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
For the fiscal year ended September 30, 1999
------------------------------------------------------
- OR -
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- -------------------------
Commission File Number: 0-23164
LANDMARK BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Kansas 48-1142260
- ------------------------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
of Incorporation or Organization) Identification No.)
Central and Spruce Streets, Dodge City, Kansas 67801
- ---------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (316) 227-8111
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
---------------------------------------
(Title of Class)
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 past 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. [ ]
Issuer's voting stock trades on The Nasdaq Stock Market under the
symbol "LARK". The aggregate market value of the voting common equity held by
non-affiliates of the registrant, based upon the closing price of such stock as
quoted on Nasdaq's National Market on December 22, 1999, was $13.5 million.
As of December 23, 1999, the issuer had 1,127,806 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Part II -- Portions of the issuer's Annual Report to Stockholders for the
fiscal year ended September 30, 1999.
2. Part III -- Portions of issuer's Proxy Statement for the Annual Meeting of
Stockholders to be held in January 2000.
PART I
Landmark Bancshares, Inc. (the "Registrant" or the "Company") may from
time to time make written or oral "forward-looking statements", including
statements contained in the Company's filings with the Securities and Exchange
Commission (including this annual report on Form 10-K and the exhibits thereto),
in its reports to stockholders and in other communications by the Company, which
are made in good faith by the Company pursuant to the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes; disruption in data processing caused by
computer malfunctions associated with the year 2000 problem; acquisitions;
changes in consumer spending and saving habits; and the success of the Company
at managing these risks.
The Company cautions that this list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Item 1. Business
- ----------------
General
The Company is a unitary savings and loan holding company that was
incorporated in November 1994 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 the Bank 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. As of September 30, 1999, the
Company had total assets of $244.1 million, total deposits of $158.9 million,
and stockholders' equity of $22.4 million or 9.2% of total assets under
generally accepted accounting principles ("GAAP"). The Company's only subsidiary
is the Bank.
2
The Bank is a federally chartered stock savings bank headquartered in
Dodge City, Kansas and originally founded in 1920. The Bank's deposits are
federally insured by the Savings Association Insurance Fund ("SAIF"), as
administered by the Federal Deposit Insurance Corporation ("FDIC").
The Company's primary activity is directing and planning the activities
of the Bank, the Company's primary asset. At September 30, 1999, the remainder
of the assets of the Company were maintained as deposits in 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 indicates otherwise. 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. Registrant also has a loan origination office in the Kansas City area.
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, commercial and consumer loans,
including home equity and savings account loans. Adjustable-rate mortgage loans
and 20-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.
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 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 most of its branch
offices, the oil industry is prevalent. 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 any 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 fixed and
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,
--------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- -------------------- ----------------- ------------------ ----------------
$ % $ % $ % $ % $ %
(Dollars in Thousands)
Type of Loan: (1)
Real estate loans
Construction......................... $ 1,848 1.04% $ 1,386 0.79% $ 1,937 1.22% $ 1,130 0.87% $ 202 0.20%
Residential.......................... 138,613 77.94 132,077 75.59 125,961 79.64 105,195 80.98 83,519 84.42
Commercial........................... 9,050 5.09 4,937 2.83 2,666 1.69 1,852 1.43 1,781 1.80
Second mortgage...................... 9,716 5.46 10,072 5.76 9,986 6.31 8,140 6.27 5,784 5.85
Commercial business.................... 6,531 3.67 8,579 4.91 4,050 2.56 3,601 2.77 1,753 1.77
Consumer:
Savings account...................... 660 0.37 588 0.34 574 0.36 555 0.43 605 0.61
Home improvement..................... -- -- - - -- -- -- -- -- --
Automobile........................... 12,269 6.90 17,623 10.08 13,310 8.42 9,784 7.53 5,986 6.05
Other................................ 650 0.37 837 0.48 968 0.61 643 0.49 286 0.29
------- ------ ------- ------ ------- ------ ------- ------ ------ ------
Gross loans.......................... 179,337 100.84 176,099 100.78 159,452 100.81 130,900 100.77 99,916 100.99
Less:..................................
Unamortized premiums (discounts)
on loan purchases................. 35 0.02 31 0.02 30 0.02 47 0.04 69 0.07
Loans in process..................... -- -- 24 0.01 (2) -- -- -- (45) (0.05)
Deferred loan origination fees and
costs............................. (214) (0.12) (284) (0.16) (348) (0.22) (304) (0.23) (362) (0.37)
Allowance for loan losses............ (1,318) (0.74) (1,137) (0.65) (969) (0.61) (740) (0.58) (644) (6.44)
------- ------ ------- ------ ------- ------ ------- ------ ------ ------
Total loans, net..................... $177,840 100.00% $174,733 100.00% $158,163 100.00% $129,903 100.00% $98,934 100.00%
======= ====== ======= ====== ======= ====== ======= ====== ====== ======
- -------------
(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, 1999. The table does not include
prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on loans totaled $74.1 million, $68.3 million, and $40.2
million for the three years ended September 30, 1999, 1998, and 1997,
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................... $ 94 $3,852 $1,303 $ 2,005 $7,254
After 1 year:
1 to 3 years.................. 533 2,883 -- 6,322 9,738
3 to 5 years.................. 1,172 1,175 -- 10,346 12,693
5 to 10 years................. 10,685 3,162 -- 3,875 17,722
10 to 20 years................ 66,446 6,411 85 746 73,688
Over 20 years................. 57,782 -- 460 -- 58,242
------- ------ ----- --------- -------
Total due after one year........ 136,618 13,631 545 21,289 172,083
------- ------ ----- --------- -------
Total amount due................ $136,712 $17,483 $1,848 $ 23,294(1) $179,337
Less:
Unamortized premium
on loan purchases............... 35 -- -- -- 35
Allowance for loan loss......... (689) (120) -- (509) (1,318)
Loans in process................ -- -- -- -- --
Deferred loan fees.............. (212) -- (2) -- (214)
------- ------ ----- --------- -------
Loans receivable, net......... $135,846 $17,363 $1,846 $ 22,785(1) $177,840
======= ====== ===== ========= =======
- --------------------
(1) Includes $9,716 of loans classified as second mortgage loans.
The following table sets forth the dollar amount of all loans due after
September 30, 2000, 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.... $ 70,226 $66,392 $136,618
Commercial............ 11,277 2,354 13,631
Construction.......... 545 -- 545
Consumer.............. 21,180 109 21,289
------- ------ -------
Total............... $103,228 $68,855 $172,083
======= ====== =======
5
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 area. Registrant also
originates a small number of residential real estate loans secured by
multi-family dwellings.
Registrant 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 note 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 refinancing
the
6
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 group of multi-family real estate loans on a single complex had a
balance of approximately $1.3 million at September 30, 1999, on an apartment
complex located within the Registrant's 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, 1999, the largest commercial
real estate loan was a construction loan that had a balance of approximately
$752,000 and was still in the construction phase at September 30, 1999.
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. Most of Registrant's commercial business loans are
secured by real estate or other assets such as automobiles. The Registrant had
two lines of credit between $1.0 million and $1.2 million at September 30, 1999.
The portfolio includes additional loans with large aggregate dollar balances.
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.
Because of the large dollar amounts outstanding on some of the loans in the
portfolio, the failure of only one of these borrowers to repay a loan could have
a material impact on the Registrant.
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, 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, 1999, Registrant originated
$79.7 million in loans, purchased $15.2 million in loans (all secured by one- to
four-family residences), and sold $23.7 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.
9
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 consumer loans expire 30 days after issuance. At September 30,
1999, Registrant had $3.3 million of commitments to originate loans and $3.6
million of unfunded commitments under lines of credit.
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 $165,000, $157,000, and $161,000 for the years ended
September 30, 1999, 1998 and 1997, respectively. As of September 30, 1999, loans
serviced for others totaled $61.9 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 limit at September 30, 1999 was approximately $3.0 million.
Registrant's largest amount of loans to one borrower was approximately
$2.7 million as of September 30, 1999. These loans are secured primarily by
interests in automobiles. These loans were current at September 30, 1999.
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,
----------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loan secured by 1-4
dwelling units ........................................... $128 $185 $ 78 $ 51 $239
All other mortgage loans .................................... -- 91 -- -- --
Non-Mortgage loans:
Consumer loans .............................................. 185 230 294 76 5
---- ---- ---- ---- ----
Total ......................................................... $313 $506 $372 $127 $244
==== ==== ==== ==== ====
Accruing loans that are contractually past due 90 days or more:
Mortgage loans:
Permanent loans secured by
1-4 dwelling units ........................................ $180 $182 $ 50 $146 $142
All other mortgage loans .................................... -- -- -- 44 --
---- ---- ---- ---- ----
Total ......................................................... $180 $182 $ 50 $190 $142
==== ==== ==== ==== ====
Total non-accrual and 90-day
past due accrual loans ...................................... $493 $688 $422 $317 $386
==== ==== ==== ==== ====
Real estate owned ............................................. $147 $ 71 $252 $-- $ 66
==== ==== ==== ==== ====
Total non-performing
assets ...................................................... $640 $759 $674 $317 $452
==== ==== ==== ==== ====
Total non-accrual and 90-day
past due accrual loans to net
loans ....................................................... 0.28% 0.39% 0.27% 0.24% 0.39%
==== ==== ==== ==== ====
Total non-accrual and 90-day
past due accrual loans to total
assets ...................................................... 0.20% 0.31% 0.19% 0.15% 0.19%
==== ==== ==== ==== ====
Total non-performing
assets to total assets ...................................... 0.26% 0.34% 0.30% 0.15% 0.22%
==== ==== ==== ==== ====
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 $39,000 for the year ended September 30, 1999. Amounts foregone and
not included in Registrant's interest income for the year ended September 30,
1999 totaled $12,000.
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 watch list 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, 1999 that Registrant had a general loss allowance for loans and
REO of $1,318,000.
At
September 30,
-------------
1999
----
(In Thousands)
Special mention assets $ 140
======
Classified assets
Substandard ........ $1,338
------
Doubtful ........... --
Loss ............... --
------
Total ............ $1,338
======
Foreclosed Assets. Assets owned or acquired by Registrant as a result
of foreclosure, judgment, or by a deed in lieu of foreclosure are classified as
foreclosed assets until they are 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 loan reserves are taken when it is determined that the
carrying value of the property exceeds 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 had $147,000 in foreclosed
assets as of September 30, 1999.
12
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, 1999,
1998, and 1997, Registrant charged $785,000, $265,000 and $308,000,
respectively, to the provision for loan losses and $0, $0 and $0, respectively,
to the provision for losses on foreclosed 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,
--------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ---------------- ----------------- ----------------- --------------------
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- --- --
(Dollars in Thousands)
Residential real estate..... $ 689 83.74% $ 689 81.51% $ 603 86.47% $ 523 87.44% $ 521 89.58%
Commercial real estate...... 70 5.05 22 2.80 12 1.67 9 1.42 10 1.78
Commercial business......... 50 3.64 38 4.87 76 2.54 51 2.75 23 1.76
Consumer.................... 509 7.57 388 10.82 278 9.32 157 8.39 90 6.88
----- ------ ------ ------ ----- ------ ----- ------ ---- ------
Total....................... $1,318 100.00% $1,137 100.00% $ 969 100.00% $ 740 100.00% $ 644 100.00%
===== ====== ===== ====== ===== ====== ===== ====== ===== ======
14
The following table sets forth information with respect to
Registrant's allowance for loan losses at the dates indicated:
At September 30,
-----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars in Thousands)
Total loans outstanding .... $ 177,840 $ 174,733 $ 158,163 $ 129,903 $ 98,934
========= ========= ========= ========= =========
Average loans outstanding .. $ 176,318 $ 167,490 $ 145,395 $ 110,084 $ 81,236
========= ========= ========= ========= =========
Allowance balances
(at beginning of period) . 1,137 969 740 644 619
Provision (credit):
Real estate-mortgage ..... -- 75 88 20 (17)
Consumer ................. 725 130 220 115 26
Commercial ............... 60 60 -- -- --
--------- --------- --------- --------- ---------
785 265 308 135 9
--------- --------- --------- --------- ---------
Charge-offs:
Real estate-mortgage ..... -- (2) (17) (19) (1)
Consumer ................. (658) (105) (75) (20) (1)
--------- --------- --------- --------- ---------
(658) (107) (92) (39) (2)
--------- --------- --------- --------- ---------
Recoveries:
Real estate-mortgage ..... -- 1 13 -- 16
Consumer ................. 54 9 -- -- 2
--------- --------- --------- --------- ---------
54 10 13 -- 18
--------- --------- --------- --------- ---------
Net (charge-offs) recoveries (604) (97) (79) (39) 16
========= ========= ========= ========= =========
Allowance balance
(at end of period) ....... $ 1,318 $ 1,137 $ 969 $ 740 $ 644
========= ========= ========= ========= =========
Allowance for loan losses as
a percent of total loans
outstanding .............. 0.74% 0.65% 0.61% 0.57% 0.65%
========= ========= ========= ========= =========
Net loans charged off as a
percent of average loans
outstanding .............. 0.34% 0.06% 0.06% 0.04% (0.02%)
========= ========= ========= ========= =========
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,
-----------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Total real estate owned and in
judgment, net .............. $ 147 $ 71 $ 252 $ -- $66
======= ======== ======== ========= ===
Allowance balances -
beginning .................. $ -- $ -- $ -- $ -- $--
Provision .................... -- -- -- -- --
Net charge-offs .............. -- -- -- -- --
------- -------- -------- --------- ---
Allowance balances - ending .. $ -- $ -- $ -- $ -- $--
======= ======== ======== ========= ===
Allowance for losses on real
estate owned and in judgment
to net real estate owned and
in judgment ................ -- % -- % -- % -- % -- %
======= ======== ======== ========= ===
15
Interest Bearing Accounts Held at Other Financial Institutions
As of September 30, 1999, the Company had a balance of $4,377,000 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,
1999, Registrant had an investment portfolio of approximately $40.9 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. Of this portfolio,
approximately $4.4 million consists of investments in common stock of other
issuers. 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, 1999 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, 1999, the market value
of Registrant's total investment portfolio was $40.0 million.
At September 30,
----------------------------
1999 1998 1997
---- ---- ----
(In thousands)
Investments Held to Maturity:
U.S. Government Securities .. $ -- $ -- $ --
U.S. Agency Securities ...... 27,465 10,000 17,298
Corporate Notes and Bonds ... -- -- --
Municipal Obligations ....... 1,385 1,575 1,540
------- ------- -------
Total Investments Held to
Maturity .................. 28,850 11,575 18,838
------- ------- -------
Investments Available-for-Sale:
U.S. Agency Securities ...... 4,000 -- --
Common Stock ................ 4,378 5,800 4,087
FHLB Stock .................. 3,441 3,211 2,976
Other Equity Securities ..... 10 10 10
Corporate Notes and Bonds ... 193 200 50
------- ------- -------
Total Investments Available
-for-Sale .................. 12,022 9,221 7,123
------- ------- -------
Total Investments ........... $40,872 $20,796 $25,961
======= ======= =======
Registrant classifies its investments in accordance with SFAS 115. See
the discussion of SFAS 115 under "-- Mortgage-Backed Securities." See Note 1 to
the Consolidated Financial Statements incorporated by reference into this
document.
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, 1999. Yields on tax exempt
obligations have not been computed on a tax equivalent basis.
As of September 30, 1999
---------------------------------------------------------------------------------------------------
Total
One Year or Less One to Five Years Five to Ten Years More than Ten Years 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........ -- -- 1,000 6.24 25,465 6.66 5,000 7.23 31,465 6.73 30,578
Municipal Obligations.......... 100 6.10 500 4.87 785 4.96 -- -- 1,385 5.01 1,392
Corporate Notes and Bonds...... -- -- 52 11.00 94 12.50 47 9.00 193 11.25 193
---- ---- ----- ----- ----- ----- ----- ----- ------ ----- ------
Total........................ $ 100 6.10% $1,552 5.95% $26,344 6.62% $5,047 7.25% $33,043 6.68% $32,163
==== ==== ===== ===== ====== ===== ===== ===== ====== ===== =======
18
Mortgage-Backed Securities
To supplement lending activities, Registrant invests in residential
mortgage-backed securities. Mortgage-backed securities can serve as collateral
for borrowings and, through repayments, as a source of liquidity (see Note 3 to
the Consolidated Financial Statements incorporated by reference into this
document).
In May 1994, 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,
1999, the mortgage-backed securities portfolio had a fair value of $13.5 million
and an amortized cost of $13.5 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, 1999, there were no mortgage-backed securities
that were classified as available for sale.
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 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
19
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, 1999
totaled $5.2 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, 1999, 1998, and 1997.
The portfolio of CMOs held in Registrant's mortgage-backed securities portfolio
at September 30, 1999 did not include any residual interests in CMOs. Further,
at September 30, 1999, 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).
The following table sets forth the carrying value of Registrant's
mortgage-backed securities portfolio at the dates indicated.
Weighted
Average
Rate At
September 30,
1999 1999 1998 1997
------ ------ ----- -----
(Dollars in Thousands)
Held for Investment:
GNMA ARMs.......................... --% $ -- $ -- $ --
FNMA ARMs.......................... 5.89 5,901 8,842 13,158
FHLMC ARMs......................... 5.54 1,901 2,815 4,768
FHLMC Fixed Rate................... 8.44 80 128 246
GNMA Fixed Rate.................... 8.00 103 230 373
FNMA Fixed Rate.................... 5.50 344 448 590
CMOs............................... 6.13 5,160 9,261 17,555
---- ----- ------ -------
Total Held for Investment 5.95% 13,489 21,724 36,690
==== ------ ------ -------
Held for Sale...................... -- -- --
------ ------ --------
Total mortgage-backed securities... $13,489 $21,724 $ 36,690
====== ====== =======
Mortgage-Backed Securities Maturity. The following table sets forth the
contractual maturity of Registrant's mortgage-backed securities portfolio at
September 30, 1999. The table does not include scheduled principal payments and
estimated prepayments.
20
Contractual
Maturities Due
--------------
(In Thousands)
Less than 1 year.......................... $132
1 to 3 years.............................. 133
3 to 5 years.............................. 350
5 to 10 years............................. 1,637
10 to 20 years............................ 2,205
Over 20 years............................. 9,032
------
Total mortgage-backed securities.......... $13,489
======
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 $32.8 million,
or 20.7% of Registrant's deposit portfolio at September 30, 1999. Certificates
of deposit constituted $126.1 million or 79.3% of the deposit portfolio,
including certificates of deposit with principal amounts of $100,000 or more
which constituted $27.0 million or 17.0% of the deposit portfolio at September
30, 1999. As of September 30, 1999, 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, 1999, $19.5 million in
investment securities and $6.2 million in mortgage-backed securities were
pledged as collateral for public funds.
21
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, 1999.
September 30,
1999
----
(In Thousands)
Maturity Period
Within three months....................................... $10,086
Over three through six months............................. 7,930
Over six through twelve months............................ 5,433
Over twelve months........................................ 3,539
------
Total................................................. $26,988
======
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, 1999, Registrant had
$58.0 million outstanding from the FHLB of Topeka and no borrowings of any other
kind.
Personnel
As of September 30, 1999 Registrant had 52 full-time and seven
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.
Regulation of the Company
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
22
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.
Subsequent to the end of the fiscal year, federal law was amended to
effectively prohibit the Company from affiliating in any way with a
non-financial company. In connection with the amendment to federal law, the
Company may now become affiliated with securities firms and insurance companies.
These changes to federal law do not impact the current business of the Company.
Unlike savings and loan holding companies that may be created in the future, the
Company generally is not restricted in the types of business in which it may
engage, provided that the Bank maintains a specified amount of its assets in
housing related investments.
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. 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. Set forth below is a brief description of certain laws that
relate to the regulation of the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations. 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.
23
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.
As a member of the SAIF, the Bank pays an insurance premium to the
FDIC. The FDIC also maintains another insurance fund, the Bank Insurance Fund
("BIF"), which primarily insures commercial bank deposits.
The deposit insurance assessment for SAIF members is .064% of deposits
on an annual basis through the end of 1999. During this same period, BIF members
will be assessed approximately .013% of deposits. After 1999, assessments for
BIF and SAIF members should be the same. It is expected that these continuing
assessments for both SAIF and BIF members will be used to repay outstanding
Financing Corporation bond obligations.
Regulatory Capital Requirements. OTS capital regulations require
savings associations to meet two capital standards: (1) a leverage ratio (core
capital) requirement of 4% of total adjusted assets and (2) a risk-based capital
requirement equal to 8% of total risk-weighted assets. Additional regulatory
requirements are discussed in Note 13 to the Consolidated Financial Statements
incorporated by reference into this document. These additional capital
requirements effectively require higher levels of capital.
As shown below, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements applicable to it as of September 30, 1999:
Percent of
Adjusted
Amount Assets
------ ------
(Dollars in Thousands)
Core Capital:
Regulatory requirement............... $ 9,652 4.0%
Regulatory capital................... 18,297 7.6
------- ----
Excess............................. $ 8,645 3.6%
======= ====
Risk-Based Capital:
Regulatory requirement............... $ 9,739 8.0%
Regulatory capital................... 19,615 16.1
------ ----
Excess............................. $ 9,876 8.1%
======= =====
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
make capital distributions, including cash dividends.
24
A savings association that is a subsidiary of a savings and loan
holding company, such as the Bank, must file an application or a notice with the
OTS at least 30 days before making a capital distribution. Savings associations
are not required to file an application for permission to make a capital
distribution and need only file a notice if the following conditions are met:
(1) they are eligible for expedited treatment under OTS regulations, (2) they
would remain adequately capitalized after the distribution, (3) the annual
amount of capital distribution does not exceed net income for that year to date
added to retained net income for the two preceding years, and (4) the capital
distribution would not violate any agreements between the OTS and the savings
association or any OTS regulations. Any other situation would require an
application to the OTS.
In addition, the OTS could prohibit a proposed capital distribution by
any institution, which would otherwise be permitted by the regulation, if the
OTS determines that the distribution would constitute an unsafe or unsound
practice.
A federal savings institution is prohibited from making a capital
distribution if, after making the distribution, the savings institution would be
unable to meet any one of its minimum regulatory capital requirements. Further,
a federal savings institution cannot distribute regulatory capital that is
needed for its liquidation account.
Qualified Thrift Lender Test. Savings institutions must meet a
qualified thrift lender ("QTL") test pursuant to OTS regulations or they become
subject to certain operating restrictions. 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, 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 on a monthly
basis in nine out of every 12 months. As of September 30, 1999, the Bank was in
compliance with its QTL requirement.
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, 1999, the Bank was in compliance with this requirement.
Proposed Regulation. The OTS has announced that it will consider
amending its capital standards so as to more closely conform its requirements to
those of the other federal banking agencies. The impact of this possible change
is not expected to materially impact the Bank. The impact on the Company cannot
yet be determined.
Executive Officers of the Registrant
James F. Strovas, age 53, has been employed by the Bank since 1988 and
presently serves as Senior Vice President and Chief Financial Officer of the
Company and Bank. He is also a board member of the Dodge City Area Community
Foundation, the American Heart Association of Ford County, and is a member of
the Dodge City Rotary Club.
25
Gary L. Watkins, age 44, has been employed by the Bank since 1985 and
is currently a Senior Vice President, Chief Operating Officer, and Secretary of
the Company and Bank. 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 four branch offices and leases one
additional branch office and one loan origination 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.
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, 1999 (the "Annual Report"), is incorporated herein by
reference.
Item 6. Selected Financial Data
- ---------------------------------
The information contained under the section 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 under the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------
The information contained under the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Asset/Liability Management" 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
--------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The information contained under the sections captioned "Proposal I --
Election of Directors" and "Section 16(A) Beneficial Ownership Reporting
Compliance" in Registrant's definitive proxy statement for Registrant's Annual
Meeting of Stockholders to be held in January 2000 (the "Proxy Statement") is
incorporated herein by reference. Additional information regarding Registrant's
executive officers is contain in Part I of this document. See "Item 1.
Description of Business -- Executive Officers of the Registrant."
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Director and
Executive Compensation" in the Proxy Statement is incorporated herein by
reference.
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 I -- 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.
27
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.
Item 14. Exhibits, Lists 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, 1999 and 1998.
Consolidated Statements of Operations for the Years
Ended September 30, 1999, 1998 and 1997.
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended September 30, 1999, 1998,
and 1997.
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1999, 1998 and 1997.
Notes to Consolidated Financial Statements.
2. Except for Exhibit 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.
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 1991 Deferred Compensation Agreement with Larry Schugart*
28
10.4 1998 Deferred Compensation Agreement with Larry Schugart***
10.5 Directors Change in Control Severance Plan***
10.6 1996 Stock Option Agreement with Richard Ball****
10.7 Employment Agreement with Larry Schugart***
10.8 Employment Agreement with Gary Watkins***
10.9 Employment Agreement with James Strovas***
10.10 1998 Stock Option Agreement with Richard Ball***
10.11 Stock Option Agreement with Larry Schugart
10.12 Stock Option Agreement with Gary Watkins
10.13 Stock Option Agreement with James Strovas
13 Annual Report to Stockholders for the fiscal year ended September 30,
1999
21 Subsidiaries of Registrant*****
23 Consent of Regier Carr & Monroe, L.L.P.
27 Financial Data Schedule (electronic filing only)
---------------------
* Incorporated by reference to the identically numbered exhibit of
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 exhibits 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 identically numbered exhibit of
the Annual Report on Form 10-KSB for the fiscal year ended
September 30, 1998 (File No. 0-23164), filed with the SEC.
**** Incorporated by reference to Exhibit 10.4 of the Annual Report on
Form 10-K for the fiscal year ended September 30, 1996 (File No.
0-23164), filed with the SEC.
*****Incorporated by reference to Exhibit 21.4 of the Annual 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.
29
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 27, 1999 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 27, 1999.
/s/ James F. Strovas /s/ Larry Schugart
- ---------------------------------------------- --------------------------------------
James F. Strovas Larry Schugart
Senior Vice President and President, Chief Executive Officer,
Chief 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