UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _______________________
to ________________________
Commission File Number 0-23164
LANDMARK BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Kansas 48-1142260
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification Number
CENTRAL AND SPRUCE STREETS, DODGE CITY, KANSAS 67801
(Address and Zip Code of principal executive offices)
(316) 227-8111
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No
The number of shares outstanding of each of the issuer's classes of common
stock, as of December 31, 1998:
$.10 par value common stock 1,231,571 shares
(Class) (Outstanding)
LANDMARK BANCSHARES, INC.
INDEX
Page Number
>C?
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Financial Condition as of
December 31, 1998 (unaudited) and September 30, 1998 1
Statements of Income for the Three
Months Ended December 31, 1998 and 1997 (unaudited) 2
Statements of Comprehensive Income for the
Three Months Ended December 31, 1998 and 1997 (unaudited) 3
Statements of Cash Flows for the Three Months Ended
December 31, 1998 and 1997 (unaudited) 4 - 5
Notes to Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14 - 16
PART II - OTHER INFORMATION
Item 2. Changes in Securities 17
Item 5. Other Information 17
Item 6(b). Reports on Form 8-K 17
SIGNATURES 18
1
LANDMARK BANCSHARES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY,
LANDMARK FEDERAL SAVINGS BANK
Consolidated Statements of Financial Condition
December 31, 1998 September 30, 1998
(Unaudited)
-------------------------------------
ASSETS
Cash and cash equivalents:
Interest bearing $ 3,289,204 $ 2,011,819
Non-interest bearing 1,364,541 832,559
Time deposits in other financial institutions 252,714 249,867
Securities held to maturity 10,485,128 11,575,433
Securities available for sale 9,573,412 9,220,910
Mortgage-backed securities held to maturity 19,165,188 21,723,755
Loans receivable, net 172,618,156 172,324,254
Loans held for sale 2,430,672 2,408,689
Accrued income receivable 1,138,224 1,443,847
Real estate owned or in judgment and other
repossessed property, net 192,139 70,939
Office properties and equipment, at cost less
accumulated depreciation 1,691,651 1,729,282
Prepaid expenses and other assets 1,499,369 1,749,177
Income taxes receivable - current 0 27,482
------------------------------
TOTAL ASSETS $ 223,700,397 $ 225,368,013
------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits 155,406,512 154,792,916
Other Borrowed Money 42,300,000 41,700,000
Advances from borrowers for taxes and
insurance 802,695 1,904,170
Accrued expenses and other Liabilities 1,187,548 1,737,080
Deferred income taxes 310,768 210,080
Income taxes
Current 376,018 0
------------------------------
TOTAL LIABILITIES $ 200,383,541 $ 200,344,246
------------------------------
Stockholders' Equity
Common Stock 228,131 228,131
$.10 par value; 10,000,000 shares authorized;
2,281,312 shares issued
Additional Paid-in Capital 22,515,702 22,466,144
Treasury Stock; 1,049,741 shares of common stock at cost (20,154,473) (17,904,245)
Retained income (substantially restricted) 21,156,475 20,739,642
Employee Stock Ownership Plan (692,719) (692,719)
Management Stock Bonus Plan (48,261) (96,522)
Accumulated other comprehensive income 312,001 283,336
------------------------------
Total Stockholders' Equity 23,316,856 25,023,767
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 223,700,397 $ 225,368,013
------------------------------
2
LANDMARK BANCSHARES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY,
LANDMARK FEDERAL SAVINGS BANK
Consolidated Statements of Income
Three Months Ended December 31
1997 1998
(unaudited) (unaudited)
---------------------
INTEREST INCOME
Interest on loans 3,341,282 3,562,238
Interest and dividends on investment securities 432,926 266,837
Interest on mortgage-backed securities 584,168 337,325
---------------------
Total interest income 4,358,376 4,166,400
INTEREST EXPENSE
Deposits 1,864,805 1,929,393
Borrowed funds 707,644 553,789
---------------------
Total interest expense 2,572,449 2,483,182
Net interest income 1,785,927 1,683,218
PROVISION FOR LOSSES ON LOANS 70,000 75,000
---------------------
Net interest income after provision for losses 1,715,927 1,608,218
NON-INTEREST INCOME
Service charges and late fees 74,597 99,040
Net gain (loss) on available for sale investments 0 65,672
Net gain (loss) on sale of loans 56,449 203,178
Service fees on loans sold 30,013 12,059
Other income 32,215 34,828
---------------------
193,274 414,777
NON-INTEREST EXPENSE
Compensation and related expenses 582,158 651,860
Occupancy expense 47,282 63,746
Advertising 16,331 13,042
Federal insurance premium 38,823 37,968
Loss (gain) from real estate operations 3,547 1,028
Data processing 45,999 43,035
Other expense 179,986 204,513
---------------------
914,126 1,015,192
Income before income taxes 995,075 1,007,803
INCOME TAXES EXPENSES 398,950 403,500
---------------------
Net income 596,125 604,303
---------------------
Basic earnings per share $ 0.38 $ 0.50
Diluted earnings per share $ 0.35 $ 0.44
Dividends per share $ 0.10 $ 0.15
3
LANDMARK BANCSHARES, INC. AND INTS WHOLLY-OWNED SUBSIDIARY,
LANDMARK FEDERAL SAVINGS BANK
Consolidated Statements of Cmprehensive Income
Three Months Ended
December 31,
1997 1998
(Unaudited) (Unaudited)
-----------------------------
Net income $ 596,125 $ 604,303
-----------------------------
Other comprehensive income, net of tax: Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period 178,902 94,337
Less: reclassification adjustment for gains included in net income (65,672)
-----------------------------
Total other comprehensive income 178,902 28,665
-----------------------------
Comprehensive income $ 775,027 $ 632,968
4
LANDMARK BANCSHARES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
LANDMARK FEDERAL SAVINGS BANK
Consolidated Statements of Cash Flows
Three Months Ended December 31
1997 1998
(unaudited) (unaudited)
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 596,125 $ 604,303
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of mortgage servicing rights 0 (54,971)
Depreciation 31,430 40,741
Decrease (increase) in accrued interest receivable (76,040) 292,956
Increase (decrease) in accrued and deferred income taxes 580,441 504,188
Increase (decrease) in accounts payable and accrued expenses (1,024,165) (536,864)
Amortization of premiums and discounts on investments and loans (32,477) (8,756)
Provision for losses on loans and investments 70,000 75,000
Gain/loss on available for sale investments 0 (65,672)
Other non-cash items, net (473,919) 152,748
Sale of loans held for sale 2,493,198 10,529,051
Gain on sale of loans held for sale (56,449) (203,178)
Origination of loans held for sale (18,939) (9,486,191)
Purchase of loans held for sale (2,399,860) (868,080)
----------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ (310,655) $ 975,275
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and principal payment on loans held for investment (1,767,492) 2,452,670
Principal repayments on mortgage-backed securities 3,313,957 2,559,812
Loans purchased for investment (7,018,907) (2,931,930)
Acquisition of investment securities held to maturity (3,000,000) (2,999,840)
Acquisition of investment securities available for sale (984,282) (168,850)
Proceeds from sale of investment securities available for sale 0 112,356
Proceeds from maturities or calls of investment securities 4,900,000 4,090,000
Sale of property acquired in settlement of loans 99,963 300
Acquisition of fixed assets (205,083) (3,110)
----------------------------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES (4,661,844) 3,111,408
----------------------------
5
LANDMARK BANCSHARES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY,
LANDMARK FEDERAL SAVINGS BANK
Consolidated Statements of Cash Flows
(Continued)
Three Months Ended December 31
1997 1998
(unaudited) (unaudited)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 1,234,550 $ 613,596
Net increase (decrease) in escrow accounts (904,307) (1,101,475)
Proceeds from FHLB advance and other borrowings 34,800,000 26,500,000
Repayment of FHLB advance and other borrowings (29,500,000) (25,900,000)
Acquisition of Treasury Stock 0 (2,250,228)
Dividend Payment (160,418) (187,470)
Other Financing Activities 48,261 48,261
----------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 5,518,086 (2,277,316)
----------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 545,587 1,809,367
BEGINNING CASH AND CASH EQUIVALENTS 2,741,052 2,844,378
----------------------------
ENDING CASH AND CASH EQUIVALENTS 3,286,639 4,653,745
----------------------------
SUPPLEMENTAL DISCLOSURES Cash paid during the period for:
Interest on deposits, advances, and other borrowings 2,597,287 2,886,638
Income taxes 398,950 752,036
Transfers from loans to real estate acquired through foreclosure 19,155 0
LANDMARK BANCSHARES, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
LANDMARK FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements were prepared in
accordance with the requirements for interim financial statement contained in
SEC Regulation S-X and , accordingly, do not include all information and
disclosures necessary to present financial condition, results of operations and
cash flows of Landmark Bancshares, Inc. (the "Company") and its wholly-owned
subsidiary Landmark Federal Savings Bank (the "Bank") in conformity with
generally accepted accounting principles. However, all normal recurring
adjustments have been made which, in the opinion of management, are necessary
for the fair presentation of the financial statements.
The results of operation for the three months ending December 31, 1998, are not
necessarily indicative of the results which may be expected for the fiscal year
ending September 30, 1999.
2. On March 28, 1994, the Bank segregated and restricted $15,144,357 of retained
earnings in a liquidation account for the benefit of eligible savings account
holders who continue to maintain their accounts at the bank after the conversion
of the bank from mutual to stock form. In the event of a complete liquidation of
the Bank, and only in such event, each eligible account holder will be entitled
to receive a distribution from the liquidation account in an amount
proportionate to the current adjusted balances of all qualifying deposits then
held. The liquidation account will be reduced annually at September 30th to the
extent that eligible account holders have reduced their qualifying deposits.
3. INVESTMENTS AND MORTGAGE - BACKED SECURITIES
A summary of the Bank's carrying value of investment and mortgage -
backed securities as of December 31, 1998 and September 30, 1998, is as follows:
Investment Securities December 31, 1998 September 30, 1998
------------------------------------
Held to maturity:
Government Agency Securities $ 9,000,128 $10,000,433
Municipal Obligations 1,485,000 1,575,000
-------------------------
$10,485,128 $11,575,433
Available for sale:
Common Stock 6,096,312 5,800,410
Stock in Federal Home Loan Bank 3,267,100 3,210,500
Other 210,000 210,000
-------------------------
$ 9,573,412 $ 9,220,910
7
Mortgage - Backed Securities held to maturity:
FNMA - Arms 8,308,442 8,841,621
FHLMC -Arms 2,664,182 2,814,514
FHLMC -Fixed Rate 120,003 128,174
CMO Government Agency 5,472,207 7,058,687
CMO Private Issue 1,961,690 2,202,738
FNMA - Fixed Rate 435,480 448,123
GNMA - Fixed Rate 203,184 229,898
-------------------------
$19,165,188 $21,723,755
4. LOAN RECEIVABLE, NET
A summary of the Bank's loans receivable at December 31, 1998 and
September 30, 1998, is as follows:
December 31, 1998 September 30, 1998
------------------------------------
Real Estate Loans:
Residential 130,857,302 129,688,030
Construction 1,090,037 1,386,224
Commercial 5,910,265 4,936,897
Second Mortgages 9,875,831 10,071,744
Commercial business 8,123,216 8,578,694
Consumer 18,195,211 19,049,741
---------------------------
Gross loans 174,051,862 173,711,330
Less: Net defered loan fees, premuims and discounts (228,758) (250,323)
Allowance for loan losses (1,204,948) (1,136,753)
---------------------------
Total Loans, net 172,618,156 172,324,254
A summary of the Bank's allowance for loan losses for the 3 months ended
December 31, 1997 and 1998, are as follows:
Three Months Ended
December 31
1997 1998
-------------------------
Balance Beginning $ 968,623 $ 1,136,753
Provisions Charged to Operations 70,000 75,000
Loans Charged Off Net of Recoveries 5,308 (6,805)
-------------------------
Balance Ending $ 1,043,931 $ 1,204,748
There has been no significant change in the level of non performing loans from
September 30, 1998 to December 31, 1998.
5. REAL ESTATE OWNED OR IN JUDGMENT
Real Estate owned or in judgment and other repossessed property:
8
December 31, 1998 September 30, 1998
------------------------------------
Real Estate Acquired by Foreclosure $ 0 $ 0
Real Estate Loans in Judgment and
Subject to Redemption 152,309 56,589
Other Repossessed Assets 39,830 14,350
-------------------------------
$192,139 $ 70,939
6. FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financial needs of its
customers and to reduce its own exposure to fluctuations in interest rates. The
financial instruments include commitments to extend credit and commitments to
sell loans. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the statement of
financial condition. The contract or notional amounts of those instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments.
The Bank's exposure to credit loss in the event of non-performance by the other
party to the financial instrument for loan commitments is represented by the
contractual or notional amount of those instruments. The Bank uses the same
credit policies in making commitments as it does for on-balance-sheet
instruments.
At December 31, 1998, the Bank had outstanding commitments to fund real estate
loans of $3,141,258. Of the commitments outstanding, $2,507,683 are for fixed
rate loans at rates of 6.375% to 8.50%. Commitments for adjustable rate loans
amount to $633,575 with initial rates of 6.50% to 7.75%. Outstanding loan
commitments to sell as of December 31, 1998 were $2,381,294, also the Bank had
outstanding commitments to purchase of $5,440,498. In addition the Bank had
outstanding commercial loan commitments of $1,661,258 with initial rates of 9.0%
to 9.50%.
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 issue common stock
(potential common stock) were exercised or converted to common stock. For the
periods presented potential common stock includes outstanding stock options and
nonvested stock awarded under the Management Stock Bonus Plan.
Earnings per share for the three months ending December 31, 1998 and
1997, was determined as follows:
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
Basic Earnings Per Share
Three months ended
December 31
1998 1997
------------------------
Weighted average common shares outstanding,
Net of Treasury shares 1,296,261 1,688,641
Average unallocated ESOP shares (69,235) (84,423)
Nonvested MSBP shares (6,842) (25,094)
------------------------
Weighted Average Shares for Basic EPS 1,220,184 1,579,124
------------------------
Net Earnings 604,303 596,125
------------------------
Per share amount $ 0.50 $ 0.38
9
Dilutive Earnings Per Share
Three months ended
December 31
1998 1997
--------------------------
Weighted average shares for Basic EPS 1,220,184 1,579,124
Dilutive stock options 135,749 138,558
Dilutive MSBP shares 2,318 8,681
--------------------------
Weighted Average Shares for Diluted EPS 1,358,251 1,726,363
--------------------------
Net Earnings 604,303 596,125
--------------------------
Per share amount $ 0.44 $ 0.35
8. DIVIDENDS
At a October 1998 board meeting, the Directors of the Company declared
a $0.15 per share dividend. The dividend was payable to all stockholders of
record as of November 2, 1998.
9. COMPREHENSIVE INCOME
Effective October 1, 1998, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 130 entitled "Reporting
Comprehensive Income" (SFAS No. 130). This statement requires disclosure of the
components of comprehensive income and the accumulated balance of other
comprehensive income within consolidated total stockholders' equity. The
adoption of the provisions of SFAS No. 130, which are only of a disclosure
nature, did not effect the Corporation's consolidated financial position,
results of operations or liquidity.
10
LANDMARK BANCSHARES, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General:
Landmark Bancshares, Inc. ("Company") is the holding company for
Landmark Federal Savings Bank ("Bank"). Apart from the operations of the Bank,
the Company did not engage in any significant operations during the quarter
ended December 31, 1998. The Bank is primarily engaged in the business of
accepting deposit accounts from the general public, using such funds to
originate mortgage loans for the purchase and refinancing of single-family homes
located in Central and Southwestern Kansas and for the purchase of
mortgage-backed and investment securities. In addition, the Bank also offers and
purchases loans through correspondent lending relationships in Wichita, Kansas
City, and other cities in Kansas, in Albuquerque and Santa Fe, New Mexico, and
Madison, Wisconsin. To a lesser extent, the Bank will purchase adjustable rate
mortgages loans, to manage its interest rate risk as deemed necessary. The Bank
also makes automobile loans, second mortgage loans, home equity loans and
savings deposit loans.
Management Strategy:
Management's strategy has been to maintain profitability and increase
capital. The Bank's lending strategy has historically focused on the origination
of traditional, conforming one to four-family mortgage loans with the primary
emphasis on single-family residences. The Bank's secondary focus has been on
consumer loans, second mortgage loans, home equity loans and savings deposit
loans. This focus, and the application of strict underwriting standards, are
designed to reduce the risk of loss on the Bank's loan portfolio. However, this
lack of diversification in its portfolio structure does increase the Bank's
portfolio concentration risk by making the value of the portfolio more
susceptible to declines in real estate values in its market area. This has been
mitigated in recent years, through the investment in mortgage-backed securities
and the sales of loans in the secondary market.
Certain risks are inherent in the sales of loans in the secondary
market. There is a risk that the Bank will not be able to sell all the loans
that it has originated, or conversely, will be unable to fulfill its commitment
to deliver loans pursuant to a firm commitment to sell loans. In addition, in
periods of rising interest rates, loans originated by the bank may decline in
value. Exposure to market and interest rate risk is significant during the
period between the time the interest rate on a customer's mortgage loan
application is established and the time the mortgage loan closes, and also
during the period between the time the interest rate is established and the time
the Bank commits to sell the loan. If interest rates change in an unanticipated
fashion, the actual percentage of loans that close may differ from projected
percentages. The resultant mismatching of commitments to closed loans and
commitments to deliver sold loans may have an adverse effect on the
profitability of loan originations.
A sudden increase in interest rates can cause a higher percentage of
loans to close than projected. To the degree that this was not anticipated, the
Bank will not have made commitments to sell these loans and may incur
significant mark to market losses, adversely affecting results of operations.
The Bank historically sold 30 year fixed rate mortgages in the
secondary market, however the Bank is keeping all currently originated 15 year
and 20 year mortgages with fixed rates at or above 6.75% and 6.875% for
investment and selling all other fixed rate loans.
Through the first three months of fiscal year 1999 rates continued with
moderate decline. As a result of rates at the end of December 1998, the Bank
reflected only a unrealized gain of $51,000 in loans held for sale. Sustained
levels of gain on sale of loans is dependent on continued stable or downward
interest rate movement and would likely be adversely affected by a continued
rise in interest rates.
11
Changes in financial condition between December 31, 1998 and September 30, 1998:
Total assets decreased by $1,667,616, or approximately 0.74% between
September 30, 1998 and December 31, 1998. This decrease is largely attributed to
a $923,651 decrease in securites held to maturity and a $2,558,567 decrease in
mortgage-backed securities held to maturity.
The Bank utilizes FHLB line of credit and short term advances which
increased $0.6 million from September 30, 1998 to December 31, 1998 to fund the
acquisition of adjustable rate mortgages. In managing the Bank's overall
interest rate risk, loan purchases have been made which increase the level of
risk to the extent that borrowing will reprice more frequently than the
adjustments on the mortgages.
Results of operations: comparison between the three months ended December 31,
1998 and 1997:
Net income for the three-month period ended December 31, 1998 of
$604,303 represents a increase of $8,178 from the net income reported for the
three-month period ended December 31, 1997. The increase was primarily due to a
$65,672 gain on sale of investments and a net gain of $203,178 on sale of loans
offset by a decrease of $102,709 in net interest income during the three month
period ended December 31, 1998.
Net interest income after provision for losses on loans for the
three-month period ended December 31, 1998 decreased $107,709 or approximately
6.27% to $1,608,218 as compared with $1,715,927 for the same period ended
December 31, 1997. This decrease is associated with the decreased interest
received on the investment portfolio. Provision for loan loss has been increased
primarily due to increased consumer lending.
Non interest income for the three-month period ended December 31, 1998
increased $221,503 or 114.60% to $414,777 as compared with $193,274 for the same
period ended December 31, 1997. This increase was due to the $65,672 net gain
from sale of investments and the $203,178 net gain on sale of loans during the
quarter ended December 1998. The increase in the gain on sale of loans is
largely attributable to an $8 million increase in the volume of loans sold as a
result of slightly lower interest rates.
Other expenses for the three-month period ended December 31, 1998
increased $101,066 or 11.05% to $1,015,192 as compared with $914,126 for the
same period ended December 31, 1997. This increase is primarily due to increased
compensation compared to the quarter ending December 31, 1998.
Earnings Per Share:
Effective with the quarter ended December 31, 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 128, Earnings per
Share. The Statement is to be applied to financial statements issued for periods
ending after December 15, 1997, including inteim periods; earlier application is
not permited. The Staement requires restatement of all prior-period earnings per
share (EPS) data presented.
FAS No. 128 simplifies the standards for computing EPS and makes them comparable
to international EPS standards. It replaces the presentation of primary EPS with
a presentation of basic EPS. It also requires presentation of basic and diluted
EPS on the face of the income staement for all entities with complex capital
structures. Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the company. Diluted EPS is computed
similarly to the previously presented fully diluted earnings per share.
Year 2000 Issue
The year 2000 poses an important business issue regarding how existing
application software programs and operating systems can accommodate this date
value. Many computer programs that can only distinguish the final two digits of
the year entered are expected to read entries for the year 2000 as the year
1900. Like most financial service providers, the Company may be significantly
affected by the Year 2000 issue due to the nature of financial information. The
Company has been evaluating both information technology (computer systems and
software) and
12
non-information technology (i.e. vault timers, elevators, electronic door lock
and heating, ventilation and air condition controls) both within and outside the
Company's direct control and with which the Company electronically or
operationally interfaces. If computer systems are not adequately changed to
identify the year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations that rely on the date field
information, such as interest, payment or due dates and other operating
functions, may generate results that could be significantly misstated, and the
Company could experience a temporary inability to process transactions and
engage in normal business activities.
The Company has also initiated formal communications with both information
technology and non-information technology vendors to determine the extent to
which the Company's interface systems may be vulnerable to those third parties'
failure to remediate their own Year 2000 issues. We have examined all of our
non-information technology systems and have either received certifications of
Year 2000 compliance for systems controlled by third party providers or
determined that the systems should not be impacted by the Year 2000. We expect
to further test the systems we control and receive third party certification,
where appropriate, that they will continue to function. We do not expect any
material costs to address our non-information technology systems and have not
had any material costs to date. We have determined that the information
technology systems we use have substantially more Year 2000 risk than the
non-information technology systems we use. The Bank continues to evaluate their
information technology systems risk in three areas: (1) internal computers and
software, (2) computers of others used by our borrowers, (3) external data
processing servicers. There is no significant change in the Banks Year 2000
status since the September 30, 1998 annual report.
Liquidity and Capital Resources:
The Bank is required to maintain minimum levels of liquid assets, as defined by
the Office of Thrift Supervision ("OTS") regulations. This requirement, which
may be varied from time to time depending upon economic conditions and deposit
flows, is based upon a percentage of deposits and short-term borrowing. The
required minimum ratio is currently 4 percent. The Bank's liquidity ratio
averaged 4.59% during December 1997. The Bank manages its liquidity ratio to
meet its funding needs, including: deposit outflows, disbursement of payments
collected from borrowers for taxes and insurance, and loan principal
disbursements. The Bank also manages its liquidity ratio to meet its
asset/liability management objectives.
In addition to funds provided from operations, the Bank's primary sources of
funds are: savings deposits, principal repayments on loans and mortgage-backed
securities, and matured or called investment securities. In addition, the Bank
may borrow funds from time to time from the Federal Home Loan Bank of Topeka.
Scheduled loan repayments and maturing investment securities are a relatively
predictable source of funds. However, savings deposit flows and prepayments on
loans and mortgage-backed securities are significantly influenced by changes in
market interest rates, economic conditions and competition. The Bank strives to
manage the pricing of its deposits to maintain a balanced stream of cash flows
commensurate with its loan commitments.
When applicable, cash in excess of immediate funding needs is invested into
longer-term investments and mortgage-backed securities which typically earn a
higher yield than overnight deposits, some of which may also qualify as liquid
investments under current OTS regulations.
As required by the financial institutions reform, recovery and enforcement act
of 1989 ("FIRREA"), OTS prescribed three separate standards of capital adequacy.
The regulations require financial institutions to have minimum regulatory
capital equal to 1.50 percent of tangible assets; minimum core capital equal to
4.00 percent of adjusted tangible assets; and risk-based capital equal to 8.00
percent of risk-based assets.
13
The Bank's capital requirements and actual capital under the OTS regulations are
as follows at December 31, 1998:
Amount (Thousands) Percent of Assets
Core Capital:
Actual 17,178 7.85%
Required 8,748 4.00%
Excess 8,430 3.85%
Risk-Based Capital:
Actual 18,383 15.37%
Required 9,571 8.00%
Excess $ 8,812 7.37%
14
LANDMARK BANCSHARES, INC.
PART I - FINANCIAL INFORMATION
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank has established an Asset/Liability Management Committee ("ALCO") for
the purpose of monitoring and managing interest rate risk. The Bank is subject
to the risk of interest rate fluctuations to the extent that there is a
difference, or mismatch, between the amount of the Bank's interest-earning
assets and interest-bearing liabilities which mature or reprice in specified
periods. Consequently, when interest rates change, to the extent the Bank's
interest-earning assets have longer maturities or effective repricing periods
than its interest-bearing liabilities, the interest income realized on the
Bank's interest-earning assets will adjust more slowly than the interest expense
on its interest-bearing liabilities. This mismatch in the maturity and interest
rate sensitivity of assets and liabilities is commonly referred to as the "gap."
A gap is considered positive when the amount of interest rate sensitive assets
maturing or repricing during a specified period exceeds the amount of interest
rate sensitive liabilities maturing or repricing during such period, and is
considered negative when the amount of interest rate sensitive liabilities
maturing or repricing during a specified period exceeds the amount of interest
rate assets maturing or repricing during such period. Generally, during a period
of rising interest rates, a negative gap would adversely affect net interest
income while a positive gap would result in an increase in net interest income,
and during a period of declining interest rates, a negative gap would result in
an increase in net interest income while a positive gap would adversely affect
net interest income. The Bank utilizes internally generated gap reports and
externally prepared interest rate sensitivity of the net portfolio value reports
to monitor and manage its interest rate risk.
The Company has historically invested in interest-earning assets that have a
longer duration than its interest-bearing liabilities. The mismatch in duration
of the interest-sensitive liabilities indicates that the Bank is exposed to
interest rate risk. In a rising rate environment, in addition to reducing the
market value of long-term interest-earning assets, liabilities will reprice
faster than assets; therefore, decreasing net interest income. To mitigate this
risk, the Bank has placed a greater emphasis on shorter-term higher yielding
assets that reprice more frequently in reaction to interest rate movements. In
addition, the Bank has continued to include in total assets a concentration of
adjustable-rate assets to benefit the one-year cumulative gap as such
adjustable-rate assets reprice and are more responsive to the sensitivity of
more frequently repricing interest-bearing liabilities.
Quarterly, the OTS prepares a report on the interest rate sensitivity of the net
portfolio value ("NPV") from information provided by the Bank. The OTS adopted a
rule in August 1993 incorporating an interest rate risk ("IRR") component into
the risk-based capital rules. Implementation of the rule has been delayed until
the OTS has tested the process under which institutions may appeal such capital
deductions. The IRR component is a dollar amount that will be deducted from
total capital for the purpose of calculating an institution's risk-based capital
requirement and is measured in terms of the sensitivity of its NPV to changes in
interest rates. The NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet
contracts.. An institution's IRR is measured as the change to its NPV as the
result of a hypothetical 200 basis point change in market interest rates. A
resulting change in NPV of more than 2% if the estimated market value of its
assets will require the institution to deduct from its capital 50% of that
excess change. The rule provides that the OTS will calculate the IRR component
quarterly for each institution.
The following tables present the Bank's NPV as well as other data as of
September 30, 1998 (the most recent available), as calculated by the OTS, based
on information provided to the OTS by the Bank.
15
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)
+400 bp $ 8,158 $(10,826) (57)% 3.91% (448) bp
+300 bp 11,650 (7,334) (39)% 5.44% (294) bp
+200 bp (1) 14,839 (4,145) (22)% 6.78% (160) bp
+100 bp 17,375 (1,609) (8)% 7.79% (59) bp
0 bp 18,984 8.39%
- -100 bp 19,830 846 4% 8.66% 27 bp
- -200 bp 20,761 1,777 9% 8.96% 57 bp
- -300 bp 21,957 2,973 16% 9.35% 97 bp
- -400 bp 23,288 4,305 23% 9.78% 140 bp
(1) Denotes rate shock used to compute interest rate risk capital component.
September 30, 1998
------------------
Risk Measures (200 Basis Point Rate Shock):
Pre-Shock NPV Ratio: NPV as % of Present Value of Assets 8.39%
Exposure Measure: Post-Shock NPV Ratio 6.78%
Sensitivity Measure: Change in NPV Ratio 1.60%
Utilizing the data above, the Bank, at September 30. 1998, would not have been
considered by the OTS to have been subject to "above normal" interest rate risk.
Accordingly, no deduction from risk-based capital would have been required.
Set forth below is a breakout, by basis points of the Bank's NPV as of September
30, 1998 by assets, liabilities, and off balance sheet items.
No
Net Portfolio Value -400 bp -300 bp -200 bp -100 bp Change +100 bp +200 bp +300 bp +400 bp
- ------------------------------------------------------------------------------------------------------------------------------------
Assets $ 238,084 $ 234,806 $ 231,740 $ 229,014 $ 226,400 $ 223,043 $ 218,794 $ 213,959 $ 208,891
- -Liabilities 214,474 212,603 210,804 209,075 207,400 205,795 204,235 202,726 201,269
+Off Balance Sheet (322) (246) (175) (109) (16) 127 280 417 536
--------------------------------------------------------------------------------------------------------------
Net Portfolio Value $ 23,288 $ 21,957 $ 20,761 $ 19,830 $ 18,984 $ 17,375 $ 14,839 $ 11,650 $ 8,158
Certain assumptions utilized by the OTS in assessing the interest rate risk of
savings associations were employed in preparing the previous table. These
assumptions related to interest rates, loan prepayment rates, deposit decay
rates and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Bank's assets and liabilities would perform as set
forth above.
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.
16
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
tem interest rate declines, could reduce or reverse the expected benefit from
decreasing interest rates.
17
LANDMARK BANCSHARES, INC.
PART II - OTHER INFORMATION
Item 2. - Changes in Securities
NONE
Item 5. - Other Information
Item 6(b). - Reports on Form 8-K
N/A
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date February 2, 1999 LANDMARK BANCSHARES, INC.
By /S/ Larry Schugart
------------------------------------------
LARRY SCHUGART
President and Chief Executive Officer
(Duly Authorized Representative)
By /S/ James F. Strovas
-----------------------------------------
JAMES F. STROVAS
Senior Vice President and
Chief Financial Officer
(Duly Authorized Representative)