| GREAT SOUTHERN BANCORP INC ITEM 1A RISK FACTORS 38 ITEM 1A RISK FACTORS An investment in the common stock of Great Southern is speculative in nature and is subject to certain risks inherent in the business of Great Southern and the Bank |
| The material risks and uncertainties that management believes affect Great Southern and the Bank are described below |
| You should carefully consider the risks described below, as well as the other information included or incorporated by reference in this Annual Report on Form 10-K, before making an investment in Great Southernapstas common stock |
| The risks described below are not the only ones we face in our business |
| Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations |
| If any of the following risks occur, our business, financial condition or operating results could be materially harmed |
| In such an event, our common stock could decline in price |
| References to "e we, "e "e us, "e and "e our "e in this "e Risk Factors "e section refer to Great Southern and its subsidiaries, including the Bank, unless otherwise specified or unless the context otherwise requires |
| Since our business is concentrated in the Southwest Missouri area, including the Springfield metropolitan area and Branson, a downturn in the Springfield and Branson economies may adversely affect our business |
| Our lending and deposit gathering activities have been historically concentrated primarily in the Springfield and Branson, Missouri areas |
| Our success depends on the general economic condition of Springfield and Branson and their surrounding areas |
| Although we believe the economy in these areas has been favorable, we do not know whether these conditions will continue |
| Our greatest concentration of loans and deposits is in the Greater Springfield area |
| With a population of approximately 390cmam000, the Greater Springfield area is the third largest metropolitan area in Missouri |
| 38 [40]Next Page The next largest concentration of loans is in the Branson area |
| The region is a vacation and entertainment center, attracting tourists to its theme parks, resorts, country music and novelty shows and other recreational facilities |
| As a result of the rapid growth of the Branson area in the early 1990apstas, property values increased at unusually high rates |
| This growth also provided for increased loan demand and a more volatile lending market than had previously been present in that area |
| Due to overbuilding of commercial properties during the mid-1990apstas, property values experienced downward pressure in the late 1990apstas |
| In recent years, commercial real estate values have stabilized |
| Reduced demand for residential properties in the 1990apstas similarly created downward pressure on one- to four-family and multi-family, primary and vacation residences in this area |
| In recent years, residential real estate demand and values have shown improvements |
| Branson is currently experiencing significant growth again as a result of a large retail, hotel, convention center project which is under construction in Bransonapstas historic downtown |
| At December 31, 2005, approximately 11prca of our loan portfolio consisted of loans in the two county region that includes the Branson area |
| Adverse changes in the regional and general economic conditions could reduce our growth rate, impair our ability to collect loans, increase loan delinquencies, increase problem assets and foreclosure, increase claims and lawsuits, decrease the demand for the Bankapstas products and services, and decrease the value of collateral for loans, especially real estate, thereby having a material adverse effect on our financial condition and results of operations |
| Our loan portfolio possesses increased risk due to our relatively high concentration of commercial and residential construction, commercial real estate and multi-family loans |
| Our commercial and residential construction, commercial real estate and multi-family loans accounted for approximately 76dtta8prca of our total loan portfolio as of December 31, 2005 |
| Generally, we consider these types of loans to involve a higher degree of risk compared to first mortgage loans on one- to four-family, owner-occupied residential properties |
| At December 31, 2005, we had dlra129dtta5 million of loans secured by residential subdivisions, dlra125dtta5 million of loans secured by healthcare facilities, dlra115dtta0 million of loans secured by motels and dlra97dtta3 million of loans secured by retail facilities, which are particularly sensitive to certain risks including the following: * large loan balances owed by a single borrower; * payments that are dependent on the successful operation of the project; and * loans that are more directly impacted by adverse conditions in the real estate market or the economy generally |
| The risks associated with construction lending include the borrowerapstas inability to complete the construction process on time and within budget, the sale of the project within projected absorption periods, the economic risks associated with real estate collateral, and the potential of a rising interest rate environment |
| These loans may include financing the development and/or construction of residential subdivisions |
| This activity may involve financing land purchase, infrastructure development (ie roads, utilities, etc), as well as construction of residences or multi-family dwellings for subsequent sale by the developer/builder |
| Because the sale of developed properties is critical to the success of developer business, loan repayment may be especially subject to the volatility of real estate market values |
| Management has established underwriting and monitoring criteria to help minimize the inherent risks of commercial real estate construction lending |
| However, there is no guaranty that these controls and procedures will avoid all losses on this type of lending |
| 39 [41]Next Page Commercial and multi-family real estate lending typically involves higher loan principal amounts and the repayment of the loans generally is dependent, in large part, on the successful operation of the property securing the loan or the business conducted on the property securing the loan |
| These loans may therefore be more adversely affected by conditions in the real estate markets or in the economy generally |
| For example, if the cash flow from the borrowerapstas project is reduced due to leases not being obtained or renewed, the borrowerapstas ability to repay the loan may be impaired |
| In addition, many commercial and multi-family real estate loans are not fully amortized over the loan period, but have balloon payments due at maturity |
| A borrowerapstas ability to make a balloon payment typically will depend on being able to either refinance the loan or completing a timely sale of the underlying property |
| We plan to continue our emphasis on commercial real estate and construction lending |
| Because of the increased risks related to these types of loans, we may determine it necessary to increase the level of our provision for loan losses |
| Increased provisions for loan losses would adversely impact our operating results |
| Business-The Company-Lending Activities-Commercial Real Estate and Construction Lending, "e "e -Other Commercial Lending, "e "e -Residential Real Estate Lending "e and "e -Allowance for Losses on Loans and Foreclosed Assets "e in this Annual Report on Form 10-K Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio |
| However, every loan we make carries a certain risk of non-payment |
| This risk is affected by, among other things: * cash flow of the borrower and/or the project being financed; * in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral; * the credit history of a particular borrower; * changes in economic and industry conditions; and * the duration of the loan |
| We maintain an allowance for loan losses that we believe is a reasonable estimate of known and inherent losses within the loan portfolio |
| We make various assumptions and judgments about the collectibility of our loan portfolio |
| Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans and performance of customers relative to their financial obligations with us |
| The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may exceed current estimates |
| Growing loan portfolios are, by their nature, unseasoned |
| As a result, estimating loan loss allowances for growing portfolios is more difficult, and may be more susceptible to changes in estimates, and to losses exceeding estimates, than more seasoned portfolios |
| We cannot fully predict the amount or timing of losses or whether the loss allowance will be adequate in the future |
| Excessive loan losses and significant additions to our allowance for loan losses could have a material adverse impact on our financial condition and results of operations |
| In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs |
| Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations |
| 40 [42]Next Page Our operations depend upon our continued ability to access brokered deposits and Federal Home Loan Bank advances |
| Due to the high level of competition for deposits in our market, we utilize a sizable amount of certificates of deposit obtained through deposit brokers and advances from the Federal Home Loan Bank of Des Moines to help fund our asset base |
| Brokered deposits are marketed through national brokerage firms that solicit funds from their customers for deposit in banks, including our bank |
| Brokered deposits and Federal Home Loan Bank advances may generally be more sensitive to changes in interest rates and volatility in the capital markets than retail deposits attracted through our branch network, and our reliance on these sources of funds increases the sensitivity of our portfolio to these external factors |
| At December 31, 2005, we had dlra584dtta4 million in brokered deposits and dlra203dtta4 million in Federal Home Loan Bank advances |
| Bank regulators can restrict our access to these sources of funds in certain circumstances |
| For example, if the Bankapstas regulatory capital ratios declined below the "e well capitalized "e status, banking regulators would require the Bank to obtain their approval prior to obtaining or renewing brokered deposits |
| The regulators might not approve our purchases of deposits in amounts that we desire or at all |
| Similarly, Federal Home Loan Bank advances are only available to borrowers that meet certain conditions |
| If the Bank were to cease meeting these conditions, our access to Federal Home Loan Bank advances could be significantly reduced or eliminated |
| We rely on these sources of funds because we believe that generating funds through brokered deposits and Federal Home Loan Bank advances in many instances decreases our cost of funds, relative to the cost of generating and retaining retail deposits through our branch network |
| If our access to brokered deposits or Federal Home Loan Bank advances were reduced or eliminated for whatever reason, the resulting decrease in our net interest income or limitation on our ability to fund additional loans would adversely affect our business, financial condition and results of operations |
| Certain Federal Home Loan Banks, including Des Moines, have experienced lower earnings from time to time and paid out lower dividends to its members |
| Future problems at the Federal Home Loan Banks may impact the collateral necessary to secure borrowings and limit the borrowings extended to its member banks, as well as require additional capital contributions by its member banks |
| Should this occur, Great Southernapstas short term liquidity needs could be negatively impacted |
| Should Great Southern be restricted from using Federal Home Loan Bank advances due to weakness in the system or with the Federal Home Loan Bank of Des Moines, Great Southern may be forced to find alternative funding sources |
| Such alternative funding sources may include the utilization of existing lines of credit with third party banks along with seeking other lines of credit, borrowing under repurchase agreement lines, increasing deposit rates to attract additional funds, accessing additional brokered deposits, or selling certain investment securities categorized as available-for-sale in order to maintain adequate levels of liquidity |
| At December 31, 2005, the Bank owned dlra11dtta9 million of Federal Home Loan Bank of Des Moines stock, which paid a dividend approximating 2dtta80prca for the fourth quarter of 2005 |
| The Federal Home Loan Bank of Des Moines may eliminate or reduce dividend payments at any time in the future in order for it to maintain or restore its retained earnings |
| 41 [43]Next Page Our future success is dependent on our ability to compete effectively in the highly competitive banking industry |
| We face substantial competition in all phases of our operations from a variety of different competitors |
| Our future growth and success will depend on our ability to compete effectively in this highly competitive environment |
| To date, we have grown our business successfully by focusing on our geographic market and emphasizing the high level of service and responsiveness desired by our customers |
| We compete for loans, deposits and other financial services with other commercial banks, thrifts, credit unions, consumer finance companies, insurance companies and brokerage firms |
| Many of our competitors offer products and services which we do not offer, and many have substantially greater resources, name recognition and market presence that benefit them in attracting business |
| In addition, larger competitors (including certain national banks that have a significant presence in Great Southernapstas market area) may be able to price loans and deposits more aggressively than we do, and smaller and newer competitors may also be more aggressive in terms of pricing loan and deposit products than us in order to obtain a larger share of the market |
| As we have grown, we have become increasingly dependent on outside funding sources, including funds borrowed from the Federal Home Loan Bank and brokered deposits, where we face nationwide competition |
| Some of the financial institutions and financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies, federally insured state-chartered banks and national banks and federal savings banks |
| As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services |
| We also experience competition from a variety of institutions outside of the Companyapstas market area |
| Some of these institutions conduct business primarily over the Internet and may thus be able to realize certain cost savings and offer products and services at more favorable rates and with greater convenience to the customer |
| Our business may be adversely affected by the highly regulated environment in which we operate, including the various capital adequacy guidelines we are required to meet |
| We are subject to extensive federal and state legislation, regulation, examination and supervision |
| Recently enacted, proposed and future legislation and regulations have had, will continue to have, or may have a material adverse effect on our business and operations |
| Our success depends on our continued ability to maintain compliance with these regulations |
| Some of these regulations may increase our costs and thus place other financial institutions in stronger, more favorable competitive positions |
| We cannot predict what restrictions may be imposed upon us with future legislation |
| -The Company -Government Supervision and Regulation "e in this Annual Report on Form 10-K Great Southern and the Bank are required to meet certain regulatory capital adequacy guidelines and other regulatory requirements imposed by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Missouri Division of Finance |
| If Great Southern or the Bank fails to meet these minimum capital guidelines and other regulatory requirements, our financial condition and results of operations could be materially and adversely affected and could compromise the status of Great Southern as a financial holding company |
| See "e Item 1 -The Company -Government Supervision and Regulation "e in this Annual Report on Form 10-K for detailed capital guidelines for bank holding companies and banks |
| 42 [44]Next Page We may be adversely affected by interest rate changes |
| Our earnings are largely dependent upon our net interest income |
| Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds |
| Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, in particular, the Federal Reserve Board |
| Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the amount of interest we pay on deposits and borrowings, but such changes could also affect (i) our ability to originate loans and obtain deposits, (ii) the fair value of our financial assets and liabilities, and (iii) the average duration of our loan and mortgage-backed securities portfolios |
| If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected |
| Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings |
| We generally seek to maintain a neutral position in terms of the volume of assets and liabilities that mature or re-price during any period |
| As such, Great Southern has adopted asset and liability management strategies to attempt to minimize the potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of loans, investments and funding sources, including interest rate swaps, so that it may reasonably maintain its net interest income and net interest margin |
| However, interest rate fluctuations, the level and shape of the interest rate yield curve, loan prepayments, loan production and deposit flows are constantly changing and influence the ability to maintain a neutral position |
| Accordingly, we may not be successful in maintaining a neutral position and, as a result, our net interest margin may be adversely impacted |
| Our exposure to operational risks may adversely affect the Company |
| Similar to other financial institutions, the Company is exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, the risk that sensitive customer or Company data is compromised, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors |
| If any of these risks occur, it could result in material adverse consequences for the Company |
| We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements |
| The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services |
| In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs |
| Our future success will depend, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience, as well as to create additional efficiencies in our operations |
| Many of our competitors have substantially greater resources to invest in technological improvements |
| We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our clients |
| As a service to our clients, we currently offer an Internet PC banking product |
| Use of this service involves the transmission of confidential information over public networks |
| We cannot be sure that advances in computer capabilities, new discoveries in the field of cryptography or other developments will not result in a compromise or breach in the commercially available encryption and authentication technology that we use to protect our clients &apos transaction data |
| If we were to experience such a breach or compromise, we could suffer losses and our operations could be adversely affected |
| 43 [45]Next Page Our accounting policies and methods impact how we report our financial condition and results of operations |
| Application of these policies and methods may require management to make estimates about matters that are uncertain |
| Great Southernapstas accounting policies and methods are fundamental to how the Company records and reports its financial condition and results of operations |
| The Companyapstas management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect managementapstas judgment of the most appropriate manner to report its financial condition and results of operations |
| In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in the Company reporting materially different amounts than would have been reported under a different alternative |
| Note 1 "e Summary of Significant Accounting Policies "e in the "e Notes to Consolidated Financial Statements "e describes the Companyapstas significant accounting policies |
| These accounting policies are critical to presenting the Companyapstas financial condition and results of operations |
| They may require management to make difficult, subjective or complex judgments about matters that are uncertain |
| Materially different amounts could be reported under different conditions or using different assumptions |
| Changes in accounting standards could materially impact our consolidated financial statements |
| The accounting standard setters, including the Financial Accounting Standards Board, Securities and Exchange Commission and other regulatory bodies, from time to time may change the financial accounting and reporting standards that govern the preparation of the Companyapstas consolidated financial statements |
| These changes can be hard to predict and can materially impact how the Company records and reports its financial condition and results of operations |
| In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results, or a cumulative charge to retained earnings |
| Our internal controls may be ineffective |
| We regularly review and update our internal controls, disclosure controls and procedures and corporate governance policies and procedures |
| Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met |
| Any failure or circumvention of our controls or procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations or financial condition |
| Our stock price can fluctuate widely in response to a variety of factors |
| Factors include actual or anticipated variations in our quarterly operating results, recommendations by securities analysts, operating and stock price performance of other companies, news reports, results of litigation and other factors, including those described in this "e Risk Factors "e section |
| General market fluctuations, industry factors and general economic conditions and events, such as economic slowdowns or recessions, interest rate changes and credit loss trends could also cause Great Southernapstas common stock price to decrease regardless of the Companyapstas operating results |
| Our common stock also has a low average daily trading volume relative to many other stocks, which may limit a personapstas ability to quickly accumulate or divest themselves of large blocks of our stock |
| This can lead to significant price swings even when a relatively small number of shares are being traded |