SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended September 30, 1996
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- OR -
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________________ to ____________________
SEC File Number: 0-23164
LANDMARK BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
Kansas 48-1142260
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(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification No.)
Central and Spruce Streets, Dodge City, Kansas 67801
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (316) 227-8111
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.10 per share
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(Title of Class)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Registrant's voting stock trades on the Nasdaq Stock Market under the
symbol "LARK". The aggregate market value of the voting stock held by
non-affiliates of registrant, based upon the closing price of such stock as of
November 29, 1996 ($16.50 per share), was $22.6 million.
As of December 1, 1996, registrant had 1,847,996 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Parts II and IV -- Portions of registrant's Annual Report to Stockholders.
2. Part III -- Portions of registrant's Proxy Statement for Annual Meeting of
Stockholders to be held in January 1997.
<PAGE>
PART I
Item 1. Business
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General
Landmark Bancshares, Inc. ("Registrant" or the "Company") is a unitary
savings and loan holding company that was incorporated in November 1993 under
the laws of the State of Kansas for the purpose of acquiring all of the issued
and outstanding common stock of Landmark Federal Savings Bank (the "Bank"). This
acquisition occurred in March 1994 at the time Landmark simultaneously converted
from a mutual to stock institution, and sold all of its outstanding capital
stock to the Company and the Company made its initial public offering of common
stock (the "Conversion"). As of September 30, 1996, the Company had total assets
of $213.7 million, total deposits of $143.8 million, and stockholders' equity of
$32.3 million or 15.15% of total assets under generally accepted accounting
principles ("GAAP"). The only subsidiary of the Company is the Bank.
The Bank is a federally chartered stock savings bank headquartered in
Dodge City, Kansas. The Bank was founded in 1920 with a charter from the state
of Kansas under the name of "Dodge City Savings and Loan Association" which
later became a federal association under the name of "First Federal Savings and
Loan of Dodge City." First Federal Savings and Loan of Dodge City became known
as Landmark Federal Savings Association in 1983 when it changed its name at the
time it merged with Peoples Savings and Loan Association of Sterling, Kansas.
Landmark Federal Savings Association changed its name to Landmark Federal Bank
at the time it converted to stock form and was acquired by Registrant in March
1994. The Bank's deposits are federally insured by the Savings Association
Insurance Fund ("SAIF"), as administered by the Federal Deposit Insurance
Corporation ("FDIC").
The primary activity of the Company is directing and planning the
activities of the Bank, the Company's primary asset. At September 30, 1996, the
remainder of the assets of the Company were maintained in the form of a loan to
the Bank or in the form of common stock of other banks. The Company engages in
no other significant activities. As a result, references to the Company or
Registrant generally refer to the Bank, unless the context otherwise indicates.
In the discussion of regulation, except for the discussion of the regulation of
the Company, all regulations apply to the Bank rather than the Company.
Registrant is primarily engaged in attracting deposits from the general
public and using those funds to originate and sell real estate loans on
one-to-four family residences and, to a lesser extent, to originate consumer and
construction loans for its portfolio. Registrant also purchases one- to
four-family residential loans. Registrant has offices in Garden City, Dodge
City, Great Bend, LaCrosse, and Hoisington, Kansas, which are located in its
primary market area of Ford, Finney, Barton, and Rush Counties in the State of
Kansas. In addition, Registrant invests in mortgage-related securities and
investment securities. Registrant offers its customers fixed-rate and
adjustable-rate mortgage loans, as well as FHA/VA loans and consumer loans,
including home equity and savings account loans. Adjustable-rate mortgage loans
and 15-year fixed-rate mortgage loans are originated for retention in
Registrant's portfolio while 30-year fixed-rate mortgage loans are sold into the
secondary market. All consumer loans are retained in Registrant's portfolio.
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The principal sources of funds for Registrant's lending activities are
deposits and the amortization, repayment, and maturity of loans,
mortgage-related securities, and investment securities. Principal sources of
income are interest and fees on loans, mortgage-related securities, investment
securities, and deposits held in other financial institutions. Registrant's
principal expense is interest paid on deposits.
Market Area
The Kansas counties of Ford, Finney, Barton, and Rush, Kansas are
Registrant's primary market area. This area was founded on agriculture, which
continues to play a major role in the economy. Predominant activities involve
the wheat crop and feed lot operations. Dodge City, the location of Registrant's
main office is known as the "Cowboy Capital of the World" and maintains a
significant tourism industry. In the central part of Kansas, where Registrant
has three branch offices, the oil industry is prevalent. In the past several
years, the economic conditions in this area have improved significantly over the
major downturn in oil drilling activity during the 1980s. The largest employment
sector in Registrant's market area is agriculture. The market area of Registrant
is largely dependent upon the agricultural, beef packing, and oil and gas
industries. The effect of a downturn in either or both of these industries could
have a negative impact on the results of operations of Registrant.
Lending Activities
General. Registrant's loan portfolio consists primarily of adjustable-rate
mortgage loans secured by one- to four-family residences and, to a lesser
extent, consumer loans and construction loans. The portfolio also includes
commercial real estate loans.
3
<PAGE>
Analysis of Loan Portfolio. Set forth below is selected data relating to
the composition of Registrant's loan portfolio by type of loan on the dates
indicated:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
--------------- --------------- -------------- --------------- ---------------
$ % $ % $ % $ % $ %
------ ----- ------ ----- ----- ----- ----- ----- ------- ----
(Dollars in Thousands)
Type of Loan:(1)
- -------------------
Real estate loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Construction .................. $ 221 0.35 % $ 201 0.32 % $ 221 0.31% $ 202 0.20 % $ 1,130 .87 %
Residential ................... 58,774 93.47 58,439 93.32 64,169 90.06 83,519 84.42 105,195 80.98
Commercial .................... 1,217 1.94 1,087 1.74 1,300 1.83 1,781 1.80 1,852 1.43
Second mortgage ............... 1,724 2.74 1,952 3.12 2,916 4.09 5,784 5.85 8,140 6.27
Commercial business ............. 35 0.05 90 0.14 74 0.10 1,753 1.77 3,601 2.77
Consumer:
Savings account ............... 409 0.65 292 0.47 369 0.52 605 0.61 555 .43
Home improvement .............. 14 0.02 2 0.00 1 0.00 -- -- -- --
Automobile .................... 1,287 2.05 1,509 2.41 3,118 4.38 5,986 6.05 9,784 7.53
Other ......................... 53 0.08 40 0.06 45 0.06 286 0.29 643 .49
Gross loans ................... 63,734 101.35 63,612 101.58 72,213 101.35 99,916 100.99 130,900 100.77
Less:
Unamortized premiums (discounts)
on loan purchases ........... -- -- -- -- -- -- 69 0.07 47 .04
Loans in process .............. (14) (0.02) (4) (0.01) -- -- (45) (0.05) -- --
Deferred loan origination fees
and costs .................. (267) (0.42) (272) (0.43) (341) (0.48) (362) (0.37) (304) (.23)
Allowance for loan losses ..... (574) (0.91) (716) (1.14) (619) (0.87) (644) (6.44) (740) (.58)
Total loans, net ................ $62,879 100.00 % $62,620 100.00 % $71,253 100.00% $98,934 100.00 % $129,903 100.00 %
</TABLE>
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(1) Includes loans classified as held for sale.
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Loan Maturity. The following table sets forth the maturity of Registrant's
loan portfolio at September 30, 1996. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on loans totalled $13.7 million, $16.3 million, and $28.9 million for the three
years ended September 30, 1994, 1995, and 1996, respectively. Adjustable- rate
mortgage loans are shown as maturing based on contractual maturities.
<TABLE>
<CAPTION>
1-4 Family Other
Real Estate Residential
Mortgage Commercial Construction Consumer Total
----------- ----------- ------------ -------- -----
(In Thousands)
Amounts Due:
<S> <C> <C> <C> <C> <C>
Within 1 year .................. $ 32 $ 533 $ 330 $ 2,146 $ 3,041
-------- ------- --------- ------- ---------
After 1 year:
1 to 3 years ................. 243 2,895 6 3,830 6,974
3 to 5 years ................. 848 517 -- 8,189 9,554
5 to 10 years ................ 6,515 1,390 -- 4,293 12,198
10 to 20 years ............... 50,909 3,839 247 611 55,606
Over 20 years ................ 42,922 5 547 53 43,527
-------- ------- --------- ------- ---------
Total due after one year........ 101,437 8,646 800 16,976 127,859
-------- ------- --------- ------- ---------
Total amount due ............... $101,469 $ 9,179 $ 1,130 $ 19,122 $ 130,900
Less:
Unamortized premium on
loan purchases ............... 47 -- -- -- 47
Allowance for loan loss......... (532) -- -- -- --
Loans in process ............... -- -- -- (208) (740)
Deferred loan fees ............. (287) (9) (8) -- (304)
-------- ------- --------- ------- ---------
Loans receivable, net........ $100,697 $ 9,170 $ 1,122 $18,914 $ 129,903
======== ======= ========= ======= =========
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 1997, which have predetermined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
One-to-four family...... $43,519 $57,918 $101,437
Commercial.............. 5,702 2,944 8,646
Construction............ 800 -- 800
Consumer................ 16,755 221 16,976
------ --- ------
Total................. $66,776 $61,083 $127,859
====== ====== =======
Residential Loans. Registrant's primary lending activity consists of the
origination of one-to-four family, owner-occupied, residential mortgage loans
secured by property located in its primary market
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area. Registrant also originates a small number of residential real estate loans
secured by multi-family dwellings.
Registrant currently offers adjustable-rate mortgages ("ARMs") that adjust
every one, three, and five years and have terms from 1 to 30 years, and
fixed-rate mortgage loans with terms of 1 to 30 years. The interest rates on
ARMs are based on treasury bill rates and the national cost of funds. Registrant
considers the market factors and competitive rates on loans as well as its own
cost of funds when determining the rates on the loans that it offers. Registrant
also has a small network of correspondents from whom Registrant may be referred
both fixed- and adjustable-rate real estate mortgage loans. Registrant retains
the adjustable-rate loans for its own loan portfolio and sells most of the fixed
rate loans into the secondary market, primarily to the Federal Home Loan
Mortgage Corporation ("FHLMC"). Historically, Registrant has sold its 30-year
and 15-year fixed rate loans in the secondary market; however, Registrant has
recently begun to hold its 15-year and 20-year fixed rate mortgage loans to
maturity. Registrant also offers Federal Housing Administration and Veterans
Administration ("FHA/VA") loans. Fixed-rate mortgage loans are generally
originated to FHLMC standards. Although Registrant originates adjustable-rate
mortgage loans for its own portfolio, they are underwritten to FHLMC standards,
so that they are saleable in the secondary market. FHA/VA loans are originated
in accordance with FHA/VA guidelines, most of which are sold to various private
investors.
Generally, during periods of rising interest rates, the risk of default on
an ARM is considered to be greater than the risk of default on a fixed-rate loan
due to the upward adjustment of interest costs to the borrower. To help reduce
such risk, Registrant qualifies the loan at the fully indexed accrual rate, as
opposed to the original interest rate. ARMs may be made at up to 95% of the loan
to value ratio.
Registrant does not originate ARMs with negative amortization.
Regulations limit the amount which a savings association may lend in
relationship to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. Such regulations
permit a maximum loan-to-value ratio of 100% for residential property and 90%
for all other real estate loans. Registrant's lending policies, however,
generally limit the maximum loan-to-value ratio to 80% of the appraised value of
the property, based on an independent or staff appraisal. When Registrant makes
a loan in excess of 80% of the appraised value or purchase price, private
mortgage insurance is generally required for at least the amount of the loan in
excess of 80% of the appraised value. Registrant generally does not make
non-owner occupied one- to four-family loans in excess of 80%.
The loan-to-value ratio, maturity, and other provisions of the residential
real estate loans made by Registrant reflect the policy of making loans
generally below the maximum limits permitted under applicable regulations.
Registrant requires an independent or staff appraisal, title insurance or an
attorney's opinion or with an abstract, flood hazard insurance (if applicable),
and fire and casualty insurance on all properties securing real estate loans
made by Registrant. Registrant reserves the right to approve the selection of
which title insurance companies' policies are acceptable to insure the real
estate in the loan transactions.
While one- to four-family residential real estate loans are normally
originated with 15-30 year terms, such loans typically remain outstanding for
substantially shorter periods. This is because borrowers often prepay their
loans in full upon sale of the property pledged as security or upon
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<PAGE>
refinancing the original loan. In addition, substantially all of the
fixed-interest rate loans in Registrant's loan portfolio contain due-on-sale
clauses providing that Registrant may declare the unpaid amount due and payable
upon the sale of the property securing the loan. Registrant enforces these
due-on-sale clauses to the extent permitted by law. Thus, average loan maturity
is a function of, among other factors, the level of purchase and sale activity
in the real estate market, prevailing interest rates, and the interest rates
payable on outstanding loans.
Second Mortgage Loans. Registrant makes loans on real estate secured by
secondary, or junior, mortgages. Secondary mortgage loans possess somewhat
greater risk than primary mortgage loans because the security underlying the
second mortgage loan must first be used to satisfy the obligation under the
primary mortgage loan. Registrant's lending policies for second mortgage loans
secured by one- to four-family residences are similar to those used for
residential loans, including the required loan-to-value ratio. Registrant does
not currently originate any second mortgage loans outside its primary market
area.
Multi-Family Loans. Registrant also makes fixed-rate and adjustable-rate
multi-family loans, including loans on apartment complexes. The largest
multi-family real estate loan had a balance of approximately $770,000 at
September 30, 1996, on an apartment complex located within its primary market
area.
Multi-family loans generally provide higher origination fees and interest
rates, as well as shorter terms to maturity and repricing, than can be obtained
from single-family mortgage loans. Multi-family lending, however, entails
significant additional risks compared with one- to four-family residential
lending. For example, multi-family loans typically involve larger loan balances
to single borrowers or groups of related borrowers, the payment experience on
such loans typically is dependent on the successful operation of the real estate
project, and these risks can be significantly impacted by supply and demand
conditions in the market for multi-family residential units and commercial
office, retail, and warehouse space.
Consumer Loans. Registrant views consumer lending as an important
component of its business operations because consumer loans generally have
shorter terms and higher yields, thus reducing exposure to changes in interest
rates. In addition, Registrant believes that offering consumer loans helps to
expand and create stronger ties to its customer base. Consequently, Registrant
intends to continue its consumer lending. Regulations permit federally-chartered
savings banks to make certain secured and unsecured consumer loans up to 35% of
assets. In addition, Registrant has lending authority above the 35% limit for
certain consumer loans, such as home improvement, credit card, and education
loans, and loans secured by savings accounts.
Consumer loans consist of personal unsecured loans, home improvement
loans, automobile loans, and savings account loans, at fixed rates.
The underwriting standards employed by Registrant for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. In addition, the stability of the applicant's monthly income from primary
employment is considered during the underwriting process. Credit worthiness of
the applicant is of primary consideration; however, the underwriting process
also includes a comparison of the value of the security in relation to the
proposed loan amount.
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<PAGE>
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreational vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. Registrant adds a general provision to its consumer loan loss
allowance, based on general economic conditions, prior loss experience, and
management's periodic evaluation.
Commercial Real Estate Loans. Commercial real estate secured loans are
originated in amounts up to 80% of the appraised value of the property. Such
appraised value is determined by an independent appraiser previously approved by
Registrant. Registrant's commercial real estate loans are permanent loans
secured by improved property such as small office buildings, retail stores,
small strip plazas, and other non-residential buildings. Registrant originates
commercial real estate loans with amortization periods of 1 to 20 years,
primarily as adjustable rate mortgages.
Loans secured by commercial real estate generally involve a greater degree
of risk than residential mortgage loans and carry larger loan balances. This
increased credit risk is a result of several factors, including the
concentration of principal in a limited number of loans and borrowers, the
effects of general economic conditions on income producing properties and the
increased difficulty of evaluating and monitoring these types of loans.
Furthermore, the repayment of loans secured by commercial real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. At September 30, 1996, the largest commercial
real estate loan had a balance of approximately $347,000 and was performing.
Construction Loans. Registrant does not actively seek to make construction
loans. Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. During
the construction phase, a number of factors could result in delays and cost
overruns. If the estimate of construction costs proves to be inaccurate,
Registrant may be required to advance funds beyond the amount originally
committed to permit completion of the development. If the estimate of value
proves to be inaccurate, Registrant may be confronted, at or prior to the
maturity of the loan, with a project having a value which is insufficient to
assure full repayment.
Commercial Business Loans. Regulations authorize Registrant to make
secured or unsecured loans for commercial, corporate, business, and agricultural
purposes. The aggregate amount of such loans outstanding may not exceed 10% of
Registrant's assets. In addition, another 10% of total assets may be invested in
commercial equipment leasing. Registrant has offered limited commercial business
loans since the early 1980s, primarily to existing customers. Most of
Registrant's commercial business loans are secured by real estate or other
assets.
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<PAGE>
It is the policy of Registrant to annually request financial statements
from commercial loan borrowers. The financial statements are reviewed as
received by management to detect any conditions or trends that may affect the
ability of the borrower, including cash flows of the project, to repay the debt.
Loan Solicitation and Processing. Registrant's sources of mortgage loan
applications are referrals from existing or past customers, local realtors,
builders, loan correspondents, and walk-in customers and also as the result of
advertising. The Association actively solicits local realtors and believes they
provide a substantial number of customers that originate loans with Registrant.
Registrant also solicits loans from a small network of correspondent lenders in
Wichita and Kansas City, Kansas and Albuquerque, New Mexico as well as various
communities in central and western Kansas. These correspondents, selected by
management, are located in markets Registrant does not otherwise serve.
The loan approval process is segmented by the type of loan and size of
loan. Consumer loans may be approved by certain loan officers within designated
limits. One or more signatures of members of senior management may also be
required for larger consumer loans. The Board of Directors ratifies all loans
that have been approved by officers or committees.
All commercial real estate loans are submitted to the Board of Directors
for approval upon the recommendation of senior management.
The real estate loan committee consists of various officers. Any two of
those individuals may collectively approve one- to four-family residential real
estate loans up to $100,000. Loans in amounts greater than $100,000 and up to
the current FHLMC maximum loan amount must be approved by no less than three
members of the loan committee. Real estate loans over the current FHLMC limit
require the approval of the Board of Directors.
Registrant uses fee appraisers or staff appraisers on all real estate
related transactions that are originated in the main office or branch offices of
Registrant. It is Registrant's policy to obtain title insurance on all
properties securing real estate loans and to obtain fire and casualty insurance
on all loans that require security. On occasion, when originating loans,
abstracts or attorney opinions may be utilized in lieu of title insurance.
Origination, Purchase, and Sale of Loans
During the fiscal year ended September 30, 1996, Registrant originated
$52.6 million in loans, purchased $17.1 million in loans (all secured by one- to
four-family residences), and sold $9.7 million in loans.
Loan Sales. Registrant generally retains servicing on all loans sold with
the exception of fixed rate FHA/VA loans which are sold with servicing released.
All such loans were sold without recourse to the Company.
Loan Commitments. Registrant issues written, formal commitments to
prospective borrowers on all real estate approved loans. The commitments
generally requires acceptance within 60 days of the date of issuance. For
commercial real estate loans or commercial loans in general, the commitment is
issued for approximately 60 days and must be closed within 60 days of issuance.
Commitments for
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consumer loans expire 30 days after issuance. At September 30, 1996, Registrant
had $2.1 million of commitments to originate mortgage loans.
Loan Processing and Servicing Fees. In addition to interest earned on
loans, the Company recognizes fees and service charges which consist primarily
of fees on loans serviced for others and late charges. The Company recognized
net loan servicing fees of $179,537, $173,020, and $161,329 for the years ended
September 30, 1994, 1995, and 1996, respectively. As of September 30, 1996,
loans serviced for others totalled $53.7 million.
Loans to One Borrower. Savings associations are subject to the same limits
as those applicable to national banks, which under current regulations generally
limit loans-to-one borrower to an amount equal to 15% of unimpaired capital and
unimpaired surplus calculated as the sum of the Bank's core and supplementary
capital included in total capital, plus the balance of the general valuation
allowances for loan and lease losses not included in supplementary capital, plus
investments in subsidiaries that are not included in calculating core capital,
or $500,000, whichever is greater. An additional amount equal to 10% of
unimpaired capital and unimpaired surplus may be included if the loan is secured
by readily marketable collateral (generally, financial instruments, not real
estate). Under this general restriction, the Bank's maximum loan to one borrower
("LTOB") limit at September 30, 1996 was approximately $7.0 million.
Registrant's largest loan to one borrower is a loan originated in June 1994
having a balance of approximately $770,000 as of September 30, 1996. This loan
is secured by an apartment complex. This loan was current at September 30, 1996.
Loan Delinquencies. Registrant's collection procedures provide that when a
mortgage loan is 15 days past due, a computer printed delinquency notice is
sent. If payment is still delinquent at the end of that month, within 15 days a
telephone call is made to the borrower. If the delinquency continues, subsequent
efforts are made to eliminate the delinquency. If the loan continues in a
delinquent status for 60 days or more, the Board of Directors of Registrant
generally approves the initiation of foreclosure proceedings unless other
repayment arrangements are made. Collection procedures for non-mortgage loans
generally begin after a loan is 10 days delinquent.
Loans are reviewed on a regular basis and are generally placed on a
non-accrual status when the loan becomes more than 90 days delinquent and, in
the opinion of management, the collection of additional interest is doubtful.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. Subsequent interest payments, if any, are
either applied to the outstanding principal balance or recorded as interest
income, depending on the assessment of the ultimate collectibility of the loan.
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The following table sets forth information regarding non-accrual loans,
real estate owned ("REO") and other repossessed assets, and loans that are 90
days or more delinquent but on which Registrant was accruing interest at the
dates indicated. At such dates, Registrant had no restructured loans within the
meaning of Statement of Financial Accounting Standards ("SFAS") No. 15.
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured
<S> <C> <C> <C> <C> <C>
by 1-4 dwelling units ..................................... $ 231 $ 48 $ 37 $ 239 $ 51
All other mortgage loans .................................... -- -- -- -- --
Non-mortgage loans:
Consumer loans .............................................. 21 30 -- 5 76
------ ------ ------ -------- ------
Total ......................................................... $ 252 $ 78 $ 37 $ 244 $ 127
====== ====== ====== ======== ======
Accruing loans that are contractually past due 90 days or more:
Mortgage loans:
Permanent loans secured
by 1-4 dwelling units ..................................... $ 222 $ 160 171 $ 142 $ 146
All other mortgage loans .................................... -- -- -- -- 44
------ ------ ------ -------- ------
Total ......................................................... $ 222 $ 160 171 $ 142 $ 190
====== ====== ------ ======== ======
Total non-accrual and
90-day past due
accrual loans ............................................... $ 474 $ 238 208 $ 386 $ 317
====== ====== ====== ======== ======
Real estate owned ............................................. $ 818 $ 351 $ 200 $ 66 $ --
====== ====== ====== ======== ======
Total non-performing
assets ...................................................... $1,292 $ 589 408 $ 452 $ 317
====== ====== ====== ======== ======
Total non-accrual and
90-day past due accrual
loans to net loans .......................................... 0.75% 0.38% 0.29% 0.39% 0.24%
====== ====== ====== ======== ======
Total non-accrual and
90 day past due accrual
loans to total assets ....................................... 0.29% 0.14% 0.11% 0.19% 0.15%
====== ====== ====== ======== ======
Total non-performing
assets to total assets ...................................... 0.80% 0.36% 0.22% 0.22% 0.15%
====== ====== ====== ======== ======
</TABLE>
Interest income that would have been recorded on renegotiated loans and
loans accounted for on a non-accrual basis under the original terms of such
loans was $13,000 for the year ended September 30, 1996. Amounts foregone and
not included in Registrant's interest income for the year ended September 30,
1996 totalled $5,000.
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Classified Assets. Office of Thrift Supervision ("OTS") regulations
provide for a classification system for problem assets of insured institutions
that covers all problem assets. Under this classification system, problem assets
of insured institutions are classified as "substandard," "doubtful," or "loss."
An asset is considered substandard if it is inadequately protected by the
current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the "distinct
possibility" that the insured institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as doubtful have all of the
weaknesses inherent in those classified substandard, with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions and values, "highly
questionable and improbable." Assets classified as loss are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
designated special mention by management are assets included on Registrant's
internal watchlist because of potential weakness but which do not currently
warrant classification in one of the aforementioned categories.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which may order the establishment of additional general or specific loss
allowances. A portion of general loss allowances established to cover possible
losses related to assets classified as substandard or doubtful may be included
in determining an institution's regulatory capital, while specific valuation
allowances for loan losses generally do not qualify as regulatory capital. At
September 30, 1996 that Registrant had a general loss allowance for loans and
REO of $740,346.
At
September 30,
1996
-------------
(In Thousands)
Special mention assets.................... $ 98
=====
Classified assets
Substandard............................. $1,101
Doubtful................................ --
Loss.................................... --
-----
Total............................... $1,101
=====
Real Estate Owned. Real estate owned or acquired by Registrant as a result
of foreclosure, judgment, or by a deed in lieu of foreclosure is classified as
real estate owned until it is sold. When property is acquired it is recorded at
fair value as of the date of foreclosure or transfer less estimated disposal
costs. Valuations are periodically performed by management and subsequent
charges to general mortgage loan reserves are taken when it is determined that
the carrying value of the property exceeds
12
<PAGE>
the fair value less estimated costs to sell. It is subsequently carried at the
lower of the new basis (fair value at foreclosure or transfer) or fair value.
Registrant did not hold any REO as of September 30, 1996.
Allowance for Loan and Real Estate Losses. It is management's policy to
provide for losses on unidentified loans in its loan portfolio and foreclosed
real estate. A provision for loan losses is charged to operations based on
management's evaluation of the potential losses that may be incurred in
Registrant's loan portfolio. Such evaluation, which includes a review of all
loans of which full collectibility of interest and principal may not be
reasonably assured, considers, among other matters, the estimated net realizable
value of the underlying collateral. During the years ended September 30, 1994,
1995, and 1996, Registrant charged $(85,000), $9,000, and $135,000,
respectively, to the provision for loan losses and $0, $0, and $0, respectively,
to the provision for losses on REO or in judgment and other repossessed assets.
Management will continue to review the entire loan portfolio to determine
the extent, if any, to which further additional loss provisions may be deemed
necessary. There can be no assurance that the allowance for losses will be
adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
13
<PAGE>
The amount and percent of loans in each category to total loans for the
distribution of Registrant's allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ---------------
$ % $ % $ % $ % $ %
----- ----- ----- ----- ----- ----- ----- ----- ----- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate. $471 95.27% $619 95.25% $526 93.21% $521 89.58% $523 87.44%
Commercial real estate.. 9 1.91 11 1.71 10 1.80 10 1.78 9 1.42
Commercial business..... -- 0.05 -- 0.14 -- 0.10 23 1.76 51 2.75
Consumer................ 94 2.77 86 2.90 83 4.89 90 6.88 157 8.39
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total................... $574 100.00% $716 100.00% $619 100.00% $644 100.00% $740 100.00%
==== ====== ==== ====== ==== ====== ==== ====== ==== ======
</TABLE>
14
<PAGE>
The following table sets forth information with respect to
Registrant's allowance for loan losses at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding ............. $ 62,879 $ 62,620 $ 71,253 $98,934 $129,903
======== ======== ======== ======== ========
Average loans outstanding ........... 69,964 61,156 64,245 81,236 110,084
======== ======== ======== ======== ========
Allowance balances
(at beginning of period) .......... 394 574 716 619 644
Provision (credit):
Real estate-mortgage .............. 194 190 (83) (17) 20
Consumer .......................... -- (6) (2) 26 115
-------- -------- -------- -------- --------
194 184 (85) 9 135
-------- -------- -------- -------- --------
Charge-offs:
Real estate-mortgage .............. (14) (83) (18) (1) (19)
Consumer .......................... (1) (17) (5) (1) (20)
-------- -------- -------- -------- --------
(15) (100) (23) (2) (39)
-------- -------- -------- -------- --------
Recoveries:
Real estate-mortgage ............. -- 48 9 16 --
Consumer ......................... 1 10 2 2 --
-------- -------- -------- -------- --------
1 58 11 18 --
-------- -------- -------- -------- --------
Net (charge-offs) recoveries ........ (14) (42) (12) 16 (39)
======== ======== ======== ======== ========
Allowance balance
(at end of period)... ............. $ 574 $ 716 $ 619 $ 644 $ 740
======== ======== ======== ======== ========
Allowance for loan losses
as a percent of total
loans outstanding ................. 0.91% 1.14% 0.87% 0.65 % 0.57%
======== ======== ======== ======== ========
Net loans charged off as a percent of
average loans outstanding ......... 0.02% 0.07% 0.02% (0.02)% 0.04%
======== ======== ======== ======== ========
</TABLE>
The following table sets forth information with respect to Registrant's
allowance for losses on real estate owned and in judgment at the dates
indicated:
At September 30,
---------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Dollars in Thousands)
Total real estate owned
and in judgment, net ...... $ 818 $ 351 $ 200 $ 66 $ --
===== ===== ===== ===== =======
Allowance balances -
beginning ................. $ -- $ 31 $ -- $ -- $ --
Provision ................... 31 -- --
Net charge-offs ............. -- (31) -- -- --
----- ----- ----- ----- -------
Allowance balances - ending . $ 31 $ -- $ -- $ -- $ --
===== ===== ===== ===== =======
Allowance for losses on
real estate owned and in
judgment to net real estate
owned and in judgment ..... 3.79% --% --% --% --%
===== ===== ===== ===== =======
15
<PAGE>
Interest Bearing Accounts Held at Other Financial Institutions
As of September 30, 1996, the Company had outstanding checks in excess of
bank balances of $143,808 on its interest-bearing deposits in other financial
institutions, principally with the Federal Home Loan Bank ("FHLB") of Topeka
(including up to $100,000 at the other financial institutions covered by FDIC
deposit insurance and held in time deposits). The Company maintains these
accounts in order to maintain liquidity and improve the interest-rate
sensitivity of its assets.
Investment Activities
Registrant is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short-term securities
and certain other investments. Registrant has generally maintained a liquidity
portfolio well in excess of regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of future yield levels,
as well as management's projections as to the short-term demand for funds to be
used in Registrant's loan origination and other activities. As of September 30,
1996, Registrant had an investment portfolio of approximately $33.5 million,
consisting primarily of U.S. Government agency obligations, U.S. Treasury
securities, investment grade corporate debt securities, municipal obligations,
and FHLB stock as permitted by the OTS regulations. The level of investment
securities increased significantly as a result of the receipt of proceeds from
the initial issuance of common stock during 1994. During the last year, the
level of investment securities declined as a result of the increase in loan
originations. Registrant has also invested in mortgage-related securities
principally in Federal National Mortgage Association ("FNMA") ARMs and FHLMC
ARMs, and to a lesser extent, Collateralized Mortgage Obligations ("CMOs").
Registrant anticipates having the ability to fund all of its investing
activities from funds held on deposit at FHLB of Topeka. Registrant will
continue to seek high quality investments with short to intermediate maturities
and duration from one to five years.
16
<PAGE>
Investment Portfolio
The following table sets forth the carrying value of Registrant's
investment securities portfolio, short-term investments, mutual funds, and FHLB
stock, at the dates indicated. None of the investment securities held as of
September 30, 1996 was issued by an individual issuer in excess of 10% of
Registrant's capital, excluding the securities of U.S. Government and U.S.
Government Agencies and Corporations. As of September 30, 1996, the market value
of Registrant's total investment portfolio was $33.3 million.
At September 30,
-----------------------------------
1994 1995 1996
-------- -------- -------
Investments Held to Maturity:
U.S. Government Securities.. $ 5,094 $ 2,887 $ --
U.S. Agency Securities...... 31,323 29,158 27,169
Corporate Notes and Bonds... 750 250 --
Municipal Obligations....... 2,755 2,530 2,230
------ ------ -----
Total Investments Held
to Maturity............. 39,922 34,825 29,399
------ ------ ------
Investments Available-for-Sale:
Common Stock................ 257 207 2,396
FHLB Stock.................. 1,476 1,476 1,732
Other Equity Securities..... 10 10 10
------ ------ -----
Total Investments Available-
for-Sale................ 1,743 1,693 4,138
------ ------ -----
Total Investments......... $41,665 $36,518 $33,537
====== ====== ======
Registrant classifies its investments in accordance with SFAS 115. See the
discussion of SFAS 115 under "-- Mortgage-Backed Securities." See Note 2 to
Consolidated Financial Statements.
17
<PAGE>
Investment Portfolio Maturities
The following table sets forth certain information regarding the carrying
values, weighted average yields, and maturities of the Company's investment
securities portfolio as of September 30, 1996.
<TABLE>
<CAPTION>
As of September 30, 1996
------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Securities
----------------- ----------------- ----------------- ------------------- ---------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
-------- ------- -------- ------- -------- ------- -------- ------- -------- ------- ------
(Dollars in Thousands)
Investment Securities:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Obligations. $ -- -- % $ -- -- % $ -- -- $ -- -- % $ -- --% $ --
U. S. Agency Obligations.... 1,500 5.13 5,000 6.04 17,669 7.69 3,000 7.38 27,169 7.21 26,858
Municipal Obligations....... 600 4.96 1,000 5.33 530 5.16 100 5.90 2,230 5.22 2,255
Corporate Notes and Bonds... -- -- -- -- -- -- -- -- -- -- --
------ ---- ------ ---- ------- ---- ------- ---- ------- ---- -------
Total...................... $2,100 5.08% $6,000 5.92% $18,199 7.62% $ 3,100 7.33% $29,399 7.06% $29,113
====== ==== ====== ==== ======= ==== ======= ==== ======= ==== =======
</TABLE>
18
<PAGE>
Mortgage-Backed Securities
To supplement lending activities, Registrant invests in residential
mortgage-backed securities. Mortgage-backed securities can serve as collateral
for borrowings (although Registrant has not used them as such) and, through
repayments, as a source of liquidity.
In May 1993, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities. This
statement addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities. SFAS No. 115 is effective for fiscal years beginning after
December 15, 1993 as of the beginning of the fiscal year (i.e., October 1, 1994
for Registrant).
SFAS No. 115 requires classification of investments into three categories.
Debt securities that Registrant has the positive intent and ability to hold to
maturity must be reported at amortized cost. Debt and equity securities that are
bought and held principally for the purpose of selling them in the near term
must be reported at fair value, with unrealized gains and losses included in
earnings. All other debt and equity securities must be considered available for
sale and must be reported at fair value, with unrealized gains and losses
excluded from earnings but reported as a separate component of stockholders'
equity (net of tax effects).
Registrant adopted SFAS No. 115 as of October 1, 1994. At September 30,
1996, the mortgage-backed securities portfolio had a fair value of $45.5 million
and an amortized cost of $45.9 million. That part of the mortgage-backed
securities portfolio classified as held to maturity is recorded at amortized
cost. That part of the mortgage-backed securities classified as available for
sale is recorded at fair value, with unrealized gains and losses excluded from
earnings but reported as a separate component of stockholders' equity (net of
tax effects). As of September 30, 1996, there were no mortgage-backed securities
that were classified as available for sale.
On November 15, 1995, the FASB adopted a special report "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." The guide included, along with other implementation
guidance, a transition provision that allowed for a reassessment of the
appropriateness of the classifications of all securities and allowed a one time
reclassification of securities. Management, in December 1995, transferred $11.3
million of mortgage-backed securities from held-to-maturity classification to
available-for-sale classification in accordance with the provisions of the
guide. These securities were sold subsequent to the transfer.
Mortgage-backed securities represent a participation interest in a pool of
single-family mortgages, the principal and interest payments on which are passed
from the mortgage originators, through intermediaries (generally
quasi-governmental agencies) that pool and repackage the participation interests
in the form of securities, to investors such as the Association. Such
quasi-governmental agencies, which guarantee the payment of principal and
interest to investors, primarily include the Federal Home Loan Mortgage
Corporation ("FHLMC"), Government National Mortgage Association ("GNMA"), and
Federal National Mortgage Association ("FNMA").
FHLMC is a publicly-owned corporation chartered by the United States
Government. FHLMC issues participation certificates backed principally by
conventional mortgage loans. FHLMC guarantees the timely payment of interest and
the ultimate return of principal within one year. FHLMC securities are indirect
obligations of the United States Government. FNMA is a private corporation
chartered by
19
<PAGE>
Congress with a mandate to establish a secondary market for conventional
mortgage loans. FNMA guarantees the timely payment of principal and interest,
and FNMA securities are indirect obligations of the United States Government.
GNMA is a government agency within the Department of Housing and Urban
Development ("HUD") which is intended to help finance government assisted
housing programs. GNMA guarantees the timely payment of principal and interest,
and GNMA securities are backed by the full faith and credit of the United States
Government. Because FHLMC, FNMA, and GNMA were established to provide support
for low- and middle-income housing, there are limits to the maximum size of
loans that qualify for these programs. To accommodate larger-sized loans, and
loans that, for other reasons, do not conform to the agency programs, a number
of private institutions have established their own home-loan origination and
securitization programs.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed rate mortgages or
adjustable rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages, (i.e., fixed rate or adjustable rate) as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages. Mortgage-backed
securities issued by FHLMC, FNMA, and GNMA make up a majority of the
pass-through certificates market.
The collateralized mortgage obligations ("CMOs") (in the form of real
estate mortgage investment conduits) held by Registrant at September 30, 1996
totaled $22.3 million and consisted of CMOs issued by FHLMC, FNMA and private
issuers. The aggregate book value of CMOs issued by any one private issuer did
not exceed 10% of stockholders' equity at September 30, 1996, 1995, and 1994.
The portfolio of CMOs held in Registrant's mortgage-backed securities portfolio
at September 30, 1996 did not include any residual interests in CMOs. Further,
at September 30, 1996, Registrant's mortgage-backed securities portfolio did not
include any "stripped" CMOs (i.e., CMOs that pay interest only and do not repay
principal or CMOs that repay principal only and do not pay interest).
20
<PAGE>
The following table sets forth the carrying value of Registrant's
mortgage-backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
Weighted
Average
Rate At
September
1994 1995 1996 30, 1996
------------- -------------- ------------- --------
Held for Investment:
<S> <C> <C> <C> <C>
GNMA ARMs................... $11,819 $11,989 $ -- --%
FNMA ARMs................... 18,823 19,889 15,516 6.72
FHLMC ARMs.................. 7,329 7,025 6,257 6.84
FHLMC Fixed Rate............ 698 541 401 8.62
GNMA Fixed Rate............. -- 771 553 8.00
FNMA Fixed Rate............. 1,043 954 813 5.81
CMOs........................ 30,758 27,037 22,337 6.13
------- --------- ------- ----
Total Held for Investment 70,470 68,206 45,877 6.46
------- --------- ------- ----
Held for Sale............... -- -- -- --
------- --------- ------- ----
Total mortgage-backed securities $70,470 $ 68,206 $45,877 6.46%
------- --------- ------- ----
</TABLE>
Mortgage-Backed Securities Maturity. The following table sets forth the
contractual maturity of Registrant's mortgage-backed securities portfolio at
September 30, 1996. The table does not include scheduled principal payments and
estimated prepayments.
Contractual
Maturities Due
--------------
(In Thousands)
Less than 1 year......................................... $ 144
1 to 3 years............................................. 1,826
3 to 5 years............................................. 1,573
5 to 10 years............................................ 5,353
10 to 20 years........................................... 8,357
Over 20 years............................................ 28,624
------
Total mortgage-backed securities......................... $45,877
======
21
<PAGE>
Sources of Funds
General. Deposits are the major source of Registrant's funds for
lending and other investment purposes. Registrant derives funds from
amortization and prepayment of loans and mortgage-backed securities, maturities
of investment securities and operations. Scheduled loan principal repayments are
a relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general interest rates and market
conditions. Registrant may also borrow funds from the FHLB of Topeka as a source
of funds.
Deposits. Consumer and commercial deposits are attracted principally
from within Registrant's primary market area through the offering of a broad
selection of deposit instruments including regular savings, demand and
negotiable order of withdrawal ("NOW") accounts, and term certificate accounts
(including negotiated jumbo certificates in denominations of $100,000 or more).
Deposit account terms vary according to the minimum balance required, the time
period the funds must remain on deposit, and the interest rate, among other
factors.
Savings deposits and demand and NOW accounts constituted $24.3
million, or 16.90% of Registrant's deposit portfolio at September 30, 1996.
Certificates of deposit constituted $119.5 million or 83.1% of the deposit
portfolio, including certificates of deposit with principal amounts of $100,000
or more which constituted $7.0 million or 4.89% of the deposit portfolio at
September 30, 1996. As of September 30, 1996, Registrant had no brokered
deposits.
To supplement lending activities in periods of deposit growth and/or
declining loan demand, Registrant has increased its investments in residential
mortgage-backed securities during recent years. Although such securities are
held for investment, they can serve as collateral for borrowings and, through
repayments, as a source of liquidity. At September 30, 1996, $7.0 million in
mortgage-backed securities were pledged as collateral for public funds.
22
<PAGE>
Jumbo Certificates of Deposit
The following table indicates the amount of Registrant's
certificates of deposit of $100,000 or more by time remaining until maturity as
of September 30, 1996.
September 30,
1996
--------------
(In Thousands)
Maturity Period
- ---------------
Within three months................................ $ 1,538
Over three through six months...................... 2,500
Over six through twelve months..................... 2,285
Over twelve months................................. 709
-----
Total.......................................... $7,032
=====
Borrowings
Deposits are the primary source of funds of Registrant's lending and
investment activities and for its general business purposes. Registrant may
obtain advances from the FHLB of Topeka to supplement its supply of lendable
funds, and Registrant has utilized this funding source. Advances from the FHLB
of Topeka would typically be secured by a pledge of Registrant's stock in the
FHLB of Topeka and a portion of Registrant's first mortgage loans and certain
other assets. Registrant, if the need arises, may also access the Federal
Reserve Bank discount window to supplement its supply of lendable funds and to
meet deposit withdrawal requirements. At September 30, 1996, Registrant had
$33.5 million outstanding from the FHLB of Topeka and no borrowings of any other
kind.
Personnel
As of September 30, 1996 Registrant had 40 full-time and nine part-time
employees. None of Registrant's employees are represented by a collective
bargaining group.
Competition
Registrant encounters strong competition both in the attraction of
deposits and origination of loans. Competition comes primarily from savings
institutions, commercial banks, and credit unions that operate in counties where
Registrant's offices are located. Registrant competes for savings accounts by
offering depositors competitive interest rates and a high level of personal
service. Registrant competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and contractors.
23
<PAGE>
Regulation
Set forth below is a brief description of certain laws that relate to the
regulation of the Company and the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations.
Company Regulation
General. The Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries, should such subsidiaries be formed, which
also permits the OTS to restrict or prohibit activities that are determined to
be a serious risk to the subsidiary savings association. This regulation and
oversight is intended primarily for the protection of the depositors of the Bank
and not for the benefit of stockholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test or a somewhat
similar test for domestic building and loan associations. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL and were acquired in a supervisory acquisition. See "--
Regulation of the Bank -- Qualified Thrift Lender Test."
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association, the
Bank is subject to extensive regulation by the OTS and the Federal Deposit
Insurance Corporation ("FDIC"). Lending activities and other investments must
comply with various federal statutory and regulatory requirements. The Bank is
also subject to certain reserve requirements promulgated by the Federal Reserve
Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law, especially in such matters as the ownership of savings accounts
and the form and content of the Bank's mortgage documents.
The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other savings institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC, or the
Congress could have a material adverse impact on the Company, the Bank, and
their operations.
24
<PAGE>
Insurance of Deposit Accounts. The Bank's deposit accounts are insured by
the SAIF to a maximum of $100,000 for each insured member (as defined by law and
regulation). Insurance of deposits may be terminated by the FDIC upon a finding
that the institution has engaged in unsafe or unsound practices, is in an unsafe
or unsound condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the institution's
primary regulator.
The FDIC charges an annual assessment for the insurance of deposits based
on the risk a particular institution poses to its deposit insurance fund. Under
this system, a savings association has paid within a range of 23 cents to 31
cents per $100 of domestic deposits, depending upon the institution's risk
classification. This risk classification is based on an institution's capital
group and supervisory subgroup assignment. In addition, the FDIC is authorized
to increase such deposit insurance rates on a semi-annual basis if it determines
that such action is necessary to cause the balance in the SAIF to reach the
designated reserve ratio of 1.25% of SAIF-insured deposits within a reasonable
period of time. The SAIF was substantially underfunded through September 30,
1996. In addition, the FDIC may impose special assessments on SAIF members to
repay amounts borrowed from the U.S. Treasury or for any other reason deemed
necessary by the FDIC. By comparison, during the first part of 1996, members of
the Bank Insurance Fund ("BIF"), predominantly commercial banks, were required
to pay substantially lower, or virtually no, federal deposit insurance premiums.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. The Bank recorded a $937,073 pre-tax
expense for this assessment at September 30, 1996, and that assessment is
payable on November 27, 1996. Beginning January 1, 1997, deposit insurance
assessments for SAIF members are expected to be reduced to approximately .064%
of deposits on an annual basis through the end of 1999. During this same period,
BIF members are expected to be assessed approximately 0.13% of deposits.
Thereafter, assessments for BIF and SAIF members should be the same and the SAIF
and BIF may be merged. It is expected that these continuing assessments for both
SAIF and BIF members will be used to repay outstanding Financing Corporation
bond obligations. As a result of these changes, beginning January 1, 1997, the
rate of deposit insurance assessed the Bank is expected to substantially
decline.
Regulatory Capital Requirements. OTS capital regulations require savings
associations to meet three capital standards: (1) a tangible capital requirement
of 1.5% of total adjusted assets, (2) a leverage ratio (core capital)
requirement of 3% of total adjusted assets and (3) a risk-based capital
requirement equal to 8% of total risk-weighted assets. Additional regulatory
requirements are discussed in Note 12 to the Consolidated Financial Statements.
25
<PAGE>
As shown below, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements applicable to it as of September 30, 1996:
Percent of
Adjusted
Amount Assets
-------- ----------
(Dollars in Thousands)
Tangible Capital:
Regulatory requirement.............. $ 3,167 1.5%
Regulatory capital.................. 28,112 13.3
-------- ----
Excess............................ $ 24,945 11.8%
======== ====
Core Capital:
Regulatory requirement.............. $ 6,335 3.0%
Regulatory capital.................. 28,112 13.3
-------- ----
Excess............................ $ 21,777 10.3%
======== ====
Risk-Based Capital:
Regulatory requirement.............. $ 7,433 8.0%
Regulatory capital.................. 28,852 31.1
-------- ----
Excess............................ $ 21,419 23.1%
======== ====
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company. In
addition, the Bank may not declare or pay a cash dividend on its capital stock
if the effect thereof would be to reduce the regulatory capital of the Bank
below the amount required for the liquidation account to be established pursuant
to the Bank's Plan of Conversion.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. As of
September 30, 1996, the Bank was a Tier 1 institution. In the event the Bank's
capital fell below its fully phased-in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
26
<PAGE>
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
Finally, a savings association is prohibited from making a capital
distribution if, after making the distribution, the savings association would be
undercapitalized (not meet any one of its minimum regulatory capital
requirements).
Qualified Thrift Lender Test. Savings institutions must meet either the
QTL test pursuant to OTS regulations or the definition of a domestic building
and loan association in section 7701 of the Internal Revenue Code ("Code:). If
the Bank maintains an appropriate level of certain specified investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) and otherwise qualifies as a QTL or a domestic
building and loan association, it will continue to enjoy full borrowing
privileges from the FHLB of Topeka. The required percentage of investments under
the QTL test is 65% of assets while the Code requires investments of 60% of
assets. An association must be in compliance with the QTL test or definition of
domestic building and loan association on a monthly basis in nine out of every
12 months. As of September 30, 1996, the Bank was in compliance with its QTL
requirement and met the definition of a domestic building and loan association.
Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW, and Super NOW
checking accounts) and non-personal time deposits. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS. At September
30, 1996, the Bank was in compliance with this requirement.
Executive Officers of the Company
The following individuals were executive officers of the Company as of
September 30, 1996:
<TABLE>
<CAPTION>
Name Age(1) Positions Held With Registrant
- ---- ------ -------------------------------
<S> <C> <C>
Larry Schugart 57 President and Chief Executive Officer
James F. Strovas 50 Senior Vice President and Chief Financial Officer
Gary L. Watkins 41 Senior Vice President, Chief Operating Officer,
and Secretary
</TABLE>
- -------------------------
(1) At September 30, 1996.
The following is a description of the principal occupation and employment
of the executive officers of Registrant as of September 30, 1996, during at
least the past five years.
27
<PAGE>
Larry Schugart has been with Registrant for more than 33 years. He is also
a director of the Federal Home Loan Bank of Topeka where he serves on the
Finance and Executive Committees. Mr. Schugart is a member and chair of various
committees of the Heartland Community Bankers Association, is a past Chairman of
the predecessor of the Heartland Community Bankers Association and serves as a
member of the Governmental Affairs Committee of the America's Community Bankers.
In addition Mr. Schugart is a member of the Dodge City Area Chamber of Commerce
and is a board member of the Dodge City/Ford County Development Corporation.
James F. Strovas has been employed by Registrant since 1988 and presently
serves as Senior Vice President and Chief Financial Officer of Registrant. He is
also a board member of the Dodge City Area Chamber of Commerce, the Dodge City
Area Community Foundation, the American Heart Association of Ford County, and is
a member of the Dodge City Rotary Club.
Gary L. Watkins has been employed by Registrant since 1985 and is currently
a Senior Vice President, Chief Operating Officer, and Secretary of Registrant.
He is also a member of the Kiwanis and the Board of Directors of Trinity
Association. Mr. Watkins is a past Vice President of the Dodge City Area Chamber
of Commerce.
Item 2. Properties
- ------------------
Registrant owns its main office and three branch offices and leases one
additional branch office. Registrant also leases a parking lot for its main
office.
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which Registrant is periodically
involved, such as claims to enforce liens, condemnation proceedings on
properties in which Registrant holds security interests, claims involving the
making and servicing of real property loans, and other issues incident to
Registrant's business.
In the opinion of management, no material loss is expected from any of the
pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matter was submitted to a vote of securities holders during the fourth
quarter of the fiscal year.
28
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- -------------------------------------------------------------------------------
The information contained under the section captioned "Stock Price
Information" in the Company's Annual Report to Stockholders for the fiscal year
ended September 30, 1996 (the "Annual Report"), is incorporated herein by
reference.
Item 6. Selected Financial Data
- ---------------------------------
The information contained in the table captioned "Five-Year Financial
Summary" in the Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- -----------------------------------------------------
Registrant's financial statements listed under Item 14 are incorporated
herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of Registrant
- --------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" and "Voting Securities and Principal Holders Thereof --
Security Ownership of Certain Beneficial Owners" in Registrant's definitive
proxy statement for Registrant's Annual Meeting of Stockholders (the "Proxy
Statement") is incorporated herein by reference.
Additional information concerning executive officers is included under
"Part I - Executive Officers of the Company."
Item 11. Executive Compensation
- --------------------------------
The information contained under the section captioned "Director and
Executive Compensation" in the Proxy Statement is incorporated herein by
reference.
29
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal
Holders Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal
Holders Thereof" and to the first table under "Proposal 1 --
Election of Directors" in the Proxy Statement.
(c) Management of Registrant knows of no arrangements, including any
pledge by any person of securities of Registrant, the operation of
which may at a subsequent date result in a change in control of
Registrant.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Certain Relationships and Related Transactions" in the
Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as a part of this report:
1. The following financial statements and the report of independent
accountants of Registrant included in Registrant's Annual Report to Stockholders
are incorporated herein by reference and also in Item 8 hereof.
Independent Auditor's Report.
Consolidated Statements of Financial Condition as of September 30, 1995 and
1996.
Consolidated Statements of Operations for the Years Ended September 30,
1994, 1995, and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended September 30, 1994, 1995, and 1996.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1994, 1995 and 1996.
Notes to Consolidated Financial Statements.
2. Except for Exhibits 11 and 27 below, Financial Statement
Schedules for which provision is made in the applicable accounting regulations
of the SEC are not required under the related instructions or are inapplicable
and therefore have been omitted.
30
<PAGE>
3. The following exhibits are included in this Report or incorporated
herein by reference:
(a) List of Exhibits:
3(i) Articles of Incorporation of Landmark Bancshares, Inc.*
3(ii) Bylaws of Landmark Bancshares, Inc.*
10.1 1994 Stock Option Plan of Landmark Bancshares, Inc.**
10.2 Management Stock Bonus Plan and Trust Agreements**
10.3 Employment Agreement with Larry Schugart***
10.4 Stock Option Agreement with Richard Ball
11 Statement Regarding Computation of Earnings per Share
13 Annual Report to Stockholders for the fiscal year ended September
30, 1996
21 Subsidiaries of Registrant***
23 Consent of Regier Carr & Monroe, L.L.P.
27 Financial Data Schedule
- ---------------------
* Incorporated by reference to the registration statement on Form S-1
(File No. 33-72562) declared effective by the SEC on February 9, 1994.
** Incorporated by reference to the proxy statement for a special meeting
of stockholders held on June 22, 1994 and filed with the SEC on May
24, 1994 (File No. 0-23164).
*** Incorporated by reference to the Annual Securities Report on Form 10-K
for the fiscal year ended September 30, 1994 (File No. 0-23164), filed
with the SEC.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed as
of December 26, 1996 on its behalf by the undersigned, thereunto duly
authorized.
Landmark Bancshares, Inc.
By: /s/ Larry Schugart
---------------------------
Larry Schugart
President and Chief
Executive Officer
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of December 26, 1996.
/s/ James F. Strovas /s/ Larry Schugart
- -------------------------------- -----------------------------------
James F. Strovas Larry Schugart
Senior Vice President and Chief President, Chief Executive Officer,
Financial Officer and Director
(Principal Financial and Accounting (Principal Executive Officer)
Officer)
/s/ Gary L. Watkins /s/ Richard A. Ball
- -------------------------------- ----------------------------------
Gary L. Watkins Richard A. Ball
Senior Vice President, Chief Operating Director
Officer, and Secretary
/s/ David H. Snapp /s/ C. Duane Ross
- -------------------------------- ----------------------------------
David H. Snapp C. Duane Ross
Director Director
/s/ Jim W. Lewis
- --------------------------------
Jim W. Lewis
Director
LANDMARK BANCSHARES, INC.
STOCK OPTION AGREEMENT
This Agreement constitutes the award of STOCK OPTIONS for a total of
11,634 shares of Common Stock, par value $.10 per share, of Landmark Bancshares,
Inc. (the "Corporation"), to Richard A. Ball (the "Participant") on such terms
and conditions as are set forth hereinafter.
1. Definitions. As used herein, the following definitions shall apply.
"Award" means the grant by the Board of the Corporation of a Stock
Option as detailed hereinafter.
"Bank" shall mean Landmark Federal Savings Bank, or any predecessor
corporation thereto.
"Board" shall mean the Board of Directors of the Corporation, or any
successor or parent corporation thereto.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Board or the Stock Option Committee which
may be appointed by the Board from time to time.
"Common Stock" shall mean common stock, par value $0.10 per share,
of the Corporation, or any successor or parent corporation thereto.
"Corporation" shall mean Landmark Bancshares, Inc., the parent
corporation for the Bank, or any predecessor or Parent thereof.
"Director" shall mean a member of the Board of the Corporation, or
any successor or parent corporation thereto.
"Director Emeritus" shall mean a person serving as a director
emeritus, advisory director, consulting director or other similar position as
may be appointed by the Board of Directors of the Bank or the Corporation from
time to time.
"Disability" means any physical or mental impairment which renders
the Participant incapable of continuing in the employment or service of the Bank
or the Parent in his then current capacity as determined by the Committee.
"Date of Grant" shall mean November 20, 1996.
A-1
<PAGE>
"Employee" shall mean a person employed by the Corporation or any
present or future Parent or Subsidiary of the Corporation.
"Fair Market Value" shall mean: (i) if the Common Stock is traded
otherwise than on a national securities exchange, then the Fair Market Value per
Share shall be equal to the mean between the last bid and ask price of such
Common Stock on such date or, if there is no bid and ask price on said date,
then on the immediately prior business day on which there was a bid and ask
price. If no such bid and ask price is available, then the Fair Market Value
shall be determined by the Committee in good faith; or (ii) if the Common Stock
is listed on a national securities exchange, then the Fair Market Value per
Share shall be not less than the average of the highest and lowest selling price
of such Common Stock on such exchange on such date, or if there were no sales on
said date, then the Fair Market Value shall be not less than the mean between
the last bid and ask price on such date.
"Option" or "Stock Option" shall mean an option to purchase Shares
awarded herein which option is not intended to qualify under Section 422 of the
Code.
"Optioned Stock" shall mean Common Stock subject to an Option
granted pursuant to the Agreement.
"Parent" shall mean any present or future corporation which would be
a "parent corporation" as defined in Subsections 424(e) and (g) of the Code.
"Participant" means Richard A. Ball.
"Share" shall mean one share of Common Stock.
"Subsidiary" shall mean any present or future corporation which
would be a "subsidiary corporation" as defined in Subsections 424(f) and (g) of
the Code.
2. Option Price. The Option exercise price is $16.50 for each Share,
representing 100% of the Fair Market Value of the Common Stock on the Date of
Grant as determined by the Board of the Corporation.
3. Exerciseability of Options.
(a) Schedule of Exercise. This Option shall be immediately
exercisable as of the Date of Grant for a period of not more that ten years
thereafter, as noted herein.
(b) Method of Exercise. This Option shall be exercisable by a written
notice which shall:
(i) State the election to exercise the Option, the number of
Shares with respect to which it is being exercised, the person in whose
name the stock certificate or certificates for such Shares of Common Stock
is to be registered, his address and Social Security Number (or if more
than one, the names, addresses and Social Security Numbers of such
persons);
A-2
<PAGE>
(ii) Contain such representations and agreements as to the
Participant's investment intent with respect to such shares of Common
Stock as may be satisfactory to the Corporation's counsel;
(iii) Be signed by the person or persons entitled to exercise
the Option and, if the Option is being exercised by any person or persons
other than the Participant, be accompanied by proof, satisfactory to
counsel for the Corporation, of the right of such person or persons to
exercise the Option; and
(iv) Be in writing and delivered in person or by certified mail
to the Treasurer of the Corporation.
Payment of the purchase price of any Shares with respect to which the
Option is being exercised shall be by certified or bank cashier's or teller's
check. The certificate or certificates for shares of Common Stock as to which
the Option shall be exercised shall be registered in the name of the person or
persons exercising the Option.
(c) Restrictions on Exercise. This Option may not be exercised if
the issuance of the Shares upon such exercise would constitute a violation of
any applicable federal or state securities or other law or valid regulation. As
a condition to the Participant's exercise of this Option, the Corporation may
require the person exercising this Option to make any representation and
warranty to the Corporation as may be required by any applicable law or
regulation.
4. Non-transferability of Option. This Option may not be transferred in
any manner otherwise than by will or the laws of descent or distribution and may
be exercised during the lifetime of the Participant only by the Participant. The
terms of this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Participant.
5. Six Month Holding Period. A total of six months must elapse between the
Date of Grant of an Option and the date of the sale of Common Stock received
through the exercise of an Option.
6. Recapitalization, Merger, Consolidation, Change in Control and Similar
Transactions.
(a) Adjustment. Subject to any required action by the stockholders
of the Corporation, within the sole discretion of the Committee, the aggregate
number of Shares of Common Stock for which Options may be granted hereunder, the
number of Shares of Common Stock covered by each outstanding Option, and the
exercise price per Share of Common Stock of each such Option, shall all be
proportionately adjusted for any increase or decrease in the number of issued
and outstanding Shares of Common Stock resulting from a subdivision or
consolidation of Shares (whether by reason of merger, consolidation,
recapitalization, reclassification, split-up, combination of shares, or
otherwise) or the payment of a stock dividend (but only on the Common Stock) or
any other increase or decrease in the number of such Shares of Common Stock
effected without the receipt of consideration by the Corporation (other than
Shares held by dissenting stockholders).
(b) Change in Control. In the event of such a change in control or
imminent change in control, the Participant shall, at the discretion of the
Committee, be entitled to receive cash in an amount equal to the fair market
value of the Common Stock subject to any Stock Option over the Option
A-3
<PAGE>
Price of such Shares, in exchange for the surrender of such Options by the
Participant on that date in the event of a change in control or imminent change
in control of the Corporation. For purposes of the Agreement, "change in
control" shall mean: (i) the execution of an agreement for the sale of all, or a
material portion, of the assets of the Corporation; (ii) the execution of an
agreement for a merger or recapitalization of the Corporation or any merger or
recapitalization whereby the Corporation is not the surviving entity; (iii) a
change of control of the Corporation, as otherwise defined or determined by the
Office of Thrift Supervision or regulations promulgated by it; or (iv) the
acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of that term as it is used in Section 13(d) of the Securities Exchange
Act of 1934 and the rules and regulations promulgated thereunder) of twenty-five
percent (25%) or more of the outstanding voting securities of the Corporation by
any person, trust, entity or group. This limitation shall not apply to the
purchase of shares by underwriters in connection with a public offering of
Corporation stock, or the purchase of shares of up to 25% of any class of
securities of the Corporation by a tax-qualified employee stock benefit plan
which is exempt from the approval requirements, set forth under 12 C.F.R.
ss.574.3(c)(1)(vi) as now in effect or as may hereafter be amended. The term
"person" refers to an individual or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein. For
purposes of the Agreement, "imminent change in control" shall refer to any offer
or announcement, oral or written, by any person or persons acting as a group, to
acquire control of the Corporation. The decision of the Committee as to whether
a change in control or imminent change in control has occurred shall be
conclusive and binding.
(c) Extraordinary Corporate Action. Subject to any required action
by the stockholders of the Corporation, in the event of any change in control,
recapitalization, merger, consolidation, exchange of Shares, spin-off,
reorganization, tender offer, partial or complete liquidation or other
extraordinary corporate action or event, the Committee, in its sole discretion,
shall have the power, prior or subsequent to such action or event to:
(i) appropriately adjust the number of Shares of Common Stock
subject to each Option, the exercise price per Share of Common Stock, and the
consideration to be given or received by the Corporation upon the exercise of
any outstanding Option;
(ii) cancel any or all previously granted Options, provided
that appropriate consideration is paid to the Participant in connection
therewith; and/or
(iii) make such other adjustments in connection with the
Agreement as the Committee, in its sole discretion, deems necessary, desirable,
appropriate or advisable.
7. Related Matters.
(a) Payment. Full payment for each Share of Common Stock purchased
upon the exercise of any Stock Option granted herein shall be made at the time
of exercise of each such Stock Option and shall be paid in cash (in United
States Dollars), Common Stock or a combination of cash and Common Stock. Common
Stock utilized in full or partial payment of the exercise price shall be valued
at its fair market value at the date of exercise. The Corporation shall accept
full or partial payment in Common Stock only to the extent permitted by
applicable law. No Shares of Common Stock shall be issued until full payment
therefor has been received by the Corporation, and no Participant shall have any
of the rights of a stockholder of the Corporation until Shares of Common Stock
are issued to him.
A-4
<PAGE>
(b) Cashless Exercise. A Participant who has held a Stock Option for
at least six months may engage in the "cashless exercise" of the Option. In a
cashless exercise, a Participant gives the Corporation written notice of the
exercise of the Option together with an order to a registered broker-dealer or
equivalent third party, to sell part or all of the Optioned Stock and to deliver
enough of the proceeds to the Corporation to pay the Option price and any
applicable withholding taxes. If the Participant does not sell the Optioned
Stock through a registered broker-dealer or equivalent third party, he can give
the Corporation written notice of the exercise of the Option and the third party
purchaser of the Optioned Stock shall pay the Option price plus any applicable
withholding taxes to the Corporation.
(c) Transferability. Any Stock Option granted pursuant to the
Agreement shall be exercised during a Participant's lifetime only by the
Participant to whom it was granted and shall not be assignable or transferable
otherwise than by will or by the laws of descent and distribution.
(d) Effect of Termination of Employment or Service. Upon the
termination of an Participant's employment or service with the Corporation or
the Bank as a Director, Director Emeritus or Employee, the Participant may
continue to exercise such Options for a period of ten years from the date of
termination of employment or service by the Participant, but not later than the
date on which the Option would otherwise expire. Such Options of a deceased
Participant may be exercised within two years from the date of his or her death,
but not later than the date on which the Option would otherwise expire.
(e) Change in Applicable Law. Notwithstanding any other provision
contained in the Agreement, in the event of a change in any federal or state
law, rule or regulation which would make the exercise of all or part of any
previously granted Stock Option unlawful or subject the Corporation to any
penalty, the Committee may restrict any such exercise without the consent of the
Participant or other holder thereof in order to comply with any such law, rule
or regulation or to avoid any such penalty.
(f) Conditions Upon Issuance of Shares. Shares shall not be issued
with respect to any Option granted under the Agreement unless the issuance and
delivery of such Shares shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the rules
and regulations promulgated thereunder, any applicable state securities law and
the requirements of any stock exchange upon which the Shares may then be listed.
The inability of the Corporation to obtain from any regulatory body or
authority deemed by the Corporation's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder shall relieve the Corporation of any
liability in respect of the non-issuance or sale of such Shares.
As a condition to the exercise of an Option, the Corporation may require
the person exercising the Option to make such representations and warranties as
may be necessary to assure the availability of an exemption from the
registration requirements of federal or state securities law.
(g) Withholding Tax. The Corporation shall have the right to deduct
from all amounts paid in cash with respect to the cashless exercise of Options
under the Agreement any taxes required by law to be withheld with respect to
such cash payments. Where a Participant or other person is entitled to receive
Shares pursuant to the exercise of an Option pursuant to the Agreement, the
Corporation shall have the right to require the Participant or such other person
to pay the Corporation the amount of any taxes which the Corporation is required
to withhold with respect to such Shares, or,
A-5
<PAGE>
in lieu thereof, to retain, or to sell without notice, a number of such Shares
sufficient to cover the amount required to be withheld.
(h) Governing Law. The Agreement shall be governed by and construed in
accordance with the laws of the State of Kansas, except to the extent that
federal law shall be deemed to apply.
(i) Administration. All decisions, determinations and interpretations
of the Committee shall be final and conclusive on all persons affected thereby.
8. Successors and Assigns. This Agreement shall inure to the benefit of and
be binding upon any corporate or other successor of the Bank or Parent which
shall acquire, directly or indirectly, by merger, consolidation, purchase or
otherwise, all or substantially all of the assets or stock of the Bank or
Parent.
9. Amendments. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
10. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceablitiy of the other provisions hereof.
11. Entire Agreement. This Agreement together with any understanding or
modifications thereof as agreed to in writing by the parties, shall constitute
the entire agreement between the parties hereto.
A-6
<PAGE>
This Agreement is hereby executed between the parties as of November 20,
1996
LANDMARK BANCSHARES, INC.
By: /s/Larry Schugart
------------------------
Attest:
/s/Gary L. Watkins
- -----------------------------
[SEAL]
ACCEPTED: /s/Richard A. Ball
------------------------
PARTICIPANT
LANDMARK BANCSHARES, INC.
Statement Regarding Computation of Earnings Per Share
Years Ended September 30, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------
1996 1995 1994
----------- ---------- ----------
Primary:
<S> <C> <C> <C>
Weighted average common shares outstandng $ 2,281,312 $ 2,281,312 $ 2,281,312
Net effect of dilutive stock options 72,860 33,707 23,736
Average unallocated ESOP shares (107,987) (123,231)
Weighted average treasury shares purchased(308,365) (50,574)
----------- -----------
1,937,820 2,141,214 2,305,048
=========== =========== ===========
Fully Diluted:
Weighted average common shares outstandng $ 2,281,312 $ 2,281,312 $ 2,281,312
Net effect of dilutive stock options 88,814 68,039 34,734
Average unallocated ESOP shares (107,987) (123,231)
Weighted average treasury shares purchased(308,365) (50,574)
----------- -----------
1,953,774 2,175,546 2,316,046
=========== =========== ===========
Net earnings $ 1,404,226 $ 1,762,523 $ 1,583,985
=========== =========== ===========
Earnings per share:
Primary $ 0.72 $ 0.82 $ 0.38
=========== =========== ===========
Fully Diluted $ 0.72 $ 0.81 $ 0.38
=========== =========== ===========
</TABLE>
Earnings per share for the year ended September 30, 1994 is computed on net
income and common stock outstanding since March 28, 1994, the date the Company
completed its initial stock offering.
Beginning with the fiscal year ending September 30, 1995, the Company accounts
for the 136,878 shares acquired by the Employee Stock Ownership Plan ("ESOP") in
accordance with Statement of Position 93-6. In accordance with this statement,
shares controlled by the ESOP are not considered in the weighted average shares
outstanding until the shares are committed for allocation. In accordance with
the provisions of the statement, the change in accounting for shares held by the
ESOP was applied prospectively. Had the statement been applied to fiscal year
ending September 30, 1994, average unallocated shares held by the ESOP would
have reduced common stock equivalents outstanding by 133,116.
[LOGO]
1996
----
ANNUAL REPORT
<PAGE>
Landmark Bancshares, Inc.
CONTENTS
Message to our Stockholders ................................ 1
Corporate Profile and Stock Price Information............... 4
Five-Year Financial Summary................................. 5
Management's Discussion and Analysis........................ 7
Report of Independent Accountants........................... F-1
Consolidated Financial Statements........................... F-2
Notes to Consolidated Financial Statements ................. F-7
Corporate Information....................................... 18
<PAGE>
MESSAGE TO OUR STOCKHOLDERS:
This past fiscal year was a good year for Landmark Bancshares, Inc. (the
"Company"). The date of September 30, 1996, the last day of our fiscal year,
will be remembered as significant, not only for our Company, but for the entire
thrift industry. On that date President Clinton signed into law the Omnibus
Appropriations Bill, earlier passed by Congress. Included in this legislation
was a one-time assessment to recapitalize the Savings Association Insurance Fund
("SAIF"). This special assessment, based on March 31, 1995 deposits, resulted in
a charge to expense of approximately $937,000 (pre-tax), which was charged in
the fourth quarter. The Company still reflected net income for 1996 of
$1,404,226, a decrease of $358,297 compared to fiscal 1995, after the charge to
expense as a result of the assessment.
While the one-time SAIF assessment depleted substantially all of the fourth
quarter earnings, it is viewed as a positive step for the future of the Company
and the thrift industry. Future SAIF payments will be reduced, resulting in an
expected $300,000 annual pre-tax savings in future periods.
Landmark Federal Savings Bank (the "Bank"), a wholly-owned subsidiary of the
Company, is a community oriented financial institution that continues to serve
southwest and central Kansas with a full range of deposit and loan products. The
Bank continues to specialize in one to four family residential loans and
consumer lending. The Bank increased loans receivable by over $30 million during
the past year. Landmark Federal Savings Bank is committed to meeting the savings
and housing needs of the communities we serve.
[PLOTTING POINTS FOR GRAPH ARE BELOW]
Loans Receivable
----------------
150
125
100
75
50
25
0
1996 1995 1994 1993 1992
Chart 1: bar graph showing the size of the loans receivable portfolio in
dollars. The horizontal axis shows 1996 to 1992 and the vertical axis shows
amounts from 0 to 150 (in thousands). Graph values are 129,903, 98,934, 71,253,
62,620, and 62,879, for 1996, 1995, 1994, 1993, and 1992, respectively.
Our 1996 success was accomplished through the continued effective application of
our basic business philosophies. These philosophies include a commitment to
strong credit quality for lending and prudent interest rate risk management.
Landmark Federal Savings Bank has consistently maintained excellent asset
quality throughout the last five years. Strong asset quality reduces operating
costs, by minimizing loan loss reserve requirements and operating expenses
associated with non-performing assets. Total non-performing assets as of
September 30, 1996, were 0.24% of net loans and 0.15% of total assets, far lower
than industry averages.
[PLOTTING POINTS FOR GRAPH ARE BELOW]
Non non-performing Assets/Total Assets
--------------------------------------
1.00%
0.80%
0.60%
0.40%
0.20%
0.00%
1996 1995 1994 1993 1992
Chart 2: bar graph showing the ratio of non-performing assets to total assets,
expressed as a percentage. The horizontal axis shows 1996 to 1992 and the
vertical axis shows percentages amounts from 0.00% to 1.00%. Graph values are
0.15%, 0.22%, 0.22%, 0.36%, and 0.80%, for 1996, 1995, 1994, 1993, and 1992,
respectively.
Our employees continue to be our most valuable resource. Through their efforts
Landmark Federal Savings Bank's efficiency ratio for the year ended September
30, 1996 was 52.03% (without the effect of the one-time SAIF assessment).
[PLOTTING POINTS FOR GRAPH ARE BELOW]
Efficiency Ratio
----------------
60.00%
40.00%
20.00%
0.00%
1996 1995 1994 1993
Chart 3: bar graph showing an efficiency ratio, expressed as a percentage. The
horizontal axis shows 1996 to 1993 and the vertical axis shows percentages
amounts from 0.00% to 60.00%. Graph values are 52.03%, 54.30%, 53.60%, and
50.80, for 1996, 1995, 1994, and 1993, respectively.
A financial institution's efficiency ratio is a measurement of how much expense
is incurred to generate each dollar of pre-tax profit. The lower the efficiency
ratio, the more efficient the generation of profit. A ratio of less than 60% is
considered good in the industry, and it remains management's goal to reduce the
ratio to 50% or less.
Fully diluted earnings per share, based on 1,953,774 shares outstanding at
September 30, 1996, was $0.72 as compared to $0.81 at September 30, 1995.
Earnings per share, without the one-time SAIF assessment, would have been $1.02
for the year ended September 30, 1996.
Continued earnings growth is the key to any successful business. This growth is
fueled by growth in assets. The Company has grown by leveraging its equity,
mainly through advances from the Federal Home Loan Bank of Topeka. Theses
advances have been used to fund for portfolio, adjustable rate mortgages
-2-
<PAGE>
originated in our trade area, as well as the purchase of mortgage loans from
other lenders in Kansas and other states.
[PLOTTING POINTS FOR GRAPH ARE BELOW]
Total Assets
------------
250,000
200,000
150,000
100,000
50,000
0
1996 1995 1994 1993 1992
Chart 4: bar graph showing total assets in thousands of dollars. The horizontal
axis shows 1996 to 1992 and the vertical axis shows amounts from 0 to 250 (in
thousands). Graph values are 213,734, 208,632, 188,727, 164,694, and 161,365,
for 1996, 1995, 1994, 1993, and 1992, respectively.
The Bank will begin construction of a new full service branch office in early
1997, to be located in the northwest area of Dodge City. It will have four
drive-thru teller lanes to relieve backup traffic in our downtown location. In
addition, the Bank will issue debit cards next year and locate our first ATM at
the new branch location to enhance our commitment to customer service.
We are enthusiastic about the future potential of Landmark Bancshares, Inc. and
feel we are positioning the Company to be a larger and more profitable full
service financial institution. The continued implementation of our basic
business plan is the core to our future success. We will continue to work
diligently to generate the returns our stockholders deserve.
Thank you for your confidence and continued support!
Personal regards,
/s/Larry Schugart
Larry Schugart
President and
Chief Executive Officer
-3-
<PAGE>
================================================================================
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 it's conversion in connection
with a $22.8 million initial public offering. The Company is a unitary savings
and loan holding company which, under existing laws, 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 four branch offices located in Barton, Finney and Rush
Counties, Kansas.
STOCK PRICE INFORMATION
There were 1,852,996 shares (net of treasury stock) of common stock of Landmark
Bancshares, Inc. outstanding on September 30, 1996, held by approximately 337
stockholders of record (not including the number of persons or entities
holdingthe 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 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 year
1996 and 1995.
Year Ended September 30,
--------------------------------------------------------
1996 1995
----------------------- -----------------------
HIGH LOW HIGH LOW
---- --- ---- ---
FIRST QUARTER 14 3/4 13 1/2 11 1/2 9 3/4
Second Quarter 15 1/4 13 1/2 11 3/4 10 1/4
Third Quarter 16 14 1/2 12 3/4 11 3/8
Fourth Quarter 16 1/2 15 1/4 14 1/2 12
The following table sets forth, for each quarter the dividends paid or payable
on the common stock for the indicated fiscal years ending September 30th. 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 1996 1995
- ------------------- --------------- ---------------
First Quarter $ 0.10 $ 0.55
Second Quarter 0.10 0.05
Third Quarter 0.10 0.05
Fourth Quarter 0.10 0.10
-4-
<PAGE>
================================================================================
FIVE-YEAR FINANCIAL SUMMARY
SELECTED FINANCIAL CONDITION DATA (DOLLARS IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
At September 30, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $213,734 $208,632 $188,727 $164,694 $161,365
Loans receivable 129,903 98,934 71,253 62,620 62,879
Investments held-to-maturity 29,399 34,825 39,922 24,579 33,712
Investments available-for-sale 4,138 1,693 1,743
Mortgaged-backed securities
held-to-maturity 45,877 68,207 70,470 69,986 59,300
Cash and cash equivalents 474 462 1,061 2,432 287
Deposits 143,815 144,957 136,858 147,428 145,408
FHLB borrowings 33,467 25,533 13,580 - -
Stockholders' equity 32,389 34,667 36,606 15,144 13,360
SUMMARY OF OPERATIONS (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
Interest income $ 14,575 $ 13,652 $ 10,671 $ 10,964 $ 13,041
Interest expense 8,678 8,224 5,917 6,424 8,390
------------- ------------- ------------- ------------- -------------
Net interest income 5,897 5,428 4,754 4,540 4,651
Provision for loan losses 135 9 (85) 184 225
Provision for losses on corporate
securities and municipal obligations - - (128) 42 32
Net interest income after provision
for losses on loans and investments 5,762 5,419 4,967 4,314 4,394
Non-interest income 745 684 450 896 1,165
Non-interest expense (1) 4,323 3,315 2,907 2,651 2,525
------------- ------------- ------------- ------------- -------------
Income before income taxes and
cumulative effect of change
in accounting principle 2,184 2,788 2,510 2,559 3,034
Provision for income taxes 780 1,025 926 944 1,130
------------- ------------- ------------- ------------- -------------
Income before cumulative effect of
change in accounting principle 1,404 1,763 1,584 1,615 1,904
Cumulative effect of October 31, 1992
change in accounting for income taxes - - - 117 -
------------- ------------- ------------- ------------- -------------
Net income $ 1,404 $ 1,763 $ 1,584 $ 1,732 $ 1,904
============= ============= ============= ============= =============
Primary earnings per share (2) $ 0.72 $ 0.82 $ 0.38 $ - $ -
============= ============= ============= ============= =============
Fully diluted earnings per share (2) $ 0.72 $ 0.81 $ 0.38 $ - $ -
============= ============= ============= ============= =============
Dividends per share (2) $ 0.40 $ 0.75 $ 0.05 $ - $ -
============= ============= ============= ============= =============
Book value per common share
outstanding at September 30 $ 17.48 $ 16.62 $ 16.05 $ - $ -
============= ============= ============= ============= =============
</TABLE>
(*) Data presented prior to March 28, 1994, the date of conversion, is for
Landmark Federal Savings Bank only.
(1) Includes one-time SAIF special assessment of $973,073 for the year ended
September 30, 1996.
(2) For periods following conversion from mutual to stock on March 28, 1994
(1994 - March 28 through September 30).
-5-
<PAGE>
================================================================================
FIVE-YEAR FINANCIAL SUMMARY
SELECTED RATIOS AND OTHER DATA(*)
================================================================================
<TABLE>
<CAPTION>
At or For the Year Ended September 30, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets 0.70 % 0.88 % 0.90 % 1.08 % 1.17 %
Return on average equity 4.14 4.92 6.06 12.14 15.21
Average equity to average assets 17.00 17.88 14.93 8.89 7.69
Equity to assets at period end 15.15 16.62 19.40 9.20 8.28
Net interest spread 2.11 1.88 2.18 2.51 2.53
Net yield on average interest-earning assets 3.01 2.76 2.77 2.89 2.92
Non-performing assets to total assets 0.15 0.22 0.22 0.36 0.80
Non-performing loans to net loans 0.24 0.39 0.29 0.38 0.75
Allowance for loan losses to total loans 0.57 0.65 0.87 1.14 0.91
Dividend payout 53.58 90.93 13.02 - -
Number of:
Loans outstanding 5,439 4,561 3,859 3,624 3,703
Deposit accounts 13,443 13,731 12,582 13,074 13,377
Full service offices 5 5 5 5 5
</TABLE>
(*) Data presented prior to March 28, 1994, the date of conversion, is for
Landmark Federal Savings Bank only.
-6-
<PAGE>
================================================================================
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 automobile loans, second mortgage loans,
equity loans 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.
FINANCIAL CONDITION
Consolidated total assets increased 2.45% from $208,631,862 at September 30,
1995, to $213,733,690 at September 30, 1996. The principal factor contributing
to the growth in assets was the increase in the loans receivable portfolio
during the year, which more than offset a decrease in investment securities and
mortgage-backed securities.
Net loans receivable held for investment increased $29,396,503 or 29.81%, from
$98,616,725 at September 30, 1995, to $128,013,228 at September 30, 1996. This
growth in the loan portfolio is attributed to increased lending throughout the
year and the purchase of $16,398,206 in mortgage loan packages during the year.
Investment securities held-to-maturity decreased $5,426,532 from $34,825,052 at
September 30, 1995 to $29,398,520 at September 30, 1996. This decrease was
directly related to the increase in the loan portfolio discussed above, as
securities matured or were called, excess funds were used to originate and
purchase loans. Investment securities available-for-sale at September 30, 1996
experienced an increase of $2,445,087 from $1,692,550 at September 30, 1995 to
$4,137,637 at September 30, 1996.
-7-
<PAGE>
Mortgage-backed securities decreased $22,329,449 or 32.74%, from $68,206,569 at
September 30, 1995 to $45,877,120 at September 30, 1996. The Company did not
have any mortgage-backed securities available-for-sale at September 30, 1996.
The Bank purchases mortgage-backed securities when loan demand decreases and it
has excess liquidity to invest.
On November 15, 1995, the FASB adopted a special report "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities". The guide includes, along with other implementation
guidance, a transition provision that allowed for a reassessment of the
appropriateness of the classifications of all securities and allowed a one-time
reclassification of securities which will not call into question the intent of
an enterprise to hold other debt securities to maturity in the future. Those
reclassifications were to be made after the adoption date of November 15, 1995
and no later than December 31, 1995. In accordance with the guide, management
transferred $11,355,417 of mortgage-backed securities from held-to-maturity
classification to available-for-sale classification. These securities were sold
after being transferred.
The Company had net unrealized losses on investment securities held-to-maturity,
not reflected on the consolidated financial statements, of $285,153 and $209,133
at September 30, 1996 and 1995, respectively. The Company had net unrealized
losses on mortgage-backed securities held-to-maturity, not reflected on the
consolidated financial statements, of $351,113 and $132,059 at September 30,
1996 and 1995, respectively. This overall decline in fair market value belowthe
amortized cost of these securities held-to-maturity at September 30, 1996 and
1995 is deemed to be due to temporary changes in the interest rate environment.
The Bank has capital sufficient to support these net unrealized losses. The
Company has experienced increases in the net unrealized losses on investments
and mortgage-backed securities held-to-maturity due to the current interest rate
environment.
There were no foreclosed assets ("REO") at September 30, 1996. At September 30,
1995, the balance in REO was $66,320, which consisted of single-family
residences. This REO balance continues to be substantially lower than that
experienced by the Bank in prior years. Additionally, non-performing loans
totaled $317,000 and $386,000 at September 30, 1996 and 1995, respectively. At
September 30, 1996 the Bank's ratio of total non-performing assets to total
assets was 0.15%, 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.
Deposits decreased slightly from $144,957,084 at September 30, 1995 to
$143,814,910 at September 30, 1996. This resulted in a 0.79% decrease. The
modest decline was attributable to normal changes in outstanding deposits. The
Bank continues to offer rates competitive with other financial institutions in
the area.
Of the $119,510,219 in certificates of deposit held by the Bank at September 30,
1996, $94,575,804 of these deposits will mature during the year ended September
30, 1997. The majority of the Bank's time deposits consist of regular deposits
from consumers within the Bank's surrounding community rather than institutional
or brokered deposit accounts. As a result, most of these accounts of local
customers are expected to be renewed.
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$14,466,668 and $9,733,334 at September 30, 1996 and 1995, respectively.
The Bank also established a line of credit with the FHLB during the year ended
-8-
<PAGE>
September 30, 1995. The Bank had an outstanding balance of $19,000,000 at
September 30, 1996. This resulted in a $7,933,334 or 31.07% increase in
advances and other borrowings from the FHLB from September 30, 1995 to September
30, 1996. 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 6.37% during fiscal 1996. Of the advances and
other borrowings outstanding at September 30, 1996, $28,166,668 matures during
the year ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Office of Thrift Supervision ("OTS") establishes the minimum liquidity
requirements for institutions such as the Bank. Current OTS regulations require
that the Bank maintain liquid assets of not less than 5% of its average daily
balance of net withdrawable deposit accounts and borrowings payable in one year
or less, of which short-term liquid assets must consist of not less than 1%. The
Bank met its liquidity requirement during fiscal 1996 and expects to meet this
requirement in the future.
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, 1996 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, 1996.
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.
ASSET/LIABILITY MANAGEMENT
The Bank has established an Asset/Liability Management Committee ("ALCO") for
the purpose of monitoring and managing interest rate risk. Interest rate risk
represents the earnings variation that could occur due to changes in the level
of interest rates. Interest rate sensitivity is a measure of the difference
between amounts of interest-earning assets and interest-bearing liabilities that
either reprice or mature within a given period of time. The difference, or the
interest rate repricing "gap," provides an indication of the extent to which a
Bank's interest rate spread will be affected by changes in interest rates over a
period of time. 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.
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
-9-
<PAGE>
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 ininterest 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, 1996, as calculated by
the OTS, based on information provided to the OTS by the Bank.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
+400 bp $ 10,804 $(16,751) (61) % 5.67 % (741) bp
+300 bp $ 15,215 (12,340) (45) % 7.77 % (531) bp
+200 bp (1) $ 19,585 (7,970) (29) % 9.75 % (334) bp
+100 bp $ 23,789 (3,766) (14) % 11.55 % (153) bp
0 bp $ 27,555 13.08 %
-100 bp $ 30,695 3,140 11 % 14.30 % 121 bp
-200 bp $ 32,498 4,943 18 % 14.94 % 186 bp
-300 bp $ 33,832 6,277 23 % 15.39 % 231 bp
-400 bp $ 35,515 7,960 29 % 15.96 % 287 bp
</TABLE>
(1) Denotes rate shock used to compute interest rate risk capital component.
September 30, 1996
------------------
Risk Measures (200 Basis Point Rate Shock):
Pre-Shock NPV Ratio: NPV as % of Present Value of Assets 13.08 %
Exposure Measure: Post-Shock NPV Ratio 9.75 %
Sensitivity Measure: Change in NPV Ratio (334) bp
Calculation of Capital Component:
Change NPV as % of Present Value of Assets (3.78)%
Utilizing the data above, the Bank, at September 30, 1996, would have been
considered by the OTS to have been subject to "above normal" interest rate risk
and a deduction from risk-based capital would have been required.
-10-
<PAGE>
Set forth below is a breakout, by basis points of the Bank's NPV as of September
30, 1996 by assets, liabilities, and off balance sheet items.
<TABLE>
<CAPTION>
No
Net Portfolio Value -400 bp -300 bp -200 bp -100 bp Change +100 bp +200 bp +300 bp +400 bp
-------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets $222,585 $219,853 $217,494 $214,701 $210,631 $205,985 $200,956 $195,803 $190,637
- - Liabilities 187,422 186,330 185,253 184,195 183,160 182,136 181,133 180,151 179,183
+ Off Balance Sheet 352 309 257 189 84 (60) (238) (437) (650)
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Portfolio Value $ 35,515 $ 33,832 $ 32,498 $ 30,695 $ 27,555 $ 23,789 $ 19,585 $ 15,215 $ 10,804
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
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 on 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.
RESULTS OF OPERATIONS
Net income decreased $358,279 or 20.33%, from $1,762,523 for the year ended
September 30, 1995 to $1,404,226 for the year ended September 30, 1996. This
decrease relates primarily to a special one-time SAIF assessment of $937,073.
On September 30, 1996, President Clinton signed into law a bill that provided
for a special assessment of SAIF insured institutions amounting to 65.7 basis
points applied to the Bank's deposit base measured as of March 31, 1995. The
total amount of the special assessment for the Bank was accrued as of September
30, 1996 and included in expense for the year ended September 30, 1996. The
after tax effect of the assessment was to reduce net income by approximately
$600,000 for the year ended September 30,
-11-
<PAGE>
1996. Without the effect of the assessment net income would have been
approximately $2,000,000 for the year ended September 30, 1996. Earnings per
share without the effect of the assessment would have been approximately $1.02
for the year ended September 30, 1996.
Beginning January 1, 1997, deposit insurance assessments for SAIF members are
expected to be reduced to approximately 6.4 basis points of deposits on an
annual basis through the end of 1999 from the previous level of 23 basis points.
Assuming this reduction occurs, beginning January 1, 1997, the rate of deposit
insurance assessed the Bank will decline by approximately 70%. Through 1999 BIF
members are expected to be assessed at approximately 1.3 basis points on
deposits. Thereafter, assessments for BIF and SAIF members should be the same
and SAIF and BIF may be merged. It is expected that these continuing assessments
for both SAIF and BIF members will be used to repay outstanding Financing
Corporation bond obligations.
The disparity in insurance premiums between those required for the Bank and BIF
members could allow BIF members to attract and retain deposits at higherinterest
rates and at a lower effective cost than the Bank. This could put competitive
pressure on the Bank to raise its interest rates paid on deposits, thus
increasing its cost of funds and possibly reducing net interest income. Although
the Bank has other sources of funds, these other sources may have higher costs
than those of deposits.
Net income increased $178,538 or 11.27% from $1,583,985 for the year ended
September 30, 1994 to $1,762,523 for the year ended September 30, 1995 which is
primarily attributable to an increase in 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. The Company's net income is also affected by
the level of its provision for losses on loans and corporate securities and
municipal obligations, non-interest income and non-interest expense.
-12-
<PAGE>
NET INTEREST INCOME
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.
<TABLE>
<CAPTION>
For Year Ended September 30,
At ---------------------------------------------------------------------------------------
September 30,
1996 1996 1995 1994
------------ -------------------------- -------------------------- ----------------------------
Average Average Average
Yield/ Average Yield/ Average Yield/ Average Yield/
Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
---- ------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars in Thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable 8.17 % $110,084 $ 9,077 8.25 $ 81,236 $ 6,449 7.94 % $ 64,245 $ 5,007 7.79%
Mortgage-backed securities 6.46 % 54,647 3,557 6.51 % 70,947 4,359 6.14 % 70,479 3,683 5.23%
Investment securities 6.56 % 29,936 1,863 6.22 % 42,936 2,744 6.39 % 31,392 1,742 5.55%
Other interest-earning assets 6.86 % 1,085 78 7.19 % 1,216 100 8.22 % 5,636 239 4.24%
---- -------- -------- ---- -------- -------- ---- -------- ------- ----
Total interest earning assets 7.54 % $195,752 $ 14,575 7.45 % $196,335 $ 13,652 6.95 % $171,752 $10,671 6.21%
==== ======== ======== ==== ======== ======== ==== ======== ======= ====
Non-interest earning assets: 3,764 3,903 3,380
-------- -------- --------
Total assets $199,516 $200,238 $175,132
======== ======== ========
Interest-bearing liabilities:
Demand deposits 2.86 % $ 14,249 $ 365 2.56 % $ 12,279 $ 267 2.17 % $ 15,872 $ 370 2.33%
Savings deposits and certificates
of deposit 5.39 % 128,899 7,077 5.49 % 129,319 6,633 5.13 % 127,772 5,382 4.21%
Other liabilities 6.17 % 19,429 1,237 6.37 % 20,473 1,324 6.47 % 3,278 165 5.03%
---- -------- -------- ---- -------- -------- ---- -------- ------- ----
Total interest-
bearing liabilities 5.27 % $162,577 $ 8,679 5.34 % $162,071 $ 8,224 5.07 % $146,922 $ 5,917 4.03%
==== ======== ======== ==== ======== ======== ==== ======== ======= ====
Non-interest bearing liabilities 3,015 2,371 2,062
Total liabilities $165,592 $164,442 $148,984
======== ======== ========
Stockholder's equity 33,924 35,796 26,148
Total liabilities and -------- -------- --------
stockholders' equity $199,516 $200,238 $175,132
======== ======== ========
Net interest income $ 5,896 $ 5,428 $ 4,754
======== ======== =======
Interest rate spread 2.27 % 2.11 % 1.88 % 2.88%
==== ==== ====
Net yield on interest-earning assets 3.01 % 2.76 % 2.77%
==== ==== ====
Ratio of interest-earning assets
to interest-bearing liabilities 120.41 % 121.14 % 116.90%
====== ====== ======
</TABLE>
-13-
<PAGE>
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).
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
------------------------------------------ ------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------------ ------------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
------ ---- ------ --- ------ ---- ------ ---
(In Thousands)
Interest income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $ 2,291 $ 252 $ 85 $ 2,628 $ 1,324 $ 96 $ 22 $ 1,442
Mortgage-backed securities (1,000) 263 (65) (802) 24 641 11 676
Investment securities (832) (73) 24 (881) 635 264 103 1,002
Other interest-earning assets (11) (13) 2 (22) (187) 224 (176) (139)
------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets $ 448 $ 429 $ 46 $ 923 $ 1,796 $ 1,225 $ (40) $ 2,981
======= ======= ======= ======= ======= ======= ======= =======
Interest expense:
Demand deposits $ 43 $ 48 $ 7 $ 98 $ (84) $ (25) $ 6 $ (103)
Savings deposits and
certificates of deposits (22) 466 - 444 65 1,176 10 1,251
Other liabilities (68) (2) (17) (87) 865 47 247 1,159
------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ (47) $ 512 $ (10) $ 455 $ 846 $ 1,198 $ 263 $ 2,307
======= ======= ======= ======= ======= ======= ======= =======
Net change in interest income $ 495 $ (83) $ 56 $ 468 $ 950 $ 27 $ (303) $ 674
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Total interest income increased $922,628, or 6.76%, to $14,574,868 for the year
ended September 30, 1996, from $13,652,240 for the year ended September 30,
1995. This increase is primarily the result of an increase in loans receivable
during the year ended September 30, 1996, this is reflected in the Bank's
rate/volume analysis as the increase in interest income resulting from the
volume of loans receivable was $2,291,000. Income resulting from the increase in
loan volume was partially offset by decreases in the volume of mortgage-backed
and investment securities during the year.
Interest expense for the year ended September 30, 1996 increased $454,579, or
5.53%, to $8,678,368 from $8,223,789 at September 30, 1995. This increase is
primarily due to an increase in market interest rates paid on deposits and the
relatively rapid repricing of the deposit base. The Bank's rate/volume analysis
reflects approximately $512,000 of the increase in interest expense resulting
from interest rate changes. Although this results in an increase in interest
expense, there was a $47,000 reduction in interest expense resulting from a
decrease in the volume of interest-bearing liabilities, including $68,000 due to
a reduction in the average balance outstanding of FHLB borrowings.
As a result of the above, net interest income increased $468,049, or 8.62%, from
$5,428,451 for the year ended September 30, 1995 to $5,896,500 for the year
ended September 30, 1996. The net interest spread
-14-
<PAGE>
of the Bank increased from 1.88% for the year ended September 30, 1995 to 2.11%
for the year ended September 30, 1996. The increase in net interest income is
also 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
$495,000.
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. The change in interest rate spreadfor
the year ended September 30, 1996 in comparison to the year ended September 30,
1995 relates to the continued overall increase in interest rates. As rates have
continued to rise during the last three years, the slower repricing
interest-earning assets have began to catch up with the more rapidly increasing
interest rates on liabilities; therefore, increasing the interest rate spread
during the year ended September 30, 1996.
Interest income increased $2,981,644, or 27.94%, to $13,652,240 for the year
ended September 30, 1995, from $10,670,596 for the year ended September 30,
1994. This increase resulted from the average yield on interest-earning assets
increasing to 6.95% for the year ended September 30, 1995 compared to 6.21% for
the year ended September 30, 1994. This increase was the result of the maturity
of lower yielding investments and the prepayment of loans and mortgage-backed
securities and the reinvesting of those funds into higher yielding investments
and loans. The higher yield is primarily due to an increase in market interest
rates for all types of interest-earning assets. The rate/volume analysis
reflects this increase, the change in interest income due to interest rates was
an increase of $1,225,000. In addition, there was a corresponding increase of
$1,796,000 in interest income due to the volume of interest-earning assets.
Interest-earning assets increased as discussed previously due to the increase in
the Bank's loan portfolio. Market interest rates continued to gradually increase
during the fiscal year. As a result, the average yield on interest-earning
assets held at September 30, 1995 was 7.12%, up from 6.49% at September 30,
1994.
Interest expense for the year ended September 30, 1995 increased $2,307,336, or
39.00%, to $8,223,789 from $5,916,453 at September 30, 1994. This increase was
also due to the increase in interest rates throughout the fiscal year.
Approximately $1,198,000 of the increase in interest expense was due to interest
rates. In addition, there was an $865,000 increase in interest expense due to
the increased volume of other interest-bearing liabilities, mainly advances and
other borrowings from the FHLB. The average cost for interest-bearing
liabilities increased from 4.03% for the year ended September 30, 1994 to
5.07%for the year ended September 30, 1995.
As a result of the above, net interest income increased $674,308, or 14.18%,
from $4,754,143 for the year ended September 30, 1994 to $5,428,451 for the year
ended September 30, 1995. The net interest spread of the Bank decreased from
2.18% for the year ended September 30, 1994 to 1.88% for the year ended
September 30, 1995. 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. Interest
rates during the year started an upward swing, and as the liabilities repriced
the net interest spread began to shrink. This increase in interest rates related
to overall market increases and although interest-earning assets reprice slower
than interest-bearing liabilities a continued decline in interest rate spreads
is expected to reverse as interest rates stabilize or begin to decline.
-15-
<PAGE>
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
$740,346 and $643,547 at September 30, 1996 and 1995, 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 increased from
$9,124 for the year ended September 30, 1995 to $134,743 for the year ended
September 30, 1996. The $125,619 increase in the provision for the year ended
September 30, 1996 was based on management's evaluation of the allowance in
relation to the increase in the Bank's loan portfolio, including a 57.44%
increase in loans other than first mortgage loans. Non-performing loans were
$317,000 and $386,000 at September 30, 1996 and 1995, respectively. 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 $643,547 and $619,218 at September 30, 1995
and 1994, respectively. The provision for losses on loans was $9,124 for the
year ended September 30, 1995 and a credit, or recovery of amounts previously
charged against income, of $84,933 for the year ended September 30, 1994. The
increase in the allowance for the year ended September 30, 1995 was based on
management's evaluation of the allowance in relation to the increase in the
Bank's loan portfolio and the slight increase in non-performing loans.
PROVISION FOR INVESTMENT LOSSES
The Bank had maintained, and the Board of Directors monitored, an allowance for
possible losses on investments, primarily corporate securities, private issue
collateralized mortgage obligations and municipal obligations. The allowance was
based on management's periodic evaluation of known and inherent risks associated
with the investment portfolio. The allowance had been established to absorb
potential credit losses associated with the above mentionedinvestment
securities. The allowance for investment losses was $0 as of September 30, 1996
and 1995. The provision was a credit of amounts previously charged against
income, of $128,106 for the year ended September 30, 1994. The provision for
investment losses is the method by which the allowance for losses is adjusted
during the period. In effect, management has discontinued its policy for the
establishment of allowances for potential losses on investments, primarily due
to the fact that no credit losses had to be charged against the allowance and
the level of these types of investments is down from previous periods. While
management has discontinued the policy for the establishment of allowance for
potential credit losses on investments, there can be no assurance that such
losses will not occur in future years.
-16-
<PAGE>
NON-INTEREST INCOME
Non-interest income increased $61,896, or 9.06%, from $683,464 for the year
ended September 30, 1995 to $745,360 for the year ended September 30, 1996. This
was primarily due to the net gain on the sale of mortgage-backed securities,
after they were reclassified from held-to-maturity to available-for- sale in
accordance with the FASB Guide to Implementation of Statement 115, discussed
earlier. The Bank reclassified $11,355,417 of mortgage-backed securities from
held-to-maturity to available-for-sale and subsequently sold all of these
securities for a net realized gain of $135,208. Net gains on sales of investment
securities and loans decreased from during 1996 in comparison to 1995 due to
reduced sales volume of available-for-sale investment securities and lower
levels of gain recognized on sales of loans held-for-sale. Service and late
charges increased from 1995 to 1996 primarily due to increases in charges on
demand accounts.
Non-interest income increased $233,278 or 51.82%, from $450,186 for the year
ended September 30, 1994 to $683,464 for the year ended September 30, 1995. The
main reason for this increase was due to the net gain on sale of investments of
$122,900, primarily corporate equity securities, which is a $216,399 increase
from the net loss on the sale of investments of $(93,499) realized during
theyear ended September 30, 1994. Additionally, gain on sale of loans declined
by 35.72% due to a decline in the volume of loan sales from 1994 to 1995 as a
result of a less favorable interest rate environment. Loans originated for sale
decreased from $18.4 million during 1994 to $5.9 million for 1995. Service and
late charges also increased from 1994 to 1995.
NON-INTEREST EXPENSE
Non-interest expense increased $1,008,266, or 30.41% from $3,315,033 for the
year ended September 30, 1995 to $4,323,299 for the year ended September 30,
1996. This increase relates primarily to the one-time SAIF special assessment of
$937,073 discussed earlier.
Non-interest expense increased $407,304 or 14.01% from $2,907,729 for the year
ended September 30, 1994 to $3,315,033 for the year ended September 30, 1995.
Compensation and related expenses increased $333,881 or 21.17% during the year
ended September 30, 1995. This increase was primarily the result of additional
compensation expense related to the Employees Stock Ownership Plan (the "ESOP")
and the Management Stock Bonus Plan (the "MSBP") which were in place throughout
the year. Other expenses also increased $111,545 or 21.49% to $630,677 for the
year ended September 30, 1995. This increase relates to an increase in
professional fees as a result of the conversion and general increases in expense
of operations as a result of inflation and increased asset size.
INCOME TAXES
Income tax expense decreased $245,643, or 23.96%, from $1,025,235 for the year
ended September 30, 1995 to $779,592 for the year ended September 3, 1996. This
decrease in income tax resulted from a decrease in pre-tax income largely
attributable to the accrual of the special SAIF assessment. Tax benefit
attributable to the SAIF assessment was approximately $335,000.
The Company's income tax expense increased $99,581 from $925,654 for the year
ended September 30, 1994 to $1,025,235 for the year ended September 30, 1995.
The principal reason for the increase was the increase in pre-tax income.
-17-
<PAGE>
[CORPORATE LOGO]
INDEPENDENT AUDITOR'S REPORT
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, 1996 and 1995,
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended September
30, 1996. These financial statements are the responsibility of the
Corporation'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, 1996 and 1995, and the results of their
operations and cash flows for each of the three years in the period ended
September 30, 1996 in conformity with generally accepted accounting principles.
/s/Regier Carr & Monroe, L.L.P.
Regier Carr & Monroe, L.L.P.
October 24, 1996
Wichita, Kansas
F-1
<PAGE>
LANDMARK BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------- -------------
Cash and cash equivalents:
<S> <C> <C>
Interest bearing $ 3,063 $ --
Non-interest bearing 470,647 462,021
------------- -------------
Total cash and cash equivalents 473,710 462,021
Time deposits in other financial institutions 479,949 579,000
Investment securities held-to-maturity (estimated market
value of $29,113,367 and $34,615,919 at September 30,
1996 and 1995, respectively) 29,398,520 34,825,052
Investment securities available-for-sale 4,137,637 1,692,550
Mortgage-backed securities held-to-maturity (estimated
market value of $45,526,007 and $68,074,510 at
September 30, 1996 and 1995, respectively) 45,877,120 68,206,569
Loans receivable, net 128,013,228 98,616,725
Loans held-for-sale 1,890,007 316,991
Accrued income receivable 1,518,640 1,671,075
Foreclosed real estate, net 66,320
Office properties and equipment, at cost
less accumulated depreciation 949,786 1,005,908
Prepaid expenses and other assets 973,383 1,175,524
Deferred income taxes 21,710
Income taxes receivable, current 14,127
------------- -------------
Total assets $ 213,733,690 $ 208,631,862
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 143,814,910 $ 144,957,084
Outstanding checks in excess of bank balance 143,808 1,050,816
Borrowings from Federal Home Loan Bank 33,466,668 25,533,334
Advances from borrowers for taxes and insurance 1,673,142 1,340,156
Accrued expenses and other liabilities 2,193,296 935,531
Income taxes payable, current 52,691
Deferred income taxes 147,495
------------- -------------
Total liabilities 181,344,515 173,964,416
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, no par value; 5,000,000 shares
authorized; no shares outstanding
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 21,944,175 21,893,499
Retained income, substantially restricted 17,468,325 16,816,492
Unrealized gain on available-for-sale securities,
net of deferred taxes 253,057 37,454
Unamortized stock acquired by Employee Stock
Ownership Plan (994,695) (1,131,573)
Unamortized compensation related to Management
Stock Bonus Plan (482,612) (675,657)
Treasury stock, at cost, 428,316 and 195,980
shares at September 30, 1996 and 1995, respectively (6,027,206) (2,500,900)
------------- -------------
Total stockholders' equity 32,389,175 34,667,446
------------- -------------
Total liabilities and stockholders' equity $ 213,733,690 $ 208,631,862
============= =============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-2
<PAGE>
LANDMARK BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
Interest income:
<S> <C> <C> <C>
Interest on loans $ 9,076,880 $ 6,448,797 $ 5,007,261
Interest and dividends on investment securities 1,940,908 2,844,191 1,980,787
Interest on mortgage-backed securities 3,557,080 4,359,252 3,682,548
------------- ------------- -------------
Total interest income 14,574,868 13,652,240 10,670,596
------------- ------------- -------------
Interest expense:
Deposits 7,441,797 6,899,764 5,751,386
Borrowed funds 1,236,571 1,324,025 165,067
------------- ------------- -------------
Total interest expense 8,678,368 8,223,789 5,916,453
------------- ------------- -------------
Net interest income 5,896,500 5,428,451 4,754,143
Provision for losses on loans 134,743 9,124 (84,933)
Provision for losses on corporate
securities and municipal obligations (128,106)
------------- ------------- -------------
Net interest income after provisions for losses 5,761,757 5,419,327 4,967,182
------------- ------------- -------------
Non-interest income:
Service charges and late charges 217,317 192,213 120,666
Net gain (loss) on sale of investments 27,107 122,900 (93,499)
Net gain on sale of loans 82,208 114,246 177,730
Net gain on sale of mortgage-backed securities 135,208 15,000
Service fees on loans sold 161,329 173,020 179,537
Other 122,191 81,085 50,752
------------- ------------- -------------
Total non-interest income 745,360 683,464 450,186
------------- ------------- -------------
Non-interest expense:
Compensation and related expenses 1,893,458 1,911,205 1,577,324
Occupancy expense 169,780 146,162 150,098
Advertising 63,371 68,876 72,438
Federal insurance premium 389,986 379,086 382,314
SAIF special assessment 937,073
Loss from real estate operations 4,289 3,425 13,970
Data processing 187,237 175,602 192,453
Other expense 678,105 630,677 519,132
------------- ------------- -------------
Total non-interest expense 4,323,299 3,315,033 2,907,729
------------- ------------- -------------
Income before income taxes 2,183,818 2,787,758 2,509,639
------------- ------------- -------------
Income taxes:
Currently payable 1,085,774 872,163 826,485
Deferred tax expense (benefit) (306,182) 153,072 99,169
------------- ------------- -------------
779,592 1,025,235 925,654
------------- ------------- -------------
Net income $ 1,404,226 $ 1,762,523 $ 1,583,985
============= ============= =============
Income per common share
Primary:
Earnings per share (for period subsequent to initial
issuance of common stock on March 28, 1994) $ 0.72 $ 0.82 $ 0.38
============= ============= =============
Weighted average common and common
shares outstanding 1,937,820 2,141,214 2,305,048
============= ============= =============
Fully diluted:
Earnings per share (for period subsequent to initial
issuance of common stock on March 28, 1994) $ 0.72 0.81 0.38
============= ============= =============
Weighted average common and common
shares outstanding 1,953,774 2,175,546 2,316,046
============= ============= =============
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-3
<PAGE>
LANDMARK BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Unrealized
Additional Gain on
Common Paid-In Retained Available-for
Stock Capital Income Sale Securities
----- ------- ------ ---------------
Balance,
<S> <C> <C> <C> <C>
September 30, 1993 $ - $ - $15,186,659 $ -
Net proceeds on
common stock issued
in stock conversion 228,131 21,883,578
Allocation of shares
by Employees'
Stock Ownership Plan
Amortization of
compensation related
to Management Stock
Bonus Plan
Net income for the
year ended
September 30, 1994 1,583,985
Cash dividend paid
($0.05 per share) (114,065)
Net change in
unrealized
depreciation
on marketable-
equity securities
------- ---------- ---------- ------
Balance,
September 30, 1994 228,131 21,883,578 16,656,579 -
Cumulative effect of
October 1, 1995
change in accounting
for certain investment
securities 15,569
Allocation of shares
by Employees'
Stock Ownership Plan 9,921
Amortization of
compensation related
to Management Stock
Bonus Plan
Net income for the
year ended
September 30, 1995 1,762,523
Cash dividend paid
($0.75 per share) (1,602,610)
Net change in
unrealized gain on
available-for-sale
investment securities 21,885
Purchase of 195,980
treasury shares
------- ---------- ---------- ------
Balance,
September 30, 1995 228,131 21,893,499 16,816,492 37,454
Allocation of shares
by Employees'
Stock Ownership Plan 50,676
Amortization of
compensation related
to Management Stock
Bonus Plan
Net income for the year
ended September 30, 1996 1,404,226
Cash dividend paid
($0.40 per share) (752,393)
Net change in
unrealized gain on
available-for-sale
investment securities 215,603
Purchase of 232,336
treasury shares
-------- ----------- ----------- ------------
Balance,
September 30, 1996 $228,131 $21,944,175 $17,468,325 $ 253,057
======== =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
Unrealized Unamortized
Depreciation on Common Unamortized
Marketable Stock Compensation Total
Equity Acquired by Related to Treasury Stockholders'
Securities ESOP MSB Stock Equity
---------- ---- ------- -------- -----------
Balance,
<S> <C> <C> <C> <C> <C>
September 30, 1993 $ (42,302) $ - $ - $ $15,144,357
Net proceeds on
common stock issued
in stock conversion (1,368,780) (965,224) 19,777,705
Allocation of shares
by Employees'
Stock Ownership Plan 75,239 75,239
Amortization of
compensation related
to Management Stock
Bonus Plan 96,522 96,522
Net income for the
year ended
September 30, 1994 1,583,985
Cash dividend paid
($0.05 per share) (114,065)
Net change in
unrealized
depreciation
on marketable-
equity securities 42,302 42,302
----------- ---------- -------- ---------- ----------
Balance,
September 30, 1994 - (1,293,541) (868,702) - 36,606,045
Cumulative effect of
October 1, 1995
change in accounting
for certain investment
securities 15,569
Allocation of shares
by Employees'
Stock Ownership Plan 161,968
Amortization of
compensation related
to Management Stock
Bonus Plan 193,045 193,045
Net income for the
year ended
September 30, 1995 1,762,523
Cash dividend paid
($0.75 per share) (1,602,610)
Net change in
unrealized gain on
available-for-sale
investment securities 21,885
Purchase of 195,980
treasury shares (2,500,900) (2,500,900)
----------- ---------- -------- ---------- ----------
Balance,
September 30, 1995 - (1,131,573) (675,657) (2,500,900) 34,667,446
Allocation of shares
by Employees'
Stock Ownership Plan 136,878 187,554
Amortization of
compensation related
to Management Stock
Bonus Plan 193,045 193,045
Net income for the year
ended September 30, 1996 1,404,226
Cash dividend paid
($0.40 per share) (752,393)
Net change in
unrealized gain on
available-for-sale
investment securities 215,603
Purchase of 232,336
treasury shares (3,526,306) (3,526,306)
----------- ---------- -------- ---------- ----------
Balance,
September 30, 1996 $ - $ (994,695) $ (482,612) $ (6,027,206) $32,389,175
========= =========== =========== ============ ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-4
<PAGE>
LANDMARK BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES
<S> <C> <C> <C>
Net income $ 1,404,226 $ 1,762,523 $ 1,583,985
Adjustments to reconcile net
income to net cash
provided by operating
activities:
Depreciation 116,278 109,413 120,986
Loss (gain) on sale of investment (27,107) (122,900) 93,499
securities available-for-sale
Decrease (increase) in accrued interest
receivable 152,435 (325,534) (290,516)
Increase (decrease) in outstanding checks
in excess of bank balance 1,050,816 (907,008) --
Increase (decrease) in accrued and deferred
income taxes (239,364) 168,159 (82,261)
Increase (decrease) in accounts payable
and accrued expenses 1,257,765 395,949 (194,146)
Amortization of premiums and discounts
on investments and loans (171,438) (261,601) (88,619)
Provision for losses on loans and investments 134,743 9,124 (213,039)
Proceeds from sale of mortgage-backed
securities held-for-sale -- -- 1,015,000
Sale of loans held-for-sale 9,679,305 6,294,625 27,312,466
Gain on sale of mortgage-backed securities
available-for-sale (135,208) -- (15,000)
Gain on sale of loans held-for-sale (82,208) (114,246) (177,730)
Origination of loans held-for-sale (9,643,647) (5,886,469) (18,395,219)
Purchase of loans held-for-sale (2,803,645) (701,310) --
Amortization related to MSBP and ESOP 329,923 355,013 171,761
Other non-cash items, net 293,135 (34,981) (61,145)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,460,520 3,399,891 7,976,377
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and principal payments
on loans held-for-investment (14,007,163) (13,940,760) (4,369,147)
Loans purchased for investment (16,398,206) (13,959,464) (10,086,155)
Principal repayments on mortgage-backed securities 12,396,168 8,046,547 28,280,853
Proceeds from sale of mortgage-backed securities
available-for-sale 11,490,625 -- --
Acquisition of mortgage-backed securities
held-to-maturity (1,482,865) (5,875,830) (30,148,425)
Acquisition of investment securities held-to-maturity (16,295,500) (6,451,406) (28,866,068)
Acquisition of investment securities available-for-sale (2,373,880) (748,625) --
Proceeds from sale of investment securities
available-for-sale 308,479 733,382 --
Proceeds from maturities or calls of investment
securities held-to-maturity 21,862,135 11,830,000 11,593,000
Proceeds from sale of marketable
equity securities -- -- 654,458
Net decrease in time deposits 99,051 285,000 955,000
Proceeds from sale of foreclosed real estate 130,923 125,554 205,179
Acquisition of fixed assets (60,156) (188,533) (24,569)
Other investing activity, net 36,111 181 (147,729)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (4,294,278) (20,143,954) (31,953,603)
------------ ------------ ------------
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-5
<PAGE>
LANDMARK BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
<S> <C> <C> <C>
Net increase (decrease) in deposits $ (1,142,174) $ 8,098,871 $(10,569,540)
Net increase (decrease) in escrow accounts 332,986 196,850 (68,615)
Proceeds from FHLB advances and other borrowings 53,600,000 62,500,000 50,030,000
Repayment of FHLB advances and other borrowings (45,666,666) (50,546,666) (36,450,000)
Purchase of treasury stock (3,526,306) (2,500,900)
Proceeds from stock issuance, net of conversion
costs and stock acquired by ESOP -- -- 20,742,929
Purchase of company stock for MSBP -- -- (965,224)
Dividends paid (752,393) (1,602,610) (114,065)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,845,447 16,145,545 22,605,485
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,689 (598,518) (1,371,741)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 462,021 1,060,539 2,432,280
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 473,710 $ 462,021 $ 1,060,539
============ ============ ============
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest on deposits, advances and other
borrowings $ 8,519,955 $ 7,718,438 $ 5,924,494
Income taxes 1,018,956 857,076 1,007,915
Transfers from loans to foreclosed real estate 27,411 42,658 214,629
Loans to finance sale of foreclosed real estate 25,954 -- 75,450
Transfer of held-to-maturity mortgage-backed
securities to available-for-sale 11,355,417 -- --
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-6
<PAGE>
LANDMARK BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
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.
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,
and, to a lesser extent, consumer and commercial loans. The Bank conducts
its business from its main office in Dodge City and also has four branch
offices located in Barton, Finney and Rush Counties, Kansas. 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 consumer loans, including auto, home equity and savings
account loans.
PRINCIPLES OF 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.
USE OF ESTIMATES:
The preparation of 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
Company'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.
F-7
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
In May, 1993, the Financial Accounting Standards Board issued SFAS
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities. This standard establishes three categories of investments,
including mortgage-backed securities; held-to-maturity, trading, and
available-for-sale. Under SFAS No. 115, held-to-maturity securities are
reported at amortized cost. Trading securities are reported at fair value,
with unrealized changes in value reported in the Company's income statement
as part of its earnings. Available-for-sale securities are also reported
at fair value, but any unrealized appreciation or depreciation, net of tax
effects are reported as a separate component of equity. The Company
adopted SFAS No. 115 with an effective adoption date of October 1, 1994.
Prior to the adoption of SFAS No. 115, bonds, notes and debentures were
carried at cost, adjusted for premiums and discounts that were recognized
in interest income using the interest method over the period to maturity.
Mortgage-backed and related securities held for investment were stated at
cost, adjusted for amortization of premiums and accretion of discounts
using the interest method. The Company had the positive intent and ability
to hold such assets to maturity. Equity securities that were non-
marketable were carried at cost. All other equity securities were carried
at the lower of cost or estimated market value in the aggregate. In the
event the carrying amount was reduced below market, a valuation account was
established by a charge to equity representing the net unrealized loss.
In accordance with the provisions of the Financial Accounting Standards
Board A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities (the Guide), the management of
the Company in December of 1995 transferred $11,355,417 of mortgage-backed
securities from held-to-maturity classification to available-for-sale
classification. These securities were sold subsequent to the transfer.
The transfer was a one-time transaction as provided for in the Guide in an
effort to restructure and enhance the yield and rate sensitivity of the
Company's portfolio of held-to-maturity securities.
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.
F-8
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 accrual of interest on impaired loans is discontinued when in
management's opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to
the extent cash payments are received.
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 REAL ESTATE:
Real estate properties 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. 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 gain or loss on foreclosed real
estate. The historical average holding period for such property is
approximately one year.
EXCESS SERVICING FEES RECEIVABLE:
Additional funds for lending are provided by selling participating
interests in real estate loans. When participating interests in loans sold
have an average contractual interest rate, adjusted for normal servicing
fees, that differs from the agreed yield to the purchaser, gains or losses
are recognized equal to the present value of such differential over the
estimated remaining life of such loans. The resulting "excess servicing
fees receivable" is amortized over the estimated life using the interest
method. The excess servicing fees receivable is included in prepaid
expenses and other assets on the consolidated statements of financial
condition.
The excess servicing fees receivable and the amortization thereon is
periodically evaluated in relation to estimated future net servicing
revenues, taking into consideration changes in interest rates, current
prepayment rates and expected future cash flows. The Bank evaluates the
carrying value of the excess servicing receivables by estimating the future
net servicing income of the excess servicing receivable based on
management's best estimate of remaining loan lives.
F-9
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS:
All derivative financial instruments held or issued by the Bank are held or
issued for purposes other than trading.
Off-balance sheet 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.
INCOME TAXES:
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets
or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
IMPACT OF NEW ACCOUNTING STANDARDS:
In April, 1995, the FASB issued SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
Statement No. 121 establishes standards for recognizing and measuring the
impairment of long-lived assets, certain identifiable intangibles, and
goodwill, when an entity is unable to recover the carrying amount of those
assets. This statement is effective for fiscal years beginning after
December 15, 1995. SFAS No. 121 would not have a material effect on the
Company's financial statements.
In May, 1995, the FASB issued SFAS No. 122, Accounting for Mortgage
Servicing Rights. This Statement amends SFAS No. 65, Accounting for
Certain Mortgage Banking Activities, to require that a mortgage banking
enterprise recognize as separate assets rights to service mortgage loans
for others, however those servicing rights are acquired. This Statement
requires that a mortgage banking enterprise assess its capitalized mortgage
servicing rights for impairment based on the fair value of those rights.
SFAS No. 122 is effective for fiscal years beginning after December 15,
1995. SFAS No. 122 is to be applied prospectively effective October 1,
1996, and is not expected to have a material effect on the Company's
financial statements. This Statement was superseded by SFAS No. 125 which
was issued in June 1996, SFAS No. 125 is discussed below.
In October, 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. This Statement 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 objective of the measurement process is to estimate the fair
value of options or other equity instruments based on the stock price at
the grant date, to which employees will become entitled when they have
F-10
<PAGE>
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
rendered the requisite service and satisfy all other conditions necessary
to earn the right to benefit from the options or other equity instruments.
Although encouraged to do so, entities are not required to adopt the
recognition and measurement aspects of SFAS No. 123, and may continue to
account for stock-based compensation plans in accordance with APB Opinion
25. However, entities that continue to apply Opinion 25 must comply with
the disclosure requirements of SFAS No. 123. Whichever method is used must
be applied for all stock-based employee compensation arrangements. Once
the recognition and measurement provisions of SFAS No. 123 are adopted,
that election may not be reversed. SFAS No. 123 will be effective for the
fiscal year beginning October 1, 1996. SFAS No. 123 will effect the
Company's stock options granted after October 1, 1996. These options will
be recognized and measured in accordance with the fair-value-based method
of accounting, this Statement is not expected to have a material effect on
the Company's financial statements
In June, 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This
Statement established revised standards for recognition, measurement, and
disclosure of transfers and servicing of financial assets and
extinguishment of debt. Those standards are based on consistent
application of a financial-components approach that focuses on control.
Under that approach, after a transfer of financial assets, an entity
recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. This
Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
A transfer of financial assets in which the transferor surrenders control
over those assets is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. As issued, Statement No. 125 is effective for
transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. An exposure draft of a proposed SFAS was issued in November
1996 titled "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125" , an amendment of FASB Statement No. 125. This proposed
statement would defer the effective date of SFAS No. 125 for one year.
This exposure draft was issued after the Board was made aware of the volume
and variety of certain transactions and the related changes to information
systems and accounting processes that are necessary to comply with the
requirements of SFAS No. 125. Earlier application of the Statement is not
allowed. The Statement's impact on the Bank is not determinable since it
will be based on future transfers of financial assets.
EARNINGS PER SHARE:
Primary earnings per common and common equivalent share and fully diluted
earnings per common and common equivalent share are computed using the
weighted average number of shares outstanding adjusted for unallocated ESOP
shares and for incremental shares related to outstanding options to
purchase common stock.
Earnings per share of common stock for 1994 was computed by dividing net
income subsequent to conversion by the weighted average number of common
and common equivalent shares outstanding subsequent to conversion on March
28, 1994.
FINANCIAL STATEMENT PRESENTATION:
Certain items in prior year financial statements have been reclassified to
conform to the 1996 presentation.
F-11
<PAGE>
2. INVESTMENT SECURITIES
Effective October 1, 1994, the Company adopted the Financial Accounting
Standards Board Statement SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. This statement is not retroactively
applied. In conjunction with the adoption of SFAS No. 115, investment
securities as of October 1, 1994 were designated as held-to-maturity or
available-for-sale. The cumulative effect of classifying securities
previously accounted for at the lower of cost or market in the aggregate as
available-for-sale was to reflect an unrealized gain, net of tax effect, as
a component of retained income of $15,569 as of October 1, 1994.
The amortized cost and estimated market values of investment securities at
September 30 are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1996
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- -------- -------- ------------
Held-to-maturity:
<S> <C> <C> <C> <C>
Government Agency Securities $27,168,520 $ 53,398 $363,467 $ 26,858,451
Municipal Obligations 2,230,000 30,291 5,375 2,254,916
----------- -------- -------- ------------
$29,398,520 $ 83,689 $368,842 $ 29,113,367
=========== ======== ======== ============
Available-for-sale:
Common Stock $ 1,982,407 $420,600 $ 6,770 $ 2,396,237
Stock in Federal Home Loan
Bank, at cost 1,731,400 1,731,400
Other, at cost 10,000 10,000
----------- -------- -------- ------------
$ 3,723,807 $420,600 $ 6,770 $ 4,137,637
=========== ======== ======== ============
</TABLE>
<TABLE>
<CAPTION>
September 30, 1995
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- -------- -------- ------------
Held-to-maturity:
<S> <C> <C> <C> <C>
United States Treasury Securities $ 2,887,463 $ - $ 24,692 $ 2,862,771
Corporate Securities 250,000 2,578 379,938 252,578
Government Agency Securities 29,157,953 137,427 5,712 28,915,442
Municipal Obligations 2,529,636 61,204 2,585,128
----------- -------- -------- -----------
$34,825,052 $201,209 $410,342 $34,615,919
=========== ======== ======== ===========
Available-for-sale:
Common Stock $ 145,000 $ 61,250 $ - $ 206,250
Stock in Federal Home Loan
Bank, at cost 1,476,300 1,476,300
Other, at cost 10,000 10,000
----------- -------- -------- -----------
$ 1,631,300 $ 61,250 $ - $ 1,692,550
=========== ======== ======== ===========
</TABLE>
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, Sallie Mae, Federal Home Loan
Bank, Resolution Trust Corporation, and the Tennessee Valley Authority.
F-12
<PAGE>
2. INVESTMENT SECURITIES (CONTINUED)
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 which is equal to cost.
The amortized cost and estimated market value of debt securities, all of
which are classified as held-to-maturity, at September 30, 1996, by
contractual maturity 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. The
equity securities have been excluded from the maturity table below because
they do not have contractual maturities associated with debt securities.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
---------------- ----------------
Held-to-maturity:
<S> <C> <C>
Due in one year or less $ 2,100,000 $ 2,104,531
Due after one year through five years 5,999,613 5,952,725
Due after five years through ten years 18,198,907 18,094,923
Due after ten years 3,100,000 2,961,188
---------------- ----------------
Total held-to-maturity $ 29,398,520 $ 29,113,367
================ ================
</TABLE>
Gross realized gains and (losses) on sales of investment securities during
the years ended September 30 are as follows:
1996 1995 1994
--------- --------- --------
Available-for-sale securities:
Realized gains $ 27,107 $ 122,900 $ --
Realized losses -- -- (93,499)
-------- -------- -------
$ 27,107 $ 122,900 $(93,499)
========= ========= ========
Proceeds from sales of available-for-sale or marketable equity securities
were $308,479, $733,382 and $654,458 for the years ended September 30,
1996, 1995 and 1994, respectively. During the year ended September 30,
1994, sales consisted of mutual funds. During the year ended September 30,
1996 and 1995, sales consisted of common stock of unrelated financial
corporations.
There were no proceeds from sales of debt securities for the years ended
September 30, 1996, 1995 and 1994.
Investment securities with a carrying amount of $0 and $500,000 as of
September 30, 1996 and 1995, respectively, were pledged as collateral for
public funds as discussed in Note 9.
F-13
<PAGE>
3. MORTGAGE-BACKED SECURITIES
Mortgage-backed securities, all of which were classified as held-to-
maturity at September 30, 1996 and 1995, consist of the following:
<TABLE>
<CAPTION>
September 30, 1996
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
GNMA - fixed rate $ 552,879 $ 11,524 $ -- $ 564,403
FNMA - ARMs 15,516,459 147,235 137,645 15,526,049
FHLMC - ARMs 6,257,007 77,661 12,704 6,321,964
FHLMC - fixed rate 401,275 10,550 2,561 409,264
FNMA - fixed rate 812,750 66,092 -- 878,842
Collateralized mortgage
obligations-government
agency issue 16,681,922 14,183 402,707 16,293,398
Collateralized mortgage
obligations-private
issues 5,654,828 4,899 127,640 5,532,087
----------- ----------- ----------- -----------
$45,877,120 $ 332,144 $ 683,257 $45,526,007
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1995
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
GNMA - ARMs $11,989,312 $ -- $ 43,189 $11,946,123
FNMA - ARMs 19,889,225 23,127 -- 19,912,352
FHLMC - ARMs 7,024,892 18,722 -- 7,043,614
GNMA - fixed rate 771,308 24,587 -- 795,895
FNMA - fixed rate 954,025 -- 1,067 952,958
FHLMC - fixed rate 540,546 10,807 -- 551,353
Collateralized mortgage
obligations-government
agency issue 19,616,992 -- 111,781 19,505,211
Collateralized mortgage
obligations-private
issues 7,420,269 -- 53,265 7,367,004
----------- ----------- ----------- -----------
$68,206,569 $ 77,243 $ 209,302 $68,074,510
=========== =========== =========== ===========
</TABLE>
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.
Proceeds from sales of mortgage-backed securities available-for-sale or
held-for-sale were $11,490,625, $0 and $1,015,000 for years ended September
30, 1996, 1995 and 1994, respectively. Sales for the year ended September
30, 1996 consisted of mortgage-backed securities that were transferred from
held-to-maturity to available-for-sale in December, 1995. These securities
were transferred in accordance with the one-time transaction allowed under
the FASB Implementation Guide, see Note 1 for further discussion. These
securities were subsequently sold.
F-14
<PAGE>
3. MORTGAGE-BACKED SECURITIES (CONTINUED)
Gross realized gains and (losses) on sales of mortgage-backed securities
during the years ended September 30 are as follows:
1996 1995 1994
--------- -------- ---------
Realized gain $ 144,885 $ -- $ 15,000
Realized losses (9,677) -- --
--------- ------- ---------
$ 135,208 $ -- $ 15,000
========= ======= =========
Mortgage-backed securities with a carrying amount of $7,001,787 and
$2,173,413 at September 30, 1996 and 1995, 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:
<TABLE>
<CAPTION>
September 30,
-----------------------------------------
1996 1995
------------------ ------------------
First mortgage loans:
<S> <C> <C>
Secured by one to four family residences $ 99,579,583 $ 79,162,144
Secured by other properties 3,726,333 4,040,156
Construction loans 1,129,915 202,177
Other 1,852,243 1,781,074
------------------ ------------------
106,288,074 85,185,551
Less: Unamortized premium on loan purchase 46,617 69,170
Unearned discounts and loan fees (304,237) (362,021)
Undisbursed loan proceeds - (45,648)
Allowance for loan losses (531,749) (530,956)
------------------ ------------------
Total first mortgage loans 105,498,705 84,316,096
------------------ ------------------
Consumer and other loans:
Automobile 9,783,677 5,985,574
Commercial 3,600,888 1,752,796
Loans on deposits 554,550 604,555
Home equity and second mortgage 8,139,668 5,784,158
Mobile homes 27,791 7,051
Other 616,546 279,086
------------------ ------------------
22,723,120 14,413,220
------------------ ------------------
Less: Allowance for loan losses (208,597) (112,591)
------------------ ------------------
Total consumer and other loans 22,514,523 14,300,629
------------------ ------------------
$ 128,013,228 $ 98,616,725
================= ==================
</TABLE>
The following is analysis of the change in the allowance for loss on loans:
1996 1995 1994
--------- --------- ---------
Balance, beginning $ 643,547 $ 619,218 $ 715,810
Provision charged to operations 134,743 9,124 (84,933)
Loans charged off (38,631) (2,200) (22,657)
Recoveries 687 17,405 10,998
--------- --------- ---------
Balance, ending $ 740,346 $ 643,547 $ 619,218
========= ========= =========
F-15
<PAGE>
4. LOANS RECEIVABLE (CONTINUED)
Impairment of loans having recorded investments of $0 at September 30, 1996
and $243,587 at September 30, 1995 , has 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,
1996 and 1995 was $60,897 and $269,555, 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, 1996 and 1995. Interest income on
impaired loans of $0 and $15,049 was recognized for cash payments received
for the year ended September 30, 1996 and 1995, 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 17 for disclosure of loans to related parties.
5. LOAN SERVICING
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:
<TABLE>
<CAPTION>
1996 1995 1994
---------------- ---------------- ----------------
<S> <C> <C> <C>
FHLMC $ 52,343,707 $ 54,326,611 $ 57,964,741
Other investors 1,396,481 1,721,703 2,012,952
---------------- ---------------- ----------------
$ 53,740,188 $ 56,048,314 $ 59,977,693
================ ================ ================
</TABLE>
The following is an analysis of the changes in excess servicing fees
retained asset balances for the years ending September 30, 1994, 1995 and
1996:
Retained
--------
Balance, October 1, 1993 $ 13,604
Amortization (7,775)
Balance, September 30, 1994 5,829
Amortization (3,627)
Balance, September 30, 1995 2,202
Amortization (2,202)
--------
Balance, September 30, 1996 $ -
========
F-16
<PAGE>
6. ACCRUED INCOME RECEIVABLE
Accrued interest receivable at September 30 is summarized as follows:
1996 1995
------------- ------------
Mortgage-backed securities $ 290,900 $ 422,503
Loans receivable 762,588 552,178
Investments 465,152 696,394
------------- ------------
$ 1,518,640 $ 1,671,075
============= ============
7. FORECLOSED REAL ESTATE
Real estate owned or in judgment and other repossessed assets consist of
the following:
<TABLE>
<CAPTION>
September
1996 1995
------- -------
<S> <C> <C>
Real estate acquired by foreclosure $ - $ -
Real estate loans in judgment
and subject to redemption - 66,320
Loans accounted for as in-substance foreclosures
------- -------
$ - $66,320
======= =======
</TABLE>
There was no activity in the allowance for loss account for the years ended
September 30, 1996, 1995 and 1994.
8. OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are stated at cost less accumulated
depreciation as follows:
<TABLE>
<CAPTION>
September 30,
1996 1995
---------- ------------
<S> <C> <C>
Land $ 298,366 $ 298,366
Office building and improvements 1,272,632 1,250,516
Furniture, fixtures and equipment 835,874 799,816
Automobiles 9,642 9,642
---------- ------------
2,416,514 2,358,340
Less accumulated depreciation 1,466,728 1,352,432
---------- ------------
$ 949,786 $ 1,005,908
========== ============
Depreciation expense ($120,986 for 1994) $ 116,278 $ 109,413
========== ============
</TABLE>
F-17
<PAGE>
9. DEPOSITS
Deposits at September 30 are summarized as follows:
1996 1995
------------ ------------
Amount Amount
------------ ------------
Demand accounts:
Interest bearing $ 15,273,551 $ 9,789,501
Non-interest bearing 3,233,958 2,564,548
------------ ------------
Total demand accounts 18,507,509 12,354,049
Savings deposits 5,797,182 6,680,784
Certificates of deposit 119,510,219 125,922,251
------------ ------------
$143,814,910 $144,957,084
============ ============
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 as of September 30, 1996 and 1995 was approximately
$7,032,053 and $9,014,468, respectively. Demand and NOW accounts as of
September 30, 1996 included public funds of $2,533,407. Public funds were
collateralized by investment securities and mortgage-backed securities as
discussed in Notes 2 and 3.
At September 30, 1996, scheduled maturities of certificates of deposit are
as follows:
Year Ending September 30,
-------------------------
1997 $ 94,575,804
1998 17,856,209
1999 3,827,400
2000 2,537,974
2001 712,832
------------------
$ 119,510,219
==================
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:
1996 1995
--------------- ---------------
Advances $ 14,466,668 $ 9,733,334
Line of credit 19,000,000 15,800,000
--------------- ---------------
$ 33,466,668 $ 25,533,334
=============== ===============
F-18
<PAGE>
10. ADVANCES AND OTHER BORROWINGS FROM FEDERAL HOME LOAN BANK (CONTINUED)
Advances and other borrowings from the Federal Home Loan Bank at September
30 consist of the following:
1996 1995
Fiscal ---------------------------- ---------------------------
Year Weighted Weighted
Maturity Amount Average Rate Amount Average Rate
-------- ------ ------------ ------ ------------
1996 $ -- --% $16,800,000 6.60%
1997 28,166,668 6.06 2,333,334 6.93
1998 5,000,000 6.74 2,000,000 7.19
1999 300,000 7.18 400,000 7.18
2000 - - 4,000,000 7.71
----------- ---- ----------- ----
$33,466,668 6.17% $25,533,334 6.86%
=========== ==== =========== ====
At September 30,1996 the Company had $19,000,000 outstanding under a
$24,000,000 line of credit with the Federal Home Loan Bank. All amounts
outstanding under the line of credit are payable on February 5, 1997 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, 1996 was 6.03%. At September 30, 1995 the Company had
$15,800,000 outstanding under a $17,000,000 line of credit, due February 6,
1996.
The advances and line of credit are collateralized as of September 30, 1996
and 1995 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.
11. INCOME TAXES
The company and subsidiary file consolidated federal income tax returns.
The company's effec-tive income tax rate was different than the statutory
federal income tax rate for the following reasons:
September 30,
-----------------------------------------
1996 1995 1994
----- ----- -----
Statutory federal income tax 34.0 % 34.0 % 34.0 %
Increase (reductions) resulting from:
Kansas Privilege Tax 4.3 5.8 4.3
Other (2.6) (3.0) (1.4)
---- ---- ----
35.7 % 36.8 % 36.9 %
==== ==== ====
F-19
<PAGE>
11. INCOME TAXES (CONTINUED)
Deferred taxes are included in the accompanying Statements of Financial
Condition at September 30, 1996 and 1995 for the estimated future tax
effects of differences between the financial statement and federal income
tax basis of assets and liabilities given the provisions of currently
enacted tax laws. The net deferred tax asset (liability) at September 30,
1996 and 1995 were comprised of the following:
1996 1995
--------- ---------
Deferred tax assets:
Deferred loan fees and costs $ 53,143 $ 69,188
Allowance for loan losses 282,590 245,642
FDIC special assessment 357,681
Deferred compensation and accrued salaries 105,913 69,301
Capital loss carryover
12,976 23,323
--------- ---------
812,303 407,454
--------- ---------
Deferred tax liabilities:
Accumulated depreciation
(6,063) (10,207)
Special bad debt deduction (347,550) (283,561)
FHLB stock dividends (276,207) (237,385)
Unrealized gain on available-for-sale securities (160,773) (23,796)
--------- ---------
(790,593) (554,949)
--------- ---------
$ 21,710 $(147,495)
========= =========
No valuation allowance was recorded against deferred tax assets at
September 30, 1996 or 1995.
The Bank is allowed a special bad debt deduction based on a percentage of
taxable income (8%) or on specified experience formulas, subject to certain
limitations based upon aggregate loan balances at the end of the year. The
Bank used the percentage-of-taxable income method in 1996, 1995, and 1994.
Effective with the tax year beginning October 1, 1996, the Bank will no
longer be able to use the percentage of taxable income method and will
begin to recapture tax bad debt reserves of approximately $910,000 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 has 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 $1,907,000 related to approximately $5,610,000
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
F-20
<PAGE>
12. REGULATORY MATTERS (CONTINUED)
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.
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, 1996, that the Bank
meets all capital adequacy requirements to which it is subject.
As of September 30, 1996, 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:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 1996:
<S> <C> <C> <C> <C> <C> <C>
Tangible Capital $28,112 13.3% $ 3,167 $ 1.5% N/A
(to Assets)
Total (Risk-Based)
Capital
(to Risk Weighted Assets) 28,852 31.1% 7,433 8.0% 9,292 10.0%
Core (Tier I)
Capital
(to Risk Weighted Assets) 28,112 30.3% N/A 5,575 6.0%
Core (Tier I)
Capital - leverage
(to Assets) 28,112 13.3% 6,335 3.0% 10,558 5.0%
As of September 30, 1995:
Tangible Capital (to Assets) 26,400 12.7% 3,116 1.5% N/A
Total (Risk-Based)
Capital
(to Risk Weighted Assets) 27,044 35.8% 6,048 8.0% 7,561 10.0%
Core (Tier I)
Capital
(to Risk Weighted Assets) 26,400 34.9% N/A 4,536 6.0%
Core (Tier I)
Capital - leveraged
(to Assets) 26,400 12.7% 6,233 3.0% 10,388 5.0%
</TABLE>
F-21
<PAGE>
12. REGULATORY MATTERS (CONTINUED)
The following is a reconciliation of net worth to regulatory capital as
reported in the September 30, 1996 and 1995 reports to the Office of Thrift
Supervision:
<TABLE>
<CAPTION>
September 30,
----------------------------------
1996 1995
------------- -------------
Bank net worth per report
<S> <C> <C>
to Office of Thrift Supervision $ 28,112,000 $ 26,401,000
Rounding 45 (576)
------------- -------------
Net worth as reported in accompanying
financial statements (Bank only) 28,112,045 26,400,424
Adjustments to arrive at Core (Tier I)
and Tangible Capital - -
------------- -------------
Core (Tier I) and Tangible Capital 28,112,045 26,400,424
Adjustments to arrive at Total Capital:
Allowable portion of general
allowance for loan losses 740,000 644,000
------------- -------------
Total Capital $ 28,852,045 $ 27,044,424
============= =============
Risk weight assets $ 92,918,000 $ 75,606,000
============= =============
</TABLE>
Effective October 1, 1996 the Bank declared a dividend payable to the
Company as of October 4, 1996 in the amount of $2,500,000.
13. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying consolidated financial statements. In addition, the Company
is 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 these 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, 1996, 1995 and
1994 were $26,218, $24,296 and $23,261, 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 $128,306 and $76,397 at September 30,
1996 and 1995, respectively.
F-22
<PAGE>
14. EMPLOYEE BENEFIT PLANS (CONTINUED)
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, 1996 and
1995, the cash surrender values on the policies were $379,857 and $339,945,
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 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 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, l996, the balance of
indebtedness from the ESOP to the Company was $994,695, 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 $133,817 and $69,187 for the years ended September
30, 1996 and 1995, respectively. As of September 30, 1996, of the 134,469
shares acquired by the ESOP, 35,000 shares were allocated and 99,469 shares
were unallocated. The 99,469 unallocated shares had an estimated market
value of $1,628,800 at September 30, 1996.
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
F-23
<PAGE>
14. EMPLOYEE BENEFIT PLANS (CONTINUED)
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. FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financial needs of its customers
and to reduce its own exposure to fluctuations in interest rates. 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, 1996 and 1995, the Bank had outstanding commitments to
fund real estate loans of $2,054,583 and $1,110,268, respectively. Of the
commitments outstanding at September 30, 1996, $898,573 were for fixed rate
loans at rates of 7.625% to 9.50%. Commitments for adjustable rate loans
amounted to $1,156,010 with initial rates of 6.50% to 8.75% at September
30, 1996. Of the commitments outstanding at September 30, 1995, $924,268
were for fixed rate loans at rates of 7.25% to 8.75%. Commitments for
adjustable rate loans outstanding at September 30, 1995 amounted to
$186,000 with initial rates of 7.625% to 9.125%.
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 outstanding commitments from mortgage banking concerns to
purchase $234,792 and $100,137 of loans yet to be originated at September
30, 1996 and 1995, respectively. The Bank has outstanding commitments to
originate or has applications pending approval at approximately equivalent
interest rates.
The Bank had no commitments to purchase mortgage-backed securities or
investments at September 30, 1996 and 1995.
F-24
<PAGE>
15. FINANCIAL INSTRUMENTS (CONTINUED)
At September 30, 1996 and 1995, loans with a carrying value of $1,890,007
and $316,991, respectively, 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, 1996 and 1995.
16. 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, 1996, the Bank had a net investment of $129,903,235 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.
17. 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, 1996 and 1995, 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 and directors
which individually exceeded $60,000 in aggregate during the year ended
September 30, 1996:
Balance, September 30, 1995 $ 1,182,566
New loans 1,526,419
Repayments 568,481
--------------
Balance September 30, 1996 $ 2,140,504
==============
F-25
<PAGE>
18. 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 marketable equity securities held for investment purposes, fair values
are based on quoted market prices or dealer quotes. For other securities
held as investments, fair value equals quoted market price, 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.
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.
F-26
<PAGE>
18. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In Thousands)
Financial assets:
Cash and cash equivalents:
<S> <C> <C> <C> <C>
Interest bearing ...................... $ 3 $ 3 $ -- $ --
Non-interest bearing .................. 471 471 462 462
Time deposits in other
financial institutions .................. 480 480 579 579
Investment securities held-to-maturity .... 29,399 29,113 34,825 34,616
Investment securitiesavailable-for-sale ... 4,138 4,138 1,693 1,693
Mortgage-backed securities held-to-maturity 45,877 45,526 68,207 68,075
Loans receivable .......................... 128,013 126,244 98,617 99,325
Loans held-for-sale ....................... 1,890 1,890 317 317
Financial liabilities:
Deposits .................................. 143,815 143,548 144,957 144,970
Advances and other borrowings from
the Federal Home Loan Bank ............ 33,467 33,377 25,533 25,698
Par Fair Par Fair
Value Value Value Value
----- ----- ----- -----
Unrecognized Financial instruments:
Commitments to extend credit $ 2,055 $ 2,040 $ 1,110 $ 1,121
</TABLE>
19. STOCK CONVERSION / RESTRICTIONS ON RETAINED EARNINGS
On August 24, 1993, the Board of Directors of the Bank adopted a Plan of
Conversion to convert from a federally chartered mutual savings and loan
association to a federally chartered stock savings bank with the concurrent
formation of Landmark Bancshares, Inc. to act as a holding company of the
Bank (the "Conversion").
At the date of conversion, March 28, 1994, the Company completed the sale
of 2,281,312 shares of common stock, $0.10 par value, through concurrent
subscription and community offerings at $10.00 per share. Included in the
total shares outstanding are 91,252 shares which were purchased by the
Bank's MSBP at an average price of $10.58 per share and 136,878 shares
which were purchased by the Bank's ESOP at $10.00 per share. Net proceeds
from the conversion, after recognizing conversion expenses and underwriting
costs of $701,411, were $22,111,709. From the net proceeds, the company
used $11,055,855 to purchase all of the capital stock of the Bank, $965,224
to fund the purchase of 91,252 shares of the company stock by the MSBP
(Note 14) and $1,368,780 to fund the purchase of 136,878 shares of the
company stock by the ESOP (Note 14).
F-27
<PAGE>
19. STOCK CONVERSION / RESTRICTIONS ON RETAINED EARNINGS (CONTINUED)
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.
20. 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
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 Plan is to provide additional incentive to certain
officers, directors and key employees by facilitating their purchase of a
stock interest in the Company. The Option Plan provides for a term of ten
years, after which no awards may be made, unless earlier terminated by the
Board of Directors pursuant to the Option Plan.
The Option Plan will be 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.
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.
All such options are exercisable immediately following stockholder
ratification. As of September 30, 1996, no options have been exercised and
all options granted remain outstanding.
F-28
<PAGE>
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, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
ASSETS
<S> <C> <C>
Cash and cash equivalents $ 666 $ 551
Time deposits in other financial institutions 95 --
Investment securities available-for-sale 2,396 206
Investment in subsidiary 12,217 10,506
Loans receivable 1,236 7,106
Other assets 54 477
-------- --------
Total assets $ 16,664 $ 18,846
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 169 $ 74
Stockholders' equity:
Common stock 228 228
Additional paid-in capital 21,944 21,893
Retained income 1,574 922
Net unrealized gain on available-for-sale securities 253 37
Unamortized amounts related to ESOP and MSBP (1,477) (1,807)
-------- --------
22,522 21,273
Treasury stock, at cost (6,027) (2,501)
-------- --------
Total stockholders' equity 16,495 18,772
-------- --------
Total liabilities and stockholders' equity $ 16,664 $ 18,846
======== ========
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Equity earnings of subsidiary $ 1,331 $ 1,587
Interest and dividend income 221 343
Net gain on sale of investments 27 123
Other 3 3
Total income 1,582 2,056
-------- ------
Operating expenses 129 190
-------- ------
Income before income taxes 1,453 1,866
Income tax expense 49 103
-------- ------
Net income $ 1,404 $1,763
======== ======
</TABLE>
F-29
<PAGE>
21. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
(IN THOUSANDS)
1996 1995
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,404 $ 1,763
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of subsidiary (1,331) (1,587)
Gain on sale of investments (27) (123)
Decrease in other assets 449 32
Increase in other liabilities 71 28
Other (137) (24)
------- -------
Net cash provided by operating activities 429 89
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiary -- 1140
Acquisition of investment securities
available-for-sale, including deposits (2,214) (748)
Proceeds from sale of investment securities
available-for-sale 308 733
Decrease in loans to subsidiary and ESOP, net 5,837 3,463
Other loans, net 33 (275)
------- -------
Net cash provided by investing activities 3,964 4,313
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of treasury stock (3,526) (2,501)
Cash dividends paid (752) (1,603)
------- -------
Net cash used by financing activities (4,278) (4,104)
------- -------
Increase in cash and cash equivalents 115 298
Cash and cash equivalents at beginning of year 551 253
------- -------
Cash and cash equivalents at end of year $ 666 $ 551
======= =======
22. RECENT DEVELOPMENTS
Deposits of the Bank are insured by the SAIF as administered by the FDIC.
As a member of the SAIF, the Bank paid an insurance premium to the FDIC
equal to a minimum of 0.23% of its total deposits. The FDIC also maintains
another insurance fund, the Bank Insurance Fund (BIF), which primarily
insures commercial bank deposits. Effective September 30, 1995, the FDIC
lowered the insurance premium of BIF insured deposits to range of between
0.04% and 0.31% of deposits, with the result that most commercial banks
would pay the lower rate of 0.04%. Effective January 1, 1996, the annual
insurance premium for most BIF members was lowered to $2,000. These
reductions in insurance premiums for BIF members placed SAIF members at a
competitive disadvantage to BIF members.
F-30
<PAGE>
22. RECENT DEVELOPMENTS (CONTINUED)
Effective September 30, 1996, federal law was revised to mandate a one-time
special assessment of SAIF members such as the Bank of approximately .657%
of deposits held on March 31, 1995. The Bank recorded a $937,073 pre-tax
expense for this assessment at September 30, 1996. Beginning January 1,
1997, deposit insurance assessments for SAIF members are expected to be
reduced to approximately .064% of deposits on an annual basis through the
end of 1999. During this same period, BIF members are expected to be
assessed approximately .013% of deposits. Thereafter, assessments for BIF
and SAIF members should be the same and SAIF and BIF may be merged. It is
expected that theses continuing assessments for both SAIF and BIF members
will be used to repay outstanding Financing Corporation bond obligations.
Assuming this reduction, beginning January 1, 1997, the rate of deposit
insurance assessed the Bank will decline by approximately 70%.
F-31
<PAGE>
Corporate Information
- ---------------------
<TABLE>
<CAPTION>
<S> <C>
Landmark Bancshares, Inc. Form 10-K
A copy of the Company's annual report on Form 10-K
Central and Spruce for fiscal year ended September 30, 1996, including
Dodge City, Kansas 67801 financial statements schedules, as filed with the
(316) 227-8111 Securities and Exchange Commission, will be finished
without charge to stockholders, as of the record date
Board of Directors upon written request to: Corporate Secretary,
Landmark Bancshares, Inc., Central and Spruce,
C. Duane Ross Dodge City, Kansas 67801.
Chairman of the Board
President, High Plains Publishers, Inc.
Annual Meeting
Larry Schugart The annual meeting of Landmark Bancshares, Inc.
President and Executive Officer will be held on January 15, 1997 at 1:30 p.m. at the
offices of the Company, located at Central and
David H. Snapp Spruce, Dodge City, Kansas 67801
Partner, Waite, Snapp & Doll, Attorneys at Law
Richard Ball Independent Accountants
CPA/Shareholder, Adams, Brown, Regier Carr & Monroe, L.L.P.
Beran & Ball, Chtd. 300 West Douglas, Suite 100
Wichita, Kansas 67202
Jim W. Lewis
Owner, Auto Dealerships
Special Counsel
Executive Officers Malizia, Spidi, Sloane and Fisch, P.C.
1301 K. Street, N.W., Suite 700 East
Larry Schugart Washington, D.C. 20005
President and Chief Executive Officer
James F. Strovas Stock Transfer Agent
Treasurer and Chief Financial Officer American Securities Transfer & Trust, Inc.
1825 Lawrence Street, Suite 444
Gary L. Watkins Denver, Colorado 80201
Secretary and Chief Operating Officer
</TABLE>
-18-
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-95072 of Landmark Bancshares, Inc. on Form S-8 of our report dated October
24, 1996 incorporated by reference in this Annual Report on Form 10-K of
Landmark Bancshares, Inc. for the year ended September 30, 1996.
/s/ Regier Carr & Monroe, L.L.P.
Regier Carr & Monroe, L.L.P.
December 27, 1996
Wichita, Kansas
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 474
<INT-BEARING-DEPOSITS> 483
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,138<F1>
<INVESTMENTS-CARRYING> 75,276<F2>
<INVESTMENTS-MARKET> 74,639<F3>
<LOANS> 129,903
<ALLOWANCE> 740
<TOTAL-ASSETS> 213,734
<DEPOSITS> 143,815
<SHORT-TERM> 28,167
<LIABILITIES-OTHER> 4,063
<LONG-TERM> 5,300
0
0
<COMMON> 228
<OTHER-SE> 23,161
<TOTAL-LIABILITIES-AND-EQUITY> 213,734
<INTEREST-LOAN> 9,077
<INTEREST-INVEST> 5,498
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14,575
<INTEREST-DEPOSIT> 7,442
<INTEREST-EXPENSE> 8,678
<INTEREST-INCOME-NET> 5,896
<LOAN-LOSSES> 135
<SECURITIES-GAINS> 27
<EXPENSE-OTHER> 4,323
<INCOME-PRETAX> 2,184
<INCOME-PRE-EXTRAORDINARY> 1,404
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,404
<EPS-PRIMARY> .72
<EPS-DILUTED> .72
<YIELD-ACTUAL> 3.01
<LOANS-NON> 127
<LOANS-PAST> 190
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 644
<CHARGE-OFFS> 39
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 740
<ALLOWANCE-DOMESTIC> 740
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> AVAILABLE FOR SALE
<F2> HELD TO MATURITY
<F3> HELD TO MATURITY
</FN>
</TABLE>
