SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended September 30, 1996
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- OR -
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________________ to ____________________
SEC File Number: 0-23164
LANDMARK BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
Kansas 48-1142260
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(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification No.)
Central and Spruce Streets, Dodge City, Kansas 67801
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (316) 227-8111
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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(Title of Class)
Indicate by check mark whether 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 Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Registrant's voting stock trades on the Nasdaq Stock Market under the
symbol "LARK". The aggregate market value of the voting stock held by
non-affiliates of registrant, based upon the closing price of such stock as of
November 29, 1996 ($16.50 per share), was $22.6 million.
As of December 1, 1996, registrant had 1,847,996 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Parts II and IV -- Portions of registrant's Annual Report to Stockholders.
2. Part III -- Portions of registrant's Proxy Statement for Annual Meeting of
Stockholders to be held in January 1997.
PART I
Item 1. Business
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General
Landmark Bancshares, Inc. ("Registrant" or the "Company") is a unitary
savings and loan holding company that was incorporated in November 1993 under
the laws of the State of Kansas for the purpose of acquiring all of the issued
and outstanding common stock of Landmark Federal Savings Bank (the "Bank"). This
acquisition occurred in March 1994 at the time Landmark simultaneously converted
from a mutual to stock institution, and sold all of its outstanding capital
stock to the Company and the Company made its initial public offering of common
stock (the "Conversion"). As of September 30, 1996, the Company had total assets
of $213.7 million, total deposits of $143.8 million, and stockholders' equity of
$32.3 million or 15.15% of total assets under generally accepted accounting
principles ("GAAP"). The only subsidiary of the Company is the Bank.
The Bank is a federally chartered stock savings bank headquartered in
Dodge City, Kansas. The Bank was founded in 1920 with a charter from the state
of Kansas under the name of "Dodge City Savings and Loan Association" which
later became a federal association under the name of "First Federal Savings and
Loan of Dodge City." First Federal Savings and Loan of Dodge City became known
as Landmark Federal Savings Association in 1983 when it changed its name at the
time it merged with Peoples Savings and Loan Association of Sterling, Kansas.
Landmark Federal Savings Association changed its name to Landmark Federal Bank
at the time it converted to stock form and was acquired by Registrant in March
1994. The Bank's deposits are federally insured by the Savings Association
Insurance Fund ("SAIF"), as administered by the Federal Deposit Insurance
Corporation ("FDIC").
The primary activity of the Company is directing and planning the
activities of the Bank, the Company's primary asset. At September 30, 1996, the
remainder of the assets of the Company were maintained in the form of a loan to
the Bank or in the form of common stock of other banks. The Company engages in
no other significant activities. As a result, references to the Company or
Registrant generally refer to the Bank, unless the context otherwise indicates.
In the discussion of regulation, except for the discussion of the regulation of
the Company, all regulations apply to the Bank rather than the Company.
Registrant is primarily engaged in attracting deposits from the general
public and using those funds to originate and sell real estate loans on
one-to-four family residences and, to a lesser extent, to originate consumer and
construction loans for its portfolio. Registrant also purchases one- to
four-family residential loans. Registrant has offices in Garden City, Dodge
City, Great Bend, LaCrosse, and Hoisington, Kansas, which are located in its
primary market area of Ford, Finney, Barton, and Rush Counties in the State of
Kansas. In addition, Registrant invests in mortgage-related securities and
investment securities. Registrant offers its customers fixed-rate and
adjustable-rate mortgage loans, as well as FHA/VA loans and consumer loans,
including home equity and savings account loans. Adjustable-rate mortgage loans
and 15-year fixed-rate mortgage loans are originated for retention in
Registrant's portfolio while 30-year fixed-rate mortgage loans are sold into the
secondary market. All consumer loans are retained in Registrant's portfolio.
2
The principal sources of funds for Registrant's lending activities are
deposits and the amortization, repayment, and maturity of loans,
mortgage-related securities, and investment securities. Principal sources of
income are interest and fees on loans, mortgage-related securities, investment
securities, and deposits held in other financial institutions. Registrant's
principal expense is interest paid on deposits.
Market Area
The Kansas counties of Ford, Finney, Barton, and Rush, Kansas are
Registrant's primary market area. This area was founded on agriculture, which
continues to play a major role in the economy. Predominant activities involve
the wheat crop and feed lot operations. Dodge City, the location of Registrant's
main office is known as the "Cowboy Capital of the World" and maintains a
significant tourism industry. In the central part of Kansas, where Registrant
has three branch offices, the oil industry is prevalent. In the past several
years, the economic conditions in this area have improved significantly over the
major downturn in oil drilling activity during the 1980s. The largest employment
sector in Registrant's market area is agriculture. The market area of Registrant
is largely dependent upon the agricultural, beef packing, and oil and gas
industries. The effect of a downturn in either or both of these industries could
have a negative impact on the results of operations of Registrant.
Lending Activities
General. Registrant's loan portfolio consists primarily of adjustable-rate
mortgage loans secured by one- to four-family residences and, to a lesser
extent, consumer loans and construction loans. The portfolio also includes
commercial real estate loans.
3
Analysis of Loan Portfolio. Set forth below is selected data relating to
the composition of Registrant's loan portfolio by type of loan on the dates
indicated:
At September 30,
----------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
--------------- --------------- -------------- --------------- ---------------
$ % $ % $ % $ % $ %
------ ----- ------ ----- ----- ----- ----- ----- ------- ----
(Dollars in Thousands)
Type of Loan:(1)
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Real estate loans
Construction .................. $ 221 0.35 % $ 201 0.32 % $ 221 0.31% $ 202 0.20 % $ 1,130 .87 %
Residential ................... 58,774 93.47 58,439 93.32 64,169 90.06 83,519 84.42 105,195 80.98
Commercial .................... 1,217 1.94 1,087 1.74 1,300 1.83 1,781 1.80 1,852 1.43
Second mortgage ............... 1,724 2.74 1,952 3.12 2,916 4.09 5,784 5.85 8,140 6.27
Commercial business ............. 35 0.05 90 0.14 74 0.10 1,753 1.77 3,601 2.77
Consumer:
Savings account ............... 409 0.65 292 0.47 369 0.52 605 0.61 555 .43
Home improvement .............. 14 0.02 2 0.00 1 0.00 -- -- -- --
Automobile .................... 1,287 2.05 1,509 2.41 3,118 4.38 5,986 6.05 9,784 7.53
Other ......................... 53 0.08 40 0.06 45 0.06 286 0.29 643 .49
Gross loans ................... 63,734 101.35 63,612 101.58 72,213 101.35 99,916 100.99 130,900 100.77
Less:
Unamortized premiums (discounts)
on loan purchases ........... -- -- -- -- -- -- 69 0.07 47 .04
Loans in process .............. (14) (0.02) (4) (0.01) -- -- (45) (0.05) -- --
Deferred loan origination fees
and costs .................. (267) (0.42) (272) (0.43) (341) (0.48) (362) (0.37) (304) (.23)
Allowance for loan losses ..... (574) (0.91) (716) (1.14) (619) (0.87) (644) (6.44) (740) (.58)
Total loans, net ................ $62,879 100.00 % $62,620 100.00 % $71,253 100.00% $98,934 100.00 % $129,903 100.00 %
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(1) Includes loans classified as held for sale.
4
Loan Maturity. The following table sets forth the maturity of Registrant's
loan portfolio at September 30, 1996. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on loans totalled $13.7 million, $16.3 million, and $28.9 million for the three
years ended September 30, 1994, 1995, and 1996, respectively. Adjustable- rate
mortgage loans are shown as maturing based on contractual maturities.
1-4 Family Other
Real Estate Residential
Mortgage Commercial Construction Consumer Total
----------- ----------- ------------ -------- -----
(In Thousands)
Amounts Due:
Within 1 year .................. $ 32 $ 533 $ 330 $ 2,146 $ 3,041
-------- ------- --------- ------- ---------
After 1 year:
1 to 3 years ................. 243 2,895 6 3,830 6,974
3 to 5 years ................. 848 517 -- 8,189 9,554
5 to 10 years ................ 6,515 1,390 -- 4,293 12,198
10 to 20 years ............... 50,909 3,839 247 611 55,606
Over 20 years ................ 42,922 5 547 53 43,527
-------- ------- --------- ------- ---------
Total due after one year........ 101,437 8,646 800 16,976 127,859
-------- ------- --------- ------- ---------
Total amount due ............... $101,469 $ 9,179 $ 1,130 $ 19,122 $ 130,900
Less:
Unamortized premium on
loan purchases ............... 47 -- -- -- 47
Allowance for loan loss......... (532) -- -- -- --
Loans in process ............... -- -- -- (208) (740)
Deferred loan fees ............. (287) (9) (8) -- (304)
-------- ------- --------- ------- ---------
Loans receivable, net........ $100,697 $ 9,170 $ 1,122 $18,914 $ 129,903
======== ======= ========= ======= =========
The following table sets forth the dollar amount of all loans due after
September 30, 1997, which have predetermined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
One-to-four family...... $43,519 $57,918 $101,437
Commercial.............. 5,702 2,944 8,646
Construction............ 800 -- 800
Consumer................ 16,755 221 16,976
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Total................. $66,776 $61,083 $127,859
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Residential Loans. Registrant's primary lending activity consists of the
origination of one-to-four family, owner-occupied, residential mortgage loans
secured by property located in its primary market
5
area. Registrant also originates a small number of residential real estate loans
secured by multi-family dwellings.
Registrant currently offers adjustable-rate mortgages ("ARMs") that adjust
every one, three, and five years and have terms from 1 to 30 years, and
fixed-rate mortgage loans with terms of 1 to 30 years. The interest rates on
ARMs are based on treasury bill rates and the national cost of funds. Registrant
considers the market factors and competitive rates on loans as well as its own
cost of funds when determining the rates on the loans that it offers. Registrant
also has a small network of correspondents from whom Registrant may be referred
both fixed- and adjustable-rate real estate mortgage loans. Registrant retains
the adjustable-rate loans for its own loan portfolio and sells most of the fixed
rate loans into the secondary market, primarily to the Federal Home Loan
Mortgage Corporation ("FHLMC"). Historically, Registrant has sold its 30-year
and 15-year fixed rate loans in the secondary market; however, Registrant has
recently begun to hold its 15-year and 20-year fixed rate mortgage loans to
maturity. Registrant also offers Federal Housing Administration and Veterans
Administration ("FHA/VA") loans. Fixed-rate mortgage loans are generally
originated to FHLMC standards. Although Registrant originates adjustable-rate
mortgage loans for its own portfolio, they are underwritten to FHLMC standards,
so that they are saleable in the secondary market. FHA/VA loans are originated
in accordance with FHA/VA guidelines, most of which are sold to various private
investors.
Generally, during periods of rising interest rates, the risk of default on
an ARM is considered to be greater than the risk of default on a fixed-rate loan
due to the upward adjustment of interest costs to the borrower. To help reduce
such risk, Registrant qualifies the loan at the fully indexed accrual rate, as
opposed to the original interest rate. ARMs may be made at up to 95% of the loan
to value ratio.
Registrant does not originate ARMs with negative amortization.
Regulations limit the amount which a savings association may lend in
relationship to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum loan-to-value ratio of 100% for residential property and 90%
for all other real estate loans. Registrant's lending policies, however,
generally limit the maximum loan-to-value ratio to 80% of the appraised value of
the property, based on an independent or staff appraisal. When Registrant makes
a loan in excess of 80% of the appraised value or purchase price, private
mortgage insurance is generally required for at least the amount of the loan in
excess of 80% of the appraised value. Registrant generally does not make
non-owner occupied one- to four-family loans in excess of 80%.
The loan-to-value ratio, maturity, and other provisions of the residential
real estate loans made by Registrant reflect the policy of making loans
generally below the maximum limits permitted under applicable regulations.
Registrant requires an independent or staff appraisal, title insurance or an
attorney's opinion or with an abstract, flood hazard insurance (if applicable),
and fire and casualty insurance on all properties securing real estate loans
made by Registrant. Registrant reserves the right to approve the selection of
which title insurance companies' policies are acceptable to insure the real
estate in the loan transactions.
While one- to four-family residential real estate loans are normally
originated with 15-30 year terms, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon
6
refinancing the original loan. In addition, substantially all of the
fixed-interest rate loans in Registrant's loan portfolio contain due-on-sale
clauses providing that Registrant may declare the unpaid amount due and payable
upon the sale of the property securing the loan. Registrant enforces these
due-on-sale clauses to the extent permitted by law. Thus, average loan maturity
is a function of, among other factors, the level of purchase and sale activity
in the real estate market, prevailing interest rates, and the interest rates
payable on outstanding loans.
Second Mortgage Loans. Registrant makes loans on real estate secured by
secondary, or junior, mortgages. Secondary mortgage loans possess somewhat
greater risk than primary mortgage loans because the security underlying the
second mortgage loan must first be used to satisfy the obligation under the
primary mortgage loan. Registrant's lending policies for second mortgage loans
secured by one- to four-family residences are similar to those used for
residential loans, including the required loan-to-value ratio. Registrant does
not currently originate any second mortgage loans outside its primary market
area.
Multi-Family Loans. Registrant also makes fixed-rate and adjustable-rate
multi-family loans, including loans on apartment complexes. The largest
multi-family real estate loan had a balance of approximately $770,000 at
September 30, 1996, on an apartment complex located within its primary market
area.
Multi-family loans generally provide higher origination fees and interest
rates, as well as shorter terms to maturity and repricing, than can be obtained
from single-family mortgage loans. Multi-family lending, however, entails
significant additional risks compared with one- to four-family residential
lending. For example, multi-family loans typically involve larger loan balances
to single borrowers or groups of related borrowers, the payment experience on
such loans typically is dependent on the successful operation of the real estate
project, and these risks can be significantly impacted by supply and demand
conditions in the market for multi-family residential units and commercial
office, retail, and warehouse space.
Consumer Loans. Registrant views consumer lending as an important
component of its business operations because consumer loans generally have
shorter terms and higher yields, thus reducing exposure to changes in interest
rates. In addition, Registrant believes that offering consumer loans helps to
expand and create stronger ties to its customer base. Consequently, Registrant
intends to continue its consumer lending. Regulations permit federally-chartered
savings banks to make certain secured and unsecured consumer loans up to 35% of
assets. In addition, Registrant has lending authority above the 35% limit for
certain consumer loans, such as home improvement, credit card, and education
loans, and loans secured by savings accounts.
Consumer loans consist of personal unsecured loans, home improvement
loans, automobile loans, and savings account loans, at fixed rates.
The underwriting standards employed by Registrant for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. In addition, the stability of the applicant's monthly income from primary
employment is considered during the underwriting process. Credit worthiness of
the applicant is of primary consideration; however, the underwriting process
also includes a comparison of the value of the security in relation to the
proposed loan amount.
7
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreational vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. Registrant adds a general provision to its consumer loan loss
allowance, based on general economic conditions, prior loss experience, and
management's periodic evaluation.
Commercial Real Estate Loans. Commercial real estate secured loans are
originated in amounts up to 80% of the appraised value of the property. Such
appraised value is determined by an independent appraiser previously approved by
Registrant. Registrant's commercial real estate loans are permanent loans
secured by improved property such as small office buildings, retail stores,
small strip plazas, and other non-residential buildings. Registrant originates
commercial real estate loans with amortization periods of 1 to 20 years,
primarily as adjustable rate mortgages.
Loans secured by commercial real estate generally involve a greater degree
of risk than residential mortgage loans and carry larger loan balances. This
increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. At September 30, 1996, the largest commercial
real estate loan had a balance of approximately $347,000 and was performing.
Construction Loans. Registrant does not actively seek to make construction
loans. Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate,
Registrant may be required to advance funds beyond the amount originally
committed to permit completion of the development. If the estimate of value
proves to be inaccurate, Registrant may be confronted, at or prior to the
maturity of the loan, with a project having a value which is insufficient to
assure full repayment.
Commercial Business Loans. Regulations authorize Registrant to make
secured or unsecured loans for commercial, corporate, business, and agricultural
purposes. The aggregate amount of such loans outstanding may not exceed 10% of
Registrant's assets. In addition, another 10% of total assets may be invested in
commercial equipment leasing. Registrant has offered limited commercial business
loans since the early 1980s, primarily to existing customers. Most of
Registrant's commercial business loans are secured by real estate or other
assets.
8
It is the policy of Registrant to annually request financial statements
from commercial loan borrowers. The financial statements are reviewed as
received by management to detect any conditions or trends that may affect the
ability of the borrower, including cash flows of the project, to repay the debt.
Loan Solicitation and Processing. Registrant's sources of mortgage loan
applications are referrals from existing or past customers, local realtors,
builders, loan correspondents, and walk-in customers and also as the result of
advertising. The Association actively solicits local realtors and believes they
provide a substantial number of customers that originate loans with Registrant.
Registrant also solicits loans from a small network of correspondent lenders in
Wichita and Kansas City, Kansas and Albuquerque, New Mexico as well as various
communities in central and western Kansas. These correspondents, selected by
management, are located in markets Registrant does not otherwise serve.
The loan approval process is segmented by the type of loan and size of
loan. Consumer loans may be approved by certain loan officers within designated
limits. One or more signatures of members of senior management may also be
required for larger consumer loans. The Board of Directors ratifies all loans
that have been approved by officers or committees.
All commercial real estate loans are submitted to the Board of Directors
for approval upon the recommendation of senior management.
The real estate loan committee consists of various officers. Any two of
those individuals may collectively approve one- to four-family residential real
estate loans up to $100,000. Loans in amounts greater than $100,000 and up to
the current FHLMC maximum loan amount must be approved by no less than three
members of the loan committee. Real estate loans over the current FHLMC limit
require the approval of the Board of Directors.
Registrant uses fee appraisers or staff appraisers on all real estate
related transactions that are originated in the main office or branch offices of
Registrant. It is Registrant's policy to obtain title insurance on all
properties securing real estate loans and to obtain fire and casualty insurance
on all loans that require security. On occasion, when originating loans,
abstracts or attorney opinions may be utilized in lieu of title insurance.
Origination, Purchase, and Sale of Loans
During the fiscal year ended September 30, 1996, Registrant originated
$52.6 million in loans, purchased $17.1 million in loans (all secured by one- to
four-family residences), and sold $9.7 million in loans.
Loan Sales. Registrant generally retains servicing on all loans sold with
the exception of fixed rate FHA/VA loans which are sold with servicing released.
All such loans were sold without recourse to the Company.
Loan Commitments. Registrant issues written, formal commitments to
prospective borrowers on all real estate approved loans. The commitments
generally requires acceptance within 60 days of the date of issuance. For
commercial real estate loans or commercial loans in general, the commitment is
issued for approximately 60 days and must be closed within 60 days of issuance.
Commitments for
9
consumer loans expire 30 days after issuance. At September 30, 1996, Registrant
had $2.1 million of commitments to originate mortgage loans.
Loan Processing and Servicing Fees. In addition to interest earned on
loans, the Company recognizes fees and service charges which consist primarily
of fees on loans serviced for others and late charges. The Company recognized
net loan servicing fees of $179,537, $173,020, and $161,329 for the years ended
September 30, 1994, 1995, and 1996, respectively. As of September 30, 1996,
loans serviced for others totalled $53.7 million.
Loans to One Borrower. Savings associations are subject to the same limits
as those applicable to national banks, which under current regulations generally
limit loans-to-one borrower to an amount equal to 15% of unimpaired capital and
unimpaired surplus calculated as the sum of the Bank's core and supplementary
capital included in total capital, plus the balance of the general valuation
allowances for loan and lease losses not included in supplementary capital, plus
investments in subsidiaries that are not included in calculating core capital,
or $500,000, whichever is greater. An additional amount equal to 10% of
unimpaired capital and unimpaired surplus may be included if the loan is secured
by readily marketable collateral (generally, financial instruments, not real
estate). Under this general restriction, the Bank's maximum loan to one borrower
("LTOB") limit at September 30, 1996 was approximately $7.0 million.
Registrant's largest loan to one borrower is a loan originated in June 1994
having a balance of approximately $770,000 as of September 30, 1996. This loan
is secured by an apartment complex. This loan was current at September 30, 1996.
Loan Delinquencies. Registrant's collection procedures provide that when a
mortgage loan is 15 days past due, a computer printed delinquency notice is
sent. If payment is still delinquent at the end of that month, within 15 days a
telephone call is made to the borrower. If the delinquency continues, subsequent
efforts are made to eliminate the delinquency. If the loan continues in a
delinquent status for 60 days or more, the Board of Directors of Registrant
generally approves the initiation of foreclosure proceedings unless other
repayment arrangements are made. Collection procedures for non-mortgage loans
generally begin after a loan is 10 days delinquent.
Loans are reviewed on a regular basis and are generally placed on a
non-accrual status when the loan becomes more than 90 days delinquent and, in
the opinion of management, the collection of additional interest is doubtful.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. Subsequent interest payments, if any, are
either applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of the loan.
10
The following table sets forth information regarding non-accrual loans,
real estate owned ("REO") and other repossessed assets, and loans that are 90
days or more delinquent but on which Registrant was accruing interest at the
dates indicated. At such dates, Registrant had no restructured loans within the
meaning of Statement of Financial Accounting Standards ("SFAS") No. 15.
At September 30,
----------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured
by 1-4 dwelling units ..................................... $ 231 $ 48 $ 37 $ 239 $ 51
All other mortgage loans .................................... -- -- -- -- --
Non-mortgage loans:
Consumer loans .............................................. 21 30 -- 5 76
------ ------ ------ -------- ------
Total ......................................................... $ 252 $ 78 $ 37 $ 244 $ 127
====== ====== ====== ======== ======
Accruing loans that are contractually past due 90 days or more:
Mortgage loans:
Permanent loans secured
by 1-4 dwelling units ..................................... $ 222 $ 160 171 $ 142 $ 146
All other mortgage loans .................................... -- -- -- -- 44
------ ------ ------ -------- ------
Total ......................................................... $ 222 $ 160 171 $ 142 $ 190
====== ====== ------ ======== ======
Total non-accrual and
90-day past due
accrual loans ............................................... $ 474 $ 238 208 $ 386 $ 317
====== ====== ====== ======== ======
Real estate owned ............................................. $ 818 $ 351 $ 200 $ 66 $ --
====== ====== ====== ======== ======
Total non-performing
assets ...................................................... $1,292 $ 589 408 $ 452 $ 317
====== ====== ====== ======== ======
Total non-accrual and
90-day past due accrual
loans to net loans .......................................... 0.75% 0.38% 0.29% 0.39% 0.24%
====== ====== ====== ======== ======
Total non-accrual and
90 day past due accrual
loans to total assets ....................................... 0.29% 0.14% 0.11% 0.19% 0.15%
====== ====== ====== ======== ======
Total non-performing
assets to total assets ...................................... 0.80% 0.36% 0.22% 0.22% 0.15%
====== ====== ====== ======== ======
Interest income that would have been recorded on renegotiated loans and
loans accounted for on a non-accrual basis under the original terms of such
loans was $13,000 for the year ended September 30, 1996. Amounts foregone and
not included in Registrant's interest income for the year ended September 30,
1996 totalled $5,000.
11
Classified Assets. Office of Thrift Supervision ("OTS") regulations
provide for a classification system for problem assets of insured institutions
that covers all problem assets. Under this classification system, problem assets
of insured institutions are classified as "substandard," "doubtful," or "loss."
An asset is considered substandard if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the "distinct
possibility" that the insured institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as doubtful have all of the
weaknesses inherent in those classified substandard, with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions and values, "highly
questionable and improbable." Assets classified as loss are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
designated special mention by management are assets included on Registrant's
internal watchlist because of potential weakness but which do not currently
warrant classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital. At
September 30, 1996 that Registrant had a general loss allowance for loans and
REO of $740,346.
At
September 30,
1996
-------------
(In Thousands)
Special mention assets.................... $ 98
=====
Classified assets
Substandard............................. $1,101
Doubtful................................ --
Loss.................................... --
-----
Total............................... $1,101
=====
Real Estate Owned. Real estate owned or acquired by Registrant as a result
of foreclosure, judgment, or by a deed in lieu of foreclosure is classified as
real estate owned until it is sold. When property is acquired it is recorded at
fair value as of the date of foreclosure or transfer less estimated disposal
costs. Valuations are periodically performed by management and subsequent
charges to general mortgage loan reserves are taken when it is determined that
the carrying value of the property exceeds
12
the fair value less estimated costs to sell. It is subsequently carried at the
lower of the new basis (fair value at foreclosure or transfer) or fair value.
Registrant did not hold any REO as of September 30, 1996.
Allowance for Loan and Real Estate Losses. It is management's policy to
provide for losses on unidentified loans in its loan portfolio and foreclosed
real estate. A provision for loan losses is charged to operations based on
management's evaluation of the potential losses that may be incurred in
Registrant's loan portfolio. Such evaluation, which includes a review of all
loans of which full collectibility of interest and principal may not be
reasonably assured, considers, among other matters, the estimated net realizable
value of the underlying collateral. During the years ended September 30, 1994,
1995, and 1996, Registrant charged $(85,000), $9,000, and $135,000,
respectively, to the provision for loan losses and $0, $0, and $0, respectively,
to the provision for losses on REO or in judgment and other repossessed assets.
Management will continue to review the entire loan portfolio to determine
the extent, if any, to which further additional loss provisions may be deemed
necessary. There can be no assurance that the allowance for losses will be
adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
13
The amount and percent of loans in each category to total loans for the
distribution of Registrant's allowance for losses on loans at the dates
indicated is summarized as follows:
At September 30,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ---------------
$ % $ % $ % $ % $ %
----- ----- ----- ----- ----- ----- ----- ----- ----- -------
(Dollars in Thousands)
Residential real estate. $471 95.27% $619 95.25% $526 93.21% $521 89.58% $523 87.44%
Commercial real estate.. 9 1.91 11 1.71 10 1.80 10 1.78 9 1.42
Commercial business..... -- 0.05 -- 0.14 -- 0.10 23 1.76 51 2.75
Consumer................ 94 2.77 86 2.90 83 4.89 90 6.88 157 8.39
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total................... $574 100.00% $716 100.00% $619 100.00% $644 100.00% $740 100.00%
==== ====== ==== ====== ==== ====== ==== ====== ==== ======
14
The following table sets forth information with respect to
Registrant's allowance for loan losses at the dates indicated:
At September 30,
----------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
Total loans outstanding ............. $ 62,879 $ 62,620 $ 71,253 $98,934 $129,903
======== ======== ======== ======== ========
Average loans outstanding ........... 69,964 61,156 64,245 81,236 110,084
======== ======== ======== ======== ========
Allowance balances
(at beginning of period) .......... 394 574 716 619 644
Provision (credit):
Real estate-mortgage .............. 194 190 (83) (17) 20
Consumer .......................... -- (6) (2) 26 115
-------- -------- -------- -------- --------
194 184 (85) 9 135
-------- -------- -------- -------- --------
Charge-offs:
Real estate-mortgage .............. (14) (83) (18) (1) (19)
Consumer .......................... (1) (17) (5) (1) (20)
-------- -------- -------- -------- --------
(15) (100) (23) (2) (39)
-------- -------- -------- -------- --------
Recoveries:
Real estate-mortgage ............. -- 48 9 16 --
Consumer ......................... 1 10 2 2 --
-------- -------- -------- -------- --------
1 58 11 18 --
-------- -------- -------- -------- --------
Net (charge-offs) recoveries ........ (14) (42) (12) 16 (39)
======== ======== ======== ======== ========
Allowance balance
(at end of period)... ............. $ 574 $ 716 $ 619 $ 644 $ 740
======== ======== ======== ======== ========
Allowance for loan losses
as a percent of total
loans outstanding ................. 0.91% 1.14% 0.87% 0.65 % 0.57%
======== ======== ======== ======== ========
Net loans charged off as a percent of
average loans outstanding ......... 0.02% 0.07% 0.02% (0.02)% 0.04%
======== ======== ======== ======== ========
The following table sets forth information with respect to Registrant's
allowance for losses on real estate owned and in judgment at the dates
indicated:
At September 30,
---------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
Total real estate owned
and in judgment, net ...... $ 818 $ 351 $ 200 $ 66 $ --
===== ===== ===== ===== =======
Allowance balances -
beginning ................. $ -- $ 31 $ -- $ -- $ --
Provision ................... 31 -- --
Net charge-offs ............. -- (31) -- -- --
----- ----- ----- ----- -------
Allowance balances - ending . $ 31 $ -- $ -- $ -- $ --
===== ===== ===== ===== =======
Allowance for losses on
real estate owned and in
judgment to net real estate
owned and in judgment ..... 3.79% --% --% --% --%
===== ===== ===== ===== =======
15
Interest Bearing Accounts Held at Other Financial Institutions
As of September 30, 1996, the Company had outstanding checks in excess of
bank balances of $143,808 on its interest-bearing deposits in other financial
institutions, principally with the Federal Home Loan Bank ("FHLB") of Topeka
(including up to $100,000 at the other financial institutions covered by FDIC
deposit insurance and held in time deposits). The Company maintains these
accounts in order to maintain liquidity and improve the interest-rate
sensitivity of its assets.
Investment Activities
Registrant is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short-term securities
and certain other investments. Registrant has generally maintained a liquidity
portfolio well in excess of regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of future yield levels,
as well as management's projections as to the short-term demand for funds to be
used in Registrant's loan origination and other activities. As of September 30,
1996, Registrant had an investment portfolio of approximately $33.5 million,
consisting primarily of U.S. Government agency obligations, U.S. Treasury
securities, investment grade corporate debt securities, municipal obligations,
and FHLB stock as permitted by the OTS regulations. The level of investment
securities increased significantly as a result of the receipt of proceeds from
the initial issuance of common stock during 1994. During the last year, the
level of investment securities declined as a result of the increase in loan
originations. Registrant has also invested in mortgage-related securities
principally in Federal National Mortgage Association ("FNMA") ARMs and FHLMC
ARMs, and to a lesser extent, Collateralized Mortgage Obligations ("CMOs").
Registrant anticipates having the ability to fund all of its investing
activities from funds held on deposit at FHLB of Topeka. Registrant will
continue to seek high quality investments with short to intermediate maturities
and duration from one to five years.
16
Investment Portfolio
The following table sets forth the carrying value of Registrant's
investment securities portfolio, short-term investments, mutual funds, and FHLB
stock, at the dates indicated. None of the investment securities held as of
September 30, 1996 was issued by an individual issuer in excess of 10% of
Registrant's capital, excluding the securities of U.S. Government and U.S.
Government Agencies and Corporations. As of September 30, 1996, the market value
of Registrant's total investment portfolio was $33.3 million.
At September 30,
-----------------------------------
1994 1995 1996
-------- -------- -------
Investments Held to Maturity:
U.S. Government Securities.. $ 5,094 $ 2,887 $ --
U.S. Agency Securities...... 31,323 29,158 27,169
Corporate Notes and Bonds... 750 250 --
Municipal Obligations....... 2,755 2,530 2,230
------ ------ -----
Total Investments Held
to Maturity............. 39,922 34,825 29,399
------ ------ ------
Investments Available-for-Sale:
Common Stock................ 257 207 2,396
FHLB Stock.................. 1,476 1,476 1,732
Other Equity Securities..... 10 10 10
------ ------ -----
Total Investments Available-
for-Sale................ 1,743 1,693 4,138
------ ------ -----
Total Investments......... $41,665 $36,518 $33,537
====== ====== ======
Registrant classifies its investments in accordance with SFAS 115. See the
discussion of SFAS 115 under "-- Mortgage-Backed Securities." See Note 2 to
Consolidated Financial Statements.
17
Investment Portfolio Maturities
The following table sets forth certain information regarding the carrying
values, weighted average yields, and maturities of the Company's investment
securities portfolio as of September 30, 1996.
As of September 30, 1996
------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
----------------- ----------------- ----------------- ------------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------- ------
(Dollars in Thousands)
Investment Securities:
U.S. Government Obligations. $ -- -- % $ -- -- % $ -- -- $ -- -- % $ -- --% $ --
U. S. Agency Obligations.... 1,500 5.13 5,000 6.04 17,669 7.69 3,000 7.38 27,169 7.21 26,858
Municipal Obligations....... 600 4.96 1,000 5.33 530 5.16 100 5.90 2,230 5.22 2,255
Corporate Notes and Bonds... -- -- -- -- -- -- -- -- -- -- --
------ ---- ------ ---- ------- ---- ------- ---- ------- ---- -------
Total...................... $2,100 5.08% $6,000 5.92% $18,199 7.62% $ 3,100 7.33% $29,399 7.06% $29,113
====== ==== ====== ==== ======= ==== ======= ==== ======= ==== =======
18
Mortgage-Backed Securities
To supplement lending activities, Registrant invests in residential
mortgage-backed securities. Mortgage-backed securities can serve as collateral
for borrowings (although Registrant has not used them as such) and, through
repayments, as a source of liquidity.
In May 1993, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities. This
statement addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities. SFAS No. 115 is effective for fiscal years beginning after
December 15, 1993 as of the beginning of the fiscal year (i.e., October 1, 1994
for Registrant).
SFAS No. 115 requires classification of investments into three categories.
Debt securities that Registrant has the positive intent and ability to hold to
maturity must be reported at amortized cost. Debt and equity securities that are
bought and held principally for the purpose of selling them in the near term
must be reported at fair value, with unrealized gains and losses included in
earnings. All other debt and equity securities must be considered available for
sale and must be reported at fair value, with unrealized gains and losses
excluded from earnings but reported as a separate component of stockholders'
equity (net of tax effects).
Registrant adopted SFAS No. 115 as of October 1, 1994. At September 30,
1996, the mortgage-backed securities portfolio had a fair value of $45.5 million
and an amortized cost of $45.9 million. That part of the mortgage-backed
securities portfolio classified as held to maturity is recorded at amortized
cost. That part of the mortgage-backed securities classified as available for
sale is recorded at fair value, with unrealized gains and losses excluded from
earnings but reported as a separate component of stockholders' equity (net of
tax effects). As of September 30, 1996, there were no mortgage-backed securities
that were classified as available for sale.
On November 15, 1995, the FASB adopted a special report "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." The guide included, along with other implementation
guidance, a transition provision that allowed for a reassessment of the
appropriateness of the classifications of all securities and allowed a one time
reclassification of securities. Management, in December 1995, transferred $11.3
million of mortgage-backed securities from held-to-maturity classification to
available-for-sale classification in accordance with the provisions of the
guide. These securities were sold subsequent to the transfer.
Mortgage-backed securities represent a participation interest in a pool of
single-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally
quasi-governmental agencies) that pool and repackage the participation interests
in the form of securities, to investors such as the Association. Such
quasi-governmental agencies, which guarantee the payment of principal and
interest to investors, primarily include the Federal Home Loan Mortgage
Corporation ("FHLMC"), Government National Mortgage Association ("GNMA"), and
Federal National Mortgage Association ("FNMA").
FHLMC is a publicly-owned corporation chartered by the United States
Government. FHLMC issues participation certificates backed principally by
conventional mortgage loans. FHLMC guarantees the timely payment of interest and
the ultimate return of principal within one year. FHLMC securities are indirect
obligations of the United States Government. FNMA is a private corporation
chartered by
19
Congress with a mandate to establish a secondary market for conventional
mortgage loans. FNMA guarantees the timely payment of principal and interest,
and FNMA securities are indirect obligations of the United States Government.
GNMA is a government agency within the Department of Housing and Urban
Development ("HUD") which is intended to help finance government assisted
housing programs. GNMA guarantees the timely payment of principal and interest,
and GNMA securities are backed by the full faith and credit of the United States
Government. Because FHLMC, FNMA, and GNMA were established to provide support
for low- and middle-income housing, there are limits to the maximum size of
loans that qualify for these programs. To accommodate larger-sized loans, and
loans that, for other reasons, do not conform to the agency programs, a number
of private institutions have established their own home-loan origination and
securitization programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate mortgages or
adjustable rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages, (i.e., fixed rate or adjustable rate) as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages. Mortgage-backed
securities issued by FHLMC, FNMA, and GNMA make up a majority of the
pass-through certificates market.
The collateralized mortgage obligations ("CMOs") (in the form of real
estate mortgage investment conduits) held by Registrant at September 30, 1996
totaled $22.3 million and consisted of CMOs issued by FHLMC, FNMA and private
issuers. The aggregate book value of CMOs issued by any one private issuer did
not exceed 10% of stockholders' equity at September 30, 1996, 1995, and 1994.
The portfolio of CMOs held in Registrant's mortgage-backed securities portfolio
at September 30, 1996 did not include any residual interests in CMOs. Further,
at September 30, 1996, Registrant's mortgage-backed securities portfolio did not
include any "stripped" CMOs (i.e., CMOs that pay interest only and do not repay
principal or CMOs that repay principal only and do not pay interest).
20
The following table sets forth the carrying value of Registrant's
mortgage-backed securities portfolio at the dates indicated.
Weighted
Average
Rate At
September
1994 1995 1996 30, 1996
------------- -------------- ------------- --------
Held for Investment:
GNMA ARMs................... $11,819 $11,989 $ -- --%
FNMA ARMs................... 18,823 19,889 15,516 6.72
FHLMC ARMs.................. 7,329 7,025 6,257 6.84
FHLMC Fixed Rate............ 698 541 401 8.62
GNMA Fixed Rate............. -- 771 553 8.00
FNMA Fixed Rate............. 1,043 954 813 5.81
CMOs........................ 30,758 27,037 22,337 6.13
------- --------- ------- ----
Total Held for Investment 70,470 68,206 45,877 6.46
------- --------- ------- ----
Held for Sale............... -- -- -- --
------- --------- ------- ----
Total mortgage-backed securities $70,470 $ 68,206 $45,877 6.46%
------- --------- ------- ----
Mortgage-Backed Securities Maturity. The following table sets forth the
contractual maturity of Registrant's mortgage-backed securities portfolio at
September 30, 1996. The table does not include scheduled principal payments and
estimated prepayments.
Contractual
Maturities Due
--------------
(In Thousands)
Less than 1 year......................................... $ 144
1 to 3 years............................................. 1,826
3 to 5 years............................................. 1,573
5 to 10 years............................................ 5,353
10 to 20 years........................................... 8,357
Over 20 years............................................ 28,624
------
Total mortgage-backed securities......................... $45,877
======
21
Sources of Funds
General. Deposits are the major source of Registrant's funds for
lending and other investment purposes. Registrant derives funds from
amortization and prepayment of loans and mortgage-backed securities, maturities
of investment securities and operations. Scheduled loan principal repayments are
a relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and market
conditions. Registrant may also borrow funds from the FHLB of Topeka as a source
of funds.
Deposits. Consumer and commercial deposits are attracted principally
from within Registrant's primary market area through the offering of a broad
selection of deposit instruments including regular savings, demand and
negotiable order of withdrawal ("NOW") accounts, and term certificate accounts
(including negotiated jumbo certificates in denominations of $100,000 or more).
Deposit account terms vary according to the minimum balance required, the time
period the funds must remain on deposit, and the interest rate, among other
factors.
Savings deposits and demand and NOW accounts constituted $24.3
million, or 16.90% of Registrant's deposit portfolio at September 30, 1996.
Certificates of deposit constituted $119.5 million or 83.1% of the deposit
portfolio, including certificates of deposit with principal amounts of $100,000
or more which constituted $7.0 million or 4.89% of the deposit portfolio at
September 30, 1996. As of September 30, 1996, Registrant had no brokered
deposits.
To supplement lending activities in periods of deposit growth and/or
declining loan demand, Registrant has increased its investments in residential
mortgage-backed securities during recent years. Although such securities are
held for investment, they can serve as collateral for borrowings and, through
repayments, as a source of liquidity. At September 30, 1996, $7.0 million in
mortgage-backed securities were pledged as collateral for public funds.
22
Jumbo Certificates of Deposit
The following table indicates the amount of Registrant's
certificates of deposit of $100,000 or more by time remaining until maturity as
of September 30, 1996.
September 30,
1996
--------------
(In Thousands)
Maturity Period
- ---------------
Within three months................................ $ 1,538
Over three through six months...................... 2,500
Over six through twelve months..................... 2,285
Over twelve months................................. 709
-----
Total.......................................... $7,032
=====
Borrowings
Deposits are the primary source of funds of Registrant's lending and
investment activities and for its general business purposes. Registrant may
obtain advances from the FHLB of Topeka to supplement its supply of lendable
funds, and Registrant has utilized this funding source. Advances from the FHLB
of Topeka would typically be secured by a pledge of Registrant's stock in the
FHLB of Topeka and a portion of Registrant's first mortgage loans and certain
other assets. Registrant, if the need arises, may also access the Federal
Reserve Bank discount window to supplement its supply of lendable funds and to
meet deposit withdrawal requirements. At September 30, 1996, Registrant had
$33.5 million outstanding from the FHLB of Topeka and no borrowings of any other
kind.
Personnel
As of September 30, 1996 Registrant had 40 full-time and nine part-time
employees. None of Registrant's employees are represented by a collective
bargaining group.
Competition
Registrant encounters strong competition both in the attraction of
deposits and origination of loans. Competition comes primarily from savings
institutions, commercial banks, and credit unions that operate in counties where
Registrant's offices are located. Registrant competes for savings accounts by
offering depositors competitive interest rates and a high level of personal
service. Registrant competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and contractors.
23
Regulation
Set forth below is a brief description of certain laws that relate to the
regulation of the Company and the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations.
Company Regulation
General. The Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries, should such subsidiaries be formed, which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association. This regulation and
oversight is intended primarily for the protection of the depositors of the Bank
and not for the benefit of stockholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test or a somewhat
similar test for domestic building and loan associations. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL and were acquired in a supervisory acquisition. See "--
Regulation of the Bank -- Qualified Thrift Lender Test."
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association, the
Bank is subject to extensive regulation by the OTS and the Federal Deposit
Insurance Corporation ("FDIC"). Lending activities and other investments must
comply with various federal statutory and regulatory requirements. The Bank is
also subject to certain reserve requirements promulgated by the Federal Reserve
Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC, or the
Congress could have a material adverse impact on the Company, the Bank, and
their operations.
24
Insurance of Deposit Accounts. The Bank's deposit accounts are insured by
the SAIF to a maximum of $100,000 for each insured member (as defined by law and
regulation). Insurance of deposits may be terminated by the FDIC upon a finding
that the institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the institution's
primary regulator.
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund. Under
this system, a savings association has paid within a range of 23 cents to 31
cents per $100 of domestic deposits, depending upon the institution's risk
classification. This risk classification is based on an institution's capital
group and supervisory subgroup assignment. In addition, the FDIC is authorized
to increase such deposit insurance rates on a semi-annual basis if it determines
that such action is necessary to cause the balance in the SAIF to reach the
designated reserve ratio of 1.25% of SAIF-insured deposits within a reasonable
period of time. The SAIF was substantially underfunded through September 30,
1996. In addition, the FDIC may impose special assessments on SAIF members to
repay amounts borrowed from the U.S. Treasury or for any other reason deemed
necessary by the FDIC. By comparison, during the first part of 1996, members of
the Bank Insurance Fund ("BIF"), predominantly commercial banks, were required
to pay substantially lower, or virtually no, federal deposit insurance premiums.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. The Bank recorded a $937,073 pre-tax
expense for this assessment at September 30, 1996, and that assessment is
payable on November 27, 1996. Beginning January 1, 1997, deposit insurance
assessments for SAIF members are expected to be reduced to approximately .064%
of deposits on an annual basis through the end of 1999. During this same period,
BIF members are expected to be assessed approximately 0.13% of deposits.
Thereafter, assessments for BIF and SAIF members should be the same and the SAIF
and BIF may be merged. It is expected that these continuing assessments for both
SAIF and BIF members will be used to repay outstanding Financing Corporation
bond obligations. As a result of these changes, beginning January 1, 1997, the
rate of deposit insurance assessed the Bank is expected to substantially
decline.
Regulatory Capital Requirements. OTS capital regulations require savings
associations to meet three capital standards: (1) a tangible capital requirement
of 1.5% of total adjusted assets, (2) a leverage ratio (core capital)
requirement of 3% of total adjusted assets and (3) a risk-based capital
requirement equal to 8% of total risk-weighted assets. Additional regulatory
requirements are discussed in Note 12 to the Consolidated Financial Statements.
25
As shown below, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements applicable to it as of September 30, 1996:
Percent of
Adjusted
Amount Assets
-------- ----------
(Dollars in Thousands)
Tangible Capital:
Regulatory requirement.............. $ 3,167 1.5%
Regulatory capital.................. 28,112 13.3
-------- ----
Excess............................ $ 24,945 11.8%
======== ====
Core Capital:
Regulatory requirement.............. $ 6,335 3.0%
Regulatory capital.................. 28,112 13.3
-------- ----
Excess............................ $ 21,777 10.3%
======== ====
Risk-Based Capital:
Regulatory requirement.............. $ 7,433 8.0%
Regulatory capital.................. 28,852 31.1
-------- ----
Excess............................ $ 21,419 23.1%
======== ====
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company. In
addition, the Bank may not declare or pay a cash dividend on its capital stock
if the effect thereof would be to reduce the regulatory capital of the Bank
below the amount required for the liquidation account to be established pursuant
to the Bank's Plan of Conversion.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. As of
September 30, 1996, the Bank was a Tier 1 institution. In the event the Bank's
capital fell below its fully phased-in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
26
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
Finally, a savings association is prohibited from making a capital
distribution if, after making the distribution, the savings association would be
undercapitalized (not meet any one of its minimum regulatory capital
requirements).
Qualified Thrift Lender Test. Savings institutions must meet either the
QTL test pursuant to OTS regulations or the definition of a domestic building
and loan association in section 7701 of the Internal Revenue Code ("Code:). If
the Bank maintains an appropriate level of certain specified investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL or a domestic
building and loan association, it will continue to enjoy full borrowing
privileges from the FHLB of Topeka. The required percentage of investments under
the QTL test is 65% of assets while the Code requires investments of 60% of
assets. An association must be in compliance with the QTL test or definition of
domestic building and loan association on a monthly basis in nine out of every
12 months. As of September 30, 1996, the Bank was in compliance with its QTL
requirement and met the definition of a domestic building and loan association.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. At September
30, 1996, the Bank was in compliance with this requirement.
Executive Officers of the Company
The following individuals were executive officers of the Company as of
September 30, 1996:
Name Age(1) Positions Held With Registrant
- ---- ------ -------------------------------
Larry Schugart 57 President and Chief Executive Officer
James F. Strovas 50 Senior Vice President and Chief Financial Officer
Gary L. Watkins 41 Senior Vice President, Chief Operating Officer,
and Secretary
- -------------------------
(1) At September 30, 1996.
The following is a description of the principal occupation and employment
of the executive officers of Registrant as of September 30, 1996, during at
least the past five years.
27
Larry Schugart has been with Registrant for more than 33 years. He is also
a director of the Federal Home Loan Bank of Topeka where he serves on the
Finance and Executive Committees. Mr. Schugart is a member and chair of various
committees of the Heartland Community Bankers Association, is a past Chairman of
the predecessor of the Heartland Community Bankers Association and serves as a
member of the Governmental Affairs Committee of the America's Community Bankers.
In addition Mr. Schugart is a member of the Dodge City Area Chamber of Commerce
and is a board member of the Dodge City/Ford County Development Corporation.
James F. Strovas has been employed by Registrant since 1988 and presently
serves as Senior Vice President and Chief Financial Officer of Registrant. He is
also a board member of the Dodge City Area Chamber of Commerce, the Dodge City
Area Community Foundation, the American Heart Association of Ford County, and is
a member of the Dodge City Rotary Club.
Gary L. Watkins has been employed by Registrant since 1985 and is currently
a Senior Vice President, Chief Operating Officer, and Secretary of Registrant.
He is also a member of the Kiwanis and the Board of Directors of Trinity
Association. Mr. Watkins is a past Vice President of the Dodge City Area Chamber
of Commerce.
Item 2. Properties
- ------------------
Registrant owns its main office and three branch offices and leases one
additional branch office. Registrant also leases a parking lot for its main
office.
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which Registrant is periodically
involved, such as claims to enforce liens, condemnation proceedings on
properties in which Registrant holds security interests, claims involving the
making and servicing of real property loans, and other issues incident to
Registrant's business.
In the opinion of management, no material loss is expected from any of the
pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matter was submitted to a vote of securities holders during the fourth
quarter of the fiscal year.
28
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -------------------------------------------------------------------------------
The information contained under the section captioned "Stock Price
Information" in the Company's Annual Report to Stockholders for the fiscal year
ended September 30, 1996 (the "Annual Report"), is incorporated herein by
reference.
Item 6. Selected Financial Data
- ---------------------------------
The information contained in the table captioned "Five-Year Financial
Summary" in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
Registrant's financial statements listed under Item 14 are incorporated
herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of Registrant
- --------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" and "Voting Securities and Principal Holders Thereof --
Security Ownership of Certain Beneficial Owners" in Registrant's definitive
proxy statement for Registrant's Annual Meeting of Stockholders (the "Proxy
Statement") is incorporated herein by reference.
Additional information concerning executive officers is included under
"Part I - Executive Officers of the Company."
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Director and
Executive Compensation" in the Proxy Statement is incorporated herein by
reference.
29
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal
Holders Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal
Holders Thereof" and to the first table under "Proposal 1 --
Election of Directors" in the Proxy Statement.
(c) Management of Registrant knows of no arrangements, including any
pledge by any person of securities of Registrant, the operation of
which may at a subsequent date result in a change in control of
Registrant.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Certain Relationships and Related Transactions" in the
Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
1. The following financial statements and the report of independent
accountants of Registrant included in Registrant's Annual Report to Stockholders
are incorporated herein by reference and also in Item 8 hereof.
Independent Auditor's Report.
Consolidated Statements of Financial Condition as of September 30, 1995 and
1996.
Consolidated Statements of Operations for the Years Ended September 30,
1994, 1995, and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended September 30, 1994, 1995, and 1996.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1994, 1995 and 1996.
Notes to Consolidated Financial Statements.
2. Except for Exhibits 11 and 27 below, Financial Statement
Schedules for which provision is made in the applicable accounting regulations
of the SEC are not required under the related instructions or are inapplicable
and therefore have been omitted.
30
3. The following exhibits are included in this Report or incorporated
herein by reference:
(a) List of Exhibits:
3(i) Articles of Incorporation of Landmark Bancshares, Inc.*
3(ii) Bylaws of Landmark Bancshares, Inc.*
10.1 1994 Stock Option Plan of Landmark Bancshares, Inc.**
10.2 Management Stock Bonus Plan and Trust Agreements**
10.3 Employment Agreement with Larry Schugart***
10.4 Stock Option Agreement with Richard Ball
11 Statement Regarding Computation of Earnings per Share
13 Annual Report to Stockholders for the fiscal year ended September
30, 1996
21 Subsidiaries of Registrant***
23 Consent of Regier Carr & Monroe, L.L.P.
27 Financial Data Schedule
- ---------------------
* Incorporated by reference to the registration statement on Form S-1
(File No. 33-72562) declared effective by the SEC on February 9, 1994.
** Incorporated by reference to the proxy statement for a special meeting
of stockholders held on June 22, 1994 and filed with the SEC on May
24, 1994 (File No. 0-23164).
*** Incorporated by reference to the Annual Securities Report on Form 10-K
for the fiscal year ended September 30, 1994 (File No. 0-23164), filed
with the SEC.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed as
of December 26, 1996 on its behalf by the undersigned, thereunto duly
authorized.
Landmark Bancshares, Inc.
By: /s/ Larry Schugart
---------------------------
Larry Schugart
President and Chief
Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of December 26, 1996.
/s/ James F. Strovas /s/ Larry Schugart
- -------------------------------- -----------------------------------
James F. Strovas Larry Schugart
Senior Vice President and Chief President, Chief Executive Officer,
Financial Officer and Director
(Principal Financial and Accounting (Principal Executive Officer)
Officer)
/s/ Gary L. Watkins /s/ Richard A. Ball
- -------------------------------- ----------------------------------
Gary L. Watkins Richard A. Ball
Senior Vice President, Chief Operating Director
Officer, and Secretary
/s/ David H. Snapp /s/ C. Duane Ross
- -------------------------------- ----------------------------------
David H. Snapp C. Duane Ross
Director Director
/s/ Jim W. Lewis
- --------------------------------
Jim W. Lewis
Director