LANDMARK BANCSHARES, INC.
-------------------------
1999
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ANNUAL REPORT
Landmark Bancshares, Inc.
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CONTENTS
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Message to our Stockholders ............................................... 1
Corporate Profile and Stock Price Information.............................. 2
Five-Year Financial Summary................................................ 3
Management's Discussion and Analysis....................................... 5
Report of Independent Accountants.......................................... F-1
Consolidated Financial Statements.......................................... F-2
Notes to Consolidated Financial Statements ................................ F-8
Corporate Information...................................................... 17
MESSAGE TO OUR STOCKHOLDERS:
I am pleased to report to you our stockholders, the 6th annual report on
Landmark Bancshares, Inc. and its wholly owned subsidiary, Landmark Federal
Savings Bank. I will endeavor to give you only some highlights on the past year
as all detailed financial information and the management discussion can be found
elsewhere in this report.
Our net income was down slightly from $2.364 million to $2.356 million, or less
than 1% which we think is tolerable in that substantial funds were used to make
stock repurchases in lieu of being available for investing in other earning
assets.
Ever mindful of our responsibility to you, our stockholders, our Board of
Directors continued to approve the repurchase of our stock when it appeared to
be a good business decision to do so. Our Stock repurchase program has been very
successful and to date we have repurchased 50% of the original shares issued
during our conversion in March 1994. In a review, I am pleased to inform you
that a substantial number of shares were purchased below book value, thus were
immediately accretive to the Holding Company.
I am proud to report that our return on average equity (ROE) improved from 7.52%
to 10.09%. Likewise, our diluted earnings per share (EPS) increased from $1.42
to $1.87, an increase of 31%. Furthermore, the Company declared its 22nd
consecutive quarterly dividend in October, 1999, which has risen over the years
from a quarterly payment of five cents to fifteen cents per share, or an
approximate annual yield of 3.80% based on the closing price per share as of
September 30, 1999.
There has been a great deal of concern in the news media regarding the upcoming
Year 2000. The Company has had a committee of senior level officers along with
other supervisors and employees that have been preparing for Y2K since the fall
of 1997. New software and hardware have been purchased and installed and testing
of all programs has occurred and is ongoing. We have had three examinations on
our Y2K preparation by our regulator, the Office of Thrift Supervision,
including our core banking critical systems, and it appears that our programs
and contingency plans are on target. It is our opinion that our customers have
no need for concern and daily business will continue without interruption.
Looking beyond the financial statistics, Landmark Federal Savings Bank, earned
its 35th consecutive quarterly "FIVE STAR" rating from Bauer Financial, a bank
rating company from Coral Gables, Florida. Also, Veribanc, Inc., from Wakefield,
Massachusetts, another financial rating service, continues to give our Bank its
highest rating "GREEN 3 STARS" designated superior strength and safety.
Although we are proud of our accomplishments, we have experienced a decrease in
our stock price over the past year. This has been very disappointing, however it
is our opinion that our stock price has been driven by the weakness of the
entire financial services sector. Our Board of Directors and the entire staff
are dedicated in continuing to manage for positive operating results. By so
doing, when the financial sector again gains favor with investors, we do believe
our stockholders will be rewarded.
On behalf of the Board of Directors, management and staff, I want to thank you
for the support you have shown by investing in Landmark Bancshares, Inc.
Respectfully submitted,
/s/ Larry Schugart
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Larry Schugart
President and
Chief Executive Officer
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Corporate Profile and Related Information
Landmark Bancshares, Inc. (the "Company") is the parent company for Landmark
Federal Savings Bank (the "Bank"). The Company was formed as a Kansas
corporation in November 1993 at the direction of the Bank in connection with the
Bank's conversion from a mutual to stock form of ownership (the "Conversion").
The Company acquired all of the capital stock that the Bank issued upon its
conversion. On March 28, 1994, the Bank completed its conversion in connection
with a $22.8 million initial public offering. The Company is a unitary savings
and loan holding company. Changes to federal law that occurred after the end of
the fiscal year significantly restrict the ability of the Company to affiliate
in any way with non-financial companies. However, these changes do not impact
the current business of the Company and the Company generally is not restricted
in the types of business activities in which it may engage provided that the
Bank retains a specified amount of its assets in housing-related investments. At
the present time, since the Company does not conduct any active business, the
Company does not intend to employ any persons other than officers but utilizes
the support staff and facilities of the Bank from time to time.
Landmark Federal Savings Bank is a federally chartered stock savings bank
headquartered in Dodge City, Kansas. The Bank was founded in 1920 with a charter
from Kansas under the name of "Dodge City Savings and Loan Association" which
later became a federal association under the name of "First Federal Savings and
Loan of Dodge City." First Federal Savings and Loan of Dodge City became known
as "Landmark Federal Savings Association" in 1983 when it changed its name at
the time it merged with Peoples Savings and Loan of Sterling, Kansas. The Bank's
deposits have been federally insured since 1943 and are currently insured by the
Federal Deposit Insurance Corporation (the "FDIC") under the Savings Association
Insurance Fund (the "SAIF"). The Bank conducts its business from its main office
in Dodge City, Kansas and five branch offices located in Barton, Finney, Ford
and Rush Counties in Kansas. The Bank also has a loan origination office located
in Overland Park, Kansas.
Stock Market Information
There were 1,131,564 shares (net of treasury stock) of common stock of Landmark
Bancshares, Inc. outstanding on September 30, 1999, held by approximately 301
stockholders of record (not including the number of persons or entities holding
the stock in nominee or street name through various brokerage firms). Since its
issuance in March 1994, the Company's common stock has been traded on the Nasdaq
National Market. The daily stock quotation for Landmark Bancshares, Inc. is
listed in the Nasdaq National Market section published in The Wall Street
Journal and other leading newspapers under the trading symbol of "LARK". The
following table reflects stock price information based on sales as published by
the Nasdaq National Market statistical report for each quarter for fiscal years
1999 and 1998.
Year Ended September 30,
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1999 1998
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HIGH LOW HIGH LOW
-------- ------ ------------ ------------
First Quarter 24 19 1/2 26 1/2 23
Second Quarter 24 20 1/8 26 22
Third Quarter 21 17 3/4 29 1/4 24 3/4
Fourth Quarter 19 15 26 4/5 20 1/4
The following table sets forth, for each quarter the dividends declared on the
common stock for the indicated fiscal years ending September 30. The Company's
ability to pay dividends to shareholders is largely dependent upon the dividends
it receives from the Bank. The Bank is subject to regulatory limitations on the
amount of cash dividends it may pay.
Year Ended September 30,
----------------------------------
Dividends per share 1999 1998
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First Quarter $ 0.15 $ 0.10
Second Quarter 0.25 0.20
Third Quarter 0.15 0.15
Fourth Quarter 0.15 0.15
On October 27, 1999 the Board of Directors declared a quarterly dividend of
$0.15 per share to shareholders of record on November 10, 1999.
-2-
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FIVE-YEAR FINANCIAL SUMMARY**
Selected Financial Condition Data (Dollars in Thousands)
=============================================================================================================================
At September 30, 1999 1998 1997 1996 1995
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Total assets $244,116 $225,368 $227,850 $213,734 $208,632
Loans receivable, net (1) 177,840 174,733 158,163 129,903 98,934
Investments held-to-maturity 28,850 11,575 18,838 29,399 34,825
Investments available-for-sale 12,022 9,221 7,123 4,138 1,693
Mortgaged-backed securities
held-to-maturity 13,489 21,724 36,690 45,877 68,207
Cash and cash equivalents 5,976 2,844 2,741 474 462
Deposits 158,936 154,793 144,735 143,815 144,957
FHLB borrowings 58,000 41,700 46,200 33,467 25,533
Stockholders' equity 22,404 25,024 32,245 32,389 34,667
Summary of Operations (Dollars in Thousands)
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Year Ended September 30, 1999 1998 1997 1996 1995
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Interest income $17,059 $17,207 $16,695 $14,575 $13,652
Interest expense 10,029 10,216 9,768 8,678 8,224
--------------- --------------- --------------- --------------- ---------------
Net interest income 7,030 6,991 6,927 5,897 5,428
Provision for loan losses 785 265 308 135 9
--------------- --------------- --------------- --------------- ---------------
Net interest income after provision
for losses on loans 6,245 6,726 6,619 5,762 5,419
Non-interest income 1,636 1,226 1,026 745 684
Non-interest expense (2) 4,191 4,134 3,581 4,323 3,315
--------------- --------------- --------------- --------------- ---------------
Income before income taxes 3,690 3,818 4,064 2,184 2,788
Provision for income taxes 1,334 1,454 1,550 780 1,025
--------------- --------------- --------------- --------------- ---------------
Net income $ 2,356 $ 2,364 $ 2,514 $ 1,404 $ 1,763
=============== =============== =============== =============== ===============
Basic earnings per share $ 2.06 $ 1.56 $ 1.52 $ 0.78 $ 0.87
=============== =============== =============== =============== ===============
Diluted earnings per share $ 1.87 $ 1.42 $ 1.42 $ 0.74 $ 0.85
=============== =============== =============== =============== ===============
Dividends per share $ 0.70 $ 0.60 $ 0.40 $ 0.40 $ 0.75
=============== =============== =============== =============== ===============
Book value per common share
outstanding at September 30 $ 19.80 $ 18.84 $ 19.10 $ 17.48 $ 16.62
=============== =============== =============== =============== ===============
** The selected consolidated financial data of the Company should be read in
conjunction with, and is qualified in its entirety by, the Consolidated
Financial Statements of the Company, including the related notes.
(1) Includes loans held for sale totaling $604, $2,409, $490, $1,890 and $317
at September 30, 1999, 1998, 1997, 1996 and 1995, respectively.
(2) Includes one-time SAIF special assessment of $973 for the year ended
September 30, 1996.
-3-
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FIVE-YEAR FINANCIAL SUMMARY
Selected Ratios and Other Data
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At or For the Year Ended September 30, 1999 1998 1997 1996 1995
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Return on average assets 1.01 % 1.03 % 1.12 % 0.70 % 0.88 %
Return on average equity 10.09 7.52 7.79 4.14 4.92
Average equity to average assets 10.02 13.71 14.44 17.00 17.88
Equity to assets at period end 9.18 11.10 14.15 15.15 16.62
Net interest spread 2.64 2.41 2.41 2.11 1.88
Net yield on average interest-earning assets 3.10 3.12 3.16 3.01 2.76
Non-performing assets to total assets 0.26 0.34 0.30 0.15 0.22
Non-performing loans to net loans 0.28 0.39 0.27 0.24 0.39
Allowance for loan losses to total loans 0.74 0.65 0.61 0.57 0.65
Dividend payout 34.18 39.31 26.95 53.58 90.93
Number of:
Loans outstanding 6,262 6,741 6,210 5,439 4,561
Deposit accounts 12,461 12,878 12,888 13,443 13,731
Full service offices 6 6 5 5 5
[NET INCOME CHART OMITTED]
[NON-PERFORMING ASSETS/TOTAL ASSETS CHART OMITTED]
[TOTAL ASSETS CHART OMITTED]
[LOANS RECEIVABLE CHART OMITTED]
-4-
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Management's Discussion and Analysis
of Financial Condition and Results of Operations
Landmark Bancshares, Inc.
The following is a discussion of the financial condition and results of
operations of the Company and its subsidiary, Landmark Federal Savings Bank (the
"Bank"), and should be read in conjunction with the accompanying Consolidated
Financial Statements.
General
The Bank is primarily engaged in the business of attracting deposits from the
general public and using those deposits, together with other funds, to originate
mortgage loans for the purchase and refinancing of residential properties
located in central and southwestern Kansas. In addition, the Bank also offers
and purchases loans through correspondent lending relationships in Kansas and in
other states. The Bank also makes commercial, automobile, second mortgage,
equity and deposit loans. The Bank's market has historically provided an excess
of savings deposits over loan demand. Accordingly, in addition to originating
loans in its market the Bank also purchases mortgage-backed securities and
investment securities.
The Company's operations, as with those of the entire banking industry, are
significantly affected by prevailing economic conditions, competition, and the
monetary and fiscal policies of governmental agencies. Lending activities are
influenced by the demand for loans, competition among lenders, the prevailing
market rates of interest, primarily on competing investments, account
maturities, and the levels of personal income and savings in the market area.
The earnings of the Bank depend primarily on its level of net interest income,
which is the difference between interest income and interest expense. The Bank's
net interest income is a function of its interest rate spread, which is
determined by the difference between rates of interest earned on
interest-earning assets, and rates of interest paid on interest-bearing
liabilities. The Bank's earnings are also affected by its provision for losses
on loans, as well as the amount of non-interest income and non-interest expense,
such as compensation and related expenses, occupancy expense, data processing
costs and income taxes.
The Company's strategy for growth emphasizes both internal and external growth.
Operations focus on increasing deposits, making loans and providing customers
with a high level of customer service. As part of the Bank's emphasis on
external growth, the Bank has expanded its operations within its market areas.
During fiscal 1998, the Bank opened a branch office in Dodge City and a loan
origination office in the Kansas City area. As part of the Bank's strategy for
internal growth, during fiscal 1997 the Bank established a commercial loan
department and has been active in increasing its commercial lending market.
This management's discussion and analysis of financial condition and results of
operations contains or incorporates by reference forward-looking statements that
involve inherent risks and uncertainties. The Company cautions readers that a
number of important factors could cause actual results to differ materially from
those in the forward-looking statements. Those factors include fluctuations in
interest rates, inflation, government regulations, economic conditions, adequacy
of allowance for loan losses, the costs or difficulties associated with the
resolution of Year 2000 issues on computer systems greater than anticipated,
technology changes and competition in the geographic and business areas in which
the Company conducts its operations. These statements are based on management's
current expectations. Actual results in future periods may differ from those
currently expected because of changes in the factors referred to above and
various risks and uncertainties.
Financial Condition
Consolidated total assets increased $18,747,971 or 8.32% from $225,368,013 at
September 30, 1998 to $244,115,984 at September 30, 1999. The principal factors
contributing to the growth in assets was the increase in the investment and
loans receivable portfolios during the year.
-5-
Cash and due from banks:
Cash and due from banks increased $3,131,352 or 110.09%, from $2,844,378 at
September 30, 1998 to $5,975,730 at September 30, 1999. This growth in cash and
due from banks results primarily from changes in the cash accounts held with the
Federal Home Loan Bank (FHLB). The Bank no longer has demand accounts held with
the FHLB, but instead uses internal accounts for demand purposes, recorded as
official checks. Official checks are reflected as a liability and are included
in accrued expenses and other liabilities. Official checks amounted to
$1,228,394 at September 30, 1999, in prior years this amount would have offset
the balance of cash and due from banks. Additionally, the growth in cash relates
to the increase in investment sales, loan sales, loan repayments and FHLB
advances and other borrowings.
Loans receivable:
Net loans receivable held-for-investment increased $4,911,942 or 2.85%, from
$172,324,254 at September 30, 1998 to $177,236,196 at September 30, 1999. This
growth in the loan portfolio is attributed primarily to increased residential
real estate and commercial lending throughout the year. Residential real estate
loans increased $8,320,931 or 6.42%, from $129,688,030 at September 30, 1998 to
$138,008,961 at September 30, 1999. This increase includes the purchase of
$14,529,810 in mortgage loan packages during fiscal year 1999. The Bank
continues to increase its investment in purchased loans in order to enhance the
yield on investable funds during periods when such amounts exceed loan demand in
the Bank's primary lending area. Commercial lending increased $4,113,328, from
$4,936,897 at September 30, 1998 to $9,050,225 at September 30, 1999. These
increases are offset by decreases in loans held-for-sale and consumer lending.
Loans held-for-sale decreased $1,804,294, from $2,408,689 at September 30, 1998
to $604,395 at September 30, 1999. This continued increase in the Bank's loan
portfolio has resulted in a 79.76% increase in total loans during the last five
years.
The allowance for loan losses was increased $180,923 or 15.92%, from $1,136,753
at September 30, 1998 to $1,317,676 at September 30, 1999. The primary increase
in loan loss reserves is based on management's evaluation of the consumer loan
portfolio, discussed further in the "Results of Operations" section, and the
continued growth of the commercial lending department.
The Bank had impaired loans of $353,790 and $505,547 at September 30, 1999 and
1998, respectively. A loan is impaired when, based on management's evaluation of
current and historical information and events, it is probable that all amounts
due according to the contractual terms of the loan agreement will not be
collected. Loans that are classified as impaired are typically collateral
dependent; therefore, impairment is measured based upon the fair value of the
collateral less estimated costs to sell. Impairment is recognized by creating a
valuation allowance with a corresponding charge to provision for loss on loans.
Management, as part of the monitoring and evaluation of non-performing loans,
classifies loans and repossessed assets in accordance with regulatory provisions
as loss, doubtful or substandard. Total assets classified as of September 30,
1999 and 1998, amounted to $1,338,000 and $1,171,000, respectively. Those loans
classified that are not recognized as impaired include loans which are currently
past due 90 days or more or have a past history of delinquency. The level of
classified loans has continued to remain consistently low primarily as a result
of improving economic conditions and real estate values. At September 30, 1999
the Bank's ratio of total non-performing assets to total assets was 0.26%, far
lower than the industry average. The Bank will continue with its aggressive
collection policies to keep non-performing assets to a minimum, but no assurance
can be given that negotiations with borrowers will continue to be successful.
Classified loans have been considered by management in the evaluation of the
adequacy of the allowance for loan loss. Management is unaware of any trends
which it reasonably expects will materially impact future operating results,
liquidity, or capital resources.
Investment securities:
Investment securities held-to-maturity increased $17,274,420 or 149.23%, from
$11,575,433 at September 30, 1998 to $28,849,853 at September 30, 1999.
Investment securities available-for-sale increased $2,801,620 or 30.38%, from
$9,220,910 at September 30, 1998 to $12,022,530 at September 30, 1999. As
additional funds became available through repayments on mortgage-backed
securities and the increase in borrowings, both discussed later, these funds
were used to purchase investment securities. The Company purchased $26,865,659
in investment securities during fiscal 1999 compared to $14,473,898 during
fiscal 1998. The yield on investment securities at September 30, 1999 was 6.29%
compared to 5.33% at September 30, 1998.
-6-
Mortgage-backed securities:
Mortgage-backed securities decreased $8,234,581 or 37.91%, from $21,723,755 at
September 30, 1998 to $13,489,174 at September 30, 1999. The Company did not
have any mortgage-backed securities available-for-sale at September 30, 1999 or
1998. Mortgage-backed securities decreased due to funds from repayments on
mortgage-backed securities being used to fund the increase in investment
securities and loans receivable. The yield on mortgage-backed securities at
September 30, 1999 was 5.95% compared to a yield on investment securities of
6.29%.
Foreclosed assets:
The balance of foreclosed assets at September 30, 1999 and 1998 was $146,883 and
$70,939, respectively. The September 30, 1999 balance in foreclosed assets
consisted of one single-family residence and repossessed automobiles. This
foreclosed asset balance continues to be substantially lower than that
experienced by the Bank in prior years.
Deposits:
Deposits increased $4,143,376, or 2.68%, from $154,792,916 at September 30, 1998
to $158,936,292 at September 30, 1999. This increase relates primarily to the
increase in demand accounts of $4,496,559 from $20,787,500 at September 30, 1998
to $25,284,059 at September 30, 1999. The increase in demand accounts relates to
the Bank's continued effort to offer rates competitive with other financial
institutions in the area. The average cost on demand deposits decreased 50 basis
points from 3.10% for fiscal year 1998 to 2.60% for fiscal year 1999. The
average cost on savings and certificates of deposit also decreased 26 basis
points from 5.43% for fiscal year 1998 to 5.17% for fiscal year 1999. The
decrease in the cost of demand deposits is the result of a decrease of $108,000
due to the changes in the rate, offset slightly by a $42,000 increase due to
changes in volume. The decrease in the cost of savings and certificates of
deposit is the result of a decrease of $331,000 due to the changes in the rate,
offset by a $350,000 increase due to changes in volume.
Of the $126,091,137 in certificates of deposit held by the Bank at September 30,
1999, $103,751,256 of these deposits will mature during the year ended September
30, 2000. The majority of the Bank's time deposits consist of regular deposits
from customers and institutional investors from the Bank's surrounding community
rather than brokered deposit accounts. As a result, most of these local accounts
are expected to be renewed.
Advances and other borrowings from Federal Home Loan Bank:
The Bank has continued to utilize advances from the Federal Home Loan Bank
("FHLB") as a source of funds. Fixed term advances from the FHLB totaled
$35,000,000 and $33,700,000 at September 30, 1999 and 1998, respectively. The
Bank also has a line of credit with the FHLB. The Bank had an outstanding
balance of $23,000,000 and $8,000,000 at September 30, 1999 and 1998,
respectively. The funds provided by these borrowings were used primarily to fund
lending activity throughout the year. The weighted average cost of these
borrowings from the FHLB was 5.39% and 5.60% as of September 30, 1999 and 1998,
respectively. Of the advances and other borrowings outstanding at September 30,
1999, $37,000,000 mature during the year ended September 30, 2000.
Stockholders' equity:
Stockholders' equity decreased $2,619,620, or 10.47%, from $25,023,767 at
September 30, 1998 to $22,404,147 at September 30, 1999. As of September 30,
1999 the Company has repurchased 1,149,748 shares, or 50.40%
of its outstanding common stock to enhance stockholder value. Total stock
repurchases for the year ended September 30, 1999 amounted to $4,239,923. As
noted in the Stock Price Information section of this report the Company has also
been consistently paying quarterly dividends to stockholders.
Asset/Liability Management
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
-7-
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 Bank. The OTS adopted a
rule in August 1993 incorporating an interest rate risk ("IRR") component into
the risk-based capital rules. Implementation of the rule has been delayed until
the OTS has tested the process under which institutions may appeal such capital
deductions. The IRR component is a dollar amount that will be deducted from
total capital for the purpose of calculating an institution's risk-based capital
requirement and is measured in terms of the sensitivity of its NPV to changes in
interest rates. The NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet contracts.
An institution's IRR is measured as the change to its NPV as the result of a
hypothetical 200 basis point change in market interest rates. A resulting change
in NPV of more than 2% of the estimated market value of its assets will require
the institution to deduct from its capital 50% of that excess change. The rule
provides that the OTS will calculate the IRR component quarterly for each
institution.
The following tables present the Bank's NPV as well as other data as of
September 30, 1999, as calculated by the OTS, based on information provided to
the OTS by the Bank.
Change in Interest
Rates in Basis
Points (Rate Shock) Net Portfolio Value NPV as % of Present Value of Assets
----------------------- ---------------------------------------------------- --------------------------------------
$ Amount $ Change % Change NPV Ratio Change
-------------- ---------------- -------------- ------------------- ---------------
(Dollars in Thousands)
+300 bp $ 8,076 (11,253) (58) % 3.58 % (445) bp
+200 bp (1) $ 12,205 (7,124) (37) % 5.28 % (275) bp
+100 bp $ 16,086 (3,243) (17) % 6.81 % (122) bp
0 bp $ 19,329 8.03 %
-100 bp $ 21,478 2,150 11 % 8.80 % 77 bp
-200 bp $ 22,913 3,585 19 % 9.28 % 125 bp
-300 bp $ 24,427 5,099 26 % 9.77 % 174 bp
(1) Denotes rate shock used to compute interest rate risk capital component.
September 30, 1999
----------------------
Risk Measures (200 Basis Point Rate Shock):
Pre-Shock NPV Ratio: NPV as % of Present Value of Assets 8.03%
Exposure Measure: Post-Shock NPV Ratio 5.28%
Sensitivity Measure: Change in NPV Ratio 2.75%
-8-
Utilizing the data above, the Bank, at September 30, 1999, would have been
considered by the OTS to have been subject to "above normal" interest rate risk.
Accordingly, a deduction from risk-based capital would have been required.
However, even with this deduction, the capital of the Bank would continue to
exceed all regulatory requirements.
Set forth below is a breakout, by basis points of the Bank's NPV as of September
30, 1999 by assets, liabilities, and off balance sheet items.
No
Net Portfolio Value -300 bp -200 bp -100 bp Change +100 bp +200 bp +300 bp
- ------------------------ -------------- ------------------------------ -------------- -------------- -------------- ---------------
Assets $ 249,953 $ 246,992 $ 244,156 $ 240,660 $ 236,131 $ 231,016 $ 225,690
- -Liabilities 225,614 224,149 222,733 221,358 220,026 218,738 217,484
+Off Balance Sheet 88 70 55 27 (19) (73) (130)
-------------- ------------------------------ -------------- -------------- -------------- ---------------
Net Portfolio Value $ 24,427 $ 22,913 $ 21,478 $ 19,329 $ 16,086 $ 12,205 $ 8,076
============== ============================== ============== ============== ============== ===============
Certain assumptions utilized by the OTS in assessing the interest rate risk of
savings associations were employed in preparing the previous table. These
assumptions related to interest rates, loan prepayment rates, deposit decay
rates and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Bank's assets and liabilities would perform as set
forth above.
Certain shortcomings are inherent in the preceding NPV tables because the data
reflect hypothetical changes in NPV based upon assumptions used by the OTS to
evaluate the Bank as well as other institutions. However, net interest income
should decline with instantaneous increases in interest rates while net interest
income should increase with instantaneous declines in interest rates. Generally,
during periods of increasing interest rates, the Bank's interest rate sensitive
liabilities would reprice faster than its interest rate sensitive assets causing
a decline in the Bank's interest rate spread and margin. This would result from
an increase in the Bank's cost of funds that would not be immediately offset by
an increase in its yield on earning assets. An increase in the cost of funds
without an equivalent increase in the yield of earning assets would tend to
reduce net interest income.
In times of decreasing interest rates, fixed rate assets could increase in value
and the lag in repricing of interest rate sensitive assets could be expected to
have a positive effect on the Bank's net interest income. However, changes in
only certain rates, such as shorter term interest rate declines without longer
term interest rate declines, could reduce or reverse the expected benefit from
decreasing interest rates.
-9-
Average Balances, Interest and Average Yields and Rates
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material difference in the information presented.
At For Year Ended September 30,
--------------------------------------------
September 30,
1999 1999
-------------- ------------------------------------------
Average Average
Yield/Cost Balance Interest Yield/Cost
-------------- --------------- ------------- ------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable 8.18 % $ 176,318 $14,102 8.00 %
Mortgage-backed securities 5.95 % 17,555 1,108 6.31 %
Investment securities 6.29 % 29,384 1,728 5.88 %
Other interest-earning assets 4.99 % 3,548 121 3.41 %
------------ --------------- ------------- ------------
Total interest-earning assets 7.67 % $ 226,805 $17,059 7.52 %
============ =============== ============= ============
Non-interest earning assets: 6,231
---------------
Total assets $ 233,036
===============
Interest-bearing liabilities:
Demand deposits 2.55 % $ 22,941 $ 597 2.60 %
Savings deposits and certificates
of deposit 4.93 % 133,729 6,918 5.17 %
Other liabilities 5.39 % 48,671 2,513 5.16 %
------------ --------------- ------------- ------------
Total interest-bearing liabilities 4.78 % $ 205,341 $10,028 4.88 %
============ =============== ============= ============
Non-interest bearing liabilities 4,348
---------------
Total liabilities $ 209,689
===============
Stockholder's equity 23,347
---------------
Total liabilities and stockholders' equity $ 233,036
===============
Net interest income $ 7,031
=============
Interest rate spread 2.89 % 2.64 %
============ ============
Net yield on interest-earning assets 3.10 %
============
Ratio of interest-earning assets
to interest-bearing liabilities 110.45 %
============
For Year Ended September 30,
------------------------------------------------------------------------------------
1998 1997
------------------------------------------ -----------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------------- ------------- ------------ --------------- ------------ ------------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 167,490 $ 13,741 8.20 % $ 145,395 $11,833 8.14 %
Mortgage-backed securities 29,724 1,927 6.48 % 41,747 2,707 6.48 %
Investment securities 23,366 1,374 5.88 % 30,956 2,079 6.72 %
Other interest-earning assets 3,169 165 5.21 % 1,252 76 6.07 %
------------- ------------- ------------ --------------- ------------ ------------
Total interest-earning assets $ 223,749 $ 17,207 7.69 % $ 219,350 $16,695 7.61 %
============= ============= ============ =============== ============ ============
Non-interest earning assets: 5,580 4,310
------------- ---------------
Total assets $ 229,329 $ 223,660
============= ===============
Interest-bearing liabilities:
Demand deposits $ 21,586 $ 669 3.10 % $ 21,536 $ 693 3.22 %
Savings deposits and certificates
of deposit 127,290 6,917 5.43 % 123,206 6,556 5.32 %
Other liabilities 44,763 2,631 5.88 % 42,951 2,520 5.87 %
------------- ------------- ------------ --------------- ------------ ------------
Total interest-bearing liabilities $ 193,639 $ 10,217 5.28 % $ 187,693 $ 9,769 5.20 %
============= ============= ============ =============== ============ ============
Non-interest bearing liabilities 4,242 3,696
------------- ---------------
Total liabilities $ 197,881 $ 191,389
============= ===============
Stockholder's equity 31,448 32,271
------------- ---------------
Total liabilities and stockholders equity $ 229,329 $ 223,660
============= ===============
Net interest income $ 6,990 $ 6,926
============= ============
Interest rate spread 2.41 % 2.41 %
============ ============
Net yield on interest-earning assets 3.12 % 3.16 %
============ ============
Ratio of interest-earning assets
to interest-bearing liabilities 115.55 % 116.87 %
============ ============
-10-
The following Rate/Volume Analysis table presents, for the periods indicated,
information regarding changes in interest income and interest expense (in
thousands) of the Company. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on the changes
attributable to (i) changes in volume (changes in average daily balances of the
portfolio multiplied by the prior year rate), (ii) changes in rate (changes in
rate multiplied by prior year volume), and (iii) changes in rate/volume (changes
in rate multiplied by the change in average volume).
Years Ended September 30,
------------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
-------------------------------------------- ---------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------------------------- ---------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
---------- ---------- --------- ----------- ----------- ----------- --------- ----------
(In Thousands)
Interest income:
Loans receivable $ 723 $ (336) $ (26) $ 361 $1,799 $ 88 $ 21 $1,908
Mortgage-backed securities (790) (52) 23 (819) (779) - (1) (780)
Investment securities 354 - - 354 (510) (260) 65 (705)
Other interest-earning assets 19 (58) (5) (44) 117 (10) (18) 89
---------- ---------- --------- ----------- ----------- ----------- --------- ----------
Total interest-earning assets $ 306 $ (446) $ (8) $(148) $ 627 $ (182) $ 67 $ 512
========== ========== ========= =========== =========== =========== ========= ==========
Interest expense:
Demand deposits $ 42 $ (108) $ (6) $ (72) $ 2 $ (26) $ - $ (24)
Savings deposits and
certificates of deposits 350 (331) (18) 1 218 137 6 361
Other liabilities 230 (322) (26) (118) 107 4 - 111
---------- ---------- --------- ----------- ----------- ----------- --------- ----------
Total interest-bearing liabilities $ 622 $ (761) $ (50) $(189) $ 327 $ 115 $ 6 $ 448
========== ========== ========= =========== =========== =========== ========= ==========
Change in net interest income $ (316) $ 315 $ 42 $ 41 $ 300 $ (297) $ 61 $ 64
========== ========== ========= =========== =========== =========== ========= ==========
Results of Operations
General:
Net income decreased slightly from $2,363,798 for the year ended September 30,
1998 to $2,355,570 for the year ended September 30, 1999, a decrease of $8,228.
The decrease in net income relates primarily to an increase in the provision for
losses on loans offset by an increase in the gain on sale of investments.
Net income decreased $150,639, or 5.99%, from $2,514,437 for the year ended
September 30, 1997 to $2,363,798 for the year ended September 30, 1998. The
decrease in net income relates primarily to an increase in costs of the core
business of the subsidiary Bank as a result of establishing a commercial loan
department and the additional expense of providing retail services in the
existing branches, the new Dodge City branch and the Overland Park loan
origination office.
Net interest income:
The operating results of the Company depend to a great degree on its net
interest income, which is the difference between interest income on
interest-earning assets, primarily loans, mortgage-backed securities and
investment securities, and interest expense on interest-bearing liabilities,
primarily deposits and borrowings.
Interest income was $17,059,052 for the year ended September 30, 1999 compared
to $17,207,440 for the year ended September 30, 1998, a decrease of $148,388.
This slight decrease was the result a decrease due to the rate of
interest-earning assets of $446,000 offset by an increase due to volume of
interest-earning assets of $306,000.
-11-
Interest expense for the year ended September 30, 1999 decreased 187,968, or
1.84%, to $10,028,595 from $10,216,563 at September 30, 1998. This decrease was
due to a decrease in the average cost of interest-bearing liabilities. Although
the average balance of interest-bearing liabilities increased from $193,639,000
for fiscal year 1999 to $205,341,000 for fiscal year 1998, the average cost for
the periods decreased from 5.28% to 4.88%, respectively. The rate/volume
analysis reflects this change, resulting in a decrease in the rate/volume of
interest-bearing liabilities of $50,000.
As a result of the above, net interest income increased $39,580, from $6,990,877
for the year ended September 30, 1998 to $7,030,457 for the year ended September
30, 1999. The average net interest spread of the Bank increased from 2.41% for
the year ended September 30, 1998 to 2.64% for the year ended September 30,
1999, an increase of 23 basis points. Interest costs on liabilities increase or
decrease faster than interest yields on assets, as shorter term liabilities
reprice or adjust for changes in interest rates quicker than longer maturity
assets. This increase in interest spread related to the significant increase in
origination and purchases of mortgage loans at yields in excess of yields on
maturing investments and mortgage-backed securities. The risks related to
interest rate movement are managed and continuously reviewed by management.
Total interest income increased $512,592, or 3.07%, to $17,207,440 for the year
ended September 30, 1998, from $16,694,848 for the year ended September 30,
1997. This increase resulted from the average yield on interest-earning assets
increasing to 7.69% for the year ended September 30, 1998 compared to 7.61% for
the year ended September 30, 1997. This increase was the result of the increase
in the loan portfolio, the rate/volume analysis reflects this increase. The
change in interest income due to the volume of loans receivable was an increase
of $1,799,000 during fiscal year 1998 from fiscal year 1997. Income resulting
from the increase in loan volume was partially offset by decreases in the volume
of investment and mortgage-backed securities.
Interest expense for the year ended September 30, 1998 increased $448,271, or
4.59%, to $10,216,563 from $9,768,292 at September 30, 1997. This increase is
primarily due to an increase in volume of certificates of deposit and market
interest rates paid on those deposits. The Bank's rate/volume analysis reflects
approximately $327,0000 of the increase in interest expense resulting from
changes in volume.
As a result of the above, net interest income had a slight increase of $64,321,
from $6,926,556 for the year ended September 30, 1997 to $6,990,877 for the year
ended September 30, 1998. The increase in net interest income is attributable to
a shift in the composition of interest-earning assets from generally lower
yielding mortgage-backed and investment securities to loans, resulting in an
increase in net interest income attributable to volume of $300,000. The net
interest spread of the Bank was consistent during the years ended September 30,
1998 and 1997, with an interest rate spread of 2.41% for both years.
Provision for losses on loans:
The Bank maintains, and the Board of Directors monitors, allowances for possible
losses on loans. These allowances are established based upon management's
periodic evaluation of known and inherent risks in the loan portfolio, review of
significant individual loans and collateral, review of delinquent loans, past
loss experience, adverse situations that may affect the borrowers' ability to
repay, current and expected market conditions, and other factors management
deems important. Determining the appropriate level of reserves involves a high
degree of management judgment and is based upon historical and projected losses
in the loan portfolio and the collateral value of specifically identified
problem loans. Additionally, allowance strategies and policies are subject to
periodic review and revision in response to current market conditions, actual
loss experience and management's expectations.
The allowance for loan losses was $1,317,676 and $1,136,753 at September 30,
1999 and 1998, respectively. The provision for losses on loans is the method by
which the allowance for losses is adjusted during the period. The provision for
losses on loans was $785,000 for the year ended September 30, 1999 compared to
$265,000 for the year ended September 30, 1998, an increase of $520,000 or
196.23%. The increase in the allowance for the year ended September 30, 1999 was
based on management's evaluation of the allowance in relation to the increase in
the Bank's loan portfolio, including increases in non-mortgage lending, and the
increase in non-performing loans.
During the year ended September 30, 1999 the Bank experienced a large increase
in the loan charge offs, net of recoveries. Loans charged off, net of
recoveries, during fiscal 1999 totaled $604,077 compared to $96,870 during
-12-
fiscal 1998 and $79,702 during fiscal 1997. This increase in charge offs was the
result of an increase in impaired consumer loans. As the Bank continued to
increase their consumer lending portfolio in recent years, it was determined
that several of these loans were considered substandard. During fiscal 1999 the
bank became aware that a large number of consumer loans at one branch had not
been properly underwritten. Continuing throughout the year the bank realized the
degree of the problem and began to adjust the allowance accordingly. The Bank
also took additional steps to ensure that proper underwriting guidelines would
be followed in the future. Management is now keenly aware of the need to closely
monitor the consumer loan underwriting process and has made every effort to
identify and address any substandard consumer loans. The Bank continues to rely
on the origination of consumer loans and it intends to enforce proper
underwriting guidelines prior to loan origination. As noted above, the Bank has
increased the allowance for loan losses in response to the identified loans.
Although the Bank has experienced an increase in consumer loan losses during
fiscal 1999, the Bank continues to experience loan losses well below industry
averages. Historical non-performing loan ratios are presented with the five-year
financial summary information. While management maintains its allowance for loan
losses at levels which it considers adequate to provide for potential losses,
there can be no assurance that additions will not be made to the allowance in
future years and that such losses will not exceed the estimated amounts.
The allowance for loan losses was $968,623 at September 30, 1997. The provision
for losses on loans decreased from $307,979 for the year ended September 30,
1997 to $265,000 for the year ended September 30, 1998. The $42,979 decrease in
the provision for the year ended September 30, 1998 was based on management's
evaluation of the allowance in relation to the Bank's loan portfolio.
Non-interest income:
Non-interest income increased $410,103 or 33.45%, from $1,225,958 for the year
ended September 30, 1998 to $1,636,061 for the year ended September 30, 1999.
The primary reason for this increase was due to the net gain on sale of
investments of $500,123, consisting of sales of corporate equity securities. The
net gain on sale of investments increased $297,824, or 147.22% from $202,299
during fiscal 1998. Additionally, service charges and late charges increased by
$58,263, or 17.16%, and other income increased $56,118, or 103.46%, from fiscal
1998 to fiscal 1999.
Non-interest income increased $199,937, or 19.49%, from $1,026,021 for the year
ended September 30, 1997 to $1,225,958 for the year ended September 30, 1998.
This was primarily due to the net gain on the sale of loans of $472,908 for
fiscal year 1998 compared to $237,281 for fiscal 1997, a $235,627 increase, or
99.3%.
Non-interest expense:
Non-interest expense increased $56,957 or 1.38% from $4,134,438 for the year
ended September 30, 1998 to $4,191,395 for the year ended September 30, 1999.
This slight increase related primarily to increases in normal costs of doing
business. The Company also experienced continued increases in equipment expense
and depreciation incurred to become Year 2000 compliant.
Non-interest expense increased $554,361, or 15.48% from $3,580,077 for the year
ended September 30, 1997 to $4,134,438 for the year ended September 30, 1998.
The Bank experienced an overall increase in non-interest expense as a result of
the addition of a commercial loan department, the loan origination office in
Overland Park, and the new Dodge City branch. These increases related primarily
to increases in compensation as a result of new positions. Compensation and
related expenses increased $252,108, or 11.24%, from $2,242,602 for fiscal 1997
to $2,494,710 for fiscal 1998. This increase in compensation is also the result
of increase in the Employee Stock Ownership Plan (the "ESOP") expense as a
result of higher market values for allocated shares and additional compensation
expense relating to the issuance of stock options, see Note 14 of the financial
statements for further discussion.
Income taxes:
The Company's income tax expense decreased $119,046 or 8.19%, from $1,453,599
for the year ended September 30, 1998 to $1,334,553 for the year ended September
30, 1999. The slight decrease in income tax resulted from a decrease in pre-tax
income.
Income tax expense decreased $96,485, or 6.22%, from $1,550,084 for the year
ended September 30, 1997 to $1,453,599 for the year ended September 30, 1998.
This decrease in income tax resulted primarily from a decrease
-13-
in deferred tax attributable to changes in state income tax rates that for the
Bank become effective as of October 1, 1998 and pre-tax income.
Liquidity and Capital Resources
Liquidity is measured by a financial institution's ability to raise funds
through deposits, borrowed funds, capital or the sale of highly marketable
assets such as available-for-sale securities. Additional sources of liquidity,
including cash flows from both repayment of loans and maturity of investment
securities, are also included in determining whether liquidity is satisfactory.
During fiscal 1999, cash and cash equivalents increased by $3,131,352, primarily
as a result of an increase in net borrowings from FHLB advances and other
borrowings, resulting in total funds provided by financing activities of
$15,638,016. Advances from the FHLB have been the primary source to balance the
Company's funding needs during each of the fiscal years presented. The Company
also had net cash provided by operating activities of $5,916,102. The cash
provided by financing and operating activities were offset by cash used by
investing activities of $18,422,766. Cash and cash equivalents used by investing
activities resulted primarily from the purchase of investment securities.
Amounts provided or used by investing activities tend to fluctuate from period
to period primarily as a result of (i) principal repayments on loans and
mortgage-backed securities, (ii) the purchase and origination of loans,
mortgage-backed securities and investment securities and (iii) proceeds from
maturities and sales of investment securities.
During fiscal 1998, cash and cash equivalents increased $103,326. The Company
had net cash provided by operating and investing activities of $3,272,735 and
$624,854, respectively. This was offset by cash used by financing activities of
$3,794,263 which consisted primarily of the net repayment of borrowing from FHLB
of $4,500,000 and the purchase of treasury stock of $8,654,310. The repurchase
of treasury stock has helped to enhance stockholder value.
The Company's principal asset is its investment in the capital stock of the
Bank, and because it does not generate any significant revenues independent of
the Bank, the Company's liquidity is dependent on the extent to which it
receives dividends from the Bank. The Bank's ability to pay dividends to the
Company is dependent on its ability to generate earnings and is subject to a
number of regulatory restrictions, the liquidation account and tax
considerations. The Bank must give the OTS 30 days advance notice of any
proposed declaration of dividends to the Company, and the OTS has the authority
under its supervisory powers to prohibit the payment of dividends to the
Company. In addition, the Bank may not declare or pay a cash dividend on its
capital stock if the dividend would (1) reduce the regulatory capital of the
Bank below the amount required for the liquidation account established in
connection with the conversion from mutual to stock form or (2) reduce the
amount of capital of the Bank below the amounts required in accordance with
other OTS regulations. In contrast, the Company has fewer restrictions on
dividends. Future dividend distributions by the Bank in excess of Bank earnings
could result in recapture of tax bad debt deductions resulting in income tax on
the amounts recaptured. See Notes 11, 12 and 20 of Notes to Consolidated
Financial Statements for additional information on capital levels and
compliance, tax bad debt reserves and the liquidation account.
Cash dividends paid by the parent company to its common stock shareholders
totaled $805,072, $929,243, and $677,675 during the fiscal years 1999, 1998 and
1997, respectively. The payment of dividends on the common stock is subject to
the direction of the Board of Directors of the Company and depends on a variety
of factors, including operating results and financial condition, liquidity,
regulatory capital limitations and other factors. It is the intention of the
Bank to continue to pay dividends to the parent company, subject to regulatory,
income tax and liquidation account considerations, to cover cash dividends on
common stock when and as declared by the parent company.
The Bank is required under applicable federal regulations to maintain specified
levels of "liquid" investments in qualifying types of U.S. Government, federal
agency and other investments having maturities of five years or less. Current
OTS regulations require that a savings bank maintain liquid assets of not less
than 4% of its average daily balance of net withdrawable deposit accounts. At
September 30, 1999, the Bank met its liquidity requirement and expects to meet
this requirement in the future. The Bank adjusts liquidity as appropriate to
meet its asset/liability objectives.
-14-
OTS has also set minimum capital requirements for institutions such as the Bank.
The capital standards require the maintenance of regulatory capital sufficient
to meet a tangible capital requirement, a core capital requirement and a
risk-based capital requirement. At September 30, 1999 the Bank exceeded all of
the minimum capital requirements as currently required. Please refer to Note 12
of the accompanying Notes to Consolidated Financial Statements for more
information regarding the Bank's regulatory capital position at September 30,
1999.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, nearly all the
assets and liabilities of the Bank are monetary. As a result, interest rates
have a greater impact on the Bank's performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the price of goods and services.
Implementation of New Accounting Pronouncements
During fiscal year 1999, the Company adopted the provisions of Statement No. 130
titled "Reporting Comprehensive Income." See Note 1 to the Consolidated
Financial Statements for a discussion of these new accounting pronouncements and
their effect on the Company.
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 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 has evaluated 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.
Internal computers and software
The Company will replace or upgrade most of its internal computer systems and
programs in order to provide cost-effective and efficient delivery of services
to its customers, information to management, and to provide additional capacity
for processing information and transactions due to increased activity. Computer
system upgrades were projected to be completed during the second quarter of
fiscal 1999. The total cost of the Year 2000 project to date is approximately
$283,000, and is substantially complete. These costs were funded through cash
flows from operations. Final testing of internal conversion to compliant systems
was completed in the third quarter of calendar year 1999.
-15-
Computers of others used by our borrowers
The Bank has evaluated most of its borrowers and does not believe that the Year
2000 issue should, on an aggregate basis, impact their ability to make payments
to the Bank. The Bank feels that most of its residential borrowers are not
dependent on their home computers for income and that none of its commercial
borrowers are so large that a Year 2000 problem would render them unable to
collect revenue or rent and, in turn, continue to make loan payments to the
Bank. As a result, the Bank has not contacted residential borrowers concerning
this issue and does not consider this issue in its residential loan underwriting
process. The Bank has contacted all commercial borrowers and considered this
issue during commercial loan underwriting. The Bank does not expect any material
costs to address this risk area.
External data processing servicer
This risk is primarily focused on one third-party service bureau that provides
virtually all of the Bank's data processing. The Bank's data processing servicer
has completed their Year 2000 testing and was determined to be in compliance.
The third-party servicer also has a contingency plan developed to provide
operating alternatives in the event of systems or communication failures. This
contingency plan has a procedure in which a disaster recovery unit will be sent
to the Bank immediately to correct any Year 2000 complications. Although
appearing to be compliant, if the service bureau fails to be Year 2000 compliant
the Bank would likely experience significant delays, mistakes or failures. These
delays, mistakes or failures could have a significant impact on the Bank's
financial condition and results of operations.
Contingency plan
Senior management has developed and presented to the Board of Directors a
contingency plan to provide operating alternatives for continuation of services
to the Bank's customers in the event of systems or communication failures at the
beginning of the Year 2000. Management believes that the Bank will be able to
continue to operate in the Year 2000 even if some systems fail. The Bank will
have available a back-up generator for use in the event of a power failure. At
the end of December 1999, the Bank will receive from its data processing
servicer a CD-ROM backup and paper printouts of all customer and general ledger
accounts. The Bank will also have a stand alone computer with internal software
to extract the information from the CD-ROM and print hard copy reports as
necessary. This software has been certified as Year 2000 compliant by the
provider and has been tested at other customer locations of the service
provider. As noted above, the disaster recovery unit provided by the Bank's
service center will also be available. Due to the size of the Bank, it feels
that it would be able to operate with all transactions processed internally
until normal operations can be restored. This procedure could require changing
of schedules and hiring of temporary staff, which would increase cost of
operations. If this procedure were to continue for any extended period of time,
or if we ultimately had to change data service providers, the cost could be
material.
-16-
Report of Independent Auditors
To the Board of Directors and Stockholders of
Landmark Bancshares, Inc.
Dodge City, Kansas
We have audited the accompanying consolidated statements of financial condition
of Landmark Bancshares, Inc. and subsidiary as of September 30, 1999 and 1998,
and the related consolidated statements of operations, comprehensive income,
changes in stockholders' equity and cash flows for each of the three years in
the period ended September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Landmark Bancshares,
Inc. and subsidiary as of September 30, 1999 and 1998, and the results of their
operations and cash flows for each of the three years in the period ended
September 30, 1999 in conformity with generally accepted accounting principles.
/s/ Regier Carr & Monroe, L.L.P.
--------------------------------
Regier Carr & Monroe, L.L.P.
October 28, 1999
Wichita, Kansas
F-1
Landmark Bancshares, Inc.
Consolidated Statements of Financial Condition
September 30, 1999 and 1998
1999 1998
------------- -------------
ASSETS
Cash and due from banks:
Non-interest bearing $ 1,598,533 $ 832,559
Interest bearing 4,377,197 2,011,819
------------- -------------
Total cash and due from banks 5,975,730 2,844,378
Time deposits in other financial institutions 289,864 249,867
Investment securities held-to-maturity (estimated market
value of $27,969,640 and $11,681,144 at September 30,
1999 and 1998, respectively) 28,849,853 11,575,433
Investment securities available-for-sale 12,022,530 9,220,910
Mortgage-backed securities held-to-maturity (estimated
market value of $13,471,716 and $22,006,970 at
September 30, 1999 and 1998, respectively) 13,489,174 21,723,755
Loans receivable, net 177,236,196 172,324,254
Loans held-for-sale 604,395 2,408,689
Accrued income receivable 1,547,901 1,443,847
Foreclosed assets, net 146,883 70,939
Office properties and equipment, net 1,759,770 1,729,282
Prepaid expenses and other assets 1,949,751 1,749,177
Income taxes receivable, current 154,072 27,482
Deferred income taxes 89,865
------------- -------------
Total assets $ 244,115,984 $ 225,368,013
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 158,936,292 $ 154,792,916
Advances and other borrowings from
Federal Home Loan Bank 58,000,000 41,700,000
Advances from borrowers for taxes and insurance 2,143,805 1,904,170
Accrued expenses and other liabilities 2,631,740 1,737,080
Deferred income taxes 210,080
------------- -------------
Total liabilities 221,711,837 200,344,246
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized; none issued
Common stock, $0.10 par value; 10,000,000 shares
authorized; 2,281,312 shares issued and outstanding 228,131 228,131
Additional paid-in capital 22,706,378 22,466,144
Retained income, substantially restricted 22,290,140 20,739,642
Accumulated other comprehensive income (loss) (120,493) 283,336
Unamortized stock acquired by Employee Stock
Ownership Plan (555,841) (692,719)
Unamortized compensation related to Management
Stock Bonus Plan (96,522)
Treasury stock, at cost, 1,149,748 and 953,378 shares at
September 30, 1999 and 1998, respectively (22,144,168) (17,904,245)
------------- -------------
Total stockholders' equity 22,404,147 25,023,767
------------- -------------
Total liabilities and stockholders' equity $ 244,115,984 $ 225,368,013
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
Landmark Bancshares, Inc.
Consolidated Statements of Operations
For the Years Ended September 30, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Interest and dividend income:
Loans, including fees $ 14,101,667 $ 13,741,660 $ 11,832,611
Debt securities:
Taxable 1,414,098 1,096,020 1,824,567
Tax-exempt 71,563 72,925 100,211
Dividends 363,280 369,990 230,078
Mortgage-backed securities 1,108,444 1,926,845 2,707,381
------------ ------------ ------------
Total interest and dividend income 17,059,052 17,207,440 16,694,848
------------ ------------ ------------
Interest expense:
Deposits 7,515,201 7,585,688 7,248,750
Borrowed funds 2,513,394 2,630,875 2,519,542
------------ ------------ ------------
Total interest expense 10,028,595 10,216,563 9,768,292
------------ ------------ ------------
Net interest income 7,030,457 6,990,877 6,926,556
Provision for losses on loans 785,000 265,000 307,979
------------ ------------ ------------
Net interest income, after provision for losses 6,245,457 6,725,877 6,618,577
------------ ------------ ------------
Non-interest income:
Service charges and late charges 397,741 339,478 270,622
Net gain on sale of available-for-sale securities 500,123 202,299 220,154
Net gain on sale of loans 462,813 472,908 237,281
Service fees on loans sold 165,025 157,032 161,304
Other 110,359 54,241 136,660
------------ ------------ ------------
Total non-interest income 1,636,061 1,225,958 1,026,021
------------ ------------ ------------
Non-interest expenses:
Compensation and related expenses 2,500,121 2,494,710 2,242,602
Occupancy expense 252,790 243,633 173,452
Federal insurance premium 149,201 156,064 198,736
Data processing 189,011 207,733 181,321
Other expense 1,100,272 1,032,298 783,966
------------ ------------ ------------
Total non-interest expenses 4,191,395 4,134,438 3,580,077
------------ ------------ ------------
Income before income taxes 3,690,123 3,817,397 4,064,521
------------ ------------ ------------
Income taxes:
Currently payable 1,377,937 1,529,953 1,261,177
Deferred tax expense (benefit) (43,384) (76,354) 288,907
------------ ------------ ------------
1,334,553 1,453,599 1,550,084
------------ ------------ ------------
Net income $ 2,355,570 $ 2,363,798 $ 2,514,437
============ ============ ============
Earnings per share:
Basic $ 2.06 $ 1.56 $ 1.52
============ ============ ============
Diluted $ 1.87 $ 1.42 $ 1.42
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
Landmark Bancshares, Inc.
Consolidated Statements of Comprehensive Income
Years Ended September 30, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- -----------
Net income $ 2,355,570 $ 2,363,798 $ 2,514,437
----------- ----------- -----------
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period (73,748) (505,531) 814,629
Less: reclassification adjustment for
gains included in net income (330,081) (133,517) (145,302)
----------- ----------- -----------
Total other comprehensive income (loss) (403,829) (639,048) 669,327
----------- ----------- -----------
Comprehensive income $ 1,951,741 $ 1,724,750 $ 3,183,764
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
Landmark Bancshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended September 30, 1999, 1998 and 1997
Unamortized
Accumulated Common
Additional Other Stock
Common Paid-in Retained Comprehensive Acquired by
Stock Capital Income Inceom ESOP
------------- ---------------- ----------------- ------------- -----------------
Balance, September 30, 1996 $228,131 $ 21,944,175 $ 17,468,325 $253,057 $ (994,695)
Allocation of shares by Employees' Stock
Ownership Plan 121,277 150,098
Amortization of compensation related to
Management Stock Bonus Plan 56,928
Compensation related to stock options granted 51,447
Net income for the year ended September 30, 1997 2,514,437
Cash dividend paid ($0.40 per share) (677,675)
Net change in unrealized gain on available-for-sale
investment securities 669,327
Purchase of 164,355 treasury shares
------------- ---------------- ----------------- ------------- -----------------
Balance, September 30, 1997 228,131 22,173,827 19,305,087 922,384 (844,597)
Allocation of shares by Employees' Stock
Ownership Plan 175,691 151,878
Amortization of compensation related to
Management Stock Bonus Plan 108,968
Compensation related to stock options granted 7,658
Net income for the year ended September 30, 1998 2,363,798
Cash dividend paid ($0.60 per share) (929,243)
Net change in unrealized gain on available-for-sale
investment securities (639,048)
Purchase of 360,707 treasury shares
------------- ---------------- ----------------- ------------- -----------------
Balance, September 30, 1998 228,131 22,466,144 20,739,642 283,336 (692,719)
Allocation of shares by Employees' Stock
Ownership Plan 98,672 136,878
Amortization of compensation related to
Management Stock Bonus Plan 104,809
Compensation related to stock options granted 36,753
Net income for the year ended September 30, 1999 2,355,570
Cash dividend paid ($0.70 per share) (805,072)
Net change in unrealized gain on available-for-sale
investment securities (403,829)
Purchase of 196,370 treasury shares
------------- ---------------- ----------------- ------------- -----------------
Balance, September 30, 1999 $228,131 $ 22,706,378 $ 22,290,140 $(120,493) $ (555,841)
============= ================ ================= ============= =================
Unamortized
Compensation Total
Related to Treasury Stockholders'
MSBP Stock Equity
----------------------------------------------
Balance, September 30, 1996 $ (482,612) $ (6,027,206) $32,389,175
Allocation of shares by Employees' Stock
Ownership Plan 271,375
Amortization of compensation related to
Management Stock Bonus Plan 193,045 249,973
Compensation related to stock options granted 51,447
Net income for the year ended September 30, 1997 2,514,437
Cash dividend paid ($0.40 per share) (677,675)
Net change in unrealized gain on available-for-sale
investment securities 669,327
Purchase of 164,355 treasury shares (3,222,729) (3,222,729)
----------------------------------------------
Balance, September 30, 1997 (289,567) (9,249,935) 32,245,330
Allocation of shares by Employees' Stock
Ownership Plan 327,569
Amortization of compensation related to
Management Stock Bonus Plan 193,045 302,013
Compensation related to stock options granted 7,658
Net income for the year ended September 30, 1998 2,363,798
Cash dividend paid ($0.60 per share) (929,243)
Net change in unrealized gain on available-for-sale
investment securities (639,048)
Purchase of 360,707 treasury shares (8,654,310) (8,654,310)
----------------------------------------------
Balance, September 30, 1998 (96,522) (17,904,245) 25,023,767
Allocation of shares by Employees' Stock
Ownership Plan 235,550
Amortization of compensation related to
Management Stock Bonus Plan 96,522 201,331
Compensation related to stock options granted 36,753
Net income for the year ended September 30, 1999 2,355,570
Cash dividend paid ($0.70 per share) (805,072)
Net change in unrealized gain on available-for-sale
investment securities (403,829)
Purchase of 196,370 treasury shares (4,239,923) (4,239,923)
----------------------------------------------
Balance, September 30, 1999 $ - $(22,144,168) $22,404,147
==============================================
The accompanying notes are an integral part of these consolidated financial
statements
F-5
Landmark Bancshares, Inc.
Consolidated Statements of Cash Flows
For the Years Ended September 30, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,355,570 $ 2,363,798 $ 2,514,437
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation 208,330 157,885 113,881
Realized gain on sale of investment securities
available-for-sale (500,123) (202,299) (220,154)
(Increase) decrease in accrued interest receivable (104,054) 2,758 72,035
Decrease in outstanding checks in excess
of bank balance (143,808)
Increase (decrease) in income taxes (169,974) (38,272) 170,652
Increase (decrease) in accounts payable and
accrued expenses 894,660 (567,513) 111,297
Amortization of premiums and discounts
on investments and loans, net (116,723) (85,099) (54,424)
Amortization of mortgage servicing rights 90,636 50,692 15,329
Provision for losses on loans 785,000 265,000 307,979
Sale of loans held-for-sale 23,698,249 22,831,874 12,956,185
Gain on sale of loans held-for-sale (462,813) (472,908) (237,281)
Origination of loans held-for-sale (20,482,876) (20,450,773) (5,896,736)
Purchase of loans held-for-sale (671,690) (1,033,045) (412,950)
Amortization related to MSBP and ESOP 233,400 344,923 343,143
Other non-cash items, net 158,510 105,714 47,773
------------ ------------ ------------
Net cash provided by operating activities 5,916,102 3,272,735 9,687,358
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and principal collections, net 8,318,338 (1,076,137) (4,345,234)
Loans purchased for investment (14,529,810) (16,852,563) (30,958,686)
Principal repayments on mortgage-backed securities 8,988,926 14,943,744 9,134,312
Acquisition of mortgage-backed securities
held-to-maturity (763,809)
Acquisition of investment securities held-to-maturity (22,425,730) (10,885,469) (4,300,000)
Acquisition of investment securities available-for-sale (4,439,929) (3,588,429) (2,413,418)
Acquisition of equity investment (250,000)
Proceeds from sale of investment securities
available-for-sale 1,478,042 647,553 742,989
Proceeds from maturities and calls of investment
securities held-to-maturity 5,191,000 18,150,000 14,890,000
Net (increase) decrease in time deposits (39,997) (139,287) 369,369
Proceeds from sale of foreclosed assets 231,838 488,420 110,614
Acquisition of fixed assets (249,886) (698,917) (352,345)
Other investing activity, net (181,749) (114,061) (50,289)
------------ ------------ ------------
Net cash provided (used) by investing activities (18,422,766) 624,854 (17,172,688)
------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
Landmark Bancshares, Inc.
Consolidated Statements of Cash Flows (Continued)
For the Years Ended September 30, 1999, 1998 and 1997
1999 1998 1997
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 4,143,376 $ 10,058,177 $ 919,829
Net increase (decrease) in escrow accounts 239,635 231,113 (85)
Proceeds from FHLB advances and other borrowings 91,800,000 31,700,000 126,600,000
Repayment of FHLB advances and other borrowings (75,500,000) (36,200,000) (113,866,668)
Purchase of treasury stock (4,239,923) (8,654,310) (3,222,729)
Dividends paid (805,072) (929,243) (677,675)
------------- ------------- -------------
Net cash provided (used) by financing activities 15,638,016 (3,794,263) 9,752,672
------------- ------------- -------------
Net increase in cash and cash equivalents 3,131,352 103,326 2,267,342
Cash and cash equivalents at beginning of year 2,844,378 2,741,052 473,710
------------- ------------- -------------
Cash and cash equivalents at end of year $ 5,975,730 $ 2,844,378 $ 2,741,052
============= ============= =============
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest on deposits, advances and other
borrowings $ 10,228,772 $ 9,899,846 $ 9,895,246
Income taxes 1,399,718 1,382,903 954,195
Transfers from loans to foreclosed assets 685,585 377,107 489,475
Loans to facilitate the sale of foreclosed assets 15,606 325,814 122,000
Net transfer of loans held for investment to held-for-sale 1,325,297 2,827,880 5,155,392
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
Landmark Bancshares, Inc.
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
1. Summary of Significant Accounting Policies
Nature of operations:
Landmark Bancshares, Inc. (the Company) is a Kansas corporation and is
the parent company of its wholly-owned subsidiary, Landmark Federal
Savings Bank (the Bank). At the present time, the Company does not
conduct any active business other than the Bank.
Landmark Federal Savings Bank is primarily engaged in attracting
deposits from the general public and using those deposits, together with
other funds, to originate real estate loans on one- to four- family
residences, commercial and consumer loans. The Bank conducts its
business from its main office in Dodge City and also has five branch
offices located in Dodge City, Garden City, Great Bend, Hoisington and
LaCrosse, Kansas. The Bank also has a loan origination office in the
Kansas City area. In addition, the Bank invests in mortgage-backed
securities and investment securities. The Bank offers its customers
fixed rate and adjustable rate mortgage loans, as well as other loans,
including commercial, auto, home equity and savings account loans.
Basis of presentation and consolidation:
The accompanying consolidated financial statements include the accounts
of Landmark Bancshares, Inc. and its wholly-owned subsidiary, Landmark
Federal Savings Bank. Significant intercompany transactions and balances
have been eliminated in consolidation.
Use of estimates:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant
change in the near-term relate to the determination of the allowance for
loan losses and the valuation of assets acquired in connection with
foreclosures or in satisfaction of loans. In connection with the
determination of the allowances for loan losses and the valuation of
assets acquired by foreclosure, management obtains independent
appraisals for significant properties.
Management believes that the allowances for losses on loans and
valuations of assets acquired by foreclosure are adequate and
appropriate. While management uses available information to recognize
losses on loans and assets acquired by foreclosure, future loss may be
accruable based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowances for losses on loans and
valuations of assets acquired by foreclosure. Such agencies may require
the Bank to recognize additional losses based on their judgment of
information available to them at the time of their examination.
Cash and cash equivalents:
Cash and cash equivalents include unrestricted cash on hand, demand
deposits maintained in depository institutions and other readily
convertible investments with original maturities when purchased of three
months or less. All time deposits in other depository institutions are
treated as non-cash equivalents.
Investment and mortgage-backed securities:
Regulations require the Bank to maintain liquidity for maturities of
deposits and other short-term borrowings in cash, U.S. Government and
other approved securities.
Investments, including mortgage-backed securities, are classified as
held-to-maturity, trading, or available-for-sale. Held-to-maturity
securities are securities for which the Bank has the positive intent and
ability to hold to maturity and are reported at amortized cost. Trading
securities are securities held principally for resale and are reported
at fair
F-8
1. Summary of Significant Accounting Policies (Continued)
value, with unrealized changes in value reported in the bank's income
statement as part of earnings. Available-for-sale securities are
securities not classified as trading nor as held-to-maturity securities
and are also reported at fair value, but any unrealized appreciation or
depreciation, net of tax effects are reported as a separate component of
equity.
Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.
Gains and losses on the sale of investment and mortgage-backed
securities are determined using the specific-identification method. All
sales are made without recourse.
Loans receivable:
Loans receivable that management has intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal balances, net of undisbursed loan proceeds, the
allowance for loan losses, any deferred fees or costs on originated
loans and unamortized premiums or discounts on purchased loans. Premiums
and discounts on purchased residential real estate loans are amortized
to income using the interest method over the estimated remaining period
to maturity. Loan origination fees and certain direct costs are
capitalized and recognized as an adjustment of the yield of the related
loan.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, the current level of
non-performing assets and current economic conditions. This evaluation
is inherently subjective as it requires estimates that are susceptible
to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value, and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment measured on a loan by loan basis
for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan's effective interest
rate, the loan's obtainable market price, or the fair value of the
collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Corporation does not
separately identify individual consumer and residential loans for
impairment disclosures.
The accrual of interest on mortgage and commercial loans is discontinued
at the time the loan is 90 days delinquent unless the credit is
well-secured and in process of collection. Consumer loans are typically
charged off no later than 180 days past due. In all cases, loans are
placed on nonaccrual or charged-off at an earlier date if collection of
principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income. The
interest on these loans is accounted for on the cash-basis or
cost-recovery method, until qualifying for return to accrual. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
F-9
1. Summary of Significant Accounting Policies (Continued)
Loans held-for-sale:
Mortgage loans originated and intended for sale in the secondary market
are carried at the lower of cost or estimated market value in the
aggregate. Net unrealized losses are recognized through a valuation
allowance by charges to income.
Foreclosed assets:
Assets acquired through, or in lieu of, foreclosure are to be sold and
are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management, and an allowance for losses is
established by a charge to operations if the carrying value of a
property exceeds the fair value less estimated costs to sell. Revenue
and expenses from operations and changes in the valuation allowance are
included in net expenses from foreclosed assets. The historical average
holding period for such property is approximately six months.
Mortgage servicing rights:
Servicing assets are recognized as separate assets when rights are
acquired through purchase or through sale of financial assets.
Capitalized servicing rights are reported in other assets and are
amortized into non-interest income in proportion to, and over the period
of, the estimated future net servicing income of the underlying
financial assets. Servicing assets are evaluated for impairment based
upon the fair value of the rights as compared to amortized cost.
Impairment is determined by stratifying rights by predominant
characteristics, such as interest rates and terms. Fair value is
determined using prices for similar assets with similar characteristics,
when available, or based upon discounted cash flows using market-based
assumptions. Impairment is recognized through a valuation allowance for
an individual stratum, to the extent that fair value is less than the
capitalized amount for the stratum. In June 1996, the Financial
Accounting Standard Board issued FASB Statement No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. FASB Statement No. 127, Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125, was issued in December
1996 to defer certain provisions of Statement 125. The provisions of
FASB No. 125 for servicing of financial assets have been applied
effective January 1, 1997.
Derivative financial instruments:
All derivative financial instruments previously held or issued by the
Company were held or issued for purposes other than trading. The Company
did not hold or issue any derivative financial instruments during the
years ended September 30, 1999, 1998 and 1997.
Credit related financial instruments:
In the ordinary course of business the Bank has entered into off-balance
sheet financial instruments consisting of commitments to extend credit,
commitments under credit card arrangements, commercial letters of
credit, and standby letters of credit. Such financial instruments are
recorded in the financial statements when they are funded or related
fees are incurred or received.
Office properties and equipment:
Office properties and equipment are stated at cost less accumulated
deprecation. Depreciation is computed on a straight-line basis or
accelerated methods over the estimated useful lives of five to fifty
years for buildings and improvements and three to twenty years for
furniture, fixtures, equipment and automobiles.
Transfers of financial assets:
Transfers of financial assets are accounted for as sales, when control
over the assets has been surrendered. Control over transferred assets is
deemed to be surrendered when (1) the assets have been isolated from the
Company, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange
the transferred assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase
them before their maturity.
F-10
1. Summary of Significant Accounting Policies (Continued)
Income taxes:
Deferred income tax assets and liabilities are determined using the
liability (or balance sheet) method. Under this method, the net deferred
tax asset or liability is determined based on the tax effects of the
temporary differences between the book and tax bases of the various
balance sheet assets and liabilities and gives current recognition to
changes in tax rates and laws.
Advertising costs:
Advertising costs are expensed as incurred and included in other
non-interest expense. Advertising expenses totaled $64,152, $74,274 and
$67,101 for the years ended September 30, 1999, 1998 and 1997,
respectively.
Stock-based compensation:
The Company has adopted Statement of Financial Accounting Standard
(SFAS) No. 123, Accounting for Stock-Based Compensation, which
establishes a fair-value-based method of accounting for stock
compensation plans with employees and others. It applies to all
arrangements under which employees receive shares of stock or other
equity instruments of the employer, or the employer incurs liabilities
to employees in amounts based on the price of the employer's stock. The
Company's stock options are recognized and measured in accordance with
the fair-value-based method of accounting.
Earnings per share:
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to
income that would result from the assumed issuance. Potential common
shares that may be issued by the Company relate solely to outstanding
stock options and MSBP shares, and are determined using the treasury
stock method.
Earnings per common share have been computed based on the following:
Years Ended September 30,
-----------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- -----------------
Net income $ 2,355,570 $ 2,363,798 $2,514,437
==================== ==================== =================
Average number of common shares
outstanding 1,142,222 1,518,482 1,652,339
Effect of dilutive stock options 119,494 140,102 111,815
Effect of dilutive MSBP shares 748 6,366 9,967
-------------------- -------------------- -----------------
Average number of common shares
outstanding used to calculate diluted
earnings per common share 1,262,464 1,664,950 1,774,121
==================== ==================== =================
Comprehensive income:
The Company adopted SFAS 130, Reporting Comprehensive Income, as of
October 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, are reported as a separate
component of the equity section of the balance sheet, such items, along
with net income are components of comprehensive income. The adoption of
SFAS 130 had no effect on the Company's net income or stockholders'
equity.
F-11
1. Summary of Significant Accounting Policies (Continued)
The components of other comprehensive income and related tax effects are
as follows:
Years Ended September 30,
--------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- -----------------
Unrealized holding gains (losses) on
available-for sale securities $ (160,267) $ (842,750) $1,314,719
Reclassification adjustment for losses
(gains) realized in income (500,123) (202,299) (220,154)
--------------------- ---------------------- -----------------
Net unrealized gains (losses) (660,390) (1,045,049) 1,094,565
Tax effect 256,561 406,001 (425,238)
--------------------- ---------------------- -----------------
Net-of-tax amount $ (403,829) $ (639,048) $ 669,327
===================== ====================== =================
Impact of new accounting standards:
In June 1998, FASB issued SFAS No. 133 entitled Accounting for
Derivative Instruments and Hedging Activities. This statement requires
the recognition of all derivative financial instruments as either assets
or liabilities in the statement of financial position and measurement of
those instruments at fair value. The accounting for gains and losses
associated with changes in the fair value of a derivative and the effect
on the consolidated financial statements will depend on its hedge
designation and whether the hedge is highly effective in achieving
offsetting changes in the fair value or cash flows of the asset or
liability hedged. Under the provisions of SFAS No. 133, the method that
will be used for assessing the effectiveness of a hedging derivative, as
well as the measurement approach for determining the ineffective aspects
of the hedge, must be established at the inception of the hedge. The
methods must be consistent with the entity's approach to managing risk.
SFAS No. 137 was issued in June 1999 to modify SFAS 133 regarding
recognition in the balance sheet of embedded derivatives that are to be
separated from the host contract.
As issued, SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. SFAS No. 137 also amended SFAS 133
by postponing the mandatory effective date to all fiscal quarters of
fiscal years beginning after June 15, 2000, with initial application as
of the beginning of an entity's fiscal quarter; on that date, hedging
relationships must be designated anew and documented pursuant to the
provisions of this Statement. Earlier application is encouraged, but is
permitted only as of the beginning of any fiscal quarter beginning after
June 15, 2000. Retroactive application to financial statements of prior
periods is prohibited. Management of the Company has not determined the
quarter in which to adopt the provisions of this statement and does not
believe that such adoption will have a material effect on the Company's
financial position, liquidity or results of operations.
Financial statement presentation:
Certain items in prior year financial statements have been reclassified
to conform to the 1999 presentation.
2. Investment Securities
The amortized cost and estimated market values of investment securities
at September 30 are summarized as follows:
September 30, 1999
------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------------- ---------------- ---------------- ------------------
Held-to-maturity:
Government Agency Securities $ 27,464,853 $ - $ 887,041 $ 26,577,812
Municipal Obligations 1,385,000 16,453 9,625 1,391,828
------------------- ---------------- ---------------- ------------------
$ 28,849,853 $ 16,453 $ 896,666 $ 27,969,640
=================== ================ ================ ==================
Available-for-sale:
Debt Securities
Government Agency Securities $ 4,000,000 $ - $ - $ 4,000,000
Corporate Bonds 200,000 2,000 9,000 193,000
Common Stock 4,568,574 537,790 727,834 4,378,530
Stock in FHLB, at cost 3,441,000 3,441,000
Other 10,000 10,000
------------------- ---------------- ---------------- ------------------
$ 12,219,574 $ 539,790 $ 736,834 $ 12,022,530
=================== ================ ================ ==================
F-12
2. Investment Securities (Continued)
September 30, 1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ------------ ------------- -----------
Held-to-maturity:
Government Agency Securities $10,000,433 $ 57,975 $ -- $10,058,408
Municipal Obligations 1,575,000 47,736 1,622,736
----------- ----------- ----------- -----------
$11,575,433 $ 105,711 $ -- $11,681,144
=========== =========== =========== ===========
Available-for-sale:
Debt Securities
Corporate Bonds $ 200,000 $ -- $ -- $ 200,000
Common Stock 5,337,064 1,056,107 592,761 5,800,410
Stock in FHLB, at cost 3,210,500 3,210,500
Other 10,000 10,000
----------- ----------- ----------- -----------
$ 8,757,564 $ 1,056,107 $ 592,761 $ 9,220,910
=========== =========== =========== ===========
Government agency securities above include bonds and notes issued by
various government agencies. Those agencies include the following:
Federal Farm Credit, Fannie Mae, Freddie Mac and Federal Home Loan Bank.
Federal Home Loan Bank members are required to maintain an investment in
stock at an amount equal to a percentage of outstanding home loans. For
disclosure purposes such stock, which is carried at cost, is assumed to
have a market value that is equal to cost.
The amortized cost and estimated market value of debt securities by
contractual maturity as of September 30, 1999 are shown below. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
September 30, 1999
--------------------------------------------------------
Held-to-Maturity Available-for-Sale
-------------------------- ----------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
------------ ------------ ------------ --------------
Due in one year or less $ 100,000 $ 100,844 $ -- $ --
Due after one year through five years 1,500,000 1,491,141 50,000 52,000
Due after five years through ten years 24,249,853 23,506,718 2,100,000 2,094,000
Due after ten years 3,000,000 2,870,937 2,050,000 2,047,000
----------- ----------- ----------- -----------
$28,849,853 $27,969,640 $ 4,200,000 $ 4,193,000
=========== =========== =========== ===========
F-13
2. Investment Securities (Continued)
Gross realized gains and (losses) on sales of investment securities and
related tax benefit (provision) during the years ended September 30 are
as follows:
1999 1998 1997
---------------- ---------------- ----------------
Available-for-sale securities:
Realized gains $ 509,255 $ 202,299 $ 220,154
Realized losses (9,132) - -
---------------- ---------------- ----------------
$ 500,123 $ 202,299 $ 220,154
================ ================ ================
Tax benefit (provision) $ (194,298) $ (78,593) $ (85,530)
================ ================ ================
Proceeds from sales of available-for-sale securities were $1,478,042,
$647,553 and $742,989 for the years ended September 30, 1999, 1998 and
1997, respectively. During the years ended September 30, 1999, 1998 and
1997, sales consisted of common stock of unrelated financial
corporations.
Investment securities with a carrying amount of $19,500,000 and
$9,200,000 as of September 30, 1999 and 1998, respectively, were pledged
as collateral for public funds as discussed in Note 9.
3. Mortgage-Backed Securities
Mortgage-backed securities, all of which were classified as
held-to-maturity at September 30, 1999 and 1998, consist of the
following:
September 30, 1999
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ----------- ----------- ------------
GNMA - fixed rate $ 103,124 $ 1,693 $ -- $ 104,817
FNMA - ARMs 5,901,429 27,530 47,602 5,881,357
FHLMC - ARMs 1,900,940 19,066 3,134 1,916,872
FHLMC - fixed rate 79,967 1,165 119 81,013
FNMA - fixed rate 343,808 7,188 350,996
Collateralized mortgage obligations -
government agency issue 3,862,807 15,579 32,719 3,845,667
Collateralized mortgage
obligations-private issues 1,297,099 2,109 8,214 1,290,994
----------- ----------- -------- -----------
$13,489,174 $ 74,330 $ 91,788 $13,471,716
=========== =========== ======== ===========
F-14
3. Mortgage-Backed Securities (Continued)
September 30, 1998
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- ---------- ------------- ----------
GNMA - fixed rate $ 229,898 $ 6,711 $ -- $ 236,609
FNMA - ARMs 8,841,621 134,117 4,066 8,971,672
FHLMC - ARMs 2,814,514 44,772 845 2,858,441
FHLMC - fixed rate 128,174 2,905 131,079
FNMA - fixed rate 448,123 28,827 476,950
Collateralized mortgage obligations -
government agency issue 7,058,687 67,667 2,432 7,123,922
Collateralized mortgage
obligations-private issues 2,202,738 7,108 1,549 2,208,297
----------- ----------- ----------- -----------
$21,723,755 $ 292,107 $ 8,892 $22,006,970
=========== =========== =========== ===========
Collateralized mortgage obligations consist of floating rate and fixed
rate notes with varying contractual principal maturities. The Bank has
no principal only, interest only, or residual collateralized mortgage
obligations.
There were no of mortgage-backed securities classified as
available-for-sale for years ended September 30, 1999, 1998 or 1997,
respectively.
Mortgage-backed securities with a carrying amount of $6,171,483 and
$17,352,579 at September 30, 1999 and 1998, respectively, were pledged
as collateral for public funds as discussed in Note 9.
4. Loans Receivable
Loans receivable at September 30, are summarized as follows:
September 30,
--------------------------------------
1999 1998
------------------ -----------------
Real estate loans:
Residential $ 138,008,961 $ 129,688,030
Construction 1,847,609 1,386,224
Commercial 9,050,225 4,936,897
Second mortgage 9,716,029 10,071,744
Commercial business 6,531,200 8,578,694
Consumer 13,578,547 19,049,741
------------------ -----------------
Gross loans 178,732,571 173,711,330
Less: Net deferred loan fees, premiums and discounts (178,699) (250,323)
Allowance for loan losses (1,317,676) (1,136,753)
------------------ -----------------
Total loans, net $ 177,236,196 $ 172,324,254
================== =================
The following is an analysis of the change in the allowance for loss on
loans:
1999 1998 1997
----------- ----------- -----------
Balance, beginning $ 1,136,753 $ 968,623 $ 740,346
Provision charged to operations 785,000 265,000 307,979
Loans charged off (657,712) (107,070) (92,243)
Recoveries 53,635 10,200 12,541
----------- ----------- -----------
Balance, ending $ 1,317,676 $ 1,136,753 $ 968,623
=========== =========== ===========
F-15
4. Loans Receivable (Continued)
Impairment of loans having recorded investments of $353,790 at September
30, 1999 and $505,547 at September 30, 1998 have been recognized in
conformity with FASB Statement No. 114, as amended by FASB Statement No.
118. The average recorded investment in impaired loans during the years
ended September 30, 1999, 1998 and 1997 was $429,669, $438,658 and
$249,450, respectively. Allowances for loss on these loans are included
in the above analysis of the overall allowance for loss on loans. There
are no specific loss provisions associated with impaired loans as of
September 30, 1999 and 1998. Interest income on impaired loans of
$27,139, $31,803 and $25,662 was recognized for cash payments received
for the year ended September 30, 1999, 1998 and 1997, respectively.
It is Bank policy not to modify interest rates below the then current
market rate on loans associated with troubled debt restructuring. The
Bank is not committed to lend additional funds to debtors whose loans
have been modified.
See Note 18 for disclosure of loans to related parties.
5. Mortgage Servicing Rights
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of
these loans at September 30 are summarized as follows:
1999 1998 1997
----------- ----------- -----------
FHLMC $60,153,338 $58,336,823 $54,658,716
Other investors 1,790,728 1,809,812 1,108,734
----------- ----------- -----------
$61,944,066 $60,146,635 $55,767,450
=========== =========== ===========
Custodial escrow balances maintained in connection with the foregoing
loan servicing and included in demand deposits, were approximately
$59,955 and $176,432 at September 30, 1999 and 1998.
The following is an analysis of the changes in mortgage servicing rights
during the year ended September 30, 1999, 1998 and 1997:
1999 1998 1997
--------- --------- ---------
Balance, beginning $ 225,835 $ 96,199 $ --
Additions 183,344 180,311 111,528
Amortization (90,636) (50,675) (15,329)
--------- --------- ---------
Balance, ending $ 318,543 $ 225,835 $ 96,199
========= ========= =========
The fair value of servicing rights as of September 30, 1999 and 1998 was
determined to approximate book value, based on values of FHLMC servicing
of comparable stratification, including prepayment speeds. No valuation
allowance was recorded against mortgage servicing rights at September
30, 1999 and 1998.
6. Accrued Income Receivable
Accrued interest receivable at September 30 is summarized as follows:
1999 1998
---------- ----------
Mortgage-backed securities $ 83,235 $ 138,525
Loans receivable 1,030,071 1,054,602
Investments 434,595 250,720
---------- ----------
$1,547,901 $1,443,847
========== ==========
F-16
7. Foreclosed Assets
Real estate owned or in judgment and other repossessed assets consist of
the following:
September 30,
-----------------------
1999 1998
-------- --------
Real estate acquired by foreclosure $ -- $ --
Real estate loans in judgment
and subject to redemption 70,081 56,589
Other foreclosed assets 76,802 14,350
-------- --------
$146,883 $ 70,939
======== ========
There was no activity in the allowance for loss account for the years
ended September 30, 1999, 1998 and 1997.
Income (loss) from foreclosed assets, included in other non-interest
income, for the years ended September 30 are as follows:
1999 1998 1997
-------- -------- --------
Net gain on sale of foreclosed assets $ 3,711 $ 24,677 $ 12,021
Operating expenses (20,773) (13,142) (6,000)
-------- -------- --------
Balance, ending $(17,062) $ 11,535 $ 6,021
======== ======== ========
8. Office Properties and Equipment
Office properties and equipment are stated at cost less accumulated
depreciation as follows:
September 30,
---------------------------
1999 1998
---------- ----------
Land $ 298,366 $ 298,366
Office building and improvements 1,955,675 1,934,541
Furniture, fixtures and equipment 1,138,044 1,163,365
Automobiles 11,544 11,544
---------- ----------
3,403,629 3,407,816
Less accumulated depreciation 1,643,859 1,678,534
---------- ----------
$1,759,770 $1,729,282
========== ==========
Depreciation expense ($113,881 for 1997) $ 208,330 $ 157,885
========== ==========
9. Deposits
Deposits at September 30 are summarized as follows:
1999 1998
------------ ------------
Demand accounts:
Interest-bearing $ 21,323,449 $ 17,131,980
Non-interest bearing 3,960,610 3,655,520
------------ ------------
Total demand accounts 25,284,059 20,787,500
Savings deposits 7,561,096 6,520,220
Certificates of deposit 126,091,137 127,485,196
------------ ------------
$158,936,292 $154,792,916
============ ============
F-17
9. Deposits (Continued)
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 as of September 30, 1999 and 1998 was
approximately $26,987,714 and $21,681,643, respectively. Deposit
accounts as of September 30, 1999 included public funds of $20,885,226.
Public funds were collateralized by investment securities and
mortgage-backed securities as discussed in Notes 2 and 3.
At September 30, 1999, scheduled maturities of certificates of deposit
are as follows:
Year Ending September 30,
----------------------------------------
2000 $103,751,256
2001 15,527,781
2002 4,253,669
2003 2,290,313
2004 256,118
Thereafter 12,000
---------------------
$126,091,137
=====================
10. Advances and other Borrowings from Federal Home Loan Bank
Advances and other borrowings from the Federal Home Loan Bank at
September 30 are summarized as follows:
1999 1998
----------- -----------
Advances $35,000,000 $33,700,000
Line of credit 23,000,000 8,000,000
----------- -----------
$58,000,000 $41,700,000
=========== ===========
Advances and other borrowings from the Federal Home Loan Bank at
September 30 consist of the following:
1999 1998
Fiscal ---------------------------- ----------------------------
Year Weighted Weighted
Maturity Amount Average Rate Amount Average Rate
- -------------- ------------- ------------ ------------- ------------
1999 $ - % $ 26,700,000 5.78 %
2000 37,000,000 5.76 4,000,000 5.99
2001
2002
2003 6,000,000 5.05
2004 8,000,000 4.93
Thereafter 13,000,000 4.64 5,000,000 4.99
------------- ------------ ------------- ------------
$ 58,000,000 5.39 % $ 41,700,000 5.60 %
============= ============ ============= ============
At September 30, 1999 the Company had $23,000,000 outstanding under a
$30,000,000 line of credit with the Federal Home Loan Bank. All amounts
outstanding under the line of credit are payable on February 4, 1999 and
bear interest at the line of credit rate established by the Federal Home
Loan Bank. This rate is adjusted from time to time. The rate as of
September 30, 1999 was 5.90%. At September 30, 1998 the Company had
$8,000,000 outstanding under a $30,000,000 line of credit, due February
5, 1999.
The advances and line of credit are collateralized as of September 30,
1999 and 1998 by a blanket pledge agreement, including all stock in
Federal Home Loan Bank, qualifying first mortgage loans, certain
mortgage-related securities and other investment securities.
F-18
11. Income Taxes
The Company and subsidiary file consolidated income tax returns.
Allocation of federal and state income taxes between current and
deferred portions is as follows:
Years ended September 30,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
Current tax provision:
Federal $ 1,212,852 $ 1,289,824 $ 1,065,231
State 165,085 240,129 195,946
----------- ----------- -----------
1,377,937 1,529,953 1,261,177
----------- ----------- -----------
Deferred tax provision:
Federal (38,308) (67,421) 241,071
State (5,076) (8,933) 47,836
----------- ----------- -----------
(43,384) (76,354) 288,907
----------- ----------- -----------
$ 1,334,553 $ 1,453,599 $ 1,550,084
=========== =========== ===========
Deferred taxes are included The Company's effective income tax rate was
different than the statutory federal income tax rate for the following
reasons:
1999 1998 1997
--------- ---------- ---------
Statuatory federal income tax 34.0 % 34.0 % 34.0 %
Increase (reductions) resulting from:
State taxes, net of federal tax benefit 2.9 3.6 3.9
Other 0.7 0.5 0.2
--------- ---------- ---------
37.6 % 38.1 % 38.1 %
========= ========== =========
The components of net deferred tax asset (liability) at September 30,
1999 and 1998 are as follows:
1999 1998
--------- ---------
Deferred tax asset:
Deferred loan fees and costs $ 15,833 $ 24,091
Allowance for loan losses 485,433 418,780
Deferred compensation and accrued salaries 182,874 139,101
Equity investment in partnership 11,129 32,797
Unrealized loss on available-for-sale securities 76,551
Accrued expenses 11,052
--------- ---------
771,820 625,821
--------- ---------
Deferred tax liabilities:
Accumulated depreciation (244) (1,566)
Special bad debt deduction (172,590) (230,120)
FHLB stock dividends (496,980) (412,064)
Investment basis (12,141) (12,141)
Unrealized gain on available-for-sale securities (180,010)
--------- ---------
(681,955) (835,901)
--------- ---------
$ 89,865 $(210,080)
========= =========
No valuation allowance was recorded against deferred tax assets at
September 30, 1999 or 1998.
F-19
11. Income Taxes (Continued)
Effective with the tax year beginning October 1, 1996, the Bank was no
longer able to use the percentage of taxable income method and began to
recapture tax bad debt reserves of $936,968 over a six year period. The
reserves to be recaptured consist of bad debt deductions after December
31, 1987. If the amounts deducted prior to December 31, 1987 are used
for purposes other than for loan losses, such as in a distribution in
liquidation or otherwise, the amounts deducted would be subject to
federal income tax at the then current corporate tax rate. The Bank had
recorded a deferred tax asset related to the allowance for loan losses
reported for financial reporting purposes and a deferred tax liability
for special bad debt deductions after December 31, 1987. The Bank, in
accordance with SFAS No. 109, has not recorded a deferred tax liability
of approximately $1,900,000 related to approximately $5,585,000 of
cumulative special bad debt deductions prior to December 31, 1987.
12. Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Prompt corrective action
provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set
forth in the table below) of core and tangible capital (as defined in
the regulations) to assets (as defined) and core and total capital to
risk weight assets (as defined). Management believes, as of September
30, 1999, that the Bank meets all capital adequacy requirements to which
it is subject.
As of September 30, 1999, the most recent notification from the Office
of Thrift Supervision (OTS) categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth
in the table. There are no conditions or events since that notification
that management believes have changed the Bank's category.
The Bank's actual capital amounts (in thousands) and ratios are also
presented in the following table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
--------------------- ------------------ ------------------
Amount Ratio Amount Ratio Amount Ratio
--------- --------- -------- ------- --------- -------
As of September 30, 1999:
Total (Risk-Based) Capital
(to Risk Weighted Assets) $ 19,615 16.1% $ 9,739 8.0% $ 12,173 10.0%
Core (Tier I) Capital
(to Risk Weighted Assets) 18,297 15.0% N/A 7,304 6.0%
Core (Tier I) Capital - leverage
(to Assets) 18,297 7.6% 9,652 4.0% 12,065 5.0%
As of September 30, 1998:
Total (Risk-Based) Capital
(to Risk Weighted Assets) $ 17,725 14.4% $ 9,825 8.0% $ 12,282 10.0%
Core (Tier I) Capital
(to Risk Weighted Assets) 16,589 13.5% N/A 7,369 6.0%
Core (Tier I) Capital - leverage
(to Assets) 16,589 7.4% 8,917 4.0% 11,158 5.0%
F-20
12. Regulatory Matters (Continued)
The following is a reconciliation of net worth to regulatory capital as
reported in the September 30, 1999 and 1998 reports to the Office of
Thrift Supervision:
September 30,
-------------------------------
1999 1998
------------- -------------
Bank net worth per report to OTS $ 18,615,000 $ 16,815,000
Rounding 328 (74)
------------- -------------
Net worth as reported in accompanying
financial statements (bank only) 18,615,328 16,814,926
Adjustments to arrive at Core (Tier I)
and Tangible Capital:
Disallowed servicing assets (318,000) (226,000)
------------- -------------
Core (Tier I) and Tangible Capital 18,297,328 16,588,926
Adjustments to arrive at Total Capital:
Allowable portion of general allowance
allowance for loan losses 1,318,000 1,136,000
------------- -------------
Total Risk-Based Capital $ 19,615,328 $ 17,724,926
============= =============
Risk weight assets $ 121,734,000 $ 122,817,000
============= =============
13. Contingencies
The Company is at times a defendant in certain claims and legal actions
arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate
disposition of such matters is not expected to have a material adverse
effect on the consolidated financial condition of the Company.
14. Employee Benefit Plans
Employee Retirement Plan:
The Bank has adopted a 401(k) defined contribution savings plan.
Substantially all employees are covered under the contributory plan.
Pension costs attributable to the years ended September 30, 1999, 1998
and 1997 were $36,286, $29,847 and $27,274, respectively, including all
current service costs.
Deferred Compensation Agreements:
The Bank has entered into deferred compensation agreements with certain
key employees which provide for cash payments to be made after their
retirement. The liabilities under the agreements have been recorded at
the present values of accrued benefits using a 7% interest rate. The
balance of estimated accrued benefits was $246,285 and $205,707 at
September 30, 1999 and 1998, respectively. In connection with the
deferred compensation agreements, the Bank has purchased life insurance
policies on covered employees in which the Bank is the beneficiary to
assist in funding benefits. At September 30, 1999 and 1998, the cash
surrender values on the policies were $529,842 and $522,791,
respectively.
Employee Stock Ownership Plan:
Upon conversion from mutual to stock form, the Bank established an
employee stock ownership plan (ESOP). The original acquisition of
136,878 shares of Company stock by the plan was funded by a loan from
the Company to the ESOP, in the amount of $1,368,780. The loan, together
with interest, is to be repaid over a ten year period through annual
contributions by the Bank. The debt, which is accounted for as a
liability of the Bank and a receivable for the Company, has been
eliminated in consolidation.
The Bank makes annual contributions to the ESOP equal to the ESOP's debt
service less dividends received by the ESOP. All dividends received by
the ESOP are used to pay debt service. The ESOP shares initially were
pledged as collateral for its debt. As the debt is repaid, shares are
released from the collateral and will be allocated to active employees,
based on the proportion of debt service paid in the year. The Bank
accounts for its ESOP shares in
F-21
14. Employee Benefit Plans (Continued)
accordance with Statement of Position No. 93-6. Accordingly, the debt of
the ESOP is recorded as debt of the Bank and the shares pledged as
collateral are reported as unearned ESOP shares in the Statement of
Financial Condition. As of September 30, l999, the balance of
indebtedness from the ESOP to the Company was $555,841, which is shown
as a deduction from stockholders' equity on the consolidated balance
sheet. The debt, which is accounted for as a liability of the Bank and a
receivable for the Company, has been eliminated in consolidation. As
shares are released from collateral, the Company reports compensation
expense equal to the current market price of the shares, and the shares
become outstanding for earnings per share (EPS) computations. Dividends
on allocated ESOP shares are recorded as a reduction of retained
earnings, dividends on unallocated ESOP shares are recorded as
compensation expense. ESOP compensation expense was $191,188, $298,320
and $257,375 for the years ended September 30, 1999, 1998 and 1997,
respectively. As of September 30, 1999, of the 133,018 shares acquired
by the ESOP, 63,746 shares were allocated and 69,272 shares were
unallocated. The 69,272 unallocated shares had an estimated market value
of $1,091,034 at September 30, 1999.
Management Stock Bonus Plan:
In connection with the stock conversion, the Bank adopted three
Management Stock Bonus Plans (collectively the MSBP), the objective of
which is to enable the Bank to retain personnel of experience and
ability in key positions of responsibility. All employees of the Bank
are eligible to receive benefits under the MSBP. Benefits may be granted
at the sole discretion of a committee appointed by the Board of
Directors. The MSBP is managed by trustees who are non-employee
directors and who have the responsibility to invest all funds
contributed by the Bank to the trusts created for the MSBP.
The MSBP has purchased 91,252 shares of the Company's stock for
$965,224. These shares were granted in the form of restricted stock
payable over a five-year period at the rate of one-fifth of such shares
per year following the date of grant of the award. Compensation expense,
in the amount of the fair market value of the common stock at the date
of the grant to the employee, will be recognized pro rata over the five
years during which the shares are payable. A recipient of such
restricted stock will be entitled to all voting and other stockholder
rights, except that the shares, while restricted, may not be sold,
pledged or otherwise disposed of and are required to be held in escrow.
If a holder of such restricted stock terminates employment for reasons
other than death, disability or retirement, the employee forfeits all
rights to the allocated shares under restriction. If the participant's
service terminates as a result of death, disability, retirement or a
change in control of the Bank, all restrictions expire and all shares
allocated become unrestricted. The Board of Directors can terminate the
MSBP at any time, and if it does so, any shares not allocated will
revert to the Company.
15. Stock Option Plan
In connection with the stock conversion, the Bank's Board of Directors
adopted the 1994 Stock Option Plan (the Option Plan). Pursuant to the
initial Option Plan, 228,131 shares of common stock are reserved for
issuance by the Company upon exercise of stock options granted to
officers, directors and employees of the Bank from time to time under
the Option Plan. The purpose of the option plans is to provide
additional incentive to certain officers, directors and key employees by
facilitating their purchase of a stock interest in the Company. Stock
option plans provide for the granting of incentive and non-incentive
stock options with a duration of ten years, after which no awards may be
made, unless earlier terminated by the Board of Directors pursuant to
the option plans. Stock to be offered under the plans may be authorized
but unissued common stock or previously issued shares that have been
reacquired by the Company and held as treasury shares.
Option plans are administered by a committee of at least three
non-employee directors designated by the Board of Directors (the Option
Committee). The Option Committee will select the employees to whom
options are to be granted and the number of shares to be granted. The
option price may not be less than 100% of the fair market value of the
shares on the date of the grant, and no option shall be exercisable
after the expiration of ten years from the grant date. In the case of
any employee who owns more than 10% of the outstanding common stock at
the time the option is granted, the option price may not be less than
110% of the fair market value of the shares on the date of the grant,
and the option shall not be exercisable after the expiration of five
years from the grant date. The exercise price may be paid in cash,
shares of the common stock, or a combination of both.
F-22
15. Stock Option Plan (Continued)
As of the date of conversion, the Option Committee granted 228,131
shares of common stock, at an exercise price of $10 per share,
contingent upon stockholder approval of the Option Plan which was
ratified June 22, 1994. In addition, options for 18,479 shares of common
stock, at an exercise price of $16.50 per share, were awarded on
November 20, 1996; options for 2,053 shares of common stock, at an
exercise price of $23.625 per share, were awarded on January 15, 1998;
and options for 10,000 shares were awarded on November 18, 1998, at an
exercise price of $23.25. All such options are exercisable immediately.
As of September 30, 1999, no options have been exercised and all options
granted remain outstanding.
The Company accounts for the fair value of its grants issued under the
plans subsequent to October 1, 1996 in accordance with FASB Statement
123. The compensation cost that has been charged against income for the
plans was $36,753, $7,658 and $51,447 for the years ended September 30,
1999, 1998 and 1997, respectively. In accordance with SFAS No. 123, the
fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants during the years ended September 30,
1999 and 1998: dividend yield of 2.54 percent, expected volatility of
25.00 percent, risk-free interest rate of 5.5 percent and expected life
of two years. Common stock options granted during the year ended
September 30, 1999 had an exercise price of $23.25 per share and an
estimated fair value of $3.73. Common stock options granted during the
year ended September 30, 1998 had an exercise price of $23.625 per share
and an estimated fair value of $3.73 per share.
Certain information for the years ended September 30, 1999 and 1998
relative to stock options are comprised of the following:
September 30,
------------------------------------------------------------------
1999 1998
------------------------------- ------------------------------
Weighted-Average Weighted-Average
Fixed Options Shares Exercise Price Shares Exercise Price
- ------------- -------------- -------------- -------------- -----------------
Outstanding at beginning of year 248,663 $ 10.70 246,610 $ 10.59
Granted 10,000 23.13 2,053 23.63
Canceled
Exercised
-------------- -------------- -------------- ------------
Outstanding at end of year 258,663 $ 11.18 248,663 $ 10.70
============== ============== ============== ============
Exercisable at end of year 258,663 248,663
============== ==============
Number of shares available for future grant:
Beginning of year 0 0
============== ==============
End of year 0 0
============== ==============
16. Off-Balance Sheet Activities
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. These financial instruments include commitments to extend credit
and commitments to sell loans. Those 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 notional amount of those instruments. The
Bank uses the same credit policies in making commitments as it does for
on-balance-sheet instruments.
At September 30, 1999, the Bank had outstanding commitments to originate
loans receivable of $3,292,299. The commitments outstanding at September
30, 1999 consisted of $3,292,299 in real estate loans. Of the
commitments outstanding at September 30, 1999, $2,480,948 were for fixed
rate loans with rates of 7.375% to 9.00% and $811,351 were for
adjustable rate loans with initial rates of 7.875% to 10.75%.
F-23
16. Off-Balance Sheet Activities (Continued)
At September 30, 1999, the Bank had unfunded commitments under lines of
credit of $3,620,503. Unfunded commitments under commercial lines of
credit, revolving credit lines and overdraft protection agreements are
commitments for possible future extensions of credit to existing
customers. The Bank uses the same credit policies in extending lines of
credit as it does for on-balance-sheet instruments.
At September 30, 1999, the Bank had commercial letters of credit of
$90,000. Commercial letters of credit are conditional commitments issued
by the bank to guarantee the performance of a customer to a third party.
Those letters of credit are primarily issued to support public and
private borrowing arrangements. Essentially all letters of credit issued
have expiration dates within one year. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Bank generally holds
collateral supporting those commitments if deemed necessary.
Loan commitments are agreements to lend to a customer as long as there
is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained if deemed necessary by the Bank upon
extension of credit is based on management's credit evaluation of the
counter-party. Collateral held is primarily residential real estate, but
may include autos, accounts receivable, inventory, property, plant and
equipment.
The Bank had no outstanding commitments from mortgage banking concerns
to purchase loans yet to be originated at September 30, 1999.
The Bank had outstanding commitments with mortgage banking concerns to
sell loans of $677,646 at September 30, 1999, the outstanding
commitments expire on November 30, 1999.
The Bank had no commitments to purchase mortgage-backed securities or
investments at September 30, 1999.
At September 30, 1999, loans with a carrying value of $604,395 have been
classified by management as held-for-sale. The carrying value of these
loans is at the lower of cost or market value as of September 30, 1999.
17. Significant Concentrations of Credit Risk
The Bank grants mortgage, consumer and business loans primarily to
customers within the state. Although the Bank has a diversified loan
portfolio, a substantial portion of its customers' ability to honor
their contracts is dependent upon the agribusiness and energy sectors of
the economy. The Bank's net investment in loans is subject to a
significant concentration of credit risk given that the investment is
primarily within a specific geographic area.
As of September 30, 1999 the Bank had a net investment of $177,840,591
in loans receivable. These loans possess an inherent credit risk given
the uncertainty regarding the borrower's compliance with the terms of
the loan agreement. To reduce credit risk, the loans are secured by
varying forms of collateral, including first mortgages on real estate,
liens on personal property, savings accounts, etc. It is generally Bank
policy to file liens on titled property taken as collateral on loans,
such as real estate and autos. In the event of default, the Bank's
policy is to foreclose or repossess collateral on which it has filed
liens.
In the event that any borrower completely failed to comply with the
terms of the loan agreement and the related collateral proved worthless,
the Bank would incur a loss equal to the loan balance.
F-24
18. Related Party Transactions
Directors and primary officers of the Company were customers of, and had
transactions with, the Bank in the ordinary course of business during
the two years ended September 30, 1999 and 1998, and similar
transactions are expected in the future. All loans included in such
transactions were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and did not involve more than
normal risk of loss or present other unfavorable features.
The following analysis is of loans made to principal officers, directors
and principal holders of equity securities that individually exceeded
$60,000 in aggregate during the year ended September 30, 1999:
Balance, September 30, 1998 $ 3,182,598
New loans 1,717,378
Repayments (2,353,625)
Adjust for balances less than $60,000 (1,433)
-----------
Balance, September 30, 1999 $ 2,544,918
===========
The Bank has made several commercial loans to a director that at times
have approached the loans to one borrower limitations. The Bank
evaluates the loan limitations and sells the loans if they would exceed
the loans to one borrower limitation.
19. Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value:
Cash:
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Time deposits in financial institutions:
The fair value of fixed maturity certificate of deposits are estimated
using the rates currently offered for deposits of similar remaining
maturities.
Investment securities and mortgage-backed securities:
For securities held for investment purposes, fair values are based on
quoted market prices or dealer quotes, if available. If a quoted market
price is not available, fair value is estimated using quoted market
prices for similar securities.
Loans receivable:
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities.
Deposit liabilities:
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of fixed-maturity certificates of deposit are estimated
using the rates currently offered for deposits of similar remaining
maturities.
Advances and other borrowings from Federal Home Loan Bank:
The fair value of advances from the Federal Home Loan Bank are estimated
using the rates offered for similar borrowings.
F-25
19. Disclosures about Fair Value of Financial Instruments (Continued)
Commitments to extend credit:
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of
the counterparties. For fixed rate loan commitments, fair value also
considers the difference between current levels of interest rates and
the committed rates.
The estimated fair values of the Bank's financial instruments are as
follows:
September 30, 1999 September 30, 1998
------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- -------------- -------------- -------------
(In Thousands) (In Thousands)
Financial assets:
Cash and cash equivalents:
Interest-bearing $ 4,377 $ 4,377 $ 2,012 $ 2,012
Non-interest bearing 1,598 1,598 833 833
Time deposits in other financial institutions 290 290 250 250
Investment securities held-to-maturity 28,850 27,970 11,575 11,681
Investment securities available-for-sale 12,022 12,022 9,221 9,221
Mortgage-backed securities held-to-maturity 13,489 13,472 21,724 22,007
Loans receivable 177,236 177,317 172,324 176,586
Loans held-for-sale 604 604 2,409 2,409
Financial liabilities:
Deposits 158,936 158,317 154,793 153,531
Advances and other borrowings from
the Federal Home Loan Bank 58,000 57,067 41,700 41,682
Par Fair Par Fair
Value Value Value Value
-------------- -------------- -------------- -------------
Unrecognized financial instruments:
Commitments to extend credit $ 3,292 $ 3,329 $ 3,110 $ 3,151
Commitments to sell loans 678 690 3,555 3,489
20. Restrictions on Retained Earnings
The Bank may not declare or pay a cash dividend to the Company if the
effect would cause the net worth of the Bank to be reduced below either
the amount required for the "liquidation account" or the net worth
requirement imposed by the OTS. If all capital requirements continue to
be met, the Bank may not declare or pay a cash dividend in an amount in
excess of the Bank's net earnings for the fiscal year in which the
dividend is declared plus one-half of the surplus over the capital
requirements, without prior approval of the OTS.
Office of Thrift Supervision regulations require that upon conversion
from mutual to stock form of ownership, a liquidation account be
established by restricting a portion of net worth for the benefit of
eligible savings account holders who maintain their savings accounts
with the Bank after conversion. In the event of complete liquidation
(and only in such event) each savings account holder who continues to
maintain their savings account shall be entitled to receive a
distribution from the liquidation account after payment to all creditors
but before any liquidation distribution with respect to common stock.
The initial liquidation account was established at $15,489,000. This
account may be proportionately reduced for any subsequent reduction in
the eligible holder's savings accounts.
F-26
21. Parent Company Financial Information
Condensed financial statements of Landmark Bancshares, Inc. (Parent
Company) are shown below. The Parent Company has no significant
operating activities.
Condensed Statements of Financial Condition
As of September 30, 1999 and 1998
(In Thousands)
1999 1998
-------- --------
ASSETS
Cash and cash equivalents $ 778 $ 479
Time deposits in other financial institutions 290 250
Investment securities available-for-sale 4,571 6,000
Investment in subsidiary 18,615 16,815
Loans receivable 556 939
Other assets 491 5,407
-------- --------
Total assets $ 25,301 $ 29,890
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Borrowings from subsidiary $ 2,800 $ 4,700
Accrued expenses and other liabilities 97 166
-------- --------
Total liabilities 2,897 4,866
-------- --------
Stockholders' equity:
Common stock 228 228
Additional paid-in capital 22,706 22,466
Retained income 22,290 20,740
Net unrealized gain on available-for-sale securities (120) 283
Unamortized amounts related to ESOP and MSBP (556) (789)
-------- --------
44,548 42,928
Treasury stock, at cost (22,144) (17,904)
-------- --------
Total stockholders' equity 22,404 25,024
-------- --------
Total liabilities and stockholders' equity $ 25,301 $ 29,890
======== ========
Condensed Statements of Operations
For the Years Ended September 30, 1999, 1998 and 1997
(In Thousands)
1999 1998 1997
------- ------- -------
Equity earnings of subsidiary $ 2,079 $ 2,267 $ 2,393
Interest and dividend income 224 248 176
Net gain on sale of investments 500 202 220
Other 5 (77) 1
------- ------- -------
Total income 2,808 2,640 2,790
------- ------- -------
Operating expenses 360 235 218
------- ------- -------
Income before income taxes 2,448 2,405 2,572
Income tax expense 93 41 58
------- ------- -------
Net income $ 2,355 $ 2,364 $ 2,514
======= ======= =======
F-27
21. Parent Company Financial Information (Continued)
Condensed Statements of Cash Flows
For the Years Ended September 30, 1999 1998 and 1997
(In Thousands)
1999 1998 1997
----------------- --------------- ---------------
Cash Flows from Operating Activities
Net income $ 2,355 $ 2,364 $ 2,514
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of subsidiary (2,079) (2,267) (2,393)
Gain on sale of investments (500) (202) (220)
(Increase) decrease in other assets 57 (165) (47)
Increase (decrease) in other liabilities 48 (17) 19
Other 52 164 87
----------------- --------------- ---------------
Net cash used by operating activities (67) (123) (40)
----------------- --------------- ---------------
Cash Flows from Investing Activities
Dividends from subsidiary 5,700 8,000 4,000
Acquisition of investment securities available-for-sale,
including deposits (287) (3,765) (1,190)
Proceeds from sale of investment securities
available-for-sale 1,516 669 749
Decrease in loans to subsidiary and ESOP, net 137 152 150
Other loans, net 245 (95) 90
----------------- --------------- ---------------
Net cash provided by investing activities 7,311 4,961 3,799
----------------- --------------- ---------------
Cash Flows from Financing Activities
Proceeds from subsidiary note payable 4,942 8,200
Repayment of note payable to subsidiary (6,842) (3,500)
Purchase of treasury stock (4,240) (8,654) (3,223)
Cash dividends paid (805) (929) (678)
----------------- --------------- ---------------
Net cash used by financing activities (6,945) (4,883) (3,901)
----------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents 299 (45) (142)
Cash and cash equivalents at beginning of year 479 524 666
----------------- --------------- ---------------
Cash and cash equivalents at end of year $ 778 $ 479 $ 524
================= =============== ===============
F-28
OFFICE LOCATION
CORPORATE OFFICE
Landmark Bancshares, Inc.
Central and Spruce
Dodge City, Kansas 67801
(316) 227-8111
Board of Directors of Landmark Bancshares, Inc.
C. Duane Ross Larry Schugart
Chairman of the Board President and Chief Executive Officer
President, High Plains Publishers, Inc.
David H. Snapp Richard Ball
Partner, Waite, Snapp & Doll, Attorneys at Law CPA/Shareholder, Adams, Brown
Beran & Ball, Chtd.
Jim W. Lewis
Owner, Auto Dealerships
Executive Officers of Landmark Bancshares, Inc.
Larry Schugart Gary L. Watkins
President and Chief Executive Officer Secretary and Chief Operating Officer
James F. Strovas
Treasurer and Chief Financial Officer
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate Counsel: Independent Auditors:
Waite, Snapp & Doll, Attorneys at Law Regier Carr & Monroe, L.L.P.
Military Plaza 300 West Douglas
Dodge City, Kansas 67801 Suite 100
Wichita, Kansas 67202
Special Counsel: Transfer Agent and Registrar:
Malizia Spidi & Fisch, PC American Securities Transfer & Trust, Inc.
One Franklin Square 12039 W. Alameda Parkway
1301 K Street, N.W., Suite 700 East Suite Z-2
Washington, D.C. 20005 Lakewood, Colorado 80228
The Company's Annual Report for the year ended September 30, 1999 filed with the
Securities and Exchange Commission on Form 10-K is available without charge upon
written request. For a copy of the Form 10-K or any other investor information,
please write or call: Corporate Secretary, Landmark Bancshares, Inc., Central
and Spruce, Dodge City, Kansas 67801. The annual meeting of stockholders will be
held on January 19, 2000 at 1:30 p.m. at the Dodge City Country Club, North
Avenue C, Dodge City, Kansas 67801.