.
Prior to fiscal 1996, when whole real estate loans were sold, the
Bank typically retained the responsibility for servicing the loans.
The Bank receives a servicing fee for performing these services.
The Bank had the servicing rights for approximately $80 million,
$88.3 million and $94.8 million at June 30, 1996, 1995 and 1994,
respectively, of loans owned by others. The servicing of these
loans generated net servicing fees to the Bank for the years ended
June 30, 1996, 1995 and 1994 of $316,000, $347,000 and $338,000,
respectively. When guaranteed student loans are sold, the Bank
typically releases the responsibility for servicing the loans to
the MOHELA.
21
In addition to interest earned on loans and loan origination fees,
the Bank receives fees for loan commitments, letters of credit,
prepayments, modifications, late payments, transfers of loans due
to changes of property ownership and other miscellaneous services.
The fees vary from time to time, generally depending on the supply
of funds and other competitive conditions in the market. Fees from
prepayments, commitments, letters of credit and late payments
totaled $487,000, $470,000 and $566,000 for the years ended June
30, 1996, 1995 and 1994, respectively. Loan origination fees, net
of related costs, are accounted for in accordance with Statement of
Financial Accounting Standards No. 91 "Accounting for Nonrefundable
Fees and Costs Associated With Originating or Acquiring Loans and
Initial Direct Costs of Leases." Loan fees and certain direct loan
origination costs are deferred, and the net fee or cost is
recognized in interest income using the level-yield method over
the contractual life of the loan. For further discussion of this
issue see Note 1 of Notes to Consolidated Financial Statements in
the Annual Report to Stockholders, which portions are incorporated
herein by reference.
The table on the following page shows the loan origination,
purchase, sale and repayment activities of the Bank for the periods
indicated. The table is based on information prepared in
accordance with generally accepted accounting principles.
22
Year Ended June 30,
---------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
(Dollars in thousands)
Loans Originated:
Adjustable-Rate Loans:
Real Estate:
One- to four-family residential $ 54,699 $ 76,753 $ 53,077 $ 51,912 $ 31,968
Other Residential 28,977 27,324 38,315 47,597 10,734
Commercial 70,812 49,473 38,141 68,677 14,832
Construction 20,237 21,253 28,524 22,645 4,153
Non-real Estate:
Consumer loans 8,383 7,848 8,519 6,744 6,113
Commercial business loans 9,742 12,741 6,044 7,228 9,653
------- ------- ------- ------ ------
Total adjustable-rate 192,850 195,392 155,582 204,803 77,453
------- ------- ------- ------ ------
Fixed-Rate Loans:
Real Estate:
One- to four-family residential 34,855 8,927 49,288 44,554 20,911
Other Residential 5,499 0 7,044 3,692 7,403
Commercial 1,787 2,031 3,787 3,595 4,273
Non-real Estate:
Consumer loans 9,863 10,112 8,944 3,923 2,647
Commercial business loans 92 9,039 2,295 199 347
------- ------- ------- ------- ------
Total fixed-rate 52,096 30,109 71,358 55,963 35,581
------- ------- ------- ------- ------
Total loans originated 244,946 225,501 243,978 260,766 113,034
Loans Purchased:
Real Estate loans (1) 0 0 0 2,395 16,883
------- ------- ------- ------- ------
Total additions 244,946 225,501 243,978 263,161 129,917
------- ------- ------- ------- ------
Loans Sold:
Real Estate loans (2) 36,643 8,686 53,544 40,487 20,072
Consumer loans (3) 8,566 5,036 3,887 2,289 1,761
------- ------- ------- ------- -------
Total sales 45,209 13,722 57,431 42,776 21,833
Principal repayments 169,658 143,020 160,206 113,156 57,428
Decrease (increase) other items, net 2,825 5,983 2,306 (1,393) 29,829
------- ------- ------- ------- ------
Total reductions 217,692 162,725 219,943 154,539 109,090
------- ------- ------- ------- ------
Net increase $ 27,254 $ 62,776 $ 24,035 $108,622 $ 20,827
======= ======= ======= ======= ======
(1) Substantially all of the loans for June 30, 1992 are multifamily residential or health care loans.
Substantially all of the loans for June 30, 1993 are commercial real estate loans.
(2) Substantially all of these loans are fixed-rate, one- to four-family residential loans.
(3) Substantially all of these loans are guaranteed student loans where the borrowers graduated and the loans
were sold prior to the beginning of repayment.
23
Allowance for Losses on Loans and Foreclosed Assets
Management periodically reviews Great Southern's allowance for loan
losses, considering numerous factors, including, but not
necessarily limited to, general economic conditions, loan portfolio
composition, prior loss experience, and independent appraisals.
Further allowances are established when management determines that
the value of the collateral is less than the amount of the unpaid
principal of the related loan plus estimated costs of the
acquisition and sale or when management determines a borrower of an
unsecured loan will be unable to make full repayment. Allowances
for estimated losses on foreclosed assets (real estate and other
assets acquired through foreclosure) are charged to expense, when,
in the opinion of management, any significant and permanent decline
in the market value of the underlying collateral reduces such
market value to less than the carrying value of the asset.
The Bank has increased its lending in the Branson Lakes area during
recent years primarily due to the substantial growth in the area.
While management believes the loans it has funded have been
originated pursuant to sound underwriting standards, and
individually have no unusual credit risk, the short period of time
in which the Branson Lakes area has grown and the lower than
expected increase in tourists visiting the area during recent years
causes some concern as to the credit risk associated with the
Branson Lakes area as a whole. Due to this concern and the overall
growth of the commercial real estate and other residential real
estate loan portfolios, management provided increased levels of
loan loss allowances in recent years.
The allowances for losses on loans and foreclosed assets are
maintained at an amount management considers adequate to provide
for potential losses. Although management believes that it uses
the best information available to make such determinations, future
adjustments to the allowances for losses on loans and foreclosed
assets may be necessary, and net income could be significantly
affected, if circumstances differ substantially from the
assumptions used in making the initial determinations.
At June 30, 1996 and 1995, Great Southern had an allowance for
losses on loans and foreclosed assets of $15.4 million and $15.5
million, respectively, of which $1.6 million and $2.0 million,
respectively, had been allocated as an allowance for specific
loans, $1.1 million and $900,000, respectively, had been allocated
for foreclosed assets and $800,000 and $0, respectively, had been
allocated for impaired loans. The allowances are discussed further
in Notes 3 and 4 of the Notes to Consolidated Financial Statements
and Management's Discussion and Analysis of Financial Condition and
Results of Operations in the Annual Report to Stockholders, which
portions are incorporated herein by reference.
24
The following table sets forth an analysis of the Bank's allowance
for losses on loans showing the details of the allowance by types
of loans and the allowance balance by loan type. The table is
based on information prepared in accordance with generally accepted
accounting principles.
Year Ended June 30,
-----------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(Dollars in thousands)
Balance at beginning of period $14,601 $13,636 $10,590 $ 6,029 $ 4,732
------ ------ ------ ------ ------
Charge-offs:
One- to four-family residential 189 13 85 189 189
Other residential 1,072 474 101 25 0
Commercial real estate 509 227 33 70 1,582
Consumer 198 48 33 28 272
Commercial business 25 120 32 106 18
------ ------ ------ ------ ------
Total charge-offs 1,993 882 284 418 2,061
------ ------ ------ ------ ------
Recoveries:
One- to four-family residential 33 0 8 0 13
Commercial real estate 136 442 181 183 142
Consumer 48 22 59 53 74
Commercial business 80 64 57 66 272
------ ------ ------ ------ ------
Total recoveries 297 528 307 302 501
------ ------ ------ ------ ------
Net charge-offs (recoveries) 1,696 354 (23) 116 1,560
Provision for losses on loans
(charged to expense) 1,451 1,319 3,023 4,677 2,857
------ ------ ------ ------ ------
Balance at end of period $14,356 $14,601 $13,636 $10,590 $ 6,029
====== ====== ====== ====== ======
Ratio of net charge-offs to
average loans outstanding 0.32% 0.07% (0.01%) 0.03% 0.46%
==== ==== ==== ==== ====
25
The allowance for losses on loans at the date indicated is summarized as follows. The table is based on
information prepared in accordance with generally accepted accounting principles.
June 30,
-----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
---------------- ---------------- ---------------- ----------------- ----------------
% of % of % of % of % of
Loans to Loans to Loans to Loans to Loans to
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands)
One- to four-family
residential and
construction $ 757 44.8% $ 670 45.9% $ 363 44.6% $ 320 47.2% $ 104 57.5%
Other residential
and construction 503 16.1 480 8.1 668 20.8 557 17.8 121 12.3
Commercial real estate
and construction
and commercial
business 7,875 34.5 7,596 31.3 7,394 30.3 3,995 31.5 1,901 26.4
Consumer 488 4.6 546 4.7 414 4.3 359 3.5 411 3.8
Unallocated 4,733 0.0 5,309 0.0 4,797 0.0 5,359 0.0 3,492 0.0
------ ----- ------ ----- ------ ----- ----- ----- ----- -----
Total $14,356 100.0% $14,601 100.0% $13,636 100.0% $10,590 100.0% $6,029 100.0%
====== ===== ====== ===== ====== ===== ===== ===== ===== =====
Loan Delinquencies and Defaults
When a borrower fails to make a required payment on a loan, the
Bank attempts to cause the delinquency to be cured by contacting
the borrower. In the case of loans secured by residential real
estate, a late notice is sent 15 days after the due date. If the
delinquency is not cured by the 30th day, a delinquent notice is
sent to the borrower. Additional written contacts are made with
the borrower 45 and 60 days after the due date. If the delinquency
continues for a period of 65 days, the Bank usually institutes
appropriate action to foreclose on the collateral. The actual time
it takes to foreclose on the collateral varies depending on the
particular circumstances and the applicable governing law. If
foreclosed, the property is sold at public auction and may be
purchased by the Bank. Delinquent consumer loans are handled in a
generally similar manner, except that initial contacts are made
when the payment is five days past due and appropriate action may
be taken to collect any loan payment that is delinquent for more
than 15 days. The Bank's procedures for repossession and sale of
consumer collateral are subject to various requirements under the
applicable consumer protection laws as well as other applicable
laws and the determination by the Bank that it would be beneficial
from a cost basis.
26
Delinquent commercial business loans and loans secured by
commercial real estate are initially handled by the loan officer in
charge of the loan, who is responsible for contacting the borrower.
The Senior Vice President in charge of commercial lending also
works with the commercial loan officers to see that necessary steps
are taken to collect such delinquent loans. In addition, the Bank
has a Problem Loan Committee which meets at least monthly which
reviews all commercial loans 30 days or more delinquent as well as
other loans not 30 days delinquent which management feels may
present possible collection problems. If an acceptable work out of
a delinquent commercial loan cannot be agreed upon, the Bank may
initiate foreclosure on any collateral securing the loan. However,
in all cases, whether a commercial or other loan, the prevailing
circumstances may be such that management may determine it is in
the best interest of the Bank not to foreclose on the collateral.
Delinquent loans at June 30, 1996 were $12.1 million compared to
$11.7 million at June 30, 1995. This increase is mainly
attributable to an increase in the 60-89 day and 90 days and over
delinquent categories offset by a decrease in the 30-59 day
category. The increase in total delinquencies mainly occurred in
the one- to four-family real estate and other residential real
estate, offset by a decrease in the commercial real estate. For
loans that Great Southern is servicing, the owners generally
prescribe the collection procedures. Great Southern may act on the
owners behalf in the collection process.
The table on the following page sets forth information concerning
delinquent mortgage and other loans held in the Bank's portfolio at
June 30, 1996, as well as comparative information for June 30,
1995, in dollar amount and as a percentage of the Bank's total loan
portfolio. The amounts presented represent the total outstanding
principal balances of the related loans rather than the actual
payment amounts which are overdue. For related information, see
the discussion under the heading "- Allowance for Losses on Loans
and Foreclosed Assets" above. The table is based on information
prepared in accordance with generally accepted accounting
principles.
27
Loans Delinquent for
---------------------------------------
90 Days Total
30-59 60-89 and Delinquent
Days Days Over Loans
------- ------- ------- ----------
(Dollars in thousands)
One- to four-family
residential real estate:
Number of loans 23 15 15 53
Amount $1,665 $1,437 $1,195 $ 4,297
Percent 0.28% 0.25% 0.20% 0.73%
Other residential:
Number of loans 1 1 2 4
Amount $ 675 $ 259 $ 934 $ 1,868
Percent 0.12% 0.04% 0.16% 0.32%
Commercial real estate:
Number of loans 2 5 4 11
Amount $ 238 $1,839 $1,407 $ 3,484
Percent 0.04% 0.31% 0.24% 0.59%
Construction:
Number of loans 1 2 3 6
Amount $ 11 $ 30 $ 972 $1,013
Percent 0.00% 0.01% 0.16% 0.17%
Consumer:
Number of loans 73 30 59 162
Amount $ 235 $ 76 $ 202 $ 513
Percent 0.04% 0.01% 0.04% 0.09%
Commercial business:
Number of loans 2 3 5 10
Amount $ 106 $ 26 $ 744 $ 876
Percent 0.02% 0.00% 0.13% 0.15%
Total June 30, 1996:
Number of loans 102 56 88 246
Amount $2,930 $3,667 $5,454 $12,051
Percent 0.50% 0.62% 0.93% 2.05%
Total June 30, 1995:
Number of loans 102 29 95 226
Amount $7,144 $1,476 $3,065 $11,685
Percent 1.28% 0.26% 0.55% 2.09%
28
Classified Assets
Federal regulations provide for the classification of loans and
other assets such as debt and equity securities considered to be of
lesser quality as "substandard," "doubtful" or "loss" assets. The
regulations require insured institutions to classify their own
assets and to establish prudent general allowances for losses from
assets classified "substandard" or "doubtful." For the portion of
assets classified as "loss," an institution is required to either
establish specific allowances of 100% of the amount classified or
charge such amount off its books. Assets which do not currently
expose the insured institution to sufficient risk to warrant
classification in one of the aforementioned categories but possess
potential weaknesses are required to be designated "special
mention" by management. In addition, the OTS may require the
establishment of a general allowance for losses based on assets
classified as "substandard" and "doubtful" or based on the general
quality of the asset portfolio of an institution. Following are
the total classified assets per the Bank's internal asset
classification list. There were no significant off-balance sheet
items classified at June 30, 1996. The Bank's significant
classified assets are discussed individually below.
Total Allowance
Asset Category Substandard Doubtful Loss Classified for Losses
----------------------- ----------- -------- ---- ---------- ----------
(Dollars in thousands)
Loans and off-balance
sheet risks $10,037 $ 0 $142 $10,179 $14,356
Foreclosed assets 10,755 0 0 10,755 1,086
------ ----- --- ------ ------
Total $20,792 $ 0 $142 $20,934 $15,442
====== ===== === ====== ======
The table below sets forth the amounts and categories of non-
performing assets (classified loans which are not performing under
regulatory guidelines and all foreclosed assets, including assets
acquired in settlement of loans) in the Bank's loan portfolio at
the times indicated. Loans are placed on non-accrual status when
the loan becomes 90 days delinquent or when the collection of
principal, interest, or both, otherwise becomes doubtful. For all
years presented, the Bank has not had any (i) accruing loans
delinquent more than 90 days or (ii) troubled debt restructurings,
which involve forgiving a portion of interest or principal on any
loans or making loans at a rate materially less than that of market
rates. It has been the Bank's practice to sell its foreclosed
assets to new borrowers and originate loans with higher loan-to-
value ratios than those generally required for the Bank's one- to
four-family residential loans. Starting in fiscal 1993, the Bank
adopted a policy of presenting such loans in the non-performing
assets category until sufficient payments of principal and interest
are received or the loan has a 90% loan-to-value ratio.
Substantially all of the loans presented in this category are
performing and the Bank is accounting for the interest on these
loans on the accrual method.
29
June 30,
-------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(Dollars in thousands)
Non-accruing loans:
One- to four-family residential $ 1,195 $ 149 $ 341 $ 739 $ 1,212
Other residential 934 -- 200 198 202
Commercial real estate 1,407 2,004 4,500 766 2,928
One- to four-family construction 121 -- -- 99 --
Consumer 202 260 195 52 44
Commercial business 744 652 786 64 220
Commercial construction 851 -- -- -- --
------ ------ ------ ------ ------
Total non-accruing loans 5,454 3,065 6,022 1,918 4,606
Loans in connection with sales of
foreclosed assets 453 775 1,321 2,541 --
------ ------ ------ ------ ------
Total non-performing loans 5,907 3,840 7,343 4,459 4,606
------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family residential 517 695 1,440 650 921
Other residential 7,121 3,359 1,709 198 --
Commercial real estate 3,309 4,878 6,180 9,451 12,582
Construction -- -- -- -- --
Commercial business -- -- -- -- --
------ ------ ------ ------ ------
Total foreclosed assets 10,947 8,932 7,620 10,101 13,503
------ ------ ------ ------ ------
Total non-performing assets $16,854 $12,772 $14,963 $14,560 $18,109
====== ====== ====== ====== ======
Total non-performing assets as a
percentage of average total assets 2.45% 2.18% 2.83% 3.04% 3.89%
==== ==== ==== ==== ====
For fiscal 1996 and 1995, approximately $135,000 and $185,000,
respectfully, was included in interest income with respect to the
above non-accruing loans. If the loans had been current in
accordance with their original loan terms, interest income for
fiscal 1996 and 1995 of approximately $444,000 and $735,000,
respectfully, would have been recorded with respect to the above
non-accruing loans. In addition, there was one loan that is being
accounted for under the cost recovery method that has no principal
balance which interest income of $604,000 and $19,000 was received
and reported in fiscal 1996 and 1995, respectively.
30
The level of non-performing assets are primarily attributable to
the Bank's commercial real estate, other residential, construction
and commercial business lending activities. These activities
generally involve significantly greater credit risks than single-
family residential lending. The level of non-performing assets
increased at a rate greater than that of the Bank's commercial
lending portfolio in fiscal 1996, and at a rate less than that of
the Bank's commercial lending portfolio in fiscal 1992, 1993, 1994
and 1995. For a discussion of the risks associated with these
activities, see the discussions under the heading "- Commercial
Real Estate and Construction Lending" and "- Commercial Business
Lending" above.
As of June 30, 1996, the Bank had approximately $5.5 million of
non-accruing loans compared to $3.1 million at June 30, 1995 and
$6 million at June 30, 1994. The following is a summary of each
non-accruing loan of $750,000 or more in principal balance at June
30, 1996. Where there is more than one loan to the same borrower
on the same project, these loans are combined for this discussion.
1. Taney County, Missouri - Residential single-family
development. In June 1993, the Bank originated a $1.2 million loan
for development of 100 residential single-family lots on 204 acres
and additional loans from August 1993 to September 1995 totaling
$3.4 million for construction of 49 single-family homes. 43 of
these homes were sold throughout the two year period, but at a
slower pace than anticipated. The Bank began foreclosure
proceedings and the borrower declared bankruptcy. The Bank is in
the process of reaching an agreement with the borrower to sell one
house by the 15th of each month starting in December 1996 for four
months, with the remaining two houses to be sold by June 15, 1997,
and a complete auction of the remaining property in July 1997. If
the borrower does not comply with these terms, they will be
required to have a complete auction within 30 days of the first
violation of the agreement or allow the Bank to foreclose on the
property. The principal balance at June 30, 1996 was $1.3 million.
2. Branson, Missouri - Restaurant. In June 1993, the Bank
originated two loans totaling $1 million for the construction and
equipping of a 1950's diner-style restaurant located in Branson,
Missouri. An additional $30,000 was originated in September 1994
to complete the equipping of the restaurant and provide temporary
operating cash. The borrower experienced lower than anticipated
revenues in the beginning and was unable to make the required
payments due to the lack of adequate cash flows. The borrower has
experienced increased business during the 1996 season and has paid
the majority of the delinquent payments on these loans. If the
borrower continues with the scheduled payments for the remainder of
the 1996 season, the loans will have been brought current. The
principal balance was $984,000 at June 30, 1996 compared to
$998,000 at June 30, 1995.
31
3. Lake Ozark, Missouri - Residential development. In 1990,
the Bank originated a $2.3 million loan for the purpose of land
development and construction of condominiums and related amenities
located adjacent to an 18 hole Arnold Palmer designed golf course
located at the Lake of the Ozarks, near Osage Beach, Missouri. The
Bank subsequently provided additional loans totaling $2.3 million
in 1992 to refinance existing debt on the golf course and for the
construction of a club house and additional loans totaling $675,000
in 1993 to provide working capital and Tax Increment Financing
("TIF") of various development costs. Repayment was to come from
development and sale of condominium units, operating income of the
golf course which opened in late summer of 1992 and collection of
taxes assigned to the TIF credit. The Company foreclosed on the
golf course and club house in July 1995 and sold these properties
in March 1996.
The residential development portion of this project, which was a
loan to a separate borrower of $1.1 million, was still recorded as
a loan at June 30, 1996 as the borrower was in chapter 11
bankruptcy. Subsequent to June 30, 1996, the property securing
this loan was auctioned at a bankruptcy court sponsored sale and
purchased by independent third parties for approximately $1.1
million. The borrower has repaid this loan in full. At June 30,
1996, the principal balance was $934,000 compared to a carrying
value as an in-substance foreclosure in foreclosed assets of
$960,000 at June 30, 1995.
The above balances do not include the TIF loan of approximately
$600,000 at both June 30, 1996 and 1995 which is included in the
non-accrual loans. Subsequent to June 30, 1996, all delinquent
payments on the TIF loan were received and the loan was brought
current.
As of June 30, 1996, the Company had approximately $9.9 million in
book value (net of $1,086,000 in reserves) of foreclosed assets
compared to $8 million (net of $933,000 in reserves) at June 30,
1995. The following is a summary of the foreclosed assets with a
carrying value of $500,000 or more at June 30, 1996.
1. Branson, Missouri - The Woodlands Condominium Units . In
August 1993, the Bank originated loans totaling $1.7 million for
the refinancing of a 30 acre acquisition loan, for development
costs of infrastructure, and construction of one 10-unit
condominium building overlooking Lake Taneycomo. In June 1994, the
Bank originated an additional $5.4 million for refinancing of the
club house, development of an additional 5 acres, and construction
of five condominium buildings with a total of 52 units. The
borrower presented contracts showing several of these units as pre-
sold at the time of obtaining the financing, however, these
contracts did not materialize once the units were complete. Due to
the overbuilding of the market, the borrower was unable to sell the
units and make the required payments on these loans. The Bank
began foreclosure proceedings and the borrower filed bankruptcy.
32
After a short period of negotiation, the Bank and the borrower
worked out an agreement and the Bank took a deed-in-lieu of
foreclosure on the property. Subsequent to June 30, 1996, the Bank
sold this property for $4.7 million with 100% financing. The new
owner has already sold two units and has an additional 9 units
under contract or with contracts pending. At June 30, 1996, the
carrying value was $4.3 million, compared to a loan balance at June
30, 1995 of $5.6 million. The decrease was the result of a charge
down of $1.4 million at the time of foreclosure.
2. Branson, Missouri - Brighton Place Motel. The Bank
originated a $1.6 million loan in April 1986 to provide
construction and permanent loan financing on a 77-unit motel. In
1988, the motel was sold and the Bank's loan was assumed by the
purchaser. The borrower went through chapter 11 bankruptcy and the
property was foreclosed in October 1995. The Bank has operated the
property since foreclosure and will continue to do so until the
property is ultimately sold. The carrying value of the property
was approximately $1.6 million at June 30, 1996 compared to a
principal balance on the loan of an equal amount at June 30, 1995.
3. Branson, Missouri - Suncrest Condominium Units. In August
1992, the Bank originated an $800,000 loan for the construction of
15 condominium units, a club house and swimming pool. In May 1993,
the Bank originated an additional $1.4 million loan to construct an
additional 18 condominium units. The borrower was unable to
perform on the loans and the Bank repossessed the property along
with an additional 6.2 acres. The carrying value at June 30, 1996
was $1.2 million compared to $1.5 million at June 30, 1995. The
reduction was due to additional reserves allocated to this
property.
4. Taney County, Missouri - Brotherton residential development.
In November 1993, the Bank originated loans totaling $1.5 million
for the development of a 62 lot residential development and the
construction of 20 homes. In September 1994, an additional
$500,000 was originated to construct another 7 homes and three
foundations. Due to an overbuilding in the market, only 13 homes
were sold and these sales were inadequate to make the required
payments. The Bank foreclosed and currently has 13 completed
houses, 15 undeveloped acres, one single-family lot, one commercial
lot, one patio home lot and four lots with foundations. The
principal balance was $1.3 million at June 30, 1996.
5. Branson, Missouri - Clevenger Cove campground. In 1984, the
Bank originated a $1.3 million loan, secured by a 53-acre vacation
camp resort near Branson, Missouri. The Bank subsequently provided
additional loans totaling approximately $200,000 for working
capital purposes. These additional loans have been charged off by
the Bank. The Bank foreclosed on the property in June 1988. In
February 1991, the Bank sold the property with 100% financing, with
the property as collateral. The borrower has struggled with this
project and the Bank is in the process of taking back the property
by way of a deed-in-lieu of foreclosure. At June 30, 1996, the
carrying value of the property was approximately $600,000 compared
to $967,000 at June 30, 1995. This decrease was due to an
additional allocation of reserves on the property.
33
6. Springfield, Missouri - Ellis Trucking terminal. In 1989,
the Bank originated a loan for the construction and permanent loan
financing of a truck terminal and office building and for
additional working capital needs. The business closed in late 1991
and the loan was modified to allow acceptance of lease payments for
a two year period to allow the borrower to market the property for
sale. The property was later determined to have little or no
equity above the loan balance and was recorded as an in-substance
foreclosure. The Bank accepted a deed in lieu of foreclosure in
fiscal year 1996.
The property has two underground storage tanks, one for fuel
storage and one for waste oil storage. Both tanks are currently
empty and not in use. The tanks were installed new in 1989 with
all applicable Department of Natural Resources ("DNR") permits in
place. They are fiberglass lined tanks and were installed
according to Underground Storage Tank ("UST") standards with a
computerized leak detection system and a guarantee by the installer
of compliance with all DNR and UST standards until the year 2001.
There has also been storage in the past of 50 gallon drums of waste
oil on the property. While there appears to be no material
environmental problems with the location, an environmental study on
the property has not been prepared. Accordingly, the environmental
exposure to the Company, if any, has not been determined.
The property is currently leased with right of first refusal
options held by the tenants. Subsequent to June 30, 1996, the Bank
entered into a contract with an independent third party to sell
this property, subject to the tenants' right of first refusal, for
$675,000 with approximately 25% cash down payment and financing of
the balance at market terms. The property had a carrying value of
$550,000 at both June 30, 1996 and 1995.
The Bank encounters certain environmental risks in its lending and
related activities. Under federal and state environmental laws,
lenders may become liable for the costs of cleaning up hazardous
materials found on property held as collateral as well as property
acquired at foreclosure on defaulted loans. This issue is
discussed in more detail under the heading "Lending Activities-
Environmental Issues" above.
34
Investment Activities
Federally-chartered thrift institutions have authority to invest in
various types of liquid assets, including U. S. Treasury
obligations and securities of various federal agencies,
certificates of deposit at insured institutions, obligations issued
by a State (with a 10% limit on obligations of a single issuer)
that qualify as liquid assets (see "Liquidity") and certain other
assets. The Bank's authority to invest in commercial paper and
corporate debt securities is subject to its overall 35% consumer
loan limit. See "Lending Activities -- Consumer Lending" above.
Great Southern must maintain minimum levels of investments that are
liquid assets as specified by the OTS as discussed under the
heading "Regulation-Liquidity" below. Liquidity may increase or
decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans.
Historically, the Bank has maintained its liquid assets above the
minimum requirements imposed by the regulations and at a level
believed adequate to meet requirements of normal daily activities,
repayment of maturing debt and potential deposit outflows. Cash
flow projections are regularly reviewed and updated to assure that
adequate liquidity is maintained. For further discussion, see the
discussion under the heading "Regulation-Liquidity" below and Note
1 of Notes to Consolidated Financial Statements included in the
Annual Report to Stockholders, which portions are incorporated
herein by reference.
The Bank's investment securities portfolio at June 30, 1996 and
1995 contained no securities (tax exempt or of any issuer) with an
aggregate book value in excess of 10% of the Bank's retained
earnings, excluding those issued by the United States Government,
or its agencies.
On August 15, 1995, the OTS adopted its final rule on regulatory
capital-stockholders' equity. This rule requires investment and
equity securities to be segregated into the following three
categories: trading, held-to-maturity and available-for-sale.
Trading securities are purchased and held principally for the
purpose of reselling them within a short period of time. The
unrealized gains and losses are included in earnings.
Investments classified as held-to-maturity are accounted for at
amortized cost, but an institution must have both positive intent
and the ability to hold those securities to maturity. There are
very limited circumstances under which securities held-to-maturity
can be sold without jeopardizing the cost basis accounting for the
remainder of the securities in this category. These circumstances
include a significant deterioration of the issuer's
creditworthiness; changes in the tax law that reduce the tax-exempt
status of interest on the debt securities; major business
combinations that require a significant disposition of assets to
maintain the institutions' existing interest rate risk or credit
risk policy; and certain changes in statutory or regulatory
investment authority or capital requirements. Any security that
might be sold in response to changes in the market interest rates,
changes in the security's prepayment risk, increases in loan demand
or general liquidity needs or similar factors would not be
classified as held-to-maturity.
35
Securities not classified as either trading or held-to-maturity are
considered available-for-sale. Unrealized gains and losses on the
available-for-sale securities are excluded from earnings and
reported as a net amount in a separate component of stockholders'
equity until realized.
As of June 30, 1996 and 1995, the Bank held approximately $49.2
million and $47 million, respectively, in principal amount of
investment securities which the Bank intends to hold until
maturity. As of such dates, these securities had a market value of
approximately $49.3 million and $47.3 million, respectively. In
addition, as of June 30, 1996 and 1995, the Company held
approximately $4.7 million and $3.1 million, respectively, in
principal amount of investment securities which the Company
classified as available-for-sale. The implementation of the OTS
policy statement has not had a material impact on the Bank's
financial condition or results of operations since management has
historically purchased securities with the intent of holding until
maturity. This issue is discussed further under the heading
"Regulation-Accounting" below and in Notes 1 and 2 of Notes to
Consolidated Financial Statements in the Annual Report to
Stockholders, which portions are incorporated herein by reference.
The amortized cost and approximate fair values of, and gross
unrealized gains and losses on, investment securities at the dates
indicated are summarized as follows. The table is based on
information prepared in accordance with generally accepted
accounting principles.
June 30, 1996
--------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----------
(Dollars in thousands)
AVAILABLE-FOR-SALE SECURITIES:
Equity securities $4,498 $259 $102 $4,656
===== === === =====
HELD-TO-MATURITY SECURITIES:
U.S. Treasury $ 6,902 $ 7 $ 22 $ 6,887
U.S. government
agencies and corporations 41,831 159 35 41,955
States and political subdivisions 449 0 0 449
------ --- --- ------
Total held-to-maturity securities $49,182 $166 $ 57 $49,291
====== === === ======
36
June 30, 1995
--------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----------
(Dollars in thousands)
AVAILABLE-FOR-SALE SECURITIES:
Equity securities $2,498 $593 $ 0 $3,091
===== === === =====
HELD-TO-MATURITY SECURITIES:
U.S. Treasury $ 1,267 $ 20 $ 0 $ 1,287
U.S. government agencies and corporations 45,247 334 59 45,522
States and political subdivisions 456 0 0 456
------ --- --- ------
Total held-to-maturity securities $46,970 $354 $ 59 $47,265
====== === === ======
June 30, 1994
--------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----------
(Dollars in thousands)
HELD-TO-MATURITY SECURITIES:
U.S. Treasury $ 8,018 $ 0 $ 42 $ 7,976
U.S. government agencies and corporations 39,730 1 274 39,457
States and political subdivisions 463 0 0 463
Equity securities 6 0 0 6
------ --- --- ------
Total held-to-maturity securities $48,217 $ 1 $316 $47,902
====== === === ======
(1) See "Regulation-Federal Home Loan Bank System" and Note 2 of
Notes to Consolidated Financial Statements in the Annual Report to
Stockholders, which portions are incorporated herein by reference.
The following table presents the contractual maturities and
weighted average yields of held-to-maturity securities at June 30,
1996. The table is based on information prepared in accordance
with generally accepted accounting principles.
Amortized Approximate
Cost Yield Fair Value
------- --------- -----------
(Dollars in thousands)
In one year or less $39,087 6.55% $39,236
After one through five years 9,646 5.70% 9,606
Other securities, not
due on a single maturity date (1) 449 8.00% 449
------ ------
Total $49,182 $49,291
====== ======
(1) These are tax exempt securities. The yields on these
securities have not been computed on a tax equivalent basis.
37
Sources of Funds
General. Deposit accounts have traditionally been the principal
source of the Bank's funds for use in lending and for other general
business purposes. In addition to deposits, the Bank obtains funds
through advances from the Federal Home Loan Bank of Des Moines,
Iowa ("FHLBank"), collateralized short-term borrowings under
repurchase agreements, loan repayments, loan sales, and cash flows
generated from operations. Scheduled loan payments are a
relatively stable source of funds, while deposit inflows and
outflows and the related costs of such funds have varied widely.
Borrowings such as FHLBank advances may be used on a short-term
basis to compensate for seasonal reductions in deposits or deposit
inflows at less than projected levels and may be used on a longer
term basis to support expanded lending activities. The
availability of funds from loan sales is influenced by general
interest rates as well as the volume of originations.
Deposits. The Bank attracts both short-term and long-term deposits
from the general public by offering a wide variety of accounts and
rates. In recent years, the Bank has been required by market
conditions to rely increasingly on short-term accounts and other
deposit alternatives that are more responsive to market interest
rates than the passbook accounts and regulated fixed-interest-rate,
fixed-term certificates that were the Bank's primary source of
deposits prior to 1978. The Bank offers regular passbook accounts,
checking accounts, various money market accounts, fixed-interest-
rate certificates with varying maturities, certificates of deposit
in minimum amounts of $100,000 ("Jumbo" accounts), brokered
certificates and individual retirement accounts. The composition
of the Bank's deposits at the end of recent periods is set forth in
Note 6 of Notes to Consolidated Financial Statements included in
the Annual Report to Stockholders, which portions are incorporated
herein by reference.
38
The following table sets forth the dollar amount of deposits, by
interest rate range, in the various types of deposit programs
offered by the Bank at the dates indicated. The table is based on
information prepared in accordance with generally accepted
accounting principles.
June 30,
-----------------------------------------------------------------
1996 1995 1994
------------------ ------------------- ------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- --------- -------- -------- --------
(Dollars in thousands)
Time deposits:
0.00% - 3.99% $ 2,376 0.60 $ 3,746 0.97% $ 83,940 23.38%
4.00% - 4.99% 14,472 3.65 30,873 8.03 65,272 18.18
5.00% - 5.99% 169,905 42.79 84,499 21.99 20,795 5.79
6.00% - 6.99% 32,596 8.21 89,817 23.37 11,677 3.25
7.00% - 7.99% 17,123 4.31 20,105 5.23 13,584 3.79
8.00% - 10.25% 646 0.16 3,801 0.99 4,869 1.36
------- ------ ------- ------ ------- ------
Total Time deposits 237,118 59.72 232,841 60.58 200,137 55.75
Non-interest-bearing demand deposits 8,886 2.24 8,182 2.13 5,330 1.48
Savings deposits (2.50%-2.52%-2.50%) 37,010 9.32 38,285 9.96 43,460 12.11
Interest-bearing demand
deposits (2.41%-2.51%-2.35%) 112,224 28.26 103,335 26.89 109,053 30.38
Accrued Interest 1,817 .46 1,684 0.44 1,007 0.28
------- ------ ------- ------ ------- ------
Total Deposits $397,055 100.00% $384,327 100.00% $358,987 100.00%
======= ====== ======= ====== ======= ======
39
The following table sets forth the deposit flows of the Bank during
the periods indicated. Net increase refers to the amount of
deposits during a period less the amount of withdrawals during the
period. The net increase in deposits during the year ended June
30, 1996 was in interest-bearing deposits, while during the year
ended June 30, 1995 was an increase in time deposits and during the
year ended June 30, 1994 was due to an overall increase in all
deposit types. Deposit flows at savings institutions may also be
influenced by external factors such as competitors' pricing,
governmental credit policies and, particularly in recent periods,
depositors' perceptions of the adequacy of federal insurance of
accounts. The table is based on information prepared in accordance
with generally accepted accounting principles.
Year Ended June 30,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(Dollars in thousands)
Opening balance $ 384,327 $ 358,987 $ 326,611
Deposits 1,731,347 1,652,386 1,538,741
Withdrawals 1,730,268 1,636,288 1,514,179
Interest credited 11,649 9,242 7,814
--------- --------- ---------
Ending Balance $ 397,055 $ 384,327 $ 358,987
========= ========= =========
Net increase $12,728 $25,340 $32,376
====== ====== ======
Percent increase 3.31% 7.06% 9.91%
==== ==== ====
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.
40
The following table sets forth the time remaining until maturity of the Bank's time deposits as of June 30,
1996. The table is based on information prepared in accordance with generally accepted accounting principles.
Maturity
---------------------------------------------------------
Over Over Over
3 Months 3 to 6 6 to 12 12
or Less Months Months Months Total
-------- ------- ------- ------- --------
(Dollars in thousands)
Time deposits:
Less than $100,000 $57,118 $36,052 $48,459 $28,877 $170,506
$100,000 or more 16,100 7,428 6,420 5,345 35,293
Brokered 9,273 2,491 2,956 11,727 26,447
Public funds (1) 2,733 1,473 666 -- 4,872
------ ------ ------ ------ -------
Total $85,224 $47,444 $58,501 $45,949 $237,118
====== ====== ====== ====== =======
(1) Deposits from governmental and other public entities.
The following table shows rate and maturity information for the Bank's time deposits as of June 30, 1996. The
table is based on information prepared in accordance with generally accepted accounting principles.
0.00- 4.00- 5.00- 6.00- 7.00- 8.00- % of
3.99% 4.99% 5.99% 6.99% 7.99% 10.25% Total Total
------ ------- ------- ------- ------- ------ -------- -------
(Dollars in thousands)
Time deposits maturing
in quarter ending:
September 30, 1996 $1,933 $11,943 $ 60,819 $ 7,865 $ 2,438 $226 $ 85,224 35.94%
December 31, 1996 160 505 42,725 2,422 1,563 69 47,444 20.01
March 31, 1997 100 1,053 19,040 8,247 775 40 29,255 12.34
June 30, 1997 68 498 24,426 4,061 162 31 29,246 12.33
September 30, 1997 69 240 5,886 1,314 9 8 7,526 3.17
December 31, 1997 -- 26 5,259 498 308 27 6,118 2.58
March 31, 1998 -- 139 3,096 1,205 534 -- 4,974 2.10
June 30, 1998 -- 8 3,121 1,655 7,775 2 12,561 5.30
September 30, 1998 -- 39 560 299 -- 2 900 0.38
December 31, 1998 -- 12 806 42 -- 18 878 0.37
March 31, 1999 -- -- 929 455 175 20 1,579 0.67
June 30, 1999 -- -- 815 279 94 1 1,189 0.50
September 30, 1999 -- -- 278 435 -- 2 715 0.30
December 31, 1999 -- 8 136 234 296 -- 674 0.28
March 31, 2000 -- -- 134 189 385 -- 708 0.30
June 30, 2000 -- -- 250 640 52 -- 942 0.40
Thereafter 46 1 1,625 2,756 2,557 200 7,185 3.03
---- ------ ------- ------ ------ --- ------- ------
Total $2,376 $14,472 $169,905 $32,596 $17,123 $646 $237,118 100.00%
===== ====== ======= ====== ====== === ======= ======
41
Borrowings. Great Southern's other sources of funds include
advances from the FHLBank and collateralized 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. FIRREA requires that all long-term FHLBank advances be
for the purpose of financing residential housing. Pursuant to
FIRREA, the Federal Housing Finance Board has promulgated
regulations which establish standards of community investment for
FHLBank members to maintain continued access to long-term advances.
Each FHLBank credit program has its own interest rate, which may be
fixed or variable, and range of maturities. The FHLBank may
prescribe the acceptable uses for these advances, as well as other
risks on availability, limitations on the size of the advances and
repayment provisions. The Bank has a $75 million revolving line of
credit with the FHLBank which provides for immediately available
funds. At June 30, 1996, $63.4 million of the revolving line was
in use with $11.6 million remaining available. These funds can be
drawn by the Bank for lending or other liquidity needs with some
limitations.
The Bank's borrowings also include borrowings collateralized with
whole mortgage loans from the Bank's portfolio. These borrowings
are also discussed in Note 8 of Notes to Consolidated Financial
Statements included in the Annual Report to Stockholders, which
portions are incorporated herein by reference.
The following table sets forth the maximum month-end balances and
average daily balances of FHLBank advances and collateralized
borrowings during the periods indicated. The table is based on
information prepared in accordance with generally accepted
accounting principles.
Year Ended June 30,
------------------------------
1996 1995 1994
------------------------------
(Dollars in thousands)
Maximum Balance:
FHLBank advances $188,450 $156,667 $119,923
Collateralized borrowings 20,132 18,695 27,477
Average Balances:
FHLBank advances $169,468 $127,361 $104,298
Collateralized borrowings 17,344 15,607 19,310
42
The following table sets forth certain information as to the Bank's
FHLBank advances and collateralized borrowings at the dates
indicated. The table is based on information prepared in
accordance with generally accepted accounting principles.
June 30,
-------------------------------
1996 1995 1994
-------- ------- --------
(Dollars in thousands)
FHLBank advances $180,797 $154,323 $93,087
Collateralized borrowings 16,468 13,947 15,500
------- ------- -------
Total borrowings $197,265 $168,270 $108,587
======= ======= =======
Weighted average interest rate
of FHLBank advances 6.06% 6.61% 6.03%
==== ==== ====
Weighted average interest rate
of collateralized borrowings 2.63% 2.96% 2.14%
==== ==== ====
Subsidiaries
Great Southern. As a federally-chartered savings bank, Great
Southern may invest up to 3% of its assets in service corporations.
The Bank had no investment in service corporations at June 30, 1996
and 1995.
Holding Company. At June 30, 1996, the Holding Company's total
investment in Great Southern Financial Corporation ("GSFC") and
Great Southern Capital Management, Inc. ("Capital Management") was
$1 million and $400,000, respectively. Both GSFC and Capital
Management are incorporated under the laws of the state of
Missouri. These subsidiaries are primarily engaged in the
following activities:
Appraisal Services. Appraisal Services, Inc., incorporated in
1976, is a wholly-owned subsidiary of GSFC and performs primarily
residential real estate appraisals for a number of clients, the
majority of which is for the Bank and its loan customers.
Appraisal Services, Inc. had net income of $7,000 and $6,000 in
fiscal 1996 and 1995, 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
$98,000 and $52,000 in fiscal 1996 and 1995, respectively.
43
Travel Agency. Great Southern Travel, a division of GSFC, was
organized in 1976. At June 30, 1996, it was the largest travel
agency based in southwestern Missouri. Great Southern Travel
operates from 15 full-time locations, including a facility at the
Springfield-Branson Regional Airport, and additional part-time
locations. It engages in personal, commercial and group travel
services. Great Southern Travel had net income of $122,000 and
$65,000 in fiscal 1996 and 1995, respectively.
Brokerage Services. Capital Management, organized in 1988, offers
a full line of financial consultation, investment counseling and
discount brokerage services. Capital Management operates through
Great Southern's branch office network. Capital Management had net
income of $257,000 and $370,000 in fiscal 1996 and 1995,
respectively.
Competition
Great Southern faces strong competition both in originating real
estate and other loans and in attracting deposits. Competition in
originating real estate loans comes primarily from other savings
institutions, commercial banks 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 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
Holding Company subsidiaries, face significant competition in their
markets.
The Bank faces substantial competition in attracting deposits from
other savings institutions, commercial banks, 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 savings institutions and commercial banks
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 locations
with interbranch deposit and withdrawal privileges at each.
The authority to offer money market deposits and the expanded
lending and other powers authorized for thrift institutions by
federal and state legislation have resulted in increased
competition for both deposits and loans between thrift institutions
and other financial institutions such as commercial banks.
Employees
At June 30, 1996, the Bank and its affiliates had a total of 471
employees, including 216 part-time employees. None of the Bank's
employees is represented by any collective bargaining agreement.
Management considers its employee relations to be good.
44
REGULATION
General
Great Southern is a federal-chartered, federally insured, Federal
Savings Bank which is a member of the FHLBank System ("FHLBank
System"). Accordingly, Great Southern is subject to broad federal
regulation and oversight extending to all of its operations. Great
Southern is a member of the FHLBank of Des Moines and is subject to
certain limited regulation by the Board of Governors of the Federal
Reserve System ("Federal Reserve Board"). As the savings and loan
holding company of Great Southern, the Holding Company also is
subject to federal regulation and oversight. The purpose of the
regulation of the Holding Company is to protect Great Southern and
its depositors.
On August 9, 1989, FIRREA was enacted into law. FIRREA
substantially changed the regulatory structure and oversight for
all savings associations, including Great Southern, and their
holding companies. Prior to FIRREA, Great Southern's deposits were
insured by the Federal Savings and Loan Insurance Corporation
("FSLIC") and Great Southern was subject to regulation by the
FHLBB, as operating head of the FSLIC. Under FIRREA, the FHLBB was
abolished and its regulatory authority over Great Southern and its
holding company was transferred to the OTS. The FSLIC was abolished
and replaced by the SAIF, a new deposit insurance fund administered
by the FDIC. As a result, the FDIC has certain regulatory and
examination authority over Great Southern. FIRREA revised many
substantive requirements and limitations to which Great Southern is
subject, generally resulting in increased restrictions on Great
Southern's authorized investment and lending activities. FIRREA
also provided for various changes in the regulation of savings and
loan holding companies, such as the Holding Company. In addition,
FIRREA revised the structure of the FHLBank System, including the
requirements for obtaining advances from the FHLBank.
The Board of Directors of the Bank approved the conversion of the
Bank from a Missouri-chartered savings bank to a federal savings
bank charter. The conversion process required the preparation and
filing of an application with the OTS regional office. The OTS
approved the conversion in December 1994. By converting, the Bank
was able to eliminate the duplicate cost associated with complying
with both federal and state regulations and has not seen a material
change in its business.
The Company and Great Southern are subject to extensive regulation
by the federal government. The regulatory structure also gives the
regulators extensive discretion in their regulatory activities.
Any changes in such regulatory structure or regulation could have a
material adverse affect on the operations of the Company or Great
Southern. Certain of the material regulatory requirements and
restrictions applicable to the Company and the Bank are discussed
below or elsewhere in this document. However, 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.
45
Federal Regulation
The OTS has extensive authority over the operations of the Bank.
As part of this authority, Great Southern is required to file
periodic reports with the OTS and is subject to periodic
examinations by the OTS. The investment and lending authority of
Great Southern is limited by federal law and regulations.
Certain of these regulations limit Great Southern's investments
including investments in equity securities, real estate, service
corporations and operating subsidiaries, as well as land loans and
nonresidential construction loans with loan-to-value ratios in
excess of 80%. In addition, as noted below, certain investments
increase the capital requirements of the Bank. Federal laws and
regulations also impose certain limitations on Great Southern's
operations, including restrictions on loans to one borrower,
transactions with affiliates and affiliated persons, liability
growth and capital distributions. Federal laws and regulations
also impose requirements for the retention of housing and thrift-
related investments. See "--Qualified Thrift Lender Test."
Federal law provides that no savings association may invest in
corporate debt securities not rated in one of the four highest
rating categories by a nationally recognized rating organization.
In addition, investment in loans secured by nonresidential real
property may not exceed 400% of capital, with authority in the OTS
to increase that investment level on a case-by-case basis. The
authority of Great Southern to engage in transactions with
affiliates, including the Holding Company and its non-savings
association subsidiaries, or to make loans to certain insiders, is
subject to certain provisions of the Federal Reserve Act. Among
other things, those provisions require that these transactions with
affiliates be on terms and conditions comparable to those for
similar transactions with non-affiliates. See "--Transactions With
Affiliates." In addition, these affiliate transactions are
regulated further by the OTS to address safety and soundness
concerns.
The OTS has extensive enforcement authority over all savings
associations and their holding companies, including Great Southern
and the Holding Company, and this enforcement authority has been
enhanced substantially by FIRREA and the Federal Deposit Insurance
Corporation Improvements Act of 1991 ("FDICIA"). This enforcement
authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions
may be initiated for violations of laws and regulations and unsafe
or unsound practices. Other actions or inactions may provide the
basis for enforcement action, including misleading or untimely
reports filed with the OTS. FIRREA significantly increased the
amount of and grounds for civil money penalties. FIRREA requires,
except under certain circumstances, public disclosure of final
enforcement actions by the OTS.
The FDIC has been granted certain regulatory and oversight
authority over federal associations by FIRREA. See "--Insurance of
Accounts and Regulation by the FDIC."
46
Insurance of Accounts and Regulation by the FDIC
Great Southern's depositors are insured by the SAIF up to $100,000
per insured account (as defined by law and regulation). This
insurance is backed by the full faith and credit of the United
States Government. The SAIF is administered and managed by the
FDIC. As insurer, the FDIC is authorized to conduct examinations
of and to require reporting by SAIF-insured associations. It also
may prohibit any FDIC-insured institution from engaging in any
activity the FDIC determines by regulation or order to pose a
serious threat to the SAIF. The FDIC also has the authority to
initiate enforcement actions against savings associations, after
first giving the OTS an opportunity to take such action.
Great Southern pays annual assessments for SAIF insurance. Under
current FDIC regulations, the annual SAIF assessment rate, is
based, in part, on the degree of risk to the deposit insurance fund
that, in the opinion of the FDIC, is presented by a particular
depository institution compared to other depository institutions.
The FDIC uses a matrix having as variables the level of
capitalization of a particular institution and the level of
supervision that its operations require; and the risk-based
amendment rates determined in this fashion range from 0.23% of
deposits for the least risky to 0.31% for the most risky. In
establishing the SAIF assessment rate, the FDIC is required to
consider the SAIF's expected operating expenses, case resolution
expenditures and income and the effect of the assessment rate on
SAIF members' earnings and capital. There is no longer a cap on
the amount the FDIC may increase the SAIF assessment rate. Great
Southern does not anticipate that the FDIC's adoption of a risk-
based deposit insurance assessment program will result in a
significant increase in its costs for deposit insurance; however,
it appears likely that SAIF deposit insurance assessments will
remain at a high level or even increase until SAIF reaches the
reserve ratio designated by Congress. The Bank currently has a
risk based assessment rate of 0.23%. In addition, the FDIC is
authorized to raise the assessment rates in certain instances. Any
increases in the assessments would negatively impact the earnings
of Great Southern.
The FDIC may terminate the deposit insurance of any insured
depository institution if it determines, after a hearing, that the
institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, order or
any condition imposed by or an agreement with the FDIC. It also
may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the
institution has no tangible capital. If insurance of accounts is
terminated, the accounts at the institution at the time of the
termination, less subsequent withdrawals, shall continue to be
insured for a period of six months to two years, as determined by
the FDIC.
47
The FDIC has reduced deposit insurance premiums for members of the
Bank Insurance Fund ("BIF"). Highly-rated institutions, which
account for 92 percent of banks, will pay only the statutory
minimum of $2,000 annually for FDIC insurance. The remaining
institutions pay on a scale ranging from 3 cents to 30 cents per
$100 of insured deposits. The deposit insurance premiums currently
assessed against SAIF members are on a scale of 23 cents to 31
cents per $100 of insured deposits. This premium differential
reflects the relative levels of attainment by the two insurance
funds of their mandated capitalization requirements, but may create
a competitive disadvantage for SAIF-insured institutions, including
the Bank.
Complicating the deposit insurance reform issue is the requirement,
initially imposed solely on savings institutions that constitute
the bulk of the membership of the SAIF, to fund debt service
obligations under bonds issued by a specially created government
entity ("FICO"), the proceeds of which were applied toward
resolution of the thrift industry crisis in the 1980s. Use of SAIF
premiums for this purpose has been a principal reason for the
failure of the SAIF to be re-capitalized as quickly as the BIF has
been.
Certain proposals have been presented to Congress for re-
capitalization of the SAIF or for payment of the FICO obligations.
Although not yet final, some of such proposals involve assessments
and payments by SAIF members such as the Bank. Paying such fees
and assessments would reduce profits and perhaps put the Bank at a
competitive disadvantage with BIF members. Other pending proposals
include spreading the responsibility for the FICO payments
proportionally over all FDIC-insured institutions and merging the
BIF and the SAIF as soon as practicable. No reliable prediction can
be made as to how these matters may ultimately be resolved or as to
the impact that any such resolution may have on the Bank. There is
also pending before Congress a proposal that would require each
federally chartered association to hereafter either convert to a
national bank charter, or to a state thrift charter. If enacted,
such proposal would have an effect on the powers and authority of
the Bank. Differing forms of this proposal have been passed on by
both the House of Representatives and the Senate, and there is
currently no way of predicting whether any proposal will ultimately
be enacted as law.
Regulatory Capital Requirements
Federally insured savings associations, such as Great Southern, are
required to maintain a minimum level of regulatory capital. These
requirements have increased significantly in recent years. FIRREA
required the OTS to establish new capital standards for all savings
associations, including a tangible capital requirement, a leverage
ratio (or core capital) requirement and a risk-based capital
requirement. FIRREA mandated that these new capital requirements
be generally as stringent as the comparable capital requirements
for national banks.
48
The capital regulations promulgated pursuant to FIRREA require that
all savings associations have tangible capital of at least 1.5% of
adjusted total assets. Tangible capital generally includes common
stockholders' equity (including retained earnings), most non-
cumulative perpetual preferred stock and related earnings, certain
non-withdrawable accounts and pledged deposits at mutual
institutions and minority equity interests in fully consolidated
subsidiaries. Tangible capital excludes intangible assets, except
that purchased mortgage servicing rights remain includable in
tangible capital in an amount that may not exceed the lesser of (i)
90% of their fair market value (if determinable), or (ii) 100% of
their current amortized book value under GAAP (except that
purchased mortgage servicing rights owned on February 9, 1990 are
grandfathered and may be recognized for regulatory capital purposes
to the extent otherwise permitted by the OTS). Great Southern has
no purchased mortgage servicing rights. In general, for purposes
of calculating the tangible capital ratio, adjusted total assets is
defined as consolidated total assets in accordance with generally
accepted accounting principles ("GAAP"), excluding intangible
assets (except includable purchased mortgage servicing rights). In
addition, as described in more detail below, certain subsidiary
investments are excluded from capital and from adjusted total
assets for purposes of determining compliance with the tangible
capital requirement.
The OTS regulations establish special capitalization requirements
for savings associations that own service corporations and other
subsidiaries. According to these regulations certain subsidiaries
are consolidated for capital purposes and others are excluded from
assets and capital. In determining compliance with the tangible
capital requirement and the leverage limit, all subsidiaries
engaged solely in activities permissible for national banks,
engaged solely in mortgage-banking activities, or engaged in
certain other activities solely as agent for its customers are
includable subsidiaries that are consolidated for capital purposes
in proportion to the association's level of ownership, including
the assets of includable subsidiaries in which the association has
a minority interest that is not consolidated for GAAP purposes (the
investment in such subsidiaries is excluded from adjusted total
assets). For all other subsidiaries ("non-includable
subsidiaries"), the debt and equity investments in such
subsidiaries are deducted from assets and capital. This deduction
is phased-in for investments existing on April 12, 1989, in non-
includable subsidiaries.
From July 1, 1990 through June 30, 1991, 90% of the lesser of the
investment in a non-includable subsidiary existing on April 12,
1989 or the then-current investment level in such subsidiary was
permitted to be included in capital and assets. During each of the
next three years, only 75%, 60% and 40%, respectively, of such
investments could be included in capital. During this transition
period, the assets of a non-includable subsidiary were consolidated
for capital purposes in inverse proportion to the level of the
investment that was excluded. For example, from July 1, 1990
through June 30, 1991, 10% of the investment in such non-includable
subsidiaries were excluded from capital and assets and 90% of the
assets of such subsidiaries were consolidated for capital purposes
49
(the remaining 90% of the investment in such subsidiaries was
excluded from adjusted total assets). After June 30, 1994, 100% of
the investment in such non-includable subsidiary is excluded from
capital and assets. At June 30, 1996, Great Southern had tangible
capital equal to 8.5% of adjusted total assets, which exceeds the
minimum requirement of 1.5% as in effect on June 30, 1996.
The new capital standards mandated by FIRREA also include a
leverage ratio requirement that requires all savings associations
to maintain core capital equal to at least 3% of adjusted total
assets. Core capital generally consists of common stockholders'
equity (including retained earnings), most non-cumulative preferred
stock and related surplus, certain non-withdrawable accounts and
pledged deposits at mutual institutions, minority equity interests
in consolidated subsidiaries, and, as described in more detail
below, certain remaining goodwill permitted under regulatory
accounting principles. Intangible assets, including goodwill, are
excluded from core capital, except, as described in more detail
below, purchased mortgage servicing rights. In general, for
purposes of calculating the core capital ratio, adjusted total
assets is defined as consolidated total assets in accordance with
GAAP, excluding intangible assets not permitted to be included in
core capital and excluding all qualifying supervisory goodwill. In
addition, the special capitalization requirements for subsidiaries
that apply for determining the tangible capital requirement also
apply for determining the leverage ratio requirement.
Purchased mortgage servicing rights may be included in core capital
up to the lesser of (i) 90% of their fair market value (if
determinable), or (ii) their current amortized book value under
GAAP (except that purchased mortgage servicing rights owned on
February 9, 1990 are grandfathered and may be recognized for
regulatory capital purposes to the extent otherwise permitted by
the OTS). At June 30, 1996, Great Southern had no purchased
mortgage servicing rights eligible for inclusion in capital.
Through the end of 1994, "eligible" savings associations were
permitted to include certain supervisory goodwill recognized under
GAAP and certain additional goodwill recognized under former
regulatory accounting principles (or "regulatory goodwill"), which
together constitute "qualifying supervisory goodwill", in core
capital up to certain specified limits. Subsequent to 1994, no
goodwill may be included in core capital. Great Southern's
goodwill of $1.3 million qualified as supervisory goodwill as of
June 30, 1994 under the regulations but, after January 1, 1995, may
not be included in core capital.
At June 30, 1996, Great Southern had core capital equal to 8.5% of
adjusted total assets, which exceeds the minimum leverage ratio
requirement of 3% now in effect.
50
The risk-based requirement promulgated by OTS requires savings
associations to have total capital of at least 8% of risk-weighted
assets. Total capital consists of core capital, as defined above,
and supplementary capital. Supplementary capital consists of
certain permanent and maturing capital instruments that do not
qualify as core capital, plus general loss reserves up to a maximum
of 1.25% of risk-weighted assets. The extent to which maturing
capital instruments may be included as supplementary capital
decreases as the maturity date of the instrument approaches. At
June 30, 1996, Great Southern had no capital instruments that
qualified as supplementary capital. At June 30, 1996, Great
Southern had $15.4 million in general loss reserves, which is $9.4
million greater than 1.25% of risk-weighted assets. Supplementary
capital qualifies as total capital only to the extent it does not
exceed an association's core capital. At June 30, 1996, Great
Southern had $6.0 million in qualifying supplementary capital.
To calculate risk-weighted assets, on-balance sheet assets and off-
balance sheet assets (after being converted to an on-balance sheet
credit equivalent amount) are risk-weighted in four risk categories
from 0% to 100%, depending on the credit risk inherent in the
asset. Before being assigned a risk-weight, off-balance sheet
items are adjusted by conversion factors of 0% to 100% to determine
the amount of the on-balance credit equivalent amount against which
risk-based capital must be maintained. The risk-weightings are
applied to the on-balance sheet credit equivalents based on the
obligor. On June 30, 1996, Great Southern had total capital
(including $49.1 million in core capital and $6.0 million in
qualifying supplementary capital) of $61.9 million and risk-
weighted assets (including $9 million in converted off-balance
sheet assets) of $476 million; or total capital of 13% of risk-
weighted assets. This amount is in excess of the required level.
The OTS has adopted a rule, implemented as of March 31, 1995,
incorporating an interest rate risk component into the risk-based
capital requirement for savings associations such as the Bank.
Under this rule, an institution's interest rate risk is measured by
the decline in net portfolio value ("NPV") resulting from a
hypothetical 200 basis point increase or decrease in interest rates
(whichever leads to the lower NPV) divided by the estimated
economic value of its assets. An institution is required to make a
deduction from total capital for purposes of calculating its risk-
based capital if a decline in its NPV (resulting from a 200 basis
point shock) exceeds 2 percent of its assets (expressed in present
value terms). Such an institution is required to deduct from its
total risk-based capital an amount equal to one-half of the
difference between its measured interest rate risk and 2 percent,
multiplied by the estimated economic value of its assets. The new
rule has not had a significant effect on Great Southern's
compliance with capital requirements.
51
Any savings association that fails any of the new capital standards
is subject to enforcement actions by the OTS or the FDIC. In
addition, FIRREA authorizes, and under certain circumstances
requires, the OTS to take certain actions against associations that
fail to meet current or future capital requirements. OTS shall
prohibit the asset growth of any association not meeting its
capital standards, except for certain limited growth in low-risk
assets up to net interest credited, and shall issue a capital
directive against the association. FIRREA enables associations to
seek exemptions from the various sanctions or penalties for failure
to meet their capital requirements, other than the mandatory growth
restrictions and appointment of a conservator or receiver. The OTS
will grant no exemptions without the submission of an approved
capital plan. FDICIA, which is discussed below, also requires
certain regulatory actions if a savings institution does not meet
these capital standards.
Capital Distributions Regulation
An OTS regulation limits the capital distributions that can be made
by savings associations, including cash dividends, payments by an
association to repurchase or otherwise acquire its shares, payments
to shareholders of another institution in a cash-out merger and
other distributions charged against capital (the "Capital
Distributions Regulation"). The Capital Distributions Regulation
establishes a three-tiered system of regulation based primarily on
capital levels, with the greatest flexibility being afforded to
well-capitalized, well-managed institutions.
An association that has capital immediately prior to, and on a pro
forma basis after giving effect to, a proposed capital distribution
that is equal to or greater than the amount of its fully phased-in
capital requirement, as modified to reflect any individual minimum
capital requirement applicable to the association would be a Tier 1
association ("Tier 1 Association"), provided the association has
not been notified by the OTS that it is in need of more than normal
supervision. An association that satisfies the Tier 1 capital
criteria but that has been notified that it has need of more than
normal supervision could be treated as a Tier 2 or Tier 3
association (a determination left to the discretion of the OTS).
An association that has capital immediately prior to, and on a pro
forma basis after giving effect to, a proposed capital distribution
that is equal to or in excess of its minimum capital requirement
but that is less than its fully phased-in capital requirement would
be a Tier 2 association ("Tier 2 Association"). An association
that does not satisfy its minimum capital requirement immediately
prior to, or on a pro forma basis after giving effect to, the
proposed capital distribution would be a Tier 3 association ("Tier
3 Association").
52
A Tier 1 Association could, after prior notice but without the need
to obtain prior approval from the OTS, make capital distributions
during a calendar year up to the higher of (1) 100% of the
association's net income to date during the calendar year plus the
amount that would reduce by one-half the association's "surplus
capital ratio" (the percentage by which its capital-to-assets ratio
exceeds the ratio of its fully phased-in capital requirement to its
assets) at the beginning of the calendar year or (2) 75% of the
association's net income over the most recent four-quarter period.
Any additional amount of capital distributions would require prior
regulatory approval.
A Tier 2 Association could, after prior notice but without the need
to obtain prior approval from the OTS, (1) make capital
distributions of up to 75% of its net income over the most recent
four-quarter period if the association's current capital satisfies
the risk-based capital standard that was applicable to it on
January 1, 1993, or (2) make capital distributions of up to 50% of
its net income over the most recent four-quarter period if the
association's current capital satisfies the risk-based standard
that was applicable to it on January 1, 1991; or (3) make capital
distributions of up to 25% of its net income over the most recent
four-quarter period if the association's current capital satisfies
the current risk-based capital requirement applicable to it. In
computing an association's current permissible amount of capital
distributions, an association must deduct the amount of capital
distributions that it has previously made during the most recent
four-quarter period. Any additional amount of capital
distributions would require prior regulatory approval.
A Tier 3 Association is not permitted to make any capital
distributions without prior regulatory approval unless the capital
distribution is consistent with a pre-approved capital plan.
The Capital Distributions Regulation provides that its requirements
supersede the provisions of agreements or conditions to approved
applications controlling associations' capital distributions that
are less stringent than the restrictions imposed under the Capital
Distributions Regulation. An association that is subject to
restrictions under an agreement or application condition that is
more stringent than the restrictions imposed under the Capital
Distributions Regulation may seek approval from the OTS to become
subject exclusively to the restrictions imposed under the Capital
Distributions Regulation.
The OTS has notified Great Southern that for purposes of the
Capital Distributions Regulation it is currently being treated as a
Tier 1 Association for purposes of computing permissible capital
distributions. Notwithstanding the Capital Distribution
Regulations, the regulatory authorities have broad discretion to
prohibit the payment of capital distributions in certain instances,
including if such authorities determine that the payment would
constitute an unsafe or unsound practice. In addition, FDICIA can
limit capital distributions. See also "Item 5. Market for the
Registrant's Common Stock and Related Stockholder Matters" and
"FDICIA" below.
53
Liquidity
Federally insured savings associations are required to maintain an
average daily balance of liquid assets equal to a certain
percentage of the sum of average daily balances of net withdrawable
deposit accounts and borrowings payable in one year or less. The
liquidity requirement may vary from time to time (between 4% and
10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the required liquid
asset ratio is 5%.
For purposes of this ratio, liquid assets include specified short-
term assets (e.g., cash, certain time deposits, certain bankers'
acceptances and short-term United States Treasury obligations), and
long-term assets (e.g., United States Treasury obligations of more
than one and less than five years and state agency obligations with
a maximum term of two years). The regulations governing liquidity
requirements include as liquid assets debt securities hedged with
forward commitments obtained from, or debt securities subject to
repurchase agreements with, members of the Association of Primary
Dealers in United States Government Securities or banks whose
accounts are insured by the FDIC, debt securities directly hedged
with a short financial futures position, and debt securities that
provide the holder with a right to redeem the security at par
value, regardless of the stated maturities of such securities.
FIRREA also authorizes the OTS to designate as liquid assets
certain mortgage-related securities and certain mortgage loans
(qualifying as backing for certain mortgage-backed securities) with
less than one year to maturity. Short-term liquid assets currently
must constitute at least 1% of an association's average daily
balance of net withdrawable deposit accounts and current
borrowings. Penalties may be imposed upon associations for
violations of liquidity requirements. At June 30, 1996, Great
Southern was in compliance with these requirements, with an overall
liquidity ratio of 9.2% and a short-term liquidity ratio of 7.6%.
The Company has been in various buy-back programs since May 1990.
During the year ended June 30, 1996, the Company repurchased
140,598 shares of its common stock at an average price of $23.83
per share and reissued 43,888 shares of treasury stock at an
average price of $3.16 per share for stock option exercises.
During the year ended June 30, 1995, the Company repurchased
362,090 shares of its common stock at an average price of $16.82
per share and reissued 65,649 shares of treasury stock at an
average price of $2.89 per share for stock option exercises.
Management intends to continue its stock buy-back programs as long
as repurchasing the stock contributes to the overall growth of
shareholder value. The number of shares of stock that will be
repurchased and the price that will be paid is the result of many
factors, several of which are outside of the control of the
Company, the primary factors of which are the number of shares
available in the market from sellers at any given time and the
price of the stock within the market as determined by the market.
54
Beginning in September 1996, the Company's Employee Stock Ownership
Plan (the "ESOP") will be distributing approximately 443,000 shares
of stock as directed by the participants in the ESOP. As of the
distribution, each participant will have full rights of ownership,
including the right of sale and transfer. It is anticipated that a
portion of these shares will be available in the market for
purchase by investors and the Company.
Management believes that the Company had at June 30, 1996, and
continues to have, sufficient cash flows and borrowing capacity
available to meet its commitments and other foreseeable cash needs
for operations. At June 30, 1996, the Company had commitments of
approximately $66.6 million to fund loan originations, issued lines
of credit, outstanding letters of credit and unadvanced loans.
Accounting
An OTS policy statement clarifies and reemphasizes that the
investment activities of a savings association must be in
compliance with approved and documented investment policies and
strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its
classification of and accounting for loans and securities (i.e.,
whether held for investment, sale or trading) with appropriate
documentation. In addition, auditors must document their
concurrence or lack thereof with management's investment policy and
strategies, at least annually, and to monitor the association's
compliance with such strategies. See "Business -- Investment
Activities."
Qualified Thrift Lender Test
Savings associations are required to satisfy a qualified thrift
lender ("QTL") test. The QTL test currently requires a savings
association to hold at least 65% of its portfolio assets in
qualified thrift investments and to continue to maintain such
percentage holdings for at least nine months of each preceding
twelve-month period. Certain temporary and limited exceptions from
meeting the new test may be granted by the OTS. Portfolio assets
are total assets less intangible assets, the value of properties
used to conduct business and certain liquid assets (up to 20% of
total assets). Qualified thrift investments include certain assets
(generally, residential housing related assets) which are
includible without limitation and assets which are includible
subject to percentage limitations. The Management of Great
Southern believes it satisfied the QTL test at June 30, 1996.
Any savings association that fails to meet the QTL test must
convert to a bank charter, unless it requalifies as a QTL. If the
association does not requalify, and converts to a bank charter, it
must remain SAIF-insured until the date upon which the FDIC permits
it to transfer to the Bank Insurance Fund. If an association that
fails the test has not yet requalified and has not converted to a
bank, its new investments and activities are limited to those
permissible for a national bank, and it is limited to national bank
branching rights in its home state. In addition, the association
is immediately ineligible to receive any new FHLBank advances and
is subject to national bank limits for payment of dividends.
55
If such association has not requalified or converted to a bank
within three years after the failure, it must divest itself of all
investments and cease all activities not permissible for a national
bank. In addition, it must repay promptly any outstanding FHLBank
advances. If any association that fails the QTL test and is
subject to these restrictions on activities and advances is
controlled by a holding company, then within one year after the
failure the holding company must register as a bank holding company
and become subject to all restrictions applicable to bank holding
companies.
Transactions with Affiliates
Transactions involving a savings association and its affiliates are
subject to sections 23A and 23B of the Federal Reserve Act.
Generally, these requirements and limits restrict certain of these
transactions to a percentage of the Bank's capital and require all
such transactions to be on terms at least as favorable to the Bank
as are available in transactions with non-affiliates. In addition,
a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire
shares of most affiliates. These provisions currently apply to
transactions between the Bank and the Holding Company or the Bank
and the Holding Company's non-savings association subsidiaries.
Affiliates of Great Southern include, without limitation, any
company whose management is under a common controlling influence
with the management of the Bank, any company controlled by
controlling stockholders of the Bank, any company with a majority
of interlocking directors with the Bank, and any company sponsored
and advised on a contractual basis by the Bank or any of its
affiliates.
Certain of these transactions are also subject to conflict of
interest regulations enforced by the OTS. These regulations
require regulatory approvals for transactions by the Bank with
affiliated persons involving the sale or purchase of property.
Affiliated persons include officers, directors and controlling
stockholders. These conflict of interest regulations also impose
restrictions on loans to affiliated persons. FIRREA also subjects
loans to directors and executive officers to section 22(h) of the
Federal Reserve Act and the regulations promulgated thereunder.
Among other things, such loans must be made on terms substantially
the same as loans to unaffiliated individuals.
FDICIA
In December, 1991, the Federal Deposit Insurance Corporation
Improvements Act of 1991 became law; this statute, and the
regulations adopted under it, have made extensive changes in
federal banking law. Some of these changes are discussed below.
56
Prompt Corrective Regulatory Action.
FDICIA requires the Federal banking regulators to take prompt
corrective action if an institution fails to satisfy certain
minimum capital requirements. Under the law, capital requirements
include a leverage limit, a risk-based capital requirement, and a
core capital requirement. All institutions, regardless of their
capital levels, will be restricted from making any capital
distribution or paying any management fees that would cause the
institution to fail to satisfy the minimum levels for any of its
capital requirements. An institution that fails to meet the
minimum level for any relevant capital measure (an
"undercapitalized institution") will be: (i) subject to increased
monitoring by the appropriate Federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45
days; (iii) subject to asset growth limits; and (iv) required to
obtain prior regulatory approval for acquisitions, branching and
new lines of business.
The capital restoration plan must include a guarantee by the
institution's holding company that the institution will comply with
the plan until it has been adequately capitalized on average for
four consecutive quarters, under which the holding company would be
liable up to the lesser of 5% of the institution's total assets or
the amount necessary to bring the institution into capital
compliance as of the date it failed to comply with its capital
restoration plan. Critically undercapitalized institutions,
defined as those with a ratio of tangible equity to total assets of
2 percent or less, must be seized and placed in receivership or
conservatorship within 90 days of becoming critically
undercapitalized, unless the Federal banking regulators determine
that other action would better resolve the problems of such insured
depository institution at the least possible long-term loss to the
deposit insurance fund. If the regulator determines that an
institution is in unsafe or unsound condition, or is engaged in an
unsafe or unsound practice that it has not corrected, it may
reclassify an institution from the "well capitalized", "adequately
capitalized", or "undercapitalized" categories into the next lower
category. Great Southern does not expect the prompt corrective
action provisions to have a significant effect on its operations.
Conservatorship and Receivership Amendments. FDICIA amended the
grounds for the appointment of a conservator or receiver for an
insured depository institution to include the following events: (i)
consent by the board of directors of the institution; (ii)
cessation of the institution's status as an insured depository
institution; (iii) the institution is undercapitalized and has no
reasonable prospect of becoming adequately capitalized when
required to do so, fails to submit an acceptable capital plan or
materially fails to implement an acceptable capital plan; and (iv)
the institution is critically undercapitalized or otherwise has
substantially insufficient capital. FDICIA provides that an
institution's directors shall not be liable to its stockholders or
creditors for acquiescing in or consenting to the appointment of
the FDIC or FTC as receiver or conservator or to a supervisory
acquisition of the institution.
57
Standards for Safety and Soundness.
FDICIA required the Federal bank regulatory agencies to prescribe
standards for all insured depository institutions and depository
institution holding companies relating to: (i) internal controls,
information systems and audit systems; (ii) loan documentation;
(iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; and (vi) compensation, fees and benefits. The
compensation standards prohibit employment contracts, compensation
or benefit arrangements, stock option plans, fee arrangements or
other compensatory arrangements that provide excessive
compensation, fees or benefits or could lead to material financial
loss. In addition, the Federal banking regulatory agencies are
required to prescribe by regulation standards specifying: (i)
maximum classified assets to capital ratios; (ii) minimum earnings
sufficient to absorb losses without impairing capital; and (iii) to
the extent feasible, a minimum ratio of market value to book value
for publicly traded shares of depository institutions and
depository institution holding companies.
Other Deposit Insurance Reforms.
FDICIA amended the Federal Deposit Insurance Act to prohibit
insured depository institutions that are not well-capitalized from
accepting brokered deposits unless a waiver has been obtained from
the FDIC; and it limits the rate of interest that institutions
receiving such waivers may pay on brokered deposits. Deposit
brokers are required to register with the FDIC. FDICIA directed
the FDIC to establish a risk-based assessment system for deposit
insurance, as previously discussed. As required by FDICIA, the
Federal bank regulatory agencies adopted regulatory guidelines for
real estate loans that became effective on March 19, 1993. The
Federal bank regulatory agencies are required to biannually review
risk-based capital standards to ensure that they adequately address
interest rate risk, concentration of credit risk and risks from
non-traditional activities.
Other Regulatory or Legislative Developments.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 ("Riegle-Neal"), effective September 1995, eliminated certain
restrictions which have heretofore prevented bank holding companies
located in states other than those contiguous to the state of
Missouri from acquiring banks or bank holding companies located
within the state of Missouri. As a result of the Act, financial
institutions located outside the midwest are now permitted, with
certain limitations, to acquire Missouri banks. If such
acquisitions occur, they may present added competition for the
Bank.
Effective August 28, 1995, the State of Missouri amended certain
provisions of the Missouri statutes, implementing minimum periods a
bank must be in existence to be eligible for acquisition by an out-
of-state bank holding company and limiting out-of-state de novo
charters in the State of Missouri.
58
The above Act will also, effective June 1, 1997 (unless the
Missouri Legislature otherwise provides), repeal certain
restrictions on the establishment of interstate branches located
within the state of Missouri. If the Missouri Legislature does not
take action to prevent such repeal, out-of-state financial
institutions will, effective on such date, be able to establish
certain interstate branches within the state of Missouri.
Management believes that any such actions would likely benefit its
competitors. In addition, various legislative proposals relating
to depository institutions have been or are expected to be
introduced in the current session of Congress. Such proposals may
restrict, regulate or otherwise alter the power or ability of the
Bank and other depository institutions to sell mutual funds and
annuities or insurance products. No prediction can be made as to
what, if any, legislative action will ultimately be taken, or what
affect it may have on the Bank.
Certain Transactions
Prior to FIRREA, Great Southern, like many financial institutions,
followed a policy of granting loans to its officers, directors and
employees, generally for the financing of their personal residences
at favorable interest rates. Generally, residential loans were
granted at interest rates 1% above the Bank's cost of funds,
subject to annual adjustments. These loans were made in the
ordinary course of business, on substantially the same terms and
collateral as those of comparable transactions prevailing at the
time, and did not involve more than the normal risk of
collectibility or present other unfavorable features. All loans by
Great Southern to its directors and executive officers are subject
to OTS regulations restricting loans and other transactions with
affiliated persons of Great Southern. Effective August 9, 1989,
FIRREA required that all such transactions be on terms and
conditions comparable to those for similar transactions with non-
affiliates. In addition, all loans and other transactions between
Great Southern and its affiliates will be subject to approval by a
majority of the directors of Great Southern, including a majority
of its disinterested directors.
Holding Company Regulation
The Holding Company is a non-diversified unitary savings and loan
holding company subject to regulatory oversight of the OTS. As
such, the Holding Company is required to register and file reports
with the OTS and is subject to regulation and examination by the
OTS. In addition, the OTS has enforcement authority over the
Holding Company and its non-savings association subsidiaries.
Among other things, this authority permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the
subsidiary savings association. The Bank must notify the OTS at
least 30 days before declaring any dividend to the Holding Company.
59
As a unitary savings and loan holding company, the Holding Company
generally is not subject to the regulatory limitations that are
applicable to the scope of permissible activities of diversified
multiple holding companies. If the Holding Company were to acquire
control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the
activities of the Holding Company and any of its subsidiaries
(other than the Bank or any other SAIF-insured savings association)
would become subject to new restrictions.
If the Bank fails the QTL test, the Holding Company may not
commence or continue after such failure, directly or through its
other subsidiaries, any business activity other than (i) furnishing
or performing management services for a subsidiary savings
association, (ii) conducting an insurance agency or an escrow
business, (iii) holding or managing or liquidating assets owned by
or acquired from a subsidiary savings association, (iv) holding or
managing properties used or occupied by a subsidiary savings
association, (v) acting as trustee under deeds of trust, (vi)
performing other activities authorized by the Board of Governors of
the Federal Reserve System and not prohibited or limited by
regulation, or (vii) purchasing, holding or disposing of stock
acquired in connection with the qualified stock issuance if
approved as required by law.
The Holding Company must obtain approval from the OTS before
acquiring control of any other SAIF-insured association. Such
acquisitions may sometimes be prohibited if they result in a
multiple savings and loan holding company controlling savings
associations in more than one state. However, such interstate
acquisitions may be permitted based on specific state authorization
or in a supervisory acquisition of a failing savings association.
The Holding Company and any of its non-savings association
subsidiaries may acquire up to 5%, in the aggregate, of the voting
stock of any non-subsidiary savings association or savings and loan
holding company. This 5% limitation does not apply to certain
types of acquisitions, including acquisitions as a bona fide
fiduciary, as an underwriter or in an account solely for trading
purposes.
60
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain reserves against their transaction accounts (primarily NOW
and Super NOW checking accounts) and non-personal time deposits.
Reserves of 3% must be maintained against net transaction accounts
of $52 million or less (subject to adjustment by the Federal
Reserve Board) and a reserve of 10% (subject to adjustment by the
Federal Reserve Board to a level between 8% and 14%) must be
maintained against the portion of total transaction accounts in
excess of such amount. In addition, a reserve of between 0% to 9%
(subject to adjustment by the Federal Reserve Board) must be
maintained on non-personal time deposits. Under current
regulations, this reserve percentage is 0%. The Bank may elect not
to maintain reserves against approximately $4.3 million in accounts
subject to these reserve requirements. At June 30, 1996, the Bank
was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal
Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "Regulation - Liquidity" above.
Savings associations are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board
regulations require associations to exhaust other reasonable
alternative sources of funds, including FHLBank advances, before
borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLBank of Des Moines, which is one of
12 regional FHLBanks that, prior to the enactment of FIRREA, were
regulated by the FHLBB. FIRREA separated the home financing credit
function of the FHLBanks from the regulation and insurance of
accounts for savings associations by transferring oversight over
the FHLBanks to a new federal agency, the Federal Home Financing
Board (FHFB). As part of that separation, the savings association
supervisory and examination function performed by the FHLBanks was
transferred to the OTS.
As a member, Great Southern is required to purchase and maintain
stock in the FHLBank of Des Moines in an amount equal to the
greater of 1% of its aggregate unpaid residential mortgage loans,
home purchase contracts or similar obligations at the beginning of
each year (if less than 30% of its assets were so invested, the
calculation must be made as if 30% of its assets were so invested),
or 5% (or such greater percentage as established by the FHLBank) of
its outstanding FHLBank advances. At June 30, 1996, Great Southern
had $10 million in FHLBank stock, which was in compliance with this
requirement. In past years, the Bank has received substantial
dividends on its FHLBank stock. Over the past five years, such
dividends have averaged 8.1% and were 7.2% for fiscal year 1996.
Certain provisions of FIRREA require all 12 FHLBanks to provide
financial assistance for the resolution of troubled savings
associations and to contribute to affordable housing programs
through direct loans or interest subsidies on advances targeted for
community investment and low- and moderate-income housing projects.
61
These contributions could cause rates on the FHLBank advances to
increase and could affect adversely the level of FHLBank dividends
paid and the value of FHLBank stock in the future.
Each FHLBank serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the FHLBank
System. It makes loans to members (i.e., advances) in accordance
with policies and procedures established by the board of directors
of the FHLBank. These policies and procedures are subject to the
regulation and oversight of the FHFB.
FIRREA established collateral requirements for FHLBank advances.
First, all advances must be fully secured by sufficient collateral
as determined by the FHLBank. FIRREA prescribed eligible
collateral as fully disbursed, whole first mortgage loans not more
than 90 days delinquent or securities evidencing interests therein,
securities (including mortgage-backed securities) issued, insured
or guaranteed by the federal government or any agency thereof,
FHLBank deposits and, to a limited extent, real estate with readily
ascertainable value in which a perfected security interest may be
obtained. All member's stock in the FHLBank also serves as
collateral for indebtedness to the FHLBank. Other forms of
collateral may be accepted as over collateralization or, under
certain circumstances, to renew advances outstanding on the date of
enactment of FIRREA. All long-term advances are required to be
used to provide funds for residential home financing. The FHFB has
established standards of community service that members must meet
to maintain access to long-term advances. FIRREA authorizes the
FHLBanks to make short-term liquidity advances to solvent
associations in poor financial condition but with prospects of
improving, upon the request of the OTS. In addition, pursuant to
FHFB regulations, each FHLBank is required to establish programs
for affordable housing that involve interest subsidies from the
FHLBanks on advances to members engaged in lending at subsidized
interest rates for low- and moderate-income, owner-occupied housing
and affordable rental housing, and certain other community
purposes.
FEDERAL AND STATE TAXATION
The following discussion contains a summary of certain federal and
state income tax provisions applicable to the Holding Company and
the Bank. It is not a comprehensive description of the federal
income tax laws that may affect the Holding Company and the Bank.
The following discussion is based upon current provisions of the
Internal Revenue Code of 1986 (the "Code") and Treasury and
judicial interpretations thereof.
62
General
The Holding Company and its subsidiaries file a consolidated
federal income tax return using the accrual method of accounting
for the taxable year ending June 30. All corporations joining in
the consolidated federal income tax return are jointly and
severally liable for taxes due and payable by the consolidated
group. The following discussion primarily focuses upon the
taxation of the Bank, since the federal income tax law contains
certain special provisions with respect to savings and loan
associations.
Thrift associations, such as the Bank, are subject, with certain
exceptions, to the provisions of the Code generally applicable to
corporations.
Bad Debt Reserve - Fiscal 1996 and prior
A thrift association is permitted to establish a reserve for bad
debts and to deduct each year a reasonable addition to that reserve
in computing its taxable income. Thrift associations that meet
certain tests relating to the nature of their regulatory
supervision, business operations, income and assets ("qualifying
thrifts") are allowed to calculate their allowable bad debt
deduction under the special rules of section 593 of the Code. In
order to be a qualifying thrift, at least 60% of the thrift's
assets in any year must be qualifying assets (including United
States government securities, loans secured by an interest in
residential real property or deposits, cash and certain other
assets). The Bank presently is, and in the past has been, a
qualifying thrift.
The Code provides different methods for computing the additions to
the bad debt reserve for qualifying real property loans and
nonqualifying loans. Generally, a qualifying real property loan
includes any loan secured by an interest in improved real property
or real property to be improved out of the proceeds of the loan and
a regular or residual interest in certain real estate mortgage
investment conduits. A nonqualifying loan is any loan which is not
a qualifying real property loan. A qualifying thrift may elect
annually to compute its addition to its reserve for qualifying real
property loans under the more favorable of (i) a method based on
the thrift's actual loss experience (the "experience method") or
(ii) a method based on a specified percentage of the thrift's
taxable income, as adjusted (the "percentage of taxable income"
method). The addition to the reserve for nonqualifying loans must
be computed under the experience method.
63
Under the experience method, the deductible annual addition is the
amount necessary to increase the balance of the reserve at the
close of the taxable year to the greater of (i) the amount which
bears the same ratio to loans outstanding at the close of the
taxable year as the total net bad debts sustained during the
current and five preceding taxable years bears to the sum of the
loans outstanding at the close of those six years or (ii) the
balance in the reserve account at the close of the last taxable
year beginning before 1988 (the "base year"), subject to further
limitations in the event total loans outstanding is less than the
total amount outstanding at the close of the base year.
Under the percentage of taxable income method, a qualifying thrift
generally is allowed to deduct as an addition to its bad debt
reserve an amount equal to 8% of such thrift's taxable income
determined without regard to such deduction and with certain
adjustments. The amount thus computed is reduced by the amount
permitted as a deduction for nonqualifying loans under the
experience method. The maximum effective federal income tax rate
(exclusive of the corporate minimum tax) payable by a thrift using
the percentage of taxable income method is approximately 31.3%
compared to a maximum rate of 34% for other corporations.
Although the Bank files a consolidated federal income tax return
with the Holding Company, the Bank generally is permitted to take
only its separate taxable income (as adjusted for this purpose)
into account when computing its allowable bad debt reserve
deduction under the percentage of taxable income method. If,
however, the Holding Company or another member of the consolidated
group incurs tax losses in activities "functionally related" to the
Bank's business, those losses will reduce the Bank's taxable income
for purposes of the bad debt reserve computation. In addition,
taxable income will be reduced by net operating loss carryforwards
of the Bank.
The amount of the addition to the reserve for losses on qualifying
real property loans under the percentage of taxable income method
cannot exceed the amount necessary to increase the balance of the
reserve for losses on qualifying real property loans at the close
of the taxable year to 6% of the balance of the qualifying real
property loans outstanding at that time. In addition, the thrift's
aggregate addition to its reserve for losses on qualifying real
property loans cannot exceed the greater of (i) the amount which,
when added to the addition to the reserve for losses on
nonqualifying loans, equals the amount by which 12% of the total
deposits and withdrawable accounts of depositors of the thrift at
the close of the taxable year exceeds the sum of the thrift's
surplus, undivided profits and reserves at the beginning of such
year or (ii) the amount determined under the experience method. As
of June 30, 1996, the 6% and 12% limitations did not restrict the
deduction available to the Bank.
64
To the extent that a qualifying thrift's reserve for losses on
qualifying real property loans exceeds the amount that would have
been allowed under the experience method (the "excess bad debt
reserve"), and if the thrift makes distributions to stockholders
that are considered to result in withdrawals from that excess bad
debt reserve, the amounts withdrawn are to be included in such
thrift's gross income in the year of withdrawal. A dividend
distribution shall be treated as first out of the thrift's current
or accumulated earnings and profits, as calculated for federal
income tax purposes. Dividend distributions in excess of such
thrift's current or accumulated earnings and profits are considered
to be from the thrift's excess bad debt reserve, to the extent of
the excess bad debt reserve, and thus includible in the thrift's
taxable income. The amount considered to be withdrawn by such a
distribution is the amount of the distribution that is deemed to
have been made from the bad debt reserve plus the amount necessary
to pay tax with respect to the withdrawal, so the total amount
included in gross income, when reduced by the income tax
attributable to the inclusion of such amount in gross income, is
equal to the amount of the distribution that is deemed to have
been made from the bad debt reserve. Distributions in redemption
of stock and distributions in partial or complete liquidation of a
thrift will be considered to be first out of such thrift's excess
bad debt reserve and then out of the thrift's current or
accumulated earnings and profits.
Bad Debt Reserves - Beginning Fiscal Year 1997
Legislation recently passed by Congress and signed by the President
repealed the bad debt reserve method of accounting for bad debts by
large thrifts for taxable years beginning after 1995 (year ended
June 30, 1997 for the Bank). The legislation requires applicable
excess reserves accumulated after 1987 (year ended June 30, 1988
for the Bank) be recaptured and restored to income over a six year
period with the first year beginning after 1995 (year ended June
30, 1997 for the Bank), and eliminates recapture of the applicable
excess reserves accumulated prior to 1988 for thrifts converting to
bank charters. The post 1987 recapture may be delayed for a one-
or two-year period if certain residential loan origination
requirements are met. The amount of post 1987 recapture for the
Bank is estimated at $5 million which would create tax of
approximately $2 million, or $333,000 per year for each of the six
years. The $2 million of tax has been accrued by the Bank in
previous periods and would not be reflected in earnings when paid.
Beginning with the year ending June 30, 1997, the Bank will be
required to follow the specific charge-off method which only allows
a bad debt deduction equal to actual charge-offs, net of
recoveries, experienced during the fiscal year of the deduction.
In a year where recoveries exceed charge-offs, the Bank would be
required to include the net recoveries in taxable income.
65
Interest Deduction
In the case of a financial institution, such as the Bank, no
deduction is allowed for the pro rata portion of its interest
expense which is allocable to tax-exempt interest on obligations
acquired after August 7, 1986. A limited class of tax-exempt
obligations acquired after August 7, 1986 will not be subject to
this complete disallowance rule. For tax-exempt obligations
acquired after December 31, 1982 and before August 8, 1986 and for
obligations acquired after August 7, 1986 that are not subject to
the complete disallowance rule, 80% of interest incurred to
purchase or carry such obligations will be deductible. No portion
of the interest expense allocable to tax-exempt obligations
acquired by a financial institution before January 1, 1983 which is
otherwise deductible will be disallowed. The interest expense
disallowance rules cited above do not significantly impact the
Bank.
Alternative Minimum Tax
Corporations generally are subject to a 20% corporate alternative
minimum tax ("AMT"). The AMT must be paid by a corporation to the
extent it exceeds that corporation's regular federal income tax
liability. The AMT is imposed on "alternative minimum taxable
income," defined as taxable income with certain adjustments and tax
preference items, less any available exemption. Such adjustments
and items include, but are not limited to, (i) net interest
received on certain tax-exempt bonds issued after August 7, 1986;
(ii) 75% of the difference between adjusted current earnings and
alternative minimum taxable income, as otherwise determined with
certain adjustments; and (iii) the amount by which a financial
institution's allowable deduction for the taxable year for
additions to its reserve for bad debts exceeds the deduction that
would have been allowable if the financial institution had made
additions to its bad debt reserve for all taxable years on the
basis of actual experience. Net operating loss carryovers may be
utilized, subject to adjustment, to offset up to 90% of the
alternative minimum taxable income, as otherwise determined. A
portion of the AMT paid, if any, may be credited against future
regular federal income tax liability. In addition, for taxable
years beginning after 1986 and before 1996, corporations generally
are also subject to an environmental tax equal to 0.12% of the
excess of the alternative minimum taxable income (computed without
regard to any net operating loss deduction) for a taxable year in
excess of $2 million.
Missouri Taxation
Missouri based thrift institutions, such as the Bank, are subject
to a franchise tax which is imposed on the thrift's net income at
the rate of 7% of the net income. The net income is determined
without regard for any net operating losses. Missouri based thrift
institutions are entitled to a credit against the franchise tax for
all other state or local taxes on thrift institutions, except taxes
on real and tangible personal property owned by the Bank and held
for lease or rental to others, contributions paid pursuant to the
Missouri unemployment compensation law, social security taxes and
sales and use taxes.
66
The Holding Company and its non-financial subsidiaries are subject
to an income tax which is imposed on the corporation's net income
at the rate of 6.25% for fiscal year 1996. The return is filed on
a consolidated basis by all members of the consolidated group
excluding the Bank.
Delaware Taxation
As a Delaware corporation, the Holding Company is required to file
annual returns with and pay annual fees to the State of Delaware.
The Holding Company is also subject to an annual franchise tax
imposed by the State of Delaware based on the number of authorized
shares of Holding Company common stock.
Examinations
The Holding Company and its consolidated subsidiaries have not been
audited recently by the Internal Revenue Service with respect to
consolidated federal income tax returns, and as such, these returns
have been closed without audit through June 30, 1992.
Item 2. Properties.
The following table sets forth certain information concerning the
main office and each branch office of the Company at September 1,
1996. The aggregate net book value of the Company's premises and
equipment was $6.7 million at June 30, 1996 and 1995. See also
Note 5 and Note 12 of the Notes to Consolidated Financial
Statements included in the Annual Report to Stockholders, which
portions are incorporated herein by reference. Substantially all
buildings owned are free of encumbrances or mortgages. In the
opinion of Management, the facilities are adequate and suitable for
the needs of the Company.
Owned Lease Expiration
Year or (Including Any
Location Opened Leased Renewal Option)
- ----------------------------------------------------------- ------ ------- -----------------
CORPORATE HEADQUARTERS AND MAIN BANK:
1451 E. Battlefield Springfield, Missouri 1976 Owned N/A
BRANCH BANKS:
430 South Avenue Springfield, Missouri 1983 Owned N/A
Kearney at Kansas Springfield, Missouri 1976 Leased* 2000
2410 N. Glenstone Springfield, Missouri 1977 Leased* 2003
1955 S. Campbell Springfield, Missouri 1979 Leased* 2030
2631 E. Sunshine Springfield, Missouri 1988 Leased* 2017
1580 W. Battlefield Springfield, Missouri 1985 Leased* 2018
67
Owned Lease Expiration
Year or (Including Any
Location Opened Leased Renewal Option)
- ----------------------------------------------------------- ------ ------- -----------------
723 N. Benton Springfield, Missouri 1985 Owned N/A
Highway 14 Nixa, Missouri 1995 Leased* 2019
1505 S. Elliot Aurora, Missouri 1985 Leased 2003
Jefferson & Washington Ava, Missouri 1982 Owned N/A
110 W. Hensley Branson, Missouri 1982 Owned N/A
919 W. Dallas Buffalo, Missouri 1976 Owned N/A
527 Ozark Cabool, Missouri 1989 Leased 2004
400 S. Garrison Carthage, Missouri 1990 Owned N/A
1710 E. 32nd Street Joplin, Missouri 1989 Leased* 2031
Highway 00 and 13 Kimberling City, Missouri 1984 Owned N/A
528 S. Jefferson Lebanon, Missouri 1978 Leased* 2018
714 S. Neosho Boulevard Neosho, Missouri 1991 Owned N/A
Highway 54 Osage Beach, Missouri 1987 Owned N/A
1000 W. Jackson Ozark, Missouri 1985 Owned N/A
208 South Street Stockton, Missouri 1988 Leased 2005
323 E. Walnut Thayer, Missouri 1978 Leased* 2011
1210 Parkway Shopping Center West Plains, Missouri 1975 Owned N/A
1729 W. Highway 76 Branson, Missouri 1983 Owned N/A
TRAVEL OFFICES:
5000 E. Kearney Springfield, Missouri 1982 Leased 2000
INSURANCE OFFICES
500 N. Third Ozark, Missouri 1988 Leased 1995
_____________________________
* Building owned with land leased.
The Bank maintains depositor and borrower customer files on an on-
line basis, utilizing a telecommunications network, portions of
which are leased. The book value of all data processing and
computer equipment utilized by the Bank at June 30, 1996 was
$578,000 compared to $732,000 at June 30, 1995. Management has a
disaster recovery plan in place with respect to the data processing
system.
The Bank maintains a network of Automated Teller Machines ("ATMs").
The Bank utilizes an external service for operation of the ATMs
which also allows access to the various national ATM networks. A
total of 31 ATMs are located at various branches and primarily
convenience stores located throughout southwest and central
Missouri. The book value of all ATMs utilized by the Bank at June
30, 1996 was $485,000 compared to $250,000 at June 30, 1995.
68
Item 3. Legal Proceedings.
The Registrant and its subsidiaries are involved as plaintiff or
defendant in various legal actions arising in the normal course of
their businesses. While the ultimate outcome of the various legal
proceedings involving the Registrant and its subsidiaries cannot be
predicted with certainty, it is the opinion of management, after
consultation with legal counsel, that these legal actions currently
are not material to the Registrant.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
quarter ended June 30, 1996.
Executive Officers of the Registrant.
Pursuant to General Instruction G(3) of Form 10-K and Instruction 3
to Item 401(b) of Regulation S-K, the following list is included as
an unnumbered item in Part I of this Form 10-K in lieu of being
included in the Registrant's Definitive Proxy Statement, which was
filed on September 18, 1996.
The following information as to the business experience during the
past five years is supplied with respect to executive officers of
the Holding Company and its subsidiaries who are not directors of
the Holding Company and its subsidiaries. There are no
arrangements or understandings between the persons named and any
other person pursuant to which such officers were selected. The
executive officers are elected annually and serve at the discretion
of their respective Boards of Directors with the exception of
Messrs Gibson and Turner who have three year employment contracts
with the Bank.
Don M. Gibson. Mr. Gibson, age 52, is the Executive Vice
President, Chief Operating Officer and Secretary of the Bank and
the Holding Company. He has supervisory responsibilities over the
Bank's Information Services, Accounting, Staff and Line Operations
areas. Mr. Gibson has been with the Holding Company and the Bank
since 1975.
Richard F. Huff. Mr. Huff, age 74, is Senior Vice President in
charge of lending at the Bank. Mr. Huff rejoined the Bank in
January 1990 after working as CEO from January 1987 to December
1989 for Huff Investment, an unaffiliated real estate management
company that manages the Bank's foreclosed assets. Mr. Huff was in
charge of managing the Bank's foreclosed assets during his
employment with Huff Investment. Prior to joining Huff Investment,
Mr. Huff had been with Great Southern since January of 1964,
serving much of that time as Senior Vice President in charge of
Real Estate lending.
69
Joseph W. Turner. Mr. Turner, age 32, is Executive Vice President
and General Counsel of the Holding Company and Executive Vice
President and General Counsel in the commercial lending area at the
Bank. Mr. Turner joined the Bank in June 1991 and the Holding
Company in 1995. Prior to joining the Bank, Mr. Turner was an
attorney with the Kansas City, Missouri law firm of Stinson, Mag
and Fizzell. His practice was primarily in the areas of banking,
creditors' rights and securities regulation. Mr. Turner is the son
of Mr. William V. Turner and the nephew of Mr. Albert F. Turner.
Steven G. Mitchem. Mr. Mitchem, age 44, is Vice President and
Credit Administration Officer of the Bank. He joined the Bank in
1990 and is responsible for administration of commercial lending
policies and banking regulatory matters. Prior to joining the
Bank, Mr. Mitchem was a Senior Bank Examiner for the Federal
Deposit Insurance Corporation.
Richard L. Wilson. Mr. Wilson, age 38, is Vice President and
Controller of the Bank. He joined the Bank in 1986 and is
responsible for the internal and external financial reporting of
the Holding Company and its subsidiaries. Mr. Wilson is a
Certified Public Accountant.
70
PART II
Responses incorporated by reference into the items under Part II of
this Form 10-K are done so pursuant to Rule 12b-23 and General
Instruction G(2) for Form 10-K.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.
Market Information. The Holding Company's Common Stock is listed
on the National Market System of the National Association of
Securities Dealers Automated Quotations ("NASDAQ") System under the
symbol "GSBC." The following table sets forth the range of high
and low bid prices of the Holding Company's Common Stock during
each fiscal quarter for fiscal years 1996 and 1995, as reported by
the NASD. These quotations represent bid prices between dealers
and do not include retail mark-up, mark-down, or commissions and do
not necessarily represent actual transactions.
Dividend
High Low Declarations
Fiscal Year 1996
First Quarter $22 1/2 $ 18 1/2 $.175
Second Quarter 24 3/4 21 1/4 .175
Third Quarter 25 3/8 23 1/4 .175
Fourth Quarter 27 1/2 24 .175
Fiscal Year 1995
First Quarter $19 $14 3/4 $.15
Second Quarter 18 1/2 16 1/2 .15
Third Quarter 17 3/4 16 1/2 .15
Fourth Quarter 19 1/4 16 1/2 .15
The last inter-dealer bid for the Holding Company's Common Stock on
June 30, 1996 was $27 1/2.
Holders. For a discussion of the holders of the Registrant's
Common Stock and dividends on such stock, see the discussion under
the headings "Corporate Profile" and "Stock Information" of the
Annual Report to Stockholders, which portions are incorporated
herein by reference.
71
Item 6. Selected Financial Data.
The following selected financial data should be read in
conjunction with the Company's consolidated financial statements,
the notes thereto and the accompanying independent accountant's
opinion included in the Company's Annual Report to Stockholders,
which portions are incorporated herein by reference, and the
following information is qualified by reference thereto.
Year Ended June 30,
----------------------------------------------------------
1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
Summary Statement of Condition Information:
Year-end assets $668,105 $622,380 $534,740 $515,293 $470,672 $468,083
Year-end loans receivable, net 546,759 519,255 443,750 419,527 352,016 337,066
Year-end allowance for loan losses 14,356 14,601 13,636 10,590 6,029 4,732
Year-end available-for-sale securities 4,656 3,091 -- -- -- --
Year-end held-to-maturity securities 49,182 46,970 48,217 51,218 61,915 82,105
Year-end foreclosed assets held for sale, net 9,862 7,999 6,070 8,909 12,386 14,230
Year-end allowance for foreclosed asset losses 1,086 933 1,549 1,192 1,117 1,186
Year-end intangibles 1,102 1,187 1,272 1,356 1,441 1,526
Year-end deposits 397,055 384,327 358,987 326,611 350,346 349,070
Year-end total borrowings 197,265 168,270 108,587 130,253 64,994 63,462
Year-end stockholders' equity (retained
earnings substantially restricted) 67,808 62,982 61,462 51,723 49,879 49,229
Average loans receivable, net 536,695 486,726 433,638 376,620 340,365 339,027
Average total assets 643,885 584,536 527,842 479,261 465,107 462,969
Average deposits 385,734 374,011 340,933 327,647 347,511 352,793
Average stockholders' equity 65,355 60,942 57,758 50,618 49,614 48,500
Year-end number of deposit accounts 59,461 58,054 53,960 53,251 56,419
Year-end number of full-service offices 25 25 25 25 27 27
Summary Income Statement Information:
Interest income $53,938 $47,110 $ 38,988 $ 37,162 $ 39,023 $ 42,929
Interest expense 28,132 23,411 17,433 16,810 22,136 28,333
Net interest income 25,806 23,699 21,555 20,352 16,887 14,596
Provision for loan losses 1,451 1,319 3,023 4,677 2,857 1,864
Net interest income after provision for loan losses 24,355 22,380 18,532 15,675 14,030 12,732
Service charge fees 2,382 2,273 2,131 1,762 1,623 1,602
Net realized gains on sales of
available-for-sale securities 680 21 -- -- -- --
Net realized gains on sales of loans 540 92 565 387 295 61
Income (expense) on foreclosed assets 728 (243) 588 352 (1,068) (647)
Other non-interest income 5,994 5,771 5,565 4,692 4,282 3,993
Non-interest expenses 16,274 15,293 14,661 13,599 12,826 13,110
Income before income taxes 18,405 15,001 12,720 9,269 6,336 4,631
Provision for income taxes 7,111 5,513 4,379 4,533 2,544 1,368
Income before change in accounting principle 11,294 9,488 8,341 4,736 3,792 3,263
Change in accounting principle -- -- 3,375 -- -- --
Net income $11,294 $ 9,488 $ 11,716 $ 4,736 $ 3,792 $ 3,263
72
Year Ended June 30,
---------------------------------------------------------
1996 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- -------
Per Common Share Data:
Primary earnings per common share:
Income before change in accounting principle $2.46 $2.00 $1.66 $.92 $.68 $.55
Change in accounting principle -- -- .67 -- -- --
Net Income 2.46 2.00 2.33 .92 .68 .55
Fully diluted earnings per common share:
Income before change in accounting principle $2.45 $2.00 $1.66 $.92 $.68 $.55
Change in accounting principle -- -- .67 -- -- --
Net Income 2.45 2.00 2.33 .92 .68 .55
Cash dividends declared .70 .60 .31 .13 .13 .13
Book value 15.39 13.99 12.84 10.82 9.86 8.40
Average shares outstanding 4,463 4,581 4,824 4,899 5,550 5,904
Year-end actual shares outstanding 4,406 4,503 4,785 4,779 5,055 5,583
Year-end fully diluted shares outstanding 4,609 4,739 5,028 5,127 5,550 5,904
Earnings Performance Ratios:
Return on assets 1.75% 1.62% 1.58% 0.99% 0.82% 0.70%
Return on stockholders' equity 17.28 15.57 14.44 9.36 7.64 6.73
Non-interest expense to average total assets 2.53 2.62 2.78 2.77 2.99 2.83
Average interest rate spread 3.82 3.86 4.05 4.20 3.55 2.93
Year-end interest rate spread 3.72 3.79 3.87 3.71 3.60 3.28
Net interest margin (1) 4.21 4.25 4.31 4.51 3.87 3.36
Adjusted efficiency ratio (excl. foreclosed assets) 45.97 48.01 49.17 50.01 55.56 64.73
Average interest-earning assets as a percentage
of average interest-bearing liabilities 108.4 109.3 107.4 108.3 107.5 106.6
Year Ended June 30,
---------------------------------------------------------
1996 1995 1994 1993 1992 1991
------- ------- ------- ------- ------- -------
Asset Quality Ratios:
Allowance for loan losses/year-end loans 2.63% 2.81% 3.08% 2.52% 1.71% 1.41%
Non-performing assets/year-end
loans and foreclosed assets 2.83 2.25 3.33 3.40 4.64 5.58
Allowance for loan losses/non-performing loans 243.03 380.23 186.04 237.50 130.89 88.90
Net charge-offs/average loans .32 .07 (0.01) 0.03 0.46 0.74
Non-performing assets/average total assets 2.62 2.18 2.83 3.04 3.89 4.48
Capital Ratios:
Average stockholders' equity to average assets 10.15% 10.43% 10.94% 10.56% 10.67% 10.47%
Year-end tangible stockholders' equity to assets 10.09 9.93 11.26 9.77 10.28 10.20
Common dividend pay-out ratio 28.6 30.0 13.9 13.0 17.6 21.7
(1) For further discussion, refer to Management's Discussion and Analysis of Financial Condition and Results of
Operations-Average Balances, Interest Rates and Yields in the Annual Report to Stockholders, which portions are
incorporated herein by reference.
73
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation.
See "Management's Discussion and Analysis of Financial Condition
and Results of Operation" in the Annual Report to Stockholders,
which portions are incorporated herein by reference.
Item 8. Financial Statements and Supplementary Information.
The financial statements and supplementary data required by this
Item are set forth in the Annual Report to Stockholders, which
portions are incorporated herein by reference. All financial
statement schedules should be read in conjunction with the
financial statements the notes thereto and the related report of
the Company's independent accountants in the Annual Report and are
qualified by reference thereto.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
Responses incorporated by reference into the items under Part III
of this Form 10-K are done so pursuant to Rule 12b-23 and General
Instruction G(3) to Form 10-K. The Registrant's Definitive Proxy
Statement was electronically filed on September 18, 1996.
Item 10. Directors and Executive Officers of the Registrant.
(a) Directors of the Registrant
See "Election of Directors" in the Registrant's Definitive
Proxy Statement for fiscal year 1996, which portion is
incorporated herein by reference.
(b) Executive Officers of the Registrant
Included under Part I of this Form 10-K.
(c) Compliance with Section 16(a) of the Exchange Act
See "Beneficial Ownership Reports of Management" in the
Registrant's Definitive Proxy Statement for the fiscal year
1996, which portion is incorporated herein by reference.
Item 11. Executive Compensation.
See "Executive Compensation" in the Registrant's Definitive Proxy
Statement, which portion is incorporated herein by reference except
for the "Report on Executive Compensation" and the "Stock
Performance Graph."
74
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
(a) See "Voting" in the Registrant's Definitive Proxy Statement,
which portion is incorporated herein by reference.
(b) See "Stock Ownership of Management" in the Registrant's
Definitive Proxy Statement, which portion is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions.
See "Indebtedness of Management and Transactions with Certain
Related Persons" in the Registrant's Definitive Proxy Statement,
which portion is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) List of Documents Filed as Part of This Report
(1) Financial Statements
The financial statements and related notes, together with the
report of Baird, Kurtz and Dobson dated August 12, 1996, which
appears on pages 26 through 39 of the Registrant's Annual
Report to Stockholders, which portion is incorporated herein by
reference.
(2) Financial Statement Schedules
None. The financial statement schedules are included in the
Annual Report to Stockholders, which portions are incorporated
herein by reference into Item 8 of Part II of this Form 10-K.
All financial statement schedules should be read in conjunction
with the financial statements the notes thereto and the related
report of the Company's independent accountants in the Annual
Report to Stockholders and are qualified by reference thereto.
Schedules and exhibits for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission not included with these financial statement
schedules have been omitted because they were not applicable,
significant or the required information is shown in the
financial statements or note thereto.
(3) List of Exhibits
Exhibits incorporated by reference below are incorporated by
reference pursuant to Rule 12b-32.
(2) Plan of acquisition, reorganization, arrangement,
liquidation, or succession
75
Inapplicable.
(3) Articles of incorporation and Bylaws
(i) The Registrant's Certificate of Incorporation
previously filed with the Commission (File no. 33-
30597) as Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 dated August 18,1989, is
incorporated herein by reference as Exhibit 3.1.
(ii) The Registrant's Bylaws, as amended, previously
filed with the Commission (File no. 33-30597) as
Exhibit 3.2 to the Registrant's Annual Report on Form
10-K for fiscal year ended June 30, 1990, is
incorporated herein by reference as Exhibit 3.2.
(4) Instruments defining the rights of security holders,
including indentures
Inapplicable.
(9) Voting trust agreement
Inapplicable.
(10) Material contracts
The Registrant's 1989 Stock Option and Incentive Plan
previously filed with the Commission (File no. 33-
30597) as Exhibit 10.2 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended June 30,
1990, is incorporated herein by reference as Exhibit
10.1.
An Employment Agreement dated February 1, 1990 between
the Registrant and William V. Turner previously filed
with the Commission (File no. 33-30597) as Exhibit 10.3
to the Registrant's Registration Statement on Form S-1
dated August 18, 1989, is incorporated herein by
reference as Exhibit 10.2.
An Employment Agreement dated February 1, 1990 between
the Registrant and Don M. Gibson previously filed with
the Commission (File no. 33-30597) as Exhibit 10.3 to
the Registrant's Registration Statement on Form S-1
dated August 18, 1989, is incorporated herein by
reference as Exhibit 10.3.
An Employment Agreement dated July 1, 1993 between the
Registrant and Joseph W. Turner previously filed with
the Commission (File no. 33-30597) as Exhibit 10.4 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended June 30, 1994, is incorporated herein
by reference as Exhibit 10.4.
(11) Statement re computation of per share earnings
Inapplicable.
76
(12) Statements re computation of ratios
Inapplicable.
(13) Annual report to security holders, Form 10-Q or quarterly
report to security holders
The Annual Report to Stockholders was filed
electronically on September 18, 1996.
(16) Letter re change in certifying accountant
Inapplicable.
(18) Letter re change in accounting principles
Inapplicable.
(21) Subsidiaries of the registrant
A listing of the Registrant's subsidiaries is attached
hereto as Exhibit 21.
(22) Published report regarding matters submitted to vote of
security holders
Inapplicable.
(23) Consents of experts and counsel
The consent of Baird, Kurtz & Dobson to the
incorporation by reference into the Form S-8 previously
filed on December 16, 1992 with the Commission (File
no. 33-55832) of their report on the financial
statements included in this Form 10-K, is attached
hereto as Exhibit 23.
(24) Power of attorney
Inapplicable.
(27) Financial Data Schedule
Inapplicable.
(28) Information from reports furnished to state insurance
regulatory authorities
Inapplicable.
(99) Additional Exhibits
Inapplicable.
(b) Reports on Form 8-K
None.
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto
duly authorized.
GREAT SOUTHERN BANCORP, INC.
(Registrant)
By /s/ William V. Turner
William V. Turner
President and Chairman of the Board
(Principal Executive Officer)
Date: September 18, 1996
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the date
indicated.
Signature Capacity in which signed Date
- --------------------- ------------------------- ------------------
/s/ William V. Turner President, Chairman of September 18, 1996
the Board and Director
(Principal Executive
Officer)
/s/Don M. Gibson Executive Vice President, September 18, 1996
Secretary and Treasurer
(Principal Financial
Officer and Principal
Accounting Officer)
/s/ William E. Barclay Director September 18, 1996
/s/ Larry D. Frazier Director September 18, 1996
/s/ William K. Powell Director September 18, 1996
/s/ Albert F. Turner Director September 18, 1996
78
Great Southern Bancorp, Inc.
Index to Exhibits
Exhibit
No. Document Page No.
- --------- -------------------------------------------- ----------
11 Statement Re Computation of Earnings Per Share . . 79
21 Subsidiaries of the Registrant . . . . . . . . . . 80
23 Consent of Baird, Kurtz & Dobson,
Certified Public Accountants . . . . . . . . . . 81
27 Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and not filed. . 82
79
Exhibit 11
----------
Statement Re Computation of Earnings Per Share
Year Ended June 30,
-----------------------
1996 1995
---------- ----------
Primary:
Average shares outstanding 4,463,096 4,581,146
Net effect of dilutive stock options -
based on the treasury stock method
using average market price 134,706 153,670
--------- ---------
Primary Shares 4,597,802 4,734,816
========= =========
Net income $11,293,955 $9,487,930
========== =========
Per share amount $2.46 $2.00
==== ====
Fully diluted:
Average shares outstanding 4,463,096 4,581,146
Net effect of dilutive stock options -
based on the treasury stock method
using the higher of average market
price or period end market price 145,979 157,587
--------- ---------
Fully diluted shares 4,609,075 4,738,733
========= =========
Net income $11,293,955 $9,487,930
========== =========
Per share amount $2.45 $2.00
==== ====
80
Exhibit 21
----------
SUBSIDIARIES OF THE REGISTRANT
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
- ---------------- ---------------------- ---------- -------------
Great Southern Great Southern Bank 100% Missouri
Bancorp, Inc.
Great Southern Great Southern 100% Missouri
Bancorp, Inc. Financial Corporation
Great Southern Great Southern Capital 100% Missouri
Bancorp, Inc. Management, Inc.
Great Southern Appraisal Services, Inc. 100% Missouri
Financial
Corporation
81
We consent to the incorporation by reference on Registration
Statement No. 33-55832 on Form S-8 dated December 16, 1992, of our
report on the consolidated financial statements and schedules
included in the Annual Report on Form 10-K of GREAT SOUTHERN
BANCORP, INC. for the year ended June 30, 1996.
/s/ Baird, Kurtz & Dobson
August 12, 1996
Springfield, Missouri