UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _______________________
to ________________________
Commission File Number 0-23164
LANDMARK BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Kansas 48-1142260
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification Number
CENTRAL AND SPRUCE STREETS, DODGE CITY, KANSAS 67801
(Address and Zip Code of principal executive offices)
(316) 227-8111
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No
The number of shares outstanding of each of the issuer's classes of common
stock, as of June 30, 1999:
$.10 par value common stock 1,142,564 shares
(Class) (Outstanding)
<PAGE>
LANDMARK BANCSHARES, INC.
INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statements of Financial Condition as of
June 30, 1999 (unaudited) and September 30, 1998 1
Statements of Income for the Three and Nine
Months Ended June 30, 1999 and 1998 (unaudited) 2 - 3
Statements of Cash Flows for the Nine Months Ended
June 30, 1999 and 1998 (unaudited) 4 - 5
Notes to Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10 - 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 - 17
PART II OTHER INFORMATION
Item 2. Changes in Securities 18
Item 4. Submission of Matter to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6(b). Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
<PAGE>
1
LANDMARK BANCSHARES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY,
LANDMARK FEDERAL SAVINGS BANK
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
June 30, 1999 September 30, 1998
(Unaudited)
----------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Interest bearing $ 4,094,475 $ 2,011,819
Non-interest bearing 1,154,584 832,559
Time deposits in other financial institutions 297,940
249,867
Securities held to maturity 28,842,101
11,575,433
Securities available for sale 9,809,947 9,220,910
Mortgage-backed securities held to maturity 15,211,672 21,723,755
Loans receivable, net 176,774,563 172,324,254
Loans held for sale 1,235,683 2,408,689
Accrued income receivable 1,506,917 1,443,847
Real estate owned or in judgment and other
repossessed property, net 131,945 70,939
Office properties and equipment, at cost less
accumulated depreciation 1,818,301 1,729,282
Prepaid expenses and other assets 1,689,651 1,749,177
Income taxes receivable, current 0
27,482
------------------------------
TOTAL ASSETS $ 242,567,778 $ 225,368,013
------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits 157,896,935 154,792,916
Landmark Official Checks 1,464,115
0
Other Borrowed Money 57,000,000 41,700,000
Advances from borrowers for taxes and
insurance 1,513,788 1,904,170
Accrued expenses and other Liabilities 2,375,201 1,737,080
Deferred income taxes 181,461 210,080
Income taxes
Current 103,100 0
------------------------------
TOTAL LIABILITIES $ 220,534,600 $ 200,344,246
------------------------------
Stockholders' Equity
Common Stock 228,131 228,131
$.10 par value; 10,000,000 shares authorized;
2,281,312 shares issued March 31, 1999
Additional Paid-in Capital 22,547,108 22,466,144
Treasury Stock, at cost, 1,138,748 shares at June 30, 1999 (21,943,418) (17,904,245)
and 953,378 shares at September 30, 1998
Retained income (substantially restricted) 21,776,036 20,739,642
Employee Stock Ownership Plan (692,719)
(692,719)
Management Stock Bonus Plan 0
(96,522)
Accumulated other comprehensive income 118,041 283,336
------------------------------
Total Stockholders' Equity 22,033,178 25,023,767
------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 242,567,778 $ 225,368,013
------------------------------
</TABLE>
<PAGE>
2
LANDMARK BANCSHARES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY,
LANDMARK FEDERAL SAVINGS BANK
Consolidated Statements of Income
<TABLE>
<CAPTION>
Six Months Ended June 30 Nine Months Ended June 30
1998 1999 1998 1999
(unaudited) (unaudited)
-------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest on loans 3,444,654 3,508,149 10,202,549 10,564,618
Interest and dividends on investment securities 369,600 534,550 1,171,761 1,200,305
Interest on mortgage-backed securities 446,840 256,644 1,553,548 882,741
-------------------------------------------------
Total interest income 4,261,094 4,299,343 12,927,858 12,647,664
INTEREST EXPENSE
Deposits 1,899,275 1,832,259 5,617,476 5,639,441
Borrowed funds 638,437 680,249 2,022,085 1,792,292
-------------------------------------------------
Total interest expense 2,537,712 2,512,508 7,639,561 7,431,733
Net interest income 1,723,382 1,786,835 5,288,297 5,215,931
PROVISION FOR LOSSES ON LOANS 60,000 235,000 205,000 465,000
-------------------------------------------------
Net interest income after provision for losses 1,663,382 1,551,835 5,083,297 4,750,931
NON-INTEREST INCOME
Service charges and late fees 92,985 91,668 247,600 295,516
Net gain (loss) on sale of available
for sale investments 82,043 256,717 177,085 389,372
Net gain (loss) on sale of loans 145,167 80,985 309,356 401,280
Service fees on loans sold 24,195 32,048 82,218 52,347
Other income 51,720 62,541 125,292 104,698
-------------------------------------------------
396,110 523,959 941,551 1,243,213
NON-INTEREST EXPENSE
Compensation and related expenses 657,792 620,818 1,854,733 1,916,056
Occupancy expense 79,156 66,842 175,830 190,539
Advertising 17,483 15,594 46,504 48,764
Federal insurance premium 39,102 36,648 116,941 112,227
Loss (gain) from real estate operations 2,827 7,469 5,586 11,794
Data processing 45,971 55,941 155,214 157,409
Other expense 244,011 256,941 681,866 726,732
-------------------------------------------------
1,086,342 1,060,253 3,036,674 3,163,521
Income before income taxes 973,150 1,015,541 2,988,174 2,830,623
INCOME TAXES EXPENSES 389,500 405,700 1,195,950 1,148,500
-------------------------------------------------
Net income 583,650 609,841 1,792,224 1,682,123
-------------------------------------------------
Basic earnings per share $ 0.38 $ 0.55 $ 1.15 $ 1.45
Fully diluted earnings per share $ 0.35 $ 0.50 $ 1.05 $ 1.30
Dividends per share $ 0.15 $ 0.15 $ 0.45 $ 0.55
</TABLE>
<PAGE>
3
LANDMARK BANCSHARES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY,
LANDMARK FEDERAL SAVINGS BANK
Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
1998 1999 1998 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
-------------------------- --------------------------
<S> <C> <C> <C> <C>
Net income $ 583,650 $ 609,841 $ 1,792,224 $ 1,682,123
-------------------------- --------------------------
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses)
arising during the period (178,827) 192,693 173,482 68,328
Less: reclassification adjustment for
gains included in net income ( 49,226) (154,030) (106,251) (233,623)
-------------------------- --------------------------
Total other comprehensive income (228,053) 38,663 67,231 (165,295)
-------------------------- --------------------------
Comprehensive income $ 355,597 $ 648,504 $ 1,859,455 $ 1,516,828
</TABLE>
<PAGE>
4
LANDMARK BANCSHARES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY
LANDMARK FEDERAL SAVINGS BANK
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended June 30
1998 1999
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,792,224 $ 1,682,123
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization and impairment of mortgage servicing rights 0 (99,388)
Depreciation 115,596 151,348
Decrease (increase) in accrued interest receivable 47,791 (84,770)
Increase (decrease) in outstanding checks in excess of bank balance 292,738 1,464,115
Increase (decrease) in accrued and deferred income taxes 258,491 101,963
Increase (decrease) in accounts payable and accrued expenses (771,592) 659,821
Amortization of premiums and discounts on investments and loans (25,676) (45,131)
Provision for losses on loans 205,000 465,000
Gain (loss) on sale of available for sale investments (177,085) (389,372)
Other non-cash items, net (198,444) 631,068
Sale of loans held for sale 14,911,596 21,166,829
Gain on sale of loans held for sale (309,356) (401,280)
Origination of loans held for sale (13,192,615) (17,558,135)
Purchase of loans held for sale (4,014,135) (2,032,210)
----------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ (1,065,467) $ 5,711,981
----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations and principal payment on loans held for investment $ (1,794,193) $ 6,487,290
Principal repayments on mortgage-backed securities 11,168,844 7,267,136
Additions to mortgage servicing rights (182,936) 0
Loans purchased for investment (10,604,217) (11,698,330)
Acquisition of mortgage-backed securities 0 (763,809)
Acquisition of investment securities held to maturity (11,885,625) (22,425,731)
Acquisition of investment securities available for sale (2,949,611) (1,371,275)
Proceeds from sale of available for sale investment securities 379,600 759,950
Proceeds from maturities or calls of investment securities held to maturity 13,650,204 5,190,000
Net (increase) decrease in time deposits (107,000) (38,695)
Sale of real estate acquired in settlement of loans 284,233 101,274
Acquisition of fixed assets (637,456) (240,368)
----------------------------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES $ (2,678,157) $(16,732,558)
----------------------------
</TABLE>
<PAGE>
5
LANDMARK BANCSHARES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY,
LANDMARK FEDERAL SAVINGS BANK
Consolidated Statements of Cash Flows
(Continued)
<TABLE>
<CAPTION>
Nine Months Ended June 30
1998 1999
(unaudited) (unaudited)
--------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 3,393,747 $ 3,104,019
Net increase (decrease) in escrow accounts (342,317) (390,382)
Proceeds from FHLB advance and other borrowings 66,600,000 77,500,000
Repayment of FHLB advance and other borrowings (63,600,000) (62,200,000)
Acquisition of Treasury Stock (3,626,581) (4,039,173)
Other Financing Activities 144,783 96,522
Dividend Payment (710,858) (645,728)
--------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 1,858,774 13,425,258
--------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,884,850) 2,404,681
BEGINNING CASH AND CASH EQUIVALENTS 2,741,052 2,844,378
--------------------------
ENDING CASH AND CASH EQUIVALENTS 856,202 5,249,059
--------------------------
SUPPLEMENTAL DISCLOSURES Cash paid during the year for:
Interest on deposits, advances, and other borrowings 7,605,017 7,823,060
Income taxes 1,132,103 1,174,810
Transfers from loans to real estate acquired through foreclosure 90,141 0
</TABLE>
<PAGE>
6
LANDMARK BANCSHARES, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
LANDMARK FEDERAL SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements were prepared in
accordance with the requirements for interim financial statements contained in
SEC regulation S-X and, accordingly, do not include all information and
disclosures necessary to present financial condition, results of operations and
cash flows of Landmark Bancshares, Inc. (the "Company") and its wholly-owned
subsidiary Landmark Federal Savings Bank (the "Bank") in conformity with
generally accepted accounting principles. However, all normal recurring
adjustments have been made which, in the opinion of management, are necessary
for the fair presentation of the financial statements.
The results of operation for the nine months ending June 30, 1999, are not
necessarily indicative of the results which may be expected for the fiscal year
ending September 30, 1999.
2. LIQUIDATION ACCOUNT
On March 28, 1994, the Bank segregated and restricted $15,144,357 of
retained earnings in a liquidation account for the benefit of eligible savings
account holders who continue to maintain their accounts at the bank after the
conversion of the bank from mutual to stock form. In the event of a complete
liquidation of the Bank, and only in such event, each eligible account holder
will be entitled to receive a distribution from the liquidation account in an
amount proportionate to the current adjusted balances of all qualifying deposits
then held. The liquidation account will be reduced annually at September 30th to
the extent that eligible account holders have reduced their qualifying deposits.
3. INVESTMENTS AND MORTGAGE - BACKED SECURITIES
A summary of the Bank's carrying value of investment and mortgage -
backed securities as of June 30, 1999 and September 30, 1998, is as follows:
Investment Securities June 30, 1999 September 30, 1998
--------------------------------
Held to maturity:
Government Agency Securities $27,457,101 $10,000,443
Municipal Obligations 1,385,000 1,575,000
Other 0 0
------------------------------
$28,842,101 $11,575,433
Available for sale:
Common Stock 6,218,547 5,800,410
Stock in Federal Home Loan Bank 3,381,400 3,210,500
Other 210,000 210,000
------------------------------
$ 9,809,947 $ 9,220,910
Mortgage - Backed Securities held to maturity:
FNMA - Arms $ 6,469,421 $ 8,841,621
FHLMC -Arms 2,177,711 2,814,514
FHLMC -Fixed Rate 86,295 128,174
CMO Government Agency 4,506,296 7,058,687
CMO Private Issue 1,463,960 2,202,738
FNMA - Fixed Rate 377,724 448,123
GNMA - Fixed Rate 130,265 229,898
-------------------------------
$15,211,672 $21,723,755
<PAGE>
7
4. LOAN RECEIVABLE, NET
A summary of the Bank's loans receivable at June 30, 1999 and September
30, 1998, is as follows:
<TABLE>
<CAPTION>
June 30, 1999 September 30, 1998
---------------------------------
<S> <C> <C>
Real Estate loans:
Residential 136,433,663 129,688,030
Construction 1,738,697 1,386,224
Commercial 7,704,546 4,936,897
Second mortgage 9,725,686 10,071,744
Commercial business 7,230,123 8,578,694
Consumer 15,373,623 19,049,741
------------------------------
Gross loans 178,206,338 173,711,330
Less: Net deferred loan fees, premiums and discounts (166,082) (250,323)
Allowance for Loan Losses (1,265,693) (1,136,753)
------------------------------
Total loans, net $ 176,774,563 $ 172,324,254
</TABLE>
A summary of the Bank's allowance for loan losses for the three and nine months
ended June 30, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30 June 30
1999 1998 1999 1998
-------------------------------------------------------
<S> <C> <C> <C> <C>
Balance Beginning $ 1,195,575 $ 1,067,354 $ 1,136,753 $ 968,623
Provisions Charged to Operations 235,000 60,000 465,000 205,000
Loans Charged Off Net of Recoveries (164,882) 1,419 (336,060) (44,850)
-------------------------------------------------------
Balance Ending $ 1,265,693 $ 1,128,773 $ 1,265,693 $ 1,128,773
</TABLE>
<PAGE>
8
5. REAL ESTATE OWNED OR IN JUDGMENT
June 30, 1999 September 30, 1998
----------------------------------
Real Estate Acquired by Foreclosure $ 0 $ 0
Real Estate Loans in Judgment and
Subject to Redemption 66,867 56,589
Other Repossessed Assets 65,078 14,350
----------------------------
$131,945 $ 70,939
6. FINANCIAL INSTRUMENTS
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financial needs of its
customers and to reduce its own exposure to fluctuations in interest rates. The
financial instruments include commitments to extend credit and commitments to
sell loans. The instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the statement of
financial condition. The contract or notional amounts of those instruments
reflect the extent of involvement the Bank has in particular classes of
financial instruments.
The Bank's exposure to credit loss in the event of non-performance by the other
party to the financial instrument for loan commitments is represented by the
contractual or notional amount of those instruments. The Bank uses the same
credit policies in making commitments as it does for on-balance-sheet
instruments.
On June 30, 1999, the Bank had outstanding commitments to fund real estate loans
of $3,291,047.00. Of the commitments outstanding, $2,155,557.00 are for fixed
rate loans at rates of 6.75% to 8.50%. Commitments for adjustable rate loans
amount to $1,135,490.00 with initial rates of 6.375% to 7.75%. Outstanding loan
commitments to sell as of June 30, 1999 were $1,221,090.00. In addition the Bank
had outstanding commercial loan commitments of $2,725,171.00 with initial rates
of 7.75% to 10%.
7. EARNINGS PER SHARE
Basic earnings per share (EPS) is computed by dividing income available to
common stockholders by the weighted-average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issued common stock (potential
common stock) were exercised or converted to common stock. For periods presented
potential common stock includes outstanding stock options and nonvested stock
awarded under the management stock bonus plan.
<PAGE>
9
Earnings per share for the three and nine months ending June 30, 1999 and 1998,
was determined as follows:
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Basic Earnings Per Share
Three months ended Nine months ended
June 30 June 30
1999 1998 1999 1998
---------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average common shares outstanding
Net of Treasury shares 1,327,934 1,688,641 1,327,934 1,688,641
Average unallocated ESOP shares (62,390) (77,578) (65,812) (81,000)
Weighted average treasury shares purchased (147,496) (75,461) (95,180) (31,624)
Nonvested MSBP shares 0 (15,965) ( 3,041) (20,528)
Weighted Average Shares for Basic EPS 1,118,048 1,519,637 1,163,901 1,555,489
---------------------------------------------------
Net Earnings 609,841 583,650 1,682,122 1,792,212
---------------------------------------------------
Per share amount $ 0.55 $ 0.38 $ 1.45 $ 1.15
</TABLE>
<TABLE>
<CAPTION>
Diluted Earnings Per Share
Three months ended Nine months ended
June 30 June 30
1999 1998 1999 1998
---------------------------------------------
<S> <C> <C> <C> <C>
Weighted average shares for Basic EPS 1,118,048 1,519,637 1,163,901 1,555,489
Dilutive stock options 109,097 150,838 126,092 141,228
Dilutive MSBP shares 0 6,010 1,026 7,191
Weighted Average Shares for Diluted EPS 1,227,144 1,676,485 1,291,019 1,703,908
---------------------------------------------
Net Earnings 609,841 583,650 1,682,122 1,792,212
---------------------------------------------
Per share amount $ 0.50 $ 0.35 $ 1.30 $ 1.05
</TABLE>
8. DIVIDENDS
At a April 1999 board meeting, the Directors of the Company declared a
.15 per share dividend. The dividend was payable to all stockholders of record
as of May 14, 1999.
9. COMPREHENSIVE INCOME
Effective October 1, 1998, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 130 entitled "Reporting
Comprehensive Income" (SFAS No. 130). This statement requires disclosure of the
components of comprehensive income and the accumulated balance of other
comprehensive income within consolidated total stockholders' equity. The
adoption of the provisions of SFAS No. 130, which are only of a disclosure
nature, did not effect the Corporation's consolidated financial position,
results of operations or liquidity.
<PAGE>
10
LANDMARK BANCSHARES, INC.
PART I - FINANCIAL INFORMATION
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General:
Landmark Bancshares, Inc. ("Company") is the holding company for
Landmark Federal Savings Bank ("Bank"). Apart from the operations of the Bank,
the Company did not engage in any significant operations during the quarter
ended June 30, 1999. The Bank is primarily engaged in the business of accepting
deposit accounts from the general public, using such funds to originate mortgage
loans for the purchase and refinancing of single-family homes located in Central
and Southwestern Kansas and for the purchase of mortgage-backed and investment
securities. In addition, the Bank also offers and purchases loans through
correspondent lending relationships in Wichita, and other cities in Kansas and
in Albuquerque and Santa Fe, New Mexico and Madison, Wisconsin. Also, the Bank
has opened a Mortgage Origination Office in Kansas City. To a lesser extent, the
Bank will purchase adjustable rate mortgages loans, to manage its interest rate
risk as deemed necessary. The Bank also makes automobile loans, second mortgage
loans, home equity loans and savings deposit loans.
Landmark Bancshares, Inc. 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 report on
Form 10-Q), 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
forward-looking statements; the strength of the United States economy 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 and 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 the risks
described above involved in the foregoing.
The Company cautions that these important factors are 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.
<PAGE>
11
Management Strategy:
Management's strategy has been to maintain profitability and increase
return on equity. The Bank's lending strategy has historically focused on the
origination of traditional, conforming one to four-family mortgage loans with
the primary emphasis on single-family residences. The Bank's secondary focus has
been on consumer loans, commercial loans, second mortgage loans, home equity
loans and savings deposit loans. This focus, and the application of strict
underwriting standards, are designed to reduce the risk of loss on the Bank's
loan portfolio. However, this lack of diversification in its portfolio structure
does increase the Bank's portfolio concentration risk by making the value of the
portfolio more susceptible to declines in real estate values in its market area.
This has been mitigated in recent years, through the investment in
mortgage-backed securities and the continued sales of loans in the secondary
market.
Certain risks are inherent in the sales of loans in the secondary
market. There is a risk that the Bank will not be able to sell all the loans
that it has originated, or conversely, will be unable to fulfill its commitment
to deliver loans pursuant to a firm commitment to sell loans. In addition, in
periods of rising interest rates, loans originated by the bank may decline in
value. Exposure to market and interest rate risk is significant during the
period between the time the interest rate on a customer's mortgage loan
application is established and the time the mortgage loan closes, and also
during the period between the time the interest rate is established and the time
the Bank commits to sell the loan. If interest rates change in an unanticipated
fashion, the actual percentage of loans that close may differ from projected
percentages. The resultant mismatching of commitments to closed loans and
commitments to deliver sold loans may have an adverse effect on the
profitability of loan originations.
A sudden increase in interest rates can cause a higher percentage of
loans to close than projected. To the degree that this was not anticipated, the
Bank will not have made commitments to sell these loans and may incur
significant mark to market losses, adversely affecting results of operations.
The Bank historically sells 30 year fixed rate mortgages in the
secondary market, however the Bank is keeping all 15 and 20 year or shorter
mortgages with fixed rates above 6.625% and 6.875% for investment and selling
all other fixed rate loans.
Throughout the first nine months of fiscal year 1999 rates continued
with moderate decline. As a result of the rates at the end of June 1999, the
Bank reflected an unrealized gain of $7,543 in loans held for sale. Sustained
levels of gain on sale of loans is dependent on continued stable or downward
interest rate movement and would likely be adversely affected by a continued
rise in interest rates.
Changes in financial condition between June 30, 1999 and September 30, 1998:
Total assets increased by $17,199,765, or approximately 7.63% between
September 30, 1998 and June 30, 1999. This increase is largely attributed to a
$17,266,668 increase in securities held to maturity.
The Bank utilizes FHLB line of credit and short term advances which
increased $15.3 million from September 30, 1998 to June 30, 1999 to fund the
acquisition of securities held to maturity. In managing the Bank's overall
interest rate risk, security purchases have been made which stabilize the level
of risk to the extent that borrowing will reprice on the call dates of
securities.
<PAGE>
12
Results of operations: comparison between the three and nine months ended June
30, 1999 and 1998:
Net income for the three-month period ended June 30, 1999 of $609,841
represents an increase of $26,191 from the net income reported for the
three-month period ended June 30, 1998. The increase was primarily due to a
$174,674 increase of net gains on sale of investments and a $38,249 increase in
total interest income partially offset by a increase of $175,000 in the
provision for losses on loans.
Net income for the nine-month period ending June 30, 1999 of $1,682,123
represents a decrease of $110,101 or a 6.14% decrease from the net income
reported for the nine-month period ended June 30, 1998. The decrease is
primarily due to a decrease of $280,194 in total interest income, a $260,000
increase in the provision for losses on loans, partially offset by a $207,828
decrease in total interest expense and a increase of $212,287 on net gains on
sale of investments.
Net interest income after provision for losses on loans for the
three-month period ended June 30, 1999 decreased $111,547 or approximately 6.71%
to $1,551,835 as compared with $1,663,382 for the same period ended June 30,
1998. This decrease is associated with the increase of the provision for loan
losses.
Net interest income after provision for losses on loans for the
nine-month period ended June 30, 1999 decreased $332,366 or approximately 6.54%
to $4,750,931 as compared with $5,083,297 for the same period ended June 30,
1998. This decrease is associated with the decrease in total interest income and
the increase of the provision for loan losses.
The bank added $235,000 for the three-month period ending June 30, 1999
and $465,000 for the nine-month period ending June 30, 1999 to the provision for
loan losses. During the quarter, management recognized that there were changes
in risk factors related to the consumer loan porfolio that resulted in an
increase in classified loans. Mangement feels that at present, loans that might
have potential losses have been identified and are appropriately classified and
that adequate provision for loss has been accrued.
Non-interest income for the three-month period ended June 30, 1999
increased $127,849 or 32.28% to $523,959 as compared with $396,110 for the same
period ended June 30, 1998. This increase was primarily due to a $174,674
increase in net gain on sale of investments and a decrease of $64,182 in net
gain on sale of loans.
Non-interest income for the nine-month period ended June 30, 1999
increased $301,662 or 32.04% to $1,243,213 as compared with $941,551 for the
same period ended June 30, 1998. This increase was primarily due to a $91,924
increase in net gain on sale of loans and a increase of $212,287 in net gain on
sale of investments.
Non-interest expense for the three-month period ended June 30, 1999
decreased $26,089 or 2.40% to $1,060,253 as compared with $1,086,342 for the
same period ended June 30, 1998. This decrease is primarily due to decreased
occupancy expense compared to the quarter ending June 30, 1998, and decreased
compensation expense as a result of Management Stock Bonus Plan being fully
amortized during the prior quarter.
Non-interest expense for the nine-month period ended June 30, 1999
increased $126,847 or 4.18% to $3,163,521 as compared with $3,036,674 for the
same period ended June 30, 1998. This increase is primarily due to increased
compensation costs compared to the nine months ending June 30, 1998.
<PAGE>
13
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 continues to evaluate their
information technology systems risk in three areas: (1) internal computers and
software, (2) computers of others used by our borrowers, (3) external data
processing servicers. There is no significant change in the Banks Year 2000
status since the September 30, 1998 annual report. As of June 30, 1999,
management feels that all substantial costs associated with Year 2000 compliance
have been incurred.
<PAGE>
14
Liquidity and Capital Resources:
The Bank is required to maintain minimum levels of liquid assets, as defined by
the Office of Thrift Supervision ("OTS") regulations. This requirement, which
may be varied from time to time depending upon economic conditions and deposit
flows, is based upon a percentage of deposits and short-term borrowing. The
required minimum ratio is currently 4 percent. The Bank's liquidity ratio
averaged 4.64% during June 1999. The Bank manages its liquidity ratio to meet
its funding needs, including: deposit outflows, disbursement of payments
collected from borrowers for taxes and insurance, and loan principal
disbursements. The Bank also manages its liquidity ratio to meet its
asset/liability management objectives.
In addition to funds provided from operations, the Bank's primary sources of
funds are: savings deposits, principal repayments on loans and mortgage-backed
securities, and matured or called investment securities. In addition, the Bank
may borrow funds from time to time from the Federal Home Loan Bank of Topeka.
Scheduled loan repayments and maturing investment securities are a relatively
predictable source of funds. However, savings deposit flows and prepayments on
loans and mortgage-backed securities are significantly influenced by changes in
market interest rates, economic conditions and competition. The Bank strives to
manage the pricing of its deposits to maintain a balanced stream of cash flows
commensurate with its loan commitments.
When applicable, cash in excess of immediate funding needs is invested into
longer-term investments and mortgage-backed securities which typically earn a
higher yield than overnight deposits, some of which may also qualify as liquid
investments under current OTS regulations.
As required by the financial institutions reform, recovery and enforcement act
of 1989 ("FIRREA"), OTS prescribed three separate standards of capital adequacy.
The regulations require financial institutions to have minimum regulatory
capital equal to 2.00 percent of tangible assets; minimum core capital equal to
4.00 percent of adjusted tangible assets; and risk-based capital equal to 8.00
percent of risk-based assets.
The Bank's capital requirements and actual capital under the OTS regulations are
as follows at June 30, 1999:
Amount (Thousands) Percent of Assets
Core Capital:
Actual $17,432 7.29%
Required 9,568 4.00%
Excess 7,864 3.29%
Risk-Based Capital:
Actual 18,698 15.39%
Required 9,719 8.00%
Excess $ 8,979 7.39%
<PAGE>
15
LANDMARK BANCSHARES, INC.
PART I - FINANCIAL INFORMATION
ITEM 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank has established an Asset/Liability Management Committee ("ALCO") for
the purpose of monitoring and managing interest rate risk. The Bank is subject
to the risk of interest rate fluctuations to the extent that there is a
difference, or mismatch, between the amount of the Bank's interest-earning
assets and interest-bearing liabilities, which mature or reprice in specified
periods. Consequently, when interest rates change, to the extent the Bank's
interest-earning assets have longer maturities or effective repricing periods
than its interest-bearing liabilities, the interest income realized on the
Bank's interest-earning assets will adjust more slowly than the interest expense
on its interest-bearing liabilities. This mismatch in the maturity and interest
rate sensitivity of assets and liabilities is commonly referred to as the "gap."
A gap is considered positive when the amount of interest rate sensitive assets
maturing or repricing during a specified period exceeds the amount of interest
rate sensitive liabilities maturing or repricing during such period, and is
considered negative when the amount of interest rate sensitive liabilities
maturing or repricing during a specified period exceeds the amount of interest
rate assets maturing or repricing during such period. Generally, during a period
of rising interest rates, a negative gap would adversely affect net interest
income while a positive gap would result in an increase in net interest income,
and during a period of declining interest rates, a negative gap would result in
an increase in net interest income while a positive gap would adversely affect
net interest income. The Bank utilizes internally generated gap reports and
externally prepared interest rate sensitivity of the net portfolio value reports
to monitor and manage its interest rate risk.
The Company has historically invested in interest-earning assets that have a
longer duration than its interest-bearing liabilities. The mismatch in duration
of the interest-sensitive liabilities indicates that the Bank is exposed to
interest rate risk. In a rising rate environment, in addition to reducing the
market value of long-term interest-earning assets, liabilities will reprice
faster than assets; therefore, decreasing net interest income. To mitigate this
risk, the Bank has placed a greater emphasis on shorter-term higher yielding
assets that reprice more frequently in reaction to interest rate movements. In
addition, the Bank has continued to include in total assets a concentration of
adjustable-rate assets to benefit the one-year cumulative gap as such
adjustable-rate assets reprice and are more responsive to the sensitivity of
more frequently repricing interest-bearing liabilities.
Quarterly, the OTS prepares a report on the interest rate sensitivity of the net
portfolio value ("NPV") from information provided by the Bank. The OTS adopted a
rule in August 1993 incorporating an interest rate risk ("IRR") component into
the risk-based capital rules. Implementation of the rule has been delayed until
the OTS has tested the process under which institutions may appeal such capital
deductions. The IRR component is a dollar amount that will be deducted from
total capital for the purpose of calculating an institution's risk-based capital
requirement and is measured in terms of the sensitivity of its NPV to changes in
interest rates. The NPV is the difference between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet contracts.
An institution's IRR is measured as the change to its NPV as the result of a
hypothetical 200 basis point change in market interest rates. A resulting change
in NPV of more than 2% if the estimated market value of its assets will require
the institution to deduct from its capital 50% of that excess change. The rule
provides that the OTS will calculate the IRR component quarterly for each
institution.
<PAGE>
16
The following tables present the Bank's NPV as well as other data as of March
31, 1999 (the most recent available), as calculated by the OTS, based on
information provided to the OTS by the Bank.
Change in Interest
Rates in Basis Net Portfolio Value NPV as % of Present
Value of Assets
Points (Rate Shock) $ Amount $ Change % Change NPV Ratio Change
- --------------------------------------------------------------------------------
(Dollars in Thousands)
+300 bp 14,054 ( 8,535) (38)% 6.28% (325) bp
+200 bp (1) 17,587 ( 5,002) (22)% 7.68% (185) bp
+100 bp 20,581 ( 2,008) ( 9)% 8.82% ( 71) bp
0 bp 22,589 9.53%
-100 bp 23,619 1,031 5 % 9.85% 32 bp
-200 bp 24,237 1,648 7 % 10.00% 47 bp
-300 bp 25,044 2,455 11 % 10.22% 69 bp
(1) Denotes rate shock used to compute interest rate risk capital component.
March 31, 1999
Risk Measures (200 Basis Point Rate Shock):
Pre-Shock NPV Ratio: NPV as % of Present Value of Assets 9.53 %
Exposure Measure: Post-Shock NPV Ratio 7.68 %
Sensitivity Measure: Decline in NPV Ratio 1.85 %
Utilizing the data above, the Bank, at March 31, 1999, 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 March 31,
1999 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 -- $245,065 $242,283 $239,801 $237,026 $233,379 $228,851 $223,870 --
- -Liabilities -- 220,143 218,136 216,244 214,458 212,760 211,147 209,607 --
+Off Balance Sheet -- 122 90 63 21 (38) (117) (209) --
-----------------------------------------------------------------------------------------------------------
Net Portfolio Value -- $ 25,044 $ 24,237 $ 23,619 $ 22,589 $ 20,581 $ 17,587 $ 14,054 --
</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.
<PAGE>
17
Certain shortcomings are inherent in the preceding NPV tables because the data
reflect hypothetical changes in NPV based upon assumptions used by the OTS to
evaluate the Bank as well as other institutions. However, net interest income
should decline with instantaneous increases in interest rates while net interest
income should increase with instantaneous declines in interest rates. Generally,
during periods of increasing interest rates, the Bank's interest rate sensitive
liabilities would reprice faster than its interest rate sensitive assets causing
a decline in the Bank's interest rate spread and margin. This would result from
an increase in the Bank's cost of funds that would not be immediately offset by
an increase in its yield on earning assets. An increase in the cost of funds
without an equivalent increase in the yield of earning assets would tend to
reduce net interest income.
In times of decreasing interest rates, fixed rate assets could increase in value
and the lag in repricing of interest rate sensitive assets could be expected to
have a positive effect on the Bank's net interest income. However, changes in
only certain rates, such as shorter term interest rate declines without longer
term interest rate declines, could reduce or reverse the expected benefit from
decreasing interest rates.
<PAGE>
18
PART II - OTHER INFORMATION
Item 2. - Changes in Securities
NONE
Item 4. - Submission of Matter to a Vote of Security Holders
NONE
Item 5. - Other Information
NONE
Item 6(b). - Reports on Form 8-K
NONE
<PAGE>
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date August 3, 1999 LANDMARK BANCSHARES, INC.
By /S/ Larry Schugart
LARRY SCHUGART
President and Chief Executive Officer
(Duly Authorized Representative)
By /S/ James F. Strovas
JAMES F. STROVAS
Senior Vice President and
Chief Financial Officer
(Duly Authorized Representative)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,249
<INT-BEARING-DEPOSITS> 298
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 9,810
<INVESTMENTS-CARRYING> 44,054
<INVESTMENTS-MARKET> 43,647
<LOANS> 178,010
<ALLOWANCE> 1,266
<TOTAL-ASSETS> 242,568
<DEPOSITS> 159,361
<SHORT-TERM> 57,000
<LIABILITIES-OTHER> 4,174
<LONG-TERM> 0
0
0
<COMMON> 228
<OTHER-SE> 21,805
<TOTAL-LIABILITIES-AND-EQUITY> 242,568
<INTEREST-LOAN> 10,565
<INTEREST-INVEST> 2,083
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 12,648
<INTEREST-DEPOSIT> 5,640
<INTEREST-EXPENSE> 1,792
<INTEREST-INCOME-NET> 5,216
<LOAN-LOSSES> 465
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,164
<INCOME-PRETAX> 2,831
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,682
<EPS-BASIC> 1.45
<EPS-DILUTED> 1.30
<YIELD-ACTUAL> 291
<LOANS-NON> 122
<LOANS-PAST> 478
<LOANS-TROUBLED> 413
<LOANS-PROBLEM> 1,810
<ALLOWANCE-OPEN> 1,107
<CHARGE-OFFS> 175
<RECOVERIES> 11
<ALLOWANCE-CLOSE> 1,266
<ALLOWANCE-DOMESTIC> 1,266
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
