-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PEgNcr6VGNPAOBCimpuBZ9UWmeTMvd5yGpsDZQtVu4pxc6CyDHHTKnaoaLlYmIZE 0UILspXJpQ75DSQlcTl0SA== 0000946275-98-000781.txt : 19981229 0000946275-98-000781.hdr.sgml : 19981229 ACCESSION NUMBER: 0000946275-98-000781 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LANDMARK BANCSHARES INC CENTRAL INDEX KEY: 0000915800 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 481142260 STATE OF INCORPORATION: KS FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: SEC FILE NUMBER: 000-23164 FILM NUMBER: 98776342 BUSINESS ADDRESS: STREET 1: CENTRAL & SPRUCE STS CITY: DODGE CITY STATE: KS ZIP: 67801 BUSINESS PHONE: 3162278111 MAIL ADDRESS: STREET 2: CENTRAL & SPRUCE STREETS CITY: DODGE CITY STATE: KS ZIP: 67801 10KSB40 1 FORM 10KSB40 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ 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 ------------------------------------------------------ - OR - |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- ------------------------ SEC File Number: 0-23164 LANDMARK BANCSHARES, INC. - -------------------------------------------------------------------------------- (Exact name of small business issuer in its charter) Kansas 48-1142260 - ---------------------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer of incorporation or organization) Identification No.) Central and Spruce Streets, Dodge City, Kansas 67801 - ---------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (316) 227-8111 -------------- Securities registered pursuant to Section 12(b) of the Act: None -------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.10 per share --------------------------------------- (Title of Class) 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. 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 - ------------------------------- 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 2 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. 3 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. 4 Analysis of Loan Portfolio. Set forth below is selected data relating to the composition of Registrant's loan portfolio by type of loan on the dates indicated:
At September 30, ------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------------ -------------------- --------------------- ----------------- ------------------- $ % $ % $ % $ % $ % --- --- --- --- --- --- --- --- --- --- (Dollars in Thousands) 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 % ======= ====== ======= ====== ======= ====== ====== ====== ====== ======
- --------------- (1) Includes loans classified as held for sale. 5 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.
1-4 Family Other Real Estate Residential Mortgage Commercial Construction Consumer Total -------- ---------- ------------ -------- ----- (In Thousands) 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 ======= ====== ===== ====== =======
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.
Floating or Fixed Rates Adjustable Rates Total ----------- ---------------- ----- (In Thousands) 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 ====== ====== =======
6 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 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. 8 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. 9 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 10 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. 11 The following table sets forth information regarding non-accrual loans, real estate owned ("REO") and other repossessed assets, and loans that are 90 days or more delinquent but on which Registrant was accruing interest at the dates indicated. At such dates, Registrant had no restructured loans within the meaning of Statement of Financial Accounting Standards ("SFAS") No. 15.
At September 30, ------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (Dollars in thousands) 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% ==== ==== ==== ==== ====
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 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 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 The amount and percent of loans in each category to total loans for the distribution of Registrant's allowance for losses on loans at the dates indicated is summarized as follows:
At September 30, --------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------------- ------------------- ------------------ -------------------- --------------------- $ % $ % $ % $ % $ % --- --- --- --- --- --- --- --- --- --- (Dollars in Thousands) 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% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
15 The following table sets forth information with respect to Registrant's allowance for loan losses at the dates indicated:
At September 30, ------------------------------------------------------------------ 1998 1997 1996 1995 1994 --------- --------- --------- --------- ---------- (Dollars in Thousands) 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% ========= ========= ========= ========= =========
The following table sets forth information with respect to Registrant's allowance for losses on real estate owned and in judgment at the dates indicated:
At September 30, ---------------------------------------------------- 1998 1997 1996 1995 1994 --------- -------- --------- --------- ------ (Dollars in Thousands) 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 .................. -- % -- % -- % -- % -- % ======== ======== ========= ========= ====
16 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 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.
At September 30, ------------------------------------- 1998 1997 1996 ------ ------- ------- (In thousands) 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 ======= ======= =======
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 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.
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) 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 ======= ==== ======= ==== ======= ===== ==== ==== ======= ===== =======
19 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 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 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 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 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 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 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 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 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 (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
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
- --------------------- * 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 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 EX-10.4 2 EXHIBIT 10.4 EXHIBIT 10.4 DEFERRED COMPENSATION AGREEMENT Between Landmark Federal Savings Bank and Larry Schugart 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 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 (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 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 (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 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 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 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 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 EX-10.5 3 EXHIBIT 10.5 EXHIBIT 10.5 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 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 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 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 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 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 EX-10.7 4 EXHIBIT 10.7 EXHIBIT 10.7 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. 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. 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, 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. (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. 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 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 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. EX-10.8 5 EXHIBIT 10.8 EXHIBIT 10.8 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 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: (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. (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 (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 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 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. EX-10.9 6 EXHIBIT 10.9 EXHIBIT 10.9 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 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: (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. (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 (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 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 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. EX-10.10 7 EXHIBIT 10.10 EXHIBIT 10.10 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 "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 (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 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 (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 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 EX-13 8 EXHIBIT 13 EXHIBIT 13 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 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- 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- ================================================================================ 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.
Year Ended September 30, ------------------------------------------------------------- 1998 1997 ----------------------------- ------------------------------ HIGH LOW HIGH LOW -------------- -------------- -------------- -------------- 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
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.
Year Ended September 30, ----------------------------------------------- Dividends per share 1998 1997 ---------------------- ---------------------- First Quarter $0.10 $0.10 Second Quarter 0.20 0.10 Third Quarter 0.15 0.10 Fourth Quarter 0.15 0.10
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-
================================================================================ FIVE-YEAR FINANCIAL SUMMARY Selected Financial Condition Data (Dollars in Thousands) ============================================================================================================================== At September 30, 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ 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
Summary of Operations (Dollars in Thousands) - ------------------------------------------------------------------------------------------------------------------------------ Year Ended September 30, 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ 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 ==================================================================================
(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-
================================================================================ FIVE-YEAR FINANCIAL SUMMARY Selected Ratios and Other Data ===================================================================================================================== At or For the Year Ended September 30, 1998 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------- 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
[FOUR GRAPHICS OMITTED] -5- ================================================================================ 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- 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- 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- 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- 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- 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- 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.
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) +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
(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.
No Net Portfolio Value -400 bp -300 bp -200 bp -100 bp Change +100 bp +200 bp +300 bp +400 bp - ----------------------------------------------------------------------------------------------------------------------------- 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 =====================================================================================================
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- 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- 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- 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.
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) 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 % ======== ======== =========
-15- The following Rate/Volume Analysis table presents, for the periods indicated, information regarding changes in interest income and interest expense (in thousands) of the Company. For each category of interest-earning assets and interest-bearing liabilities, information is provided on the changes attributable to (i) changes in volume (changes in average daily balances of the portfolio multiplied by the prior year rate), (ii) changes in rate (changes in rate multiplied by prior year volume), and (iii) changes in rate/volume (changes in rate multiplied by the change in average volume).
Years Ended September 30, ----------------------------------------------------------------------------------- 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) 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 ======== ======== ====== ======== ======== ======== ======== ========
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- 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- 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- 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- [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
300 WEST DOUGLAS, SUITE 100 o WICHITA, KANSAS 67202-2994 o 316 264-2335 o FAX 316 264-1489 WICHITA o TUCSON o TULSA
F-1 Landmark Bancshares, Inc. Consolidated Statements of Financial Condition September 30, 1998 and 1997
ASSETS 1998 1997 ------------- ------------- 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 ============= =============
The Notes to Consolidated Financial Statements are an integral part of these statements. F-2 Landmark Bancshares, Inc. Consolidated Statements of Operations For the Years Ended September 30, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ 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 ============ ============ ============
The Notes to Consolidated Financial Statements are an integral part of these statements. F-3 Landmark Bancshares, Inc. Consolidated Statements of Changes in Stockholders' Equity Years Ended September 30, 1998, 1997 and 1996
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 ---------- ------------ ------------ ----------- ------------- ------------ ------------- ------------- 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 ========== ============ ============ =========== ============= ============ ============= =============
The Notes to Consolidated Financial Statements are an integral part of these statements. F - 4 Landmark Bancshares, Inc. Consolidated Statements of Cash Flows For the Years Ended September 30, 1998, 1997, and 1996
1998 1997 1996 ------------ ------------ ------------ 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) ------------ ------------ ------------
The Notes to Consolidated Financial Statements are an integral part of these statements. F-5 Landmark Bancshares, Inc. Consolidated Statements of Cash Flows (Continued) For the Years Ended September 30, 1998, 1997 and 1996
1998 1997 1996 ------------- ------------- ------------- 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 -
The Notes to Consolidated Financial Statements are an integral part of these statements. F-6 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 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 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 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 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 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:
September 30, 1998 ----------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ----------- ----------- ----------- Held-to-maturity: Government Agency Securities $10,000,433 $ 57,975 $ - $10,058,408 Municipal Obligations 1,575,000 47,736 1,622,736 ----------- ----------- ----------- ----------- $11,575,433 $ 105,711 $ - $11,681,144 =========== =========== =========== =========== Available-for-sale: 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 =========== =========== =========== ===========
F-12 2. Investment Securities (Continued)
September 30, 1997 ----------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ----------- ----------- ----------- 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 =========== =========== =========== ===========
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.
September 30, 1998 ------------------------------------------------------ Held-to-Maturity Available-for-Sale ------------------------- -------------------------- Amortized Estimated Amortized Estimated Cost Market Value Cost Market Value ----------- ----------- ----------- ----------- 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 =========== =========== =========== ===========
F-13 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:
September 30, 1998 ----------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ----------- ----------- ----------- GNMA - fixed rate $ 229,898 $ 6,711 $ - $ 236,609 FNMA - ARMs 8,841,621 134,117 4,066 8,971,672 FHLMC - ARMs 2,814,514 44,772 845 2,858,441 FHLMC - fixed rate 128,174 2,905 131,079 FNMA - fixed rate 448,123 28,827 476,950 Collateralized mortgage obligations-government agency issue 7,058,687 67,667 2,432 7,123,922 Collateralized mortgage obligations-private issues 2,202,738 7,108 1,549 2,208,297 ----------- ----------- ----------- ----------- $21,723,755 $ 292,107 $ 8,892 $22,006,970 =========== =========== =========== ===========
F-14 3. Mortgage-Backed Securities (Continued)
September 30, 1997 ----------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Market Cost Gains Losses Value ----------- ----------- ----------- ----------- 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 =========== =========== =========== ===========
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 4. Loans Receivable Loans receivable at September 30, are summarized as follows:
September 30, ------------------------------ 1998 1997 ------------- ------------- 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 ============= =============
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 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 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 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 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:
1998 1997 ----------- ----------- 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) =========== ===========
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. 12. Earnings Per Share The following is a reconciliation of the numerators and denominators of the basic and diluted per share computations for income:
Income Shares Per Share Numerator) (Denominator) Amount ----------- ------------- ------- 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 =========== ============= =======
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 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:
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes: Action Provisions: ------------------- ------------------ ------------------- Amount Ratio Amount Ratio Amount Ratio --------- ------- ------- ------ -------- ------- 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%
F-22 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 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 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:
September 30, ---------------------------------------------------------------------------- 1998 1997 ------------------------------------ ----------------------------------- Weighted-Average Weighted-Average Fixed Options Shares Exercise Price Shares Exercise Price - ------------- ---------------- ------------------ ------------------ -------------- 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 ================ ==================
F-25 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 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 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:
September 30, 1998 September 30, 1997 --------------------- ---------------------- Carrying Fair Carrying Fair Amount Value Amount Value ----------- -------- ---------- -------- (In Thousands) 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
F-28 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 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.
Condensed Statements of Financial Condition As of September 30, 1998 and 1997 (In Thousands) 1998 1997 ASSETS -------- -------- 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 ======== ========
Condensed Statements of Operations For the Years Ended September 30, 1998, 1997 and 1996
1998 1997 1996 ------- ------- ------- 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 ======= ======= =======
F-30 23. Parent Company Financial Information (Continued) Condensed Statements of Cash Flows For the Years Ended September 30, 1998, 1997 and 1996 (In Thousands)
1998 1996 1995 ------- ------- ------- 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 ======= ======= =======
F-31 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. EX-23 9 EXHIBIT 23 EXHIBIT 23 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 EX-27 10 FDS
9 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. 1000 12-MOS SEP-30-1998 SEP-30-1998 2,844 2,262 0 0 9,221 33,299 33,688 174,733 1,137 225,368 154,793 26,700 3,851 15,000 0 0 228 24,796 225,368 13,741 3,301 165 17,207 7,586 10,216 6,991 265 202 4,134 3,818 3,818 0 0 2,364 1.56 1.42 3.12 506 182 0 0 969 107 10 1,137 1,137 0 0
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