UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-23164
LANDMARK BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Kansas 48-1142260
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification Number
CENTRAL AND SPRUCE STREETS, DODGE CITY, KANSAS 67801
(Address and Zip Code of principal executive offices)
(316) 227-8111
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
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
The number of shares outstanding of each of the issuer's classes of common
stock, as of December 31, 1999:
$.10 par value common stock 1,127,806 shares
(Class) (Outstanding)
LANDMARK BANCSHARES, INC.
INDEX
Page Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Financial Condition as of
December 31, 1999 (unaudited) and September 30, 1999 1
Statements of Income for the Three
Months Ended December 31, 1999 and 1998 (unaudited) 2
Statements of Comprehensive Income for the
Three Months Ended December 31, 1999 and 1998 (unaudited) 3
Statements of Cash Flows for the Three Months Ended
December 31, 1999 and 1998 (unaudited) 4-5
Notes to Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13-15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
None
Item 2. Changes in Securities and Use of Proceeds 16
None
Item 3. Default Upon Senior Securities 16
None
Item 4. Submission of Matter to a Vote of Security Holders 16
None
Item 5. Other Information 16
None
Item 6. Exhibits and Report on Form 8-K 16
(A) None
(B) None
SIGNATURES 17
1
LANDMARK BANCSHARES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY,
LANDMARK FEDERAL SAVINGS BANK
Consolidated Statements of Financial Condition
December 31, 1999 September 30, 1999
(Unaudited)
------------- -------------
ASSETS
Cash and cash equivalents:
Interest bearing $ 3,686,458 $ 4,377,197
Non-interest bearing 2,273,043 1,598,533
Time deposits in other financial institutions 292,119 289,864
Securities held to maturity 28,855,630 28,849,853
Securities available for sale 9,398,923 12,022,530
Mortgage-backed securities held to maturity 12,372,483 13,489,174
Loans receivable, net 182,632,907 177,236,196
Loans held for sale 340,268 604,395
Accrued income receivable 1,559,693 1,547,901
Real estate owned or in judgment and other
repossessed property, net 486,284 146,883
Office properties and equipment, at cost less
accumulated depreciation 1,769,860 1,759,770
Prepaid expenses and other assets 1,764,203 1,949,751
Income taxes receivable, current 0 154,072
Deferred income taxes 113,156 89,865
------------- -------------
TOTAL ASSETS $ 245,545,027 $ 244,115,984
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits 156,036,515 158,936,292
Landmark Official Checks 1,301,066 0
Other Borrowed Money 63,500,000 58,000,000
Advances from borrowers for taxes and
insurance 738,447 2,143,805
Accrued expenses and other Liabilities 1,141,704 2,631,740
Income taxes
Current 215,228 0
------------- -------------
TOTAL LIABILITIES $ 222,932,960 $ 221,711,837
------------- -------------
Stockholders' Equity
Common Stock 228,131 228,131
$.10 par value; 10,000,000 shares authorized;
2,281,312 shares issued
Additional Paid-in Capital 22,705,944 22,706,378
Treasury Stock, at cost, 1,153,506 shares at December 31, 1999 (22,210,403) (22,144,168)
and 1,149,748 shares at September 30, 1999
Retained income (substantially restricted) 22,715,346 22,290,140
Employee Stock Ownership Plan (555,841) (555,841)
Accumulated other comprehensive income (271,110) (120,493)
------------- -------------
Total Stockholders' Equity 22,612,067 22,404,147
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 245,545,027 $ 244,115,984
------------- -------------
2
LANDMARK BANCSHARES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY,
LANDMARK FEDERAL SAVINGS BANK
Consolidated Statements of Income
Three Months
Ended December 31
1998 1999
--------- ---------
(unaudited) (unaudited)
INTEREST INCOME
Interest on loans 3,562,238 3,564,736
Interest and dividends on investment securities 266,837 711,327
Interest on mortgage-backed securities 337,325 203,159
--------- ---------
Total interest income 4,166,400 4,479,222
INTEREST EXPENSE
Deposits 1,929,393 1,797,441
Borrowed funds 553,789 792,631
--------- ---------
Total interest expense 2,483,182 2,590,072
Net interest income 1,683,218 1,889,150
PROVISION FOR LOSSES ON LOANS 75,000 135,000
--------- ---------
Net interest income after provision for losses 1,608,218 1,754,150
NON-INTEREST INCOME
Service charges and late fees 99,040 106,546
Net gain (loss) on sale of available
for sale investments 65,672 10,591
Net gain (loss) on sale of loans 203,178 50,731
Service fees on loans sold 12,059 20,732
Other income 34,828 38,277
414,777 226,877
--------- ---------
NON-INTEREST EXPENSE
Compensation and related expenses 651,860 608,041
Occupancy expense 63,746 63,447
Advertising 13,042 19,682
Federal insurance premium 37,968 37,718
Loss (gain) from real estate operations 1,028 5,928
Data processing 43,035 37,545
Other expense 204,513 252,763
--------- ---------
1,015,192 1,025,124
Income before income taxes 1,007,803 955,903
INCOME TAXES EXPENSES 403,500 369,300
--------- ---------
Net income 604,303 586,603
--------- ---------
Basic earnings per share $ 0.50 $ 0.55
Diluted earnings per share $ 0.44 $ 0.50
Dividends per share $ 0.15 $ 0.15
3
LANDMARK BANCSHARES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY,
LANDMARK FEDERAL SAVINGS BANK
Consolidated Statements of Comprehensive Income
Three Months Ended
December 31,
1998 1999
--------- ---------
(Unaudited) (Unaudited)
Net income $ 604,303 $ 586,603
--------- ---------
Other comprehensive income, net of tax: Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period 94,337 (144,262)
Less: reclassification adjustment for gains included in net income (65,672) (6,355)
--------- ---------
Total other comprehensive income 28,665 (150,617)
--------- ---------
Comprehensive income $ 632,968 $ 435,986
4
LANDMARK BANCSHARES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
LANDMARK FEDERAL SAVINGS BANK
Consolidated Statements of Cash Flows
Three Months Ended December 31
1998 1999
(unaudited) (unaudited)
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 604,303 $ 586,603
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization and impairment of mortgage servicing rights (54,971) (307,571)
Depreciation 40,741 58,604
Decrease (increase) in accrued interest receivable 292,956 (100,950)
Increase (decrease) in outstanding checks in excess of bank balance 0 543,980
Increase (decrease) in accrued and deferred income taxes 504,188 346,009
Increase (decrease) in accounts payable and accrued expenses (536,864) (1,368,691)
Amortization of premiums and discounts on investments and loans (8,756) (14,195)
Provision for losses on loans 75,000 135,000
Gain (loss) on sale of available for sale investments (65,672) (10,591)
Other non-cash items, net 152,748 320,229
Sale of loans held for sale 10,529,051 2,237,215
Gain on sale of loans held for sale (203,178) (50,731)
Origination of loans held for sale (9,486,191) (1,843,451)
Purchase of loans held for sale (868,080) (81,600)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 975,275 $ 449,860
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and principal payment on loans held for investment $ 2,452,670 $ 1,841,707
Principal repayments on mortgage-backed securities 2,559,812 1,114,357
Loans purchased for investment (2,931,930) (7,805,475)
Acquisition of investment securities held to maturity (2,999,840) 0
Acquisition of investment securities available for sale (168,850) (262,400)
Proceeds from sale of available for sale investment securities 112,356 2,878,221
Proceeds from maturities or calls of investment securities held to maturity 4,090,000 0
Sale of real estate acquired in settlement of loans 300 111,877
Acquisition of fixed assets (3,110) (68,694)
------------ ------------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES $ 3,111,408 $ (2,190,407)
------------ ------------
5
LANDMARK BANCSHARES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY,
LANDMARK FEDERAL SAVINGS BANK
Consolidated Statements of Cash Flows
(Continued)
Three Months Ended December 31
1998 1999
(unaudited) (unaudited)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 613,596 $ (2,142,692)
Net increase (decrease) in escrow accounts (1,101,475) (1,405,358)
Proceeds from FHLB advance and other borrowings 26,500,000 17,500,000
Repayment of FHLB advance and other borrowings (25,900,000) (12,000,000)
Acquisition of Treasury Stock (2,250,228) (66,235)
Other Financing Activities 48,261 0
Dividend Payment (187,470) (161,397)
------------ ------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (2,277,316) 1,724,318
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,809,367 (16,229)
BEGINNING CASH AND CASH EQUIVALENTS 2,844,378 5,975,730
------------ ------------
ENDING CASH AND CASH EQUIVALENTS 4,653,745 5,959,501
------------ ------------
SUPPLEMENTAL DISCLOSURES Cash paid during the year for:
Interest on deposits, advances, and other borrowings 2,886,638 2,907,414
Income taxes 752,036 0
Transfers from loans to real estate acquired through foreclosure 0 451,598
6
LANDMARK BANCSHARES, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
LANDMARK FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements were prepared in accordance with
the requirements for interim financial statements contained in SEC regulation
S-X and, accordingly, do not include all information and disclosures necessary
to present financial condition, results of operations and cash flows of Landmark
Bancshares, Inc. (the "Company") and its wholly-owned subsidiary Landmark
Federal Savings Bank (the "Bank") in conformity with generally accepted
accounting principles. However, all normal recurring adjustments have been made
which, in the opinion of management, are necessary for the fair presentation of
the financial statements.
The results of operation for the three months ending December 31, 1999, are not
necessarily indicative of the results which may be expected for the fiscal year
ending September 30, 2000.
2. LIQUIDATION ACCOUNT
On March 28, 1994, the Bank segregated and restricted $15,144,357 of retained
earnings in a liquidation account for the benefit of eligible savings account
holders who continue to maintain their accounts at the bank after the conversion
of the bank from mutual to stock form. In the event of a complete liquidation of
the Bank, and only in such event, each eligible account holder will be entitled
to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted balances of all qualifying deposits then
held. The liquidation account will be reduced annually at September 30th to the
extent that eligible account holders have reduced their qualifying deposits.
3. INVESTMENTS AND MORTGAGE - BACKED SECURITIES
A summary of the Bank's carrying value of investment and mortgage - backed
securities as of December 31, 1999 and September 30, 1999, is as follows:
Investment Securities December 31, 1999 September 30, 1999
----------- -----------
Held to maturity:
Government Agency Securities $27,470,630 $27,464,853
Municipal Obligations 1,385,000 1,385,000
Other 0 0
----------- -----------
$28,855,630 $28,849,853
Available for sale:
Common Stock 3,991,648 4,378,530
Stock in Federal Home Loan Bank 3,237,400 3,441,000
Other 2,169,875 4,203,000
----------- -----------
$ 9,398,923 $12,022,530
Mortgage - Backed Securities held to maturity:
FNMA - Arms $ 5,640,342 $ 5,901,429
FHLMC -Arms 1,718,315 1,900,940
FHLMC -Fixed Rate 73,575 79,967
CMO Government Agency 3,328,210 3,862,807
CMO Private Issue 1,188,732 1,297,099
FNMA - Fixed Rate 334,671 343,808
GNMA - Fixed Rate 88,638 103,124
----------- -----------
$12,372,483 $13,489,174
7
4. LOAN RECEIVABLE, NET
A summary of the Bank's loans receivable at December 31, 1999 and September 30,
1999, is as follows:
December 31, 1999 September 30, 1999
----------------- ------------------
Real Estate loans:
Residential 144,988,583 138,008,961
Construction 993,122 1,847,609
Commercial 9,912,839 9,050,225
Second mortgage 9,678,012 9,716,029
Commercial business 6,355,748 6,531,200
Consumer 12,269,315 13,578,547
------------- -------------
Gross loans 184,197,619 178,732,571
Less: Net deferred loan fees, premiums and discounts (164,608) (178,699)
Allowance for Loan Losses (1,400,104) (1,317,676)
------------- -------------
Total loans, net $ 182,632,907 $ 177,236,196
A summary of the Bank's allowance for loan losses for the three months ended
December 31, 1998 and 1999, are as follows:
Three Months Ended
December 31
1998 1999
----------- -----------
Balance Beginning $ 1,136,753 1,317,676
Provisions Charged to Operations 75,000 135,000
Loans Charged Off Net of Recoveries (6,805) (52,572)
----------- -----------
Balance Ending $ 1,204,948 $ 1,400,104
5. REAL ESTATE OWNED OR IN JUDGMENT
Real Estate owned or in judgment and other repossessed property:
December 31, 1999 September 30, 1999
--------- --------
Real Estate Acquired by Foreclosure $ 70,187 $ 0
Real Estate Loans in Judgment and
Subject to Redemption 393,597 70,081
Other Repossessed Assets 22,500 76,802
--------- --------
$ 486,284 $146,883
6. FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financial needs of its customers and to
reduce its own exposure to fluctuations in interest rates. The financial
instruments include commitments to extend credit and commitments to sell loans.
The instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the statement of financial
condition. The contract or notional amounts of those instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments.
The Bank's exposure to credit loss in the event of non-performance by the other
party to the financial instrument for loan commitments is represented by the
contractual or notional amount of those instruments. The Bank uses the same
credit policies in making commitments as it does for on-balance-sheet
instruments.
On December 31, 1999, the Bank had outstanding commitments to fund real estate
loans of $1,726,127.00. Of the commitments outstanding, $1,060,927.00 are for
fixed rate loans at rates of 7.375% to 9.00%. Commitments for adjustable rate
loans amount to $665,200.00 with initial rates of 7.125% to 8.75%. Outstanding
loan commitments to sell as of December 31, 1999 were $289,905.00. In addition
the Bank had outstanding commercial loan commitments of $938,601.00 with initial
rates of 7.75% to 10.00%.
8
7. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issued common stock (potential
common stock) were exercised or converted to common stock. For periods presented
potential common stock includes outstanding stock options and nonvested stock
awarded under the management stock bonus plan.
Earnings per share for the three months ending December 31, 1999 and 1998, was
determined as follows:
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
Basic Earnings Per Share
Three months ended
December 31
1999 1998
--------- ---------
Weighted average common shares outstanding
Net of Treasury shares 1,131,564 1,327,934
Average unallocated ESOP shares (55,547) (69,235)
Weighted average treasury shares purchased (2,042) (31,673)
Nonvested MSBP shares 0 (6,842)
--------- ---------
Weighted Average Shares for Basic EPS 1,073,975 1,220,184
--------- ---------
Net Earnings 586,603 604,303
--------- ---------
Per share amount $ 0.55 $ 0.50
Diluted Earnings Per Share
Three months ended
December 31
1999 1998
--------- ---------
Weighted average shares for Basic EPS 1,073,975 1,220,184
Dilutive stock options 93,148 135,749
Dilutive MSBP shares 0 2,318
--------- ---------
Weighted Average Shares for Diluted EPS 1,167,123 1,358,251
--------- ---------
Net Earnings 586,603 604,303
--------- ---------
Per share amount $ 0.50 $ 0.44
8. DIVIDENDS
At a October 1999 board meeting, the Directors of the Company declared a .15 per
share dividend. The dividend was payable to all stockholders of record as of
November 10, 1999.
9
LANDMARK BANCSHARES, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General:
Landmark Bancshares, Inc. ("Company") is the holding company for Landmark
Federal Savings Bank ("Bank"). Apart from the operations of the Bank, the
Company did not engage in any significant operations during the quarter ended
December 31, 1999. The Bank is primarily engaged in the business of accepting
deposit accounts from the general public, using such funds to originate mortgage
loans for the purchase and refinancing of single-family homes located in Central
and Southwestern Kansas and for the purchase of mortgage-backed and investment
securities. In addition, the Bank also offers and purchases loans through
correspondent lending relationships in Kansas City, and other cities in Kansas
and in Albuquerque and Santa Fe, New Mexico and Madison, Wisconsin. The Bank
also has a Loan Origination Office located in Overland Park, Kansas. To a lesser
extent, the Bank will purchase adjustable rate mortgages loans, to manage its
interest rate risk as deemed necessary. The Bank also makes automobile loans,
second mortgage loans, home equity loans, savings deposit loans, and small
business loans.
Management Strategy:
Management's strategy has been to maintain profitability. The Bank's lending
strategy has historically focused on the origination of traditional, conforming
one to four-family mortgage loans with the primary emphasis on single-family
residences. The Bank's secondary focus has been on consumer loans, commercial
loans, second mortgage loans, home equity loans, savings deposit loans, and
small business lending. This focus, and the application of strict underwriting
standards, are designed to reduce the risk of loss on the Bank's loan portfolio.
However, this lack of diversification in its portfolio structure does increase
the Bank's portfolio concentration risk by making the value of the portfolio
more susceptible to declines in real estate values in its market area. This has
been mitigated in recent years, through the investment in mortgage-backed
securities, the sales of loans in the secondary market, and the entrance into
small business lending.
Certain risks are inherent in the sales of loans in the secondary market. There
is a risk that the Bank will not be able to sell all the loans that it has
originated, or conversely, will be unable to fulfill its commitment to deliver
loans pursuant to a firm commitment to sell loans. In addition, in periods of
rising interest rates, loans originated by the bank may decline in value.
Exposure to market and interest rate risk is significant during the period
between the time the interest rate on a customer's mortgage loan application is
established and the time the mortgage loan closes, and also during the period
between the time the interest rate is established and the time the Bank commits
to sell the loan. If interest rates change in an unanticipated fashion, the
actual percentage of loans that close may differ from projected percentages. The
resultant mismatching of commitments to closed loans and commitments to deliver
sold loans may have an adverse effect on the profitability of loan originations.
A sudden increase in interest rates can cause a higher percentage of loans to
close than projected. To the degree that this was not anticipated, the Bank will
not have made commitments to sell these loans and may incur significant mark to
market losses, adversely affecting results of operations.
The Bank historically sells 30 year fixed rate mortgages in the secondary
market, however the Bank is keeping all 15 and 20 year or shorter mortgages with
fixed rates above 6.625% and 6.875% for investment and selling all other fixed
rate loans.
Through the first three months of fiscal year 2000 rates continued with a steady
increase. As a result of the rates at the end of December 1999, the Bank
reflected an unrealized loss of $1,882 in loans held for sale. Sustained levels
of gain on sale of loans is dependent on continued stable or downward interest
rate movement and could likely be adversely affected by a continued rise in
interest rates.
10
Changes in financial condition between December 31, 1999 and September 30, 1999:
Total assets increased by $1,429,043, or approximately 0.58% between September
30, 1999 and December 31, 1999. This increase is largely attributed to a
$5,396,711 increase in loans receivable partially offset by a decrease of
$3,734,521 in investments and mortgage backed securities.
The Bank utilizes FHLB line of credit and short term advances which increased
$5.5 million from September 30, 1999 to December 31, 1999 to fund the
acquisition of adjustable rate mortgages. In managing the Bank's overall
interest rate risk, loan purchases have been made which increase the level of
risk to the extent that borrowing will reprice more frequently than the
adjustments on the mortgages.
Results of operations: comparison between the three months ended December 31,
1999 and 1998:
Net income for the three-month period ended December 31, 1999 of $586,603
represents a decrease of $17,700 from the net income reported for the
three-month period ended December 31, 1998. The decrease was primarily due to
$152,447 less gain on sale of loans and $60,000 more placed in loan loss
reserves, which were almost totally offset by an increase in net interest income
before provision for loan losses of 205,932 from the year ago period.
Net interest income after provision for losses on loans for the three-month
period ended December 31, 1999 increased $145,932 or approximately 9.1% to
$1,754,150 as compared with $1,608,218 for the same period ended December 31,
1998. This increase in interest income is largely due to an increase in the
average balance on securities held to maturity from $9,718,696, the three months
ended December 31, 1998, to $28,852,089 for the same period ended December 31,
1999. Provision for loan loss has been increased primarily due to increased
consumer loan losses.
Landmark Federal Savings Bank's charge-off experience for loans for the five
years ended September 30, 1998 had averaged only $52,000 per year or .04% of
total loans. However, in fiscal 1999 the Bank charged off $658,000 in loans as a
result of a quality control issue on automobile loans. The problem arose
primarily on individual loans being originated by one loan officer who is no
longer employed by the Bank. The Bank has conducted a thorough review of its
automobile loan portfolio, has reserved, and continues to reserve for the
portfolio. In November, 1998, the loan policies were rewritten. Monitoring has
been tightened and all modifications and deferrals require senior management
approval. Exceptions are reported to the Board of Directors monthly. The files
are reviewed individually by an experienced lender / servicer for insurance and
proper documentation. Valuation reserves increased $82,428, or 6.3%, on December
31, 1999 compared to the period ending September 30, 1999. Classified assets
decreased by $191,000, or 12.9%, this quarter. For the quarter ended December
31, 1999, net charge-offs totaled $52,500, and were primarily auto loans.
Non-interest income for the three-month period ended December 31, 1999 decreased
$187,900 or 45.3% to $226,877 as compared with $414,777 for the same period
ended December 31, 1998. The decrease was primarily due to a net gain on sale of
loans of $203,178 during the quarter ended December 1998, and the fact that more
adjustable rate loans were placed in portfolio during the more recent quarter
ending December, 1999.
Other expenses for the three-month period ended December 31, 1999 increased
$9,931 or 0.98% to $1,025,123 as compared with $1,015,192 for the same period
ended December 31, 1998.
11
Earning Per Share:
Effective with the quarter ended December 31, 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 128, Earnings per
Share. The Statement is to be applied to financial statements issued for periods
ending after December 15, 1997, including interim periods; earlier application
is not permitted. The Statement requires restatement of all prior-period
earnings per share (EPS) data presented.
FAS No. 128 simplifies the standards for computing EPS and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS with
a presentation of basic EPS. It also requires presentation of basic and diluted
EPS on the face of the income statement for all entities with complex capital
structures. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the company. Diluted EPS is computed
similarly to the previously presented fully diluted earnings per share.
Year 2000 Issue:
The year 2000 posed an important business issue regarding how existing
application software programs and operating systems would accommodate this date
value. Many computer programs that could only distinguish the final two digits
of the year entered were expected to read entries for the year 2000 as the year
1900. Like most financial service providers, the Company thought they may be
significantly affected by the Year 2000 issue due to the nature of financial
information. The Company evaluated both information technology (computer systems
and software) and non-information technology (i.e. vault timers, elevators,
electronic door lock and heating, ventilation and air condition controls) both
within and outside the Company's direct control and with which the Company
electronically or operationally interfaces. Computer systems were changed or
updated to identify the year 2000. Prior to the filing of this report the
Company has not experienced any unusual problems that would significantly affect
the Company or its customers.
The Bank continues to evaluate their information technology systems risk in
three areas: (1) internal computers and software, (2) computers of others used
by our borrowers, (3) external data processing servicers. The Company will
continue to monitor for any unusual activities associated with the turn of the
century.
12
Liquidity and Capital Resources:
The Bank is required to maintain minimum levels of liquid assets, as defined by
the Office of Thrift Supervision ("OTS") regulations. This requirement, which
may be varied from time to time depending upon economic conditions and deposit
flows, is based upon a percentage of deposits and short-term borrowing. The
required minimum ratio is currently 4 percent. The Bank's liquidity ratio
averaged 4.66% during December 1999. The Bank manages its liquidity ratio to
meet its funding needs, including: deposit outflows, disbursement of payments
collected from borrowers for taxes and insurance, and loan principal
disbursements. The Bank also manages its liquidity ratio to meet its
asset/liability management objectives.
In addition to funds provided from operations, the Bank's primary sources of
funds are: savings deposits, principal repayments on loans and mortgage-backed
securities, and matured or called investment securities. In addition, the Bank
may borrow funds from time to time from the Federal Home Loan Bank of Topeka.
Scheduled loan repayments and maturing investment securities are a relatively
predictable source of funds. However, savings deposit flows and prepayments on
loans and mortgage-backed securities are significantly influenced by changes in
market interest rates, economic conditions and competition. The Bank strives to
manage the pricing of its deposits to maintain a balanced stream of cash flows
commensurate with its loan commitments.
When applicable, cash in excess of immediate funding needs is invested into
longer-term investments and mortgage-backed securities which typically earn a
higher yield than overnight deposits, some of which may also qualify as liquid
investments under current OTS regulations.
As required by the financial institutions reform, recovery and enforcement act
of 1989 ("FIRREA"), OTS prescribed three separate standards of capital adequacy.
The regulations require financial institutions to have minimum core capital
equal to 4.00 percent of adjusted tangible assets; and risk-based capital equal
to 8.00 percent of risk-based assets.
The Bank's capital requirements and actual capital under the OTS regulations are
as follows at December 31, 1999:
Amount (Thousands) Percent of Assets
Core Capital:
Actual $17,524 7.25%
Required 9,670 4.00%
Excess 7,854 3.25%
Risk-Based Capital:
Actual 18,926 15.64%
Required 9,681 8.00%
Excess $ 9,245 7.64%
13
LANDMARK BANCSHARES, INC.
PART I - FINANCIAL INFORMATION
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank has established an Asset/Liability Management Committee ("ALCO") for
the purpose of monitoring and managing interest rate risk. The Bank is subject
to the risk of interest rate fluctuations to the extent that there is a
difference, or mismatch, between the amount of the Bank's interest-earning
assets and interest-bearing liabilities, which mature or reprice in specified
periods. Consequently, when interest rates change, to the extent the Bank's
interest-earning assets have longer maturities or effective repricing periods
than its interest-bearing liabilities, the interest income realized on the
Bank's interest-earning assets will adjust more slowly than the interest expense
on its interest-bearing liabilities. This mismatch in the maturity and interest
rate sensitivity of assets and liabilities is commonly referred to as the "gap."
A gap is considered positive when the amount of interest rate sensitive assets
maturing or repricing during a specified period exceeds the amount of interest
rate sensitive liabilities maturing or repricing during such period, and is
considered negative when the amount of interest rate sensitive liabilities
maturing or repricing during a specified period exceeds the amount of interest
rate assets maturing or repricing during such period. Generally, during a period
of rising interest rates, a negative gap would adversely affect net interest
income while a positive gap would result in an increase in net interest income,
and during a period of declining interest rates, a negative gap would result in
an increase in net interest income while a positive gap would adversely affect
net interest income. The Bank utilizes internally generated gap reports and
externally prepared interest rate sensitivity of the net portfolio value reports
to monitor and manage its interest rate risk.
The Company has historically invested in interest-earning assets that have a
longer duration than its interest-bearing liabilities. The mismatch in duration
of the interest-sensitive liabilities indicates that the Bank is exposed to
interest rate risk. In a rising rate environment, in addition to reducing the
market value of long-term interest-earning assets, liabilities will reprice
faster than assets; therefore, decreasing net interest income. To mitigate this
risk, the Bank has placed a greater emphasis on shorter-term higher yielding
assets that reprice more frequently in reaction to interest rate movements. In
addition, the Bank has continued to include in total assets a concentration of
adjustable-rate assets to benefit the one-year cumulative gap as such
adjustable-rate assets reprice and are more responsive to the sensitivity of
more frequently repricing interest-bearing liabilities.
Quarterly, the OTS prepares a report on the interest rate sensitivity of the net
portfolio value ("NPV") from information provided by the Bank. The OTS adopted a
rule in August 1993 incorporating an interest rate risk ("IRR") component into
the risk-based capital rules. Implementation of the rule has been delayed until
the OTS has tested the process under which institutions may appeal such capital
deductions. The IRR component is a dollar amount that will be deducted from
total capital for the purpose of calculating an institution's risk-based capital
requirement and is measured in terms of the sensitivity of its NPV to changes in
interest rates. The NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet contracts.
An institution's IRR is measured as the change to its NPV as the result of a
hypothetical 200 basis point change in market interest rates. A resulting change
in NPV of more than 2% if the estimated market value of its assets will require
the institution to deduct from its capital 50% of that excess change. The rule
provides that the OTS will calculate the IRR component quarterly for each
institution.
14
The following tables present the Bank's NPV as well as other data as of
September 30, 1999 (the most recent available), as calculated by the OTS, based
on information provided to the OTS by the Bank.
Change in Interest
Rates in Basis
Points (Rate Shock) Net Portfolio Value NPV as % of Present Value of Assets
$ Amount $ Change % Change NPV Ratio Change
- ----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
+300 bp $ 8,076 $ (11,253) (58)% 3.58% (445) bp
+200 bp (1) 12,205 (7,124) (37)% 5.28% (275) bp
+100 bp 16,086 (3,243) (17)% 6.81% (122) bp
0 bp 19,329 8.03%
-100 bp 21,478 2,150 11 % 8.80% 77 bp
-200 bp 22,913 3,585 19 % 9.28% 125 bp
-300 bp 24,427 5,099 26 % 9.77% 174 bp
(1) Denotes rate shock used to compute interest rate risk capital component.
September 30, 1999
------------------
Risk Measures (200 Basis Point Rate Shock):
Pre-Shock NPV Ratio: NPV as % of Present Value of Assets 8.03 %
Exposure Measure: Post-Shock NPV Ratio 5.28 %
Sensitivity Measure: Decline in NPV Ratio 2.75 %
Utilizing the data above, the Bank, at September 30, 1999, would have been
considered by the OTS to have been subject to "above normal" interest rate risk.
Accordingly, a deduction from risk-based capital would have been required.
However, even with this deduction, the capital of the Bank would continue to
exceed all regulatory requirements.
Set forth below is a breakout, by basis points of the Bank's NPV as of September
30, 1999 by assets, liabilities, and off balance sheet items.
No
Net Portfolio Value -300 bp -200 bp -100 bp Change +100 bp +200 bp +300 bp
- ---------------------------------------------------------------------------------------------------------------
Assets $ 249,953 $ 246,992 $ 244,156 $ 240,660 $ 236,131 $ 231,016 $ 225,690
- -Liabilities 225,614 224,149 222,733 221,358 220,026 218,738 217,484
+Off Balance Sheet 88 70 55 27 (19) (73) (130)
--------- --------- --------- --------- --------- --------- ---------
Net Portfolio Value $ 24,427 $ 22,913 $ 21,478 $ 19,329 $ 16,086 $ 12,205 $ 8,076
Certain assumptions utilized by the OTS in assessing the interest rate risk of
savings associations were employed in preparing the previous table. These
assumptions related to interest rates, loan prepayment rates, deposit decay
rates and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Bank's assets and liabilities would perform as set
forth above.
15
Certain shortcomings are inherent in the preceding NPV tables because the data
reflect hypothetical changes in NPV based upon assumptions used by the OTS to
evaluate the Bank as well as other institutions. However, net interest income
should decline with instantaneous increases in interest rates while net interest
income should increase with instantaneous declines in interest rates. Generally,
during periods of increasing interest rates, the Bank's interest rate sensitive
liabilities would reprice faster than its interest rate sensitive assets causing
a decline in the Bank's interest rate spread and margin. This would result from
an increase in the Bank's cost of funds that would not be immediately offset by
an increase in its yield on earning assets. An increase in the cost of funds
without an equivalent increase in the yield of earning assets would tend to
reduce net interest income.
In times of decreasing interest rates, fixed rate assets could increase in value
and the lag in repricing of interest rate sensitive assets could be expected to
have a positive effect on the Bank's net interest income. However, changes in
only certain rates, such as shorter term interest rate declines without longer
term interest rate declines, could reduce or reverse the expected benefit from
decreasing interest rates.
16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of Matter to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Report on Form 8-K
(C) None
(D) None
17
SIGNATURES
Pursuant to the requirements 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.
Date February 11, 2000 LANDMARK BANCSHARES, INC.
By /S/ Larry Schugart
------------------------------------------------
LARRY SCHUGART
President and Chief Executive Officer
(Duly Authorized Representative)