SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
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- OR -
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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SEC File Number: 0-23164
LANDMARK BANCSHARES, INC.
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(Exact name of small business issuer 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)
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
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-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year $18,231,099.
Issuer'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 the issuer, based upon the closing price of such stock as of
December 18, 1998 ($23.63 per share), was $21.5 million.
As of December 18, 1998, registrant had 1,231,571 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Part II -- Portions of issuer's 1998 Annual Report to Stockholders.
2. Part III -- Portions of issuer's Proxy Statement for Annual Meeting of
Stockholders to be held in January 1999.
<PAGE>
PART I
Landmark Bancshares, Inc. (the "Registrant" or the "Company") may from
time to time make written or oral "forward-looking statements", including
statements contained in the Company's filings with the Securities and Exchange
Commission (including this annual report on Form 10-KSB and the exhibits
thereto), in its reports to stockholders and in other communications by the
Company, which are made in good faith by the Company pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing these risks.
The Company cautions that this list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Item 1. Description of Business
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General
The Company is a unitary savings and loan holding company that was
incorporated in November 1994 under the laws of the State of Kansas for the
purpose of acquiring all of the issued and outstanding common stock of Landmark
Federal Savings Bank (the "Bank"). This acquisition occurred in March 1994 at
the time 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, 1998, the Company had total assets of $225.4 million, total
deposits of $154.8 million, and stockholders' equity of $25.0 million or 11.1%
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
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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 1995. 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, 1998, the
remainder of the assets of the Company were maintained as deposits in the Bank
or in the form of common stock of other banks. The Company engages in no other
significant activities. As a result, references to the Company or Registrant
generally refer to the Bank, unless the context 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. The Registrant also has a loan origination office in the Kansas City
area. In addition, Registrant invests in mortgage-related securities and
investment securities. Registrant offers its customers fixed-rate and
adjustable-rate mortgage loans, as well as FHA/VA loans, commercial and consumer
loans, including home equity and savings account loans. Adjustable-rate mortgage
loans and 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.
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 most of its branch offices, the oil industry is prevalent. The largest
employment sector in Registrant's market area is agriculture. The market area of
Registrant is largely dependent upon the agricultural, beef packing, and oil and
gas industries. The effect of a downturn in either or both of these industries
could have a negative impact on the results of operations of Registrant.
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Lending Activities
General. Registrant's loan portfolio consists primarily of fixed and
adjustable-rate mortgage loans secured by one- to four-family residences and, to
a lesser extent, consumer loans and construction loans. The portfolio also
includes commercial real estate loans.
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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,
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1998 1997 1996 1995 1994
------------------ -------------------- --------------------- ----------------- -------------------
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- --- ---
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Type of Loan: (1)
Real estate loans
Construction.............. $ 1,386 .79% $ 1,937 1.22% $ 1,130 .87 % $ 202 0.20 % $ 221 0.31%
Residential............... 132,077 75.59 125,961 79.64 105,195 80.98 83,519 84.42 64,169 90.06
Commercial................ 4,937 2.83 2,666 1.69 1,852 1.43 1,781 1.80 1,300 1.83
Second mortgage........... 10,072 5.76 9,986 6.31 8,140 6.27 5,784 5.85 2,916 4.09
Commercial business......... 8,579 4.91 4,050 2.56 3,601 2.77 1,753 1.77 74 0.10
Consumer:
Savings account........... 588 .34 574 .36 555 .43 605 0.61 369 0.52
Home improvement.......... -- -- -- -- -- -- -- -- 1 0.00
Automobile................ 17,623 10.08 13,310 8.42 9,784 7.53 5,986 6.05 3,118 4.38
Other..................... 837 .48 968 .61 643 .49 286 0.29 45 0.06
------- ------ ------- ------ ------- ------- ------ ------ ------ ------
Gross loans............... 176,099 100.78 159,452 100.81 130,900 100.77 99,916 100.99 72,213 101.35
Less:.......................
Unamortized premiums
(discounts) on
loan purchases........... 31 .02 30 .02 47 .04 69 0.07 -- --
Loans in process.......... 24 .01 (2) -- -- -- (45) (0.05) -- --
Deferred loan
origination fees
and costs................. (284) (.16) (348) (.22) (304) (.23) (362) (0.37) (341) (0.48)
Allowance for
loan losses............. (1,137) (.65) (969) (.61) (740) (.58) (644) (6.44) (619) (0.87)
------- ------ ------- ------ ------- ------ ------ ------ ------ ------
Total loans, net............ $174,733 100.00% $158,163 100.00% $129,903 100.00 % $98,934 100.00 % $71,253 100.00 %
======= ====== ======= ====== ======= ====== ====== ====== ====== ======
</TABLE>
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(1) Includes loans classified as held for sale.
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<PAGE>
Loan Maturity. The following table sets forth the maturity of
Registrant's loan portfolio at September 30, 1998. The table does not include
prepayments or scheduled principal repayments. Prepayments and scheduled
principal repayments on loans totalled $68.3 million, $40.2 million, and $28.9
million for the three years ended September 30, 1998, 1997, 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)
<S> <C> <C> <C> <C> <C>
Amounts Due:
Within 1 year................... $ 81 $ 4,181 $ 458 $ 2,437 $ 7,157
After 1 year:
1 to 3 years.................. 411 3,968 -- 5,936 10,315
3 to 5 years.................. 1,572 951 -- 13,887 16,410
5 to 10 years................. 7,218 1,593 -- 6,014 14,825
10 to 20 years................ 61,605 6,195 497 846 69,143
Over 20 years................. 57,818 -- 431 -- 58,249
-------- --------- ------ ---------- -------
Total due after one year........ 128,624 12,707 928 26,683 168,942
-------- ------- ------ ------- -------
Total amount due................ $128,705 $16,888 $1,386 $29,120 176,099
Less:
Unamortized premium
on loan purchases............... 31 -- -- -- 31
Allowance for loan loss......... (689) (60) -- (388) (1,137)
Loans in process................ 24 -- -- -- 24
Deferred loan fees.............. (279) (3) (2) -- (284)
Loans receivable, net......... $127,792 $16,825 $1,384 $28,732 $174,733
======= ====== ===== ====== =======
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 1999, which have predetermined interest rates and which have
floating or adjustable interest rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
<S> <C> <C> <C>
One-to-four family.... $60,904 $67,720 $128,624
Commercial............ 10,317 2,390 12,707
Construction.......... 928 -- 928
Consumer.............. 26,521 162 26,683
------ ------ --------
Total............... $98,670 $70,272 $168,942
====== ====== =======
</TABLE>
6
<PAGE>
Residential Loans. Registrant's primary lending activity consists of
the origination of one-to-four family, owner-occupied, residential mortgage
loans secured by property located in its primary market area. Registrant also
originates a small number of residential real estate loans secured by
multi-family dwellings.
Registrant offers adjustable-rate mortgages ("ARMs") that adjust every
one, three, and five years and have terms from 1 to 30 years, and fixed-rate
mortgage loans with terms of 1 to 30 years. The interest rates on ARMs are based
on treasury 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
7
<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 $764,000 at
September 30, 1998, 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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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, 1998, the largest commercial
real estate loan had a balance of approximately $721,000 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. During the fourth quarter of the 1997 fiscal year, a commercial loan
department was started. The commercial loan portfolio, including commercial real
estate loans, doubled in size during the past fiscal year.
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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, 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, 1998, Registrant originated
$69.3 million in loans, purchased $17.9 million in loans (all secured by one- to
four-family residences), and sold $22.8 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
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issued for approximately 60 days and must be closed within 60 days of issuance.
Commitments for consumer loans expire 30 days after issuance. At September 30,
1998, Registrant had $3.1 million of commitments to originate 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 $157,000, $161,000 and $161,000 for the years ended
September 30, 1998, 1997 and 1996, respectively. As of September 30, 1998, loans
serviced for others totalled $60.1 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, 1998 was approximately $3.4 million.
Registrant's largest amount of loans to one borrower was approximately
$3,163,000 as of September 30, 1998. These loans are primarily secured by
interests in automobiles. These loans were current at September 30, 1998.
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,
-------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loan secured by 1-4
dwelling units .......................... $185 $ 78 $ 51 $239 $ 37
All other mortgage loans ................ 91 -- -- -- --
Non-Mortgage loans:
Consumer loans .......................... 230 294 76 5 --
---- ---- ---- ---- ----
Total ..................................... $506 $372 $127 $244 $ 37
==== ==== ==== ==== ====
Accruing loans that are
contractually past due 90 days
or more:
Mortgage loans:
Permanent loans secured by 1-
4 dwelling units ....................... $182 $ 50 $146 $142 $171
All other mortgage loans ................ -- -- 44 -- --
---- ---- ---- ---- ----
Total ..................................... $182 $ 50 $190 $142 $171
==== ==== ==== ==== ====
Total non-accrual and 90-day
past due accrual loans .................. $688 $422 $317 $386 $208
==== ==== ==== ==== ====
Real estate owned ......................... $ 71 $252 $-- $ 66 $200
==== ==== ==== ==== ====
Total non-performing
assets ................................... $759 $674 $317 $452 $408
==== ==== ==== ==== ====
Total non-accrual and 90-day
past due accrual loans to net
loans ................................... 0.39% 0.27% 0.24% 0.39% 0.29%
==== ==== ==== ==== ====
Total non-accrual and 90-day
past due accrual loans to total
assets .................................. 0.31% 0.19% 0.15% 0.19% 0.11%
==== ==== ==== ==== ====
Total non-performing
assets to total assets ................... 0.34% 0.30% 0.15% 0.22% 0.22%
==== ==== ==== ==== ====
</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 $48,000 for the year ended September 30, 1998. Amounts foregone and
not included in Registrant's interest income for the year ended September 30,
1998 totalled $19,000.
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
12
<PAGE>
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, 1998 that Registrant had a general loss allowance for loans and
REO of $1,137,000.
At
September 30,
1998
----
(In Thousands)
Special mention assets........................ $ 192
======
Classified assets
Substandard................................. $1,171
Doubtful.................................... -
Loss........................................ -
------
Total..................................... $1,171
=====
Foreclosed Assets. Assets owned or acquired by Registrant as a result
of foreclosure, judgment, or by a deed in lieu of foreclosure are classified as
foreclosed assets until they are sold. When property is acquired it is recorded
at fair value as of the date of foreclosure or transfer less estimated disposal
costs. Valuations are periodically performed by management and subsequent
charges to general loan reserves are taken when it is determined that the
carrying value of the property exceeds the fair value less estimated costs to
sell. It is subsequently carried at the lower of the new basis (fair value at
foreclosure or transfer) or fair value. Registrant had $71,000 in foreclosed
assets as of September 30, 1998.
13
<PAGE>
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, 1998,
1997, and 1996, Registrant charged $265,000, $308,000 and $135,000,
respectively, to the provision for loan losses and $0, $0 and $0, respectively,
to the provision for losses on foreclosed assets.
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loss provisions may be
deemed necessary. There can be no assurance that the allowance for losses will
be adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
14
<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,
---------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------- ------------------ -------------------- ---------------------
$ % $ % $ % $ % $ %
--- --- --- --- --- --- --- --- --- ---
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate $ 689 81.51% $ 603 86.47% $ 523 87.44% $ 521 89.58% $ 526 93.21%
Commercial real estate 22 2.80 12 1.67 9 1.42 10 1.78 10 1.80
Commercial business ... 38 4.87 76 2.54 51 2.75 23 1.76 -- 0.10
Consumer .............. 388 10.82 278 9.32 157 8.39 90 6.88 83 4.89
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total ................. $1,137 100.00% $ 969 100.00% $ 740 100.00% $ 644 100.00% $ 619 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
15
<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,
------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding .... $ 174,733 $ 158,163 $ 129,903 $ 98,934 $ 71,253
========= ========= ========= ========= =========
Average loans outstanding .. $ 167,490 $ 145,395 $ 110,084 $ 81,236 $ 64,245
========= ========= ========= ========= =========
Allowance balances
(at beginning of period) . 969 740 644 619 716
Provision (credit):
Real estate-mortgage ..... 135 88 20 (17) (83)
Consumer ................. 130 220 115 26 (2)
--------- --------- --------- --------- ---------
265 308 135 9 (85)
--------- --------- --------- --------- ---------
Charge-offs:
Real estate-mortgage ..... (2) (17) (19) (1) (18)
Consumer ................. (105) (75) (20) (1) (5)
--------- --------- --------- --------- ---------
(107) (92) (39) (2) (23)
--------- --------- --------- --------- ---------
Recoveries:
Real estate-mortgage ..... 1 13 -- 16 9
Consumer ................. 9 -- -- 2 2
--------- --------- --------- --------- ---------
10 13 -- 18 11
--------- --------- --------- --------- ---------
Net (charge-offs) recoveries (97) (79) (39) 16 (12)
========= ========= ========= ========= =========
Allowance balance
(at end of period) ....... $ (1,137) $ 969 $ 740 $ 644 $ 619
========= ========= ========= ========= =========
Allowance for loan losses as
a percent of total loans
outstanding ............... 0.65% 0.61% 0.57% 0.65% 0.87%
========= ========= ========= ========= =========
Net loans charged off as a
percent of average loans
outstanding .............. 0.06% 0.06% 0.04% (0.02%) 0.02%
========= ========= ========= ========= =========
</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:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------
1998 1997 1996 1995 1994
--------- -------- --------- --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total real estate owned and in
judgment, net .............. $ 71 $ 252 $ -- $ 66 $200
======== ======== ========= ========= ====
Allowance balances -
beginning ................. $ -- $ -- $ -- $ -- $--
Provision .................... -- -- --
Net charge-offs .............. -- -- -- -- --
-------- -------- --------- --------- ----
Allowance balances - ending .. $ -- $ -- $ -- $ -- $--
======== ======== ========= ========= ====
Allowance for losses on real
estate owned and in judgment
to net real estate owned and
in judgment .................. -- % -- % -- % -- % -- %
======== ======== ========= ========= ====
</TABLE>
16
<PAGE>
Interest Bearing Accounts Held at Other Financial Institutions
As of September 30, 1998, the Company had a balance of $2,012,000 on
its interest-bearing deposits in other financial institutions, principally with
the Federal Home Loan Bank ("FHLB") of Topeka (including up to $100,000 at the
other financial institutions covered by FDIC deposit insurance and held in time
deposits). The Company maintains these accounts in order to maintain liquidity
and improve the interest-rate sensitivity of its assets.
Investment Activities
Registrant is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short-term securities
and certain other investments. Registrant has generally maintained a liquidity
portfolio well in excess of regulatory requirements. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of future yield levels,
as well as management's projections as to the short-term demand for funds to be
used in Registrant's loan origination and other activities. As of September 30,
1998, Registrant had an investment portfolio of approximately $20.8 million,
consisting primarily of U.S. Government agency obligations, U.S. Treasury
securities, investment grade corporate debt securities, municipal obligations,
and FHLB stock as permitted by the OTS regulations. Of this portfolio,
approximately $5.8 million consists of investments in common stock of other
issuers. The level of investment securities increased significantly as a result
of the receipt of proceeds from the initial issuance of common stock during
1995. 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.
17
<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, 1998 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, 1998, the market value
of Registrant's total investment portfolio was $20.9 million.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------
1998 1997 1996
------ ------- -------
(In thousands)
<S> <C> <C> <C>
Investments Held to Maturity:
U.S. Government Securities .. $ -- $ -- $ --
U.S. Agency Securities ...... 10,000 17,298 27,169
Corporate Notes and Bonds ... -- -- --
Municipal Obligations ....... 1,575 1,540 2,230
------- ------- -------
Total Investments Held to
Maturity .................. 11,575 18,838 29,399
------- ------- -------
Investments Available-for-Sale:
Common Stock ................ 5,800 4,087 2,396
FHLB Stock .................. 3,211 2,976 1,732
Other Equity Securities ..... 10 10 10
Corporate Notes and Bonds ... 200 50 --
------- ------- -------
Total Investments Available
-for-Sale .................. 9,221 7,123 4,138
------- ------- -------
Total Investments ........... $20,796 $25,961 $33,537
======= ======= =======
</TABLE>
Registrant classifies its investments in accordance with SFAS 115. See
the discussion of SFAS 115 under "-- Mortgage-Backed Securities." See Note 1 to
Consolidated Financial Statements.
18
<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, 1998.
<TABLE>
<CAPTION>
As of September 30, 1998
----------------------------------------------------------------------------------------------------
Total
One Year or Less One to Five Years Five to Ten Years More than Ten Years Investment Securities
---------------- ----------------- ------------------ ------------------- --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Government Obligations $ -- --% $ -- --% $ -- --% $ -- --% $ -- --% $ --
U.S. Agency Obligations ... 2,000 5.43 1,000 6.24 7,000 6.65 -- -- 10,000 6.37 10,058
Municipal Obligations ..... -- -- 740 5.11 835 4.98 -- -- 1,575 5.04 1,623
Corporate Notes and Bonds . -- -- -- -- 150 12.00 50 9.00 200 11.25 200
------- ---- ------- ---- ------- ----- ---- ---- ------- ----- -------
Total ................... $ 2,000 5.43% $ 1,740 5.76% $ 7,985 6.58% $ 50 9.00% $11,775 6.27% $11,881
======= ==== ======= ==== ======= ===== ==== ==== ======= ===== =======
</TABLE>
19
<PAGE>
Mortgage-Backed Securities
To supplement lending activities, Registrant invests in residential
mortgage-backed securities. Mortgage-backed securities can serve as collateral
for borrowings and, through repayments, as a source of liquidity (see note 3 to
the Consolidated Financial Statements).
In May 1994, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.
This statement addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities. SFAS No. 115 is effective for fiscal years beginning after
December 15, 1993 as of the beginning of the fiscal year (i.e., October 1, 1994
for Registrant).
SFAS No. 115 requires classification of investments into three
categories. Debt securities that Registrant has the positive intent and ability
to hold to maturity must be reported at amortized cost. Debt and equity
securities that are bought and held principally for the purpose of selling them
in the near term must be reported at fair value, with unrealized gains and
losses included in earnings. All other debt and equity securities must be
considered available for sale and must be reported at fair value, with
unrealized gains and losses excluded from earnings but reported as a separate
component of stockholders' equity (net of tax effects).
Registrant adopted SFAS No. 115 as of October 1, 1994. At September 30,
1998, the mortgage-backed securities portfolio had a fair value of $22.0 million
and an amortized cost of $21.7 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, 1998, there were no mortgage-backed securities
that were classified as available for sale.
Mortgage-backed securities represent a participation interest in a pool
of single-family mortgages, the principal and interest payments on which are
passed from the mortgage originators, through intermediaries (generally
quasi-governmental agencies) that pool and repackage the participation interests
in the form of securities, to investors such as the Association. Such
quasi-governmental agencies, which guarantee the payment of principal and
interest to investors, primarily include the Federal Home Loan Mortgage
Corporation ("FHLMC"), Government National Mortgage Association ("GNMA"), and
Federal National Mortgage Association ("FNMA").
FHLMC is a publicly-owned corporation chartered by the United States
Government. FHLMC issues participation certificates backed principally by
conventional mortgage loans. FHLMC guarantees the timely payment of interest and
the ultimate return of principal within one year. FHLMC securities are indirect
obligations of the United States Government. FNMA is a private corporation
chartered by Congress with a mandate to establish a secondary market for
conventional mortgage loans. FNMA guarantees the timely payment of principal and
interest, and FNMA securities are indirect obligations of the United States
Government. GNMA is a government agency within the Department of Housing and
Urban Development ("HUD") which is intended to help finance government assisted
housing programs. GNMA guarantees the timely payment of principal and interest,
and GNMA securities are backed by the full faith and credit of the United States
Government. Because FHLMC, FNMA, and GNMA were established to provide support
for low- and middle-income housing, there are limits to the maximum size of
loans that qualify for these programs. To accommodate larger-sized loans, and
loans that, for other
20
<PAGE>
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, 1998
totaled $9.3 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, 1998, 1997, and 1996.
The portfolio of CMOs held in Registrant's mortgage-backed securities portfolio
at September 30, 1998 did not include any residual interests in CMOs. Further,
at September 30, 1998, 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).
21
<PAGE>
The following table sets forth the carrying value of Registrant's
mortgage-backed securities portfolio at the dates indicated.
Weighted
Average
Rate At
September
1998 1998 1997 1996
---------- ------- ------- ---------
Held for Investment:
GNMA ARMs ...................... --% $ -- $ -- $ --
FNMA ARMs ...................... 7.00 8,842 13,158 15,516
FHLMC ARMs ..................... 7.36 2,815 4,768 6,257
FHLMC Fixed Rate ............... 8.62 128 246 401
GNMA Fixed Rate ................ 8.00 230 373 553
FNMA Fixed Rate ................ 5.50 448 590 813
CMOs ........................... 6.37 9,261 17,555 22,337
----- ------- ------- -------
Total Held for Investment ... 6.77% 21,724 36,690 45,877
===== ------- ------- -------
Held for Sale .................. -- -- --
------- ------- -------
Total mortgage-backed securities $21,724 $36,690 $45,877
======= ======= =======
Mortgage-Backed Securities Maturity. The following table sets forth the
contractual maturity of Registrant's mortgage-backed securities portfolio at
September 30, 1998. The table does not include scheduled principal payments and
estimated prepayments.
Contractual
Maturities Due
--------------
(In Thousands)
Less than 1 year.......................................... $ --
1 to 3 years.............................................. 438
3 to 5 years.............................................. 1,163
5 to 10 years............................................. 3,222
10 to 20 years............................................ 3,513
Over 20 years............................................. 13,388
------
Total mortgage-backed securities.......................... $21,724
======
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
22
<PAGE>
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 $27.3 million,
or 17.6% of Registrant's deposit portfolio at September 30, 1998. Certificates
of deposit constituted $127.5 million or 82.4% of the deposit portfolio,
including certificates of deposit with principal amounts of $100,000 or more
which constituted $21.7 million or 14.0% of the deposit portfolio at September
30, 1998. As of September 30, 1998, 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, 1998, $9.2 million in
investment securities and $17.4 million in mortgage-backed securities were
pledged as collateral for public funds.
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, 1998.
September 30,
1998
----
(In Thousands)
Maturity Period
- ---------------
Within three months....................................... $ 4,485
Over three through six months............................. 6,308
Over six through twelve months............................ 6,042
Over twelve months........................................ 4,847
------
Total................................................. $21,682
======
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, 1998, Registrant had
$41.7 million outstanding from the FHLB of Topeka and no borrowings of any other
kind.
23
<PAGE>
Personnel
As of September 30, 1998 Registrant had 52 full-time and seven
part-time employees. None of Registrant's employees are represented by a
collective bargaining group.
Competition
Registrant encounters strong competition both in the attraction of
deposits and origination of loans. Competition comes primarily from savings
institutions, commercial banks, and credit unions that operate in counties where
Registrant's offices are located. Registrant competes for savings accounts by
offering depositors competitive interest rates and a high level of personal
service. Registrant competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and contractors.
Regulation of the Company
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which also 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. Set forth below is a brief description of certain laws that
relate to the regulation of the Bank. The description does not purport to be
complete and is qualified in its entirety by reference to applicable laws and
regulations. As a federally chartered, SAIF-insured savings association, the
Bank is subject to extensive regulation by the OTS and the Federal Deposit
Insurance Corporation ("FDIC"). Lending activities and other investments must
comply with various federal statutory and regulatory requirements. The Bank is
also subject to certain reserve requirements promulgated by the Federal Reserve
Board.
The OTS, in conjunction with the FDIC, regularly examines the Bank and
prepares reports for the consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's operations. The Bank's relationship
with its depositors and borrowers is also regulated to a great extent
24
<PAGE>
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.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). Insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
institution's primary regulator.
As a member of the SAIF, the Bank 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. In 1996, the annual insurance premium for most BIF
members was lowered to $2,000. The lower insurance premiums for BIF members
placed SAIF members at a competitive disadvantage to BIF members.
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. Beginning January 1, 1997, the deposit
insurance assessment for SAIF members was reduced to .064% of deposits on an
annual basis through the end of 1999. During this same period, BIF members will
be assessed approximately .013% of deposits. After 1999, assessments for BIF and
SAIF members should be the same. It is expected that these continuing
assessments for both SAIF and BIF members will be used to repay outstanding
Financing Corporation bond obligations. As a result of these changes, beginning
January 1, 1997, the rate of deposit insurance assessed the Bank declined by
approximately 70%.
Regulatory Capital Requirements. OTS capital regulations require
savings associations to meet two capital standards: (1) a leverage ratio (core
capital) requirement of 4% of total adjusted assets and (2) a risk-based capital
requirement equal to 8% of total risk-weighted assets. Additional regulatory
requirements are discussed in Note 13 to the Consolidated Financial Statements.
25
<PAGE>
As shown below, the Bank's regulatory capital exceeded all minimum
regulatory capital requirements applicable to it as of September 30, 1998:
Percent of
Adjusted
Amount Assets
------ ------
(Dollars in Thousands)
Core Capital:
Regulatory requirement............................... $ 8,917 4.0%
Regulatory capital................................... 16,589 7.4
------ ----
Excess............................................. $ 7,672 3.4%
====== ====
Risk-Based Capital:
Regulatory requirement............................... $ 9,825 8.0%
Regulatory capital................................... 17,725 14.4
------ ----
Excess............................................. $ 7,900 6.4%
====== ====
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, 1998, 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
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
26
<PAGE>
regulatory capital requirements). Future dividend distributions by the Bank in
excess of Bank earnings could result in recapture of tax bad debt deductions
resulting in income tax on the amounts recaptured.
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, 1998, 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, 1998, the Bank was in compliance with this requirement.
Item 2. Description of Property
- -------------------------------
Registrant owns its main office and four branch offices and leases one
additional branch office and one loan origination office. Registrant also leases
a parking lot for its main office.
Item 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits in which Registrant is
periodically involved, such as claims to enforce liens, condemnation proceedings
on properties in which Registrant holds security interests, claims involving the
making and servicing of real property loans, and other issues incident to
Registrant's business.
In the opinion of management, no material loss is expected from any of
the pending claims or lawsuits.
Item 4. Submission of Matters to a Vote of Security Holders
- -------------------------------------------------------------
No matter was submitted to a vote of securities holders during the
fourth quarter of the fiscal year.
27
<PAGE>
PART II
Item 5. Market for 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, 1998 (the "Annual Report"), is incorporated herein by
reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- -------------------------------------------------------------------
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 7. Financial Statements
- ------------------------------
Registrant's financial statements listed under Item 14 are incorporated
herein by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
- --------------------------------------------------------------------------------
With Section 16(a) of the Exchange Act
- --------------------------------------
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.
Item 10. Executive Compensation
- --------------------------------
The information contained under the section captioned "Director and
Executive Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 11. 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.
28
<PAGE>
(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 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
Item 13. Exhibits, Lists and Reports on Form 8-K
- ------------------------------------------------
(a) The following documents are filed as a part of this report:
1. The following financial statements and the report of
independent accountants of Registrant included in Registrant's Annual Report to
Stockholders are incorporated herein by reference and also in Item 8 hereof.
Independent Auditor's Report.
Consolidated Statements of Financial Condition as of September 30, 1998
and 1997.
Consolidated Statements of Operations for the Years Ended September 30,
1998, 1997, and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended September 30, 1998, 1997, and 1996.
Consolidated Statements of Cash Flows for the Years Ended September 30,
1998, 1997 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.
3. The following exhibits are included in this Report or
incorporated herein by reference:
(a) List of Exhibits:
3(i) Articles of Incorporation of Landmark Bancshares, Inc.*
3(ii) Bylaws of Landmark Bancshares, Inc.*
10.1 1994 Stock Option Plan of Landmark Bancshares, Inc.**
10.2 Management Stock Bonus Plan and Trust Agreements**
10.3 1991 Deferred Compensation Agreement with Larry Schugart*
29
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.4 1998 Deferred Compensation Agreement with Larry Schugart
10.5 Directors change in Control Severance Plan
10.6 1996 Stock Option Agreement with Richard Ball***
10.7 Employment Agreement with Larry Schugart
10.8 Employment Agreement with Gary Watkins
10.9 Employment Agreement with James Strovas
10.10 1998 Stock Option Agreement with Richard Ball
13 Annual Report to Stockholders for the fiscal year ended September 30, 1998
21 Subsidiaries of Registrant****
23 Consent of Regier Carr & Monroe, L.L.P.
27 Financial Data Schedule
</TABLE>
- ---------------------
* Incorporated by reference to the identically numbered exhibit of the
registration statement on Form S-1 (File No. 33-72562) declared effective
by the SEC on February 9, 1994.
** Incorporated by reference to the exhibits to the proxy statement for a
special meeting of stockholders held on June 22, 1994 and filed with the
SEC on May 24, 1994 (File No. 0-23164).
*** Incorporated by reference to Exhibit 10.4 of the Annual Report on Form 10-K
for the fiscal year ended September 30, 1996 (File No. 0-23164), filed with
the SEC.
**** Incorporated by reference to Exhibit 21.4 of the Annual Report on Form 10-K
for the fiscal year ended September 30, 1994 (File No. 0-23164), filed with
the SEC.
(b) No reports on Form 8-K were filed during the last quarter of
the period covered by this report.
30
<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 28, 1998 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 28, 1998.
/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
EXHIBIT 10.4
<PAGE>
DEFERRED COMPENSATION
AGREEMENT
Between
Landmark Federal Savings Bank
and
Larry Schugart
<PAGE>
DEFERRED COMPENSATION AGREEMENT OF
Landmark Federal Savings Bank
This Agreement was made and entered into the 30th day of November, 1973
by and between Landmark Federal Savings Bank, formerly known as Landmark Federal
Savings Association and successor in interest to Peoples Savings and Loan
Association herein after referred to as the "Institution" or "Employer", and
Larry Schugart, hereinafter referred to as the "Employee" and is hereby amended
and restated this 24th day of June, 1998.
WITNESSETH:
WHEREAS, the Employee has been employed by the Institution and is
currently employed in an executive capacity;
WHEREAS, the Institution desires to retain the valuable services and
business counsel of the Employee and to induce the Employee to remain in an
executive capacity with the Institution;
WHEREAS, the Employee is considered a highly compensated Employee or
member of a select management group of the Institution;
NOW, THEREFORE, the Institution promises to pay the benefits provided
herein, subject to the terms and conditions of this Agreement, in consideration
for the Employee's promise to remain in the continuous employment of the
Institution until retirement. The parties hereto agree that the following shall
constitute the terms of this Agreement.
2
<PAGE>
SECTION 1. Definitions.
For the purposes of this Agreement, whenever the context so indicates,
the singular or plural number and the masculine, feminine, or neuter gender
shall be deemed to include the other. The definitions below shall apply only to
this Agreement and shall not be construed as applying to a qualified employee
plan under Section 401(a) of the Internal Revenue Code of 1986, as amended.
Beneficiary.
Beneficiary shall mean the person or persons the Employee has
designated in writing to the Institution, if none, the Employee's Spouse,
Children, or Estate (in that order).
Deferred Compensation Benefit.
Deferred Compensation Benefit shall mean the benefit provided to the
Employee at his Retirement Age, provided he has satisfied the conditions and
terms of this Agreement.
Estate.
Estate shall mean the estate of the Employee.
Retirement Age.
Retirement Age shall mean age sixty-five (65) or later if permitted by
the Institutions Board of Directors.
Spouse.
Spouse shall mean the person to whom the Employee is legally married at
the time of the Employee's death.
SECTION 2. Conditions.
(a) Normal Employment. The payment of retirement benefits to the
Employee under this Agreement are conditioned upon the continuous employment
(including periods of disability and authorized leaves of absence as described
by this Agreement) of the Employee to the Institution from date of execution of
this Agreement until attaining Retirement Age or if applicable, the other
payment provisions of Section 3.
(b) Noncompetition. Unless expressly waived by the Subsection in
Section 3 or Section 12 authorizing payment, the payment of benefits is further
conditioned upon the Employee not acting in any similar employment capacity for
any business enterprise which competes to a substantial degree with the
Institution, nor engaging in any activity involving substantial competition with
the Institution during employment or after retirement, while receiving benefits
under this Agreement without the prior written consent of the Institution. In
the event of violation of these provisions, all future payments shall be
canceled and discontinued.
SECTION 3. Deferred Compensation.
3
<PAGE>
(a) At retirement age, if the Employee is still in active service, the
Institution shall commence payments as provided in this Subpart (a). Subject to
the provisions and limitations of this Agreement, the Institution shall pay to
the Employee a monthly benefit which shall commence the first day of the month
following the Employee's date of retirement and shall be payable monthly
thereafter until one hundred and twenty (120) payments have been made. The
amount of such benefit will be determined as of the Employee's date of
retirement as follows:
Once the Employee reaches Retirement Age and has maintained continuous
service with the Institution from the date of execution of this Agreement to the
Retirement Age (including periods of disability and authorized leaves of absence
as described in this Agreement), he shall receive compensation at the annualized
rate of fourteen thousand, seven hundred dollars ($14,700) per year. This
compensation to be paid on a monthly basis as set forth above.
(b) Retirement Prior to Age 65. The Employee may retire after the age
of fifty-five and receive a benefit reduced by a level actuarial method.
(c) Involuntary Termination After a Change of Control. If within three
(3) years of a Change of Control as defined in this Agreement, the Employee is
terminated by action of the Employer for any reason other than willful
misconduct or his base salary is reduced, or his principal responsibilities and
duties are substantially reduced or changed, the Employee will immediately
receive his full normal retirement benefit, without any other conditions being
applicable, as if he had retired at normal retirement age that being fourteen
thousand, seven hundred dollars ($14,700) per year normally paid in one hundred
and twenty (120) monthly payments but to be paid in a lump sum payment under
this Subsection with no other conditions being applicable. Such payment shall be
only adjusted for the time value of money for the change to lump sum form under
the terms of Section 9.
If the Employee is terminated by action of the Employer for any reason
other than willful misconduct after the three year period above, he shall
receive his full benefit paid in the form as specified in 3(d) below.
Change of Control for this Section 3 shall mean a change in the
ownership of 25% or more of the voting stock of the Institution, measured on a
cumulative basis from the date of execution of this amended and restated
Agreement which shall be transferred by any means other than by will or
intestate and acquired by one party or group of parties acting in concert.
However, for the purposes of defining a Change of Control, stock transferred to
a trust for the benefit of employees shall not be counted.
(d) Voluntary Termination After a Change of Control. If there is a
Change of Control as defined above and the Employee voluntarily terminates his
employment for any reason other than willful misconduct, the Employee will
immediately receive his full normal retirement benefit, with no other conditions
being applicable, as if he had retired at normal retirement age that being
payment of fourteen thousand, seven hundred dollars ($14,700) per year paid
monthly for one hundred and twenty (120) months.
(e) Acceleration of Payments. If there is a Change of Control as
defined above and the Employee is already receiving benefits under the
provisions of Section (a) or (b) above, the Employee will receive the balance of
his payments immediately in a lump sum payment under this Subsection with no
other conditions being applicable. Such payment shall be only adjusted for the
time value of money for the change to lump sum form under the terms of Section
9.
4
<PAGE>
SECTION 4. Death Benefit.
(a) In the event of the death of the Employee prior to retirement and
the conditions of Section 2 of this Agreement being effective up to the time of
death, the Beneficiary shall receive one hundred and twenty (120) monthly
payments which will represent an annualized payment equal to ten thousand
dollars ($10,000). Such payments shall be paid beginning no later than the
latest of:
(i) January 1 of the year after the death of the Employee, or
(ii) the first day of the third month after the death of the Employee.
(b) In the event of the death of the Employee after retirement or after
entitlement to payments under Section 3(c) or 3(d), the Beneficiary shall
receive the balance of the payments to which the Employee would have been
entitled had he survived. The payments shall be made in the same manner and form
as provided for in Section 3.
(c) Acceleration of Payments. If there is a Change of Control as
defined above, all death benefits including those already being distributed
shall be payable in a Lump Sum Payment. The Beneficiary will receive the
payments due adjusted for the time value of money for the change to lump sum
form under the terms of Section 9. Such Lump Sum Payment shall be paid beginning
no later than the latest of:
(i) January 1 of the year after the death of the Employee, or
(ii) the first day of the third month after the death of the Employee.
(iii) January 1 of the year after the Change of Control
(iv) the first day of the third month after the Change of Control
SECTION 5. Named Fiduciary.
(a) Named Fiduciary. The Institution is hereby designated as the named
fiduciary and Plan Administrator under this Agreement. The named fiduciary shall
have authority to control and manage the operation and administration of this
Agreement, and it shall be responsible for establishing and carrying out a
funding policy and method consistent with the objectives of this Agreement and
Section 7 below.
(b) Powers of Employer. In addition to any powers and authority
conferred on the Institution elsewhere in this Agreement or by law, the
Institution as Employer shall have the following powers and authority:
(i) To designate agents to carry out responsibilities relating to
this Agreement;
(ii) To administer, interpret, construe and apply this Agreement and
to answer all questions which may arise or which may be raised
under this Agreement by the Employee, the Employee's Beneficiary
or any other person whatsoever;
5
<PAGE>
(iii)To establish rules and procedures from time to time for the
conduct of its business and for the administration and
effectuation of its responsibilities under the Agreement.
Section 6. Claims Procedure.
(a) Initial Denial. Any decision by the Institution denying a claim by
the Employee or a Beneficiary for benefits under this Agreement shall be in
writing and delivered or mailed to the Employee or Beneficiary. Such statement
shall set forth the specific reasons for the denial. In addition, the
Institution shall afford a reasonable opportunity to the Employee or Beneficiary
for a full and fair review of the decision denying such claim.
(b) Denial of Claim. A Claim for Benefits under the Plan shall be
denied if the Plan Administrator determines that the Employee or Beneficiary
(hereinafter called "Claimant") is not entitled to receive benefits under the
Plan. Notice of a denial shall be furnished to the Claimant within a reasonable
period of time after receipt of the Claim for Benefits by the Plan
Administrator. The Plan Administrator shall provide within ninety (90) days to
every Claimant who is denied a Claim for Benefits written notice setting forth,
in a manner calculated to be understood by the Claimant, the following:
(i) The specific reason or reasons for the denial; and
(ii) Specific reference to pertinent Plan provisions on which the
denial is based; and
(iii)A description of any additional material or information
necessary for the Claimant to perfect the claim, and an
explanation of why such material or information is necessary; and
(iv) An explanation of the Plan's Claim Review Procedure as set forth
below.
The purpose of the Review Procedure is to provide a method by which a
claimant may have a reasonable opportunity to appeal a denial of a Claim to the
named fiduciary and Plan Administrator for a full and fair review. To accomplish
that purpose, the Claimant or the Claimant's duly authorized representative:
(i) May require a review upon written application to the named
fiduciary;
(ii) May review pertinent Plan documents; and
(iii) May submit issues and comments in writing.
A Claimant (or authorized representative) shall request a review by
filing a written application for review with the named fiduciary and Plan
Administrator at any time within sixty (60) days after receipt by the Claimant
of written notice of the denial of the claim.
In addition to a request for payment of a claim which is payable, any
person who will be a Claimant or believes he or she will be a Claimant may
request from the Employer a statement of benefits to be paid in the future. Such
statement shall comply with the requirements of Section 209(a) of ERISA for the
purposes of this Section whether or not such statute would normally be
applicable to this Plan. Such benefits may be conditioned upon future
conditions. If there is a dispute between the Employer and
6
<PAGE>
a Claimant on such benefits to be paid in the future, either party may request
the procedures of this Section and Section 21 to resolve the dispute over the
future payment(s) even if no payment is currently available.
(c) Review of Denied Claim. A decision on review of a denied claim
shall be made in the following manner:
(i) The decision on review shall be made by the named fiduciary or
Plan Administrator, who may in its discretion hold a hearing on
the denied claim. Such decision shall be made promptly, and not
later than sixty (60) days after receipt of the request for
review, unless special circumstances (such as the need to hold a
hearing) require an extension of time for processing, in which
case a decision shall be rendered as soon as possible, but not
later than one hundred and twenty (120) days after receipt of the
request for review.
(ii) The decision on review shall be in writing and shall include
specific reasons for the decision, written in a manner calculated
to be understood by the Claimant, and specific references to the
pertinent Plan provisions upon which the decision is based.
SECTION 7. Funding.
The Employer's obligations under this Agreement shall be an unfunded
and unsecured promise to pay. The Employer shall not be obligated under any
circumstances to fund its obligations under this Agreement. The Employer may,
however, at its sole and exclusive option, elect to fund this Agreement in whole
or in part.
This Plan is intended to be an unfunded plan within the meaning of the
Employee Retirement Income Security Act of 1974 (ERISA). Accordingly, it is
intended that the Plan be exempt from the requirements of Parts II, III, and IV
of Title I of ERISA pursuant to ERISA Sections 201(2), 301(3), and 401(1).
SECTION 8. Employee's Right to Assets.
The rights of the Employee or his Beneficiaries shall be solely those
of an unsecured general creditor of the Institution. The Employee or his
Beneficiaries shall only have the right to receive from the Institution those
payments as specified under this Agreement. The Employee agrees that neither he
nor his Beneficiaries shall have any rights or interests whatsoever in any
assets of the Institution. Any asset used or acquired by the Institution in
connection with the liabilities the Institution has assumed under this
Agreement, except as expressly provided, shall not be deemed to be held under
any Trust for the benefit of the Employee or his Beneficiaries, nor shall it be
considered security for the performance of the obligations of the Institution.
It shall be, and remain, a general, unpledged, and unrestricted asset of the
Institution.
SECTION 9. Acceleration of Payment.
The Institution may at its option, accelerate the payment of any
benefits payable under this Agreement without the consent of the Employee or his
Beneficiaries. In the event it is agreed to accelerate these payments, the
present value of all future payments shall be paid to the Employee or his
Beneficiaries. The then current Federal Reserve discount rate which is charged
on loans to depository
7
<PAGE>
institutions by the New York Federal Reserve Bank shall be used in discounting
any payments as determined by the Institution.
SECTION 10. Leaves of Absence and Disability.
(a) The Institution may, in its sole discretion, permit the Employee to
take a leave of absence for a period not to exceed one year. During such leave,
the Employee shall be considered to be in the continuous employment of the
Institution for purposes of this Agreement.
(b) For the purposes of this Agreement, disabled shall mean a physical
or mental condition of the Employee resulting from bodily injury, disease, or
mental disorder which renders him incapable of continuing his usual and
customary employment with the Institution. The status of disability of the
Employee shall be determined by an independent licensed physician chosen by the
Institution. During such disability, the Employee shall be considered to be in
the continuous employment of the Institution for the purposes of this Agreement.
SECTION 11. Assignability.
No sale, transfer, alienation, or assignment, pledge,
collateralization, or attachment of any benefits under this Agreement shall be
valid or recognized by the Institution.
SECTION 12. Amendment.
This Agreement can be amended by the mutual written agreement of both
parties. The Institution shall have the power to terminate this Agreement
completely by giving proper notice of not less than 60 days. However, upon
termination of the Agreement, the Employee will be entitled to complete payment
of benefits as required by this Agreement as if he had obtained Normal
Retirement Age if, as of the day before the effective date of the termination of
the Agreement, the Employee was in compliance with all other applicable
conditions of this Agreement.
SECTION 13. Enforcement.
This Agreement shall be governed by the laws of the State of Kansas.
This Agreement is solely between the Institution and the Employee. Furthermore,
the Employee or his beneficiaries shall only have recourse against the
Institution for enforcement of this Agreement. However, it shall be binding upon
the Beneficiaries, heirs, executors, and administrators of the Employee, and
upon any and all successors and assigns of the Institution.
SECTION 14. Severability.
In the event that any of the provision of this Agreement or portion
thereof, are held to be inoperative or invalid by any court of competent
jurisdiction, then (1) insofar as is reasonable, effect will be given to the
intent manifested in the provisions held invalid or inoperative and (2) the
validity and enforceability of the remaining provisions will not be affected
thereby.
8
<PAGE>
SECTION 15. Payments to Beneficiaries.
For the purposes of this Agreement, Beneficiaries shall mean the person
or persons designated by the Employee in writing on forms furnished by the
Institution. Such Employee may from time to time change the designated
Beneficiaries by written notice to the Institution, and upon such change the
rights of all previously designated Beneficiaries to receive any benefits under
this Agreement shall cease. If, at the date of death of the Employee, no proper
designated Beneficiary exists, then for the purpose of this Agreement, the
legally recognized Spouse of the Employee living at his death, shall be the
Beneficiary; if none, then the Children, natural and adopted, then living of the
Employee; if none, then the Employee's Estate.
SECTION 16. Incompetency.
If the Institution shall find that any person to whom any payment is
payable under this Agreement is unable to care for their affairs due to an
illness or accident, or is a minor, payment due (unless a prior claim therefore
shall have been made by a duly appointed guardian, committee, or other legal
representative) may be paid to the Spouse, a child, a parent, a brother or
sister, or a custodian determined pursuant to the Uniform Gift to Minors Act,
the Uniform Transfer to Minors Act, or to any person deemed by the Institution
to have incurred expense for such person otherwise entitled to payment, in such
manner and proportions as the Institution may determine. Any such payments made
under this Section in good faith shall be a complete discharge of the
liabilities of the Institution under this Agreement.
SECTION 17. Right of Employment.
Nothing contained in this Agreement shall be construed to be a contract
of employment for any term of years, nor as conferring upon the Employee the
right to continue in the employment of the Institution in the Employee's present
capacity, or in any other capacity. It is expressly understood by the parties
hereto that this Agreement related exclusively to additional compensation for
the Employee's services, which compensation is payable after the end of active
employment service and is not intended to be an employment contract.
SECTION 18. Scope of Agreement.
Nothing contained in this Agreement shall be construed as limiting or
restricting any benefit to the Employee, his designated Beneficiary, or their
estates, under any pensions, profit-sharing, or similar retirement plan, or
under any group life, or group health or accident, or other plan of the
Institution, for the benefit of its employees generally or a group of them, now
or here after in existence, nor shall any payment under this Agreement to any
person entitled to such hereunder be deemed to constitute payment to such person
in lieu of or in reduction of any benefit or payment under any such plan.
9
<PAGE>
SECTION 19. Consultation.
In the event that the Employee furnishes his services subsequent to his
retirement of an advisory or consulting nature, the Employee shall be
compensated in an amount mutually agreed upon by the parties prior to the
rendering of such services. Payments under other Sections of this Agreement
shall in no manner be construed as compensation for the services provided by the
Employee of an advisory or consulting nature.
SECTION 20. Regulatory Compliance.
Notwithstanding any other provisions of this Agreement, no payment
shall be paid by the Institution under this Agreement if such payment would be
in violation of any order or regulation of the Institution's primary regulator
or any secondary financial institution regulatory body having jurisdiction over
the Institution.
SECTION 21. Arbitration.
Any controversy, dispute, or claim arising out of or in connection with
or relating to this Plan will, after satisfying the requirements of Section 6,
be submitted by the parties to binding arbitration in Dodge City, Kansas or the
nearest major metropolitan city in accordance with the rules and procedures of
the American Arbitration Association. If the parties can not independently agree
upon an arbitrator, one shall be chosen under the process of the American
Arbitration Association. The prevailing party in such arbitration shall be
entitled to an award of costs and expenses of the arbitration, including
reasonable attorney's fees.
SECTION 22. Limitation on Liability.
No employee of the Institution or member of the Board of Directors for
the Institution shall be subject to any liability with respect to his or her
actions under this Agreement unless the person acts fraudulently or in bad
faith. To the extent permitted by law, the Institution shall indemnify each
member of the Board of Directors, and any other employee of the Institution with
duties under this Agreement who was or is a party or is threatened to be made a
party, to any threatened, pending, or completed proceeding, whether civil,
criminal, administrative, or investigative, by reason of the person's conduct in
the performance of his or her duties under the Agreement so long as such
indemnification is not prohibited under the rules of the regulatory bodies
having jurisdiction over the Institution.
10
EXHIBIT 10.5
<PAGE>
LANDMARK FEDERAL SAVINGS BANK
DIRECTORS CHANGE IN CONTROL SEVERANCE PLAN
WHEREAS, Landmark Federal Savings Bank (the "Savings Bank") wishes to
provide assurances to its members of the Board of Directors ("Board") that their
continued service and contribution is valued and to offer a degree of economic
security to such individuals so long as such service is deemed beneficial to the
Board as indicated by their continued election and re-election to such Board
from time to time; and
WHEREAS, it is deemed advisable and in the best interests of the
Savings Bank to offer to its members of the Board a degree of financial security
in the event that their service is terminated as a result of a Change in Control
of the Board;
NOW THEREFORE, BE IT RESOLVED that the Plan shall be implemented as of
the Effective Date as follows:
ARTICLE I
DEFINITIONS
The following words and phrases as used herein shall, for the purpose
of the Plan and any subsequent amendment thereof, have the following meanings
unless a different meaning is plainly required by the content:
1.1 "Board" means the Board of Directors of the Savings Bank, as
constituted from time to time, and successors thereto.
1.2 "Change in Control" shall mean: (i) a change in the power to
control proxies by any person, other than the Board of Directors of the Savings
Bank, to direct more than 25% of the outstanding votes of the Savings Bank; (ii)
a change in the control of the election of a majority of the Savings Bank's
directors; or (iii) a change in the exercise of a controlling influence over the
management or policies of the Savings Bank by any person or by persons acting as
a group within the meaning of Section 13(d) of the Securities Exchange Act of
1934, as amended, (the "Exchange Act"). Change in Control shall also mean: (i)
the sale of all, or a material portion, of the assets of the Savings Bank; (ii)
the merger or recapitalization of the Savings Bank whereby the Savings Bank is
not the surviving entity; (iii) a change in control of the Savings Bank, as
otherwise defined or determined by the Office of Thrift Supervision ("OTS") 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 Exchange Act and the rules and regulations promulgated
thereunder) of twenty-five percent (25%) or more of the outstanding voting
securities of the Savings Bank by any person, trust, entity or group. The term
"person" refers to an individual or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or
<PAGE>
any other form of entity not specifically listed herein. The decision of the
Committee as to whether a change in control has occurred shall be conclusive and
binding.
1.3 "Committee" means the Board or the administrative committee as
appointed by the Board pursuant to Section 6.11 herein.
1.4 "Director" means a member of the Board of Directors of the Savings
Bank as of the Effective Date.
1.5 "Effective Date" means May 21, 1998.
1.6 "Participant" means a Director serving as a member of the Board on
or after the Effective Date. A Director's participation in the Plan shall
continue as long as he or she continues to serve as a Director subject to the
right of termination, amendment, and modification of the Plan set forth herein.
1.7 "Plan" means the Landmark Federal Savings Bank Directors Change in
Control Severance Plan as set forth herein, and as may be amended from time to
time by the Board.
1.8 "Savings Bank" means Landmark Federal Savings Bank, or any
successor thereto.
1.9 "Service" means all years of service as a Director of the Savings
Bank and all predecessor (or successor) entities of the Savings Bank. Years of
service as a Director need not be continuous.
1.10 "Severance Benefit Amount" means the benefit payable under the
Plan in accordance Section 2.4 herein.
1.11 "Termination Event" means the termination of service as a Director
following the date of a Change in Control of the Savings Bank or within one year
thereafter.
ARTICLE II
BENEFITS
2.1 Severance Benefits. Upon the occurrence of a Termination Event, the
Savings Bank shall pay monthly to the Participant the Severance Benefit Amount,
as described and in the amount set forth at Article II, Section 2.2. Payment of
such Severance Benefit Amount shall begin on the first business day of the month
following such Termination Event. The payments will continue to be paid monthly
until all scheduled payments are made to the Participant. Except as provided at
Article II, Section 2.2 upon a Participant's termination from service as a
Director of the Savings Bank prior to a Termination Event, the Savings Bank
shall have no financial obligations to the Participant under the Plan.
2.2 Severance Benefit Amount. The Severance Benefit Amount shall be
calculated and payable as follows:
2
<PAGE>
a. A Severance Benefit Amount shall be paid for a period of
months based upon service of the Participant prior to the Termination
Event as follows:
Years of Service Maximum Number of Monthly Payments
---------------- ----------------------------------
less than 1 year 0
1 or more 12
b. The Severance Benefit Amount shall be calculated as the
aggregate annual Board retainer and regular monthly Board fees in
effect with respect to such Director at the Termination Event, which
would normally be paid during the next twelve month period to such
Participant as a Director.
c. Benefits payable in accordance with the Plan are exclusive
of any other benefits that may be payable to a participant under any other plan
of the Bank.
2.3 Death of Participant. Upon the death of a Participant who is
receiving benefit payments under the Plan prior to his or her death, the
remaining monthly payments will cease immediately and all obligations of the
Savings Bank under the Plan shall cease to exist with respect to such
Participant.
2.4 Alternative Forms Of Benefit Payment. The Committee may at any time
distribute the Severance Benefit Amount with respect to all future benefits
payable pursuant to Article II of the Plan, in a lump sum payment equal to the
present value of all future benefits payable to such Participant. The interest
rate in effect for a six month U.S. Treasury Bill on the date of the lump sum
payment shall be used for purposes of calculating the present value of amounts
payable in accordance with Section 2.4.
ARTICLE III
TRUST/NON-FUNDED STATUS OF PLAN
3.1 Trust/Non-Funded Status of Plan. Except as may be specifically
provided, nothing contained in this Plan and no action taken pursuant to the
provisions of this Plan shall create or be construed to create a trust of any
kind, or a fiduciary relationship between the Savings Bank and the Participant
or any other person. Any funds which may be invested under the provisions of
this Plan shall continue for all purposes to be a part of the general funds of
the Savings Bank. No person other than the Savings Bank shall by virtue of the
provisions of this Plan have any interest in such funds. The Savings Bank shall
not be under any obligation to use such funds solely to provide benefits
hereunder, and no representations have been made to any Participant that such
funds can or will be used only to provide benefits hereunder. To the extent that
any person acquires a right to receive payments from the Savings Bank under the
Plan, such rights shall be no greater than the right of any unsecured general
creditor of the Savings Bank.
3
<PAGE>
ARTICLE IV
VESTING
4.1 Vesting. All benefits under this Plan are deemed non-vested and
forfeitable prior to a Termination Event. All benefits payable hereunder shall
be deemed 100% vested and non- forfeitable by the Participant upon his or her
meeting the requirements set forth at Article II upon a Termination Event. No
benefits shall be deemed payable hereunder for any period prior to the time that
such benefits shall be deemed 100% vested and non-forfeitable.
ARTICLE V
TERMINATION
5.1 Termination. All the rights of a Participant shall terminate
immediately upon the Participant ceasing to be in the active service of the
Savings Bank prior to a Termination Event. A leave of absence approved by the
Board shall not constitute a cessation of service within the meaning of this
Section 5.1.
ARTICLE VI
GENERAL PROVISIONS
6.1 Other Benefits. Nothing in this Plan shall diminish or impair a
Participant's eligibility, participation or benefit entitlement under any other
benefit, insurance or compensation plan or agreement of the Savings Bank now or
hereinafter in effect.
6.2 No Effect on Employment or Service. This Plan shall not be deemed
to give any Participant or other person in the employ or service of the Savings
Bank any right to be retained in the employment or service of the Savings Bank,
or to interfere with the right of the Savings Bank to terminate any Participant
or such other person at any time and to treat him or her without regard to the
effect which such treatment might have upon him or her as a Participant in this
Plan.
6.3 Legally Binding. The rights, privileges, benefits and obligations
under this Plan are intended to be legal obligations of the Savings Bank and
binding upon the Savings Bank, its successors and assigns.
6.4 Modification. The Savings Bank, by action of the Board of
Directors, reserves the exclusive right to amend, modify, or terminate this
Plan. Any such termination, modification or amendment shall not terminate or
diminish any rights or benefits accrued by any Participant prior thereto without
regard to whether such rights or benefits shall be deemed vested as of such
date. The Savings Bank shall give thirty (30) days notice in writing to any
Participant prior to the effective date of any amendment, modification or
termination of this Plan.
4
<PAGE>
6.5 Arbitration. Any controversy or claim arising out of or relating to
the Plan or the breach thereof shall be settled by arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration Association,
with such arbitration hearing to be held at the offices of the American
Arbitration Association ("AAA") nearest to the home office of the Savings Bank,
unless otherwise mutually agreed to by the Participant and the Savings Bank, and
judgment upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction thereof.
6.6 Limitation. No rights of any Participant are assignable by any
Participant, in whole or in part, either by voluntary or involuntary act or by
operation of law. The rights of a Participant hereunder are not subject to
anticipation, alienation, sale, transfer, assignment, pledge, hypothecation,
encumbrance or garnishment by creditors of the Participant. Further, a
Participant's rights under the Plan are not subject to the debts, contracts,
liabilities, engagements, or torts of any Participant. No Participant shall have
any right under this Plan or right against any assets held or acquired pursuant
thereto other than the rights of a general, unsecured creditor of the Savings
Bank pursuant to the unsecured promise of the Savings Bank to pay the benefits
accrued hereunder in accordance with the terms of this Plan. The Savings Bank
has no obligation under this Plan to fund or otherwise secure its obligations to
render payments hereunder to a Participant. No Participant shall have any
discretion in the use, disposition, or investment of any asset acquired or set
aside by the Savings Bank to provide benefits under this Plan.
6.7 ERISA and IRC Disclaimer. It is intended that the Plan be neither
an "employee welfare benefit plan" nor an "employee pension benefit plan" for
purposes of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). Further, it is intended that the Plan will not cause the interest of
a Participant under the Plan to be includable in the gross income of such
Participant prior to the actual receipt of a payment under the Plan for purposes
of the Internal Revenue Code of 1986, as amended ("IRC").
6.8 Regulatory Matters.
(a) The Participant shall have no right to receive compensation or
other benefits in accordance with the Plan for any period after termination of
service for Just Cause. Termination for "Just Cause" shall include termination
because of the Participant's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or material breach of any provision of the Plan.
(b) Notwithstanding anything herein to the contrary, any payments made
to a Participant pursuant to the Plan shall be subject to and conditioned upon
compliance with 12 USC ss.1828(k) and any regulations promulgated thereunder.
6.9 Incompetency. If the Savings Bank shall find that any person to
whom any payment is payable under the Plan is deemed unable to care for his or
her personal affairs because of illness or accident, any payment due (unless a
prior claim therefor shall have been made by a duly appointed guardian,
committee or other legal representative) may be paid to the
5
<PAGE>
spouse, a child, a parent, or a brother or sister, or to any person deemed by
the Savings Bank to have incurred expense for such person otherwise entitled to
payment, in such manner and proportions as the Board may determine in its sole
discretion. Any such payments shall constitute a complete discharge of the
liabilities of the Savings Bank under the Plan.
6.10 Construction. The Committee shall have full power and authority to
interpret, construe and administer this Plan and the Committee's interpretations
and construction thereof, and actions thereunder, shall be binding and
conclusive on all persons for all purposes. Directors of the Savings Bank shall
not be liable to any person for any action taken or omitted in connection with
the interpretation and administration of this Plan unless attributable to his or
her own willful, gross misconduct or lack of good faith.
6.11 Plan Administration. The Board shall administer the Plan;
provided, however, that the Board may appoint an administrative committee (i.e.,
the Committee) to provide administrative services or perform duties required by
this Plan. The Committee shall have only the authority granted to it by the
Board.
6.12 Governing Law. This Plan shall be construed in accordance with and
governed by the laws of the State of Kansas ("State"), except to the extent that
federal law shall be deemed to apply.
6.13 Successors and Assigns. The Plan shall be binding upon any
successor or successors of the Savings Bank, and unless clearly inapplicable,
reference herein to the Savings Bank shall be deemed to include any successor or
successors of the Savings Bank.
6.14 Sole Agreement. The Plan expresses, embodies, and supersedes all
previous agreements, understandings, and commitments, whether written or oral,
between the Savings Bank and any Participants hereto with respect to the subject
matter hereof.
6
EXHIBIT 10.7
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
as amended and restated
THIS AGREEMENT entered into this 31 day of May, 1998 ("Effective
Date"), by and between Landmark Federal Savings Bank (the "Bank") and Larry L.
Schugart (the "Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as
President and Chief Executive Officer and is experienced in all phases of the
business of the Bank; and
WHEREAS, the parties have previously enter into an Employment Agreement
dated September 30, 1994, as subsequently amended and renewed; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as the
President and Chief Executive Officer of the Bank. The Employee shall render
such administrative and management services to the Bank and Landmark Bancshares,
Inc. ("Parent") as are currently rendered and as are customarily performed by
persons situated in a similar executive capacity. The Employee shall promote to
the extent permitted by law the business of the Bank and Parent. The Employee's
other duties shall be such as the Board of Directors for the Bank (the "Board of
Directors" or "Board") may from time to time reasonably direct, including normal
duties as an officer of the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the
term of this Agreement a salary at the rate of $95,000 per annum, payable in
cash not less frequently than monthly; provided, that the rate of such salary
shall be reviewed by the Board of Directors not less often than annually, and
Employee shall be entitled to receive annually an increase at such percentage or
in such an amount as the Board of Directors in its sole discretion may decide at
such time.
3. Discretionary Bonus. The Bank will continue to periodically consider
the payment of cash bonuses in accordance with past business practices, based
upon the performance of the Employee and the results of operations of the Bank.
The Employee shall be entitled to participate in an equitable manner with all
other senior management employees of the Bank in bonuses that may be authorized
and declared by the Board of Directors to its senior management employees from
time to time. No other compensation provided for in this Agreement shall be
deemed a substitute for the Employee's right to participate in such
discretionary bonuses when and as declared by the Board of Directors.
<PAGE>
4. (a) Participation in Retirement, Medical and Other Plans. The
Employee shall be entitled to participate in any plan of the Bank relating to
pension, profit-sharing, or other retirement benefits and medical coverage or
reimbursement plans that the Bank may adopt for the benefit of its employees.
Additionally, Employee's dependent family shall be eligible to participate in
medical and dental insurance plans sponsored by the Bank or Parent with the cost
of such premiums paid by the Bank. The Employee shall be entitled to participate
in any stock benefit programs, tax-qualified or non-tax-qualified deferred
compensation plans or any other fringe benefits instituted by the Bank.
(b) Employee Benefits; Expenses. The Employee shall be eligible to
participate in any fringe benefits which may be or may become applicable to the
Bank's senior management employees, including by example, participation in any
stock option or incentive plans adopted by the Board of Directors of Bank or
Parent, club memberships, a reasonable expense account, and any other benefits
which are commensurate with the responsibilities and functions to be performed
by the Employee under this Agreement. The Bank shall reimburse Employee for all
reasonable out-of-pocket expenses which Employee shall incur in connection with
his service for the Bank.
5. Term. The term of employment of Employee under this Agreement shall
be for the period commencing on the Effective Date and ending thirty-six (36)
months thereafter ("Term"). Additionally, on each annual anniversary date from
the Effective Date, the term of employment under this Agreement shall be
extended for an additional one year period beyond the then effective expiration
date upon a determination and resolution of the Board of Directors that the
performance of the Employee has met the requirements and standards of the Board,
and that the term of such Agreement shall be extended.
6. Loyalty; Noncompetition.
(a) The Employee shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of
Employee's employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the Bank
or Parent.
(b) Nothing contained in this Section 6 shall be deemed to prevent or
limit the right of Employee to invest in the capital stock or other securities
of any business dissimilar from that of the Bank or Parent, or, solely as a
passive or minority investor, in any business.
7. Standards. The Employee shall perform his duties under this
Agreement in accordance with such reasonable standards expected of employees
with comparable positions in comparable organizations and as may be established
from time to time by the Board of Directors.
<PAGE>
8. Vacation and Sick Leave. At such reasonable times as the Board of
Directors shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement, with all such voluntary absences to count as
vacation time; provided that:
(a) The Employee shall be entitled to annual vacation leave in
accordance with the policies as are periodically established by the Board of
Directors for senior management employees of the Bank.
(b) The Employee shall not be entitled to receive any additional
compensation from the Bank on account of his failure to take vacation leave and
Employee shall not be entitled to accumulate unused vacation from one fiscal
year to the next, except in either case to the extent authorized by the Board of
Directors for senior management employees of the Bank.
(c) In addition to the aforesaid paid vacations, the Employee shall be
entitled without loss of pay, to absent himself voluntarily from the performance
of his employment with the Bank for such additional periods of time and for such
valid and legitimate reasons as the Board of Directors in its discretion may
determine. Further, the Board of Directors shall be entitled to grant to the
Employee a leave or leaves of absence with or without pay at such time or times
and upon such terms and conditions as the Board of Directors in its discretion
may determine.
(d) In addition, the Employee shall be entitled to an annual sick leave
benefit as established by the Board of Directors for senior management employees
of the Bank. In the event that any sick leave benefit shall not have been used
during any year, such leave shall accrue to subsequent years only to the extent
authorized by the Board of Directors for employees of the Bank.
9. Termination and Termination Pay.
The Employee's employment under this Agreement shall be terminated upon
any of the following occurrences:
(a) The death of the Employee during the term of this Agreement, in
which event the Employee's estate shall be entitled to receive the compensation
due the Employee through the last day of the calendar month which is six (6)
months after Employee's death
(b) The Board of Directors may terminate the Employee's employment at
any time, but any termination by the Board of Directors other than termination
for Just Cause, shall not prejudice the Employee's right to compensation or
other benefits under the Agreement. The Employee shall have no right to receive
compensation or other benefits for any period after termination for Just Cause.
Termination for "Just Cause" shall include termination because of the Employee's
personal dishonesty, incompetence,
<PAGE>
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any law, rule
or regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or material breach of any provision of the Agreement.
(c) Except as provided pursuant to Section 12 herein, in the event
Employee's employment under this Agreement is terminated by the Board of
Directors without Just Cause, the Bank shall be obligated to continue to pay the
Employee the salary provided pursuant to Section 2 herein, up to the date of
termination of the term (including any renewal term) of this Agreement and the
cost of Employee obtaining all health, life, disability, and other benefits
which the Employee would be eligible to participate in through such date based
upon the benefit levels substantially equal to those being provided Employee at
the date of termination of employment, but in no event shall such salary or
benefits continuation be for a period of less than one year from the date of
termination of employment.
(d) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the parties shall not be affected.
(e) If the Bank is in default (as defined in Section 3(x)(1) of FDIA)
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the contracting
parties.
(f) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(g) The voluntary termination by the Employee during the term of this
Agreement with the delivery of no less than 60 days written notice to the Board
of Directors, other than pursuant to Section 12(b), in which case the Employee
shall be entitled to receive only the compensation, vested rights, and all
employee benefits up to the date of such termination.
<PAGE>
(h) Notwithstanding anything herein to the contrary, any payments made
to the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
10. Suspension of Employment . If the Employee is suspended and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12 U.S.C.
1818(e)(3) and (g)(1)), the Bank's obligations under the Agreement shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank shall, (i) pay the Employee
all or part of the compensation withheld while its contract obligations were
suspended and (ii) reinstate any of its obligations which were suspended.
11. Disability. If the Employee shall become disabled or incapacitated
to the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Employee shall nevertheless continue to
receive the compensation and benefits which may be payable to Employee under the
provisions of disability insurance coverage in effect for Bank employees. Upon
returning to active full-time employment, the Employee's full compensation as
set forth in this Agreement shall be reinstated as of the date of commencement
of such activities. In the event that the Employee returns to active employment
on other than a full-time basis, then his compensation (as set forth in Section
2 of this Agreement) shall be reduced in proportion to the time spent in said
employment, or as shall otherwise be agreed to by the parties.
12. Change in Control.
(a) Notwithstanding any provision herein to the contrary, in the event
of the involuntary termination of Employee's employment under this Agreement, in
connection with or within 18 months following any change in control of the Bank
or Parent, Employee shall be paid an amount equal to the product of three (3)
times the Employee's "base amount" as defined in Section 280G(b)(3) of the
Internal Revenue Code of 1986, as amended (the "Code") and regulations
promulgated thereunder less one dollar. Said sum shall be paid, at the option of
Employee, either (i) in periodic payments over the next 36 months or the
remaining term of this Agreement, whichever is less, as if Employee's employment
had not been terminated, or (ii) in one (1) lump sum within thirty (30) days of
such termination, and such payments shall be in lieu of any other future
payments which the Employee would be otherwise entitled to receive under Section
9 of this Agreement. Further, Employee shall be eligible to continue
participation for the Employee and Employee's dependents under the medical and
dental insurance program of the Bank, and any successors thereto, from the date
of such termination of employment through the period ending as of the first day
of the month following Employee's attainment of age 65.
<PAGE>
Notwithstanding the forgoing, all sums payable hereunder shall be reduced in
such manner and to such extent so that no such payments made hereunder when
aggregated with all other payments to be made to the Employee by the Bank or the
Parent shall be deemed an "excess parachute payment" in accordance with Section
280G of the Code and be subject to the excise tax provided at Section 4999(a) of
the Code. The term "control" shall refer to the ownership, holding or power to
vote more than 25% of the Parent's or Bank's voting stock, the control of the
election of a majority of the Parent's or Bank's directors, or the exercise of a
controlling influence over the management or policies of the Parent or Bank by
any person or by persons acting as a group within the meaning of Section 13(d)
of the Securities Exchange Act of 1934. The term "person" means an individual
other than the Employee, or a corporation, partnership, trust, association,
joint venture, pool, syndicate, sole proprietorship, unincorporated organization
or any other form of entity not specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary, Employee may voluntary terminate his employment under this Agreement
following a change in control of the Bank or Parent, and Employee shall
thereupon be entitled to receive the payment described in Section 12(a) of this
Agreement, upon the occurrence, or within one year thereafter, of any of the
following events, which have not been consented to in advance by the Employee in
writing: (i) if Employee would be required to move his personal residence or
perform his principal executive functions more than thirty-five (35) miles from
the Employee's primary office as of the signing of this Agreement; (ii) if in
the organizational structure of the Bank or Parent, Employee would be required
to report to a person or persons other than the Board of the Bank or Parent;
(iii) if the Bank or Parent should fail to maintain existing employee benefits
plans, including material fringe benefit, stock option and retirement plans;
(iv) if Employee would be assigned duties and responsibilities other than those
normally associated with his position as referenced at Section 1, herein; (v) if
Employee would not be elected or reelected to the Board of Directors of the
Bank; or (vi) if Employee's responsibilities or authority have in any way been
materially diminished or reduced.
(c) Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Bank, and
judgment upon the award rendered may be entered in any court having jurisdiction
thereof, except to the extend that the parties may otherwise reach a mutual
settlement of such issue. The Bank shall incur the cost of all fees and expenses
associated with filing a request for arbitration with the AAA, whether such
filing is made on behalf of the Bank or the Employee, and the costs and
administrative fees associated with employing the arbitrator and related
administrative expenses assessed by the AAA. The Bank shall reimburse Employee
for all costs and expenses, including reasonable attorneys' fees, arising from
such dispute, proceedings or actions, notwithstanding
<PAGE>
the ultimate outcome thereof. Such reimbursement, which shall not exceed the
Employee's compensation for the remaining term of this Agreement, shall be paid
within ten (10) days of Employee furnishing to the Bank or Parent evidence,
which may be in the form, among other things, of a canceled check or receipt, of
any costs or expenses incurred by Employee. Any such request for reimbursement
by Employee shall be made no more frequently than at sixty (60) day intervals.
13. Successors and Assigns.
(a) 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.
(b) Since the Bank is contracting for the unique and personal skills of
the Employee, the Employee shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Bank.
14. 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.
15. Applicable Law. This agreement shall be governed by all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of Kansas, except to the extent that Federal law shall be
deemed to apply.
16. 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.
17. 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.
18. Indemnification; Insurance
(a) Indemnification. The Bank agrees to indemnify the Employee
and his heirs, executors, and administrators to the fullest extent permitted
under applicable law and regulations, including, without limitation 12 U.S.C.
Section 1828(k), against any and all expenses and liabilities reasonably
incurred by the Employee in connection with or arising out of any action, suit
or proceeding in which the Employee may be involved by reason of his having been
a director or officer of the Bank or any of its subsidiaries, whether or not the
Employee is a director or officer at the time of incurring any such expenses or
liabilities. Such expenses and liabilities shall include, but shall not be
limited
<PAGE>
to, judgments, court costs and attorney's fees and the cost of reasonable
settlements. The Employee shall be entitled to indemnification in respect of a
settlement only if the Board of Directors of the Bank has approved such
settlement. Notwithstanding anything herein to the contrary, (i) indemnification
for expenses shall not extend to matters for which the Employee has been
terminated for, and (ii) the obligations of this Section 18 shall survive the of
this. Nothing contained herein shall be deemed to provide indemnification
prohibited by applicable law or regulation.
(b) Insurance. During the of the Agreement, the Bank shall
provide the Employee (and his heirs, executors, and administrators) with
coverage under a directors' and officers' liability policy at the Bank's
expense, at least equivalent to such coverage otherwise provided to the other
directors and senior officers of the Bank.
EXHIBIT 10.8
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
as amended and restated
THIS AGREEMENT entered into this 31 st day of May, 1998 ("Effective
Date"), by and between Landmark Federal Savings Bank (the "Bank") and Gary L.
Watkins (the "Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as
Senior Vice President and is experienced in all phases of the business of the
Bank; and
WHEREAS, the parties have previously enter into an Employment Agreement
dated September 30, 1994, as subsequently amended and renewed; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as the Senior
Vice President of the Bank. The Employee shall render such administrative and
management services to the Bank and Landmark Bancshares, Inc. ("Parent") as are
currently rendered and as are customarily performed by persons situated in a
similar executive capacity. The Employee shall also promote, by entertainment or
otherwise, as and to the extent permitted by law, the business of the Bank and
Parent. The Employee's other duties shall be such as the Board of Directors for
the Bank (the "Board of Directors" or "Board") may from time to time reasonably
direct, including normal duties as an officer of the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the
term of this Agreement a salary at the rate of $65,000 per annum, payable in
cash not less frequently than monthly; provided, that the rate of such salary
shall be reviewed by the Board of Directors not less often than annually, and
Employee shall be entitled to receive annually an increase at such percentage or
in such an amount as the Board of Directors in its sole discretion may decide at
such time.
3. Discretionary Bonus. The Employee shall be entitled to participate
in an equitable manner with all other senior management employees of the Bank in
discretionary bonuses that may be authorized and declared by the Board of
Directors to its senior management employees from time to time. No other
compensation provided for in this Agreement shall be deemed a substitute for the
Employee's right to participate in such discretionary bonuses when and as
declared by the Board of Directors.
4. (a) Participation in Retirement and Medical Plans. The
Employee shall be entitled to participate in any plan of the Bank
<PAGE>
relating to pension, profit-sharing, or other retirement benefits and medical
coverage or reimbursement plans that the Bank may adopt for the benefit of its
employees.
(b) Employee Benefits; Expenses. The Employee shall be eligible to
participate in any fringe benefits which may be or may become applicable to the
Bank's senior management employees, including by example, participation in any
stock option or incentive plans adopted by the Board of Directors of Bank or
Parent, club memberships, a reasonable expense account, and any other benefits
which are commensurate with the responsibilities and functions to be performed
by the Employee under this Agreement. The Bank shall reimburse Employee for all
reasonable out-of-pocket expenses which Employee shall incur in connection with
his service for the Bank.
5. Term. The term of employment of Employee under this Agreement shall
be for the period commencing on the Effective Date and ending twelve (12) months
thereafter ("Term"). Additionally, on each annual anniversary date from the
Effective Date, the term of employment under this Agreement shall be extended
for an additional one year period beyond the then effective expiration date upon
a determination and resolution of the Board of Directors that the performance of
the Employee has met the requirements and standards of the Board, and that the
term of such Agreement shall be extended.
6. Loyalty; Noncompetition.
(a) The Employee shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of
Employee's employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the Bank
or Parent.
(b) Nothing contained in this Paragraph 6 shall be deemed to prevent or
limit the right of Employee to invest in the capital stock or other securities
of any business dissimilar from that of the Bank or Parent, or, solely as a
passive or minority investor, in any business.
7. Standards. The Employee shall perform his duties under this
Agreement in accordance with such reasonable standards expected of employees
with comparable positions in comparable organizations and as may be established
from time to time by the Board of Directors.
8. Vacation and Sick Leave. At such reasonable times as the Board of
Directors shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement, with all such voluntary absences to count as
vacation time; provided that:
<PAGE>
(a) The Employee shall be entitled to annual vacation leave in
accordance with the policies as are periodically established by the Board of
Directors for senior management employees of the Bank.
(b) The Employee shall not be entitled to receive any additional
compensation from the Bank on account of his failure to take vacation leave and
Employee shall not be entitled to accumulate unused vacation from one fiscal
year to the next, except in either case to the extent authorized by the Board of
Directors for senior management employees of the Bank.
(c) In addition to the aforesaid paid vacations, the Employee shall be
entitled without loss of pay, to absent himself voluntarily from the performance
of his employment with the Bank for such additional periods of time and for such
valid and legitimate reasons as the Board of Directors in its discretion may
determine. Further, the Board of Directors shall be entitled to grant to the
Employee a leave or leaves of absence with or without pay at such time or times
and upon such terms and conditions as the Board of Directors in its discretion
may determine.
(d) In addition, the Employee shall be entitled to an annual sick leave
benefit as established by the Board of Directors for senior management employees
of the Bank. In the event that any sick leave benefit shall not have been used
during any year, such leave shall accrue to subsequent years only to the extent
authorized by the Board of Directors for employees of the Bank.
9. Termination and Termination Pay.
The Employee's employment under this Agreement shall be terminated upon
any of the following occurrences:
(a) The death of the Employee during the term of this Agreement, in
which event the Employee's estate shall be entitled to receive the compensation
due the Employee through the last day of the calendar month which is three (3)
months after the Employee's death.
(b) The Board of Directors may terminate the Employee's employment at
any time, but any termination by the Board of Directors other than termination
for Just Cause, shall not prejudice the Employee's right to compensation or
other benefits under the Agreement. The Employee shall have no right to receive
compensation or other benefits for any period after termination for Just Cause.
Termination for "Just Cause" shall include termination because of the Employee's
personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
provision of the Agreement.
<PAGE>
(c) Except as provided pursuant to Section 12 herein, in the event
Employee's employment under this Agreement is terminated by the Board of
Directors without Just Cause, the Bank shall be obligated to continue to pay the
Employee the salary provided pursuant to Section 2 herein, up to the date of
termination of the term (including any renewal term) of this Agreement and the
cost of Employee obtaining all health, life, disability, and other benefits
which the Employee would be eligible to participate in through such date based
upon the benefit levels substantially equal to those being provided Employee at
the date of termination of employment.
(d) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the parties shall not be affected.
(e) If the Bank is in default (as defined in Section 3(x)(1) of FDIA)
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the contracting
parties.
(f) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(g) The voluntary termination by the Employee during the term of this
Agreement with the delivery of no less than 60 days written notice to the Board
of Directors, other than pursuant to Section 12(b), in which case the Employee
shall be entitled to receive only the compensation, vested rights, and all
employee benefits up to the date of such termination.
(h) Notwithstanding anything herein to the contrary, any payments made
to the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
10. Suspension of Employment . If the Employee is suspended and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or
<PAGE>
(g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)), the Bank's obligations
under the Agreement shall be suspended as of the date of service, unless stayed
by appropriate proceedings. If the charges in the notice are dismissed, the Bank
shall, (i) pay the Employee all or part of the compensation withheld while its
contract obligations were suspended and (ii) reinstate any of its obligations
which were suspended.
11. Disability. If the Employee shall become disabled or incapacitated
to the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Employee shall nevertheless continue to
receive the compensation and benefits which may be payable to Employee under the
provisions of disability insurance coverage in effect for Bank employees. Upon
returning to active full-time employment, the Employee's full compensation as
set forth in this Agreement shall be reinstated as of the date of commencement
of such activities. In the event that the Employee returns to active employment
on other than a full-time basis, then his compensation (as set forth in
Paragraph 2 of this Agreement) shall be reduced in proportion to the time spent
in said employment, or as shall otherwise be agreed to by the parties.
12. Change in Control.
(a) Notwithstanding any provision herein to the contrary, in the event
of the involuntary termination of Employee's employment under this Agreement, in
connection with or within 18 months after, any change in control of the Bank or
Parent, Employee shall be paid an amount equal to the product of 1.50 times the
Employee's "base amount" as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and regulations promulgated
thereunder. Said sum shall be paid, at the option of Employee, either (i) in
periodic payments over the next 36 months or the remaining term of this
Agreement, whichever is less, as if Employee's employment had not been
terminated, or (ii) in one (1) lump sum within thirty (30) days of such
termination, and such payments shall be in lieu of any other future payments
which the Employee would be otherwise entitled to receive under Section 9 of
this Agreement. Notwithstanding the forgoing, all sums payable hereunder shall
be reduced in such manner and to such extent so that no such payments made
hereunder when aggregated with all other payments to be made to the Employee by
the Bank or the Parent shall be deemed an "excess parachute payment" in
accordance with Section 280G of the Code and be subject to the excise tax
provided at Section 4999(a) of the Code. The term "control" shall refer to the
ownership, holding or power to vote more than 25% of the Parent's or Bank's
voting stock, the control of the election of a majority of the Parent's or
Bank's directors, or the exercise of a controlling influence over the management
or policies of the Parent or Bank by any person or by persons acting as a group
within the meaning of Section 13(d) of the Securities Exchange Act of 1934. The
term "person" means an individual other than the Employee, or
<PAGE>
a corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary, Employee may voluntary terminate his employment under this Agreement
within twelve (12) months following a change in control of the Bank or Parent,
and Employee shall thereupon be entitled to receive the payment described in
Section 12(a) of this Agreement, upon the occurrence, or within one year
thereafter, of any of the following events, which have not been consented to in
advance by the Employee in writing: (i) if Employee would be required to move
his personal residence or perform his principal executive functions more than
thirty-five (35) miles from the Employee's primary office as of the signing of
this Agreement; (ii) if in the organizational structure of the Bank or Parent,
Employee would be required to report to a person or persons other than the
President and Board of the Bank or Parent; (iii) if the Bank or Parent should
fail to maintain existing employee benefits plans, including material fringe
benefit, stock option and retirement plans; (iv) if Employee would be assigned
duties and responsibilities other than those normally associated with his
position as referenced at Section 1, herein; or (v) if Employee's
responsibilities or authority have in any way been materially diminished or
reduced.
(c) Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Bank, and
judgment upon the award rendered may be entered in any court having jurisdiction
thereof, except to the extend that the parties may otherwise reach a mutual
settlement of such issue. The Bank shall incur the cost of all fees and expenses
associated with filing a request for arbitration with the AAA, whether such
filing is made on behalf of the Bank or the Employee, and the costs and
administrative fees associated with employing the arbitrator and related
administrative expenses assessed by the AAA.
13. Successors and Assigns.
(a) 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.
(b) Since the Bank is contracting for the unique and personal skills of
the Employee, the Employee shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Bank.
14. Amendments. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in
<PAGE>
writing and signed by both parties, except as herein otherwise specifically
provided.
15. Applicable Law. This agreement shall be governed by all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of Kansas, except to the extent that Federal law shall be
deemed to apply.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. 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.
EXHIBIT 10.9
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT entered into this 31 st day of May, 1998 ("Effective
Date"), by and between Landmark Federal Savings Bank (the "Bank") and James F.
Strovas (the "Employee").
WHEREAS, the Employee has heretofore been employed by the Bank as
Senior Vice President and is experienced in all phases of the business of the
Bank; and
WHEREAS, the parties have previously enter into an Employment Agreement
dated September 30, 1994, as subsequently amended and renewed; and
WHEREAS, the parties desire by this writing to set forth the continuing
employment relationship of the Bank and the Employee.
NOW, THEREFORE, it is AGREED as follows:
1. Employment. The Employee is employed in the capacity as the Senior
Vice President of the Bank. The Employee shall render such administrative and
management services to the Bank and Landmark Bancshares, Inc. ("Parent") as are
currently rendered and as are customarily performed by persons situated in a
similar executive capacity. The Employee shall also promote, by entertainment or
otherwise, as and to the extent permitted by law, the business of the Bank and
Parent. The Employee's other duties shall be such as the Board of Directors for
the Bank (the "Board of Directors" or "Board") may from time to time reasonably
direct, including normal duties as an officer of the Bank.
2. Base Compensation. The Bank agrees to pay the Employee during the
term of this Agreement a salary at the rate of $60,000 per annum, payable in
cash not less frequently than monthly; provided, that the rate of such salary
shall be reviewed by the Board of Directors not less often than annually, and
Employee shall be entitled to receive annually an increase at such percentage or
in such an amount as the Board of Directors in its sole discretion may decide at
such time.
3. Discretionary Bonus. The Employee shall be entitled to participate
in an equitable manner with all other senior management employees of the Bank in
discretionary bonuses that may be authorized and declared by the Board of
Directors to its senior management employees from time to time. No other
compensation provided for in this Agreement shall be deemed a substitute for the
Employee's right to participate in such discretionary bonuses when and as
declared by the Board of Directors.
4. (a) Participation in Retirement and Medical Plans. The
Employee shall be entitled to participate in any plan of the Bank relating to
pension, profit-sharing, or other retirement benefits
<PAGE>
and medical coverage or reimbursement plans that the Bank may adopt for the
benefit of its employees.
(b) Employee Benefits; Expenses. The Employee shall be eligible to
participate in any fringe benefits which may be or may become applicable to the
Bank's senior management employees, including by example, participation in any
stock option or incentive plans adopted by the Board of Directors of Bank or
Parent, club memberships, a reasonable expense account, and any other benefits
which are commensurate with the responsibilities and functions to be performed
by the Employee under this Agreement. The Bank shall reimburse Employee for all
reasonable out-of-pocket expenses which Employee shall incur in connection with
his service for the Bank.
5. Term. The term of employment of Employee under this Agreement shall
be for the period commencing on the Effective Date and ending twelve (12) months
thereafter ("Term"). Additionally, on each annual anniversary date from the
Effective Date, the term of employment under this Agreement shall be extended
for an additional one year period beyond the then effective expiration date upon
a determination and resolution of the Board of Directors that the performance of
the Employee has met the requirements and standards of the Board, and that the
term of such Agreement shall be extended.
6. Loyalty; Noncompetition.
(a) The Employee shall devote his full time and attention to the
performance of his employment under this Agreement. During the term of
Employee's employment under this Agreement, the Employee shall not engage in any
business or activity contrary to the business affairs or interests of the Bank
or Parent.
(b) Nothing contained in this Paragraph 6 shall be deemed to prevent or
limit the right of Employee to invest in the capital stock or other securities
of any business dissimilar from that of the Bank or Parent, or, solely as a
passive or minority investor, in any business.
7. Standards. The Employee shall perform his duties under this
Agreement in accordance with such reasonable standards expected of employees
with comparable positions in comparable organizations and as may be established
from time to time by the Board of Directors.
8. Vacation and Sick Leave. At such reasonable times as the Board of
Directors shall in its discretion permit, the Employee shall be entitled,
without loss of pay, to absent himself voluntarily from the performance of his
employment under this Agreement, with all such voluntary absences to count as
vacation time; provided that:
<PAGE>
(a) The Employee shall be entitled to annual vacation leave in
accordance with the policies as are periodically established by the Board of
Directors for senior management employees of the Bank.
(b) The Employee shall not be entitled to receive any additional
compensation from the Bank on account of his failure to take vacation leave and
Employee shall not be entitled to accumulate unused vacation from one fiscal
year to the next, except in either case to the extent authorized by the Board of
Directors for senior management employees of the Bank.
(c) In addition to the aforesaid paid vacations, the Employee shall be
entitled without loss of pay, to absent himself voluntarily from the performance
of his employment with the Bank for such additional periods of time and for such
valid and legitimate reasons as the Board of Directors in its discretion may
determine. Further, the Board of Directors shall be entitled to grant to the
Employee a leave or leaves of absence with or without pay at such time or times
and upon such terms and conditions as the Board of Directors in its discretion
may determine.
(d) In addition, the Employee shall be entitled to an annual sick leave
benefit as established by the Board of Directors for senior management employees
of the Bank. In the event that any sick leave benefit shall not have been used
during any year, such leave shall accrue to subsequent years only to the extent
authorized by the Board of Directors for employees of the Bank.
9. Termination and Termination Pay.
The Employee's employment under this Agreement shall be terminated upon
any of the following occurrences:
(a) The death of the Employee during the term of this Agreement, in
which event the Employee's estate shall be entitled to receive the compensation
due the Employee through the last day of the calendar month which is three (3)
months after the Employee's death.
(b) The Board of Directors may terminate the Employee's employment at
any time, but any termination by the Board of Directors other than termination
for Just Cause, shall not prejudice the Employee's right to compensation or
other benefits under the Agreement. The Employee shall have no right to receive
compensation or other benefits for any period after termination for Just Cause.
Termination for "Just Cause" shall include termination because of the Employee's
personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty
involving personal profit, intentional failure to perform stated duties, willful
violation of any law, rule or regulation (other than traffic violations or
similar offenses) or final cease-and-desist order, or material breach of any
provision of the Agreement.
<PAGE>
(c) Except as provided pursuant to Section 12 herein, in the event
Employee's employment under this Agreement is terminated by the Board of
Directors without Just Cause, the Bank shall be obligated to continue to pay the
Employee the salary provided pursuant to Section 2 herein, up to the date of
termination of the term (including any renewal term) of this Agreement and the
cost of Employee obtaining all health, life, disability, and other benefits
which the Employee would be eligible to participate in through such date based
upon the benefit levels substantially equal to those being provided Employee at
the date of termination of employment.
(d) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Sections 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act ("FDIA") (12
U.S.C. 1818(e)(4) and (g)(1)), all obligations of the Bank under this Agreement
shall terminate, as of the effective date of the order, but the vested rights of
the parties shall not be affected.
(e) If the Bank is in default (as defined in Section 3(x)(1) of FDIA)
all obligations under this Agreement shall terminate as of the date of default,
but this paragraph shall not affect any vested rights of the contracting
parties.
(f) All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of this Agreement is necessary for the
continued operation of the Bank: (i) by the Director of the Office of Thrift
Supervision ("Director of OTS"), or his or her designee, at the time that the
Federal Deposit Insurance Corporation ("FDIC") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of FDIA; or (ii) by the Director of the OTS, or his or her
designee, at the time that the Director of the OTS, or his or her designee
approves a supervisory merger to resolve problems related to operation of the
Bank or when the Bank is determined by the Director of the OTS to be in an
unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(g) The voluntary termination by the Employee during the term of this
Agreement with the delivery of no less than 60 days written notice to the Board
of Directors, other than pursuant to Section 12(b), in which case the Employee
shall be entitled to receive only the compensation, vested rights, and all
employee benefits up to the date of such termination.
(h) Notwithstanding anything herein to the contrary, any payments made
to the Employee pursuant to the Agreement, or otherwise, shall be subject to and
conditioned upon compliance with 12 USC ss.1828(k) and any regulations
promulgated thereunder.
10. Suspension of Employment . If the Employee is suspended and/or
temporarily prohibited from participating in the conduct of the Bank's affairs
by a notice served under Section 8(e)(3) or
<PAGE>
(g)(1) of the FDIA (12 U.S.C. 1818(e)(3) and (g)(1)), the Bank's obligations
under the Agreement shall be suspended as of the date of service, unless stayed
by appropriate proceedings. If the charges in the notice are dismissed, the Bank
shall, (i) pay the Employee all or part of the compensation withheld while its
contract obligations were suspended and (ii) reinstate any of its obligations
which were suspended.
11. Disability. If the Employee shall become disabled or incapacitated
to the extent that he is unable to perform his duties hereunder, by reason of
medically determinable physical or mental impairment, as determined by a doctor
engaged by the Board of Directors, Employee shall nevertheless continue to
receive the compensation and benefits which may be payable to Employee under the
provisions of disability insurance coverage in effect for Bank employees. Upon
returning to active full-time employment, the Employee's full compensation as
set forth in this Agreement shall be reinstated as of the date of commencement
of such activities. In the event that the Employee returns to active employment
on other than a full-time basis, then his compensation (as set forth in
Paragraph 2 of this Agreement) shall be reduced in proportion to the time spent
in said employment, or as shall otherwise be agreed to by the parties.
12. Change in Control.
(a) Notwithstanding any provision herein to the contrary, in the event
of the involuntary termination of Employee's employment under this Agreement, in
connection with or within 18 months after, any change in control of the Bank or
Parent, Employee shall be paid an amount equal to the product of 1.50 times the
Employee's "base amount" as defined in Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended (the "Code") and regulations promulgated
thereunder. Said sum shall be paid, at the option of Employee, either (i) in
periodic payments over the next 36 months or the remaining term of this
Agreement, whichever is less, as if Employee's employment had not been
terminated, or (ii) in one (1) lump sum within thirty (30) days of such
termination, and such payments shall be in lieu of any other future payments
which the Employee would be otherwise entitled to receive under Section 9 of
this Agreement. Notwithstanding the forgoing, all sums payable hereunder shall
be reduced in such manner and to such extent so that no such payments made
hereunder when aggregated with all other payments to be made to the Employee by
the Bank or the Parent shall be deemed an "excess parachute payment" in
accordance with Section 280G of the Code and be subject to the excise tax
provided at Section 4999(a) of the Code. The term "control" shall refer to the
ownership, holding or power to vote more than 25% of the Parent's or Bank's
voting stock, the control of the election of a majority of the Parent's or
Bank's directors, or the exercise of a controlling influence over the management
or policies of the Parent or Bank by any person or by persons acting as a group
within the meaning of Section 13(d) of the Securities Exchange Act of 1934. The
term "person" means an individual other than the Employee, or
<PAGE>
a corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.
(b) Notwithstanding any other provision of this Agreement to the
contrary, Employee may voluntary terminate his employment under this Agreement
within twelve (12) months following a change in control of the Bank or Parent,
and Employee shall thereupon be entitled to receive the payment described in
Section 12(a) of this Agreement, upon the occurrence, or within one year
thereafter, of any of the following events, which have not been consented to in
advance by the Employee in writing: (i) if Employee would be required to move
his personal residence or perform his principal executive functions more than
thirty-five (35) miles from the Employee's primary office as of the signing of
this Agreement; (ii) if in the organizational structure of the Bank or Parent,
Employee would be required to report to a person or persons other than the
President and Board of the Bank or Parent; (iii) if the Bank or Parent should
fail to maintain existing employee benefits plans, including material fringe
benefit, stock option and retirement plans; (iv) if Employee would be assigned
duties and responsibilities other than those normally associated with his
position as referenced at Section 1, herein; or (v) if Employee's
responsibilities or authority have in any way been materially diminished or
reduced.
(c) Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or the breach thereof, shall be settled by arbitration in
accordance with the rules then in effect of the district office of the American
Arbitration Association ("AAA") nearest to the home office of the Bank, and
judgment upon the award rendered may be entered in any court having jurisdiction
thereof, except to the extend that the parties may otherwise reach a mutual
settlement of such issue. The Bank shall incur the cost of all fees and expenses
associated with filing a request for arbitration with the AAA, whether such
filing is made on behalf of the Bank or the Employee, and the costs and
administrative fees associated with employing the arbitrator and related
administrative expenses assessed by the AAA.
13. Successors and Assigns.
(a) 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.
(b) Since the Bank is contracting for the unique and personal skills of
the Employee, the Employee shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Bank.
14. Amendments. No amendments or additions to this Agreement shall
be binding upon the parties hereto unless made in
<PAGE>
writing and signed by both parties, except as herein otherwise specifically
provided.
15. Applicable Law. This agreement shall be governed by all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the State of Kansas, except to the extent that Federal law shall be
deemed to apply.
16. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
17. 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.
EXHIBIT 10.10
<PAGE>
LANDMARK BANCSHARES, INC.
STOCK OPTION AGREEMENT
----------------------
This Agreement constitutes the award of STOCK OPTIONS for a total of
2,053 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 January 15, 1998.
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 $23.625 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 six months 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
EXHIBIT 13
<PAGE>
Landmark Bancshares, Inc.
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
Message to our Stockholders ...........................................1
Corporate Profile and Stock Price Information .........................3
Five-Year Financial Summary ...........................................4
Management's Discussion and Analysis ..................................6
Report of Independent Accountants ...................................F-1
Consolidated Financial Statements ...................................F-2
Notes to Consolidated Financial Statements ..........................F-7
Corporate Information ................................................20
<PAGE>
MESSAGE TO OUR STOCKHOLDERS:
I am pleased to report to you fiscal year 1998 progress, accomplishments, and
the financial condition of Landmark Bancshares, Inc. in this, our fifth, annual
report since becoming a public company in March 1994.
As we approach the new millenium, we continue to become more bank-like in the
way we operate our wholly-owned subsidiary, Landmark Federal Savings Bank, and
the services we offer our customers. Over the past twelve months, our commercial
loan department has become fully operational and a new full service branch
facility with three drive through lanes and a drive up ATM has been opened.
Furthermore, 24 hour ATMs were installed at our Great Bend and Garden City
offices in the spring, and we have begun to offer CheckCards to our customer
base.
The core business during fiscal year 1998 continued to focus on mortgage
lending. Loans receivable and loans held for sale increased $16.57 million or
10.48%, to $174.73 million at September 30, 1998 from $158.16 million at
September 30, 1997. This increase is a result of a larger number of residential
mortgage loans, attributable to our new Kansas City origination office, our
mortgage broker program, rural development loans, and the efforts of our lending
personnel to dominate the markets in which we offer our products. As we move
forward, we will continue to provide home financing to our communities, focusing
on prudent underwriting standards that will result in a high quality mortgage
loan portfolio with moderate risk. To a lesser extent but no less important, was
the growth in consumer loans, new auto leasing loans, and small business
lending.
Our core business in fiscal 1998 included significant growth in deposits
attributable to aggressive bidding for municipal funds and excellent service
provided by our customer service representatives to our savers. Deposit
liabilities increased $10.05 million to $154.79 million at September 30, 1998,
from $144.74 million at September 30, 1997.
Net earnings for the year was $2.36 million or $1.56 basic earnings per share,
compared to $1.52 basic earnings per share in fiscal 1997.
Total assets decreased slightly to $225.37 million from $227.85 million for the
year prior, due mainly to reducing investment securities held-to-maturity and
mortgage backed securities, which was partially offset by the increased loan
receivables. It has been the strategy of the Board of Directors and Management
to grow the loan portfolio, which has a higher yield to the Bank than investment
and mortgage-backed securities.
The Board of Directors and the management have established a formal process for
the implementation of a plan to evaluate and correct the problems that the year
2000, commonly known as Y2K, could cause the Company's critical automated
systems. A committee known as
-1-
<PAGE>
Vision 2000, made up of officers and supervisory personnel of the Bank, have met
regularly over the past year to address such matters. Management is continuing
to work closely with its main data processor, as well as other vendors, service
providers, and regulators to accomplish its goal of a smooth transition to the
year 2000.
The Board of Directors continued their policy of paying quarterly cash
dividends, and in fact, increased the dividend from $0.10 per share in May to
$0.15 per share in August. A special $0.10 dividend was declared at the regular
January 1998 board meeting.
Stock repurchases are another element of our shareholder value enhancement
strategy. Due to the recent downturn in bank and thrift stocks, the Corporation
was able to buy back 212,429 shares of stock within a thirty-day period ending
September 30, 1998. At fiscal year end a total of 953,378 shares or 41% of the
original shares issued had been repurchased.
On behalf of the Board of Directors, I wish to thank our stockholders, customers
and dedicated staff for your continued support of Landmark Bancshares, Inc.
Personal Regards,
/s/Larry Schugart
- -------------------------------------
Larry Schugart
President and
Chief Executive Officer
-2-
<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 its 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 five branch offices located in Barton, Finney, Ford
and Rush Counties in Kansas. The Bank also has a loan origination office located
in Overland Park, Kansas.
Stock Market Information
There were 1,327,934 shares (net of treasury stock) of common stock of Landmark
Bancshares, Inc. outstanding on September 30, 1998, held by approximately 263
stockholders of record (not including the number of persons or entities holding
the stock in nominee or street name through various brokerage firms). Since its
issuance in March 1994, the Company's common stock has been traded on the Nasdaq
National Market. The daily stock quotation for Landmark Bancshares, Inc. is
listed in the Nasdaq National Market section published in The Wall Street
Journal and other leading newspapers under the trading symbol of "LARK". The
following table reflects stock price information based on sales as published by
the Nasdaq National Market statistical report for each quarter for fiscal years
1998 and 1997.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------
1998 1997
----------------------------- ------------------------------
HIGH LOW HIGH LOW
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
First Quarter 26 1/2 23 18 3/4 16
Second Quarter 26 22 20 18
Third Quarter 29 1/4 24 3/4 20 1/8 18 3/4
Fourth Quarter 26 4/5 20 1/4 27 5/8 20 1/4
</TABLE>
The following table sets forth, for each quarter the dividends paid or payable
on the common stock for the indicated fiscal years ending September 30. The
Company's ability to pay dividends to shareholders is largely dependent upon the
dividends it receives from the Bank. The Bank is subject to regulatory
limitations on the amount of cash dividends it may pay.
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------------
Dividends per share 1998 1997
---------------------- ----------------------
<S> <C> <C>
First Quarter $0.10 $0.10
Second Quarter 0.20 0.10
Third Quarter 0.15 0.10
Fourth Quarter 0.15 0.10
</TABLE>
On October 21, 1998 the Board of Directors declared a quarterly dividend of
$0.15 per share to shareholders of record on November 2, 1998.
-3-
<PAGE>
<TABLE>
<CAPTION>
================================================================================
FIVE-YEAR FINANCIAL SUMMARY
Selected Financial Condition Data (Dollars in Thousands)
==============================================================================================================================
At September 30, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $225,368 $227,850 $213,734 $208,632 $188,727
Loans receivable, net (1) 174,733 158,163 129,903 98,934 71,253
Investments held-to-maturity 11,575 18,838 29,399 34,825 39,922
Investments available-for-sale 9,221 7,123 4,138 1,693 1,743
Mortgaged-backed securities
held-to-maturity 21,724 36,690 45,877 68,207 70,470
Cash and cash equivalents 2,844 2,741 474 462 1,061
Deposits 154,793 144,735 143,815 144,957 136,858
FHLB borrowings 41,700 46,200 33,467 25,533 13,580
Stockholders' equity 25,024 32,245 32,389 34,667 36,606
</TABLE>
<TABLE>
<CAPTION>
Summary of Operations (Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended September 30, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $17,207 $16,695 $14,575 $13,652 $10,671
Interest expense 10,216 9,768 8,678 8,224 5,917
----------------------------------------------------------------------------------
Net interest income 6,991 6,927 5,897 5,428 4,754
Provision for loan losses 265 308 135 9 (85)
Provision for losses on corporate
securities and municipal obligations 0 0 0 0 (128)
----------------------------------------------------------------------------------
Net interest income after provision
for losses on loans and investments 6,726 6,619 5,762 5,419 4,967
Non-interest income 1,226 1,026 745 684 450
Non-interest expense (2) 4,134 3,581 4,323 3,315 2,907
----------------------------------------------------------------------------------
Income before income taxes 3,818 4,064 2,184 2,788 2,510
Provision for income taxes 1,454 1,550 780 1,025 926
----------------------------------------------------------------------------------
Net income $2,364 $2,514 $1,404 $1,763 $1,584
==================================================================================
Basic earnings per share (3) $1.56 $1.52 $0.78 $0.87 $0.42
==================================================================================
Diluted earnings per share (3) $1.42 $1.42 $0.74 $0.85 $0.42
==================================================================================
Dividends per share (3) $0.60 $0.40 $0.40 $0.75 $0.05
==================================================================================
Book value per common share
outstanding at September 30 $18.84 $19.10 $17.48 $16.62 $16.05
==================================================================================
</TABLE>
(1) Includes loans held for sale totaling $2,409, $490, $1,890, $317 and $611
at September 30, 1998, 1997, 1996, 1995 and 1994, respectively.
(2) Includes one-time SAIF special assessment of $973 for the year ended
September 30, 1996.
(3) For periods following conversion from mutual to stock on March 28, 1994
(1994 - March 28 through September 30).
-4-
<PAGE>
<TABLE>
<CAPTION>
================================================================================
FIVE-YEAR FINANCIAL SUMMARY
Selected Ratios and Other Data
=====================================================================================================================
At or For the Year Ended September 30, 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Return on average assets 1.03 % 1.12 % 0.70 % 0.88 % 0.90 %
Return on average equity 7.52 7.79 4.14 4.92 6.06
Average equity to average assets 13.71 14.44 17.00 17.88 14.93
Equity to assets at period end 11.10 14.15 15.15 16.62 19.40
Net interest spread 2.41 2.41 2.11 1.88 2.18
Net yield on average interest-earning assets 3.12 3.16 3.01 2.76 2.77
Non-performing assets to total assets 0.34 0.30 0.15 0.22 0.22
Non-performing loans to net loans 0.39 0.27 0.24 0.39 0.29
Allowance for loan losses to total loans 0.65 0.61 0.57 0.65 0.87
Dividend payout 39.31 26.95 53.58 90.93 13.02
Number of:
Loans outstanding 6,741 6,210 5,439 4,561 3,859
Deposit accounts 12,878 12,888 13,443 13,731 12,582
Full service offices 6 5 5 5 5
</TABLE>
[FOUR GRAPHICS OMITTED]
-5-
<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 commercial, automobile, second mortgage,
equity and deposit loans. The Bank's market has historically provided an excess
of savings deposits over loan demand. Accordingly, in addition to originating
loans in its market the Bank also purchases mortgage-backed securities and
investment securities.
The Company's operations, as with those of the entire banking industry, are
significantly affected by prevailing economic conditions, competition, and the
monetary and fiscal policies of governmental agencies. Lending activities are
influenced by the demand for loans, competition among lenders, the prevailing
market rates of interest, primarily on competing investments, account
maturities, and the levels of personal income and savings in the market area.
The earnings of the Bank depend primarily on its level of net interest income,
which is the difference between interest income and interest expense. The Bank's
net interest income is a function of its interest rate spread, which is
determined by the difference between rates of interest earned on
interest-earning assets, and rates of interest paid on interest-bearing
liabilities. The Bank's earnings are also affected by its provision for losses
on loans, as well as the amount of non-interest income and non-interest expense,
such as compensation and related expenses, occupancy expense, data processing
costs and income taxes.
The Company's strategy for growth emphasizes both internal and external growth.
Operations focus on increasing deposits, making loans and providing customers
with a high level of customer service. As part of the Bank's emphasis on
external growth, the Bank has expanded its operations within its market areas.
During fiscal 1998, the Bank opened a branch office in Dodge City and a loan
origination office in the Kansas City area. As part of the Bank's strategy for
internal growth, during fiscal 1997 the Bank established a commercial loan
department and has been active in increasing its commercial lending market.
This management's discussion and analysis of financial condition and results of
operations contains or incorporates by reference forward-looking statements that
involve inherent risks and uncertainties. The Company cautions readers that a
number of important factors could cause actual results to differ materially from
those in the forward-looking statements. Those factors include fluctuations in
interest rates, inflation, government regulations, economic conditions, adequacy
of allowance for loan losses, the costs or difficulties associated with the
resolution of Year 2000 issues on computer systems greater than anticipated,
technology changes and competition in the geographic and business areas in which
the Company conducts its operations. These statements are based on management's
current expectations. Actual results in future periods may differ from those
currently expected because of changes in the factors referred to above and
various risks and uncertainties.
-6-
<PAGE>
Financial Condition
Consolidated total assets decreased 1.09% from $227,850,154 at September 30,
1997 to $225,368,013 at September 30, 1998. This slight decrease is the result
of the continued maturity of investment and mortgage-backed securities held to
maturity. The proceeds from these maturities in addition to the increase in
deposits were used to increase the loan portfolio and purchase treasury stock.
Loans receivable:
Net loans receivable held-for-investment increased $14,651,651 or 9.29%, from
$157,672,603 at September 30, 1997 to $172,324,254 at September 30, 1998. This
growth in the loan portfolio is attributed to increased lending throughout the
year resulting from the first full year with a commercial loan department and
the addition of a loan origination branch in the Kansas City area. The
commercial loan department was started during the fourth quarter of fiscal year
1997. Commercial loans, including commercial real estate, have increased
$6,799,246 from $6,716,345 at September 30, 1997 to $13,515,591 at September 30,
1998. The bank opened a loan origination office in Overland Park, Kansas during
the first quarter of fiscal 1998. At September 30, 1998 the Kansas City office
had a loan portfolio balance of $6,692,213. The increase also resulted from the
purchase of $17,885,608 in mortgage loan packages during fiscal year 1998. The
Bank continues to increase its investment in purchased loans in order to enhance
yield on investable funds during periods when such amounts exceeded loan demand
in the Bank's primary lending area. Loans held-for-sale also increased
$1,918,455, or 391.33%, from $490,234 at September 30, 1997 to $2,408,689 at
September 30, 1998. This continued increase in the Bank's loan portfolio has
resulted in a 145.23% increase in total loans during the last five years.
The Bank had impaired loans of $505,547 and $371,769 at September 30, 1998 and
1997, respectively. A loan is impaired when, based on management's evaluation of
current and historical information and events, it is probable that all amounts
due according to the contractual terms of the loan agreement will not be
collected. Loans that are classified as impaired are typically collateral
dependent; therefore, impairment is measured based upon the fair value of the
collateral less estimated costs to sell. Impairment is recognized by creating a
valuation allowance with a corresponding charge to provision for loss on loans.
Management, as part of the monitoring and evaluation of non-performing loans,
classifies loans and repossessed assets in accordance with regulatory provisions
s loss, doubtful or substandard. Total assets classified as of September 30,
1998 and 1997, amounted to $1,171,000 and $1,328,000, respectively. Those loans
classified that are not recognized as impaired include loans which are currently
past due 90 days or more or have a past history of delinquency. The level of
classified loans has continued to remain consistently low primarily as a result
of improving economic conditions and real estate values. At September 30, 1998
the Bank's ratio of total non-performing assets to total assets was 0.34%, far
lower than the industry average. The Bank will continue with its aggressive
collection policies to keep non-performing assets to a minimum, but no assurance
can be given that negotiations with borrowers will continue to be successful.
Classified loans have been considered by management in the evaluation of the
adequacy of the allowance for loan loss. Management is unaware of any trends
which it reasonably expects will materially impact future operating results,
liquidity, or capital resources.
Investment securities:
Investment securities held-to-maturity decreased $7,262,509 from $18,837,942 at
September 30, 1997 to $11,575,433 at September 30, 1998. 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. Excess funds were also used to purchase the Company's treasury
stock. Investment securities available-for-sale at September 30, 1998
experienced an increase of $2,098,125 from $7,122,785 at September 30, 1997 to
$9,220,910 at September 30, 1998 as a result of continued purchases of equity
securities by the Company.
-7-
<PAGE>
Mortgage-backed securities:
Mortgage-backed securities decreased $14,965,796 or 40.79%, from $36,689,551 at
September 30, 1997 to $21,723,755 at September 30, 1998. The Company did not
have any mortgage-backed securities available-for-sale at September 30, 1998 or
1997. Mortgage-backed securities also decreased due to funds from repayments on
mortgage-backed securities being used to fund the increase in loans receivable
and repurchase treasury stock. The Company did not acquire any mortgage-backed
securities during the years ended September 30, 1998 or 1997. The yield on
mortgage-backed securities at September 30, 1998 was 6.77% compared to a yield
on investment securities of 5.33%.
Foreclosed assets:
The balance in foreclosed assets at September 30, 1998 and 1997 was $70,939 and
$251,950, respectively. The September 30, 1998 balance in foreclosed assets
consisted of one single-family residence and three repossessed automobiles. This
foreclosed asset balance continues to be substantially lower than that
experienced by the Bank in prior years.
Deposits:
Deposits increased $10,058,177, or 6.95%, from $144,734,739 at September 30,
1997 to $154,792,916 at September 30, 1998. This increase relates primarily to
the increase in jumbo certificates of deposit of $10,507,180 from $11,174,463 at
September 30, 1997 to $21,681,643 at September 30, 1998. The increase in jumbo
certificates of deposit relates to the Bank's focus during the year on obtaining
municipal funds. The Bank continues to offer rates competitive with other
financial institutions in the area. The average cost on demand deposits
decreased 12 basis points from 3.22% for fiscal year 1997 to 3.10% for fiscal
year 1998. This was offset by an increase in the average cost on savings and
certificates of deposit of 11 basis points from 5.32% for fiscal year 1997 to
5.43% for fiscal year 1998. The increase in the cost of savings and certificates
of deposit is the result of an increase in the volume of both savings and
certificate of deposit accounts in addition to an increase in rates. The
rate/volume analysis table reflects an increase of $218,000 due to the changes
in volume and an increase of $137,000 due to changes in the rate of savings and
certificate of deposit accounts.
Of the $127,485,196 in certificates of deposit held by the Bank at September 30,
1998, $88,891,755 of these deposits will mature during the year ended September
30, 1999. The majority of the Bank's time deposits consist of regular deposits
from customers and institutional investors from the Bank's surrounding community
rather than brokered deposit accounts. As a result, most of these local accounts
are expected to be renewed.
Advances and other borrowings from Federal Home Loan Bank:
The Bank has continued to utilize advances from the Federal Home Loan Bank
("FHLB") as a source of funds. Fixed term advances from the FHLB totaled
$33,700,000 and $36,200,000 at September 30, 1998 and 1997, respectively. The
Bank also has a line of credit with the FHLB. The Bank had an outstanding
balance of $8,000,000 and $10,000,000 at September 30, 1998 and 1997,
respectively. The funds provided by these borrowings were used primarily to fund
lending activity throughout the year. The weighted average cost of these
borrowings from the FHLB was 5.60% and 6.16% as of September 30, 1998 and 1997,
respectively. Of the advances and other borrowings outstanding at September 30,
1998, $26,700,000 mature during the year ended September 30, 1999.
Stockholders' equity:
Stockholders' equity decreased $7,221,563, or 22.40%, from $32,245,330 at
September 30, 1997 to $25,023,767 at September 30, 1998. As of September 30,
1998 the Company has repurchased 953,378 shares of its common stock to enhance
stockholder value. Total stock repurchases for the year ended September 30, 1998
amounted to $8,654,310. As noted in the Stock Price Information section of this
report the Company has also been consistently paying quarterly dividends to
stockholders.
-8-
<PAGE>
Implementation of New Accounting Pronouncements
During fiscal year 1998, the Company adopted the provisions of two accounting
pronouncements: Statement No. 128 entitled "Earnings Per Share" and Statement
No. 129 entitled "Disclosure of Information about Capital Structure." See Note 1
to the Consolidated Financial Statements for a discussion of these new
accounting pronouncements and their effect on the Company.
Liquidity and Capital Resources
Liquidity is measured by a financial institution's ability to raise funds
through deposits, borrowed funds, capital or the sale of highly marketable
assets such as available-for-sale securities. Additional sources of liquidity,
including cash flows from both repayment of loans and maturity of investment
securities, are also included in determining whether liquidity is satisfactory.
During the years ended September 30, 1998, 1997 and 1996, cash and cash
equivalents have increased by $103,326, $2,267,342 and $11,689, respectively.
As reflected in the Consolidated Statement of Cash Flows, net cash flows
provided by operating activities for fiscal year 1998, 1997 and 1996 totaled
$3,272,735, $9,687,358 and $1,460,520, respectively. Amounts fluctuate from
period to period primarily as a result of the purchase and origination of loans
held-for-sale and the subsequent sale of such loans. The sale of loans
held-for-sale was $22,831,874, $12,956,185 and $9,679,305 for fiscal years 1998,
1997 and 1996, respectively. This is offset by the origination and purchase of
loans held-for-sale of $21,483,818, $6,309,686 and $10,344,957 for fiscal years
1998, 1997 and 1996, respectively.
Net cash flows provided by investing activities totaled $624,854 for fiscal year
1998. Net cash flows used by investing activities totaled $17,172,688 and
$4,294,278 for fiscal year 1997 and 1996, respectively. Amounts fluctuate from
period to period primarily as a result of (i) principal repayments on loans and
mortgage-backed securities, (ii) the purchase and origination of loans,
mortgage-backed securities and investment securities and (iii) proceeds from
maturities and sales of investment securities. Loans originated and purchased
for investment, net of principal payments on loans, were $17,928,700,
$35,303,920 and $30,405,369 for fiscal years 1998, 1997 and 1996, respectively.
Net cash flows used by financing activities totaled $3,794,263 for fiscal year
1998. Net cash flows provided by financing activities totaled $9,752,672 and
$2,845,447, respectively, for fiscal years 1997 and 1996. Advances from the FHLB
have been the primary source to balance the Company's funding needs during each
of the fiscal years presented. As of September 30, 1998, the Bank had an
existing line of credit with the FHLB of $30,000,000 against which the Bank had
an outstanding balance of $8,000,000 that could serve as an additional source of
liquidity. For fiscal 1998 the Company had net repayments of FHLB borrowings of
$4,500,000, compared to net proceeds of $12,733,332 and $7,933,334 for the
fiscal years 1997 and 1996, respectively. The Company's repurchase of treasury
stock amounted to $8,654,310, $3,222,729 and $3,526,306 for years ending
September 30, 1998, 1997 and 1996, respectively. The repurchase of treasury
stock during this three year period has helped to enhance stockholder value.
The Company's principal asset is its investment in the capital stock of the
Bank, and because it does not generate any significant revenues independent of
the Bank, the Company's liquidity is dependent on the extent to which it
receives dividends from the Bank. The Bank's ability to pay dividends to the
Company is dependent on its ability to generate earnings and is subject to a
number of regulatory restrictions, the liquidation account and tax
considerations. Under capital distribution regulations of the OTS, a savings
institution that, immediately prior to, and on a proforma basis after giving
effect to, a proposed dividend, has total capital that is at least equal to the
amount of its fully phased-in capital requirements (a "Tier I Association") is
permitted to pay dividends during a calendar year in an amount equal to the
greater of (i) 75.0% of its net income for the recent four
-9-
<PAGE>
quarters, or (ii) 100.0% of its net income to date during the calendar year plus
an amount that would reduce by one-half the amount by which its ratio of total
capital to assets exceeded its fully phased-in risk-based capital ratio
requirement at the beginning of the calendar year. At September 30, 1998, the
Bank qualified as a Tier I Association. Should the Bank's regulatory capital
fall below certain levels, applicable law would require approval by the OTS of
such proposed dividends and, in some cases, would prohibit the payment of
dividends. Future dividend distributions by the Bank in excess of Bank earnings
could result in recapture of tax bad debt deductions resulting in income tax on
the amounts recaptured. See Notes 11, 13 and 21 of Notes to Consolidated
Financial Statements for additional information on capital levels and
compliance, tax bad debt reserves and the liquidation account.
Cash dividends paid by the parent company to its common stock shareholders
totaled $929,243, $677,675 and $752,393 during the fiscal years 1998, 1997 and
1996, respectively. The payment of dividends on the common stock is subject to
the direction of the Board of Directors of the Company and depends on a variety
of factors, including operating results and financial condition, liquidity,
regulatory capital limitations and other factors. It is the intention of the
Bank to continue to pay dividends to the parent company, subject to regulatory,
income tax and liquidation account considerations, to cover cash dividends on
common stock when and as declared by the parent company.
The Bank is required under applicable federal regulations to maintain specified
levels of "liquid" investments in qualifying types of U.S. Government, federal
agency and other investments having maturities of five years or less. Current
OTS regulations require that a savings bank maintain liquid assets of not less
than 4% of its average daily balance of net withdrawable deposit accounts. At
September 30, 1998, the Bank met its liquidity requirement and expects to meet
this requirement in the future. The Bank adjusts liquidity as appropriate to
meet its asset/liability objectives.
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, 1998 the Bank exceeded all of
the minimum capital requirements as currently required. Please refer to Note 13
of the accompanying Notes to Consolidated Financial Statements for more
information regarding the Bank's regulatory capital position at September 30,
1998.
As discussed in Note 22 of the financial statements, the Deposit Insurance Funds
Act of 1996 authorized the recapitalization of the Savings Associations
Insurance Fund (SAIF). After the one-time special assessment, the Bank's annual
deposit insurance rate declined to 0.064% of insured deposits effective January
1, 1997 from the 0.23% rate prior to this recapitalization. Until December 31,
1999, SAIF-insured institutions will likely continue to pay the 0.064%
assessment to the FDIC to help fund interest payments on bonds issued by an
agency of the federal government established to finance takeovers of insolvent
thrifts. During this period, Bank Insurance Fund (BIF) members likely will be
assessed at the rate of 0.013% to fund interest payments on these bonds. After
December 31, 1999, both BIF and SAIF members will likely be assessed at the same
rate for such interest payments. The Deposit Insurance Funds Act of 1996
provides that the BIF and the SAIF will be merged into a single deposit
insurance fund effective December 31, 1999, but only if there are no insured
savings associations on that date. The legislation directed the Department of
Treasury to make recommendations to Congress for the establishment of a single
charter for banks and thrifts.
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.
-10-
<PAGE>
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. The Bank is subject
to the risk of interest rate fluctuations to the extent that there is a
difference, or mismatch, between the amount of the Bank's interest-earning
assets and interest-bearing liabilities which mature or reprice in specified
periods. Consequently, when interest rates change, to the extent the Bank's
interest-earning assets have longer maturities or effective repricing periods
than its interest-bearing liabilities, the interest income realized on the
Bank's interest-earning assets will adjust more slowly than the interest expense
on its interest-bearing liabilities. This mismatch in the maturity and interest
rate sensitivity of assets and liabilities is commonly referred to as the "gap."
A gap is considered positive when the amount of interest rate sensitive assets
maturing or repricing during a specified period exceeds the amount of interest
rate sensitive liabilities maturing or repricing during such period, and is
considered negative when the amount of interest rate sensitive liabilities
maturing or repricing during a specified period exceeds the amount of interest
rate assets maturing or repricing during such period. Generally, during a period
of rising interest rates, a negative gap would adversely affect net interest
income while a positive gap would result in an increase in net interest income,
and during a period of declining interest rates, a negative gap would result in
an increase in net interest income while a positive gap would adversely affect
net interest income. The Bank utilizes internally generated gap reports and
externally prepared interest rate sensitivity of the net portfolio value reports
to monitor and manage its interest rate risk.
The Company has historically invested in interest-earning assets that have a
longer duration than its interest-bearing liabilities. The mismatch in duration
of the interest-sensitive liabilities indicates that the Bank is exposed to
interest rate risk. In a rising rate environment, in addition to reducing the
market value of long-term interest-earning assets, liabilities will reprice
faster than assets; therefore, decreasing net interest income. To mitigate this
risk, the Bank has placed a greater emphasis on shorter-term higher yielding
assets that reprice more frequently in reaction to interest rate movements. In
addition, the Bank has continued to include in total assets a concentration of
adjustable-rate assets to benefit the one-year cumulative gap as such
adjustable-rate assets reprice and are more responsive to the sensitivity of
more frequently repricing interest-bearing liabilities.
Quarterly, the OTS prepares a report on the interest rate sensitivity of the net
portfolio value ("NPV") from information provided by Bank. The OTS adopted a
rule in August 1993 incorporating an interest rate risk ("IRR") component into
the risk-based capital rules. Implementation of the rule has been delayed until
the OTS has tested the process under which institutions may appeal such capital
deductions. The IRR component is a dollar amount that will be deducted from
total capital for the purpose of calculating an institution's risk-based capital
requirement and is measured in terms of the sensitivity of its NPV to changes in
interest rates. The NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet contracts.
An institution's IRR is measured as the change to its NPV as the result of a
hypothetical 200 basis point change in market interest rates. A resulting change
in NPV of more than 2% of the estimated market value of its assets will require
the institution to deduct from its capital 50% of that excess change. The rule
provides that the OTS will calculate the IRR component quarterly for each
institution.
-11-
<PAGE>
The following tables present the Bank's NPV as well as other data as of
September 30, 1998, 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>
+400 bp $8,158 ($10,826) (57) % 3.91 % (448) bp
+300 bp $11,650 (7,334) (39) % 5.44 % (294) bp
+200 bp (1) $14,839 (4,145) (22) % 6.78 % (160) bp
+100 bp $17,375 (1,609) (8) % 7.79 % (59) bp
0 bp $18,984 8.39 %
-100 bp $19,830 846 4 % 8.66 % 27 bp
-200 bp $20,761 1,777 9 % 8.96 % 57 bp
-300 bp $21,957 2,973 16 % 9.35 % 97 bp
-400 bp $23,288 4,305 23 % 9.78 % 140 bp
</TABLE>
(1) Denotes rate shock used to compute interest rate risk capital component.
September 30, 1998
------------------
Risk Measures (20 Basis Point Rate Shock):
Pre-Shock NPV Ratio: NPV as % of Present Value of Assets 8.39%
Exposure Measure: Post-Shock NPV Ratio 6.78%
Sensitivity Measure: Change in NPV Ratio 1.60%
Utilizing the data above, the Bank, at September 30, 1998, would not have been
considered by the OTS to have been subject to "above normal" interest rate risk.
Accordingly, no deduction from risk-based capital would have been required.
Set forth below is a breakout, by basis points of the Bank's NPV as of September
30, 1998 by assets, liabilities, and off balance sheet items.
<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 $238,084 $234,806 $231,740 $229,014 $226,400 $223,043 $218,794 $213,959 $208,891
- -Liabilities 214,474 212,603 210,804 209,075 207,400 205,795 204,235 202,726 201,269
+Off Balance Sheet (322) (246) (175) (109) (16) 127 280 417 536
-----------------------------------------------------------------------------------------------------
Net Portfolio Value $23,288 $21,957 $20,761 $19,830 $18,984 $17,375 $14,839 $11,650 $8,158
=====================================================================================================
</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
-12-
<PAGE>
interest income should decline with instantaneous increases in interest rates
while net interest income should increase with instantaneous declines in
interest rates. Generally, during periods of increasing interest rates, the
Bank's interest rate sensitive liabilities would reprice faster than its
interest rate sensitive assets causing a decline in the Bank's interest rate
spread and margin. This would result from an increase in the Bank's cost of
funds that would not be immediately offset by an increase in its yield on
earning assets. An increase in the cost of funds without an equivalent increase
in the yield of earning assets would tend to reduce net interest income.
In times of decreasing interest rates, fixed rate assets could increase in value
and the lag in repricing of interest rate sensitive assets could be expected to
have a positive effect on the Bank's net interest income. However, changes in
only certain rates, such as shorter term interest rate declines without longer
term interest rate declines, could reduce or reverse the expected benefit from
decreasing interest rates.
Year 2000 Issue
The year 2000 poses an important business issue regarding how existing
application software programs and operating systems can accommodate this date
value. Many computer programs that can only distinguish the final two digits of
the year entered are expected to read entries for the year 2000 as the year
1900. Like most financial service providers, the Company may be significantly
affected by the Year 2000 issue due to the nature of financial information. The
Company has been evaluating both information technology (computer systems and
software) and non-information technology (i.e. vault timers, elevators,
electronic door lock and heating, ventilation and air condition controls) both
within and outside the Company's direct control and with which the Company
electronically or operationally interfaces. If computer systems are not
adequately changed to identify the year 2000, many computer applications could
fail or create erroneous results. As a result, many calculations that rely on
the date field information, such as interest, payment or due dates and other
operating functions, may generate results that could be significantly misstated,
and the Company could experience a temporary inability to process transactions
and engage in normal business activities.
The Company has also initiated formal communications with both information
technology and non-information technology vendors to determine the extent to
which the Company's interface systems may be vulnerable to those third parties'
failure to remediate their own Year 2000 issues. We have examined all of our
non-information technology systems and have either received certifications of
Year 2000 compliance for systems controlled by third party providers or
determined that the systems should not be impacted by the Year 2000. We expect
to further test the systems we control and receive third party certification,
where appropriate, that they will continue to function. We do not expect any
material costs to address our non-information technology systems and have not
had any material costs to date. We have determined that the information
technology systems we use have substantially more year 2000 risk than the
non-information technology systems we use. The Bank has evaluated their
information technology systems risk in three areas: (1) internal computers and
software, (2) computers of others used by our borrowers, (3) external data
processing servicers.
Internal computers and software
The Company will replace or upgrade most of its internal computer systems and
programs in order to provide cost-effective and efficient delivery of services
to its customers, information to management, and to provide additional capacity
for processing information and transactions due to increased activity. Computer
system upgrades are projected to be completed during the second quarter of
fiscal 1999. The total cost of the Year 2000 project is estimated to approximate
$400,000 which will be funded through cash flows from operations. The Company
will spend approximately $250,000 during the first and second quarters of fiscal
1999 to upgrade computer systems, which will be capitalized. At September 30,
1998, none of the estimated $250,000 has been capitalized. The Bank expensed
approximately $10,000 relating to Year 2000 compliance during the year ended
September 30, 1998. In addition, the Company will expect to expense
approximately $75,000 during fiscal 1999. This results in estimated known costs
to the Bank of $325,000. The Bank estimates a potential of an
-13-
<PAGE>
additional $75,000 in unidentified costs at the present time. Final testing of
internal conversion to compliant systems is scheduled to be completed by the end
of the first quarter of calendar 1999.
Computers of others used by our borrowers
The Bank has evaluated most of its borrowers and does not believe that the Year
2000 issue should, on an aggregate basis, impact their ability to make payments
to the Bank. The Bank feels that most of its residential borrowers are not
dependent on their home computers for income and that none of its commercial
borrowers are so large that a Year 2000 problem would render them unable to
collect revenue or rent and, in turn, continue to make loan payments to the
Bank. As a result, the Bank has not contacted residential borrowers concerning
this issue and does not consider this issue in its residential loan underwriting
process. The Bank has contacted all commercial borrowers and considered this
issue during commercial loan underwriting. The Bank does not expect any material
costs to address this risk area.
External data processing servicer
This risk is primarily focused on one third-party service bureau that provides
virtually all of the Bank's data processing. The Bank's data processing servicer
has completed their Year 2000 testing and was determined to be in compliance.
The third-party servicer also has a contingency plan developed to provide
operating alternatives in the event of systems or communication failures. This
contingency plan has a procedure in which a disaster recovery unit will be sent
to the Bank immediately to correct any Year 2000 complications. Although
appearing to be compliant, if the service bureau fails to be Year 2000 compliant
the Bank would likely experience significant delays, mistakes or failures. These
delays, mistakes or failures could have a significant impact on the Bank's
financial condition and results of operations.
Contingency plan
Senior management has developed and presented to the Board of Directors a
contingency plan to provide operating alternatives for continuation of services
to the Bank's customers in the event of systems or communication failures at the
beginning of the Year 2000. Management believes that the Bank will be able to
continue to operate in the Year 2000 even if some systems fail. The Bank will
have available a back-up generator for use in the event of a power failure. At
the end of December 1999, the Bank will receive from its data processing
servicer a CD-ROM backup of all customer and general ledger accounts. The Bank
will also have a stand alone computer with internal software to extract the
information from the CD-ROM and print hard copy reports as necessary. This
software has been certified as Year 2000 compliant by the provider and has been
tested at other customer locations of the service provider. As noted above, the
disaster recovery unit provided by the Bank's service center will also be
available. Due to the size of the Bank, it feels that it would be able to
operate with all transactions processed internally until normal operations can
be restored. This procedure could require changing of schedules and hiring of
temporary staff, which would increase cost of operations. If this procedure were
to continue for any extended period of time, or if we ultimately had to change
data service providers, the cost could be material.
-14-
<PAGE>
Average Balances, Interest and Average Yields and Rates
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material difference in the information presented.
<TABLE>
<CAPTION>
For Year Ended September 30,
At -------------------------------------------------------------------------------
September 30,
1998 1998 1997 1996
---------- ------------------------- ------------------------- -----------------------------
Average Average Average
Yield/ Yield/ Yield/ Yield/
Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
--------- -------- -------- ------ -------- -------- ------ -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable 8.14 % $167,490 $13,741 8.20 % $145,395 $11,833 8.14 % $110,084 $ 9,077 8.25 %
Mortgage-backed securities 6.77 % 29,724 1,927 6.48 % 41,747 2,707 6.48 % 54,647 3,557 6.51 %
Investment securities 5.33 % 23,366 1,374 5.88 % 30,956 2,079 6.72 % 29,936 1,863 6.22 %
Other interest-earning assets 5.72 % 3,169 165 5.21 % 1,252 76 6.07 % 1,085 78 7.19 %
--------- -------- ------- ------ -------- ------- ------ -------- ------- -------
Total interest-earning assets 7.71 % $223,749 $17,207 7.69 % $219,350 $16,695 7.61 % $195,752 $14,575 7.45 %
========= ======== ======= ====== ======== ======= ====== ======== ======= =======
Non-interest earning assets: 5,580 4,310 3,764
-------- -------- --------
Total assets $229,329 $223,660 $199,516
======== ======== ========
Interest-bearing liabilities:
Demand deposits 2.79 % $ 21,586 $ 669 3.10 % $ 21,536 $ 693 3.22 % $ 14,249 $ 365 2.56 %
Savings deposits and certificates
of deposit 5.45 % 127,290 6,917 5.43 % 123,206 6,556 5.32 % 128,899 7,077 5.49 %
Other liabilities 5.60 % 44,763 2,631 5.88 % 42,951 2,520 5.87 % 19,429 1,237 6.37 %
--------- -------- ------- ------ -------- ------- ------ -------- ------- -------
Total interest-bearing
liabilities 5.20 % $193,639 $10,217 5.28 % $187,693 $ 9,769 5.20 % $162,577 $ 8,679 5.34 %
========= ======== ======= ====== ======== ======= ====== ======== ======= =======
Non-interest bearing liabilities 4,242 3,696 3,015
-------- -------- --------
Total liabilities $197,881 $191,389 $165,592
======== ======== ========
Stockholder's equity 31,448 32,271 33,924
--------- -------- --------
Total liabilities and
stockholders' equity $229,329 $223,660 $199,516
========= ======== ========
Net interest income $ 6,990 $ 6,926 $ 5,896
======= ======= =======
Interest rate spread 2.51 % 2.41 % 2.41 % 2.11 %
========= ====== ====== =======
Net yield on interest-earning assets 3.12 % 3.16 % 3.01 %
====== ====== =======
Ratio of interest-earning assets
to interest-bearing liabilities 115.55 % 116.87 % 120.41 %
======== ======== =========
</TABLE>
-15-
<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 September 30,
-----------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
--------------------------------------- -----------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------------------- -----------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
-------- -------- ------ -------- -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ 1,799 $ 88 $ 21 $ 1,908 $ 2,913 ($ 121) ($ 36) $ 2,756
Mortgage-backed securities (779) 0 (1) (780) (840) (16) 6 (850)
Investment securities (510) (260) 65 (705) 63 150 3 216
Other interest-earnings assets 117 (10) (18) 89 13 (11) (4) (2)
-------- -------- ------ -------- -------- -------- -------- --------
Total interest-earning assets $ 627 ($ 182) $ 67 $ 512 $ 2,149 $ 2 ($ 31) $ 2,120
======== ======== ====== ======== ======== ======== ======== ========
Interest expense:
Demand deposits $ 2 ($ 26) $ 0 ($ 24) $ 187 $ 94 $ 47 $ 328
Savings deposits and
certificates of deposits 218 137 6 361 (313) (219) 11 (521)
Other liabilities 107 4 0 111 1,498 (97) (118) 1,283
-------- -------- ------ -------- -------- -------- -------- --------
Total interest-bearing liabilities $ 327 $ 115 $ 6 $ 448 $ 1,372 ($ 222) ($ 60) $ 1,090
======== ======== ====== ======== ======== ======== ======== ========
Change in net interest income $ 300 ($ 297) $ 61 $ 64 $ 777 $ 224 $ 29 $ 1,030
======== ======== ====== ======== ======== ======== ======== ========
</TABLE>
Results of Operations
General:
Net income decreased slightly, from $2,514,437 for the year ended September 30,
1997 to $2,363,798 for the year ended September 30, 1998. The decrease in net
income relates primarily to an increase in costs of the core business of the
subsidiary Bank as a result of establishing a commercial loan department and the
additional expense of providing retail services in the existing branches, the
new Dodge City branch and the Overland Park loan origination office. These
increased expenses are expected and intended to lead to increased volume in the
customer base, resulting in increased loan and general market share.
Net income increased $1,110,211 or 79.06% from $1,404,226 for the year ended
September 30, 1996 to $2,514,437 for the year ended September 30, 1997. As
discussed in the following paragraphs the net income for the year ended
September 30, 1996 included a special one-time SAIF assessment of $937,073
which, net of tax effect, resulted in decreasing fiscal year 1996 net income by
approximately $600,000. Exclusive of the effect of the assessment on 1996, net
income for fiscal 1997 increased over 1996 by approximately $530,000. This
increase is primarily attributable to an increase in net interest income.
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
-16-
<PAGE>
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, 1996. Without
the effect of the assessment net income would have been approximately $2,000,000
for the year ended September 30, 1996.
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, non-interest income and
non-interest expense.
Total interest income increased $512,592, or 3.07%, to $17,207,440 for the year
ended September 30, 1998, from $16,694,848 for the year ended September 30,
1997. This increase resulted from the average yield on interest-earning assets
increasing to 7.69% for the year ended September 30, 1998 compared to 7.61% for
the year ended September 30, 1997. This increase was the result of the increase
in the loan portfolio, the rate/volume analysis reflects this increase. The
change in interest income due to the volume of loans receivable was an increase
of $1,799,000 during fiscal year 1998 from fiscal year 1997. Income resulting
from the increase in loan volume was partially offset by decreases in the volume
of investment and mortgage-backed securities.
Interest expense for the year ended September 30, 1998 increased $448,271, or
4.59%, to $10,216,563 from $9,768,292 at September 30, 1997. This increase is
primarily due to an increase in volume of certificates of deposit and market
interest rates paid on those deposits. The Bank's rate/volume analysis reflects
approximately $327,0000 of the increase in interest expense resulting from
changes in volume.
As a result of the above, net interest income had a slight increase of $64,321,
from $6,926,556 for the year ended September 30, 1997 to $6,990,877 for the year
ended September 30, 1998. The increase in net interest income is attributable to
a shift in the composition of interest-earning assets from generally lower
yielding mortgage-backed and investment securities to loans, resulting in an
increase in net interest income attributable to volume of $300,000. The net
interest spread of the Bank was consistent during the years ended September 30,
1998 and 1997, with an interest rate spread of 2.41% for both years. The risks
related to interest rate movement are managed and continuously reviewed by
management.
Interest income was $16,694,848 for the year ended September 30, 1997 compared
to $14,574,868 for the year ended September 30, 1996, an increase of $2,119,980
or 14.55%. As discussed above, this increase is also primarily the result of an
increase in loans receivable during the year ended September 30, 1997, this is
reflected in the Bank's rate/volume analysis as the increase in interest income
resulting from the volume of loans receivable was $2,913,000.
Interest expense for the year ended September 30, 1997 increased $1,089,924, or
12.56%, to $9,768,292 from $8,678,368 at September 30, 1996. This increase was
due to the increase in borrowed funds throughout the fiscal year. Approximately
$1,498,000 of the increase in interest expense was due to an increase in the
volume of other liabilities, which consists of advances and other borrowings
from the FHLB. The average cost for interest-bearing liabilities decreased
slightly from 5.34% for the year ended September 30, 1996 to 5.20% for the year
ended September 30, 1997.
As a result of the above, net interest income increased $1,030,056, or 17.47%,
from $5,896,500 for the year ended September 30, 1996 to $6,926,556 for the year
ended September 30, 1997. The net interest
-17-
<PAGE>
spread of the Bank increased from 2.11% for the year ended September 30, 1996 to
2.41% for the year ended September 30, 1997, an increase of 30 basis points.
Interest costs on liabilities increase or decrease faster than interest yields
on assets, as shorter term liabilities reprice or adjust for changes in interest
rates quicker than longer maturity assets. This increase in interest spread
related to the significant increase in origination and purchases of mortgage
loans at yields in excess of yields on maturing investments and mortgage-backed
securities.
Provision for losses on loans:
The Bank maintains, and the Board of Directors monitors, allowances for possible
losses on loans. These allowances are established based upon management's
periodic evaluation of known and inherent risks in the loan portfolio, review of
significant individual loans and collateral, review of delinquent loans, past
loss experience, adverse situations that may affect the borrowers' ability to
repay, current and expected market conditions, and other factors management
deems important. Determining the appropriate level of reserves involves a high
degree of management judgment and is based upon historical and projected losses
in the loan portfolio and the collateral value of specifically identified
problem loans. Additionally, allowance strategies and policies are subject to
periodic review and revision in response to current market conditions, actual
loss experience and management's expectations.
The allowance for loan losses was $1,136,753 and $968,623 at September 30, 1998
and 1997, respectively. The provision for losses on loans is the method by which
the allowance for losses is adjusted during the period. The provision for losses
on loans was $265,000 for the year ended September 30, 1998 and $307,979 for the
year ended September 30, 1997. The increase in the allowance for the year ended
September 30, 1998 was based on management's evaluation of the allowance in
relation to the increase in the Bank's loan portfolio, including increases in
non-mortgage lending, and the increase in non-performing loans. 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 $740,346 at September 30, 1996. The provision
for losses on loans increased from $134,743 for the year ended September 30,
1996 to $307,979 for the year ended September 30, 1997. The $173,236 increase in
the provision for the year ended September 30, 1997 was based on management's
evaluation of the allowance in relation to the increase in the Bank's loan
portfolio, as discussed above.
Non-interest income:
Non-interest income increased $199,937, or 19.49%, from $1,026,021 for the year
ended September 30, 1997 to $1,225,958 for the year ended September 30, 1998.
This was primarily due to the net gain on the sale of loans of $472,908 for
fiscal year 1998 compared to $237,281 for fiscal 1997, a $235,627 increase, or
99.3%.
Non-interest income increased $280,661 or 37.65%, from $745,360 for the year
ended September 30, 1996 to $1,026,021 for the year ended September 30, 1997.
The main reason for this increase was due to the net gain on sale of investments
of $220,154, consisting of sales of corporate equity securities, which was a
$193,047 increase from the net gain on the sale of investments of $27,107
realized during the year ended September 30, 1996. Additionally, gain on sale of
loans increased by 188.63% due to an increase in the volume of loan sales from
fiscal year 1997 to fiscal year 1996. Sale of loans held-for-sale were
$12,956,185 for the year ended September 30, 1997 compared to $9,679,305 for the
year ended September 30, 1996.
-18-
<PAGE>
Non-interest expense:
Non-interest expense increased $554,361, or 15.48% from $3,580,077 for the year
ended September 30, 1997 to $4,134,438 for the year ended September 30, 1998.
The Bank has experienced an overall increase in non-interest expense as a result
of the addition of a commercial loan department, the loan origination office in
Overland Park, and the new Dodge City branch. These increases relate primarily
to increases in compensation as a result of new positions. Compensation and
related expenses increased $252,108, or 11.24%, from $2,242,602 for fiscal 1997
to $2,494,710 for fiscal 1998. This increase in compensation is also the result
of increase in the Employees Stock Ownership Plan (the "ESOP") expense as a
result of higher market values for allocated shares and additional compensation
expense relating to the issuance of stock options, see Note 16 of the financial
statements for further discussion.
Non-interest expense decreased $743,222 or 17.19% from $4,323,299 for the year
ended September 30, 1996 to $3,580,077 for the year ended September 30, 1997.
This decrease related primarily to the special one-time SAIF assessment of
$937,073 recorded during fiscal 1996. If this special assessment were excluded,
total non-interest expense would have increased $193,851 or 5.72% from fiscal
1996 to 1997. Compensation and related expenses increased $349,144 or 18.44%
during the year ended September 30, 1997, relating to overall increases in
compensation and ESOP expense as discussed above. The increase in compensation
was offset by a $191,250 or 49.04% decrease in federal insurance premium expense
from $389,986 during fiscal year 1996 to $198,736 during fiscal year 1997. The
decrease in regulatory insurance and assessments was substantially due to the
revised rate structure on insured deposits adopted by the FDIC after the
recapitalization of the SAIF. The Bank's annual deposit insurance rate in effect
prior to this recapitalization was 0.23% of insured deposits, declining to 0.18%
of insured deposits for the quarter ended December 31, 1996, and reduced to
0.064% of insured deposits effective January 1, 1997.
Income taxes:
Income tax expense decreased $96,485, or 6.22%, from $1,550,084 for the year
ended September 30, 1997 to $1,453,599 for the year ended September 30, 1998.
This decrease in income tax resulted primarily from a decrease in pre-tax income
and deferred tax attributable to changes in state income tax rates that for the
Bank become effective as of October 1, 1998.
The Company's income tax expense increased $770,492 or 98.83%, from $779,592 for
the year ended September 30, 1996 to $1,550,084 for the year ended September 30,
1997. The principal reason for the increase was the increase in pre-tax income.
-19-
<PAGE>
[LOGO] MEMBER OF
THE AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS
[LOGO] Regier Carr & Monroe, L.L.P. THE DIVISION OF CPA FIRMS
- --------------------------------------------------------------------------------
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, 1998 and 1997,
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, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Landmark Bancshares,
Inc. and subsidiary as of September 30, 1998 and 1997, and the results of their
operations and cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
/s/Regier Carr & Monroe, L.L.P.
Regier Carr & Monroe, L.L.P.
October 29, 1998
Wichita, Kansas
<TABLE>
<CAPTION>
<S> <C> <C> <C>
300 WEST DOUGLAS, SUITE 100 o WICHITA, KANSAS 67202-2994 o 316 264-2335 o FAX 316 264-1489
WICHITA o TUCSON o TULSA
</TABLE>
F-1
<PAGE>
Landmark Bancshares, Inc.
Consolidated Statements of Financial Condition
September 30, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------- -------------
<S> <C> <C>
Cash and due from banks:
Non-interest bearing $ 832,559 $ 678,173
Interest bearing 2,011,819 2,062,879
------------- -------------
Total cash and due from banks 2,844,378 2,741,052
Time deposits in other financial institutions 249,867 110,580
Investment securities held-to-maturity (estimated market
value of $11,681,144 and $18,907,385 at September 30,
1998 and 1997, respectively) 11,575,433 18,837,942
Investment securities available-for-sale 9,220,910 7,122,785
Mortgage-backed securities held-to-maturity (estimated
market value of $22,006,970 and $36,933,775 at
September 30, 1998 and 1997, respectively) 21,723,755 36,689,551
Loans receivable, net 172,324,254 157,672,603
Loans held-for-sale 2,408,689 490,234
Accrued income receivable 1,443,847 1,446,605
Foreclosed real estate, net 70,939 251,950
Office properties and equipment, net 1,729,282 1,188,250
Prepaid expenses and other assets 1,749,177 1,233,038
Income taxes receivable, current 27,482 65,564
------------- -------------
Total assets $ 225,368,013 $ 227,850,154
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 154,792,916 $ 144,734,739
Borrowings from Federal Home Loan Bank 41,700,000 46,200,000
Advances from borrowers for taxes and insurance 1,904,170 1,673,057
Accrued expenses and other liabilities 1,737,080 2,304,593
Deferred income taxes 210,080 692,435
------------- -------------
Total liabilities 200,344,246 195,604,824
------------- -------------
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 22,466,144 22,173,827
Retained income, substantially restricted 20,739,642 19,305,087
Unrealized gain on available-for-sale securities,
net of deferred taxes 283,336 922,384
Unamortized stock acquired by Employee Stock
Ownership Plan (692,719) (844,597)
Unamortized compensation related to Management
Stock Bonus Plan (96,522) (289,567)
Treasury stock, at cost, 953,378 and 592,671 shares at
September 30, 1998 and 1997, respectively (17,904,245) (9,249,935)
------------- -------------
Total stockholders' equity 25,023,767 32,245,330
------------- -------------
Total liabilities and stockholders' equity $ 225,368,013 $ 227,850,154
============= =============
</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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Interest income:
Interest on loans $ 13,741,660 $ 11,832,611 $ 9,076,880
Interest and dividends on investment securities 1,538,935 2,154,856 1,940,908
Interest on mortgage-backed securities 1,926,845 2,707,381 3,557,080
------------ ------------ ------------
Total interest income 17,207,440 16,694,848 14,574,868
------------ ------------ ------------
Interest expense:
Deposits 7,585,688 7,248,750 7,441,797
Borrowed funds 2,630,875 2,519,542 1,236,571
------------ ------------ ------------
Total interest expense 10,216,563 9,768,292 8,678,368
------------ ------------ ------------
Net interest income 6,990,877 6,926,556 5,896,500
Provision for losses on loans 265,000 307,979 134,743
------------ ------------ ------------
Net interest income after provision for losses 6,725,877 6,618,577 5,761,757
------------ ------------ ------------
Non-interest income:
Service charges and late charges 339,478 270,622 217,317
Net gain on sale of investments 202,299 220,154 27,107
Net gain on sale of loans 472,908 237,281 82,208
Net gain on sale of mortgage-backed securities 135,208
Service fees on loans sold 157,032 161,304 161,329
Other 54,241 136,660 122,191
------------ ------------ ------------
Total non-interest income 1,225,958 1,026,021 745,360
------------ ------------ ------------
Non-interest expense:
Compensation and related expenses 2,494,710 2,242,602 1,893,458
Occupancy expense 243,633 173,452 169,780
Federal insurance premium 156,064 198,736 389,986
SAIF special assessment 937,073
Data processing 207,733 181,321 187,237
Other expense 1,032,298 783,966 745,765
------------ ------------ ------------
Total non-interest expense 4,134,438 3,580,077 4,323,299
------------ ------------ ------------
Income before income taxes 3,817,397 4,064,521 2,183,818
------------ ------------ ------------
Income taxes:
Currently payable 1,529,953 1,261,177 1,085,774
Deferred tax expense (benefit) (76,354) 288,907 (306,182)
------------ ------------ ------------
1,453,599 1,550,084 779,592
------------ ------------ ------------
Net income $ 2,363,798 $ 2,514,437 $ 1,404,226
============ ============ ============
Income per common share
Basic:
Earnings per share $ 1.56 $ 1.52 $ 0.78
============ ============ ============
Weighted average common and common
shares outstanding 1,518,482 1,652,339 1,810,182
============ ============ ============
Diluted:
Earnings per share $ 1.42 $ 1.42 $ 0.74
============ ============ ============
Weighted average common and common
shares outstanding 1,664,950 1,774,121 1,892,443
============ ============ ============
</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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Unrealized Unamortized
Gain on Common Unamortized
Additional Available- Stock ompensation Total
Common Paid-In Retained for-Sale Acquired by Related to Treasury Stockholders'
Stock Capital Income Securities ESOP MSBP Stock Equity
---------- ------------ ------------ ----------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30, 1995 $228,131 $21,893,499 $16,816,492 $37,454 ($1,131,573) ($675,657) ($2,500,900) $34,667,446
Allocation of shares
by Employees' Stock
Ownership Plan 50,676 136,878 187,554
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 1,404,226
Cash dividend paid
($0.40 per share) (752,393) (752,393)
Net change in unrealized
gain on available-for-
sale investment
securities 215,603 215,603
Purchase of 232,336
treasury shares (3,526,306) (3,526,306)
---------- ------------ ------------ ----------- ------------- ------------ ------------- -------------
Balance,
September 30, 1996 228,131 21,944,175 17,468,325 253,057 (994,695) (482,612) (6,027,206) 32,389,175
Allocation of shares by
Employees' Stock
Ownership Plan 121,277 150,098 271,375
Amortization of
compensation related
to Management Stock
Bonus Plan 56,928 193,045 249,973
Compensation related to
stock options granted 51,447 51,447
Net income for the year
ended September 30,
1997 2,514,437 2,514,437
Cash dividend paid
($0.40 per share) (677,675) (677,675)
Net change in unrealized
gain on available-for-
sale investment
securities 669,327 669,327
Purchase of 164,355
treasury shares (3,222,729) (3,222,729)
---------- ------------ ------------ ----------- ------------- ------------ ------------- -------------
Balance,
September 30, 1997 228,131 22,173,827 19,305,087 922,384 (844,597) (289,567) (9,249,935) 32,245,330
Allocation of shares by
Employees' Stock
Ownership Plan 175,691 151,878 327,569
Amortization of
compensation related
to Management Stock
Bonus Plan 108,968 193,045 302,013
Compensation related to
stock options granted 7,658 7,658
Net income for the year
ended September 30,
1998 2,363,798 2,363,798
Cash dividend paid
($0.60 per share) (929,243) (929,243)
Net change in unrealized
gain on available-for-
sale investment
securities (639,048) (639,048)
Purchase of 360,707
treasury shares (8,654,310) (8,654,310)
---------- ------------ ------------ ----------- ------------- ------------ ------------- -------------
Balance,
September 30, 1998 $228,131 $22,466,144 $20,739,642 $283,336 ($692,719) ($96,522) ($17,904,245) $25,023,767
========== ============ ============ =========== ============= ============ ============= =============
</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, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,363,798 $ 2,514,437 $ 1,404,226
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 157,885 113,881 116,278
Gain on sale of investment securities
available-for-sale (202,299) (220,154) (27,107)
Decrease in accrued interest receivable 2,758 72,035 152,435
Decrease in outstanding checks in excess
of bank balance (143,808) (907,008)
Increase (decrease) in income taxes (38,272) 170,652 (239,364)
Increase (decrease) in accounts payable and
accrued expenses (567,513) 111,297 1,257,765
Amortization of premiums and discounts
on investments and loans (85,099) (54,424) (171,438)
Amortization of mortgage servicing rights 50,692 15,329 2,202
Provision for losses on loans 265,000 307,979 134,743
Sale of loans held-for-sale 22,831,874 12,956,185 9,679,305
Gain on sale of mortgage-backed securities
available-for-sale (135,208)
Gain on sale of loans held-for-sale (472,908) (237,281) (82,208)
Origination of loans held-for-sale (20,450,773) (5,896,736) (9,643,647)
Purchase of loans held-for-sale (1,033,045) (412,950) (701,310)
Amortization related to MSBP and ESOP 344,923 343,143 329,923
Other non-cash items, net 105,714 47,773 290,933
------------ ------------ ------------
Net cash provided by operating activities 3,272,735 9,687,358 1,460,520
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Repayment of loans, net of originations (1,076,137) (4,345,234) (14,007,163)
Loans purchased for investment (16,852,563) (30,958,686) (16,398,206)
Principal repayments on mortgage-backed securities 14,943,744 9,134,312 12,396,168
Proceeds from sale of mortgage-backed securities
available-for-sale 11,490,625
Acquisition of mortgage-backed securities
held-to-maturity (1,482,865)
Acquisition of investment securities held-to-maturity (10,885,469) (4,300,000) (16,295,500)
Acquisition of investment securities available-for-sale (3,588,429) (2,413,418) (2,373,880)
Acquisition of equity investment (250,000)
Proceeds from sale of investment securities
available-for-sale 647,553 742,989 308,479
Proceeds from maturities or calls of investment
securities held-to-maturity 18,150,000 14,890,000 21,862,135
Net (increase) decrease in time deposits (139,287) 369,369 99,051
Proceeds from sale of foreclosed assets 488,420 110,614 130,923
Acquisition of fixed assets (698,917) (352,345) (60,156)
Other investing activity, net (114,061) (50,289) 36,111
------------ ------------ ------------
Net cash provided by (used in) investing activities 624,854 (17,172,688) (4,294,278)
------------ ------------ ------------
</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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 10,058,177 $ 919,829 ($ 1,142,174)
Net increase (decrease) in escrow accounts 231,113 (85) 332,986
Proceeds from FHLB advances and other borrowings 31,700,000 126,600,000 53,600,000
Repayment of FHLB advances and other borrowings (36,200,000) (113,866,668) (45,666,666)
Purchase of treasury stock (8,654,310) (3,222,729) (3,526,306)
Dividends paid (929,243) (677,675) (752,393)
------------- ------------- -------------
Net cash provided by (used in) financing activities (3,794,263) 9,752,672 2,845,447
------------- ------------- -------------
Net increase in cash and cash equivalents 103,326 2,267,342 11,689
Cash and cash equivalents at beginning of year 2,741,052 473,710 462,021
------------- ------------- -------------
Cash and cash equivalents at end of year $ 2,844,378 $ 2,741,052 $ 473,710
============= ============= =============
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest on deposits, advances and other
borrowings $ 9,899,846 $ 9,895,246 $ 8,519,955
Income taxes 1,382,903 954,195 1,018,956
Transfers from loans to foreclosed real estate 377,107 489,475 27,411
Loans to facilitate the sale of foreclosed assets 325,814 122,000 25,954
Transfer of held-to-maturity mortgage-backed
securities to available-for-sale - - 11,355,417
Transfer of loans held for investment to held-for-sale 2,827,880 5,155,392 -
</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, 1998, 1997 and 1996
1. Summary of Significant Accounting Policies
Nature of operations:
Landmark Bancshares, Inc. (the Company) is a Kansas corporation and is
the parent company of its wholly-owned subsidiary, Landmark Federal
Savings Bank (the Bank). At the present time, the Company does not
conduct any active business other than the Bank.
Landmark Federal Savings Bank is primarily engaged in attracting
deposits from the general public and using those deposits, together with
other funds, to originate real estate loans on one- to four- family
residences, commercial and consumer loans. The Bank conducts its
business from its main office in Dodge City and also has five branch
offices located in Dodge City, Garden City, Great Bend, Hoisington and
LaCrosse, Kansas. The Bank also has a loan origination office in the
Kansas City area. In addition, the Bank invests in mortgage-backed
securities and investment securities. The Bank offers its customers
fixed rate and adjustable rate mortgage loans, as well as other loans,
including commercial, auto, home equity and savings account loans.
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 Bank's allowances for losses on loans and
valuations of assets acquired by foreclosure. Such agencies may require
the Bank to recognize additional losses based on their judgment of
information available to them at the time of their examination.
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.
Investments, including mortgage-backed securities, are classified as
either held-to-maturity, trading, or available-for-sale.
Held-to-maturity securities are securities for which the Bank has the
positive intent and ability to hold to maturity and are reported at
amortized cost. Trading securities are securities held principally for
resale and are reported at fair value, with unrealized changes in value
reported in the bank's income statement as part of earnings.
Available-for-sale securities are securities not classified as trading
nor as held-to-maturity securities and are also reported at fair value,
but any unrealized appreciation or depreciation, net of tax effects are
reported as a separate component of equity.
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.
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.
F-8
<PAGE>
1. Summary of Significant Accounting Policies (Continued)
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 assets:
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 six months.
Mortgage servicing rights:
In June 1996, the Financial Accounting Standard Board issued FASB
Statement No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. FASB Statement No. 127,
Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125, was issued in December 1996 to defer certain provisions of
Statement 125. The provisions of FASB No. 125 for servicing of
financial assets have been applied effective January 1, 1997.
The cost of mortgage servicing rights is amortized in proportion to, and
over the period of, estimated net servicing revenues. Impairment of
mortgage servicing rights is assessed based on the fair value of those
rights. Fair values are estimated using discounted cash flows based on a
current market interest rate. For purposes of measuring impairment, the
rights are stratified based on loan type, investor type, interest rate
and the life of the loan (15, 20 and 30 years) at the date of sale. The
amount of impairment recognized is the amount by which the capitalized
mortgage servicing rights for a stratum exceed their fair value.
Rights to future interest income from serviced loans that exceed
contractually specified servicing fees are classified as interest-only
strips and accounted for as debt securities that are available-for-sale.
The Company held no such assets at September 30, 1998 and 1997.
Prior the implementation of SFAS 125, excess servicing fees receivable
were amortized over the estimated life using the interest method. The
excess servicing fees receivable and the amortization thereon was
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 evaluated 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 previously held or issued by the
Company were held or issued for purposes other than trading. The Company
did not hold or issue any derivative financial instruments during the
years ended September 30, 1998, 1997 and 1996.
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.
Stock-based compensation:
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 Company has adopted the recognition and
measurement provisions of SFAS No. 123 effective for the fiscal year
beginning October 1, 1996. SFAS No. 123 effects the Company's stock
options granted after October 1, 1996. These options are recognized and
measured in accordance with the fair-value-based method of accounting.
Impact of new accounting standards:
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. SFAS 130 establishes standards of disclosure and financial
statement display for reporting total comprehensive income and the
individual components thereof. This Statement requires that all items
that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial
statements. This Statement requires that an enterprise (a) classify
items of other comprehensive income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital
in the equity section of a statement of financial position. This
Statement is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. SFAS No. 130 provisions
are only of a disclosure nature and at present the only significant item
having an impact on the Company's financial statements is the inclusion
of unrealized gain or loss, net of tax, on available-for-sale securities
as a component of comprehensive income. Management of the Company will
adopt the provisions of this statement effective October 1, 1998.
F-10
<PAGE>
1. Summary of Significant Accounting Policies (Continued)
FASB issued Statement No. 131, Disclosures about Segments of an
Enterprise and Related Information, in June 1997. SFAS 131 establishes
new standards for determining a reportable segment and for disclosing
information regarding each such segment. This Statement requires that a
public business enterprise report financial and descriptive information
about its reportable operating segments. Operating segments are
components of an enterprise about which separate financial information
is available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing
performance. This Statement requires that a public business enterprise
report a measure of segment profit or loss, certain specific revenue and
expense items, and segment assets. However, this Statement does not
require an enterprise to report information that is not prepared for
internal use if reporting it would be impracticable. Statement 131 is
effective for financial statements for periods beginning after December
15, 1997. In the initial year of application, comparative information
for earlier years is to be restated. SFAS No. 131 provisions are only of
a disclosure nature and the Company currently does not have any
components that would be considered separate operating segments.
In February 1998, FASB issued Statement No. 132, Employers' Disclosures
about Pensions and Other Postretirement Benefits. SFAS 132 revises
employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans.
It standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates
certain disclosures that are no longer as useful as they were when FASB
Statements No. 87, 88 and 106 were issued. The Statement is effective
for fiscal years beginning after December 15, 1997 earlier application
is encouraged. SFAS No. 132 will not have a material effect on the
Company's financial statements. Management of the Company will adopt the
provisions of this statement effective October 1, 1998.
In June 1998, FASB issued SFAS No. 133 entitled Accounting for
Derivative Instruments and Hedging Activities. This statement requires
the recognition of all derivative financial instruments as either assets
or liabilities in the statement of financial position and measurement of
those instruments at fair value. The accounting for gains and losses
associated with changes in the fair value of a derivative and the effect
on the consolidated financial statements will depend on its hedge
designation and whether the hedge is highly effective in achieving
offsetting changes in the fair value or cash flows of the asset or
liability hedged. Under the provisions of SFAS No. 133, the method that
will be used for assessing the effectiveness of a hedging derivative, as
well as the measurement approach for determining the ineffective aspects
of the hedge, must be established at the inception of the hedge. The
methods must be consistent with the entity's approach to managing risk.
SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999, with initial application as of the
beginning of an entity's fiscal quarter; on that date, hedging
relationships must be designated anew and documented pursuant to the
provisions of this Statement. Earlier application is encouraged, but is
permitted only as of the beginning of any fiscal quarter beginning after
June 15, 1999. Retroactive application to financial statements of prior
periods is prohibited. Management of the Company has not determined the
quarter in which to adopt the provisions of this statement and does not
believe that such adoption will have a material effect on the Company's
financial position, liquidity or results of operations.
F-11
<PAGE>
1. Summary of Significant Accounting Policies (Continued)
Earnings per share:
The Company adopted the provisions of SFAS No. 128, entitled Earnings
Per Share effective December 15, 1997, and accordingly, restated all
prior period earnings per share to conform with SFAS No. 128. This
statement requires dual presentation with equal prominence of basic and
diluted earnings per share (EPS) for income from continuing operations
and for net income on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. Basic EPS excludes
dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding
for the period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. See Note 12
for additional information.
Financial statement presentation:
Certain items in prior year financial statements have been reclassified
to conform to the 1998 presentation.
2. Investment Securities
The amortized cost and estimated market values of investment securities
at September 30 are summarized as follows:
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Held-to-maturity:
Government Agency Securities $10,000,433 $ 57,975 $ - $10,058,408
Municipal Obligations 1,575,000 47,736 1,622,736
----------- ----------- ----------- -----------
$11,575,433 $ 105,711 $ - $11,681,144
=========== =========== =========== ===========
Available-for-sale:
Common Stock $ 5,337,064 $ 1,056,107 $ 592,761 $ 5,800,410
Stock in Federal Home Loan
Bank, at cost 3,210,500 3,210,500
Corporate Bonds 200,000 200,000
Other 10,000 10,000
----------- ----------- ----------- -----------
$ 8,757,564 $ 1,056,107 $ 592,761 $ 9,220,910
=========== =========== =========== ===========
</TABLE>
F-12
<PAGE>
2. Investment Securities (Continued)
<TABLE>
<CAPTION>
September 30, 1997
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Held-to-maturity:
Government Agency Securities $17,297,942 $ 85,039 $ 42,512 $17,340,469
Municipal Obligations 1,540,000 28,908 1,992 1,566,916
----------- ----------- ----------- -----------
$18,837,942 $ 113,947 $ 44,504 $18,907,385
=========== =========== =========== ===========
Available-for-sale:
Common Stock $ 2,578,390 $ 1,508,395 $ - $ 4,086,785
Stock in Federal Home Loan
Bank, at cost 2,976,000 2,976,000
Corporate Bonds 50,000 50,000
Other 10,000 10,000
----------- ----------- ----------- -----------
$ 5,614,390 $ 1,508,395 $ - $ 7,122,785
=========== =========== =========== ===========
</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.
Federal Home Loan Bank members are required to maintain an investment in
stock at an amount equal to a percentage of outstanding home loans. For
disclosure purposes such stock, which is carried at cost, is assumed to
have a market value that is equal to cost.
The amortized cost and estimated market value of debt securities by
contractual maturity as of September 30, 1998 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>
September 30, 1998
------------------------------------------------------
Held-to-Maturity Available-for-Sale
------------------------- --------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 2,000,000 $ 2,000,104 $ - $ -
Due after one year through five years 1,740,000 1,761,903
Due after five years through ten years 7,835,433 7,919,137 150,000 150,000
Due after ten years 50,000 50,000
----------- ----------- ----------- -----------
$11,575,433 $11,681,144 $ 200,000 $ 200,000
=========== =========== =========== ===========
</TABLE>
F-13
<PAGE>
2. Investment Securities (Continued)
Gross realized gains and (losses) on sales of investment securities
during the years ended September 30 are as follows:
1998 1997 1996
-------- -------- --------
Available-for-sale securities:
Realized gains $202,299 $220,154 $ 27,107
Realized losses - - -
-------- -------- --------
$202,299 $220,154 $ 27,107
======== ======== ========
Proceeds from sales of available-for-sale securities were $647,553,
$742,989 and $308,479 for the years ended September 30, 1998, 1997 and
1996, respectively. During the years ended September 30, 1998, 1997 and
1996, sales consisted of common stock of unrelated financial
corporations.
Investment securities with a carrying amount of $9,200,000 and
$2,000,000 as of September 30, 1998 and 1997, respectively, were pledged
as collateral for public funds as discussed in Note 9.
3. Mortgage-Backed Securities
Mortgage-backed securities, all of which were classified as held-to-
maturity at September 30, 1998 and 1997, consist of the following:
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
GNMA - fixed rate $ 229,898 $ 6,711 $ - $ 236,609
FNMA - ARMs 8,841,621 134,117 4,066 8,971,672
FHLMC - ARMs 2,814,514 44,772 845 2,858,441
FHLMC - fixed rate 128,174 2,905 131,079
FNMA - fixed rate 448,123 28,827 476,950
Collateralized mortgage
obligations-government
agency issue 7,058,687 67,667 2,432 7,123,922
Collateralized mortgage
obligations-private issues 2,202,738 7,108 1,549 2,208,297
----------- ----------- ----------- -----------
$21,723,755 $ 292,107 $ 8,892 $22,006,970
=========== =========== =========== ===========
</TABLE>
F-14
<PAGE>
3. Mortgage-Backed Securities (Continued)
<TABLE>
<CAPTION>
September 30, 1997
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
GNMA - fixed rate $ 373,311 $ 13,200 $ 0 $ 386,511
FNMA - ARMs 13,157,644 190,254 25,145 13,322,753
FHLMC - ARMs 4,768,042 114,215 2,003 4,880,254
FHLMC - fixed rate 245,443 6,035 740 250,738
FNMA - fixed rate 589,777 24,017 613,794
Collateralized mortgage
obligations-government
agency issue 13,310,277 38,128 70,443 13,277,962
Collateralized mortgage
obligations-private issues 4,245,057 6,425 49,719 4,201,763
----------- ----------- ----------- -----------
$36,689,551 $ 392,274 $ 148,050 $36,933,775
=========== =========== =========== ===========
</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
were $0, $0, and $11,490,625 for years ended September 30, 1998, 1997
and 1996, 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.
Gross realized gains and (losses) on sales of mortgage-backed securities
during the years ended September 30 are as follows:
1998 1997 1996
-------- -------- --------
Realized gains $ - $ - $144,885
Realized losses (9,677)
-------- -------- --------
$ - $ - $135,208
======== ======== ========
Mortgage-backed securities with a carrying amount of $17,352,579 and
$9,067,094 at September 30, 1998 and 1997, respectively, were pledged as
collateral for public funds as discussed in Note 9.
F-15
<PAGE>
4. Loans Receivable
Loans receivable at September 30, are summarized as follows:
<TABLE>
<CAPTION>
September 30,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Real estate loans:
Residential $ 129,688,030 $ 125,470,688
Construction 1,386,224 1,936,517
Commercial 4,936,897 2,666,395
Second mortgage 10,071,744 9,986,176
Commercial business 8,578,694 4,049,950
Consumer 19,049,741 14,850,445
Gross loans 173,711,330 158,960,171
------------- -------------
Less: Net deferred loan fees, premiums and discounts (250,323) (318,945)
Allowance for loan losses (1,136,753) (968,623)
------------- -------------
Total loans, net $ 172,324,254 $ 157,672,603
============= =============
</TABLE>
The following is an analysis of the change in the allowance for loss on
loans:
1998 1997 1996
----------- ----------- -----------
Balance, beginning $ 968,623 $ 740,346 $ 643,547
Provision charged to operations 265,000 307,979 134,743
Loans charged off (107,070) (92,243) (38,631)
Recoveries 10,200 12,541 687
----------- ----------- -----------
Balance, ending $ 1,136,753 $ 968,623 $ 740,346
=========== =========== ===========
Impairment of loans having recorded investments of $505,547 at September
30, 1998 and $371,769 at September 30, 1997 have been recognized in
conformity with FASB Statement No. 114, as amended by FASB Statement No.
118. The average recorded investment in impaired loans during the years
ended September 30, 1998 and 1997 was $438,658 and $249,450,
respectively. Allowances for loss on these loans are included in the
above analysis of the overall allowance for loss on loans. There are no
specific loss provisions associated with impaired loans as of September
30, 1998 and 1997. Interest income on impaired loans of $31,803, $25,662
and $8,460 was recognized for cash payments received for the year ended
September 30, 1998, 1997 and 1996, 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 19 for disclosure of loans to related parties.
F-16
<PAGE>
5. Mortgage Servicing Rights
Mortgage loans serviced for others are not included in the accompanying
statements of financial condition. The unpaid principal balances of
these loans at September 30 are summarized as follows:
1998 1997 1996
----------- ----------- -----------
FHLMC $58,336,823 $54,658,716 $52,343,707
Other investors 1,809,812 1,108,734 1,396,481
----------- ----------- -----------
$60,146,635 $55,767,450 $53,740,188
=========== =========== ===========
Custodial escrow balances maintained in connection with the foregoing
loan servicing and included in demand deposits, were approximately
$176,432 and $150,840 at September 30, 1998 and 1997.
The following is an analysis of the changes in mortgage servicing rights
during the year ended September 30, 1998 and 1997:
1998 1997
--------- ---------
Balance, beginning $ 96,199 $ -
Additions 180,311 111,528
Amortization (50,675) (15,329)
--------- ---------
Balance, ending $ 225,835 $ 96,199
========= =========
There were no mortgage servicing rights capitalized or amortized during
the year ended September 30, 1996. No valuation allowance was recorded
against mortgage servicing rights at September 30, 1998 and 1997. For
the year ended September 30, 1996 amortization of excess servicing fees
retained was $2,202.
6. Accrued Income Receivable
Accrued interest receivable at September 30 is summarized as follows:
. 1998 1997
---------- ----------
Mortgage-backed securities $ 138,525 $ 233,811
Loans receivable 1,054,602 957,036
Investments 250,720 255,758
---------- ----------
$1,443,847 $1,446,605
========== ==========
7. Foreclosed Assets
Real estate owned or in judgment and other repossessed assets consist of
the following:
September
-------------------
1998 1997
-------- --------
Real estate acquired by foreclosure $ - $232,851
Real estate loans in judgment
and subject to redemption 56,589 19,099
Other foreclosed assets 14,350
-------- --------
$ 70,939 $251,950
======== ========
F-17
<PAGE>
7. Foreclosed Assets (Continued)
There was no activity in the allowance for loss account for the years
ended September 30, 1998, 1997 and 1996.
8. Office Properties and Equipment
Office properties and equipment are stated at cost less accumulated
depreciation as follows:
September 30,
-----------------------
1998 1997
---------- ----------
Land $ 298,366 $ 298,366
Office building and improvements 1,934,541 1,503,037
Furniture, fixtures and equipment 1,163,365 927,977
Automobiles 11,544 9,642
---------- ----------
3,407,816 2,739,022
Less accumulated depreciation 1,678,534 1,550,772
---------- ----------
$1,729,282 $1,188,250
========== ==========
Depreciation expense ($116,278 for 1996) $ 157,885 $ 113,881
========== ==========
9. Deposits
Deposits at September 30 are summarized as follows:
1998 1997
------------ ------------
Demand accounts:
Interest-bearing $ 17,131,980 $ 18,549,636
Non-interest bearing 3,655,520 3,254,991
------------ ------------
Total demand accounts 20,787,500 21,804,627
Savings deposits 6,520,220 5,715,254
Certificates of deposit 127,485,196 117,214,858
------------ ------------
$154,792,916 $144,734,739
============ ============
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 as of September 30, 1998 and 1997 was
approximately $21,681,643 and $11,174,463, respectively. Deposit
accounts as of September 30, 1998 included public funds of $13,902,580.
Public funds were collateralized by investment securities and
mortgage-backed securities as discussed in Notes 2 and 3.
At September 30, 1998, scheduled maturities of certificates of deposit
are as follows:
Year Ending September 30,
---------------------------------------------------
1999 $ 88,891,755
2000 30,914,111
2001 4,537,539
2002 1,449,876
2003 1,691,915
------------------------
$127,485,196
========================
F-18
<PAGE>
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:
1998 1997
----------- -----------
Advances $33,700,000 $36,200,000
Line of credit 8,000,000 10,000,000
----------- -----------
$41,700,000 $46,200,000
=========== ===========
Advances and other borrowings from the Federal Home Loan Bank at
September 30 consist of the following:
1998 1997
Fiscal ------------------------------------------------------------
Year Weighted Weighted
Maturity Amount Average Rate Amount Average Rate
- ---------------- ---------------- ------------ ------------ --------------
1998 $ - % $28,000,000 6.30 %
1999 26,700,000 5.78 14,200,000 5.91
2000 4,000,000 5.99 4,000,000 6.09
2001
2002
2003 6,000,000 5.05
Thereafter 5,000,000 4.99
---------------- ------------ ------------ --------------
$41,700,000 5.60 % $46,200,000 6.16 %
================ ============ ============ ==============
At September 30, 1998 the Company had $8,000,000 outstanding under a
$30,000,000 line of credit with the Federal Home Loan Bank. All amounts
outstanding under the line of credit are payable on February 5, 1999 and
bear interest at the line of credit rate established by the Federal Home
Loan Bank. This rate is adjusted from time to time, the rate as of
September 30, 1998 was 6.03%. At September 30, 1997 the Company had
$10,000,000 outstanding under a $30,000,000 line of credit, due February
5, 1998.
The advances and line of credit are collateralized as of September 30,
1998 and 1997 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 effective income tax rate was different than the statutory
federal income tax rate for the following reasons:
1998 1997 1996
---- ------ ------
Statuatory federal income tax 34.0 % 34.0 % 34.0 %
Increase (reductions) resulting from:
Kansas Privilege Tax 3.6 3.9 4.3
Other 0.5 0.2 (2.6)
----- ------ ------
38.1 % 38.1 % 35.7 %
===== ====== ======
F-19
<PAGE>
11. Income Taxes (Continued)
Deferred taxes are included in the accompanying Statements of Financial
Condition at September 30, 1998 and 1997 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, 1998 and 1997
were comprised of the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax asset:
Deferred loan fees and costs $ 24,091 $ 37,087
Allowance for loan losses 418,780 369,723
Deferred compensation and accrued salaries 139,101 126,777
Equity investment in partnership 32,797
Accrued expenses 11,052
----------- -----------
625,821 533,587
----------- -----------
Deferred tax liabilities:
Accumulated depreciation (1,566) (4,545)
Special bad debt deduction (230,120) (298,034)
FHLB stock dividends (412,064) (337,432)
Investment basis (12,141)
Unrealized gain on available-for-sale securities (180,010) (586,011)
----------- -----------
(835,901) (1,226,022)
----------- -----------
($ 210,080) ($ 692,435)
=========== ===========
</TABLE>
No valuation allowance was recorded against deferred tax assets at
September 30, 1998 or 1997.
Prior to the year ended September 30, 1997, the Bank was 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.
Effective with the tax year beginning October 1, 1996, the Bank was no
longer able to use the percentage of taxable income method and began to
recapture tax bad debt reserves of $936,968 over a six year period. The
reserves to be recaptured consist of bad debt deductions after December
31, 1987. If the amounts deducted prior to December 31, 1987 are used
for purposes other than for loan losses, such as in a distribution in
liquidation or otherwise, the amounts deducted would be subject to
federal income tax at the then current corporate tax rate. The Bank had
recorded a deferred tax asset related to the allowance for loan losses
reported for financial reporting purposes and a deferred tax liability
for special bad debt deductions after December 31, 1987. The Bank, in
accordance with SFAS No. 109, has not recorded a deferred tax liability
of approximately $1,900,000 related to approximately $5,585,000 of
cumulative special bad debt deductions prior to December 31, 1987.
<PAGE>
12. Earnings Per Share
The following is a reconciliation of the numerators and denominators of
the basic and diluted per share computations for income:
<TABLE>
<CAPTION>
Income Shares Per Share
Numerator) (Denominator) Amount
----------- ------------- -------
<S> <C> <C> <C>
Year ended September 30, 1998:
Basic EPS
Income available to common stockholders $2,363,798 1,518,482 $1.56
=======
Effect of dilutive securities
MSBP shares 6,366
Stock options 140,102
----------- -------------
$2,363,798 1,664,950 $1.42
=========== ============= =======
Year ended September 30, 1997:
Basic EPS
Income available to common stockholders $2,514,437 1,652,339 $1.52
=======
Effect of dilutive securities
MSBP shares 9,967
Stock options 111,815
----------- -------------
$2,514,437 1,774,121 $1.42
=========== ============= =======
Year ended September 30, 1996:
Basic EPS
Income available to common stockholders $1,404,226 1,810,182 $0.78
=======
Effect of dilutive securities
MSBP shares 9,402
Stock options 72,860
----------- -------------
$1,404,226 1,892,444 $0.74
=========== ============= =======
</TABLE>
As discussed in Note 1, the Company adopted SFAS No. 128, Earnings Per
Share, effective for the year ended September 30, 1998. The Statement
requires restatement of all prior-period earnings per share data
presented. The following is the EPS data as originally presented:
1997 1996
--------- -------------
Primary:
Earnings per share $ 1.40 $ 0.72
========= =============
Weighted average common and common
shares outstanding 1,800,585 1,937,820
========= =============
Fully diluted:
Earnings per share $ 1.37 $ 0.72
========= =============
Weighted average common and common
shares outstanding 1,832,882 1,953,774
========= =============
F-21
<PAGE>
13. Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory--and possibly
additional discretionary--actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines
that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are
also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
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, 1998, that the Bank meets all capital adequacy requirements to which
it is subject.
As of September 30, 1998, 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
--------- ------- ------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998:
Total (Risk-Based) Capital
(to Risk Weighted Assets) $17,725 14.4% $ 9,825 8.0% $12,282 10.0%
Core (Tier I) Capital
(to Risk Weighted Assets) 16,589 13.5% N/A 7,369 6.0%
Core (Tier I) Capital - leverage
(to Assets) 16,589 7.4% 8,917 4.0% 11,158 5.0%
As of September 30, 1997:
Tangible Capital (to Assets) $26,895 12.0% $ 3,349 1.5% $ N/A
Total (Risk-Based) Capital
(to Risk Weighted Assets) 27,864 25.8% 8,627 8.0% 10,784 10.0%
Core (Tier I) Capital
(to Risk Weighted Assets) 26,895 24.9% N/A 6,470 6.0%
Core (Tier I) Capital - leverage
(to Assets) 26,895 12.0% 6,698 3.0% 11,168 5.0%
</TABLE>
F-22
<PAGE>
13. Regulatory Matters (Continued)
The following is a reconciliation of net worth to regulatory capital as
reported in the September 30, 1998 and 1997 reports to the Office of
Thrift Supervision:
September 30,
------------------------------
1998 1997
------------- -------------
Bank net worth per report to OTS $ 16,815,000 $ 26,991,000
Rounding (74) (126)
------------- -------------
Net worth as reported in accompanying
financial statements (bank only) 16,814,926 26,990,874
Adjustments to arrive at Core (Tier I)
and Tangible Capital:
Disallowed servicing assets (226,000) (96,000)
------------- -------------
Core (Tier I) and Tangible Capital 16,588,926 26,894,874
Adjustments to arrive at Total Capital:
Allowable portion of general allowance
allowance for loan losses 1,136,000 969,000
------------- -------------
Total Risk-Based Capital $ 17,724,926 $ 27,863,874
============= =============
Risk weight assets $ 122,817,000 $ 107,838,000
============= =============
14. Contingencies
The Company is at times a defendant in certain claims and legal actions
arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate
disposition of such matters is not expected to have a material adverse
effect on the consolidated financial condition of the Company.
15. 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, 1998, 1997
and 1996 were $29,847, $27,274 and $26,218, 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 $205,707 and $165,636 at
September 30, 1998 and 1997, respectively. In connection with the
deferred compensation agreements, the Bank has purchased life insurance
policies on covered employees in which the Bank is the beneficiary to
assist in funding benefits. At September 30, 1998 and 1997, the cash
surrender values on the policies were $522,791 and $501,638,
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.
F-23
<PAGE>
15. Employee Benefit Plans (Continued)
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,
l998, the balance of indebtedness from the ESOP to the Company was
$692,719, 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 $298,320
and $257,375 for the years ended September 30, 1998 and 1997,
respectively. As of September 30, 1998, of the 133,018 shares acquired
by the ESOP, 48,558 shares were allocated and 84,460 shares were
unallocated. The 84,460 unallocated shares had an estimated market value
of $1,858,120 at September 30, 1998.
Management Stock Bonus Plan:
In connection with the stock conversion, the Bank adopted three
Management Stock Bonus Plans (collectively the MSBP), the objective of
which is to enable the Bank to retain personnel of experience and
ability in key positions of responsibility. All employees of the Bank
are eligible to receive benefits under the MSBP. Benefits may be granted
at the sole discretion of a committee appointed by the Board of
Directors. The MSBP is managed by trustees who are non-employee
directors and who have the responsibility to invest all funds
contributed by the Bank to the trusts created for the MSBP.
The MSBP has purchased 91,252 shares of the Company's stock for
$965,224. These shares were granted in the form of restricted stock
payable over a five-year period at the rate of one-fifth of such shares
per year following the date of grant of the award. Compensation expense,
in the amount of the fair market value of the common stock at the date
of the grant to the employee, will be recognized pro rata over the five
years during which the shares are payable. A recipient of such
restricted stock will be entitled to all voting and other stockholder
rights, except that the shares, while restricted, may not be sold,
pledged or otherwise disposed of and are required to be held in escrow.
If a holder of such restricted stock terminates employment for reasons
other than death, disability or retirement, the employee forfeits all
rights to the allocated shares under restriction. If the participant's
service terminates as a result of death, disability, retirement or a
change in control of the Bank, all restrictions expire and all shares
allocated become unrestricted. The Board of Directors can terminate the
MSBP at any time, and if it does so, any shares not allocated will
revert to the Company.
16. Stock Option Plan
In connection with the stock conversion, the Bank's Board of Directors
adopted the 1994 Stock Option Plan (the Option Plan). Pursuant to the
initial Option Plan, 228,131 shares of common stock are reserved for
issuance by the Company upon exercise of stock options granted to
officers, directors and employees of the Bank from time to time under
the Option Plan. The purpose of the option plans is to provide
additional incentive to certain officers, directors and key employees by
facilitating their purchase of a stock interest in the Company. Stock
option plans provide for the granting of incentive and non-incentive
stock options with a duration of ten years, after which no awards may be
made, unless earlier terminated
F-24
<PAGE>
16. Stock Option Plan (Continued)
by the Board of Directors pursuant to the option plans. Stock to be
offered under the plans may be authorized but unissued common stock or
previously issued shares that have been reacquired by the Company and
held as treasury shares.
Option plans are administered by a committee of at least three
non-employee directors designated by the Board of Directors (the Option
Committee). The Option Committee will select the employees to whom
options are to be granted and the number of shares to be granted. The
option price may not be less than 100% of the fair market value of the
shares on the date of the grant, and no option shall be exercisable
after the expiration of ten years from the grant date. In the case of
any employee who owns more than 10% of the outstanding common stock at
the time the option is granted, the option price may not be less than
110% of the fair market value of the shares on the date of the grant,
and the option shall not be exercisable after the expiration of five
years from the grant date. The exercise price may be paid in cash,
shares of the common stock, or a combination of both.
As of the date of conversion, the Option Committee granted 228,131
shares of common stock, at an exercise price of $10 per share,
contingent upon stockholder approval of the Option Plan which was
ratified June 22, 1994. In addition, options for 18,479 shares of common
stock, at an exercise price of $16.50 per share, were awarded on
November 20, 1996. Additionally, options for 2,053 shares of common
stock, at an exercise price of $23.625 per share, were awarded on
January 15, 1998. All such options are exercisable immediately. As of
September 30, 1998, no options have been exercised and all options
granted remain outstanding. The Company accounts for the fair value of
its grants issued under the plans subsequent to October 1, 1996 in
accordance with FASB Statement 123. The compensation cost that has been
charged against income for the plans was $7,658 and $51,447 for the
years ended September 30, 1998 and 1997, respectively.
In accordance with SFAS No. 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions used for grants
during the year ended September 30, 1998: dividend yield of 2.54
percent, expected volatility of 25.00 percent, risk-free interest rate
of 5.5 percent and expected life of two years. Common stock options
granted during the year ended September 30, 1998 had an exercise price
of $23.625 per share and an estimated fair value of $3.73 per share.
Certain information for the years ended September 30, 1998 and 1997
relative to stock options are comprised of the following:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------------
1998 1997
------------------------------------ -----------------------------------
Weighted-Average Weighted-Average
Fixed Options Shares Exercise Price Shares Exercise Price
- ------------- ---------------- ------------------ ------------------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 246,610 $ 10.59 228,131 $ 10.00
Granted 2,053 23.63 18,479 16.50
Canceled
Exercised
---------------- ------------------ ------------------ --------------
Outstanding at end of year 248,663 $10.70 246,610 $10.59
================ ================== ================== ==============
Exercisable at end of year 248,663 246,610
================ ==================
Number of shares available for future grant:
Beginning of year 0 0
================ ==================
End of year 0 0
================ ==================
</TABLE>
F-25
<PAGE>
17. 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, 1998, the Bank had outstanding commitments to originate
loans receivable of $3,110,084. The commitments outstanding at September
30, 1998 consisted of $3,060,084 in real estate loans and a $50,000
commercial business loan. Of the commitments outstanding at September
30, 1998, $1,746,529 were for fixed rate loans with rates of 6.625% to
10.75% and $1,363,555 were for adjustable rate loans with initial rates
of 6.125% to 9.00%.
Loan commitments are agreements to lend to a customer as long as there
is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments
are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained if deemed necessary by the Bank upon
extension of credit is based on management's credit evaluation of the
counter-party. Collateral held is primarily residential real estate, but
may include autos, accounts receivable, inventory, property, plant and
equipment.
The Bank had no outstanding commitments from mortgage banking concerns
to purchase loans yet to be originated at September 30, 1998.
The Bank had outstanding commitments with mortgage banking concerns to
sell loans of $3,554,652 at September 30, 1998, the outstanding
commitments expire on November 8, 1998.
The Bank had no commitments to purchase mortgage-backed securities or
investments at September 30, 1998 and 1997.
At September 30, 1998, loans with a carrying value of $2,408,689 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,
1998.
18. 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.
F-26
<PAGE>
18. Significant Concentrations of Credit Risk (Continued)
As of September 30, 1998 the Bank had a net investment of $174,732,943
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.
19. 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, 1998 and 1997, and similar
transactions are expected in the future. All loans included in such
transactions were made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons and did not involve more than
normal risk of loss or present other unfavorable features.
The following analysis is of loans made to principal officers, directors
and principal holders of equity securities that individually exceeded
$60,000 in aggregate during the year ended September 30, 1998:
Balance, September 30, 1997 $2,999,450
New loans 3,133,987
Repayments 2,950,839
----------
Balance, September 30, 1998 $3,182,598
==========
The Bank has made several commercial loans to a director that at times
have approached the loans to one borrower limitations. The Bank
evaluates the loan limitations and sells the loans if they would exceed
the loans to one borrower limitation. The Bank sold $1,010,165 of
related party loans of this type during the year ended September 30,
1998.
20. Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable
to estimate that value:
Cash:
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Time deposits in financial institutions:
The fair value of fixed maturity certificate of deposits are estimated
using the rates currently offered for deposits of similar remaining
maturities.
Investment securities and mortgage-backed securities:
For securities held for investment purposes, fair values are based on
quoted market prices or dealer quotes, if available. If a quoted market
price is not available, fair value is estimated using quoted market
prices for similar securities.
F-27
<PAGE>
20. Disclosures about Fair Value of Financial Instruments (Continued)
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.
The estimated fair values of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
--------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- -------- ---------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents:
Interest-bearing ........................ $ 2,012 $ 2,012 $ 2,063 $ 2,063
Non-interest bearing .................... 833 833 678 678
Time deposits in other financial institutions 250 111 111
Investment securities held-to-maturity ...... 11,575 11,681 18,838 18,907
Investment securities available-for-sale .... 9,221 9,221 7,123 7,123
Mortgage-backed securities held-to-maturity . 21,724 22,007 36,690 36,934
Loans receivable ............................ 172,324 176,586 157,673 157,985
Loans held-for-sale ......................... 2,409 2,409 490 499
Financial liabilities:
Deposits .................................... 154,793 153,531 144,735 144,342
Advances and other borrowings from
the Federal Home Loan Bank .............. 41,700 41,682 46,200 46,058
Par Fair Par Fair
Value Value Value Value
------- ------- ------- -------
Unrecognized financial instruments:
Commitments to extend credit $3,110 $3,151 $1,907 $1,938
Commitments to sell loans 3,555 3,489 900 891
</TABLE>
F-28
<PAGE>
21. 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).
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.
22. Deposit Insurance
The Deposit Insurance Funds Act of 1996 authorized the recapitalization
of the Savings Associations Insurance Fund (SAIF) by imposing a one time
special assessment on institutions with SAIF assessable deposits. Such
assessment was at the rate of 0.657% and was imposed in order to
increase the reserve levels of the SAIF to 1.25% of insured deposits. On
September 30, 1996, the Bank recorded a pre-tax expense for this
assessment of $937,073. The Bank's annual deposit insurance rate in
effect prior to this recapitalization was 0.23% of insured deposits,
declining to 0.064% of insured deposits effective January 1, 1997.
F-29
<PAGE>
23. Parent Company Financial Information
Condensed financial statements of Landmark Bancshares, Inc. (Parent
Company) are shown below. The Parent Company has no significant
operating activities.
<TABLE>
<CAPTION>
Condensed Statements of Financial Condition
As of September 30, 1998 and 1997
(In Thousands)
1998 1997
ASSETS -------- --------
<S> <C> <C>
Cash and cash equivalents $ 479 $ 524
Time deposits in other fnancial institutions 250 111
Invesment securities available-for-sale 6,000 4,137
Investment subsidiary 920 11,039
Loans receivable 939 996
-------- --------
Total assets $ 13,995 $ 16,883
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 4,866 $ 589
Stockholders' equity:
Common stock 228 228
Additional paid-in capital 22,466 22,117
Retained income 4,845 3,410
Net unrealized gain on available-for-sale securities 283 923
Unamortized amounts related to ESOP and MSBP (789) (1,134)
--------- --------
27,033 25,544
Treasury stock, at cost (17,904) (9,250)
--------- --------
Total stockholders' equity 9,129 16,294
Total liabilities and stockholders' equity $ 13,995 $ 16,883
======== ========
</TABLE>
Condensed Statements of Operations
For the Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Equity earnings of subsidiary $ 2,267 $ 2,393 $ 1,331
Interest and dividend income 248 176 221
Net gain on sale of investments 202 220 27
Other (77) 1 3
------- ------- -------
Total income 2,640 2,790 1,582
------- ------- -------
Operating expenses 235 218 129
------- ------- -------
Income before income taxes 2,405 2,572 1,453
Income tax expense 41 58 49
------- ------- -------
Net income $ 2,364 $ 2,514 $ 1,404
======= ======= =======
</TABLE>
F-30
<PAGE>
23. Parent Company Financial Information (Continued)
Condensed Statements of Cash Flows
For the Years Ended September 30, 1998, 1997 and 1996
(In Thousands)
<TABLE>
<CAPTION>
1998 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 2,364 $ 2,514 $ 1,404
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in net income of subsidiary (2,267) (2,393) (1,331)
Gain on sale of investments (202) (220) (27)
(Increase) decrease in other assets (165) (47) 449
Increase in other liabilities (17) 19 71
Other 164 87 (137)
------- ------- -------
Net cash provided (used) by operating activities (123) (40) 429
------- ------- -------
Cash Flows from Investing Activities
Dividends from subsidiary 8,000 4,000
Acquisition of investment securities available-for-sale,
including deposits (3,765) (1,190) (2,214)
Proceeds from sale of investment securities
available-for-sale 669 749 308
Decrease in loans to subsidiary and ESOP, net 152 150 5,837
Other loans, net (95) 90 33
------- ------- -------
Net cash provided by investing activities 4,961 3,799 3,964
------- ------- -------
Cash Flows from Financing Activities
Proceeds from subsidiary note payable 8,200
Repayment of note payable to subsidiary (3,500)
Purchase of treasury stock (8,654) (3,223) (3,526)
Cash dividends paid (929) (678) (752)
------- ------- -------
Net cash used by financing activities (4,883) (3,901) (4,278)
------- ------- -------
Increase (decrease) in cash and cash equivalents (45) (142) 115
Cash and cash equivalents at beginning of year 524 666 551
------- ------- -------
Cash and cash equivalents at end of year $ 479 $ 524 $ 666
======= ======= =======
</TABLE>
F-31
<PAGE>
OFFICE LOCATION
CORPORATE OFFICE
Landmark Bancshares, Inc.
Central and Spruce
Dodge City, Kansas 67801
(316) 227-8111
Board of Directors of Landmark Bancshares, Inc.
C. Duane Ross Larry Schugart
Chairman of the Board President and Executive Officer
President, High Plains Publishers, Inc.
David H. Snapp Richard Ball
Partner, Waite, Snapp & Doll, CPA/Shareholder, Adams, Brown
Attorneys at Law Beran & Ball, Chtd.
Jim W. Lewis
Owner, Auto Dealerships
Executive Officers of Landmark Bancshares, Inc.
Larry Schugart Gary L. Watkins
President and Secretary and
Chief Executive Officer Chief Financial Officer
James F. Strovas
Treasurer and
Chief Financial Officer
- --------------------------------------------------------------------------------
Corporate Counsel: Independent Auditors:
Waite, Snapp & Doll, Attorneys at Law Regier Carr & Monroe, L.L.P.
Landmark Federal Building 300 West Douglas
Dodge City, Kansas 67801 Suite 100
Wichita, Kansas 67202
Special Counsel: Transfer Agent and Registrar:
Malizia, Spidi, Sloane & Fisch, P.C. American Securities Transfer & Trust, Inc.
One Franklin Square 1825 Lawrence Street, Suite 444
1301 K Street, N.W., Suite 700 East Denver, Colorado 80202-1817
Washington, D.C. 20005
The Company's Annual Report for the year ended September 30, 1998 filed with the
Securities and Exchange Commission on Form 10-KSB is available without charge
upon written request. For a copy of the Form 10-KSB or any other investor
information, please write or call: Corporate Secretary, Landmark Bancshares,
Inc., Central and Spruce, Dodge City, Kansas 67801. The annual meeting of
stockholders will be held on January 20, 1999 at 1:30 p.m. at the Dodge City
Country Club, North Avenue C, Dodge City, Kansas 67801.
EXHIBIT 23
<PAGE>
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
29, 1998 incorporated by reference in this Annual Report on Form 10-KSB of
Landmark Bancshares, Inc. for the year ended September 30, 1998.
/s/Regier Carr & Monroe, L.L.P.
Regier Carr & Monroe, L.L.P.
December 28, 1998
Wichita, Kansas
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE
ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,844
<INT-BEARING-DEPOSITS> 2,262
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,221
<INVESTMENTS-CARRYING> 33,299
<INVESTMENTS-MARKET> 33,688
<LOANS> 174,733
<ALLOWANCE> 1,137
<TOTAL-ASSETS> 225,368
<DEPOSITS> 154,793
<SHORT-TERM> 26,700
<LIABILITIES-OTHER> 3,851
<LONG-TERM> 15,000
0
0
<COMMON> 228
<OTHER-SE> 24,796
<TOTAL-LIABILITIES-AND-EQUITY> 225,368
<INTEREST-LOAN> 13,741
<INTEREST-INVEST> 3,301
<INTEREST-OTHER> 165
<INTEREST-TOTAL> 17,207
<INTEREST-DEPOSIT> 7,586
<INTEREST-EXPENSE> 10,216
<INTEREST-INCOME-NET> 6,991
<LOAN-LOSSES> 265
<SECURITIES-GAINS> 202
<EXPENSE-OTHER> 4,134
<INCOME-PRETAX> 3,818
<INCOME-PRE-EXTRAORDINARY> 3,818
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,364
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 1.42
<YIELD-ACTUAL> 3.12
<LOANS-NON> 506
<LOANS-PAST> 182
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 969
<CHARGE-OFFS> 107
<RECOVERIES> 10
<ALLOWANCE-CLOSE> 1,137
<ALLOWANCE-DOMESTIC> 1,137
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
