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 June 30, 2000
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 August 4 , 2000:
$.10 par value common stock 1,148,764 shares
(Class) (Outstanding)
LANDMARK BANCSHARES, INC.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Financial Condition as of
June 30, 2000 (unaudited) and September 30, 1999 1
Statements of Income for the Three and Nine
Months Ended June 30, 2000 and 1999 (unaudited) 2
Statements of Comprehensive Income for the Three and
Nine Months Ended June 30, 2000 and 1999 (unaudited) 3
Statements of Cash Flows for the Nine Months Ended
June 30, 2000 and 1999 (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
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Default Upon Senior Securities 16
Item 4. Submission of Matter to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Report on Form 8-K 16
SIGNATURES 17
1
LANDMARK BANCSHARES, INC.
Consolidated Statements of Financial Condition
June 30, 2000 September 30, 1999
(Unaudited)
-----------------------------------
ASSETS
Cash and cash equivalents:
Interest bearing $ 3,905,952 $ 4,377,197
Non-interest bearing 1,725,843 1,598,533
Time deposits in other financial institutions 279,807 289,864
Securities held to maturity 28,663,679 28,849,853
Securities available for sale 9,099,807 12,022,530
Mortgage-backed securities held to maturity 10,977,067 13,489,174
Loans receivable, net 188,404,707 177,236,196
Loans held for sale 220,808 604,395
Accrued income receivable 1,605,287 1,547,901
Real estate owned or in judgment and other
repossessed property, net 376,608 146,883
Office properties and equipment, at cost less
accumulated depreciation 1,678,475 1,759,770
Prepaid expenses and other assets 1,576,513 1,949,751
Income taxes receivable, current 17,562 154,072
Deferred income taxes 237,028 89,865
------------- -------------
TOTAL ASSETS $ 248,769,143 $ 244,115,984
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 147,370,455 $ 158,936,292
Other Borrowed Money 73,000,000 58,000,000
Advances from borrowers for taxes and insurance 1,699,519 2,143,805
Accrued expenses and other liabilities 3,208,472 2,631,740
Income taxes
Current 0 0
------------- -------------
TOTAL LIABILITIES 225,278,446 221,711,837
------------- -------------
Stockholders' Equity
Preferred Stock
no par value; 5,000,000 shares authorized;
none issued
Common Stock 228,131 228,131
$.10 par value; 10,000,000 shares authorized;
2,281,312 shares issued
Additional Paid-in Capital 22,435,740 22,706,378
Treasury Stock, at cost, 1,123,348 shares at June 30, 2000 (21,629,665) (22,144,168)
and 1,149,748 shares at September 30, 1999
Retained income (substantially restricted) 23,405,691 22,290,140
Employee Stock Ownership Plan (555,841) (555,841)
Accumulated other comprehensive income (393,359) (120,493)
------------- -------------
Total Stockholders' Equity 23,490,697 22,404,147
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 248,769,143 $ 244,115,984
============= =============
2
LANDMARK BANCSHARES, INC.
Consolidated Statements of Income
Three Months Ended June 30 Nine Ended June 30 Months
2000 1999 2000 1999
( Unaudited ) ( Unaudited )
----------------------------------------------------------------
INTEREST INCOME
Interest on loans $3,719,837 $3,508,149 $10,896,544 $10,564,618
Interest and dividends on investment securities 650,542 534,550 2,012,797 1,200,305
Interest on mortgage-backed securities 188,764 256,644 586,206 882,741
----------------------------------------------------------------
Total interest income 4,559,143 4,299,343 13,495,547 12,647,664
----------------------------------------------------------------
INTEREST EXPENSE
Deposits 1,788,288 1,832,259 5,440,149 5,639,441
Borrowed funds 1,068,290 680,249 2,729,216 1,792,292
----------------------------------------------------------------
Total interest expense 2,856,578 2,512,508 8,169,365 7,431,733
----------------------------------------------------------------
Net interest income 1,702,565 1,786,835 5,326,182 5,215,931
PROVISION FOR LOSSES ON LOANS 135,000 235,000 365,000 465,000
----------------------------------------------------------------
Net interest income after provision
for losses 1,567,565 1,551,835 4,961,182 4,750,931
----------------------------------------------------------------
NON-INTEREST INCOME
Service charges and late fees 118,299 91,668 336,591 295,516
Net gain (loss) on sale of available
for sale investments 12,352 256,717 55,635 389,372
Net gain (loss) on sale of loans 41,478 80,985 133,691 401,280
Service fees on loans sold 11,406 32,048 52,454 52,347
Other income 67,816 62,541 123,779 104,698
----------------------------------------------------------------
251,351 523,959 702,150 1,243,213
----------------------------------------------------------------
NON-INTEREST EXPENSE
Compensation and related expenses 565,114 620,818 1,704,996 1,916,056
Occupancy expense 68,341 66,842 193,140 190,539
Advertising 20,774 15,594 75,308 48,764
Federal insurance premium 12,407 36,648 83,387 112,227
Loss (gain) from real estate operations 24,444 7,469 29,957 11,794
Data processing 32,657 55,941 132,914 157,409
Other expense 243,112 256,941 774,266 726,732
----------------------------------------------------------------
966,849 1,060,253 2,993,968 3,163,521
----------------------------------------------------------------
Income before income taxes 852,067 1,015,541 2,669,364 2,830,623
INCOME TAXES EXPENSES 340,600 405,700 1,066,900 1,148,500
----------------------------------------------------------------
Net income $ 511,467 $ 609,841 $1,602,464 $1,682,123
================================================================
Basic earnings per share $0.46 $0.55 $1.48 $1.45
================================================================
Diluted earnings per share $0.44 $0.50 $1.37 $1.30
================================================================
Dividends per share $0.15 $0.15 $0.45 $0.55
================================================================
3
LANDMARK BANCSHARES, INC.
Consolidated Statements of Comprehensive Income
Three Months Ended Nine Months Ended
June 30 June 30
2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
--------------------------------------------------------
Net income $ 511,467 $ 609,841 $ 1,602,464 $ 1,682,123
--------------------------------------------------------
Other comprehensive income, net of tax: Unrealized gains (losses)
on securities:
Unrealized holding gains (losses) arising during
the period 83,523 192,693 (239,485) 68,328
Less: reclassification adjustment for gains included
in net income (7,411) (154,030) (33,381) (233,623)
--------------------------------------------------------
Total other comprehensive income 76,112 38,663 (272,866) (165,295)
--------------------------------------------------------
Comprehensive income $ 587,579 $ 648,504 $ 1,329,598 $ 1,516,828
========================================================
4
LANDMARK BANCSHARES, INC.
Consolidated Statements of Cash Flows
Nine Months Ended June 30
2000 1999
(unaudited) (unaudited)
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,602,464 $ 1,682,123
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 173,676 151,348
Decrease (increase) in accrued interest receivable 402 (84,770)
Increase (decrease) in accrued and deferred income taxes (10,653) 101,963
Increase (decrease) in accounts payable and accrued expenses (656,969) 2,123,936
Amortization of premiums and discounts on investments and loans (14,816) (45,131)
Provision for losses on loans 365,000 465,000
Gain (loss) on sale of available for sale investments (55,635) (389,372)
Other non-cash items, net 390,551 531,680
Sale of loans held for sale 6,820,415 21,166,829
Gain on sale of loans held for sale (133,691) (401,280)
Origination of loans held for sale (5,533,026) (17,558,135)
Purchase of loans held for sale (771,400) (2,032,210)
----------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,176,318 5,711,981
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and principal payment on loans held for investment 1,220,212 6,487,290
Principal repayments on mortgage-backed securities 2,507,729 7,267,136
Loans purchased for investment (13,224,384) (11,698,330)
Acquisition of mortgage-backed securities 0 (763,809)
Acquisition of investment securities held to maturity 0 (22,425,731)
Acquisition of investment securities available for sale (675,000) (1,371,275)
Proceeds from sale of available for sale investment securities 3,177,693 759,950
Proceeds from maturities or calls of investment securities held to maturity 200,000 5,190,000
Net (increase) decrease in time deposits 0 (38,695)
Sale of real estate acquired in settlement of loans 263,936 101,274
Acquisition of fixed assets (92,382) (240,368)
----------------------------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES (6,622,196) (16,732,558)
----------------------------
5
LANDMARK BANCSHARES, INC.
Consolidated Statements of Cash Flows
(Continued)
Nine Months Ended June 30
2000 1999
(unaudited) (unaudited)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ (10,084,976) $ 3,104,019
Net increase (decrease) in escrow accounts (447,313) (390,382)
Proceeds from FHLB advance and other borrowings 130,500,000 77,500,000
Repayment of FHLB advance and other borrowings (115,500,000) (62,200,000)
Acquisition of Treasury Stock (66,235) (4,039,173)
Sale of Treasury Stock 580,738 0
Dividends Paid (486,912) (645,728)
Other Financing Activities (393,359) 96,522
------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 4,101,943 13,425,258
------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (343,935) 2,404,681
BEGINNING CASH AND CASH EQUIVALENTS 5,975,730 2,844,378
------------------------------
ENDING CASH AND CASH EQUIVALENTS $ 5,631,795 $ 5,249,059
==============================
SUPPLEMENTAL DISCLOSURES Cash paid during the year for:
Interest on deposits, advances, and other borrowings $ 8,559,182 $ 7,823,060
Income taxes 930,390 1,174,810
Transfers from loans to real estate acquired through foreclosure 520,782 0
6
LANDMARK BANCSHARES, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED 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 nine months ended June 30, 2000 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 values of investments and mortgage - backed
securities as of June 30, 2000 and September 30, 1999, is as follows:
June 30, 2000 September 30, 1999
---------------------------------------------
Investment Securities
Held to maturity:
Government Agency Securities $ 27,478,679 $ 27,464,853
Municipal Obligations
1,185,000 1,385,000
Other 0 0
---------------------------------------------
$ 28,663,679 $ 28,849,853
=============================================
Available for sale:
Common Stock $ 3,321,844 $ 4,378,530
Stock in Federal Home Loan Bank 3,650,000 3,441,000
Other 2,127,963 4,203,000
---------------------------------------------
$ 9,099,807 $ 12,022,530
=============================================
Mortgage - Backed Securities held to maturity:
FNMA - Arms $ 5,302,908 $ 5,901,429
FHLMC - Arms 1,592,147 1,900,940
FHLMC - Fixed Rate 54,872 79,967
CMO Government Agency 2,637,349 3,862,807
CMO Private Issue 1,018,180 1,297,099
FNMA - Fixed Rate 315,903 343,808
GNMA - Fixed Rate 55,708 103,124
---------------------------------------------
$ 10,977,067 $ 13,489,174
=============================================
7
4. LOAN RECEIVABLE, NET
A summary of the Bank's loans receivable at June 30, 2000 and September 30,
1999, is as follows:
June 30, 2000 September 30, 1999
--------------------------------
Real Estate loans
Residential $ 153,318,100 $ 138,008,961
Construction 820,823 1,847,609
Commercial 9,622,944 9,050,225
Second mortgage 10,429,333 9,716,029
Commercial business 6,107,163 6,531,200
Consumer 9,814,666 13,578,547
Gross loans 190,113,029 178,732,571
Less: Net deferred loan fees, premiums and discounts (162,560) (178,699)
Allowance for Loan Losses (1,545,762) (1,317,676)
------------------------------
Total loans, net $ 188,404,707 $ 177,236,196
==============================
A summary of the Bank's allowance for loan losses for the three and nine months
ended June 30, 2000 and 1999, is as follows:
Three Months Ended Nine Months Ended
June 30 June 30
2000 1999 2000 1999
------------------------------------------------------------
Balance Beginning $ 1,424,205 $ 1,195,575 $ 1,317,676 $ 1,136,753
Provisions Charged to Operations 135,000 235,000 365,000 465,000
Loans Charged Off Net of Recoveries (13,443) (164,882) (136,914) (336,060)
------------------------------------------------------------
Balance Ending $ 1,545,762 $ 1,265,693 $ 1,545,762 $ 1,265,693
============================================================
5. REAL ESTATE OWNED OR IN JUDGMENT
Real Estate owned or in judgment and other repossessed property:
June 30, 2000 September 30, 1999
------------------------------------------
Real Estate Acquired by Foreclosure $ 0 $ 0
Real Estate Loans in Judgement and
Subject to Redemption 351,608 70,081
Other Repossessed Assets 25,000 76,802
------------------------------------------
$ 376,608 $ 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, reflects 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 June 30, 2000, the Bank had outstanding commitments to fund real estate loans
of $2,713,115.00. Of the commitments outstanding, $1,521,910.00 are for fixed
rate loans at rates of 8.25% to 9.125%. Commitments for adjustable rate loans
amount to $1,191,205.00 with initial rates of 7.25% to 9.50%. Outstanding loan
commitments to sell as of June 30, 2000 were $484,170.00. In addition the Bank
had outstanding commercial loan commitments of $3,125,000.00 with initial rates
of 7.75% to 10.75%, at June 30, 2000.
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 and nine months ended June 30, 2000 and 1999,
were determined as follows:
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
Basic Earnings Per Share
Three months ended Nine months ended
June 30 June 30
2000 1999 2000 1999
-----------------------------------------------------------
Weighted average common shares outstanding,
net of treasury shares 1,152,393 1,180,438 1,137,739 1,232,754
Average unallocated ESOP shares (48,703) (62,390) (52,125) (65,812)
Nonvested MSBP shares 0 0 0 (3,041)
-----------------------------------------------------------
Weighted Average Shares for Basic EPS 1,103,690 1,118,048 1,085,614 1,163,901
===========================================================
Net Earnings $ 511,467 $ 609,841 $ 1,602,464 $ 1,682,123
===========================================================
Per share amount $ 0.46 $ 0.55 $ 1.48 $ 1.45
===========================================================
Diluted Earnings Per Share
Three months ended Nine months ended
June 30 June 30
2000 1999 2000 1999
-----------------------------------------------------------
Weighted average shares for Basic EPS 1,103,690 1,118,048 1,085,614 1,163,901
Dilutive stock options 65,323 109,097 80,942 126,092
Dilutive MSBP shares 0 0 0 1,026
Weighted Average Shares for Diluted EPS 1,169,013 1,227,145 1,166,556 1,291,019
===========================================================
Net Earnings $ 511,467 $ 609,841 $ 1,602,464 $1,682,123
===========================================================
Per share amount $ 0.44 $ 0.50 $ 1.37 $ 1.30
===========================================================
8. DIVIDENDS
At an April 2000 board meeting, the Directors of the Company declared a $0.15
per share dividend. The dividend was paid May 26, 2000 to all stockholders of
record as of May 12, 2000.
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
June 30, 2000. The Bank is primarily engaged in the business of accepting
deposit accounts from the general public. These funds are used to originate
mortgage loans for the purchase and refinancing of single-family homes located
in Central and Southwestern Kansas, and the purchase of mortgage-backed and
investment securities. In addition, the Bank also offers and purchases loans
through correspondent lending relationships in Kansas City, other cities in
Kansas, 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 mortgage 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 by managing the Bank's
capital in a prudent manner. The Bank's lending strategy has historically
focused on the origination of traditional, conforming one to four-family
mortgage loans with the 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 is designed to reduce the risk of loss to the Bank's loan portfolio.
However, 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 risk has
been mitigated in recent years, through investment in mortgage-backed
securities, sales of loans in the secondary market, and 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 will be unable to fulfill its commitment to deliver loans
pursuant to a 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 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, 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,
where the Bank has committed to an interest rate, to close than projected. To
the degree that this is 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 7.50% and 7.75%, respectively, for investment and selling all
other fixed rate loans.
Through the first nine months of fiscal year 2000 rates continued with a steady
increase. Sustained levels of gain on sale of loans are dependent on stable or
downward interest rate movement and gains could be adversely affected by
continued rises in interest rates.
10
Changes in financial condition between June 30, 2000 and September 30, 1999:
Total assets increased by $4,653,159, or approximately 1.91% between September
30, 1999 and June 30, 2000. This increase is largely attributed to a $11,168,511
increase in loans receivable partially offset by a decrease of $5,621,004 in
investments and mortgage backed securities. The decrease in mortgage backed
securities is due to repayments. The $11,168,151 increase in loans receivable
between September 30, 1999 and June 30, 2000, consists of a $16,000,000 increase
in mortgage loans, which includes a $6,000,000 purchase of mortgage loans,
offset by decreases of $1,000,000 in commercial loans and $4,000,000 in consumer
loans.
The Bank utilizes the Federal Home Loan Bank of Topeka for a line of credit and
short term advances, which increased $15 million from September 30, 1999 to June
30, 2000 to fund the acquisition of adjustable rate mortgage loans and provide
working capital. Deposits decreased $11,565,837 at June 30, 2000 as compared to
September 30, 1999 due to a $4,000,000 decrease in public monies with the
remaining decrease coming from savings and demand accounts. 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 interest rate adjustments on the mortgage loans.
Results of operations: comparison between the three and nine months ended June
30, 2000 and 1999:
Net income for the three-month period ended June 30, 2000 of $511,467 represents
a decrease of $98,374 from net income reported for the three-month period ended
June 30, 1999. The decrease was primarily due to a decrease in the net gain on
sale of available for sale investments of $244,365, partially offset by a
decrease of $93,404 in non-interest expense, and a decrease of $65,100 of income
tax expense. For the three-month period ended June 30, 2000 the Bank received
$128,118 in proceeds from the redemption of an insurance policy for a former
employee of which $46,386 were recognized as income.
Net income for the nine-month period ended June 30, 2000 of $1,602,464
represents a decrease of $79,659 or a 4.74% decrease from the net income
reported for the nine-month period ended June 30, 1999. The decrease is
primarily due to a decrease of $541,063 in non-interest income, partially offset
by an $210,251 increase in net interest income after provision for losses and a
$169,553 decrease in non-interest expense. Non-interest income decreased as a
result of the decrease in gain on sale of available for sale investments.
Net interest income after provision for losses on loans for the three-month
period ended June 30, 2000 increased $15,730 or approximately 1.01% to
$1,567,565 as compared with $1,551,835 for the same period ended June 30, 1999.
This increase is associated with the decrease in net interest income and a
decrease in the provision for loan losses due to a reduced volume of
non-performing loans.
Net interest income after provision for losses on loans for the nine-month
period ended June 30, 2000 increased $210,251 or approximately 4.43% to
$4,961,182 as compared with $4,750,931 for the same period ended June 30, 1999.
This increase is associated with the increase in net interest income and a
decrease in the provision for loan losses due to a reduced volume of
non-performing loans.
Non-interest income for the three-month period ended June 30, 2000 decreased
$272,608 or 52.03% to $251,351 as compared with $523,959 for the same period
ended June 30, 1999. This decrease was primarily due to a decrease of $244,365
in net gain on sale of available for sale investments.
Non-interest income for the nine-month period ended June 30, 2000 decreased
$541,063 or 43.52% to $702,150 as compared with $1,243,213 for the same period
ended June 30, 1999. This decrease was primarily due to a decrease of $333,737
on net gain on sale of available for sale investments as well as a decrease of
$267,589 on the net gain on the sale of loans resulting from rising mortgage
interest rates.
Non-interest expense for the three-month period ended June 30, 2000 decreased
$93,404 or 8.81% to $966,849 as compared with $1,060,253 for the same period
ended June 30, 1999. This decrease is primarily due to a decrease in
compensation of $55,704 compared to the quarter ended June 30, 1999 due to
vacant employee positions and reduced costs of an employee benefit plan.
11
Non-interest expense for the nine-month period ended June 30, 2000 decreased
$169,553 or 5.36% to $2,993,968 as compared with $3,163,521 for the same period
ended June 30, 1999. This decrease is primarily due to decreased compensation
compared to the nine-months ended June 30, 1999 due to vacant employee positions
and reduced costs of an employee benefit plan.
The Bank added $365,000 to the provision for loan losses for the nine-month
period ended June 30, 2000, as compared to $465,000 for the nine-month period
ended June 30, 1999. During the quarter ended June 30, 2000, management
continued to recognize there were changes in risk factors related to the
consumer loan portfolio that resulted in an increase in classified consumer
loans. Management is continuing to closely monitor potential problem loans in
all areas, and deem they have accrued an appropriate provision for loan losses
considering all available information.
The 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 in the Fall of 1998,
primarily on individual loans being originated by one loan officer who is no
longer employed by the Bank. The Bank conducted a thorough review of its
automobile loan portfolio that prompted management to set aside additional
reserves, which they continue to do at the present time. In November 1998, loan
policies were rewritten. The monitoring of loan policies was increased and all
modifications and deferrals require senior management approval. Exceptions to
policy are reported to the Board of Directors monthly. The loan files are
reviewed individually by an experienced lender / service provider for proper
documentation and for maintenance of proper insurance on all collateral. In
addition, the Bank has contracted an outside third party to test loans for
compliance with the bank's underwriting policies. Such tests are conducted every
four months from a sampling of loans selected at random. The findings of the
loan review are presented every four months to the Board of Directors at their
regular meeting. As of June 30, 2000 the balance in the Bank's allowance for
loan losses has increased $228,086 for the fiscal year. The increase is
comprised of $365,000 in addition to the provision for loan losses netted
against loans charged off net of recoveries of $136,914. Classified assets for
the quarter ended June 30, 2000 have decreased $427,550, primarily in mortgage
loans. Loans charged off, net of recoveries, were $13,000 (nearest thousand) for
the quarter ended June 30, 2000. The $13,000 charge off consists of consumer
loans, principally auto loans, of $86,000 charged off and $27,000 recovered, for
a net charge off of $59,000, and mortgage loans charged off for the same period
of $7,000, netted against recoveries of $53,000 for a net recovery of $46,000.
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 regulatory liquidity
ratio for the quarter ended June 30, 2000 averaged 7.81%. 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.
12
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of core and tangible capital (as defined in the regulations) to assets
(as defined) and core and total capital to risk weight assets (as defined).
Management believes, as of June 30, 2000, that the Bank meets all capital
adequacy requirements to which it is subject.
The Bank's actual capital amounts (in thousands) and ratios as of June 30, 2000
are also presented in the following table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
---------- --------- ---------- --------- ---------- ---------
As of June 30, 2000:
Total (Risk-Based) Capital
(to Risk Weighted Assets) $20,086 16.42% $9,785 8.00% $12,232 10.00%
Core (Tier 1) Capital
(to Risk Weighted Assets) $18,557 15.17% n/a n/a $7,339 6.00%
Core (Tier 1) Capital -
leverage (to Assets) $18,557 7.56% $9,820 4.00% $12,275 5.00%
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 externally prepared interest rate
sensitivity of the net portfolio value reports furnished by the OTS to monitor
and manage its interest rate risk.
The Bank 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.
The OTS prepares a report quarterly 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% of 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 March
31, 2000 (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 6,140 (18,348) (75%) 2.73% (721 bp)
+200 bp (1) 12,292 (12,197) (50%) 5.29% (464 bp)
+100 bp 18,500 (5,988) (24%) 7.72% (221 bp)
0 bp 24,489 9.93%
-100 bp 29,737 5,248 21% 11.76% 183 bp
-200 bp 33,775 9,287 38% 13.09% 316 bp
-300 bp 37,731 13,242 54% 14.34% 441 bp
(1) Denotes rate shock used to compute interest rate risk capital component.
March 31, 2000
--------------
Risk Measures (200 Basis Point Rate Shock):
Pre-Shock NPV Ratio: NPV as % of Present Value of Assets 9.93%
Exposure Measure: Post-Shock NPV Ratio 5.29%
Sensitivity Measure: Decline in NPV Ratio 4.64%
Utilizing the data above, the Bank, at March 31, 2000, 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 March 31,
2000 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 $263,063 $257,990 $252,859 $246,549 $239,544 $232,348 $225,235
-Liabilities
225,450 224,303 223,183 222,076 220,994 219,930 218,889
+Off Balance Sheet 117 88 61 16 (50) (126) (206)
------------------------------------------------------------------------------
Net Portfolio Value $37,730 $33,775 $29,737 $24,489 $18,500 $12,292 $ 6,140
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 would 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
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 August 8, 2000 LANDMARK BANCSHARES, INC.
------------------
By /S/ Larry Schugart
---------------------------------------
LARRY SCHUGART
President and Chief Executive Officer
(Duly Authorized Representative)
Date August 8, 2000
------------------
By /S/ Stephen H. Sundberg
-------------------------------------------
STEPHEN H. SUNDBERG
Senior Vice President and
Chief Financial Officer
(Duly Authorized Representative)