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ITEM 1. BUSINESS
THE COMPANY AND SUBSIDIARIES
Gold Banc Corporation, Inc.
Gold Banc Corporation, Inc. ("the Company") is a multi bank holding
company that owns and operates nine commercial banks and a federal savings bank
(the "Banks"). The Banks are community banks providing a full range of
commercial and consumer banking services to small and medium sized communities
and metropolitan areas and the surrounding market areas. The Company also owns
three NonBank subsidiaries ("NonBank Subsidiaries"). These NonBank Subsidiaries
provide securities brokerage, investment management, trust and insurance agency
services to clients and Bank customers. Since December 1978, the Company has
grown internally and through acquisitions from a one bank holding company with
$2.9 million in total assets to a ten bank holding company offering diversified
financial services with total assets as of December 31, 1998 of $1.1 billion.
The Company's principal executive offices are located at 11301 Nall Avenue,
Leawood, Kansas 66211, telephone number (913) 451 8050.
The Banks
Exchange National Bank ("Exchange Bank"). Exchange Bank has five
locations and is headquartered in Marysville, Kansas. The two Marysville
locations' loan portfolio as of December 31, 1998 consisted primarily of
commercial and real estate loans. Since April 1992 and October 1995, Exchange
Bank has been operating branches in Shawnee and Leawood, Kansas, respectively.
These branches are located in Johnson County, the rapidly developing suburbs
southwest of Kansas City, Missouri. Exchange Bank opened a new Shawnee branch
March 2, 1998 and opened a fourth location in Shawnee on March 5, 1999. The
three Johnson County, Kansas branches of Exchange Bank's loan portfolio as of
December 31, 1998 consisted primarily of commercial, real estate construction
and residential real estate loans. As of December 31, 1998, Exchange Bank had
assets of $283.4 million.
Provident Bank f.s.b. (" Provident Bank"). Provident Bank, a federally
chartered savings and loan has one location and a second location under
construction that is expected to open during the second quarter of 1999, both in
the city of St. Joseph, Missouri. Provident Bank's loan portfolio as of December
31, 1998 consisted primarily of real estate loans. As of December 31, 1998,
Provident Bank had assets of $81.4 million.
Citizens State Bank and Trust Co. ("Citizens State Bank"). Citizens
State Bank has two locations in the town of Seneca, Kansas. As of December 31,
1998, Citizens State Bank's loan portfolio consisting primarily in the
agricultural sector, including farm real estate, agricultural production and
agricultural industrial and residential home loans. As of December 31, 1998,
Citizens State Bank had assets of $65.5 million.
Peoples National Bank ("Peoples"). Peoples has a total of four
locations in Clay Center, Concordia, Linn and Washington, Kansas. Tri County
National Bank, acquired by the Company on August 17, 1998, was merged into
Peoples on October 31, 1998. As of December 31, 1998, Peoples' loan portfolio
consisted primarily of real estate and agricultural loans. As of December 31,
1998, Peoples had assets of $123.9 million.
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Farmers National Bank ("Farmers"). Farmers has two locations and is
headquartered in Oberlin, Kansas. As of December 31, 1998, Farmers' loan
portfolio consisted primarily of agricultural and real estate loans. As of
December 31, 1998, Farmers had assets of $54.5 million.
First National Bank in Alma ("Alma"). Alma has one location in the town
of Alma, Kansas. Alma was acquired by the Company on February 19, 1998. As of
December 31, 1998 Alma's loan portfolio consisted primarily of agricultural and
real estate loans. As of December 31, 1998, Alma had assets of $35.1 million.
Farmers State Bank of Sabetha ("Sabetha"). Sabetha has two locations in
the town of Sabetha, Kansas. The Company acquired Sabetha on July 9, 1998. As of
December 31, 1998, Sabetha's loan portfolio consisted primarily of agriculture
and real estate loans. Sabetha had assets of $53.7 million as of December 31,
1998.
Peoples State Bank of Colby ("Colby"). Colby has two locations and is
headquartered in the town of Colby, Kansas. The Company acquired Colby on August
4, 1998. As of December 31, 1998, Colby's loan portfolio consisted primarily of
real estate and agricultural loans. As of December 31, 1998, Colby had assets of
$23.4 million.
The First State Bank and Trust Company ("First State"). First State has
two locations and is headquartered in Pittsburg, Kansas. The Company acquired
First State on October 21, 1998. As of December 31, 1998, First State's loan
portfolio consisted primarily of real estate and installment loans. As of
December 31, 1998, First State had assets of $117.9 million.
Citizens Bank of Tulsa ("Citizens"). Citizens has two locations located
in the city of Tulsa, Oklahoma. Citizens expects to open a third location in
south Tulsa, Oklahoma during the second quarter of 1999. The Company acquired
Citizens on December 10, 1998. As of December 31, 1998, Citizens' loan portfolio
consisted primarily of commercial, real estate and installment loans. Citizens
had assets of $252.5 million as of December 31, 1998.
NonBank Subsidiaries
Midwest Capital Management, Inc. ("Midwest Capital"). The Company
provides securities brokerage and investment management services through Midwest
Capital, a wholly owned nonbank subsidiary, which operates as a broker dealer in
securities. The Company acquired Midwest Capital on January 30, 1998. Customers
consist primarily of financial institutions located throughout the United
States, with concentration in the Midwestern section of the United States.
Midwest Capital manages a wide variety of stock, bond and money market
portfolios for clients that currently include a significant number of commercial
banks located primarily in Kansas, Missouri, Oklahoma, Nebraska and Iowa, as
well as trusts, pension plans, insurance companies, commercial businesses,
government entities, foundations and high net worth individuals. Midwest Capital
is registered with the National Association of Securities Dealers as a
broker/dealer and investment advisor.
The Trust Company ("The Trust Company") The Company provides trust
services through The Trust Company, a Midwest trust services business
headquartered in St. Joseph, Missouri. The Company acquired The Trust Company on
December 31, 1998. As of December 31, 1998, The Trust Company had approximately
$250 million in trust assets under management or administration.
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Gold Banc Financial Services, Inc. ("Gold Banc Financial Services").
The Company provides insurance agency services through Gold Banc Financial
Services, a wholly owned subsidiary of Exchange Bank. Gold Banc Financial
Services is headquartered in Marysville, Kansas.
Pending Acquisition
On February 12, 1999, the Company entered into an agreement to purchase
all of the assets of CompuNet Engineering, L.L.C. ("CompuNet Engineering"), a
computer services business located in Lenexa, Kansas, for a purchase price of
$4.3 million. Regulatory approval was granted on March 22, 1999 and the
acquisition of CompuNet Engineering, subject to certain closing conditions, is
expected to close on or before March 31, 1999. CompuNet Engineering is expected
to operate as a wholly owned subsidiary of the Company. CompuNet Engineering is
in the business of designing, implementing, integrating and administering local
and wide area computer networks and administering consolidated back office
operations, including the operation of data and call centers, for the Company
and other financial institutions. CompuNet Engineering also provides such
technology services as Y2K compliance support, internet solutions and
videoconferencing. Malcolm M. Aslin, President and Chief Operating Officer of
the Company, and Joseph F. Smith, Executive Vice President and Chief Technology
Officer of the Company, currently are the controlling owners of CompuNet
Engineering.
BUSINESS
Community Banking Strategy
The Company serves the needs and caters to the economic strengths of
the local communities in which the Banks are located. Through the Banks and
their employees, the Company strives to provide a high level of personal and
professional customer service. Employee participation in community affairs is
encouraged in order to build long term banking relationships with established
businesses and individual customers in these market areas.
The Company believes its central and western Kansas locations, together
with the other communities in their respective counties that comprise their
market area, provide a stable base of relatively low cost deposits compared to
larger metropolitan and small business markets with larger competitors. The
Company believes that, through good management, community banks such as the
Banks can maximize earnings by attracting relatively low cost core deposits and
investing those funds in loans and other high yielding investments, while
maintaining risk at an acceptable level.
The Company has applied its community banking strategy to two affluent
communities in the rapidly developing Johnson County suburbs southwest of Kansas
City. In 1998 the Company extended its presence into the growing Tulsa, Oklahoma
and Pittsburg, Kansas market areas through the acquisition of Citizens and First
State, respectively. The Company believes the recent wave of regional bank
acquisitions of local banks in those communities and metropolitan areas, and the
subsequent conversion of some of those acquired banks to branch locations, has
alienated the customers of those locations. This has created an opportunity for
the Company to attract and retain as loan customers those owner operated
businesses that require flexibility and responsiveness in lending decisions and
desire a more personal banking relationship. The Company believes that it has
been able to meet these customers' expectations without compromising credit
standards. The success of this strategy is reflected in the Company's growth and
ability to attract significant levels of non interest bearing deposits in the
suburban communities of Leawood and Shawnee, Kansas and in small business
markets like Tulsa, Oklahoma and Pittsburg, Kansas.
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Operating Strategy
The Company's operating strategy is to provide in each market that it
operates a full range of financial products and services to small and medium
sized businesses and to consumers. The Company emphasizes personal relationships
with customers, involvement in local community activities and responsive lending
decisions. The Company strives to maintain responsive community banking offices
with local decision makers, allowing senior management at each banking location,
within certain limitations, to make its own credit and pricing decisions and
retaining at each Bank a local identity and board of directors. The Company's
goals include long term customer relationships, a high quality of service and
responsiveness to specific customer needs. The principal elements of the
Company's operating strategy are:
Emphasize Personalized Customer Service and Community Involvement. The
Company believes that, in most of its market areas, customer loyalty and service
are the most important competitive factors. The Banks have experienced low
turnover in their management and lending staffs, enabling them to provide
continuity of service by the same staff members, leading to long term customer
relationships, high quality service and quick response to customer needs. The
Banks' management and other employees participate actively in a wide variety of
community activities and organizations in order to develop and maintain customer
relationships. The Banks seek to recruit the best available banking talent to
deliver the quality of personal banking services required to meet customer
expectations and to permit the Company to meet its goals for long term
profitable growth.
Capitalize on Changing Market Conditions. The Company's management
continually monitors economic developments in its market areas in order to
tailor its operations to the evolving strengths and needs of the local
communities. For example, Exchange Bank has opened branch locations in the high
growth areas of Shawnee and Leawood, Kansas to fill the void of community banks
that management believes has been created by the recent transaction activity of
regional banking institutions and to deploy excess low cost funds derived from
its rural northeastern Kansas market.
Centralize and Streamline Operations to Achieve Economies. While each
of the Banks presently operates autonomously, the Company, in order to minimize
duplication of functions, is centralizing certain management and administrative
functions, including data processing, human resources and regulatory
administration, that can better and more efficiently be performed by the
Company. Such centralization will help to reduce operating expenses and enable
the Bank personnel to focus on customer service and community involvement. The
Company believes it has acquired the personnel necessary to make implementation
of these operating efficiencies possible. The Company also provides overall
direction in areas of budgets, asset/liability and investment portfolio
management and credit review.
Acquisition/Growth Strategy
Transactions. Management believes that the Company is well positioned
to acquire and profitably operate community banks because of its experience in
operating community banks, its ability to provide centralized management
assistance to those banks and its access to capital. Management of the Company
believes there are owners of community banks who may be willing to sell their
banks in the future for, among other reasons, stockholder liquidity, to
diversify their own investment portfolios, lack of family successor operators
and the burden of compliance with bank regulations. In addition, management
believes there are individual community bank owners in the targeted regions who
are interested in selling their banks to an organization that has a strong
capital base and management that has
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demonstrated a commitment to maintaining local bank identity. The Company's goal
is to acquire banks with strong existing management such that the Company's
strategies can be implemented while retaining the individual identity of the
banks through the continuation of the existing management, boards of directors
and bank charters.
The Company is generally targeting larger community banks in
metropolitan areas and county seat towns of 2,000 persons or more. Market
factors to be considered by the Company include the size and long term viability
of the community and market area served by the target bank, the position of the
transaction target in the market and the proximity of other banks owned by the
Company. Generally, the bank target must be among the top three financial
institutions in its market in terms of deposit share. Financial criteria include
historical performance, comparison to peers in terms of key operating
performance and capital ratios, loan asset quality, operating procedures and
deposit structure. Also of significant financial importance is the investment
required for, and opportunity costs of, the transaction. Non financial
considerations in evaluating a prospective bank target include the quality of
the target's management and the demand on the Company resources to integrate the
target institution.
Because of the large number of county seat towns and banks and its
familiarity with the market place, the Company's transaction focus is the
Midwest and primarily in the States of Kansas, Oklahoma and Missouri, but it
will also consider institutions in other contiguous states. Kansas is perceived
by management to be the Company's best market for bank transactions because only
recently have state banking laws permitted the large regional banking
institutions based in Missouri to conduct branching activities in the State of
Kansas.
Internal Growth. The recent wave of regional bank transactions of
community banks in the Midwest has created what management of the Company
perceives to be a void in the community banking market. It is management's
belief that it has been the practice of regional banking institutions to convert
the banks they acquire into branches of the acquiring institution. Management of
the Company believes this practice detracts from the delivery of quality
personalized services to the existing customer base of those branches. In 1992,
the Company entered the Kansas City suburban community market by acquiring the
deposits of a failed thrift in Shawnee, Kansas. In October 1995, Exchange Bank
further expanded its presence in the suburban Johnson County communities of
Kansas City by opening a branch location in Leawood, Kansas, another rapidly
growing residential and small business community. In 1998, Exchange Bank opened
another branch location in a rapidly developing part of Shawnee, Kansas that
presently has few other lending institutions in the immediate area. Also, during
1999 Exchange Bank, Citizens and Provident Bank expect to open another branch in
Shawnee, Kansas; Tulsa, Oklahoma and St. Joseph, Missouri, respectively.
Management of the Company believes its branching activities are distinguished
from those of regional banking institutions by the high degree of autonomy given
each branch location.
The Company's expansion activity also has allowed it to diversify its
loan portfolio, which was previously dominated by loans related to the
agricultural industry. Further, due to heavy residential and small business
development the loan demand in the suburban Johnson County communities, as well
as in southeastern Tulsa, Oklahoma, is greater than that experienced in the
Company's rural market areas.
The Company expects it will continue to expand in the suburban Johnson
County communities west of Kansas City through growth in the assets and loan
portfolios of existing branches and to a limited extent through additional
branching activities.
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Lending Activities
General. The Company strives to provide in each market area it serves a
full range of financial products and services to small and medium sized
businesses and to consumers. The Company targets owner operated businesses and
emphasizes the use of Small Business Administration and Farmers Home
Administration lending. The Banks participate in credits originated within the
organization but generally do not participate in loans from non affiliated
lenders. Each Bank has an established loan committee which has authority to
approve credits, within established guidelines, of up to $200,000.
Concentrations in excess of $200,000 must be approved by an executive loan
committee comprised of the Chief Executive Officer and a Vice President of the
Company and the local Bank's president and senior lending officer. When lending
to an entity, the Company generally obtains a guaranty from the principals of
the entity. The loan mix within the individual Banks is subject to the
discretion of the Bank's board of directors and the demands of the local
marketplace.
Residential loans are priced consistently with the secondary market,
and commercial and consumer loans generally are issued at or above the prime
rate. The Company has no potential negative amortization loans. The following is
a brief description of each major category of the Company's lending activity.
Real Estate Lending. Commercial, residential and agricultural real
estate loans represent the largest class of loans of the Company. As of December
31, 1998, real estate and real estate construction loans totaled $352.0 million
and $50.7 million, respectively or 48.0% and 6.9% of all loans, respectively.
Commercial loans at December 31, 1998 made up approximately 48.3% of real estate
loans, followed by one to four family residential 40.9%, and agricultural 10.8%.
Generally, residential loans are written on a variable rate basis with
adjustment periods of five years or less and amortized over either 15 or 30
years. The Company retains in its portfolio some adjustable rate mortgages
having an adjustment period of five years or less. Agricultural and commercial
real estate loans are amortized over 15 or 20 years. The Company also generates
long term fixed rate residential real estate loans which it sells in the
secondary market. The Company takes a security interest in the real estate.
Commercial real estate, construction and agricultural real estate loans are
generally limited, by policy, to 80% of the appraised value of the property.
Commercial real estate and agricultural real estate loans also are supported by
an analysis demonstrating the borrower's ability to repay. Residential loans
that exceed 80% of the appraised value of the real estate generally are
required, by policy, to be supported by private mortgage insurance, although on
occasion the Company will retain non conforming residential loans to known
customers at premium pricing.
Commercial Lending. Loans in this category principally include loans to
service, retail, wholesale and light manufacturing businesses, including
agricultural service businesses. Commercial loans are made based on the
financial strength and repayment ability of the borrower, as well as the
collateral securing the loans. As of December 31, 1998, commercial loans
represented the second largest class of loans at $191.3 million, or 25.1% of
total loans. The Company targets owner operated businesses as its customers and
makes lending decisions based upon a cash flow analysis of the borrower as well
as the accounts receivable, inventory and equipment of the borrower. Accounts
receivable loans and loans for inventory purchases are generally of a one year
renewable term and those for equipment generally have a term of seven years or
less. The Company generally takes a blanket security interest in all assets of
the borrower. Equipment loans are generally limited to 75% of the cost or
appraised value of the equipment. Inventory loans are limited to 50% of the
value of the inventory, and accounts receivable loans are limited to 75% of a
pre determined eligible base. Each of the Banks is approved to make loans under
the Small Business Administration program.
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Consumer and Other Lending. Loans classified as consumer and other
loans include automobile, credit card, boat, home improvement and home equity
loans, the latter two secured principally through second mortgages. The Company
generally takes a purchase money security interest in goods for which it
provides the original financing. The terms of the loans range from one to five
years, depending upon the use of the proceeds, and range from 75% to 90% of the
value of the collateral. The majority of these loans are installment loans with
fixed interest rates. As of December 31, 1998, consumer and other loans amounted
to $79.9 million, or 10.9% of total loans. The Company implemented a credit card
program in late 1994 and targeted the Banks' existing customer base as potential
consumers. As of December 31, 1998, the Company had issued 2,527 cards having an
aggregate outstanding balance of $2.0 million in credit card receivables. The
Company has not marketed credit cards to persons other than existing customers.
Agricultural Lending. The Company provides short term credit for
operating loans and intermediate term loans for farm product, livestock and
machinery purchases and other agricultural improvements. Agricultural loans were
$54.7 million as of December 31, 1998, or 7.5% of total loans. Farm product
loans have generally a one year term and machinery and equipment and breeding
livestock loans generally have five to seven year terms. Extension of credit is
based upon the ability to repay, as well as the existence of federal guarantees
and crop insurance coverage. Farm Credit Services guarantees are pursued
wherever possible. Exchange Bank and Citizens State Bank hold "Preferred Lender
Status" from the Farm Credit Services, a guarantee program similar to the Small
Business Administration, that minimizes the credit exposure of the Banks through
partial transfer of the credit risk to the federal government. Preferred Lender
Status expedites the processing of loan applications. These loans are generally
secured by a blanket lien on livestock, equipment, feed, hay, grain and growing
crops. Equipment and breeding livestock loans are limited to 75% of appraised
value.
Loan Origination and Processing
Loan originations are derived from a number of sources. Residential
loan originations result from real estate broker referrals, mortgage loan
brokers, direct solicitation by the Banks' loan officers, present savers and
borrowers, builders, attorneys, walk in customers and, in some instances, other
lenders. Residential loan applications, whether originated through the Banks or
through mortgage brokers, are underwritten and closed based on the same
standards, which generally meet FNMA underwriting guidelines. Consumer and
commercial real estate loan originations emanate from many of the same sources.
The average loan is less than $500,000. From time to time, loans may be
participated among the Banks.
The loan underwriting procedures followed by the Banks conform to
regulatory specifications and are designed to assess both the borrower's ability
to make principal and interest payments and the value of any assets or property
serving as collateral for the loan. Generally, as part of the process, a loan
officer meets with each applicant to obtain the appropriate employment and
financial information as well as any other required loan information. The Bank
then obtains reports with respect to the borrower's credit record, and orders
and reviews an appraisal of any collateral for the loan (prepared for the Bank
through an independent appraiser). The loan information supplied by the borrower
is independently verified.
Loan applicants are notified promptly of the decision of the Bank by
telephone and a letter. If the loan is approved, the commitment letter specifies
the terms and conditions of the proposed loan including the amount of the loan,
interest rate, amortization term, a brief description of the required
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collateral, and required insurance coverage. Prior to closing any long term
loan, the borrower must provide proof of fire and casualty insurance on the
property serving as collateral, and such insurance must be maintained during the
full term of the loan. Title insurance is required on loans collateralized by
real property. Interest rates on committed loans are normally locked in at the
time of application or for a 30 to 45 day period.
Mortgage Banking Division Operations
The mortgage banking division of Provident Bank is engaged in the
business of originating and selling principally first lien mortgages secured by
single family residences. Loans originated through Provident Bank's mortgage
banking division were $60.3 million, $50.9 million and $83.1 million in 1998,
1997 and 1996, respectively. The mortgage banking division's principal sources
of revenue consist of loan origination fees and gain or loss on the sale of
mortgage loans. Mortgage loans are originated primarily in St. Joseph, Missouri,
Johnson County, Kansas and throughout the metropolitan Kansas City area. Loans
usually are purchased by Provident Bank for investment pending resale into the
secondary market. Loans usually are sold to investment banking firms and other
investors as whole loans, without retaining servicing rights. The Company only
originates mortgage loans against loan purchase commitments from third parties.
Mortgage loans are originated primarily through loan originators and
from referrals from real estate brokers, builders, developers and prior
customers. The origination of a loan from the date of initial application to a
loan closing normally takes three to eight weeks. It involves processing the
borrower's loan application, evaluating the borrower's credit and other
qualifications consistent with underwriting criteria established by private
institutional investors and insuring or guaranteeing agencies, obtaining
investor approvals, property appraisals, and title insurance, arranging for
hazard insurance and handling various other matters customarily associated with
the closing of a residential loan. For this service, the division typically
collects an origination fee of one percent of the principal amount of the loan.
Costs that are incurred in originating mortgage loans include: overhead,
origination commissions paid to the originators, certain out of pocket costs
and, in some cases, commitment fees where the loans are made subject to a
purchase commitment from wholesale lenders, private investors or other
intermediaries.
Brokerage Services
The Company provides securities brokerage and investment management
services through Midwest Capital Management, Inc., a wholly owned NonBank
Subsidiary, which operates as a broker dealer in securities. Customers consist
primarily of financial institutions located throughout the United States, with
concentrations in the midwestern section of the United States. Midwest Capital
manages a wide variety of stock, bond and money market portfolios for clients
which currently include a significant number of commercial banks located
primarily in Kansas, Missouri, Oklahoma, Nebraska and Iowa, as well as trusts,
pension plans, insurance companies, commercial businesses, government entities,
foundations and high net worth individuals. Midwest Capital is registered with
the National Association of Securities Dealers as a broker/ dealer and
investment advisor.
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Trust Services
The Company provides trust services, primarily to individuals,
corporations and employee benefit plans, through The Trust Company, a Missouri
chartered trust company and wholly owned NonBank Subsidiary.
Other Services
The Company also provides insurance agency services through Gold Banc
Financial Services, an indirect wholly owned NonBank Subsidiary. Although this
business is not of financial significance to the Company, management believes
this service is important to certain of the Banks' customers, provides an
opportunity to strengthen and develop relationships with customers, and furthers
the Company's objective of becoming a complete financial services provider.
Investment Portfolio
The Banks' investment portfolio is used to meet the Banks' liquidity
needs while endeavoring to maximize investment income. Additionally, management
augments the quality of the loan portfolio by maintaining a high quality
investment portfolio oriented toward U.S. government and U.S. government agency
securities. The portfolio is comprised of U.S. Treasury securities, U.S.
government agency instruments and a modest amount of investment grade
obligations of state and political subdivisions. In managing its interest rate
exposure, the Company also invests in mortgage backed securities and
collateralized mortgage obligations. Federal funds sold and certificates of
deposit are additional investments that are not classified as investment
securities. Investment securities were $229.5 million, or 20.7% of total assets,
at December 31, 1998. As of December 31, 1998, the investment portfolio included
approximately $1.3 million of equity securities of other publicly held bank
holding companies.
Deposits and Borrowings
Deposits are the major source of the Banks' funds for lending and other
investment purposes. In addition to deposits, including local public fund
deposits and demand deposits of commercial customers, the Banks derive funds
from loan principal repayments, maturing investments, Federal Funds borrowings
from commercial banks, borrowings from the Federal Reserve Bank of Kansas City
and the Federal Home Loan Bank ("FHLB") and from repurchase agreements. Loan
repayments and maturing investments are a relatively stable source of funds,
while deposit inflows are significantly influenced by general interest rates and
money market conditions. Borrowings may be used on a short term basis to
compensate for reductions in the availability of funds from other sources. They
also may be used on a long term basis for funding specific loan transactions and
for general business purposes.
The Banks offer a variety of accounts for depositors designed to
attract both short term and long term deposits. These accounts include
certificates of deposit savings accounts, money market accounts, checking and
individual retirement accounts. Deposit accounts generally earn interest at
rates established by management based on competitive market factors and
management's desire to increase or decrease certain types or maturities of
deposits. The Company has not sought brokered deposits and does not intend to do
so in the future.
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Competition
The deregulation of the banking industry, the widespread enactment of
state laws permitting multi bank holding companies, and the availability of
nationwide interstate banking has created a highly competitive environment for
financial services providers, particularly for institutions in suburban areas,
such as Exchange Bank's Shawnee and Leawood branches. These branches compete
with other commercial banks, savings and loan associations, credit unions,
finance companies, mutual funds, insurance companies, brokerage and investment
banking companies and other financial intermediaries. Some of these competitors
have substantially greater resources and lending limits and may offer certain
services that these branches do not currently provide. In addition, some of the
non bank competitors are not subject to the same extensive federal regulations
that govern these branches.
Management believes the Banks have generally been able to compete
successfully in their respective communities because of the Company's emphasis
on local control and the autonomy of Bank management, allowing the Banks to meet
what is perceived to be the preference of community residents and businesses to
deal with "local" banks. While management believes the Banks will continue to
compete successfully in their communities, there is no assurance future
competition will not adversely affect the Banks' earnings.
Executive Officers of the Company
The executive officers of the Company are as set forth below.
Principal Occupation and
Name Age Five Year Employment History
- - ---- --- ----------------------------
Michael W. Gullion 44 Mr. Gullion has served as Chairman of
the Board of Directors and Chief
Executive Officer of the Company since
its inception and served as the
Company's President until February 10,
1999. Mr. Gullion is the son in law of
William Wallman, a director of the
Company.
Malcolm M. Aslin 51 Mr. Aslin was appointed to the Board
of Directors on February 11, 1999. He
has served as President and Chief
Operating Officer of the Company since
February 10, 1999. From October 1995
until February 10, 1999, Mr. Aslin
served as (i) Chairman of the Board of
Western National Bank and Unison
Bancorporation, Inc. in Lenexa, Kansas
and (ii) Chairman and Managing
Director of CompuNet Engineering,
L.L.C., a Lenexa, Kansas computer
service business the Company expects
to acquire, subject to certain
closing conditions, on or before March
31, 1999. From May 1994 until May 1995
Mr. Aslin served as President of
Langley Optical Company, Inc., a
wholesale optical laboratory located
in Lenexa, Kansas. Prior to purchasing
Langley Optical Company, Mr. Aslin
spent more than 22 years in various
positions with UMB Banks and United
Missouri Financial Corporation,
including President and Chief
Operating Officer of United Missouri
Bancshares, Inc. and President of
UMB's Kansas City bank, United
Missouri Bank of Kansas City, N.A.
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Principal Occupation and
Name Age Five Year Employment History
- - ---- --- ----------------------------
Keith E. Bouchey 48 Mr. Bouchey was elected to the Board
of Directors of the Company on May 30,
1996. His term of office as a director
expires at the annual meeting of
stockholders to be held in 2000. He
has served as the Executive Vice
President, Chief Financial Officer and
Corporate Secretary of the Company
since joining the Company in November
1995. Prior to joining the Company,
Mr. Bouchey had been, since August
1977, a principal of GRA, Thompson,
White & Company, P.C., a regional bank
accounting and consulting firm, where
he served on the executive committee
and as the managing director of the
firm's regulatory services practice.
Joseph F. Smith 50 Mr. Smith has served as Executive Vice
President and Chief Technology Officer
of the Company since February 10,
1999. Mr. Smith also serves as a
director of Centurion Funds, Inc., a
Phoenix, Arizona mutual fund family
advised by Centurion Trust Company.
From October 1995 until February 10,
1999, Mr. Smith served as Predident
and Chief Operating Officer of
CompuNet Engineering, L.L.C., a
Lenexa, Kansas computer service
business that the Company expects to
acquire, subject to certain closing
conditions, on or before March 31,
1999. From August 1993 until May 1995
Mr. Smith served as a director and
Executive Vice President of Investors
Fiduciary Trust Company, located in
Kansas City Missouri. Prior to joining
Investors Fiduciary Trust Company, Mr.
Smith spent more than 26 years in
various management and operational
positions with UMB Bank, including
Executive Vice President and an
advisory director of UMB's Kansas City
bank, United Missouri Bank of Kansas
City, N.A.
Employees
The Company maintains a corporate staff of 16 persons. At December 31,
1998, the Banks and NonBank Subsidiaries had 324 full time equivalent employees.
None of the employees of the Company or the Banks are covered by a collective
bargaining agreement. The Company and the subsidiaries believe their employee
relations are good.
SUPERVISION AND REGULATION
Introduction
Bank holding companies and banks are extensively regulated under both
federal and state law. The following information describes certain aspects of
that regulation applicable to the Company and the Banks, and does not purport to
be complete. The discussion is qualified in its entirety by reference to all
particular statutory or regulatory provisions.
The Company is a legal entity separate and distinct from the Banks and
NonBank Subsidiaries. Accordingly, the right of the Company, and consequently
the right of creditors and shareholders of the Company, to participate in any
distribution of the assets or earnings of the Banks is necessarily subject to
11
the prior claims of creditors of the Banks, except to the extent that claims of
the Company in its capacity as creditor may be recognized. The principal source
of the Company's revenue and cash flow is dividends from the Banks. There are,
however, legal limitations on the extent to which a subsidiary bank can finance
or otherwise supply funds to its parent holding company.
The Company
The Company is a bank holding company within the meaning of Bank
Holding Company Act of 1956, as amended (the "BHCA").
The BHCA. Under the BHCA, the Company is subject to periodic
examination by the Board of Governors of the Federal Reserve System and is
required to file periodic reports of its operations and such additional
information as the Federal Reserve may require. The Company's and the Banks'
activities are limited to banking, managing or controlling banks, furnishing
services to or performing services for its subsidiaries, or engaging in any
other activity the Federal Reserve determines to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Some of the activities the Federal Reserve has determined by regulation to be
proper incidents to the business of banking include making or servicing loans
and certain types of leases, engaging in certain insurance and discount
brokerage activities, performing certain data processing services, acting in
certain circumstances as a fiduciary or investment or financial advisor, owning
savings associations, and making investments in certain corporations or projects
designed primarily to promote community welfare.
With certain limited exceptions, the BHCA requires every bank holding
company to obtain the prior approval of the Federal Reserve before (i) acquiring
substantially all of the assets of any bank or other entity, (ii) acquiring
direct or indirect ownership or control of any voting shares of any bank or
other entity if after such transaction it would own or control more than 5% of
the voting shares of such bank or other entity(unless it already owns or
controls the majority of such shares), or (iii) merging or consolidating with
another bank holding company.
In addition, and subject to certain exceptions, the BHCA and the
federal Change in Bank Control Act, together with the regulations thereunder,
require Federal Reserve approval (or, depending on the circumstances, no notice
of disapproval) prior to any person or company acquiring "control" of a bank
holding company, such as the Company. Control is conclusively presumed to exist
if any individual or company acquires 25% or more of any class of voting
securities of the bank holding company. With respect to corporations with
securities registered under the Securities Exchange Act of 1934, such as the
Company, control will be rebuttably presumed to exist if a person acquires at
least 10% of any class of voting securities of the corporation.
In accordance with Federal Reserve policy, the Company is expected to
act as a source of financial strength for and commit resources to support the
Banks. Under the BHCA, the Federal Reserve may require a bank holding company to
terminate any activity or relinquish control of a non bank subsidiary (other
than a non bank subsidiary of a bank) upon the Federal Reserve Board's
determination that such activity or control constitutes a serious risk to the
financial soundness or stability of any subsidiary depository institution of the
bank holding company. Further, federal bank regulatory authorities have
additional discretion to require a bank holding company to divest itself of any
bank or non bank subsidiary if the agency determines that divestiture may aid
the depository institution's financial condition.
12
The Banks
Exchange Bank, Peoples, Farmers and Alma. Exchange Bank, Peoples,
Farmers and Alma operate as national banking associations organized under the
laws of the United States and are subject to examination by the Office of the
Comptroller of the Currency (the "OCC"). Deposits are insured by the Federal
Deposit Insurance Corporation (the "FDIC") up to a maximum amount (generally
$100,000 per depositor, subject to aggregation rules). The OCC and the FDIC
regulate or monitor all areas of their operations, including security devices
and procedures, adequacy of capitalization and loss reserves, loans,
investments, borrowings, deposits, mergers, issuances of securities, payment of
dividends, interest rate risk management, establishment of branches, corporate
reorganizations, maintenance of books and records, and adequacy of staff
training to carry on safe lending and deposit gathering practices. The OCC
requires these Banks to maintain certain capital ratios and imposes limitations
on its aggregate investment in real estate, bank premises, and furniture and
fixtures. These Banks are currently required by the OCC to prepare quarterly
reports on its financial condition and to conduct an annual audit of their
financial affairs in compliance with minimum standards and procedures prescribed
by the OCC.
Citizens State Bank, Sabetha, Colby and First State. Citizens State
Bank, Sabetha, Colby and First State operate under Kansas state bank charters
and are subject to regulation by the Kansas Banking Department and the FDIC. The
Kansas Banking Department and FDIC regulate or monitor all areas of these Bank's
operations, including capital requirements, issuance of stock, declaration of
dividends, interest rates, deposits, record keeping, establishment of branches,
transactions, mergers, loans, investments, borrowing, security devices and
procedures and employee responsibility and conduct. The Kansas Banking
Department places limitations on activities of these Banks including the
issuance of capital notes or debentures and the holding of real estate and
personal property and requires these Banks to maintain a certain ratio of
reserves against deposits. The Kansas Banking Department requires these Banks to
file a report annually showing receipts and disbursements of the bank, in
addition to any periodic report requested. These Banks are examined by the
Kansas Banking Department at least once every 18 months and at any other time
deemed necessary. The FDIC insures deposits held in these Banks up to a maximum
amount, which is generally $100,000 per depositor.
Citizens. Citizens operates under a Oklahoma state bank charter and is
subject to regulation by the Oklahoma State Banking Department and the Federal
Reserve System. The Oklahoma State Banking Department and Federal Reserve System
regulate or monitor all areas of Citizen's operations, including capital
requirements, issuance of stock, declaration of dividends, interest rates,
deposits, record keeping, establishment of branches, transactions, mergers,
loans, investments, borrowing, security devices and procedures and employee
responsibility and conduct. The Oklahoma State Banking Department places
limitations on activities of Citizens including the issuance of capital notes or
debentures and the holding of real estate and personal property and requires
Citizens to maintain a certain ratio of reserves against deposits. The Oklahoma
State Banking Department requires Citizens to file a report annually showing
receipts and disbursements of the bank, in addition to any periodic report
requested. Citizens is examined by the Oklahoma State Banking Department at
least once every 18 months and at any other time deemed necessary. The FDIC
insures deposits held in Citizens up to a maximum amount, which is generally
$100,000 per depositor.
Provident Bank. Provident Bank operates as a federal savings bank and
provides full savings bank services. As a savings institution, Provident Bank is
subject to regulation by the OTS. The OTS regulates or monitors all areas of
Provident Bank's operations, including capital requirements, loans, investments,
establishment of branch offices, mergers, conversions, dissolutions,
transactions, borrowing, management, record keeping, security devices and
procedures and offerings of securities.
13
The OTS requires Provident Bank to file annual current reports in compliance
with OTS procedures, as well as periodic reports upon the request of the
director of OTS. Provident Bank must also prepare a statement of condition
report showing the savings association's assets, liabilities and capital at the
end of each fiscal year. The OTS may require an independent audit of financial
statements by a qualified independent public accountant when needed for safety
and soundness purposes. With some exceptions, an appraisal by a state certified
or licensed appraiser is required for all real estate related financial
transactions.
All savings associations, including Provident Bank, are required to
meet the QTL test to avoid certain restrictions on their operations. This test
requires a savings association to have at least 65% of its portfolio assets (as
defined by regulation) in qualified thrift investments on a monthly average for
nine out of every 12 months on a rolling basis. Such assets primarily consist of
residential housing related loans and investments.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If such an association has not yet requalified or converted to a national
bank, its new investments and activities are limited to those permissible for
both a savings association and a national bank, and it is limited to national
bank branching rights in its home state. In addition, the association is
immediately ineligible to receive any new FHLB borrowings and is subject to
national bank limits for payment of dividends. If such association has not
requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties.
Provident Bank is a member of the SAIF, which is administered by the
FDIC. As insurer, the FDIC imposes deposit insurance premiums and is authorized
to conduct examinations of and to require reporting by FDIC insured
institutions. It also may prohibit any FDIC insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the FDIC. The FDIC also has the authority to initiate enforcement actions
against savings associations, after giving the OTS an opportunity to take such
action, and may terminate the deposit insurance if it determines that the
institution has engaged in unsafe or unsound practices, or is in an unsafe or
unsound condition.
Payment of Dividends
Exchange Bank, Peoples, Farmers and Alma are subject to the dividend
restrictions set forth by the OCC. Under such restrictions, they may not,
without prior approval of the OCC, declare dividends in excess of the sum of the
current year's earnings (as defined) plus the retained earnings (as defined)
from the prior two years. Provident Bank, as a Tier 1 savings institution, is
limited in its payment of dividends during a calendar year to the higher of 100%
of the current year earnings during the calendar year plus the amount that would
reduce by one half its surplus capital ratio at the beginning of the calendar
year, or 75% of its current earnings over the most recent four quarter period.
Provident Bank is required to obtain OTS approval for dividends exceeding the
preceding amount. There are no specific state bank regulatory restrictions on
the ability of Citizens, Citizens State Bank, Sabetha, Colby and First State to
pay dividends. In addition, under the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), a FDIC insured depository institution may
not pay any dividend if payment would cause it to become undercapitalized or in
the event it is undercapitalized.
14
If, in the opinion of the applicable federal bank regulatory authority,
a depository institution or holding company is engaged in or is about to engage
in an unsafe or unsound practice (which, depending on the financial condition of
the depository institution or holding company, could include the payment of
dividends), such authority may require, after notice and hearing (except in the
case of an emergency proceeding where there is no notice or hearing), that such
institution or holding company cease and desist from such practice. The federal
banking agencies have indicated that paying dividends that deplete a depository
institution's or holding company's capital base to an inadequate level would be
such an unsafe and unsound banking practice. Moreover, the Federal Reserve and
the FDIC have issued policy statements providing that bank holding companies and
insured depository institutions generally should only pay dividends out of
current operating earnings.
Transactions With Affiliates and Insiders
The Banks are subject to Section 23A of the Federal Reserve Act, which
places limits on the amount of loans or extensions of credit to, or investments
in, or certain other transactions with, affiliates, including the Company. In
addition, limits are placed on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. Most of these
loans and certain other transactions must be secured in prescribed amounts. The
Banks are also subject to Section 23B of the Federal Reserve Act, which, among
other things, prohibits an institution from engaging in transactions with
certain affiliates unless the transactions are on terms substantially the same,
or at least as favorable to such institution or its subsidiaries, as those
prevailing at the time for comparable transactions with non affiliated
companies. The Banks are subject to restrictions on extensions of credit to
executive officers, directors, certain principal stockholders, and their related
interests. Such extensions of credit (i) must be made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with third parties and (ii) must not involve more
than the normal risk of repayment or present other unfavorable features.
Branching
National bank branches are required by the National Bank Act to adhere
to branch banking laws applicable to state banks in the states in which they are
located. Under federal legislation a bank may merge or consolidate across state
lines, unless, prior to May 31, 1997, either of the states involved elected to
prohibit such mergers or consolidations. States may also authorize banks from
other states to engage in branching across state lines de novo and by
acquisition of branches without acquiring a whole banking institution. Missouri
has enacted legislation authorizing interstate branching within thirty miles of
its state borders and placing a minimum age requirement of five years on
acquired institutions. The Kansas and Oklahoma legislatures have not placed
limits on interstate merging activities of banks. State law in Missouri permits
branching anywhere in the state. Statewide branching is also allowed in Kansas
and legislation is pending in Oklahoma that, if enacted, will allow state wide
branching sometime during mid-year 1999.
Community Reinvestment Act
The Community Reinvestment Act requires that, in connection with
examinations of financial institutions within their jurisdiction, the Federal
Reserve, the FDIC, the OCC and the OTS evaluate the record of such financial
institutions in meeting the credit needs of their local communities, including
low and moderate income neighborhoods, consistent with the safe and sound
operation of those institutions.
15
These factors are also considered in evaluating mergers, transactions and
applications to open a branch or facility.
Other Regulations
Interest and certain other charges collected or contracted for by the
Banks are subject to state usury laws and certain federal laws concerning
interest rates. The Banks' loan operations are also subject to certain federal
laws applicable to credit transactions, such as the federal Truth In Lending Act
governing disclosures of credit terms to consumer borrowers, the Home Mortgage
Disclosure Act of 1975 requiring financial institutions to provide information
to enable the public and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the housing needs of the
community it serves, the Equal Credit Opportunity Act prohibiting discrimination
on the basis of race, creed or other prohibited factors in extending credit, the
Fair Credit Reporting Act of 1978 governing the use and provision of information
to credit reporting agencies, the Fair Debt Collection Act governing the manner
in which consumer debts may be collected by collection agencies, and the rules
and regulations of the various federal agencies charged with the responsibility
of implementing such federal laws. The deposit operations of the Banks also are
subject to the Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records, and the Electronic
Funds Transfer Act and Regulation E issued by the Federal Reserve to implement
that act, which govern automatic deposits to and withdrawals from deposit
accounts and customers' rights and liabilities arising from the use of automated
teller machines and other electronic banking services.
Regulatory Capital Requirements
Federal regulations establish minimum requirements for the capital
adequacy of depository institutions. The regulators may establish higher minimum
requirements if, for example, a bank has previously received special attention
or has a high susceptibility to interest rate risk. The Banks with capital
ratios below the required minimum are subject to certain administrative actions,
including prompt corrective action, the termination of deposit insurance upon
notice and hearing, or a temporary suspension of insurance without a hearing.
The federal risk based capital guidelines for banks require a ratio of
Tier 1, or core capital, to total risk weighted assets of 4% and a ratio of
total capital to total risk weighted assets of 8%. The leveraged capital
guidelines require that banks maintain Tier 1 capital of no less than 5% of
total adjusted assets, except in the case of certain highly rated banks for
which the minimum leverage ratio is 3% of total adjusted assets. OTS capital
regulations require savings institutions to meet three capital standards: (1)
tangible capital equal to 1.5% of total adjusted assets, (2) a leverage ratio
(core capital to total adjusted assets) of at least 3% and (3) a risk based
capital requirement equal to at least 8% of total risk weighted assets.
Federal regulations applicable to financial institutions define five
capital levels: well capitalized, adequately capitalized, undercapitalized,
severely undercapitalized and critically undercapitalized. An institution is
critically undercapitalized if it has a tangible equity to total assets ratio
that is equal to or less than 2%. An institution is well capitalized (adequately
capitalized) if it has a total risk based capital ratio (total capital to risk
weighted assets) of 10% or greater (8.00% to be adequately capitalized), has a
Tier 1 risk based capital ratio (Tier 1 capital to risk weighted assets) of 6%
or greater (4.00% to be adequately capitalized), has a leverage ratio (Tier 1
capital to total adjusted assets) of 5% or greater (4.00% to be adequately
capitalized), and is not subject to an order, written agreement, capital
directive,
16
or prompt corrective action directive to meet and maintain a specific capital
level for any capital measure. Under the regulations, each of the Banks is well
capitalized at December 31, 1998.
The FDICIA requires federal banking regulators to take "prompt
corrective action" with respect to capital deficient institutions. In addition
to requiring the submission of a capital restoration plan, FDICIA contains broad
restrictions on certain activities of undercapitalized institutions involving
asset growth, transactions, branch establishment, and expansion into new lines
of business. With certain exceptions, an insured depository institution is
prohibited from making capital distributions, including dividends, and is
prohibited from paying management fees to control persons if the institution
would be undercapitalized after any such distribution or payment.
As an institution's capital decreases, the powers of the federal
regulators become greater. A significantly undercapitalized institution is
subject to mandated capital raising activities, restrictions on interest rates
paid and transactions with affiliates, removal of management, and other
restrictions. The regulators have very limited discretion in dealing with a
critically undercapitalized institution and are virtually required to appoint a
receiver or conservator if the capital deficiency is not corrected promptly.
NonBank Subsidiaries
The Company's NonBank Subsidiaries are subject to the supervision of
the Federal Reserve Board and may be subject to the supervision of other
regulatory agencies including the Securities and Exchange Commission ("SEC"),
the National Association of Securities Dealers ("NASD"), the Missouri Division
of Finance, and state securities and insurance regulators.
The United States securities industry generally is subject to extensive
regulation under federal and state laws. The SEC is the federal agency charged
with administration of the federal securities laws. However, much of the
regulation of broker/dealers, such as Midwest Capital, has been delegated to
self-regulatory organizations, principally the NASD and the national securities
exchanges. These self-regulatory organizations adopt rules (that are subject to
approval by the SEC) that govern the industry and conduct periodic examinations
of member broker/dealers. Securities firms are also subject to regulation by
state securities commissions in the state in which they registered. Midwest
Capital is a registered broker/dealer in securities under the Securities
Exchange Act of 1934, as amended, and is a member of the NASD.
The regulations to which broker/dealers are subject cover all aspects
of the securities business, including sales methods, trade practices among
broker/dealers, capital structure of securities firms, uses and safekeeping of
customers' funds and securities, recordkeeping, and the conduct of directors,
officers and employees. Additional legislation, changes in rules promulgated by
the SEC and by self-regulatory organizations, or changes in interpretation or
enforcement of existing laws and rules, often affect directly the method of
operation and profitability of broker/dealers. The SEC and the self-regulatory
organizations may conduct administrative proceedings that can result in censure,
fines, suspension or expulsion of a broker/dealer, its directors, officers and
employees. The principal purposes of regulation and discipline of broker/dealers
is the protection of customer and the securities market rather than the
protection of creditors and stockholders of broker/dealers.
ITEM 2. PROPERTIES
The Company and the Banks each own their banking facilities. The
NonBank Subsidiaries have entered into short-term leases for their properties.
The Company believes each of the facilities is in good
17
condition, adequately covered by insurance and sufficient to meet the needs at
that location for the foreseeable future. The Company's headquarters and
Exchange Bank's Leawood, Kansas location are contained in a 25,000 square foot
building that opened in 1996, 40% of which is leased to third parties.
ITEM 3. LEGAL PROCEEDINGS
Exchange Bank is a named defendant in a case styled Wilson v. Olathe
Bank, filed in the United States District Court for the District of Kansas on
September 11, 1997 on behalf of a putative class of over 2,400 persons who
allegedly invested at least $14,900 each in entities known as Parade of Toys and
Bandero Cigar Company. The complaint alleged violations of the Racketeer
Influenced Corrupt Organizations ("RICO") statute (18 U.S.C. 1962(c)),
conspiracy to violate RICO, negligent misrepresentation, fraud, civil conspiracy
and negligence on the part of the defendants. The plaintiffs contend that the
defendants, including Exchange Bank, were listed in trade reference sheets
provided to plaintiffs by Parade of Toys and Bandero Cigar Company and that the
defendants made false and misleading representations on which the plaintiffs
relied to their detriment. The Second Amended Complaint seeks actual damages in
the total amount of $13,551,559.72. It also prays for punitive damages in a
total amount of $27,103,119.44. On September 29, 1998, the Court denied
plaintiffs' motion for class certification. Plaintiffs, however, have renewed
that motion. Exchange Bank has filed a motion for summary judgment in this case.
Exchange Bank denies liability and is in the process of vigorously defending
this claim.
A second lawsuit arising out of Parade of Toys styled Aaron v.
Hillcrest Bank, was filed in the United States District Court for the District
of Kansas on September 23, 1998 on behalf of 670 individually named persons. The
complaint names Exchange Bank as a defendant and alleges similar causes of
action as the Wilson action. Exchange Bank has filed a motion to dismiss in this
case. Exchange Bank denies any liability and intends to vigorously defend this
claim.
On November 12, 1998, the federal district court ruled, in Wilson and
Aaron, that multiple plaintiffs could not join their claims in a single action.
In response, plaintiffs have begun to commence new individual actions in the
District Court of Johnson County, Kansas. To date, Exchange Bank has been served
with 15 Petitions filed on behalf of individual distributors. Each makes claims
of fraud, negligent misrepresentation, civil conspiracy, and negligence. The
damages claimed range between $17,900 and $37,900. Exchange Bank denies any
liability and intends to vigorously defend these and any additional claims.
The First State Bank and Trust Company ("First State Bank"), a wholly
owned subsidiary of the Company, is a defendant in an adversary proceeding,
filed on July 23, 1998, styled Nelson v. The First State Bank and Trust Company
in a bankruptcy case pending in the Federal Bankruptcy Court for the Western
District of Missouri, filed on October 14, 1997, styled In re: Hagman's Inc.
Hagman's Inc. was owned by William R. Hagman, Jr.'s deceased brother Kenneth R.
Hagman. Until his death on September 8, 1997, Kenneth R. Hagman served as a
director of First State Bank. William R. Hagman, Jr. has had no interest, direct
or indirect, in Hagman's Inc. since 1983. In the adversary proceeding, the
bankruptcy trustee alleges that First State Bank received preferential transfers
from Hagman's Inc. in settlement of loans and bank overdrafts of approximately
$694,000 plus interest prior to the commencement of the Hagman's Inc. bankruptcy
case. There is an issue as to whether First State Bank properly perfected its
security interest in the debtor's inventory. First State Bank and the trustee
each filed motions for summary judgment on the issue of perfection both of which
the court denied. First State Bank and the trustee then agreed to a settlement
that is subject to court approval, which is expected
18
in early April 1999. As a result of this pending settlement, First State Bank
will be required to recognize a charge to its existing reserve for loan losses.
The Company is from time to time involved in routine litigation
incidental to the conduct of its business. The Company believes that no pending
litigation to which it is a party will have a material adverse effect on its
liquidity, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 9, 1998, a special meeting of the stockholders of the
Company was held. The following matter was submitted for consideration by the
stockholders:
A proposal to approve and adopt the Amended and Restated
Agreement and Plan of Merger, dated as of October 5, 1998 (the
"Agreement"), between the Company, Gold Banc Acquisition Corporation
IX, Inc. and Citizens Bancorporation, Inc.
The Agreement approved and adopted with the following voting results:
8,957,759 votes or 69.36% FOR
18,700 votes or 0.14% AGAINST
50,018 votes or 0.39% ABSTAINED
3,885,543 votes or 30.09% UNVOTED
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock, par value $1.00 per share, trades on the
NASDAQ National Market tier of The NASDAQ Stock Market under the symbol "GLDB."
19
Information relating to market prices of common stock and cash
dividends declared on common stock is set forth in the table below.
Market Price (1)
Cash
High Low Dividends (1)
---- --- -------------
1997 Quarters
First $5.9375 $4.25 $0.00
Second 7.25 5.25 0.015
Third 10.25 6.9375 0.015
Fourth 13.125 9.25 0.015
1998 Quarters
First $13.38 $11.63 $0.015
Second 22.75 12.50 0.02
Third 21.75 14.00 0.02
Fourth 17.25 13.00 0.02
(1) Market price and cash dividends are adjusted to reflect a 100% stock
dividend in the form of a two for one stock split on May 18, 1998.
As of March 9, 1999, there were approximately 309 holders of record of
the Company's common stock.
On December 31, 1998, the Company issued 300,000 shares of its common
stock in an unregistered stock offering in connection with its acquisition of
The Trust Company, a closely held trust services business. The sale was
completed in reliance on the exemption from the registration requirements
provided by Section 4(2) of the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated information regarding the Company
has been restated to include pooling of interest acquisitions and per share
information has been restated to reflect a two-for-one stock split in 1998. This
selected consolidated information should be read in conjunction with the
consolidated financial statements of the Company and notes beginning on page .
At or for the Years Ended
December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands except share data and ratios)
Earnings
Net interest income $ 35,608 $ 27,556 $ 20,370 $ 17,233 $ 14,385
Provision for possible loan losses 2,781 2,130 1,262 1,812 518
Non-interest income 8,778 4,753 4,179 3,322 917
Non-interest expense 28,079 17,478 16,047 14,118 10,156
Income taxes 1,607 2,827 2,334 1,520 1,433
-------- -------- -------- -------- --------
Net income $ 11,919 $ 9,874 $ 4,906 $ 3,105 $ 3,132
======== ======== ======== ======== ========
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At or for the Years Ended
December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands except share data and ratios)
Financial Position
Total assets $1,111,356 $ 824,464 $ 632,561 $ 532,044 $ 453,065
Loans, net of unearned income 723,364 545,531 408,258 321,866 271,148
Allowance for loan losses 10,752 7,736 5,232 4,486 3,678
Goodwill 13,328 3,205 3,257 3,409
Investment securities 229,520 164,534 148,637 140,984 138,967
Deposits 926,687 697,163 549,507 466,327 391,514
Long-term Debt 78,708 35,174 7,074 14,973 14,631
Stockholders' equity 83,811 66,566 53,120 28,875 24,479
Share Data
Net income $ 0.71 $ 0.64 $ 0.54 $ 0.30 $ 0.29
Book value 4.88 4.19 3.47 2.65 2.33
Cash dividend(1) .075 .045 0.00 -0- -0-
Ratios
Return on average assets 0.93% 1.13% 0.85% 0.65% 0.74%
Return on average equity 11.59% 13.07% 13.63% 10.93% 13.47%
Dividend payout(1) 10.56% 7.03% -- -- --
Stockholders' equity to total assets
at period-end 7.54% 8.07% 8.40% 5.43% 5.40%
Average stockholders' equity to average
total assets 8.07% 8.66% 6.30% 5.90% 5.50%
Capital Ratios
Tier 1 risk-based capital ratio(3) 12.03% 14.11% 13.59% 6.93% 7.67%
Total risk-based capital ratio(3) 13.42% 15.41% 14.85% 8.19% 8.94%
Leverage ratio 8.80% 11.00% 8.14% 5.27% 5.14%
Ratios of Earnings to Fixed Charges(2)
Excluding interest on deposits 1.34% 1.45% 1.30% 1.23% 1.33%
Including interest on deposits 3.90% 8.06% 4.72% 3.48% 4.15%
(1) Prior to the second quarter of 1997, the Company had not paid cash
dividends on shares of its common stock. The Dividend Payout Ratio is
computed using dividends paid by the Company and does not reflect a
restatement of dividends paid by subsidiaries acquired in 1998.
(2) The consolidated ratio of earnings to fixed charges has been computed
by dividing income before income taxes, cumulative effect of changes in
accounting principles and fixed charges by fixed charges. Fixed charges
represent all interest expense (ratios are presented both excluding and
including interest on deposits). There were no amortization of notes
and debentures expense nor any portion of net rental expense which was
deemed to be equivalent to interest on debt. Interest expense (other
than on deposits) includes interest on notes, federal funds purchased
and securities sold under agreements to repurchase, and other funds
borrowed.
(3) Tier 1 risk-based and total risk-based capital ratios for the years
ended 1996, 1995 and 1994 have not been restated to reflect
subsidiaries acquired in pooling of interests transactions in 1998.
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS GOLD BANC CORPORATION, INC. AND SUBSIDIARIES
The following discussion of financial condition and results of operations should
be read in conjunction with the consolidated financial statements of the Company
and the notes thereto, which are included elsewhere in this report.
General
The Company provides community banking and related financial services at 28
locations in Kansas, Oklahoma and Missouri. As a multi-bank holding company, the
Company owned nine commercial banks, one federal savings bank, an investment
company, and a trust company with total assets of $1.1 billion, at year-end
1998. Geographic markets include Johnson County, Kansas, an affluent suburb in
the Kansas City metropolitan area; Tulsa, Oklahoma, a growing city with a strong
small-business sector; and a number of smaller cities.
The Company has focused on growth of its Banks' lending and other services by
cultivating relationships with small businesses and other clients. The Company
has expanded through a strategy of making community bank acquisitions that are
accretive to earnings and stockholders' equity. The Company also has taken steps
to offer nonbank financial services to customers of its Banks. During 1998, the
Company completed acquisitions of six Banks and two non-bank companies.
The following table lists the Company's Banks ("Banks") total assets of each (in
millions of dollars) as of December 31, 1998, communities served, number of
offices and year acquired:
Total Location and Year
Bank Assets Number of Offices Acquired
- - ----------------------------------------------------------------------------------------------------
Exchange National Bank $283.4 Johnson County, KS--4 1978
Marysville, KS--2
Citizens Bank of Tulsa* $253.0 Tulsa, OK--2 1998
Peoples National Bank** $123.9 Clay Center, KS--1 1997
Concordia, KS--2
Washington County, KS--2
First State Bank and Trust Company $117.9 Pittsburg, KS--2 1998
Provident Bank, f.s.b.*** $ 81.4 St. Joseph, MO--1 1994
Citizens State Bank and Trust Co. $ 65.5 Seneca, KS--2 1985
Farmers National Bank $ 54.5 Decatur County, KS--2 1997
Farmers State Bank $ 53.7 Sabetha, KS--2 1998
First National Bank in Alma $ 35.1 Alma, KS--1 1998
Peoples State Bank of Colby $ 24.0 Thomas County, KS--2 1998
* A third office of Citizens Bank is scheduled to open in south Tulsa
in 1999.
** Peoples National Bank includes the former Tri-County National Bank,
acquired in 1998 and merged into Peoples.
*** A second office of Provident Bank is scheduled to open in March
1999.
22
The following table lists non-bank subsidiaries of the Company, which offer
financial services to their own clients and to bank customers through the
offices of the Banks:
Year
Nonbank Subsidiary Service Focus Headquarters Location Acquired
- - ------------------------------------------------------------------------------------------------------------
Midwest Capital Management, Inc. Broker/dealer Kansas City, MO 1998
The Trust Company Trust accounts St. Joseph, MO 1998
Gold Banc Financial Services, Inc.+ Insurance Marysville, KS -
+ Gold Banc Financial Services was formed in 1996 as a subsidiary of
Exchange National Bank.
In April 1998, the Company's Board of Directors declared a two-for-one stock
split in the form of a 100% stock dividend, and per share results in this report
are adjusted to reflect a per share split. The Company paid quarterly cash
dividends during 1998 totaling $855,000 or 7.5 cents per share.
Markets
The economies of Kansas, Oklahoma and Missouri, including local markets where
the Banks operate, generally performed well in 1998. Personal income and
employment in the three states grew approximately in line with national
averages. Economic activity showed some signs of slowing in these three states
in the second half of 1998.
The Company is headquartered in Johnson County, Kansas, along with Exchange
Bank, our lead Bank. Johnson County is a suburban community of 417,000 people
that ranks No. 1 in per capita income in Kansas and in the top 1 percent of
counties nationally. Johnson County's economy remained strong in 1998, as
indicated by increases in retail sales, a third consecutive year of more than $1
billion in construction activity, and growth in employment and new business
formation, according to the County Economic Research Institute. The county's
unemployment rate was between 2.1% and 2.7% throughout 1998. Johnson County has
a more competitive banking environment than the Company's smaller markets, but
its robust economic growth has enabled Exchange Bank to rapidly grow its loans
and deposits in the county. Exchange Bank has three offices in growing areas of
Johnson County, and a fourth office currently under construction is expected to
open during the second quarter of 1999. This presence in Johnson County
accounted for approximately 17% of the Company's total assets at year-end.
The Company entered the Tulsa, Oklahoma, market in 1998 with the acquisition of
Citizens Bank of Tulsa. Tulsa is a metropolitan area of 760,000 located in a
county that ranks No. 1 in per capita income in Oklahoma and in the top 7
percent of counties nationally. Tulsa's diversified economy generated employment
growth of 3.5% during 1998, well above the national growth rate. The larger of
two Citizens Bank offices serves a rapidly growing area in southeastern Tulsa, a
light-industrial district that is home to more than 5,000 small businesses. More
than 80 percent of the Bank's loans involve small-business clients. A second
location serves a mature residential area of Tulsa and is primarily a retail
banking office. A third office currently under construction in an affluent,
developing residential area of south Tulsa is expected to open during the second
quarter of 1999. Citizens Bank of Tulsa accounted for approximately 23% of the
Company's total assets at year-end.
Other local markets where the Banks operate generally did not experience the
level of growth seen in Johnson County and Tulsa, but their economies were
sound, with a mix of services, manufacturing and agriculture-related industries.
Each of the Banks in these other local markets is based in a county seat and
serves both that city and the surrounding area. Peoples National Bank is based
in Clay Center, Kansas, and has offices in three counties in north-central
Kansas with 26,000 residents. First State Bank and Trust Company of Pittsburg,
Kansas, serves a county of 36,000 people whose economy revolves around a state
university and regional trade for southeast Kansas. Provident Bank, a federal
savings bank, is a leading home mortgage lender in St. Joseph, Missouri, a
metropolitan area with 97,000 residents.
23
Two non-bank companies were acquired in 1998, Midwest Capital Management and The
Trust Company, both have clients throughout the Midwest. In addition, financial
services of these non-bank subsidiaries are being offered to current customers
of the Banks, either directly through representatives located in bank offices or
through telecommunication links with the non-bank offices.
Influences on Earnings
The Company's net income depends upon the combined results of operations of the
Banks, each of which conducts a commercial and consumer banking business by
attracting deposits from the general public and deploying those funds to earning
assets. In addition, the non-bank subsidiaries contribute income from management
fees and commissions.
Each Bank's profitability depends primarily on net interest income, which is
interest income on interest-earning assets less interest expense on
interest-bearing liabilities. Interest-earning assets include loans, investment
securities and other earning assets, such as Federal Funds sold.
Interest-bearing liabilities include customer deposits, time and savings
deposits and other borrowings such as Federal Funds purchased, short-term
borrowings and long-term debt, including junior subordinated deferrable interest
debentures. Besides the balances of interest-earning assets and interest-bearing
liabilities, net interest income is affected by each Bank's interest rate
spread. This spread is the difference between the Bank's average yield on
interest-earning assets and the average rate paid on interest-bearing
liabilities. The interest rate spread is impacted by changes in interest rates,
deposit flows and loan demand, among other factors.
The levels of non-interest income and non-interest expense also affect the
Company's profitability. A significant portion of the Company's revenue is
non-interest income of the Banks and non-bank subsidiaries, consisting of
investment trading fees and commissions, service fees, gains on the sale of
mortgage loans and investment securities, and other fees. Non-interest expense
consists of compensation and benefits, occupancy related expenses, deposit
insurance premiums, expenses of opening bank offices, acquisition-related
expenses and other operating expenses. The Company's profitability also is
affected by the effective tax rate, the Banks' provision for loan losses, and
various non-recurring items.
Results of Operations
Overview
In the year ended December 31,1998, the Company acquired Banks and financial
companies with assets aggregating $491 million. These acquisitions were
accounted for under both pooling-of-interests and purchase transactions (see
note 2 of the accompanying financial statements). Total consideration paid for
acquisitions using the purchase method was $22.4 million, consisting of cash of
$12.5 million and 1,292,000 shares of common stock. The Company's historical
financial statements and other data in this report have been restated to reflect
the operations of two Banks acquired in 1998 pooling-of-interests transactions,
Citizens Bank of Tulsa, Oklahoma, and First State Bank and Trust Co., Pittsburg,
Kansas.
Consolidated net earnings for 1998 totaled $11.9 million, compared to $9.9
million in the year ended December 31, 1997, a 20.7% increase. Earnings in 1998
improved as a result of increased net interest income of $8.1 million, or 29.2%,
and increased other income of $4.0 million, or 84.7%. This growth was offset
partially by increases in the provision for loan losses and non-interest
expense. Earnings per share increased $.07, or 10.9%.
Citizens Bancorporation, Inc., formerly the parent company of Citizens Bank of
Tulsa and one of the companies acquired using the pooling-of-interests method,
was a Subchapter S Corporation prior to the acquisition. As a Subchapter S
Corporation, Citizens was not subject to tax on its earnings; the earnings were
included in the tax returns of Citizens' stockholders. Consolidated net earnings
and per share
24
results, as set forth above, exclude taxes on Citizens' earnings. Pro forma tax
expense, net earnings and net per share earnings as if Citizens had been subject
to income taxes for 1998 and 1997 were $4,404,000, $9,122,000 and $.55 per share
and $4,406,000, $8,295,000 and $.54 per share, respectively. Pro forma net
earnings and net earnings per share increased in 1998 by $827,000 (10.0%) and
$.01 (1.9%), respectively.
In 1997, two Banks with assets totaling $124.6 million were acquired, one using
the purchase method and one using the pooling-of-interests method. Total
consideration paid for the Bank acquired under the purchase method was
$5,718,000, consisting of cash of $1,964,000 and 546,000 shares of common stock.
Consolidated net income for 1997 totaled $9.9 million, a 101.3% increase over
net income for the year ended December 31, 1996. Earnings in 1997 improved as a
result of increased net interest income of $7.2 million, or 35.3%, partially
offset by a slight increase in the provision for loan losses. Earnings per share
increased $.19, or 42.2%.
Net Interest Income
The following table presents the Company's average balances, interest income or
expense on a tax equivalent basis, and the related yields and rates on major
categories of the Company's interest-earning assets and interest-bearing
liabilities for the periods indicated:
Year Ended December 31,
- - ---------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- - ---------------------------------------------------------------------------------------------------------------------
Average Average Average
Interest Rate Interest Rate Interest Rate
Average Income/ Earned/ Average Income/ Earned/ Average Income/ Earned/
Balance Expense Paid Balance Expense Paid Balance Expense Paid
- - ---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Assets:
Loans, net (1) $642,598 $61,017 9.50% $489,314 $ 44,977 9.19% $ 361,775 $34,674 9.58%
Investment securities-taxable 167,971 9,724 5.79% 138,324 7,670 5.55% 135,103 7,605 6.03%
Investment
securities-nontaxable (2) 28,606 2,100 7.34% 22,097 1,662 7.52% 11,621 1,734 8.05%
Other earning assets 43,619 3,069 7.03% 30,037 1,787 5..95% 21,946 1,201 5.47%
- - ---------------------------------------------------------------------------------------------------------------------
Total earning assets 882,794 75,910 8.60% 679,772 56,096 8.25% 530,445 45,214 8.52%
- - ---------------------------------------------------------------------------------------------------------------------
Noninterest-earning assets 93,102 53,630 40,856
- - ---------------------------------------------------------------------------------------------------------------------
Total assets $975,896 $733,402 $ 571,301
- - ---------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Savings deposits and
interest-bearing checking $269,639 $ 9,332 3.46% $202,470 $ 6,614 3.27% $145,625 $ 4,706 3.23%
Time deposits 460,841 25,599 5.55% 368,339 19,561 5.31% 314,824 17,630 5.60%
Short-term borrowings 13,448 751 5.59% 21,726 1,281 5.89% 13,928 1,023 7.34%
Long-term borrowings 59,110 3,906 6.61% 6,950 519 7.47% 11,048 923 8.36%
- - ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 803,038 39,588 4.93% 599,485 27,975 4.67% 485,425 24,282 5.00%
- - ---------------------------------------------------------------------------------------------------------------------
Non-interest-bearing
liabilities 94,117 70,440 49,893
Stockholders' equity 78,741 63,477 35,983
- - ---------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $975,896 $733,402 $ 571,301
- - ---------------------------------------------------------------------------------------------------------------------
Net interest income (3) $36,322 $ 28,121 $20,932
=====================================================================================================================
Net interest spread 3.67% 3.58% 3.52%
=====================================================================================================================
Net interest margin (4) 4.11% 4.14% 3.95%
=====================================================================================================================
25
(1) Non-accruing loans are included in the computation of average balance.
(2) Yield is adjusted for the tax effect of tax exempt securities. The tax
effects in 1998, 1997 and 1996 were $714,000, $565,000 and $562,000,
respectively.
(3) The Company includes loan fees in interest income. Such fees totaled
$2,782,000, $2,146,000 and $1,353,000 in 1998, 1997 and 1996, respectively.
(4) The net interest margin on average earning assets is the net interest income
divided by average interest-earning assets.
For 1998, total interest income increased $19.7 million, or 35.4%. Interest
income on loans increased $16.0 million, or 35.7%. Of the increase, $4.3 million
is attributed to purchase transactions completed during 1998. The remaining
$11.7 million increase is primarily due to increased loan volume in 1998 at
certain Banks. For 1998, the average loan balance increased $153.3 million, or
31.3%, and the yield earned on loans increased from 9.19% in 1997 to 9.50% in
1998. Interest income on investments increased $2.3 million, or 26.7%. For 1998,
the average investment balance (taxable and non-taxable) increased $36.2
million, or 22.5%. Interest income on non-taxable investments was negatively
impacted by a slight decrease in the yield earned on non-taxable investments,
7.34% in 1998 compared to 7.52% in 1997.
For 1997, total interest income increased $10.9 million, or 24.4%. Interest
income on loans increased $10.3 million, or 29.5%, primarily due to increased
loan volume in 1997. For 1997, the average loan balance increased $127.5
million, or 35.3%, and the yield earned on loans decreased from 9.58% in 1996 to
9.19% in 1997.
Total interest expense on a tax equivalent basis was $39.6 million for 1998
compared to $28.0 million for 1997, a 41.5% increase. Of the $11.6 million
increase, $2.9 is attributed to purchase transactions completed in 1998, with
the remainder attributed to internal growth and increased rates paid. For 1998,
interest expense on savings and interest-bearing checking increased $2.7
million, or 41.1%, primarily as a result of an increase in the average balance
of such deposits of $67.2 million, or 33.2%, coupled with an increase in rate
paid on such deposits from 3.27% in 1997 to 3.46% in 1998. Of the increase in
the average balances of all types of deposits, $130.0 million, or 72.0%, is
attributed to the purchase transactions completed in 1998. Interest expense on
time deposits increased $6.0 million, or 30.9%, primarily as a result of an
increase in the average balance of such deposits of $92.5 million, or 25.1%,
coupled with an increase in rate paid on such deposits from 5.31% in 1997 to
5.55% in 1998. Interest expense on combined short-term and long-term borrowings
increased $2.9 million, or 158.8%, primarily as a result of an increase in the
average balance of such borrowings of $43.9 million, or 153.0%, in 1998 compared
to 1997.
Total interest expense on a tax equivalent basis was $28.0 million for 1997,
compared to $24.3 million for 1996, a 15.2% increase. For 1997, interest expense
on savings and interest-bearing checking increased $1.9 million, or 40.5%,
primarily as a result of an increase in the average balance of such deposits of
$56.8 million, or 39.0%. Interest expense on time deposits increased $1.9
million, or 10.9%, primarily as a result of an increase in the average balance
on such deposits of $53.5 million, or 17.0%. This increase was negatively
impacted by a decrease in the rate paid on such deposits from 5.60% in 1996 to
5.31% in 1997.
As a result of the changes described above, net interest income increased $8.1
million, or 29.2%, for 1998 compared to 1997 and increased $7.2 million, or
35.3%, for 1997 compared to 1996.
26
The following table summarizes the changes in net interest income on a tax
equivalent basis, by major category of interest-earning assets and
interest-bearing liabilities, identifying changes related to volumes and rates.
Changes not solely due to volume or rate changes are allocated to rate.
Management believes this allocation method, applied on a consistent basis,
provides meaningful comparisons between periods.
1998 compared 1997 compared
to 1997 Year Ended December 31, to 1996
- - ----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
- - ----------------------------------------------------------------------------------------------------------------------
Average Total Average Total
Volume Rate Changes Volume Rate Changes
- - ----------------------------------------------------------------------------------------------------------------------
Interest income:
Loans (1) $14,087 $ 1,953 $ 16,040 $ 12,244 $ (1,941) $10,303
Investment securities-taxable 1,645 409 2,054 181 (116) 65
Investment securities-nontaxable 489 (51) 438 1,599 (1,671) (72)
Other earning assets 809 473 1,282 450 136 586
- - ----------------------------------------------------------------------------------------------------------------------
Total interest income $17,030 $ 2,784 $ 19,814 $ 14,474 $ (3,592) $10,882
Interest expense:
Savings deposits and interest-bearing checking 2,197 $ 521 $ 2,718 $ 1,838 $ 70 $ 1,908
Time deposits 4,911 1,127 6,039 2,997 (1,066) 1,931
Short-term borrowings (488) (42) (530) 571 (313) 258
Long-term borrowings 3,897 (510) 3,387 (343) (61) (404)
- - ----------------------------------------------------------------------------------------------------------------------
Total interest expense $10,517 $ 1,096 $ 11,613 $ 5,063 $ (1,370) $ 3,693
- - ----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net interest income $ 6,513 $ 1,688 $ 8,201 $ 9,411 $ (2,222) $ 7,189
- - ----------------------------------------------------------------------------------------------------------------------
(1) The Company includes loan fees in interest income. Such fees totaled
$2,782,000, $2,146,000 and $1,353,000 in 1998, 1997, and 1996, respectively.
Provision for Loan Losses
The provision for loan losses was $2.8 million for 1998 compared to $2.1 million
for 1997, a 30.6% increase. The increase in the provision is primarily the
result of a $177.8 million, or 32.6%, increase in total net loans outstanding at
December 31, 1998 compared to the end of 1997.
The provision for loan losses was $2.1 million for 1997 compared to $1.3 million
for 1996, a 68.8% increase. The increase in the provision is primarily the
result of non-recurring recoveries in 1996 of amounts previously charged off,
which decreased the provision for 1996.
27
Non-Interest Income
The following table presents the components of the Company's non-interest income
for the periods indicated:
Year Ended December 31,
1998 1997 1996
- - --------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Service charges on deposit accounts $3,275 $2,446 $1,982
Gain/(loss) on sale of loans 1,106 679 1,128
Gain/(loss) on sale of securities 94 116 -
Insurance premium income 65 99 35
Fiduciary income 531 405 338
Investment trading fees and commissions 3,265 - -
Other non-interest income 442 1,008 696
----------------------------
Total non-interest income $8,778 $4,753 $4,179
Non-interest income as a percentage ============================
of average total assets 0.90% 0.65% 0.73%
- - ---------------------------------------------------------------------------------------------------
Non-interest income was $8.8 million for 1998 compared to $4.8 million for 1997,
an 84.7% increase. Service charges on deposit accounts increased $0.8 million,
or 33.9%, in 1998 as a result of a larger customer base. Investment trading fees
and commissions increased $3.3 million, due to the acquisition of a full-service
broker/dealer and investment management firm, Midwest Capital Management, Inc.,
in January 1998. Also during 1998, the fair value of the Company's portfolio of
trading securities declined $399,000, resulting in unrealized losses compared to
unrealized gains of $229,000 in 1997.
Non-interest income was $4.8 million for 1997 compared to $4.2 million for 1996,
a 13.7% increase. For 1997, the $0.6 million increase in non-interest income is
primarily due to an increase of $0.5 million in service charges on deposit
accounts.
Non-Interest Expense
The following table presents the components of non-interest expense for the
periods indicated:
Year Ended December 31,
1998 1997 1996
-----------------------------
(Dollars in Thousands)
Salaries and employee benefits $13,307 $ 8,884 $ 8,301
Net occupancy expense 3,023 2,145 1,571
Deposit insurance expense 103 95 551
Professional services 3,065 1,340 1,000
Data processing expense 1,115 677 633
Supplies 667 510 603
Telephone 326 206 215
Postage 374 253 219
Advertising/promotion 1,124 728 549
Other 4,975 2,640 2,405
-----------------------------
Total non-interest expense $28,079 $17,478 $16,047
=============================
Efficiency Ratio 67.50% 58.34% 69.80%
=============================
Total non-interest expense was $28.1 million for 1998 compared to $17.5 million
for 1997, a 60.6% increase. The increase is primarily attributable to an
increase in salaries and employee benefits of $4.4 million, or 49.8%, in 1998.
Professional services increased $1.7 million, or 128.7%, as a result of legal
28
and accounting expenses associated with numerous acquisitions completed in 1998
and the profit improvement study commissioned by the Company at a cost of
approximately $700,000. Net occupancy expense increased $878,000 or 40.9%. Of
the total increase in net occupancy expense, $432,000, or 49.2%, is due to the
purchase transactions completed during 1998. Other non-interest expense
increased $2.3 million, or 88.5%, in 1998. The increase in other non-interest
expense is primarily attributed to the purchase transactions completed during
1998.
Total non-interest expense was $17.5 million for 1997 compared to $16.0 million
for 1996, representing an 8.9% increase. This increase is due to a $0.5 million
increase in salaries and employee benefits caused by annual increases.
Income Tax Expense
Income tax expense was $1.6 million for 1998 compared to $2.8 million for 1997,
a $1.2 million, or 43.2%, decrease. The effective tax rate for 1998 was 11.9% as
compared to 22.3% for 1997. Such effective tax rates differ from the expected
rate of 34% due primarily to the earnings of Citizens Banccorpration, Inc.,
which as a Subchapter S Corporation, was not subject to tax prior to the
acquisition by the Company. In addition, the Company recognized a $500,000
deferred tax benefit resulting from timing differences upon the conversion of
Citizens back to a "C" Corporation on the date of acquisition by the Company.
Pro forma tax expense, if Citizens had not been a Subchapter S Corporation,
would have been $4,404,000 and $4,406,000, yielding tax rates of 32.6% and
34.7%, respectively.
Income tax expense was $2.8 million for 1997 compared to $2.3 million for 1996,
a 21.1% increase. The effective tax rate on actual earnings was 22.3% in 1997
and 32.2% in 1996. The decrease in the effective tax rate can be primarily
attributed to Citizens Bank of Tulsa, which was a taxable entity in 1996.
Asset/Liability Management
Asset/liability management refers to management's efforts to minimize
fluctuations in net interest income caused by interest rate changes. This is
accomplished by managing the repricing of interest rate sensitive
interest-earning assets and interest-bearing liabilities. An interest rate
sensitive balance sheet item is one that is able to reprice quickly, through
maturity or otherwise. Controlling the maturity or repricing of an institution's
assets and liabilities in order to minimize interest rate risk is commonly
referred to as gap management. Close matching of the repricing of assets and
liabilities will normally result in little change in net interest income when
interest rates change. A mismatched gap position will normally result in greater
changes in net interest income as interest rates change.
Along with internal gap management reports, the Company and the Banks use an
asset/liability modeling methodology to analyze each Bank's current gap
position. That methodology simulates the Banks' asset and liability base and
projects future net interest income under several interest rate assumptions. The
Company strives to maintain an aggregate gap position, so that changes in
interest rates will not negatively affect net interest income by more than 10%
in any twelve-month period. The Company has not engaged in derivatives or
hedging transactions to synthetically alter net interest income.
29
The following table indicates that, at December 31, 1998, if there had been a
sudden and sustained increase in prevailing market interest rates, the Company's
1999 net interest income would be expected to increase, while a decrease in
rates would indicate a decrease in net interest income.
Changes in Net Interest Percent
Interest Rate Income Change Change
- - -------------------------------------------------------------------------------------------------------------------
200 basis point rise $ 42,970,500 $ 4,119,600 10.60%
100 basis point rise 41,133,500 2,282,600 5.88%
Base rate scenario 38,850,900
100 basis point decline 37,759,000 (1,091,900) -2.81%
200 basis point decline 36,215,300 (2,635,000) -6.78%
- - -------------------------------------------------------------------------------------------------------------------
The following table sets forth the maturities of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998.
As of December 31, 1998
Term to Repricing
- - -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
--------------------------------------------------------
Zero to Four Months Over One Over
Three to Twelve to Five Five
Months Months Years Years Total
--------------------------------------------------------
Interest-earning assets:
Loans $ 299,455 $133,051 $ 251,214 $ 50,396 $ 734,116
Investment securities 32,598 69,647 98,741 28,534 229,520
Other interest-bearing assets 62,798 -- -- -- 62,798
- - -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 394,851 $202,698) $ 349,955 $ 78,930 $1,026,434
Interest-bearing liabilities:
Savings deposits and interest-bearing checking $ 305,065 $ -- $ -- $ -- $ 305,065
Time deposits 140,721 230,144 146,254 3,216 520,335
Short-term borrowings 7,212 7,000 -- -- 14,212
Long-term borrowings 197 395 27,201 50,915 78,708
- - -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 453,195 $237,539 $ 173,455 $ 54,131 $ 918,320
Interest sensitivity gap (58,344) (34,841) 176,500 24,799 108,114
Cumulative gap (58,344) (93,185) 83,315 108,114
Cumulative ratio of interest-earning assets
to interest-bearing liabilities 87.13% 86.51% 109.64% 111.77%
Ratio of cumulative gap to interest-earning assets -14.78% -15.59% 8.79% 10.53%
- - -------------------------------------------------------------------------------------------------------------------
The cumulative gap value indicated above for the zero to five-year periods
indicates that a rise in interest rates would have a positive effect on net
interest income. The Company has the ability to reprice the rates or savings
deposits and interest bearing checking. Historically the rates on these deposits
have been repriced when rates have had small movements.
Financial Condition
Lending Activities
Commercial Loans. This category includes loans to service, retail, wholesale and
light manufacturing businesses, including agricultural service businesses.
Commercial loans were $191.3 million as of December 31, 1998, or 26.06%, of
total loans. The proportion of commercial loans decreased in 1998, due primarily
to acquisitions of Banks during 1998 which have greater proportions of
agricultural loans.
Real Estate Loans. Real estate loans represent the largest class of loans of the
Company. The Company categorizes real estate loans as follows:
I) Commercial. Commercial real estate loans totaled $170.2 million at
December 31, 1998, compared to $111.3 million at December 31, 1997, an
increase of $58.9 million, or 52.9%. Approximately $10 million of such
growth resulted from bank acquisitions accounted for as purchase
transactions during 1998, while the remaining growth resulted from growth
in the Johnson County, Kansas, and Tulsa, Oklahoma, markets.
30
II) Construction. Construction lending consists primarily of single family
construction. Construction loans decreased 18.2% primarily due to a
decrease in such lending in Johnson County, Kansas.
III) 1 to 4 Family Residential. Residential loans totaled $143.8 million at
December 31, 1998, compared to $111.4 million at December 31, 1997, an
increase of $32.4 million, or 29.0%. Loans in this category consist
primarily of owner-occupied residential loans. Since December 31, 1996, the
mix of loans has shifted from fixed-rate loans to variable-rate products.
The Company has elected to retain selected variable-rate real estate loans,
which has resulted in the loan growth in this category.
IV) Agricultural. This category consists of loans secured by agricultural
real estate. Agricultural loans totaled $38.1 million at December 31, 1998,
compared to $21.2 million at December 31, 1997, an increase of $16.9
million, or 79.7%. The growth is almost entirely attributable to Banks
acquired under purchase transactions in 1998. Growth among all other Banks
was relatively insignificant.
V) Held for Sale. Loans held for sale represent residential loans intended
to be sold to secondary investors, and are in the process of being
delivered; and student loans held for sale. The increase of 24.5% is due to
timing of loans made in the prior year as compared to the current year.
Agricultural Loans. Agricultural loans are typically made to farmers, small
corporate farms, and feed and grain dealers. Agricultural loans were $54.7
million as of December 31, 1998, compared to $37.8 million as of December 31,
1997, an increase of $16.9 million, or 44.9%. Agricultural loans as a percent of
total loans increased from 6.82% in 1997 to 7.45% in 1998. This increase is due
to the fact that Banks acquired under purchase transactions in 1998 held a
disproportionately higher balance in agricultural loans than the Banks owned
at December 31, 1997.
Consumer and Other Loans. Loans classified as consumer and other loans include
automobile, residential, other personal loans and credit card loans. The
majority of these are installment loans with fixed interest rates. Consumer and
other loans were $79.9 million as of December 31, 1998, compared to $52.8
million as of December 31, 1997, an increase of $27.1 million, or 51.4%.
Consumer and other loans represented 10.88% of total loans as of December 31,
1998, an increase from 9.54% as of December 31, 1997. These increases are
primarily due to a $19.2 million increase in consumer lending in Johnson County,
Kansas.
The following table presents the balance of each major category of the
Company's loans as of December 31 of each year.
1998 1997 1996 1995 1994
----------------------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount % Amount %
----------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Commercial $191,325 26.06% $152,541 27.57% $109,745 26.54% $82,729 25.35% $68,981 25.10%
Real estate construction 50,696 6.91% 61,967 11.20% 38,608 9.34% 26,024 7.97% 43,249 15.74%
Real estate (1) 352,072 47.96% 243,884 44.08% 195,556 47.28% 146,031 44.75% 87,080 31.69%
Loans held for sale 5,425 0.74% 4,359 0.79% 4,934 1.19% 9,631 2.95% 1,786 0.65%
Agricultural 54,698 7.45% 37,753 6.82% 21,805 5.27% 20,798 6.37% 23,332 8.49%
Consumer and other loans
other loans 79,900 10.88% 52,763 9.54% 42,932 10.38% 41,139 12.61% 50,398 18.34%
---------------------------------------------------------------------------------------------------------
Total loans 734,116 100.00% 553,267 100.00% 413,580 100.00% 326,352 100.00% 274,826 100.00%
Less allowance
for loan losses 10,752 7,736 5,322 4,486 3,678
==========================================================================================================
Total 723,364 $545,531 $408,258 $321,866 $271,148
==========================================================================================================
(1) Includes commercial real estate loans, agriculture real estate
loans and 1 to 4 family residential real estate loans.
31
The following table sets forth the repricing of portfolio loans outstanding at
December 31, 1998.
After 3
Months But After 1 Year
In 3 Months Before But Before After 5
Or Less 1 year 5 years Years Total
- - -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Loan category:
Commercial $ 70,730 $ 30,308 $ 78,840 $ 11,447 $ 191,325
Real estate construction 43,093 6,363 1,156 84 50,696
Real estate 130,788 63,702 125,718 31,864 352,072
Loans held for sale 5,425 -- -- -- 5,425
Agricultural 20,290 19,170 11,944 3,294 54,698
Consumer and other 29,129 13,508 33,556 3,707 79,900
- - -------------------------------------------------------------------------------------------------------------------
Total loans $ 299,455 $ 133,051 $ 251,214 $ 50,396 $ 734,116
===================================================================================================================
As of December 31, 1998, loans repricing after one year include approximately
$211 million in fixed rate loans and $91 million in floating or adjustable rate
loans.
Asset Quality
The Company's asset quality compares favorably to its peer institutions. The
Company follows regulatory guidelines in placing loans on a non-accrual basis
and places loans with doubtful principal repayment on a non-accrual basis,
whether current or past due. The Company considers non-performing assets to
include all non-accrual loans, other loans past due 90 days or more as to
principal and interest (with the exception of those loans which in management's
opinion are well collateralized or exhibit other characteristics suggesting they
are collectible), other real estate owned ("OREO") and repossessed assets. The
Company does not return a loan to accrual status until it is brought current
with respect to both principal and interest and future principal payments are no
longer in doubt. When a loan is placed on non-accrual status, any previously
accrued and uncollected interest income is reversed against current income.
Restructured and impaired loans are considered insignificant for all periods
presented. The Company would have recorded additional interest in the amounts of
$197,000, $44,000 and $25,000 for the years ended December 31, 1998, 1997 and
1996, respectively, if non-accrual loans had been current during these periods.
32
Non-performing assets are summarized in the following table.
December 31,
1998 1997 1996 1995 1994
-----------------------------------------------------
(Dollars in Thousands)
Loans:
Loans 90 days or more past due still accruing $ 882 $ 102 $ 335 $ 87 $ 828
Non-accrual loans 2,818 1,047 372 1,889 189
-----------------------------------------------------
Non-performing loans 3,700 1,149 707 1,976 1,017
Other assets 78 44 5 39 0
Other real estate owned 1,484 723 70 170 294
=====================================================
Non-performing assets $ 5,262 $ 1,916 $ 782 $ 2,185 $ 1,311
=====================================================
Non-performing loans as a percentage
of total loans 0.50% 0.21% 0.17% 0.61% 0.37%
=====================================================
Non-performing assets as a percentage
of total assets 0.47% 0.23% 0.12% 0.41% 0.29%
=====================================================
Non-performing assets as a percentage of total
loans and OREO 0.72% 0.35% 0.19% 0.67% 0.48%
=====================================================
Allowance for Loan Losses
The success of a bank depends to a significant extent upon the quality of its
assets, particularly loans. This is highlighted by the fact that net loans are
65.09% of the Company's total assets as of December 31, 1998. Credit losses are
inherent in the lending business. The risk of loss will vary with general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and the quality of the collateral in the case
of a collateralized loan, among other things. Management maintains an allowance
for loan losses based on industry standards, management's experience, historical
experience, an evaluation of economic conditions and regular reviews of
delinquencies and loan portfolio quality. Based upon such factors, management
makes various assumptions and judgments about the ultimate collectability of the
loan portfolio and provides an allowance for potential loan losses based upon a
percentage of the outstanding balances and for specific loans if their ultimate
collectability is considered questionable. Since certain lending activities
involve greater risks, the percentage applied to specific loan types may vary.
The Company actively manages its past due and non-performing loans in each Bank
in an effort to minimize credit losses, and monitors asset quality to maintain
an adequate loan loss allowance. Although management believes its allowance for
loan losses is adequate for each Bank and collectively, there can be no
assurance that the allowance will prove sufficient to cover future loan losses.
Further, although management uses the best information available to make
determinations with respect to the allowance for loan losses, future adjustments
may be necessary if economic conditions differ substantially from the
assumptions used, or adverse developments arise with respect to non-performing
or performing loans. Accordingly, there can be no assurance that the allowance
for loan losses will be adequate to cover loan losses or that significant
increases to the allowance will not be required in the future if economic
conditions should worsen. Material additions to the allowance for loan losses
would result in a decrease of the Company's net income and capital and could
result in the inability to pay dividends, among other adverse consequences.
The allowance for loan losses on December 31, 1998, totaled $10.8 million, or
1.5% of outstanding loans, compared to $7.7 million or 1.4% at December 31,
1997. Charge-offs were $1.8 million, recoveries were $449,000, and provisions
charged to expense were $2.8 million. In addition, allowance for loan losses of
acquired banks were $1.6 million. The allowance for loan losses on December 31,
1997, totaled $7.7 million, a $2.4 million increase from the prior year.
Charge-offs were $1.0 million, recoveries were $481,000, and provisions charged
to expenses were $2.1 million. In addition, allowance for loan losses of
acquired banks aggregated $808,000.
33
The following table sets forth activity in the Company's allowance for loan
losses during the periods indicated.
Year Ended December 31,
1998 1997 1996 1995 1994
-----------------------------------------------------
(Dollars in Thousands)
Total net loans outstanding at the end of period $723,364 $545,531 $408,258 $321,866 $271,148
=====================================================
Average net loans outstanding during the period 642,598 489,314 361,775 295,350 240,290
=====================================================
Allowance for loan losses, beginning of period 7,736 5,322 4,486 3,678 2,485
Charge-offs:
Commercial 315 639 397 542 137
Real estate construction 80 - 24 - -
Real estate 835 111 32 17 27
Agricultural - 2 99 260 88
Consumer and other 583 253 195 444 139
-----------------------------------------------------
Total charge-offs 1,813 1,005 747 1,263 391
-----------------------------------------------------
Recoveries:
Commercial 131 351 98 10 164
Real estate construction - - 11 - -
Real estate 85 54 107 58 30
Agricultural 141 28 27 58 25
Consumer and other 92 48 78 133 56
-----------------------------------------------------
Total recoveries 449 481 321 259 275
-----------------------------------------------------
Net charge-offs (recoveries) 1,346 524 426 1,004 116
Provision charged to operations 2,781 2,130 1,262 1,812 581
Adjustments due to mergers and sales 1,599 808 - - 728
-----------------------------------------------------
Allowance for loan losses, end of period $10,752 $7,736 $5,322 $4,486 $3,678
=====================================================
Ratios:
Net charge-offs to average loans outstanding .21% 0.10% .12% .34% .05%
Allowance for loan losses to loans, end of period 1.46% 1.40% 1.29% 1.37% 1.34%
Allowance for loan losses to non-performing loans 290.59% 673.28% 752.76% 227.02% 361.65%
The following table sets forth the allocation of the Company's allowance for
loan losses among categories of loans.
As of December 31, 1998
Percent of Loans
in Each Category to
Amount Total Loans
---------------------------------------
(Dollars in Thousands)
Commercial $ 2,802 26.1%
Real estate construction 743 6.9%
Real estate 5,236 48.7%
Agricultural 801 7.4%
Consumer and other 1,170 10.9%
--------------------------------
Total $ 10,752 100.0%
=================================
Investment Activities
The Company's investment portfolio serves three important functions: First, it
facilitates the adjustment of the balance sheet's sensitivity to changes in
interest rate movements; second, it provides an outlet for investing excess
funds; and third, it provides liquidity. The investment portfolio is structured
to maximize the return on invested funds within conservative risk management
guidelines.
34
The portfolio is comprised primarily of available for sale securities, which
include U.S. Treasury securities, U.S. government agency obligations, state
municipal obligations, Federal Reserve Bank stock, FNMA stock, and FHLB stock.
The U.S. government agency obligations include Federal Home Loan Mortgage
Corporation ("FHLMC"), FNMA notes and mortgage-backed securities, FHLB notes and
Government National Mortgage Association ("GNMA") mortgage-backed securities. As
of December 31, 1998, the available for sale portfolio totaled $225.5 million,
including a net unrealized gain of $591,000.
The investment portfolio increased $65.0 million, or 39.6%, during 1998. Of this
increase, $47.9 million or 73.7% can be attributed to purchase transactions
completed in 1998, and $17.1 million of the increase is the result of increased
activity at certain Banks. The investment portfolio increased $15.8 million, or
10.7%, during 1997. The 1997 increase is primarily due to increased activity at
Citizens Bank of Tulsa and First State Bank and Trust Company. Both banks were
acquired as poolings-of-interests in 1998.
The composition of the investment portfolio as of December 31, 1998 was 46.3%
U.S. Treasury and agency securities, 16.6% state and municipal securities, 31.7%
mortgage-backed securities, 1.7% trading securities and 3.7% other securities.
The comparable distribution for December 31, 1997 was 64.7% U.S. Treasury and
agency securities, 12.0% state and municipal securities, 19.9% mortgage-backed
securities, 1.0% trading securities and 2.4% other securities. The estimated
maturity of the investment portfolio on December 31, 1998 was two years and two
months. The average balance of the investment portfolio as of December 31, 1998
represented 22.2% of average earning assets as compared to 23.6% on December 31,
1997.
The following table sets forth the composition of the Company's investment
portfolio at the dates indicated.
At December 31,
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Securities held to maturity: (1)
U.S. Treasury and other U.S. agencies and corporations $ -- $ - $ 77
Obligations of states and political subdivisions 63 617 732
Mortgage-backed securities -- -- --
- - ------------------------------------------------------------------------------------------------------------
Total $ 63 $ 617 $ 809
- - ------------------------------------------------------------------------------------------------------------
Securities available for sale: (2)
U.S. Treasury and other U.S. agencies and corporations $ 106,326 $ 106,375 $ 85,152
Obligations of states and political subdivisions 38,085 19,683 20,636
Mortgage-backed securities 72,644 32,774 38,585
Other (3) 8,551 4,014 3,455
- - ------------------------------------------------------------------------------------------------------------
Subtotal 225,606 162,846 147,828
Trading (4) $ 3,851 $ 1,072 $ -
- - ------------------------------------------------------------------------------------------------------------
Total investment securities $ 229,520 $ 164,535 $ 148,637
- - ------------------------------------------------------------------------------------------------------------
(1) Held to maturity securities are carried on the Company's books at
amortized cost.
(2) Available for sale securities are carried on the Company's books at
fair value.
(3) Includes FHLB stock, Federal Reserve stock and FNMA stock.
(4) Trading securities are carried on the Company's books at fair
value.
35
The following table sets forth a summary of maturities in the investment
portfolio at December 31, 1998.
At December 31, 1998
(At market value)
Over One Year Over 5 Years
One year or less through 5 years through 10 years Over 10 years Total
- - -------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- - -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
U.S. Treasury and other U.S.
agencies and corporations $ 36,615 5.77% $64,437 5.87% $ 5,274 6.26% $ -- -- $106,326 5.83%
Obligations of states and
political subdivisions 3,817 7.35% 11,176 7.22% 16,301 6.76% 6,854 6.91% 38,148 7.00%
Mortgage-backed securities 45,908 5.57% 24,196 6.13% 1,834 6.18% 706 6.29% 72,644 5.78%
Other 8,551 3.77% -- -- -- -- -- -- 8,551 3.77%
----------------------------------------------------------------------------------------
Total $ 94,891 $99,809 $ 23,409 $ 7,560 $225,669 5.93%
========================================================================================
The above table does not include trading securities of $3,851,000, as those
securities do not have a stated yield or maturity.
Deposit Activities
Deposits are the major source of the Banks' funds for lending and other
investment purposes. In addition to deposits, the Banks derive funds from
interest payments, loan principal payments, loan and securities sales, and funds
from operations. Scheduled loan repayments are a relatively stable source of
funds, while deposit inflows are significantly influenced by general interest
rates and money market conditions. The Banks may use borrowings on a short-term
basis, if necessary, to compensate for reductions in the availability of other
sources of funds; or borrowings may be used on a longer-term basis for general
business purposes.
Deposits are attracted principally from within the Banks' primary market area
through the offering of a broad variety of deposit instruments, including
checking accounts, money market accounts, savings accounts, certificates of
deposit (including jumbo certificates in denominations of $100,000 or more), and
retirement savings plans. The Banks have aggressively attempted to obtain
deposits in selected markets to increase market share or meet particular
liquidity needs. The Company has not used brokered deposits and has not sought
to attract deposits outside its market areas.
Maturity terms, service fees and withdrawal penalties are established by the
Banks on a periodic basis. The determination of rates and terms is predicated on
funds transaction and liquidity requirements, rates paid by competitors, growth
goals and federal obligations.
During 1998, average balances of non-interest bearing demand deposits increased
$20.9 million, or 32.4%; average balances of savings and interest bearing
deposits increased $67.1 million, or 33.2%; and average balances of time
deposits increased $92.5 million, or 25.1%. As of December 31, 1998, the balance
of total deposits had increased $229.5 million compared to December 31, 1997.
This increase is primarily due to increases of $91.4 million in time deposits
less than $100,000 and $78.7 million in savings and NOW accounts. Of the
increase in year-end balances of all deposits, $130.0 million, or 56.6%, is due
to purchase transactions completed during 1998. The remaining increase is
primarily the result of increased activity at certain Banks.
36
The following table sets forth the average balances and weighted average rates
for the Company's categories of deposits at the dates indicated.
Year Ended December 31,
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------
Average Average % of Total Average Average % of Total Average Average % of Total
Balance Rate Deposits Balance Rate Deposits Balance Rate Deposits
- - ------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Non-interest checking $ 85,629 0.00% 10% $ 64,681 0.00% 10% $ 45,697 0.00% 9%
Savings deposits and
interest-bearing checking 269,639 3.46% 33% 202,470 3.27% 32% 145,625 3.23% 29%
Certificates of deposit 460,841 5.55% 57% 368,339 5.31% 58% 314,824 5.60% 62%
- - ------------------------------------------------------------------------------------------------------------------------------
Total $816,109 100% $ 635,490 100% $ 506,146 100%
- - ------------------------------------------------------------------------------------------------------------------------------
The Company does not have a concentration of deposits from any one source, the
loss of which would have a material adverse effect on its business. Management
believes that substantially all of the Banks' depositors are residents in their
respective primary market areas.
The following table sets forth a summary of the deposits of the Company at the
dates indicated:
December 31,
1998 1997 1996
---------------------------------------
(Dollars in Thousands)
Non-interest-bearing $ 101,287 $ 76,846 $ 56,313
Interest-bearing:
Savings and NOW accounts 305,065 226,366 161,052
Time accounts less than $100,000 406,087 314,657 266,920
Time accounts greater than $100,000 114,248 79,294 65,222
---------------------------------------
Total deposits $ 926,687 $ 697,163 $ 549,507
The following table summarizes at December 31, 1998, the Company's certificates
of deposit of $100,000 or more by time remaining until maturity.
$100,000 or greater
-----------------------
(Dollars in Thousands)
Maturity Period:
Less than three months $ 48,291
Over three months through six months 21,267
Over six months through twelve months 25,393
Over twelve months 19,297
-----------------------
Total $114,248
=======================
The Company has no other time deposits in excess of $100,000.
Capital and Liquidity
Sources of Liquidity. Liquidity defines the ability of the Company and the Banks
to generate funds to support asset growth, satisfy other disbursement needs,
meet deposit withdrawals and other fund reductions, maintain reserve
requirements and otherwise operate on an ongoing basis. The immediate liquidity
needs of the Banks are met primarily by Federal Funds sold, short-term
investments, deposits and the generally predictable cash flow (primarily
repayments) from each Bank's assets. Intermediate term liquidity is provided by
the Banks' investment portfolios. The Banks also have established a credit
facility with the FHLB, under which the Banks are eligible for short-term
advances and long-term borrowings secured by real estate loans or
mortgage-related investments. The Company's liquidity needs and funding are
provided through non-affiliated bank borrowing,
37
cash dividends and tax payments from its subsidiary Banks. As described in note
8 to the financial statements, the Company has a $15 million line of credit with
outstanding borrowings of $7 million at year-end.
Capital. The Company and its subsidiaries actively monitor their compliance with
regulatory capital requirements. The elements of capital adequacy standards
include strict definitions of core capital and total assets, which include
off-balance sheet items such as commitments to extend credit. Under the
risk-based capital method of capital measurement, the ratio computed is
dependent on the amount and composition of assets recorded on the balance sheet
and the amount and composition of off-balance sheet items, in addition to the
level of capital. Historically, the Banks have increased core capital through
retention of earnings or capital infusions. Each Bank's ability to incur
additional indebtedness or to issue or pay dividends on common stock may be
limited by regulatory policies and the terms of the outstanding securities.
At December 31, 1998, the Company's Tier 1 risk-based capital, total risk-based
capital and leverage ratios were 12.03%, 13.42% and 8.80%, respectively,
compared to minimum required levels of 4%, 8% and 4%, respectively (subject to
change and the discretion of regulatory authorities to impose higher standards
in individual cases).
Impact of Inflation and Changing Prices
The primary impact of inflation on the operations of the Company is reflected in
increased operating costs. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature. As
a result, changes in interest rates have a more significant impact on the
performance of a financial institution than do changes in the general rate of
inflation and changes in prices. Interest rate changes do not necessarily move
in the same direction or have the same magnitude as changes in the prices of
goods and services.
Accounting and Financial Reporting
The Financial and Accounting Standards Board (FASB) has issued SFAS No. 132,
Employers' Disclosures about Pensions and Other Postretirement Benefits; SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities; and SFAS
No. 134, Accounting for Mortgage Backed Securities Retained after
Securitization. SFAS No. 132 standardizes the disclosure requirements for
pensions and other post-retirement 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. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and hedging
activities. This statement requires that entities recognize all derivatives as
either assets or liabilities in the statement of condition and measure such
instruments at fair value. SFAS No. 134 establishes accounting and reporting
standards for certain activities of mortgage banking enterprises and other
enterprises that conduct operations similar to mortgage banking enterprises.
This statement requires that retained mortgage-backed securities be classified
in accordance with FASB 115. The adoption of the standards is not expected to
have a significant impact on the financial statements of the Company.
Year 2000 Initiatives
State of Readiness
In response to potential Year 2000 transition issues for computer and
environmental systems, the Company continues to actively address these issues as
they relate to the Company's subsidiaries and corporate systems. The Company is
in the process of implementing permanent solutions, rather than waiting until
potential problems develop. A task force began work on identifying and assessing
potential issues in 1997, and the Company is currently evaluating hardware and
software solutions. Resources have been allocated for hardware systems and
software, as needed, at each of the Company's subsidiaries.
Year 2000 issues are also being addressed as they relate to the Company's
hardware, information processing systems, environmental systems and the
Company's vendors and customers. All of these issues are contained
38
within the Company's timeline for Year 2000 compliance. The Company's timeline
for Year 2000 compliance schedules each material element of Year 2000 compliance
within regulatory guidelines. Present progress indicates that the Company will
comply with its timeline. The Company has completed the awareness and assessment
phases of its preparation for the year change from 1999 to 2000, has
substantially completed renovation and validation and has begun implementation.
Estimated Costs
Expenses associated with this issue are expensed as incurred. As of December 31,
1998, the Company had incurred approximately one-half of its projected year 2000
related expenses. The Company projects its actual expenditures will total
approximately $1,000,000. Included in this amount are items such as computer
hardware and software that may carry three-to five-year depreciable lives.
Risks
As with other financial institutions, the Company engages in a significant
amount of business and reporting activity that depends on accurate date
information, such as interest and other calculations pertaining to loans,
deposits, assets and investments. As a result, Year 2000 problems could result
in a system failure or miscalculations that disrupt operations. Most of the
Company Banks are scheduled to convert their core data processing from their
current providers to Bankline Midamerica, Inc. As of December 31, 1998, two
Banks had completed the conversion. The Company does not expect to convert any
of the remaining eight Banks later than the third quarter of 1999. Management
believes the Company's principal risk relating to Year 2000 issues lies in the
potential inability of Bankline Midamerica's data processing system to process
date sensitive information involving the Year 2000. The Company has tested the
system and the results indicate the Company should expect few, if any, problems.
Although the Company does not expect Year 2000 issues to have a material adverse
effect on its internal operations, it is possible that Year 2000 issues could
have a material adverse effect on (i) the Company's service providers, including
Bankline Midamerica, and their ability to service the Company; and (ii) the
Company's customers in their ability to continue to utilize the Company's
services. The cumulative effect of such problems, if they occur, could have a
material adverse effect on the Company.
Contingency Plans
The Company is uncertain whether possible Year 2000 noncompliance will have a
material effect on its operations, liquidity or financial position. The most
significant worst case scenario would involve Year 2000 noncompliance by
Bankline Midamerica, Inc., to whose data processing system the Banks will
convert during 1999. The Company is monitoring Bankline Midamerica Inc.'s
progress toward Year 2000 compliance, and has tested the system as described
above.
The Company's subsidiaries have developed remediation contingency plans for all
mission-critical vendors. The remediation contingency plans contain readiness
dates by which the Company plans to validate Year 2000 compliance. In the event
a particular vendor's readiness can not be validated by the readiness date, the
pertinent remediation contingency plan will be implemented.
Also, the Company's subsidiaries have developed business resumption contingency
plans. These plans are incorporated into or work in coordination with each
subsidiary's existing disaster recovery plan. The business resumption issues
relating directly to the year change from 1999 to 2000 are addressed in these
plans.
39
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asset/Liability Management
Asset/liability management refers to management's efforts to minimize
fluctuations in net interest income caused by interest rate changes. This is
accomplished by managing the repricing of interest rate sensitive interest
earning assets and interest bearing liabilities. An interest rate sensitive
balance sheet item is one that is able to reprice quickly, through maturity or
otherwise. Controlling the maturity or repricing of an institution's liabilities
and assets in order to minimize interest rate risk is commonly referred to as
gap management. Close matching of the repricing of assets and liabilities will
normally result in little change in net interest income when interest rates
change. A mismatched gap position will normally result in changes in net
interest income as interest rates change.
Along with internal gap management reports, the Company and the Banks
use an asset/liability modeling service to analyze each Bank's current gap
position. The system simulates the Banks' asset and liability base and projects
future net interest income results under several interest rate assumptions. The
Company strives to maintain an aggregate gap position such that changes in
interest rates will not affect net interest income by more than 10% in any
twelve month period. The Company has not engaged in derivatives transactions for
its own account.
40
The following table indicates that, at December 31,1998, if there had
been a sudden and sustained increase in prevailing market interest rates, the
Company's 1999 net interest income would be expected to increase, while a
decrease in rates would indicate a decrease in income.
Changes in Net Interest Percent
Interest Rates Income Change Change
- - -------------- ------------ ------ -------
200 basis point rise $42,970,500 $4,119,600 10.60%
100 basis point rise 41,133,500 2,282,000 5.88%
Base Rate Scenario 38,850,900
100 basis point decline 37,759,000 (1,091,900) -2.81%
200 basis point decline 36,215,300 (2,635,000) -6.78%
The following table indicates that, at December 31,1997, if there had
been a sudden and sustained increase in prevailing market interest rates, the
Company's 1998 net interest income would have increased, while a decrease in
rates would have caused a decrease in income.
Changes in Net Interest Percent
Interest Rates Income Change Change
- - -------------- ------------ ------ -------
200 basis point rise $ 19,014,400 $ 755,800 4.14%
100 basis point rise 18,628,600 370,000 2.03%
Base Rate Scenario 18,258,600
100 basis point decline 17,669,400 (589,200) -3.23%
200 basis point decline 17,098,000 (1,160,600) -6.36%
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Independent Auditors' Report
The Board of Directors
Gold Banc Corporation, Inc.:
We have audited the accompanying consolidated balance sheets of Gold Banc
Corporation, Inc. and subsidiaries (the Company) as of December 31, 1998 and
1997 and the related consolidated statements of earnings, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We
did not audit the financial statements of First State Bank and Trust Co.
(First State) for 1997 or 1996. Those statements reflect total assets
constituting 13% at December 31, 1997 and total revenues constituting 14% and
15% in 1997 and 1996, respectively, of the related consolidated totals.
Additionally, we did not audit the financial statements of Peoples National
Bank (Peoples) for 1996. Those statements reflect total revenues constituting
11% in 1996 of the related consolidated totals. Those financial statements
were audited by other auditors whose reports have been furnished to us, and
our opinion, insofar as it relates to the amounts included for First State
and Peoples, is based solely on the report of the other auditors.
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 consolidated financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Gold Banc Corporation, Inc. and
subsidiaries as of December 31, 1998 and 1997 and the results of their
operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Kansas City, Missouri
February 12, 1999
42
GOLD BANC CORPORATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(Dollars in thousands)
Assets 1998 1997
------------- -----------
Cash and due from banks $ 36,305 29,187
Federal funds sold and interest bearing deposits 62,798 49,082
------------- -----------
Total cash and cash equivalents 99,103 78,269
------------- -----------
Investment securities (note 3):
Available for sale 225,606 162,846
Held to maturity 63 617
Trading 3,851 1,072
------------- -----------
Total investment securities 229,520 164,535
------------- -----------
Mortgage and student loans held for sale, net 5,425 4,358
Loans, net (note 4) 717,939 541,172
Premises and equipment, net (note 5) 26,183 20,227
Goodwill, net 13,328 3,205
Accrued interest and other assets 19,858 12,698
------------- -----------
782,733 581,660
------------- -----------
Total assets $ 1,111,356 824,464
============= ===========
see accompanying notes to consolidated financial statements.
43
GOLD BANC CORPORATION, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(Dollars in thousands)
Liabilities and Stockholders' Equity 1998 1997
-------------- -----------
Liabilities:
Deposits (note 6) $ 926,687 697,163
Securities sold under agreements to repurchase (note 7) 6,644 6,516
Federal funds purchased and other short term borrowings
(note 8) 7,568 13,550
Guaranteed preferred beneficial interests in Company's
debentures 28,750 28,750
Long term debt (note 9) 49,958 6,424
Accrued interest and other liabilities 7,938 5,495
-------------- -----------
Total liabilities 1,027,545 757,898
-------------- -----------
Stockholders' equity (notes 11 and 14):
Preferred stock, no par value; 25,000,000 shares authorized,
no shares issued -- --
Common stock, $1 par value; 25,000,000 shares authorized,
17,181,618 and 15,890,047 shares issued and outstanding
at December 31, 1998 and 1997, respectively 17,182 15,890
Additional paid in capital 29,200 20,529
Retained earnings 37,235 30,028
Accumulated other comprehensive income, net 391 355
Unearned compensation (note 11) (197) (236)
-------------- -----------
Total stockholders' equity 83,811 66,566
Commitments and contingent liabilities (note 16)
-------------- -----------
Total liabilities and stockholders' equity $ 1,111,356 824,464
============== ===========
See accompanying notes to consolidated financial statements.
44
GOLD BANC CORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands, except per share data)
1998 1997 1996
---------- ---------- ---------
Interest income:
Loans, including fees $ 61,017 44,977 34,674
Investment securities 11,110 8,767 8,777
Other 3,069 1,787 1,201
---------- ---------- ---------
75,196 55,531 44,652
---------- ---------- ---------
Interest expense:
Deposits 34,931 26,175 22,336
Borrowings and other 4,657 1,800 1,946
---------- ---------- ---------
39,588 27,975 24,282
---------- ---------- ---------
Net interest income 35,608 27,556 20,370
Provision for loan losses (note 4) 2,781 2,130 1,262
---------- ---------- ---------
Net interest income after provision for loan losses 32,827 25,426 19,108
---------- ---------- ---------
Other income:
Service fees 3,275 2,446 1,982
Investment trading fees and commissions 3,265 -- --
Net gains on sale of mortgage loans 1,106 679 1,128
Net securities gains 94 116 --
Unrealized gains (losses) on trading securities (399) 229 --
Gain (loss) on sale of other assets (85) 203 297
Other 1,522 1,080 772
---------- ---------- ---------
8,778 4,753 4,179
---------- ---------- ---------
Other expense:
Salaries and employee benefits 13,307 8,884 8,301
Net occupancy expense (note 5) 3,023 2,145 1,571
Outside services 3,065 1,340 1,000
Data processing 1,115 677 633
Advertising 1,124 728 549
Federal deposit insurance premiums (note 6) 103 95 551
Other 6,342 3,609 3,442
---------- ---------- ---------
28,079 17,478 16,047
---------- ---------- ---------
Earnings before income taxes 13,526 12,701 7,240
Income tax expense (note 10) 1,607 2,827 2,334
---------- ---------- ---------
Net earnings $ 11,919 9,874 4,906
========== ========== =========
Net earnings per share - basic and diluted $ .71 .64 .45
========== ========== =========
Pro forma net earnings and earnings per share data (notes 1 and 10):
Earnings before income taxes $ 13,526 12,701
Pro forma income tax expense 4,404 4,406
---------- ----------
Pro forma net earnings $ 9,122 8,295
========== ==========
Pro forma earnings per common share:
Basic $ .55 .54
Diluted .55 .54
========== ==========
See accompanying notes to consolidated financial statements.
45
GOLD BANC CORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands)
Accumulated
Additional other
Preferred Common paid in Retained comprehensive Unearned
stock stock capital earnings income compensation Total
-------- -------- --------- ------------------------ ----------------------
Balance at December 31, 1995 $ 65 10,730 1,644 15,969 467 -- 28,875
-------- -------- --------- -------- -------------- ------------ --------
Net income -- -- -- 4,906 -- -- 4,906
Change in unrealized loss on available for sale
securities -- -- -- -- (544) -- (544)
-------- -------- --------- -------- -------------- ------------ --------
Total comprehensive income -- -- -- 4,906 (544) -- 4,362
-------- -------- --------- -------- -------------- ------------ --------
Purchase and retirement of 3,922 shares of
common stock -- -- (12) -- -- -- (12)
Capital contribution -- -- 2,250 -- -- -- 2,250
Conversion of 65 shares of preferred stock into (65) 28 37 -- -- -- --
28,096 shares of common stock
Redemption and retirement of 29,640 shares of
common stock -- (14) (120) -- -- -- (134)
Issuance of 4,600,000 shares in initial public
offering of common
stock, net of issuance costs of $1,942 -- 4,600 13,522 -- -- -- 18,122
Purchase of 63,776 shares of common stock for the
employee stock ownership plan -- -- -- -- -- (276) (276)
Dividends paid -- -- -- (68) -- -- (68)
-------- -------- --------- -------- -------------- ------------ --------
Balance at December 31, 1996 -- 15,344 17,321 20,807 (77) (276) 53,119
-------- -------- --------- -------- -------------- ------------ --------
Net income -- -- -- 9,874 -- -- 9,874
Change in unrealized gain on available for sale 432
securities -- -- -- -- 432 --
-------- -------- --------- -------- -------------- ------------ --------
Total comprehensive income -- -- -- 9,874 432 -- 10,306
-------- -------- --------- -------- -------------- ------------ --------
Issuance of 546,000 shares of common stock in
purchase business combinations -- 546 3,208 -- -- -- 3,754
Reduction of unearned compensation -- -- -- -- -- 40 40
Dividends paid -- -- -- (653) -- -- (653)
-------- -------- --------- -------- -------------- ------------ --------
Balance at December 31, 1997 -- 15,890 20,529 30,028 355 (236) 66,566
-------- -------- --------- -------- -------------- ------------ --------
Net income -- -- -- 11,919 -- -- 11,919
Change in unrealized gain on available for sale
securities -- -- -- -- 36 -- 36
-------- -------- --------- -------- -------------- ------------ --------
Total comprehensive income -- -- -- 11,919 36 -- 11,955
-------- -------- --------- -------- -------------- ------------ --------
Issuance of 1,292,000 shares of common stock in
purchase business combinations -- 1,292 8,671 -- -- -- 9,963
Reduction of unearned compensation -- -- -- -- -- 39 39
Dividends paid -- -- -- (4,712) -- -- (4,712)
-------- -------- --------- -------- -------------- ------------ --------
Balance at December 31, 1998 $ -- 17,182 29,200 37,235 391 (197) 83,811
======== ======== ========= ======== ============== ============ ========
See accompanying notes to consolidated financial statements.
46
GOLD BANC CORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands)
1998 1997 1996
------------ ----------- ----------
Cash flows from operating activities:
Net earnings $ 11,919 9,874 4,906
Adjustments to reconcile net earnings to net cash provided by
(used in) operating activities, net of purchase acquisitions:
Provision for loan losses 2,781 2,130 1,262
Gains on sales of securities (94) (116) --
Amortization of investment securities' premiums, net of accretion (733) (12) 272
Depreciation and amortization 2,169 1,555 1,240
Gain on sale of assets, net (85) (215) (367)
Net (increase) decrease in trading securities 663 (829) --
Unrealized (gains) losses on trading securities 399 (229) --
Net (increase) decrease in mortgage loans held for sale (1,066) 1,324 4,483
Other changes:
Accrued interest receivable and other assets (4,009) (971) (313)
Accrued interest payable and other liabilities (1,196) 737 363
--------- ----------- ------------
Net cash provided by operating activities 10,748 13,248 11,846
--------- ----------- ------------
Cash flows from investing activities:
Net increase in loans (95,010) (114,015) (92,267)
Principal collections and proceeds from maturities of held to maturity 554 192 133
securities
Principal collections and proceeds from sales and maturities of
available for sale securities 43,564 58,968 56,237
Purchases of available for sale securities (61,439) (56,639) (64,761)
Purchases of held to maturity securities -- -- (342)
Net additions to premises and equipment (5,072) (3,813) (5,645)
Proceeds from sale of other assets 111 421 961
Cash received in acquisitions, net of cash paid 3,579 362 --
--------- ----------- ------------
Net cash used in investing activities (113,713) (114,524) (105,684)
--------- ----------- ------------
Cash flows from financing activities:
Increase in deposits 99,542 104,817 83,181
Proceeds from long term debt 47,736 914 --
Principal payment on long term debt (5,444) (3,975) (8,175)
Proceeds from issuance of guaranteed preferred beneficial interests
in Company's debentures -- 28,750 --
Purchase of treasury stock -- -- (146)
Proceeds from issuance of common stock, net of costs -- -- 18,122
Capital contribution -- -- 2,250
Increase (decrease) in repurchase agreements (2,225) 550 (6,187)
Increase (decrease) in federal funds purchased, advances, and other
short term borrowings (11,098) 1,523 7,087
Dividends paid (4,712) (653) (68)
--------- ----------- ------------
Net cash provided by financing activities 123,799 131,926 96,064
--------- ----------- ------------
Increase in cash and cash equivalents 20,834 30,650 2,226
Cash and cash equivalents, beginning of year 78,269 47,619 45,393
--------- ----------- ------------
Cash and cash equivalents, end of year $ 99,103 78,269 47,619
========= =========== ============
(Continued)
See accompanying notes to consolidated financial statements.
47
GOLD BANC CORPORATION, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1998, 1997, and 1996
(Dollars in thousands)
1998 1997 1996
---------- --------- ----------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 39,120 26,752 23,953
========= ========= ===========
Cash paid during the year for income taxes $ 1,522 1,941 2,641
========= ========= ===========
Supplemental schedule of noncash financing activities - issuance of 1,292,000
and 546,000shares of common stock for purchase business
combinations, respectively. $ 9,963 3,754 --
========= ========= ===========
Noncash activities related to purchase acquisitions:
Investing activities:
Increase in investments $ 47,949 17,498 --
Increase in loans 37 27,269 --
Increase in land, buildings, and equipment 2,539 474 --
Financing activities:
Increase in deposits 126,981 42,838 --
Increase in debt 8,751 1,762 --
========= ========= ===========
See accompanying notes to consolidated financial statements.
(1) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Gold Banc
Corporation, Inc. and its subsidiary banks and companies (the Company).
All significant intercompany transactions have been eliminated.
In May 1998, the Company announced a two for one stock split in the form
of a 100% stock dividend. Share and per share information for all years
presented has been restated for the split.
Acquisitions
During 1998 and 1997, the Company completed a total of ten acquisitions
of banks and other financial service companies. The prior period
consolidated financial statements have been restated to include the
acquisitions accounted for by the pooling method. For acquisitions
accounted for as purchases, the consolidated financial statements
include the results of operations of acquired companies from the dates
of acquisition.
Nature of Operations
The Company is a multibank holding company that owns and operates
community banks located in Kansas, Missouri, and Oklahoma. The banks
provide a full range of commercial and consumer banking services
primarily to small and medium sized communities and the surrounding
market areas, including suburban Kansas City. In addition, the Company
owns and operates a full service broker/dealer and investment firm and a
trust company, both located in Missouri.
Initial Public Offering
Effective November 19, 1996, the Company completed an initial public
offering, selling 4,000,000 shares of its common stock at $4.38 per
share. Subsequently, the Company's underwriter exercised its over
allotment option and on December19, 1996, the Company sold an additional
600,000 shares at
48
$4.38 per share. Total expenses, including underwriter's discounts,
aggregated $1,942,000. The Company's shares are registered on the NASDAQ
under the symbol GLDB.
Guaranteed Preferred Beneficial Interests in Company's Debentures
On December 15, 1997, GBCI Capital Trust (the Trust), a Delaware
business trust wholly owned by the Company, completed the sale of $28.75
million of 8.75% Preferred Securities (the Preferred Securities). The
Trust used the net proceeds from the offering to purchase a like amount
of 8.75% Guaranteed Preferred Beneficial Interests in Company's
Debentures (the Debentures) of the Company. The Debentures are the sole
assets of the Trust and are eliminated, along with the related income
statement effects, in the consolidated financial statements. The Company
used the proceeds from the sale of the Debentures to retire certain debt
and for general corporate purposes. Total expenses associated with the
offering approximating $1,219,000 are included in other assets and are
being amortized on a straight line basis over the life of the
Debentures.
The Preferred Securities accrue and pay distributions quarterly at an
annual rate of 8.75% of the stated liquidation amount of $25 per
Preferred Security. The Company has fully and unconditionally guaranteed
all of the obligations of the Trust. The guarantee covers the quarterly
distributions and payments on liquidation or redemption of the Preferred
Securities, but only to the extent of funds held by the Trust.
The Preferred Securities are mandatorily redeemable upon the maturity of
the Debentures on December 31, 2027 or upon earlier redemption as
provided in the Indenture. The Company has the right to redeem the
Debentures, in whole or in part, on or after December 31, 2002 at a
redemption price specified in the Indenture plus any accrued but unpaid
interest to the redemption date.
Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Investment Securities
The Company classifies investment securities in one of three categories:
trading, available for sale, or held to maturity. Trading securities are
bought and held principally for the purpose of selling them in the near
term. Held to maturity securities are those which the Company has the
positive intent and ability to hold to maturity. All other securities
are classified as available for sale.
Held to maturity securities are recorded at amortized cost. Trading and
available for sale securities are recorded at fair value. Unrealized
holding gains and losses on trading securities are included in earnings.
Unrealized holding gains and losses, net of related tax effect, on
available for sale securities are excluded from earnings and are
reported as a separate component of stockholders' equity until realized.
Realized gains and losses upon disposition of available for sale
securities are included in income using the specific identification
method for determining the cost of the securities sold.
A decline in the market value of any security below cost that is deemed
other than temporary is charged to income, resulting in the
establishment of a new cost basis for the security. Premiums and
discounts are amortized or accreted over the life of the related
security as an adjustment to interest income. Dividend and interest
income is recognized when earned.
Mortgage and Student Loans Held for Sale
Mortgage and student loans originated and intended for sale in the
secondary market are carried at the lower of aggregate cost or estimated
fair value. Fees received on such loans are deferred and
49
recognized in income as part of the gain or loss on sale. Net unrealized
losses are recognized through a valuation allowance by charges to
income.
Loans
Loans receivable that management has the intent and ability to hold for
the foreseeable future or until maturity or payoff are reported at their
outstanding principal balance adjusted for any charge offs, the
allowance for loan losses, and any deferred fees or costs on originated
loans and unamortized premiums or discounts on purchased loans.
Interest income on loans is accrued and credited to operations based on
the principal amount outstanding. 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. Significant loan and commitment fee income and related costs
are deferred and amortized over the term of the related loan or
commitment.
Allowance for Loan Losses
Provisions for losses on loans receivable are based upon management's
estimate of the amount required to maintain an adequate allowance for
losses, relative to the risk in the loan portfolio. This estimate is
based on reviews of the loan portfolio, including assessment of the
estimated net realizable value of the related underlying collateral, and
upon consideration of past loss experience, current economic conditions,
and such other factors which, in the opinion of management, deserve
current recognition. Amounts are charged off as soon as probability of
loss is established, taking into consideration such factors as the
borrower's financial condition, underlying collateral, and guarantees.
Loans are also subject to periodic examination by regulatory agencies.
Such agencies may require charge offs or additions to the allowance
based upon their judgments about information available at the time of
their examination.
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight line and accelerated methods based on the estimated useful
lives of the related assets.
Goodwill
The excess cost over fair value of assets acquired of consolidated
subsidiaries is being amortized on a straight line basis over periods of
fifteen to forty years. When facts and circumstances indicate potential
impairment, the Company evaluates the recoverability of asset carrying
values, including goodwill, using estimates of undiscounted cash flows
over remaining asset lives. Any impairment loss is measured by the
excess of carrying values over fair values.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the
consolidated financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and are measured using
enacted tax rates expected to apply to taxable income in the years in
which those differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities for subsequent changes in
tax rates is recognized in the period that includes the tax rate change.
During 1998, the Company acquired one company, Citizens Bank of Tulsa,
which had been taxed as a Subchapter S corporation in 1997 and 1998. The
consolidated statements of earnings for those years include pro forma
tax expense, net earnings, and earnings per share as if that company had
been subject to income taxes at corporate rates. Distributions made by
the Company to its stockholders, to
50
provide for the payment of taxes by the stockholders on the earnings of
the Company, are recorded as dividends in the accompanying financial
statements.
Accounting Changes
The Company adopted Financial Accounting Standards Board (FASB) No.130,
Reporting Comprehensive Income, (SFAS 130) effective January1, 1998.
SFAS No.130 establishes standards for reporting comprehensive income and
its components (revenues, expenses, gains, and losses). Components of
comprehensive income are net income and all other nonowner changes in
equity. The statement requires than 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. Reclassification of
financial statements for earlier periods provided for comparative
purposes is required. The only component of comprehensive income
consists of unrealized holding gains and losses on available for sale
investment securities.
The Company adopted FASB Statement No.131, Disclosures About Segments of
an Enterprise and Related Information, (SFAS No.131) effective January1,
1998. This statement establishes standards for reporting information
about segments in annual and interim financial statements. SFAS No131
introduces a new model for segment reporting called the "management
approach." The management approach is based on the way the chief
operating decision maker organizes segments within the company for
making operating decisions and assessing performance. Reportable
segments are based on products and services, geography, legal structure,
management structure, and any other in which management disaggregates a
company. Based on the "management approach" model, the Company has
determined that its business is comprised of a single operating segment
and that SFAS No.131, therefore, has no impact on its consolidated
financial statements.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash
equivalents include cash on hand, amounts due from banks, federal funds
sold, and interest bearing deposits.
Earnings Per Share
Basic earnings per share is based upon the weighted average number of
common shares outstanding during the periods presented. Diluted earnings
per share include the effects of all dilutive potential common shares
outstanding during each period. The shares used in the calculation of
basic and diluted income per share are shown below (in thousands):
1998 1997 1996
---------- ---------- -----------
Weighted average common shares outstanding 16,566 15,482 11,237
Stock options 141 40 --
---------- ---------- -----------
16,707 15,522 11,237
========== ========== ===========
Future Accounting Pronouncements
The FASB issued SFAS No.133, Accounting for Derivative Financial
Instruments and Hedging Activities, in June 1998. This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. SFAS No.133 is effective for all
fiscal quarters of fiscal years beginning June15, 1999, may be adopted
early for periods beginning after issuance of the statement, and may not
be applied retroactively. The Company does not expect to adopt SFAS
No.133 early. The FASB issued SFAS No.134, Accounting for Mortgage
backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise, in October 1998. This
statement amends SFAS No.65 and requires that after the securitization
of mortgage loans held for sale, an entity
51
engaged in mortgage banking activities classify the resulting mortgage
backed securities or other retained interests based on its ability and
intent to sell or hold those investments. SFAS No.134 is effective for
the first fiscal quarter beginning after December15, 1998. The adoption
of SFAS No.133 and SFAS No.134 is not expected to have a material impact
on the Company's consolidated financial statements.
(2) Mergers and Acquisitions
During 1998 and 1997, the Company completed the following acquisitions:
Date of Total Method of
Company acquisition assets (1) accounting
Citizens Bank of Tulsa, Oklahoma December 1998 $ 225 Pooling
The Trust Company, St. Joseph, Missouri December 1998 1 Pooling
First State Bank & Trust Co., Pittsburg, Kansas October 1998 112 Pooling
Tri County National Bank, Washington, Kansas August 1998 44 Purchase
Peoples State Bank, Colby, Kansas August 1998 21 Pooling
Farmers State Bank, Sabetha, Kansas July 1998 48 Purchase
First National Bank in Alma, Kansas February 1998 30 Purchase
Midwest Capital Management January 1998 10 Purchase
Farmers National Bank, Oberlin, Kansas October 1997 54 Purchase
Peoples National Bank, Clay Center, Kansas August 1997 71 Pooling
(1) Assets at acquisition date, in millions.
Total consideration paid for the banks and companies acquired in 1998
using the purchase method aggregated $22,400,000, consisting of cash of
$12,500,000 and 1,292,000 shares of common stock. Total consideration
paid for the bank acquired in 1997 using the purchase method aggregated
$5,718,000, consisting of cash of $1,964,000 and 546,000 shares of
common stock. Goodwill recorded in connection with these acquisitions
aggregated $10,254,000 and $269,000 in 1998 and 1997, respectively.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and the companies acquired
through purchase transactions in 1998 as if those acquisitions had
occurred as of the beginning of 1997, after giving effect to certain
adjustments, including amortization of goodwill. The pro forma financial
information does not necessarily reflect the results of operations that
would have occurred had the Company and acquired entities constituted a
single entity during the periods (in thousands):
Year ended
December 31,
1998 1997
----------- -----------
Net interest income, after provision for loan losses $ 35,060 30,912
Net earnings $ 12,439 10,627
Basic net earnings per share $ .72 .63
The Company issued 5,745,000 shares in connection with the acquisition
of banks in 1998 using the pooling method. The results of operations
previously reported by each of the companies and the amounts presented
in the accompanying consolidated financial statements for the nine
months ended September30, 1998 and the years ended December31, 1997 and
1996 are summarized below (in thousands):
52
Nine months ended
September 30, Years ended
December 31,
1998 1997 1996
----------- ------------ -------------
Net interest income, after provision for loan losses:
Gold Banc Corporation, Inc. $ 14,627 14,445 11,359
First State Bank and Trust Co. 2,936 3,675 3,228
Citizens Bank of Tulsa 6,649 7,306 4,521
$ 24,212 25,426 19,108
Net income:
Gold Banc Corporation, Inc. $ 3,958 3,731 2,077
First State Bank and Trust Co. 971 1,258 1,051
Citizens Bank of Tulsa 5,109 4,885 1,778
$ 10,038 9,874 4,906
(3) Investment Securities
The amortized cost, gross unrealized gains and losses, and estimated
fair value of investment securities by major security type at
December31, 1998 and 1997 are as follows (in thousands):
Gross Gross Estimated
Amortized unrealized unrealized fair
1998 cost gains losses value
- - ------------------------------------- -------------- ------------- ------------- --------------
Held to maturity:
Obligations of states and
political subdivisions $ 63 -- -- 63
=============== ============= ============= ==============
Available for sale:
U. S. treasury and agency
securities $ 105,658 672 (4) 106,326
Obligations of states and
political subdivisions 37,465 620 -- 38,085
Mortgage backed securities 73,271 2 (629) 72,644
Other 8,621 6 (76) 8,551
---------------- ------------- ------------- --------------
Total $ 225,015 1,300 (709) 225,606
=============== ============= ============= ==============
Gross Gross Estimated
Amortized unrealized unrealized fair
1997 cost gains losses value
- - ------------------------------------- -------------- ------------- ------------- --------------
Held to maturity:
Obligations of states and
political subdivisions $ 617 1 -- 618
=============== ============= ============= ==============
Available for sale:
53
U. S. treasury and agency
securities $ 106,249 282 (91) 106,440
Obligations of states and
political subdivisions 19,273 423 (13) 19,683
Mortgage backed securities 32,878 107 (211) 32,774
Other 3,949 -- -- 3,949
---------------- ------------- ------------- --------------
Total $ 162,349 812 (315) 162,846
=============== ============= ============= ==============
The amortized cost and estimated fair values of investment securities at
December31, 1998, by contractual maturity, are shown below (in
thousands). 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.
Held to maturity Available for sale
------------------------------ ------------------------------
Amortized Estimated Amortized Estimated
cost fair value cost fair value
-------------- -------------- -------------- --------------
Due in one year or less $ -- -- 39,024 39,220
Due after one year through five years 63 63 74,889 75,613
Due after five years through ten years -- -- 21,332 21,575
Due after ten years -- -- 7,878 8,003
Mortgage backed securities -- -- 73,271 72,644
Other -- -- 8,621 8,551
-------------- -------------- -------------- --------------
Total $ 63 63 225,015 225,606
============== ============== ============== ==============
The Company's trading securities consist of a segregated portfolio of
equity securities purchased with the intent to actively manage and trade
such securities frequently. Realized gains since the trading portfolio
was established aggregate $3,000. Other securities classified as
available for sale consist primarily of stock in the Federal Reserve
Bank, Federal Home Loan Banks, Kansas Venture Capital Company, and
certain other debt and equity securities. At December31, 1998,
investment securities with fair values of approximately $94,065,000 were
pledged to secure public deposits and for other purposes.
54
(4) Loans
Loans are summarized as follows (in thousands):
1998 1997
----------- -----------
Real estate - mortgage $ 352,072 243,884
Real estate - construction 50,696 61,967
Commercial 191,325 152,541
Agricultural 54,698 37,753
Consumer and other 79,900 52,763
----------- -----------
728,691 548,908
Allowance for loan losses (10,752) (7,736)
----------- -----------
$ 717,939 541,172
=========== ===========
Loans made to directors and executive officers of the Company
approximated $12,637,000 and $10,192,000 at December31, 1998 and 1997,
respectively. Such loans were made in the ordinary course of business on
normal credit terms, including interest rate and collateralization.
Changes in such loans for 1998 are as follows (in thousands):
Balance at December 31, 1997 $ 10,192
Additions 23,209
Amounts collected (22,574)
Amounts of acquired bank 1,810
----------
Balance at December 31, 1998 $ 12,637
==========
Nonaccrual loans approximated $2,819,000 and $1,047,000 at December31,
1998 and 1997, respectively. The interest income not recognized on
nonaccrual loans was approximately $197,000, $44,000, and $25,000 in
1998, 1997, and 1996, respectively. Impaired loans, excluding nonaccrual
loans, are insignificant at December31, 1998 and 1997.
Activity in the allowance for loan losses during the years ended
December 31, 1998, 1997, and 1996 are as follows (in thousands):
1998 1997 1996
---------- --------- --------
Balance at beginning of year $ 7,736 5,322 4,486
Allowance of acquired banks (purchase method) 1,599 808 --
Provision for loan losses 2,781 2,130 1,262
Charge offs (1,813) (1,005) (747)
Recoveries 449 481 321
---------- --------- --------
Balance at end of year $ 10,752 7,736 5,322
========== ========= ========
55
(5) Premises and Equipment
Premises and equipment are summarized as follows (in thousands):
1998 1997
---------- ----------
Land $ 5,403 4,445
Buildings and leasehold improvements 18,450 14,073
Construction in progress 48 1,059
Furniture, fixtures, and equipment 12,057 7,931
Automobiles 308 134
---------- ----------
36,266 27,642
Accumulated depreciation and amortization 10,083 7,415
---------- ----------
$ 26,183 20,227
========== ==========
Depreciation expense aggregating $1,713,000, $1,377,000, and $1,125,000
for the years ended December 31, 1998, 1997, and 1996, respectively, has
been included in net occupancy expense in the accompanying consolidated
statements of earnings.
(6) Deposits
Deposits are summarized as follows (in thousands):
1998 1997
----------- -----------
Demand:
Noninterest bearing $ 101,287 76,846
----------- -----------
Interest bearing:
NOW 108,717 87,977
Super NOW 30,244 20,318
Money market 118,741 82,563
----------- -----------
257,702 190,858
----------- -----------
Total demand 358,989 267,704
Savings 47,363 35,508
Time 520,335 393,951
----------- -----------
$ 926,687 697,163
=========== ===========
Time deposits include certificates of deposit of $100,000 and over
totaling approximately $114,248,000 and $79,294,000 at December 31, 1998
and 1997, respectively.
56
Principal maturities of time deposits at December 31, 1998 are as
follows (in thousands):
Year Amount
--------------- -----------
1999 $ 370,865
2000 96,082
2001 25,800
2002 12,659
2003 11,713
Thereafter 3,216
-----------
$ 520,335
===========
During 1996, the Federal Deposit Insurance Corporation imposed a one
time special assessment on Savings Association Insurance Fund (SAIF)
assessable deposits. The assessment on the Company's SAIF deposits was
$389,000 and is included in federal deposit insurance premiums in the
accompanying 1996 consolidated statement of earnings.
(7) Securities Sold Under Agreements to Repurchase
Information concerning securities sold under agreements to repurchase is
as follows (in thousands):
1998 1997
----------- ---------
Average monthly balance during the year $ 11,664 6,835
Maximum month end balance during the year 13,986 6,516
At December 31, 1998, such agreements were secured by investment and
mortgage backed securities. Pledged securities are maintained by a
safekeeping agent under the control of the Company.
(8) Federal Funds Purchased and Other Short term Borrowings
Following is a summary of federal funds purchased and other short term
borrowings at December 31, 1998 and 1997 (in thousands):
1998 1997
----------- -----------
Advances under a $15 million line of credit from LaSalle National Bank,
interest at LaSalle's prime rate (7.37% at December 31, 1998),
maturing on May 1, 1999, secured by subsidiary stock $ 7,000 --
Note payable, secured by certain trading securities, interest at 6.90%,
maturing July 31, 1999 568 --
Federal Home Loan Bank (FHLB) advances, secured by qualifying one to four
family mortgage loans, weighted average interest of 6.24%, maturing
throughout 1998 -- 11,650
Federal funds purchased, weighted average interest rate of 6.53% at
December 31, 1997 -- 1,900
----------- -----------
$ 7,568 13,550
=========== ===========
57
(9) Long term Debt
Following is a summary of long term borrowings at December 31, 1998 and
1997 (in thousands):
1998 1997
---------- ----------
FHLB borrowings by subsidiary banks bearing weighted average fixed interest
rates of 5.19% and 6.50% at December 31, 1998 and 1997,
secured by qualifying one to four family mortgage loans $ 49,604 2,870
Note payable of Gold Banc Corporation, Inc. Employee Stock Ownership
secured by 27,333 shares of Company stock (see note 11) 197 236
Notes payable of subsidiary to former stockholders of Farmers Bank,
interest rate of 8.50% at December 31, 1998, maturing February 1, 2000 157 262
Notes payable to former stockholders of Farmers National Bank, interest rates
ranging from 6.62% to 7.59%, maturities ranging from
January 31, 2005 to July 31, 2005. Such notes were repaid in 1998 -- 1,500
Note payable to bank, interest at the prime rate due September 30, 2007
secured by stock of Citizens Bank of Tulsa. Such note was repaid in 1998. -- 925
Notes payable to bank, interest at corporate base rate adjusted daily not
to exceed 9.5%, due February 17, 1999, secured by stock of The First State
Bank and Trust Company. Such note was repaid in 1998 -- 631
---------- ----------
$ 49,958 6,424
========== ==========
Principal maturities of long term borrowings at December 31, 1998 are as
follows (in thousands):
Year Amount
--------------- -----------
1999 $ 592
2000 499
2001 2,586
2002 308
2003 23,808
Thereafter 22,165
-----------
$ 49,958
===========
None of the Company borrowings have any related compensating balance
requirements which restrict the usage of Company assets. However,
regulations of the Federal Reserve System require reserves to be
maintained by all banking institutions according to the types and
amounts of certain deposit liabilities. These requirements restrict
usage of a portion of the amounts shown as consolidated "cash and due
from banks" from everyday usage in operation of the banks.
58
(10) Income Taxes
Income tax expense (benefit) related to operations for 1998, 1997, and
1996 is summarized as follows (in thousands):
Current Deferred Total
------------ ------------ --------
1998:
Federal $ 1,587 (568) 1,019
State 670 (82) 588
------------ ------------ --------
$ 2,257 (650) 1,607
============ ============ ========
1997:
Federal $ 2,439 (36) 2,403
State 442 (18) 424
------------ ------------ --------
$ 2,881 (54) 2,827
============ ============ ========
1996:
Federal $ 1,419 424 1,843
State 488 3 491
------------ ------------ --------
$ 1,907 427 2,334
============ ============ ========
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December
31, 1998 and 1997 are presented below (in thousands):
1998 1997
-------- --------
Deferred tax assets:
Allowance for loan losses $ 2,855 1,680
State taxes 177 41
Other 755 544
-------- --------
Total deferred tax assets 3,787 2,265
-------- --------
Deferred tax liabilities:
Unrealized gains on available for sale
securities 199 142
FHLB stock dividends 177 171
Premises and equipment 1,233 1,080
Other 317 170
-------- --------
Total deferred tax liabilities 1,926 1,563
-------- --------
Net deferred tax asset, included
in other assets $ 1,861 702
======== ========
A valuation allowance for deferred tax assets was not necessary at
December 31, 1998 or 1997.
59
A reconciliation of expected income tax expense based on the statutory
rate of 34% to actual tax expense for 1998, 1997, and 1996 is summarized
as follows (in thousands):
1998 1997 1996
--------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
---------- ---------- ----------- ---------- ----------- ----------
Expected federal
income tax expense $ 4,599 34.0 % $ 4,318 34.0 % $ 2,461 34.0 %
Income of flow
through entity (2,063) (15.3) (1,254) (9.9) -- --
Municipal interest (546) (4.0) (453) (3.6) (449) (6.2)
State taxes, net of
federal tax benefit 388 2.9 280 2.2 324 4.5
Change in tax status (500) (3.7) -- -- -- --
Other (271) (2.0) (64) (0.4) (2) (0.1 )
---------- ---------- ----------- ---------- ----------- ----------
$ 1,607 11.9 % $ 2,827 22.3 % $ 2,334 32.2 %
========== ========== =========== ========== =========== ==========
Citizens Bank of Tulsa (Citizens), acquired in a pooling in December
1998, was taxed as a SubchapterS corporation for 1997 and 1998 prior to
the date of acquisition. As a SubchapterS corporation, Citizens was not
subject to federal or state income taxes; rather, such income was
included in the taxable income of the stockholders. The accompanying
consolidated statements of earnings for 1998 and 1997 include pro forma
tax expense, net earnings, and earnings per share as if Citizens had not
been a SubchapterS corporation and had accrued income tax expense in
accordance with generally accepted accounting principles. The effect of
the nontaxable income is reflected in the table above as "Income of flow
through entity." In connection with the acquisition, Citizens' tax
status was changed and, from the date of acquisition forward, such
earnings are subject to taxes. As a result, deferred tax assets
aggregating $500,000 were recorded and are reflected in the table above
as "change in tax status." Cash distributions to Citizens shareholders
of $3,970,000 for the year ended December 31, 1998 are reflected as
dividends in the accompanying consolidated financial statements.
(11) Employee Benefit Plans
The Gold Banc Corporation, Inc. Employee Stock Ownership Plan (ESOP) was
formed to acquire shares of the Company common stock for the benefit of
all eligible employees. During 1996, the ESOP borrowed $275,800 from an
unaffiliated bank to purchase 63,776 shares of common stock from a
stockholder of the Company. The ESOP is repaying the loan with
contributions received from the Company. Accordingly, the Company has
recorded the obligation with an offsetting amount of unearned
compensation included in stockholders' equity in the accompanying
consolidated balance sheets. The amount of annual contributions from the
Company, if any, is determined by the Board of Directors. Contributions
were approximately $56,000, $92,000, and $78,000 for the years ended
December 31, 1998, 1997, and 1996, respectively. The 1998 and 1997
contributions were used to make principal payments on the note of
$40,000 and in connection with those payments, 10,267 and 9,110 shares
were released to participants.
The Company has a 401(k) savings plan for the benefit of all eligible
employees. Prior to December 31, 1997, the Company did not match
employee contributions. Effective January 1, 1998, the Company will
match 50% of employee contributions up to 5% of base compensation,
subject to certain Internal Revenue Service limitations. Contributions
charged to salaries and employee benefits expense were $18,000 for 1998.
In 1996, the Company established a stock option plan. Under the stock
option plan, options to acquire 500,000 shares of the Company's common
stock may be granted to certain officers, directors, and employees of
the Company. The options will enable the recipient to purchase stock at
an exercise price equal to or greater than the fair market value of the
stock at the date of the grant. In 1997, the Company granted options to
acquire 141,000 shares for $5.25 per share. Those options vested in 1997
60
and expire in 2007. In 1998, the Company granted options to acquire
188,000 shares for exercise prices ranging from $12.13 to $18.38 per
share. Those options vest 20% per year over a five year period and
expire in 2008.
No options have been exercised at December 31, 1998. The Company applies
APB Opinion No.25 in accounting for its plan and, accordingly, no
compensation expense has been recognized in the accompanying
consolidated financial statements. Had compensation cost for the
Company's stock options been determined based upon the fair value at the
grant date consistent with the methodology prescribed under SFAS No.123,
the Company's net earnings and basic earnings per share would have been
decreased by approximately $125,000 ($.01 per share) in 1998 and
$185,000 ($.02 per share) in 1997. The weighted average fair values of
the options granted are estimated using an option pricing model with the
following assumptions: expected dividend yield of 1.0%, risk free
interest rate of 7.0%, and an expected life of ten years.
(12) Financial Instruments With Off balance Sheet Risk
Financial instruments, which represent off balance sheet credit risk,
consist of open commitments to extend credit, irrevocable letters of
credit, and loans sold with recourse. Open commitments to extend credit
and irrevocable letters of credit amounted to approximately $7,102,000
at December 31, 1998. Such agreements require the Company 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. Since many of the commitments are expected to
expire without being fully drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company
evaluates each customer's creditworthiness on a case by case basis. The
amount of collateral obtained (if deemed necessary by the Company upon
extension of credit) is based on management's credit evaluation of the
customer. Collateral held varies, but may include accounts receivable,
inventory, property, plant and equipment, and income producing
commercial properties.
The Company processes residential home mortgage loans for sale in the
secondary market. In conjunction with the sale of such loans, the
Company has entered into agreements with the purchasers of the loans,
setting forth certain provisions. Among those provisions is the right of
the purchaser to return the loans to the Company in the event the
borrower defaults within a stated period. This period ranges among the
various purchasers from between one to twelve months. Loans sold with
recourse amounted to approximately $14,303,000, $3,642,000, and
$6,021,000 at December 31, 1998, 1997, and 1996, respectively. The
Company's exposure to credit loss in the event of default by the
borrower and the return of the loan by the purchaser is represented by
the difference in the amount of the loan and the recovery value of the
underlying collateral.
(13) Disclosures About the Fair Value of Financial Instruments
The following disclosures of the estimated fair value of financial
instruments are made in accordance with the requirements of SFAS No.107,
Disclosures About Fair Value of Financial Instruments. The estimated
fair value amounts have been determined by the Company and its
subsidiaries using available market information and valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Company and its subsidiaries could realize
in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material impact on the
estimated fair value amounts.
61
The estimated fair value of the Company's financial instruments is as
follows (in thousands):
1998 1997
Carrying Estimated Carrying Estimated
amount fair value amount fair value
------------- ------------- -------------- --------------
Investment securities $ 229,520 229,520 164,535 164,535
Mortgage and student loans held for sale $ 5,425 5,425 4,358 4,358
Loans $ 717,939 723,138 541,172 543,212
Deposits $ 926,687 915,492 697,163 691,070
Securities sold under agreements to
repurchase $ 6,644 6,644 6,516 6,516
Federal funds purchased, and other
short term borrowings $ 7,568 7,568 13,550 13,550
Long term debt $ 49,958 50,036 6,424 6,424
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:
o Investment securities - Various methods and assumptions were used
to estimate fair value of the investment securities. For investment
securities, excluding other securities, fair values are based on
quoted market prices or dealer quotes. If a quoted market price is
not available, fair value is estimated using quoted prices for
similar securities. The carrying value of other securities
approximates fair values.
o Mortgage and student loans held for sale - The fair value of
mortgage and student loans held for sale equals the contractual
sales price agreed upon with third party investors.
o Loans - For certain homogenous categories of loans, such as some
Small Business Administration guaranteed loans, student loans,
residential mortgages, consumer loans, and commercial loans, fair
value is estimated using quoted market prices for similar loans or
securities backed by similar loans, adjusted for differences in
loan characteristics. The fair value of other types 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.
o Deposits - The fair value of demand deposits, savings accounts, and
money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed maturity certificates of
deposit is estimated by discounting the future cash flows using the
rates currently offered for deposits of similar remaining
maturities.
o Federal funds purchased and other short term borrowings - For these
instruments, the current carrying amount is a reasonable estimate
of fair value.
o Long term debt - The fair value of long term debt is estimated
using discounted cash flow analyses based on the Company's and
subsidiaries' current incremental borrowing rates for similar types
of borrowing arrangements.
o Commitments to extend credit and irrevocable letters of credit -
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account
62
the remaining terms of the agreements and the present
creditworthiness of the customers. For fixed rate loan commitments,
fair value also considers the difference between current levels of
interest rates and the committed rates. The estimated fair value of
letters of credit is based on the fees currently charged for
similar agreements. These instruments were determined to have no
positive or negative market value adjustments and are not listed in
the following table.
o Loans sold with recourse - The fair value of loans sold with
recourse is limited to the contractual amount of the loans required
to be repurchased. Loans currently under the recourse provision
have been sold to investors within the last twelve months. Because
the recourse provisions have not yet expired, it is impractical to
determine the fair value; however, it is not believed they would
have a material market value adjustment.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1998 and 1997.
Although management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of the consolidated financial
statements since that date and, therefore, current estimates of fair
value may differ significantly from the amounts presented herein.
(14) Capital Adequacy
Quantitative measures established by regulation to ensure capital
adequacy require the Company and its subsidiaries to maintain minimum
amounts and ratios (set forth in the table below on a consolidated
basis, dollars in thousands) of total and Tier 1 capital (as defined in
the regulations) to risk weighted assets and of Tier 1 capital to
average assets. At December 31, 1998 and 1997 total risk based and Tier
1 capital includes approximately $23,000,000 and $21,000,000,
respectively, of subordinated debentures (see note 1) which is permitted
under regulatory guidelines. Management believes, as of December 31,
1998, that the Company meets all capital adequacy requirements to which
it is subject.
To be well
capitalized
For capital under prompt
adequacy corrective action
Actual purposes provisions
------------------- ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------- ---------- ------- --------- ------
At December 31, 1998:
Total risk based capital
(to risk weighted assets) $ 104,208 13.42 % $ 62,126 8.00 % $ 77,657 10.00 %
Tier 1 capital (to
risk weighted
assets) 93,456 12.03 31,063 4.00 53,071 6.00
Tier 1 capital (to average 93,456 8.80 42,457 4.00 46,594 5.00
assets)
========== ======= ========== ======= ========= ======
At December 31, 1997:
Total risk based capital
(to risk weighted assets) $ 91,743 11.00 % $ 47,614 8.00 % $ 59,517 10.00 %
Tier 1 capital (to
risk weighted
assets) 84,007 14.11 23,807 4.00 35,710 6.00
Tier 1 capital (to average 84,007 15.41 30,557 4.00 38,197 5.00
assets)
========== ======= ========== ======= ========= ======
(15) Parent Company Condensed Financial Statements
Following is condensed financial information of the Company as of
December 31, 1998 and 1997 and for the three years ended December 31,
1998 (in thousands):
63
Condensed Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
----------- -----------
Cash $ 1,743 203
Investment securities 3,739 7,488
Federal funds sold, securities purchased under
agreements to resell, and interest bearing deposits 22 16,819
Investment in subsidiaries 109,803 70,285
Other 5,715 3,335
----------- -----------
Total assets $ 121,022 98,130
=========== ===========
Liabilities and Stockholders' Equity
Guaranteed preferred beneficial interests in
Company's debentures $ 29,639 29,639
Long term debt 7,197 1,793
Other 375 132
Stockholders' equity 83,811 66,566
----------- -----------
Total liabilities and stockholders' equity $ 121,022 98,130
=========== ===========
Condensed Statements of Earnings
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
---------- ----------- -----------
Dividends from subsidiaries $ 1,114 943 1,561
Interest income 525 366 61
Unrealized gains on trading securities (399) 229 --
Other expense, net 6,835 1,885 1,526
---------- ----------- -----------
Income (loss) before equity in undistributed
earnings of subsidiaries (5,595) (347) 96
Increase in undistributed equity of subsidiaries 15,079 9,768 4,333
---------- ----------- -----------
Earnings before income taxes 9,484 9,421 4,429
Income tax benefit 2,435 453 477
---------- ----------- -----------
Net earnings $ 11,919 9,874 4,906
========== =========== ===========
64
Condensed Statements of Cash Flows
Years ended December 31, 1998, 1997, and 1996
1998 1997 1996
----------- ----------- ----------
Cash flows from operating activities:
Net earnings $ 11,919 9,874 4,906
Increase in undistributed equity of subsidiaries (33,178) (11,213) (4,693)
Net change in trading securities 87 (1,072) --
Other (2,702) (805) 344
----------- ----------- ----------
Net cash provided by (used in) operating
activities (23,874) (3,216) 557
----------- ----------- ----------
Cash flows from investing activities:
Net change in held to maturity securities 76 2 (5)
Net change in available for sale securities 3,586 (6,341) --
Net change in loans -- -- 501
Net additions to premises and equipment 565 (18) 5
Capital contributions to subsidiaries -- (6,000) (3,000)
Cash received (paid) for acquisitions 3,659 (1,964) --
----------- ----------- ----------
Net cash provided by (used in) investing activities 7,886 (14,321) (2,499)
----------- ----------- ----------
Cash flows from financing activities:
Principal payments on long term debt 5,443 (3,130) (7,385)
Purchase of treasury stock -- -- (134)
Issuance of common stock -- -- 18,122
Issuance of subordinated debentures -- 29,639 --
Payment of dividends (4,712) (653) (68)
----------- ----------- ----------
Net cash provided by financing activities 731 25,856 10,535
----------- ----------- ----------
Net increase (decrease) in cash (15,257) 8,319 8,593
Cash at beginning of year 17,022 8,703 110
----------- ----------- ----------
Cash at end of year $ 1,765 17,022 8,703
=========== =========== ==========
The primary source of funds available to the Company is the payment of
dividends by the subsidiaries. Subject to maintaining certain minimum
regulatory capital requirements, regulations limit the amount of
dividends that may be paid without prior approval of the subsidiaries'
regulatory agencies. At December 31, 1998, the subsidiaries could pay
dividends of $25,292,000 without prior regulatory approval.
65
(16) Litigation
Exchange National Bank (Exchange), a wholly owned subsidiary of the
Company, is a defendant in lawsuits styled Wilson v. Olathe Bank and
Aaron v. Hillcrest Bank, both in the United States District Court for
the District of Kansas. Those cases were commenced on behalf of persons
who had invested in distributorships sold by Parade of Toys, Inc. and
Bandero Cigar Company. Those companies sold business opportunities. Some
of those who invested in Parade of Toys were provided with trade
reference lists that included Exchange. Some of the distributors who
received such a list called Exchange to discuss the bank's relationships
with a principal of Parade of Toys and Bandero Cigar. The complaints
allege theories of violation of RICO and RICO conspiracy statutes,
common law fraud, negligent misrepresentation, civil conspiracy, and
negligence. Both complaints allege that the total amount of damage
sustained by all distributors is in excess of $13 million. On
February10, 1999, Exchange was served with eight petitions filed in the
District Court of Johnson County, Kansas on behalf of Parade of Toys
distributors. The petitions make claims of fraud, negligent
misrepresentation, common law conspiracy, and negligence. Each petition
claims damages ranging from $17,900 to $37,900. Exchange has filed a
motion for summary judgment in the Wilson suit and a motion to dismiss
in the Aaron suit. Exchange intends to continue its vigorous defense of
the pending claims and any additional claims that are filed against it
by Parade of Toys distributors, but is not yet in a position to
determine whether the expenses and losses, if any, on these matters will
be material to the Company's financial condition.
First State Bank, another wholly owned subsidiary of the Company, is a
defendant in an adversary proceeding styled Nelson v. First State Bank
in a bankruptcy case pending in the Federal Bankruptcy Court for the
Western District of Missouri styled In re: Hagman's Inc. William R.
Hagman, Jr. became an advisory director of the Company on November12,
1998. Mr. Hagman has no direct or indirect interest in Hagman, Inc. In
the adversary proceeding, the bankruptcy trustee has alleged that First
State Bank received preferential transfers in settlement of loans and
bank overdrafts prior to the commencement of the Hagman's Inc.
bankruptcy case of approximately $694,000 plus interest. There is an
issue as to whether the bank properly perfected its security interest in
the debtor's inventory. The bank and the bankruptcy trustee have filed
motions for summary judgment on the issue of perfection. If the bank is
successful in its motion, it will have no liability in the lawsuit. If
the bankruptcy trustee is successful in its motion, the bank has
additional defenses it will assert at trial. If the bank does not
prevail in its motion, the case is set for trial on March18, 1999. The
bank will continue to vigorously defend the allegations, and will
continue to conduct settlement discussions with the plaintiff.
No accrual or provision for losses, if any, related to the above matters
has been made in the accompanying consolidated financial statements. In
the normal course of business, the Company had certain other lawsuits
pending at December 31, 1998. In the opinion of management, after
consultation with legal counsel, none of those other lawsuits is
expected to have a significant effect on the consolidated financial
condition or results of operations of the Company.
(17) Subsequent Events
On February12, 1999, the Company executed a definitive asset purchase
agreement with CompuNet Engineering, LLC (CompuNet). CompuNet provides
various computer technology, networking and back office operation
services for banks including the Company. The $4.3 million asset
purchase, which is subject to regulatory approval and the satisfaction
of other conditions, will be accounted for as a purchase.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
66
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Management of the Company
The directors and executive officers of the Company are as set forth
below.
Principal Occupation and
Name Age Five Year Employment History
- - ---- --- ----------------------------
Michael W. Gullion 44 Mr. Gullion has served as Chairman of
the Board of Directors and Chief
Executive Officer of the Company since
its inception and served as the
Company's President until February 10,
1999. His term of office as a director
expires at the annual meeting of
stockholders to be held on April 28,
1999. Mr. Gullion is the son in law of
William Wallman, a director of the
Company.
Malcolm M. Aslin 51 Mr. Aslin was appointed to the Board
of Directors on February 11, 1999. His
term of office as a director expires
at the annual meeting of stockholders
to be held in 2000. He has served as
President and Chief Operating Officer
of the Company since February 10,
1999. From October 1995 until February
10, 1999, Mr. Aslin served as (i)
Chairman of the Board of Western
National Bank and Unison
Bancorporation, Inc. in Lenexa, Kansas
and (ii) Chairman and Managing
Director of CompuNet Engineering,
L.L.C., a Lenexa, Kansas computer
service business the Company expects
to acquire, subject to certain closing
conditions, on or before March 31,
1999. From May 1994 until May 1995 Mr.
Aslin served as President of Langley
Optical Company, Inc., a wholesale
optical laboratory located in Lenexa,
Kansas. Prior to purchasing Langley
Optical Company, Mr. Aslin spent more
than 22 years in various positions
with UMB Banks and United Missouri
Financial Corporation, including
President and Chief Operating Officer
of United Missouri Bancshares, Inc.
and President of UMB's Kansas City
bank, United Missouri Bank of Kansas
City, N.A.
Keith E. Bouchey 48 Mr. Bouchey was elected to the Board
of Directors of the Company on May 30,
1996. His term of office as a director
expires at the annual meeting of
stockholders to be held in 2000. He
has served as the Executive Vice
President, Chief Financial Officer and
Corporate Secretary of the Company
since joining the Company in November
1995. Prior to joining the Company,
Mr. Bouchey had been, since August
1977, a principal of GRA, Thompson,
White & Company, P.C., a regional bank
accounting and consulting firm, where
he served on the executive committee
and as the managing director of the
firm's regulatory services practice.
67
Principal Occupation and
Name Age Five Year Employment History
- - ---- --- ----------------------------
Joseph F. Smith 50 Mr. Smith has served as Executive Vice
President and Chief Technology Officer
of the Company since February 10,
1999. Mr. Smith also serves as a
director of Centurion Funds, Inc., a
Phoenix, Arizona mutual fund family
advised by Centurion Trust Company.
From October 1995 until February 10,
1999, Mr. Smith served as President
and Chief Operating Officer of
CompuNet Engineering, L.L.C., a
Lenexa, Kansas computer service
business that the Company expects to
acquire, subject to certain closing
conditions, on or before March 31,
1999. From August 1993 until May 1995
Mr. Smith served as a director and
Executive Vice President of Investors
Fiduciary Trust Company, located in
Kansas City, Missouri Prior to joining
Investors Fiduciary Trust Company, Mr.
Smith spent more than 26 years in
various management and operational
positions with UMB Bank, including
Executive Vice President and an
advisory director of UMB's Kansas City
bank, United Missouri Bank of Kansas
City, N.A.
William F. Wright 56 Mr. Wright was elected as a director
of the Company on May 30, 1996. His
term of office as a director expires
at the annual meeting of stockholders
to be held in 2000. For more than five
years Mr. Wright has served as the
Chairman of the Board of AMCON
Distributing Company, a wholesale
distributor headquartered in Omaha,
Nebraska.
D. Michael Browne 46 Mr. Browne has served as a director of
the Company since November 1989. His
term of office as a director expires
at the annual meeting of stockholders
to be held in 2001. He has been the
Chairman and Chief Executive Officer
of Consortia, Ltd. (formerly Mike
Browne International LTD), a direct
marketing advertising agency.
William Wallman 75 Mr. Wallman has served as director of
the Company since November 1989. His
term of office as a director expires
at the annual meeting of stockholders
to be held on April 28, 1999. For more
than five years Mr. Wallman has been
the President and owner of Wallman
Chrysler Plymouth, Inc., a car
dealership located in Beatrice,
Nebraska. Mr. Wallman is the father in
law of Mr. Gullion.
Allen D. Petersen 58 Mr. Petersen was appointed to the
Board of Directors of the Company on
July 31, 1997. His term of office as a
director expires at the annual meeting
of stockholders to be held in 2001.
Mr. Petersen previously served in an
advisory capacity to the Board of
Directors. For more than five years
Mr. Petersen has been the Chairman and
Chief Executive Officer of American
Tool Companies located in Hoffman
Estates, Illinois.
68
Principal Occupation and
Name Age Five Year Employment History
- - ---- --- ----------------------------
William R. Hagman, Jr. 63 Mr. Hagman has served in an advisory
capacity to the Board of Directors
since November 12, 1998. Since
September 1996 Mr. Hagman has also
served as an advisory director of The
First State Bank and Trust Company, a
wholly owned subsidiary of the
Company. For more than ten years Mr.
Hagman served as a director of City
National Bank in Pittsburg, Kansas
until September 1996. For more than
five years Mr. Hagman has been the
President of Hagman Companies, Inc., a
wholesale distribution business
located in Pittsburg, Kansas.
Section 16(a) Beneficial Ownership Reporting Compliance
Under Section 16(a) of the Securities Exchange Act of 1934, the
Company's directors and executive officers and shareholders holding more than
ten percent of the outstanding stock of the Company are required to report their
initial ownership of stock and any subsequent change in such ownership to the
Securities and Exchange Commission and the Company. Specific time deadlines for
the Section 16(a) filing requirements have been established by the Securities
and Exchange Commission. To the Company's knowledge, all reports due pursuant to
Section 16 (a) were filed on a timely basis during the fiscal year ended
December 31, 1998, except that one report relating to the acquisition of shares
was inadvertently filed late by D. Michael Browne.
ITEM 11. EXECUTIVE COMPENSATION.
The table below sets forth information concerning the annual and long
term compensation paid to or earned by the Chief Executive Officer and all other
executive officers of the Company whose compensation exceeded $100,000 during
the last fiscal year.
Summary Compensation Table
Annual Compensation Long Term
Compensation
Awards
Securities
Name and Underlying All Other
Principal Position Year Salary($) Bonus($)(1) Options (#) Compensations ($)
- - ------------------ ---- --------- ----------- ----------- -----------------
Michael W. Gullion 1998 $250,000 $150,000 70,000(2) $13,687(3)
Chief Executive 1997 $241,000 $112,500 70,000(2) $16,809(3)
Officer 1996 $186,000 $165,000 None $15,923(3)
Keith E. Bouchey 1998 $156,000 $0 25,000(4) $ 7,162(5)
Executive Vice 1997 $156,000 $31,000 25,000(4) $ 7,841(5)
President, Chief 1996 $156,000 $31,000 None $ 3,933(5)
Financial Officer and
Corporate Secretary
- - ----------
(1) Represents amounts earned in fiscal year. Actual cash payment is made
in the following fiscal year.
(2) Original grants for 35,000 shares were adjusted following a 100%
stock dividend in the form of 2 for 1 stock split on May 18, 1998 to
prevent diminution or dilution of the awards as provided in the 1996
69
Equity Compensation Plan. As a result, shares covered by outstanding
option awards were multiplied by two and the per share exercise prices
of outstanding option awards were divided by two.
(3) Consists of contributions to the Company's Employee Stock Ownership
Plan, matching contributions under the Company's Employees' 401(k)
Plan, personal use of Company owned automobile, and country club
membership dues.
(4) Original grants for 12,500 shares were adjusted following a 100% stock
dividend in the form of 2 for 1 stock split to prevent diminution or
dilution of the awards as provided in the 1996 Equity Compensation
Plan. As a result, shares covered by outstanding option awards were
multiplied by two and the per share exercise prices of outstanding
option awards were divided by two.
(5) Consists of contributions to the Company's Employee Stock Ownership
Plan, matching contributions under the Company's Employees' 401(k) Plan
and country club membership dues.
Option/SAR Grants in Last Fiscal Year
Individual Grants
Potential Realized Value
Number of As Assumed Annual
Securities Percent of Total Rates of Stock Price
Underlying Options Granted Exercise or Appreciation
Options to Employees in Base Price Expiration For Option Term
Name Granted(#) Fiscal Year ($/Share) Date 5% 10%
- - ---- ---------- ----------- --------- ---- -- ---
Michael W. Gullion 70,000(1) 37.2% $12.13(1) 2/11/2008 $534,000 $1,353,000
Keith E. Bouchey 25,000(1) 13.3% $12.13(1) 2/11/2008 $191,000 $483,000
(1) Options granted on February 11, 1998 were adjusted following a 100%
stock dividend in the form of a 2 for 1 stock split on May 18, 1998 to
prevent diminution or dilution of such awards as provided in the 1996
Equity Compensation Plan. As a result, shares covered by outstanding
option awards were multiplied by two and the per share exercise prices
of outstanding option awards were divided by two.
Aggregated Option/SAR Exercises in Last
Fiscal Year and FY End Option/SAR Values
Number of
Underlying
Unexercised Value of Unexercised
Options at Fiscal In the Money Options at
Year End (#) Fiscal Year End($)
Shares Acquired Value Exercisable/ Exercisable/
Name Of Exercise(#) Received($) Unexercisable Unexercisable
- - ----- --------------- ------------ ---------------- -----------------------
Michael W. Gullion 0 0 84,000/56,000 $754,250/$182,000
Keith E. Bouchey 0 0 30,000/20,000 $269,375/$65,000
70
Employment Contracts
Messrs. Gullion and Bouchey (the "Executives") have entered into
employment agreements with the Company (each an "Agreement"). The terms of the
Agreements are three years (automatically renewed on each anniversary date of
the Agreements unless either party gives notice of its intention not to renew)
and provide that Mr. Gullion will be the Chairman, Chief Executive Officer and
Mr. Bouchey will be Executive Vice President, Chief Financial Officer, Treasurer
and Corporate Secretary of the Company. Throughout the employment period, each
of the Executives will be nominated by the Board of Directors for directorships
and the base compensation of the Executives and their opportunity to earn
incentive compensation will be at least as great as in existence prior to the
effectiveness of the Agreements. An Executive may be terminated for "cause" only
(as defined in the Agreement). An Executive may terminate the Agreement for
"good reason", which is defined as a material breach of the Agreement by the
Company. The death or disability of an Executive automatically terminates the
Agreement.
If the Company terminates an Agreement for cause or an Executive
terminates without good reason, neither the Company nor the Executive has any
further obligations to the other. If the Company terminates an Executive without
cause (as defined in the Agreement), an Executive terminates for good reason (as
defined in the Agreement), or a Change in Control (as defined below) of the
Company occurs, the Company is obligated to pay the Executive three times the
present value of the Executive's long and short term compensation in place
immediately prior to the termination or Change in Control, provided that such
benefits cannot exceed an amount that would be subject to federal excise taxes.
A Change in Control of the Company will be deemed to occur upon (i) the
hostile replacement of at least the majority of the Board of Directors, (ii) a
person acquiring 25% or more of the shares or voting power of the stock of the
Company, provided such person is not an existing director or Executive or
relative of such a person or does not acquire such shares or voting rights
pursuant to an agreement to which the Executive is a party, or as a result of
the acquisition does not become the largest stockholder of the Company, (iii) a
merger or sale of substantially all of the assets of the Company or (iv) the
occurrence of any other event the Board of Directors determines to be a Change
in Control.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1998, there were no
interlocking relationships between any executive officers of the Company and any
entity whose directors or executive officers serve on the Board's Compensation
Committee, nor did any current or past officers serve on the Compensation
Committee.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Committee") is composed of three
independent non employee Directors. The Committee is responsible for setting and
administering executive officers' salaries and the annual bonus and long term
incentive plans that govern the compensation paid to executives of the Company.
Compensation Philosophy
The Company's compensation programs are designed to provide executives
with a competitive base salary and with incentives linked to the performance of
the Company and the individual. The Committee previously engaged the services of
an independent compensation consultant to assist it and has developed the
following guidelines for establishing executive compensation:
Competitiveness: Base salaries for executives should be reasonably
commensurate with those paid by comparable companies.
71
Entrepreneurialism: Each executive will have the opportunity to earn
total annual compensation, including bonuses, at approximately the
75th percentile of comparable companies.
Long Term Incentives: In order to create a sense of executive ownership
in and commitment to the Company, the Committee has adopted a stock
option plan that provides executives stock options.
The Committee selects comparable companies for purposes of determining
competitive compensation levels based upon their size, industry and other
factors the Committee considers appropriate. These companies may or may not be
included in computing the indices used to prepare the common stock performance
graph.
Annual Compensation
Total annual cash compensation for executive officers of the
Company consists of a base salary and a potential annual cash bonus
based upon a target incentive opportunity established each year by the
Committee.
The Committee approves the base salary of each executive
officer on a subjective basis at a level believed to be sufficient to
attract and retain qualified individuals. In making this determination,
the Committee considers the executive's performance, salary levels at
other competing businesses and the Company's performance. In approving
salaries and incentive bonus plan payments for 1998, the Committee
considered, among other matters, the Company's performance during 1998
and the compensation of similar level executives employed by comparable
companies for which information was available, although the Committee
did not target compensation to any particular group of these companies.
The factors impacting base salary levels are not independently assigned
specific weights but are subjectively considered by the Committee.
The incentive bonus plan for executive officers consists of
various objective and subjective criteria related to areas for which
each such executive has responsibility as well as for Company wide
performance. Under the incentive bonus plan, each executive has a
target bonus percentage with an opportunity to earn up to a maximum
amount approved by the Committee. The target and maximum incentive
bonus opportunity is stated as a percentage of base salary. The
percentage increases relative to the executive's level of
responsibility within the Company. The Committee believes that this
structure is appropriate given that an executive's ability to affect
the overall performance of the Company increases with the level of
responsibility. For executives other than the Chief Executive Officer,
the executive's target incentive bonus ranges from 10% to 20% of base
salary, depending upon the executive's level.
In February of 1998, the Committee set Mr. Gullion's base
salary at $250,000. His 1998 compensation also included $112, 500 (45%
of his base salary) in payments earned under the Company's incentive
bonus plan. Mr. Gullion received the maximum incentive available under
the incentive bonus plan for 1998, based largely upon the Company's
success during the year as measured by: (i) a 107% increase in the
market capitalization of the Company; (ii) a 116% growth in the
Company's assets; (iii) a 144% increase in earnings; and (iv) the
substantial improvement in the return on the Company's assets, when
adjusted for the impact of acquisitions made during the year. For 1999,
Mr. Gullion's base salary will remain $250,000. However, his target
incentive bonus opportunity will be increased from 45% to 60% of his
base salary.
72
Long Term Incentive Compensation
The Board of Directors and the Company believe that stock
options create a mutuality of interests between the Company's executive
officers and stockholders. The long term incentive compensation for
executive officers has consisted of awards of stock options granted
under the Company's stock option plan. The stock option plan provides
option recipients the right to purchase shares of Common Stock at a
specified exercise price. All stock options issued to executive
officers generally have exercise prices equal to the fair market value
of the Common Stock on the date of the option grant. The number of
options awarded to each executive was determined by reference to the
group of comparable companies described above.
Committee Members
Allen D. Petersen
William F. Wright
D. Michael Browne
Compensation of Directors
Non employee directors of the Company in 1998 received $8,000
annually, $1,000 per meeting attended, $500 per telephonic meeting and
options to purchase 3,000 shares of the Company's Common Stock at an
exercise price of $12.13 per share for serving on the Board of
Directors. The option awards, originally granted for 1,500 shares at an
exercise price of $24.25 on February 11, 1998, were subsequently
adjusted by the Compensation Committee following a 100% stock dividend
in the form of a two for one stock split on May 18, 1998 to prevent the
diminution or dilution of such awards under the Company's 1996 Equity
Compensation Plan. In addition, the Company reimburses directors for
expenses incurred in connection with attendance at meetings of the
Board of Directors and committees thereof. Employees of the Company
receive no additional compensation for serving as a director.
73
Common Stock Performance
The graph set forth below is based upon information provided
by SNL Securities L.C. and compares the yearly percentage change in
cumulative stockholder return of the Company's Common Stock since
November 19, 1996 (the date the Company completed its initial public
offering of Common Stock) against the cumulative return of the NASDAQ
Stock (U.S.), the SNL $250 $500 Million Bank Index, the SNL $500
Million $1 Billion Bank Asset Size Index and the SNL All Bank and
Thrift Index covering the same time period. On account of the Company's
growth in 1998 the SNL $500 Million $1 Billion Bank Asset Size Index
was added to the graph. The graph is based on $100 invested on November
19, 1996 in the Company's Common Stock, the NASDAQ Stock (U.S.), the
SNL $250 $500 Million Bank Index, the SNL $500 Million $1 Billion Bank
Asset Size Index and the SNL All Bank and Thrift Index, each assuming
dividend reinvestment. The historical stock price performance shown on
this graph is not necessarily indicative of future performance.
Period Ending
--------------------------------------------------------------------------
Index 11/19/96 12/31/96 6/30/97 12/31/97 6/30/98 12/31/98
------------------------------------------------------------------------------------------------------------------------
Gold Banc Corporation, Inc. 100.00 101.48 169.54 298.71 486.21 365.50
NASDAQ Total US 100.00 102.51 114.72 125.76 151.41 176.78
SNL $250M $500M Bank Index 100.00 103.71 129.73 179.37 190.19 160.63
SNL All Bank & Thrift Index 100.00 100.50 122.12 154.28 170.55 163.76
SNL $500M $1B Bank Asset Size Index 100.00 105.42 128.41 171.36 189.75 168.49
74
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information as of February 28, 1999
concerning the shares of Common Stock beneficially owned by (i) each person
known by the Company to be the beneficial owner of 5% or more of the Company's
outstanding Common Stock, (ii) each of the directors of the Company, (iii) each
of the executive officers of the Company named in the Summary Compensation Table
and (iv) all directors and executive officers of the Company as a group. Unless
otherwise indicated, the named beneficial owner has sole voting and investment
power over the shares listed.
Name and Address of Number of Shares Percentage of Shares
Beneficial Owner Beneficially Owned Beneficially Owned
------------------- ------------------ --------------------
Michael W. Gullion(1) 1,840,735 10.66%
11301 Nall Avenue
Leawood, Kansas 66221
William R. Hagman, Jr.(2) 854,607 4.97%
224 Via Napoli
Naples, Florida 34105
William Wallman(3) 441,402 2.57%
538 West Mary
Beatrice, Nebraska 68310
William F. Wright(3) 322,620 1.88%
1431 Stratford Court
Del Mar, California 92014
Allen D. Petersen (3)(4) 311,256 1.81%
1220 West County Line Road
Barrington Hills, Illinois 60010
Keith E. Bouchey(5) 72,220 *
11301 Nall Avenue
Leawood, Kansas 66211
*
D. Michael Browne(6) 60,106
6450 Campbell Drive
Lincoln, Nebraska 68510
Malcolm M. Aslin 100 *
11301 Nall Avenue
Leawood, Kansas 66211
Directors and executive officers as a 2,836,048 16.39%
group (9 persons)
*Less than 1%.
75
(1) Includes: (i) 1,067,478 shares for which Mr. Wallman, Mr. Petersen, Mr.
Wright or The Lifeboat Foundation are the record owners and that are
subject to the terms of agreements granting Mr. Gullion voting control
over such shares; (ii) 21,332 shares held by the Gold Banc Corporation,
Inc. Employee Stock Ownership Plan and Trust that are not allocated to
individual accounts and over which Mr. Gullion, as Plan Administrator,
has voting control; (iii) 1,422 shares owned by Mr. Gullion's wife, as
custodian for their children under the Kansas Uniform Transfers to
Minors Act; (iv) 711 shares owned by Mr. Gullion's child, and (v)
84,000 shares that can be acquired pursuant to options that are
presently exercisable.
(2) Includes: (i) 518,641 shares for which Dorothy F. Hagman, Trustee u/t/a
9/13/82; Phyllis Estrada, Trustee u/t/a 9/3/82; John R. Hagman, Trustee
u/t/a 12/19/97; Susan G. Hagman, Trustee u/t/a 12/19/97; Sharon R.
Redmond and Richard I. Redmond, JTWROS; Hagman Associates, L.P. of
which Mr. Hagman is Managing Partner; and H&H Investment Partnership,
of which Mr. Hagman is a partner, are the record owners and that are
subject to the terms of proxies granting Mr. Hagman the right to vote
such shares; (ii) 100,001 shares owned by the Hagman Family Irrevocable
Trust #1, of which Mr. Hagman is co trustee; (iii) 117,649 shares owned
by the Hagman Family Irrevocable Trust #2, of which Mr. Hagman is co
trustee; and (iv) 118,316 shares owned by William R. Hagman, Jr.,
Trustee u/t/a 12/19/86.
(3) Subject to the terms of an agreement granting Mr. Gullion voting
control over such shares; includes 2,600 shares that may be acquired
pursuant to options that are presently exercisable.
(4) 308,656 of these shares are owned by The Lifeboat Foundation. Mr.
Petersen is one of three directors of The Lifeboat Foundation. The
Lifeboat Foundation has granted Mr. Gullion an irrevocable proxy to
vote each of these shares. Mr. Petersen disclaims beneficial ownership
of the shares owned by The Lifeboat Foundation.
(5) Includes: (i) 30,000 shares held in the name of Holyrood Bancshares,
Inc., of which Mr. Bouchey is a director, officer and stockholder; (ii)
1,200 shares owned by children of Mr. Bouchey; and (iii) 30,000 shares
that may be acquired pursuant to options that are presently
exercisable.
(6) Includes: (i) 33,486 shares owned by the D. Michael Browne Trust #1, of
which Mr. Browne is trustee; (ii) 24,020 shares owned by the Susan C.
Browne Trust #1, of which Mr. Browne is trustee; and (iii) 2,600 shares
that may be acquired pursuant to options that are presently
exercisable.
Mr. Gullion has entered into an agreement, as amended, with Mr. Wallman
pursuant to which Mr. Wallman has granted to Mr. Gullion an irrevocable proxy to
vote all shares of Common Stock owned or subsequently acquired by Mr. Wallman.
The agreement also grants to Mr. Gullion: (i) a 180 day first right of refusal
in the event Mr. Wallman receives a bona fide offer from a third party to
purchase some or all of the shares of Common Stock held by Mr. Wallman or
certain permitted transferees to whom Mr. Wallman may transfer shares; and (ii)
in the event Mr. Wallman dies, a 180 day option to purchase some or all of the
shares of Common Stock held by Mr. Wallman or certain permitted transferees to
whom Mr. Wallman may transfer shares. This agreement terminates on the earlier
to occur of: (i) the date Mr. Gullion ceases to be Chairman and/or Chief
Executive Officer of the Company; or (ii) six months after Mr. Wallman's death.
Mr. Gullion has also entered into an agreement, as amended, with Mr.
Wright, Mr. Petersen and The Lifeboat Foundation pursuant to which Mr. Wright,
Mr. Petersen and The Lifeboat Foundation have granted to Mr. Gullion an
irrevocable proxy to vote all shares of Common Stock owned or subsequently
acquired by Mr. Wright, Mr. Petersen or The Lifeboat Foundation. Such proxy
continues until the earlier of: (i) the date Mr. Gullion ceases to be Chairman
and/or Chief Executive Officer of the Company; or (ii) termination of the
76
agreement as described below. The agreement grants to Mr. Gullion a 90 day first
right of refusal in the event either Mr. Wright, Mr. Petersen or The Lifeboat
Foundation receives a bona fide offer from a third party to purchase, or
proposes to sell on the public market, some or all of the shares of Common Stock
held by such individual or by certain permitted transferees to whom such
individual may transfer shares. The agreement also grants to Mr. Wright and Mr.
Petersen a 90 day first right of refusal in the event Mr. Gullion receives a
bona fide offer from a third party to purchase, or proposes to sell on the
public market, some or all of the shares of Common Stock held by Mr. Gullion or
certain permitted transferees to whom Mr. Gullion may transfer shares. The
agreement terminates in 2006.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1998 CompuNet Engineering, L.L.C. provided $1,127,000 in products and
services to the Company and its affiliates, including computer hardware and
software and services in the areas of operations consulting, local and wide area
computer networks, video conferencing systems, and consolidated back office
services. The Company has entered into an agreement to purchase CompuNet,
subject to regulatory approval which was received on March 22, 1999, for a
purchase price of $4.3 million. It is expected that CompuNet will become a
wholly owned subsidiary of the Company. Currently, Mr. Aslin and Joseph F. Smith
are the controlling owners of CompuNet. Mr. Smith is also Executive Vice
President and Chief Technology Officer of the Company.
Certain of the officers, directors and principal stockholders of the
Company and its subsidiary banks, and members of their immediate families and
businesses in which these individuals hold controlling interests, are customers
of the Company's banks and it is anticipated such parties will continue to be
customers of the banks in the future. Credit transactions with these parties are
subject to review by each bank's Board of Directors. All outstanding loans and
extensions of credit by the banks to these parties were made in the ordinary
course of business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and, in the opinion of management, did not and do not involve
more than the normal risk of collectibility or present other features
unfavorable to the banks. The aggregate balance of loans and advances under
existing lines of credit to these parties was $9.1 million and $9.3 million at
December 31, 1998 and 1997, respectively.
The First State Bank and Trust Company ("First State Bank"), a wholly
owned subsidiary of the Company, is a defendant in an adversary proceeding,
filed on July 23, 1998, styled Nelson v. The First State Bank and Trust Company
in a bankruptcy case pending in the Federal Bankruptcy Court for the Western
District of Missouri, filed on October 14, 1997, styled In re: Hagman's Inc.
Hagman's Inc. was owned by William R. Hagman, Jr.'s deceased brother Kenneth R.
Hagman. Until his death on September 8, 1997, Kenneth R. Hagman served as a
director of First State Bank. William R. Hagman, Jr. has had no interest, direct
or indirect, in Hagman's Inc. since 1983. In the adversary proceeding, the
bankruptcy trustee alleges that First State Bank received preferential transfers
from Hagman's Inc. in settlement of loans and bank overdrafts of approximately
$694,000 plus interest prior to the commencement of the Hagman's Inc. bankruptcy
case. There is an issue as to whether First State Bank properly perfected its
security interest in the debtor's inventory. First State Bank and the trustee
each filed motions for summary judgment on the issue of perfection both of which
the court denied. First State Bank and the trustee then agreed to a settlement
that is subject to court approval, which is expected in early April 1999. As a
result of this pending settlement, First State Bank will be required to
recognize a charge to its existing reserve for loan losses.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) Exhibits
3(a) Restated Articles of Incorporation of the Company*
77
3(a)(i) Certificate of Amendment to Restated Articles of
Incorporation**
3(b) Amended and Restated Bylaws of the Company*
4 Form of Common Stock Certificate*
9(a) Proxy Agreement/Shareholder Agreement between Michael W.
Gullion and William Wallman, dated as of September 15, 1996*
9(b) Proxy Agreement/Shareholder Agreement between Michael W.
Gullion and William F. Wright, dated as of September 15, 1996*
9(c) Accession of The Lifeboat Foundation to the Proxy
Agreement/Stockholder Agreement among Michael W. Gullion,
William Wright and Allen Petersen, dated as of May 28, 1997***
9(d) Addendum to Proxy/Shareholder Agreement between Michael W.
Gullion and William Wallman dated as of February 10, 1999.
9(e) Addendum to Proxy/Shareholder Agreement among Michael W.
Gullion, Allen D. Peterson, William F. Wright and The
Lifeboat Foundation, dated as of February 10, 1999.
10(a) Employment Agreement between the Company and Michael W.
Gullion*
10(b) Amendment to Employment Agreement between the Company and
Michael W. Gillion.
10(c) Employment Agreement between the Company and Malcolm M. Aslin
10(d) Employment Agreement between the Company and Keith E. Bouchey*
10(e) Employment Agreement between the Company, CompuNet
Engineering, Inc. and Joseph F. Smith.
10(f) Gold Banc Corporation, Inc. 1996 Equity Compensation Plan*
10(g) Form of Tax Sharing Agreements between the Company and the
Banks*
10(h) Form of Federal Home Loan Bank Credit Agreement to which each
of the Banks is a party*
10(i) Form of Junior Subordinated Indenture dated as of December 15,
1977 between the Company and Bankers Trust Company as
Trustee.***
10(j) Form of Trust Agreement dated as of December 15, 1997 between
the Company and Bankers Trust (Delaware) as Trustee.***
10(k) Form of Amended and Restated Trust Agreement among the
Company, Bankers Trust Company, as Property Trustee, Bankers
Trust (Delaware), as Delaware Trustee and various holders of
Trust Securities.***
10(l) Form of Guarantee Agreement between the Company, as Guarantor,
and Bankers Trust Company, as Trustee, dated as of December
15, 1997.***
78
10(m) Registration Rights Agreement among the Company, Daniel
Buford, Sam Buford, Sharon Buford, Stephen Buford, Dillard
Enterprises, L.L.C., Eric M. Bohne Revocable Family Trust #1,
and Eric M. Bohne Revocable Family Trust #2, dated as of
December 10, 1998.
21 List of Subsidiaries of the Company
27 Financial Data Schedule
*Previously filed as an Exhibit to the Company's Registration Statement
on Form SB-2 No. 333-12377 and the same is incorporated herein by reference .
**Previously filed as an Exhibit to the Company's Registration
Statement on Form S-4 No. 333-28563 and the same is incorporated herein by
reference.
***Previously filed as an Exhibit to the Company's Registration
Statement on Form SB-2 No. 333-39849.
(b) Reports on Form 8-K
The Company filed the following three Current Reports on Form 8-K
during the fourth quarter of 1998:
(1) Form 8-K filed on November 15, 1998, reporting on the Company's
completed acquisition of First State Bancorp, Inc. on October 21,
1998 under Items 2 and 7.
(2) Form 8-K filed on December 15, 1998, reporting the Company's
consolidated revenue and net income for the eleven month period
ending November 30, 1998 under Item 5.
(3) Form 8-K filed on December 21, 1998, reporting on the Company's
completed acquisition of Citizens Bancorporation, Inc. on December
10, 1998 under Items 2 and 7.
79
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 on
its behalf by the undersigned, thereunto duly authorized.
GOLD BANC CORPORATION, INC.
(Registrant)
By: /s/ Michael W. Gullion
----------------------------------
Michael W. Gullion
Chief Executive Officer
Dated: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dated indicated:
Signature Title Date
--------- ----- ----
/s/ Michael W. Gullion Chairman of the Board and March 29, 1999
- - ---------------------------------------- Chief Executive
Michael W. Gullion Officer (Principal Executive
Officer)
/s/ Malcolm M. Aslin Director, President and March 29, 1999
- - ---------------------------------------- Chief Operating Officer
Malcolm M. Aslin
/s/ Keith E. Bouchey Director, Executive Vice March 29, 1999
- - ---------------------------------------- President, Chief Financial
Keith E. Bouchey Officer and Corporate
Secretary (Principal
Financial Officer)
/s/ Brian J. Ruisinger Treasurer and Controller March 29, 1999
- - ---------------------------------------- (Principal Accounting
Brian J. Ruisinger Officer)
/s/ William Wallman Director March 29, 1999
- - ----------------------------------------
William Wallman
/s/ D. Michael Browne Director March 29, 1999
- - ----------------------------------------
D. Michael Browne
/s/ William F. Wright Director March 29, 1999
- - ----------------------------------------
William F. Wright
Director March , 1999
- - ----------------------------------------
Allen D. Petersen
80
INDEX
-----
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OPERATIONS GOLD BANC CORPORATION, INC. AND SUBSIDIARIES
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K
i