<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended March 31, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaction period from ___________________ to ______________________
Commission File Number: 000-22951
LANDMARK FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
Delaware 16-1531343
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
26 Church Street, Canajoharie, NY 13317
(Address of Principal Executive Office) (Zip Code)
(518) 673-2012
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days. YES __ NO x
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [X]
The Registrant's revenues for the fiscal year ended March 31, 1998 were
$1,293,000.
As of June 10, 1998, there were issued and outstanding 152,000 shares of
the Registrant's Common Stock. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of the Common Stock as of June 10, 1998, 1998 ($12.75) was
$1,938,000.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
March 31, 1998 (Parts II and IV).
2. Proxy Statement for the 1998 Annual Meeting of Stockholders (Parts I and
III).
<PAGE>
PART I
ITEM 1. Business
Landmark Financial Corp.
Landmark Financial Corp. (the "Company") was organized in June 1997 for the
purpose of serving as the holding company for Landmark Community Bank (the
"Bank"). The Company has not engaged and will not engage in any material
operations. The Company has no significant assets other than the outstanding
capital stock of the Bank, net proceeds of $120,007 from the Stock Conversion
and a note evidencing its loan to the Bank's ESOP. The Company's principal
business is overseeing and directing the business of the Bank and investing the
net Stock Conversion proceeds retained by it.
At March 31, 1998, the Company had consolidated assets of $16,811,038,
deposits of $14,628,856 and stockholders' equity of $2,059,355.
The executive office of the Company is located at 26 Church Street,
Canajoharie, New York 13317-1117. Its telephone number at that address is
(518) 673-2012.
Landmark Community Bank
The Bank is a federally chartered stock savings bank headquartered in
Canajoharie, New York. The Bank was chartered in 1925 as a New York savings and
loan association under the name Canajoharie Building Savings and Loan
Association. In 1997, the Bank converted to a federal mutual savings bank
charter and changed its name to Landmark Community Bank. Its deposits are
insured up to the maximum allowable amount by the SAIF of the FDIC. Through its
office it serves communities located in Canajoharie, New York.
The Bank has been, and intends to continue to be, a community-oriented
financial institution offering selected financial services to meet the needs of
the communities it serves. The Bank attracts deposits from the general public
and historically has used such deposits, together with other funds, to originate
one- to four-family residential mortgage loans, and in recent periods to
originate commercial real estate loans, commercial business loans and consumer
loans consisting primarily of personal loans secured by automobiles. At March
31, 1998, the Bank's total loan portfolio was $13.8 million, of which $8.7
million, or 63.1% were one- to four-family residential mortgage loans, $971,000,
or 7.1% were commercial real estate loans, $3.9 million, or 28.6% were consumer
loans, and $169,000, or 1.2% were commercial business loans.
During the year ended March 31, 1998, the Bank originated $7.7 million of
fixed-rate and $237,000 million of adjustable rate loans, all of which were
retained in the Bank's portfolio. See "Business--Lending Activities."
The Bank's executive office is located at 26 Church Street, Canajoharie,
New York 13317-1117. Its telephone number at that address is (518) 673-2012.
Market Area and Competition
The Bank conducts its operations through its office in Canajoharie,
New York which is located in Montgomery County. Montgomery County's population
has remained relatively stable over the last 10 years. The largest employers
in the Bank's market area are Beechnut Foods, Inc., Richardson Foods and
Hasbro Toys. Consequently, the local economy is not expected to produce a
large number of one- to four-family residential mortgage lending
opportunities. Unemployment in Montgomery County is higher than the average
nationally and in New York State. At March 1998 the unemployment rate in
Montgomery County was 7.8%
The Bank faces competition in attracting deposits and originating loans.
Such competition consists of two commercial banks, one savings association and
one credit union.
<PAGE>
Lending Activities
General. The Bank has emphasized and, subject to market conditions, will
continue to emphasize the origination of one- to four-family residential
mortgage loans. However, to a lesser extent, the Bank intends to continue to
focus additional resources and lending efforts in consumer lending and
commercial business lending. In recent years, subject to market conditions, the
Bank has emphasized the origination of ARM loans and shorter-term fixed-rate
residential mortgage loans. At March 31, 1998, the Bank's portfolio of one- to
four-family residential mortgage loans totaled $8.7 million, or 63.1% of total
loans. At March 31, 1998, the commercial real estate portfolio totaled $971,000,
or 7.1% of total loans, all of which were secured by properties located in the
Bank's market area. The Bank's consumer loans consist primarily of personal
loans (primarily secured by automobiles), passbook loans and property
improvement loans. At March 31, 1998 consumer loans totaled $3.9 million, or
28.6% of total loans. The Bank has recently commenced the origination of
commercial business loans which at March 31, 1998 totaled $169,000, or 1.2% of
total loans.
Under OTS regulations, a thrift institution's loans-to-one borrower limit
is generally limited to the greater of 15% of unimpaired capital and surplus or
$500,000. See "Regulation--Federal Regulation of Savings Associations." At March
31, 1998, the maximum amount which the Bank could have lent under this limit to
any one borrower and the borrower's related entities was approximately $500,000.
At March 31, 1998, the Bank had no loans or groups of loans to related borrowers
with outstanding balances in excess of this amount. The Bank's largest lending
relationship at March 31, 1998 was approximately $150,000, which was secured by
a personal residence, barns, a fruit and vegetable retail store and 112 acres of
land. At March 31, 1998, this loan was performing in accordance with its terms.
Loan Portfolio Composition. The following information concerning the
composition of the Bank's loan portfolio in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and discounts and
allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
March 31,
---------------------------------------------
1998 1997
---------------------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family......................................... $ 8,687 63.13% $ 7,185 74.93%
Commercial.................................................. 971 7.06 392 4.09
------- -------- ------- --------
Total real estate loans................................... 9,658 70.19 7,577 79.02
------- -------- ------- --------
Other Loans:
Consumer Loans:
Property improvement........................................ 16 .11 29 .30
Passbook loans.............................................. 102 .74 229 2.39
Personal loans (1).......................................... 3,818 27.74 1,558 16.25
------- -------- ------- --------
Total consumer loans...................................... 3,936 28.59 1,816 18.94
Commercial business loans................................... 168 1.22 196 2.04
------- -------- ------- --------
Total loans............................................... $13,762 100.00% $ 9,589 100.00%
------- -------- ------- --------
------- -------- ------- --------
Less:
Loans in process............................................ -- $ (87)
Allowance for losses........................................ (122) (110)
------- --------
Total loans receivable, net................................. $13,640 $ 9,392
------- --------
------- --------
</TABLE>
- ----------
(1) Personal loans are primarily comprised of loans secured by automobiles.
2
<PAGE>
The following table shows the composition of the Bank's loan portfolio by
fixed- and adjustable-rate at the dates indicated.
<TABLE>
March 31,
---------------------------------------------
1998 1997
---------------------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family........................................ $ 4,713 34.25% $ 3,044 31.74%
Commercial................................................. 971 7.06 392 4.09
------- ----- ------- -----
Total real estate loans.................................. 5,684 41.31 3,436 35.83
Consumer..................................................... 4,105 29.83 1,816 18.94
------- ----- ------- -----
Total fixed-rate loans................................... 9,789 71.13 5,252 54.77
------- ----- ------- -----
Adjustable-Rate Loans:
Real estate:
One- to four-family........................................ 3,973 28.87 4,141 43.18
------- ----- ------- -----
Total real estate loans.................................. 3,973 28.87 4,141 43.18
------- ----- ------- -----
Consumer..................................................... -- -- 196 2.04
------- ----- ------- -----
Total adjustable-rate loans.............................. 3,973 28.87 4,337 45.23
------- ----- ------- -----
Total loans.............................................. $13,762 100.00% $ 9,589 100.00%
------- ------- ------- -------
------- -------
Less:
Loans in process............................................. -- $ (87)
Allowance for loan losses.................................... (122) (110)
------- --------
Total loans receivable, net.............................. $13,640 $ 9,392
------- --------
------- --------
</TABLE>
One- to Four-Family Mortgage Loans. The Bank's primary lending activity is
the origination for its portfolio of one- to four-family, owner-occupied,
residential mortgage loans secured by property located in the Bank's market
area. Loans are generated through the Bank's marketing efforts, its existing
customers and referrals, real estate brokers, builders and local businesses. The
Bank generally has limited its real estate loan originations to the financing of
properties located within its market area. The average principle balance of the
loans in the Bank's one- to four-family residential mortgage loan portfolio was
approximately $31,500 at March 31, 1998. At March 31, 1998, the Bank had $8.7
million, or 63.1% of its total loan portfolio, invested in mortgage loans
secured by one- to four-family residences.
The Bank originates fixed-rate residential one- to four-family loans with
terms of up to 20 years. As of March 31, 1998, $4.7 million, or 34.25% of the
Bank's loan portfolio, consisted of fixed-rate residential one- to four-family
loans. The Bank's fixed-rate mortgage loans amortize monthly with principal and
interest due each month. Residential real estate loans often remain outstanding
for significantly shorter periods than their contractual terms because borrowers
may refinance or prepay loans at their option. The Bank also originates
fixed-rate residential balloon loans with either five or ten year terms that
amortize over a 30 year period.
The Bank also offers ARM loans with maturities ranging up to 30 years. The
Bank currently offers ARM loans that adjust every year, with interest rate
adjustment limitations up to two percentage points per year and up to six
percentage points over the life of the loan. In a rising interest rate
environment, such rate limitations may prevent ARM loans from repricing to
market interest rates, which would have an adverse effect on net interest
income. The Bank has used different interest indices for ARM loans in the past,
and currently uses the one year U.S. Treasury Index adjusted to a constant
maturity, with a margin of 350 basis points for agency-conforming ARM loans. ARM
loans secured by residential one- to four-family real estate totaled $4.0
million, or 28.9% of the Bank's total loan portfolio at March 31, 1998. The
origination of fixed-rate mortgage loans versus ARM loans is monitored on an
ongoing basis and is affected significantly by the level of market interest
rates, customer preference, the Bank's interest rate gap position and loan
products offered by the Bank's competitors. Particularly in a relatively low
interest rate environment, borrowers prefer fixed-rate loans to ARM loans.
During fiscal 1998, the Bank originated $2.7 million in fixed-rate residential
mortgage loans and $239,000 of ARM loans.
The primary purpose of offering ARM loans is to make the Bank's loan
portfolio more interest rate sensitive. However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans do not offer the
Bank predictable cash flows as would long-term, fixed-rate loans. See
"Management's Discussion and Analysis
3
<PAGE>
of Financial Condition and Results of Operations--Asset/Liability Management."
ARM loans carry increased credit risk associated with potentially higher monthly
payments by borrowers as general market interest rates increase. It is possible,
therefore, during periods of rising interest rates, that the risk of
delinquencies and defaults on ARM loans may increase due to the upward
adjustment of interest costs to the borrower, resulting in increased loan
losses.
The Bank's residential first mortgage loans customarily include due-on-sale
clauses, which are provisions giving the Bank the right to declare a loan
immediately due and payable in the event, among other things, that the borrower
sells or otherwise disposes of the underlying real property serving as security
for the loan. Due-on-sale clauses are a means of imposing assumption fees and
increasing the interest rate on the Bank's mortgage portfolio during periods of
rising interest rates.
Regulations limit the amount that a savings association may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Such regulations permit a maximum
loan-to-value ("LTV") ratio of 95% for residential property (and 100% for loans
guaranteed by the Veterans Administration) and 90% for all other real estate
loans. The Bank's lending policies, however, generally limit the maximum LTV
ratio to 80% of the lesser of the appraised value or the purchase price of the
property securing the loan in the case of loans secured by one- to four-family
owner-occupied properties. On conventional one- to four-family loans, the Bank
will lend up to a 95% LTV ratio; however, loans with LTV ratios in excess of 80%
may require private mortgage insurance and loans with LTV ratios in excess of
90%, with rare exceptions, require private mortgage insurance or additional
readily marketable collateral.
When underwriting residential real estate loans, the Bank reviews each loan
applicant's employment, income and credit history. The Bank's policy is to
obtain credit reports and financial statements on all borrowers and guarantors.
Properties securing real estate loans are appraised by independent certified
appraiser. Appraisals are subsequently reviewed by the Bank's Chief Executive
Officer. Management believes that stability of income, past credit history and
adequacy of the proposed security are integral parts in the underwriting
process. Generally, the applicant's total monthly mortgage payment, including
all escrow amounts, is limited to 28% of the applicant's total monthly income.
In addition, total monthly obligations of the applicant, including mortgage
payments, should not generally exceed 36% of total monthly income. Written
appraisals are always required on real estate property offered to secure an
applicant's loan. The Bank requires fire and casualty insurance on all
properties securing real estate loans, as well as title insurance or a certified
abstract and written attorney's title opinion.
Commercial Real Estate Lending. The Bank originates loans secured by
commercial real estate. At March 31, 1998, $1.0 million, or 7.1%, of the Bank's
loan portfolio consisted of commercial real estate loans. The Bank's commercial
real estate loans are secured by a campground, restaurant and rental properties.
At March 31, 1998, 2.9% of commercial real estate loans were classified as
non-performing. The Bank will seek to emphasize the origination of commercial
real estate lending in the future. There can be no assurances, however, that
delinquencies will not increase in the future.
Commercial real estate loans originated by the Bank may be either
fixed- or adjustable-rate loans with terms to maturity and amortization
schedules of up to 20 years. Commercial real estate loans are written in amounts
of up to 75% of the lesser of the appraised value of the property or the sales
price.
Appraisals on properties which secure commercial real estate loans are
performed by an independent appraiser designated by the Bank before the loan is
made. All appraisals on commercial real estate loans are reviewed by the Bank's
Chief Executive Officer. In underwriting such loans, the Bank primarily
considers the cash flows generated by the real estate to support the debt
service, the financial resources and income level of the borrower and the Bank's
experience with the borrower. In addition, the Bank's underwriting procedures
require verification of the borrower's credit history, an analysis of the
borrower's income, financial statements and banking relationships, a review of
the borrower's property management experience and references, and a review of
the property, including cash flow projections and historical operating results.
The Bank seeks to ensure that the property securing the loans will generate
sufficient cash flow to adequately cover operating expenses and debt service
payments.
4
<PAGE>
Commercial real estate lending affords the Bank an opportunity to receive
interest at rates higher than those generally available from one- to four-family
residential lending. Nevertheless, loans secured by such properties are
generally larger, more difficult to evaluate and monitor and, therefore,
generally involve a greater degree of risk than one- to four-family residential
mortgage loans. Because payments on loans secured by commercial real estate are
often dependent on the successful operation or management of the properties,
repayment of such loans may be subject to adverse conditions in the real estate
market or the economy. If the cash flow from the project is reduced, the
borrower's ability to repay the loan might be impaired. The Bank has attempted
to minimize these risks by lending primarily to the ultimate user of the
property or on existing income-producing properties.
Consumer and Other Lending. The Bank originates a limited variety of
consumer loans, primarily property improvement loans, passbook loans and
personal loans which are secured by automobiles. The Bank currently originates
substantially all of its consumer loans in its primary market area.
The primary component of the Bank's consumer loan portfolio consists of
personal loans secured by automobiles. In the past year the Bank has sought to
increase its consumer loan originations. It has entered into correspondent
relationships with a number of automobile dealerships in its market area whereby
a borrower wishing to acquire an automobile will complete a loan form at the
dealership. The loan document is sent to the Bank which evaluates the borrower's
credit worthiness, including the borrower's credit history, ability to meet
existing obligations and payments on the proposed loan. The Bank generally will
not make an automobile loan with a loan-to-value ratio in excess of 80% of the
invoice price or the automobile's National Automobile Dealers Association
"yellow book" value. The Bank's personal loans are generally fixed rate loans
and have terms that do not exceed 66 months.
Finally, the Bank has originated a small number of loans for property
improvement. Such loans are generally secured by a second mortgage or UCC-1
filing on improvement and are originated as fixed-rate loans with terms of less
than 66 months.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards employed by the Bank for originated consumer loans include an
application, a determination of the applicant's payment history on other debts
and an assessment of ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as automobiles. Further, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At March 31, 1998, 2.0% of consumer loans were classified as
non-performing. See "--Asset Quality--Delinquent Loans and Non-Performing
Assets." There can be no assurances, however, that delinquencies will not
increase in the future.
Commercial Business Lending. The Bank originates commercial business loans
to borrowers located in its market area which are secured by collateral other
than real estate. Such commercial business loans are generally secured by
equipment, inventory and accounts receivable. At March 31, 1998, the Bank's
commercial business loan portfolio totaled $169,000, or 1.23% of total loans. At
that date, all of the Bank's commercial business loans were performing in
accordance with their terms.
The underwriting standards used by the Bank for commercial business loans
include a determination of the borrower's ability to meet existing obligations
and payments on the proposed loan from normal cash flow generated
5
<PAGE>
from the borrower's business. The financial strength of each borrower is
assessed through a review of tax returns and credit reports.
Commercial business loans generally bear higher interest rates than one- to
four-family residential loans, but they also involve a higher risk of default
since their repayment is dependent on the successful operation of the borrower's
business.
6
<PAGE>
Loan Maturity Schedule
The following table illustrates the interest rate sensitivity of the Bank's
loan portfolio at March 31, 1998. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Commercial Commercial
One- to Four-Family Real Estate Consumer Business
------------------- ------------------ ---------------------- --------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due During Years Ending March 31,
1999............................ $ 3 9.20% $ -- --% $ 322 8.79% $ 41 9.25%
2000............................ 15 9.78 18 9.50 165 10.90 5 9.50
2001 and 2002................... 813 8.85 -- -- 3,367 9.26 61 9.72
2003 to 2007.................... 1,452 8.91 230 9.95 81 9.18 61 8.75
2008 to 2022.................... 5,439 8.72 724 9.57 -- -- -- --
2023 and following.............. 965 8.28 -- -- -- -- -- --
------ ------- ------- ------
Total Amount Due $8,687 8.72 $ 972 9.66 $ 3,935 9.29 $ 168 9.24
------ ------- ------- ------
------ ------- ------- ------
Weighted
Average
Amount Rate
------ --------
<C> <C>
Due During Years Ending March 31,
1999............................ $ 366 8.85%
2000............................ 203 10.66
2001 and 2002................... 4,241 9.19
2003 to 2007.................... 1,824 9.05
2008 to 2022.................... 6,163 8.82
2023 and following.............. 965 8.28
-------
Total Amount Due $13,762 8.95
-------
-------
</TABLE>
- -----------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after March 31, 1999 which have predetermined
interest rates is $9.4 million, while the total amount of loans due after such
date which has floating or adjustable interest rates is $4.0 million.
7
<PAGE>
Loan Originations
Loan originations are developed from continuing business with depositors
and borrowers, soliciting realtors, builders, walk-in customers and third-party
sources. The Board of Directors of the Bank has authorized certain officers to
originate loans within specified underwriting limits. Specifically, Bank
officers may originate loans secured by single-family, owner occupied residences
up to $140,000. All loans over $50,000 or with a loan to value ratio over 80%
require action by the Bank's Loan Committee. In addition, the full Board of
Directors meets monthly to review all real estate loans made by officers of the
Bank.
While the Bank originates both adjustable-rate and fixed-rate loans, its
ability to originate loans to a certain extent is dependent upon the relative
customer demand for loans in its market, which is affected by the interest rate
environment, among other factors. For fiscal 1998, the Bank originated $7.7
million in fixed-rate loans and $239,000 in adjustable-rate loans.
The following table shows the loan origination and repayment activities of
the Bank for the periods indicated. The Bank did not purchase or sell any loans
during the periods indicated.
<TABLE>
<CAPTION>
Years Ended March 31,
------------------------
1998 1997
------- -------
(In Thousands)
<S> <C> <C>
Originations by Type:
Adjustable rate real estate:
- one- to four-family...................... $ 239 $ 1,051
- multi-family............................. -- --
- commercial............................... -- 586
Non-real estate-consumer........................ -- --
Commercial business.......................... -- 210
-------- --------
Total adjustable-rate.................... 239 1,847
-------- --------
Fixed-rate real estate:
- one- to four-family...................... 2,689 1,909
- multi-family............................. -- --
- commercial............................... -- --
Non-real estate-- consumer................... 4,300 1,919
Commercial business.......................... 725 --
-------- --------
Total fixed-rate......................... 7,714 3,828
-------- --------
Total loans originated................... 7,953 5,675
-------- --------
Principal repayments............................ 3,780 1,645
-------- --------
Total reductions......................... 3,780 1,645
-------- --------
Net increase (decrease)......................... $ 4,173 $ 4,030
-------- --------
-------- --------
</TABLE>
Asset Quality
The Bank's collection procedures provide that when a real estate loan is
past due 15 days, a delinquent notice is sent requesting payment. Prior to a
loan becoming 30 days past due, personal contact is attempted by the Bank's
collection officer. If the loan document provides for a right to cure, then the
required notice is mailed by certified mail and regular mail when the loan
becomes 30 days past due. Personal contact is continued on all delinquent real
estate loans until the loan is completely current.
With respect to consumer loans, a delinquent notice is sent requesting
payment 15 days after the due date. If payment is not made by the 30th day after
it is due, the Bank sends a certified letter requesting that the borrower cure
the delinquency. If consumer loans are not resolved by 90 days, the account is
put on non-accrual status and repossession and/or legal action is normally
initiated. Real estate loans of 30 days or more past due and consumer loans of
30 or more past due are reported monthly to the Board of Directors. For both
consumer loans and real estate loans, the Bank officer has authority to begin
foreclosure and/or repossession procedures at any time he feels it necessary or
advisable. At March 31, 1998, the total loans delinquent 90 days or more was
$144,000 and the total loans delinquent 60 to 89 days was $61,000.
8
<PAGE>
Delinquent Loans and Non-performing Assets. Loans are reviewed on a regular
basis and are placed on non-accrual status when, in the opinion of management,
the collection of additional interest is doubtful. Mortgage and consumer loans
are placed on non-accrual status when principal is 90 days or more past due.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. The loan will remain on non-accrual status
until the loan is brought current.
Real estate acquired through foreclosure or by deed-in-lieu of foreclosure
is classified as real estate owned until such time as it is sold. When real
estate owned is acquired, it is recorded at the lower of the unpaid principal
balance of the related loan, or its fair value, less estimated selling expenses.
Any further write-down of real estate owned is charged against earnings. At
March 31, 1998, the Bank had no property classified as real estate owned.
The following table sets forth the Bank's loan delinquencies by type, by
amount and by percentage of type at March 31, 1998.
<TABLE>
<CAPTION>
Loans Delinquent For:
60-89 Days 90 Days and Over Total Delinquent Loans
----------------------- ----------------------- -------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family... -- $-- --% 2 $ 99 1.14% 2 $ 99 1.14%
Commercial ........... -- -- -- 1 28 2.88 1 28 2.88
Consumer ............... 6 61 1.55 2 17 0.43 8 78 1.98
Commercial business..... -- -- -- -- -- -- -- -- --
Total ............. 6 $ 61 .44% 5 $144 .05% 11 $205 1.49%
</TABLE>
The table below sets forth the amounts and categories of non-performing
assets in the Bank's loan portfolio. Loans are placed on non-accrual status when
the collection of principal and/or interest become doubtful. For all years
presented, the Bank has had no troubled debt restructurings (which involve
forgiving a portion of interest or principal on any loans or making loans at a
rate materially less than that of market rates). Foreclosed assets include
assets acquired in settlement of loans. At March 31, 1998 and 1997, the Bank did
not have any accruing loans that were delinquent more than 90 days, nor did it
have any foreclosed assets.
<TABLE>
<CAPTION>
March 31,
-----------------------
1998 1997
-------- ------
(Dollars In Thousands)
<S> <C> <C>
Non-accruing loans:
One- to four-family................. $ 99 $ 47
Commercial real estate.............. 28 --
Consumer............................ 17 --
Commercial business................. -- --
------ -------
Total............................. 144 47
------ -------
Total non-performing assets........... $ 144 $ 47
------ -------
------ -------
Total as a percentage of total assets. 0.86% 0.41%
------ -------
------ -------
</TABLE>
For the year ended March 31, 1998, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $9,000. No amounts were included in interest income
on such loans for the year ended March 31, 1998.
Classified Assets. Federal regulations provide for the classification of
loans and other assets, such as debt and equity securities, considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful"
9
<PAGE>
have all of the weaknesses inherent in those classified "substandard" with the
added characteristic that the weaknesses present make "collection or liquidation
in full" on the basis of currently existing facts, conditions and values,
"highly questionable and improbable." Assets classified as "loss" are those
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either substandard
or doubtful, it may establish general allowances for losses in an amount deemed
prudent by management. General allowances represent loss allowances which have
been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as "loss," it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge-off such
amount. An institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the
regulatory authorities, who may order the establishment of additional general or
specific loss allowances.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank reviews loans in
its portfolio quarterly to determine whether such assets require classification
in accordance with applicable regulations.
On the basis of management's review of its assets, at March 31, 1998, the
Bank had classified a total of $89,000 of its loans and other assets as follows:
<TABLE>
<CAPTION>
March 31, 1998
--------------
(In Thousands)
<S> <C>
Special Mention........................... $ --
Substandard............................... 89
Doubtful assets........................... --
Loss assets............................... --
-------
Total................................ $ 89
-------
-------
General loss allowance.................... $ 122
-------
-------
Specific loss allowance................... --
Charge-offs............................... --
-------
-------
</TABLE>
Other Loans of Concern. In addition to the non-performing loans set forth
in the tables above, as of March 31, 1998, there were no loans classified by the
Bank with respect to which known information about the possible credit problems
of the borrowers or the cash flows of the security properties have caused
management to have some doubts as to the ability of the borrowers to comply with
present loan repayment terms and which may result in the future inclusion of
such items in the non-performing asset categories.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity, including those loans which are being specifically monitored by
management. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
loan classifications discussed above, the estimated fair value of the underlying
collateral, economic conditions, historical loan loss experience, the amount of
loans outstanding and other factors that warrant recognition in providing for an
adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at the
lower of cost or fair value minus estimated cost to sell. If fair value at the
date of foreclosure is lower than the balance of the related loan, the
difference will be charged-off to the allowance for loan losses at the time of
transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on such property is established by a
charge to operations. At March 31, 1998, the Bank had no properties that were
acquired through foreclosure.
Although management believes that it uses the best information available to
determine the allowance, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if
10
<PAGE>
circumstances differ substantially from the assumptions used in making the final
determination. Future additions to the Bank's allowance for loan losses will be
the result of periodic loan, property and collateral reviews and thus cannot be
predicted in advance. In addition, federal regulatory agencies, as an integral
part of the examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to increase the allowance based
upon their judgment of the information available to them at the time of their
examination. At March 31, 1998, the Bank had a total allowance for loan losses
of $122,000, representing 84.7% of total non-performing loans and 0.89% of the
Bank's loans receivable, net. See Notes A and C of the Notes to Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
At March 31,
----------------------------------------------------------------
1998 1997
----------------------------------------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- ------- --------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family............................. $ 60 $ 8,687 63.13% $ 55 $ 7,185 74.93%
Commercial real estate.......................... -- 971 7.06 -- 392 4.09
Consumer........................................ 59 3,936 28.59 53 1,816 18.94
Commercial business............................. 3 168 1.22 2 196 2.04
Unallocated..................................... -- -- -- -- -- --
------ ------- ------- ------- ------- -------
Total...................................... $ 122 $13,762 100.00% $ 110 $ 9,589 100.00%
------ ------- ------- ------- ------- -------
------ ------- ------- ------- ------- -------
</TABLE>
The following table sets forth an analysis of the Bank's allowance for loan
losses.
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------
1998 1997
------------- ---------
(Dollars In Thousands)
<S> <C> <C>
Balance at beginning of period........................................... $ 110 $ 32
Charge-offs:
One- to four-family................................................... (2) --
Commercial real estate................................................ -- --
Consumer.............................................................. -- --
Commercial business................................................... -- --
------- ------
Total charge-offs.................................................. (2) --
------- ------
Recoveries:
One- to four-family................................................... -- --
Commercial real estate................................................ -- --
Consumer.............................................................. -- --
Commercial business................................................... -- --
------- ------
Total recoveries................................................... -- --
------- ------
Net charge-offs.......................................................... (2) --
Provision for loan losses................................................ 14 78
------- ------
Balance at end of period................................................. $ 122 $ 110
------- ------
------- ------
Ratio of net charge-offs during the period
to average loans outstanding during the period.......................... 0.02% 0.00%
------- ------
------- ------
Ratio of net charge-offs during the period to
average non-performing assets 2.09% 0.00%
------- ------
------- ------
</TABLE>
11
<PAGE>
Investment Activities
General. The Bank must maintain minimum levels of investments that qualify
as liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Bank has generally
maintained liquid assets at levels above the minimum requirements imposed by the
OTS regulations and at levels believed adequate to meet the requirements of
normal operations, including repayments of maturing debt and potential deposit
outflows. Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is maintained. At March 31, 1998, the Bank's liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
current borrowings) was 18.0%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Liquidity and Capital Resources"
and "Regulation--Liquidity."
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including U.S. Treasury obligations, securities
of various federal agencies, certain certificates of deposit of insured banks
and savings institutions, certain bankers' acceptances, repurchase agreements
and federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Bank, as established by the Board
of Directors, is to invest funds among various categories of investments and
maturities based upon the Bank's liquidity needs, asset/liability management
policies, investment quality, marketability and performance objectives.
Mortgage-backed Securities. The Bank historically purchased mortgage-backed
securities primarily to supplement its lending activities, to generate positive
interest rate spreads on principal balances with minimal administrative expense,
to lower the credit risk of the Bank as a result of the guarantees provided by
Government National Mortgage Administration ("GNMA") and to generally assist in
managing the interest rate risk of the Bank. The Bank has invested primarily in
federal agency securities, principally GNMA obligations. At March 31, 1998, the
Bank's investment in mortgage-backed securities totaled $74,000, or 0.44% of its
total assets. At March 31, 1998, all of the Bank's mortgage-backed securities
were classified as held to maturity. See Note B of the Notes to Financial
Statements.
The GNMA certificates are modified pass-through mortgage-backed securities
that represent undivided interests in underlying pools of fixed-rate, or certain
types of adjustable-rate, single-family residential mortgages issued by these
government-sponsored entities. As a result, the interest rate risk
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable rate, as well as prepayment risk, are passed on to the certificate
holder. GNMA's guarantee to the holder of timely payments of principal and
interest is backed by the full faith and credit of the United States Government.
All of the Bank's GNMA certificates are fixed-rate securities.
Mortgage-backed securities generally yield less than the loans that
underlie such securities because of the cost of payment guarantees and credit
enhancements. In addition, mortgage-backed securities are usually more liquid
than individual mortgage loans and may be used to collateralize certain
liabilities and obligations of the Bank. These types of securities also permit
the Bank to optimize its regulatory capital because they have low risk
weighting.
Of the Bank's $74,000 mortgage-backed securities portfolio at March 31,
1998, mortgage-backed securities totaling $74,000 had contractual maturities
over 10 years. The actual maturity of a mortgage-backed security may be less
than its contractual maturity due to prepayments of the underlying mortgages.
Prepayments that are faster than anticipated may shorten the life of the
security and may result in a loss of any premiums paid and thereby reduce the
net yield on such securities. Although prepayments of underlying mortgages
depend on many factors, including the type of mortgages, the coupon rate, the
age of mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant determinant
of
12
<PAGE>
the rate of prepayments. During periods of declining mortgage interest rates, if
the coupon rate of the underlying mortgages exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Under such circumstances, the Bank may be subject to reinvestment risk because,
to the extent that the Bank's mortgage-backed securities amortize or prepay
faster than anticipated, the Bank may not be able to reinvest the proceeds of
such repayments and prepayments at a comparable rate.
The guaranteed portion of a given pool must be all fixed or all variable
rate. The certificates purchased by the Bank are fixed rate mortgage backed
securities.
The following table sets forth the composition of the Bank's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
----------------------------------
1998 1997
--------------- ----------------
Book % of Book % of
Value Total Value Total
----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities held to maturity:
GNMA ..................................... $ 67 90.54% $ 267 103.89%
----- ------ ----- ------
Unamortized premium (discounts), net ....... 7 9.46 (10) (3.89)%
----- ------ ----- ------
Total mortgage-backed securities ........ $ 74 100.00% $ 257 100.00%
----- ------ ----- ------
----- ------ ----- ------
</TABLE>
The following table shows mortgage-backed securities repayment activities
of the Bank for the periods indicated. The Bank did not purchase any
mortgage-backed securities during fiscal 1998.
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------
1998 1997
-------- ------
(In Thousands)
<S> <C> <C>
Purchases:
Adjustable-rate (1)................................... $ -- $ --
Fixed-rate (1)........................................ -- --
------- --------
Total purchases..................................... -- --
------- --------
Sales (136) --
Principal Repayments:
Principal repayments.................................. (47) (83)
Increase in other items, net.......................... -- --
------- --------
Net increase (decrease)............................. $ (183) $ (83)
------- --------
------- --------
</TABLE>
- -------------------------
(1) Consists of pass-through securities.
Other Investments. At March 31, 1998, the Bank's investment securities
other than mortgage-backed securities consisted of federal agency obligations,
U.S. Government securities, FHLB stock, and interest-earning deposits with other
financial institutions.
OTS regulations restrict investments in corporate debt and equity
securities by the Bank. These restrictions include prohibitions against
investments in the debt securities of any one issuer in excess of 15% of the
Bank's unimpaired capital and unimpaired surplus as defined by federal
regulations, plus an additional 10% if the investments are fully secured by
readily marketable collateral. At March 31, 1998, the Bank was in compliance
with this regulation. See "Regulation--Federal Regulation of Savings
Associations" for a discussion of additional restrictions on the Bank's
investment activities.
13
<PAGE>
The following table sets forth the composition of the Bank's investment
securities at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
-----------------------------------------------
1998 1997
--------------------- ------------------
Book % of Book % of
Value Total Value Total
----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Investment securities held to maturity:
Federal agency obligations.................................. $ -- --% $ 200 27.55%
Investment securities available for sale:
U.S. government securities.................................. 599 50.51 398 54.82
Federal agency obligations.................................. 500 42.15 -- --
Equity securities........................................... -- -- -- --
------- ------- ------- ------
Subtotal.................................................. 1,099 92.66 598 82.37
------- ------- ------- ------
Trading account security (1).................................. -- -- 69 9.50
FHLB stock.................................................... 87 7.34 59 8.13
------- ------- ------- ------
Total investment securities and FHLB stock $ 1,186 100.00% $ 726 100.00%
------- ------- ------- ------
------- ------- ------- ------
Average remaining life of debt securities..................... 2.3 years 4.3 years
Other interest-earning assets:
Interest-bearing deposits with banks........................ $ 1,490 100.00% $ 120 100.00%
Federal funds sold.......................................... -- -- -- --
------- ------- ------- ------
Total..................................................... $ 1,490 100.00% $ 120 100.00%
------- ------- ------- ------
------- ------- ------- ------
</TABLE>
- ----------
(1) Consists of Freddie Mac stock that was sold during the year ended March 31,
1998.
Investment Portfolio Maturities. The composition and maturities of the
investment securities portfolio and mortgage-backed securities are indicated in
the following table.
<TABLE>
<CAPTION>
At March 31, 1998
------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Investment Securities
---------------------------
Amortized Amortized Amortized Amortized Amortized Fair
Cost Cost Cost Cost Cost Value
--------- --------- --------- --------- --------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government securities.................. $300 $299 $ -- $-- $ 599 $ 606
Federal agency obligations.................. -- 100 400 -- 500 498
Mortgage-backed securities.................. -- -- -- 74 74 72
Total investment securities................. $300 $399 $400 $74 $1,173 $1,176
Weighted average yield...................... 6.24% 6.31% 6.77% 6.54% 6.46% 6.13%
</TABLE>
Sources of Funds
General. The Bank's primary sources of funds are deposits, receipt of
principal and interest on loans and securities, FHLB advances, and other funds
provided from operations.
FHLB advances are used to support lending activities and to assist in the
Bank's asset/liability management strategy. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Asset\Liability
Management." Typically, the Bank does not use other forms of borrowings. At
March 31, 1998, the Bank had no FHLB advances.
Deposits. The Bank offers deposit accounts having a range of interest rates
and terms. The Bank's deposits consist of passbook, checking and certificate
accounts. The certificate accounts currently range in terms from 91 days to 10
years.
14
<PAGE>
The Bank relies primarily on advertising, competitive pricing policies and
customer service to attract and retain these deposits. During fiscal 1998, the
Bank participated in an on-line service pursuant to which it advertises its
certificates of deposit rates nationwide. For the year ended March 31, 1998, the
Bank obtained certificates of deposit totaling $4.4 million through this
service, which represented 30.1% of the Bank's total deposits at March 31, 1998.
Deposits obtained through the on-line service are a more volatile source of
funds than transaction or savings accounts, or certificate of deposit accounts
obtained from depositors in the Bank's market area. As such, the Bank no longer
utilizes an on-line service to obtain certificate of deposits. The flow of
deposits is influenced significantly by general economic conditions, changes in
money market and prevailing interest rates and competition. During fiscal 1997,
the Bank introduced an interest bearing checking account product. At March 31,
1998, $234,000, or 1.6% of total deposits were in interest bearing checking
accounts.
The Bank has become more susceptible to short-term fluctuations in deposit
flows as customers have become more interest-rate conscious. The Bank endeavors
to manage the pricing of its deposits in keeping with its profitability
objectives giving consideration to its asset/liability management. At March 31,
1998, $893,000 million, or 8.4% of the Bank's certificates of deposit were in
certificates of deposit with terms of 12 months or less. The Bank believes that
upon maturity most of these deposits will remain at the Bank. The ability of the
Bank to attract and maintain savings accounts and certificates of deposit, and
the rates paid on these deposits, has been and will continue to be significantly
affected by market conditions.
Savings Portfolio
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by the Bank as of the dates indicated.
<TABLE>
<CAPTION>
At March 31,
------------------------------------------------
1998 1997
----------------------- --------------------
Amount Percent Amount Percent
------- ------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Transactions and savings deposits:
Non-interest bearing checking accounts....................... $ 226 1.54% 298 2.91%
Interest-bearing checking accounts 1.75%..................... 234 1.60 235 2.30%
Passbook accounts 3.00%...................................... 3,584 24.50 3,584 35.01
------- ------ ------- -----
Total transactions and savings deposits...................... 4,044 27.64 4,117 40.22
------- ------ ------- -----
Certificates of deposit:
0.00 - 3.99%............................................... -- -- 198 1.93
4.00 - 5.99%............................................... 2,983 20.39 2,672 26.10
6.00 - 7.99%............................................... 7,602 51.97 3,250 31.75
------- ------ ------- -----
Total certificates of deposit................................ 10,585 72.36 6,120 59.78
------- ------ ------- -----
Accrued Interest............................................. -- -- -- --
------- ------ ------- -----
Total Deposits............................................... $14,629 100.00% $10,237 100.00%
------- ------ ------- -----
------- ------ ------- -----
</TABLE>
15
<PAGE>
Deposit Activity
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Years Ended March 31,
--------------------------
1998 1997
---------- -------
(Dollars In Thousands)
<S> <C> <C>
Opening balance.................................. $ 10,237 $ 6,465
Deposits......................................... 33,278 7,115
Withdrawals...................................... (29,596) (3,628)
Interest credited................................ 710 285
--------- --------
Ending balance................................... $ 14,629 $ 10,237
--------- --------
--------- --------
Net increase (decrease).......................... $ 4,392 $ 3,772
--------- --------
--------- --------
Percent increase (decrease)...................... $ 42.90% 58.34%
--------- --------
--------- --------
</TABLE>
Time Deposit Maturity Schedule
The following table shows weighted average rate and maturity information
for the Bank's certificates of deposit as of March 31, 1998.
<TABLE>
<CAPTION>
Weighted
Certificate accounts maturing Total Average Percent of
in quarter ending Balance Rate Total
----------------------------- ---------- -------- ----------
(In Thousands)
<S> <C> <C> <C>
June 30, 1998............................. $ 727 5.74% 6.87%
September 30, 1998........................ 1,693 5.83 16.00
December 31, 1998......................... 888 5.73 8.39
March 31, 1999............................ 1,399 6.09 13.21
June 30, 1999............................. 1,649 6.45 15.57
September 30, 1999........................ 992 6.27 9.38
December 31, 1999......................... 295 6.15 2.79
March 31, 2000............................ 751 6.36 7.09
June 30, 2000............................. 775 6.77 7.32
September 30, 2000........................ 693 6.58 6.55
December 31, 2000......................... -- -- --
March 31, 2001............................ 107 6.29 1.01
June 30, 2001............................. 1 6.25 .01
Thereafter................................ 615 6.70 5.81
--------- -------
Total................................. $ 10,585 6.21 100.00%
--------- -------
--------- -------
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of March 31,
1998.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------- -------- -------- ------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000 $ 727 $ 1,590 $ -- $ 7,543 $ 9,860
Certificates of deposit of $100,000 or more -- 103 -- 622 725
------- -------- ------- -------- -------
Total certificates of deposit............... $ 727 $ 1,693 $ -- $ 8,165 $ 10,585
------- -------- ------- -------- -------
------- -------- ------- -------- -------
</TABLE>
16
<PAGE>
Borrowings. Federal law limits an institution's borrowings from the FHLB to
20 times the amount paid for capital stock in the FHLB, subject to regulatory
collateral requirements. At March 31, 1998, the Bank had an unused line of
credit at the FHLB for up to $788,000. At March 31, 1998, the Bank had no
advances from the FHLB.
Management of Market Risk - Interest Rate Risk
The Bank's most significant form of market risk is interest rate risk, as
the majority of the Bank's assets and liabilities are sensitive to changes in
interest rates. The Bank's mortgage loan portfolio, consisting primarily of
loans on residential real property located in Montgomery and Fulton Counties, is
subject to credit risk associated with the local economy. The Bank does not own
any assets classified as trading assets. At March 31, 1998 the Bank did not have
any hedging transactions in place, such as interest rate swaps and caps. The
Bank's interest rate risk management program focuses primarily on evaluating and
managing the composition of the Bank's assets and liabilities in the context of
various interest rate scenarios. Factors beyond the control of management, such
as market interest rates and competition, also have an impact on interest income
and interest expense. The Bank's assets consists primally of 1-4 family mortgage
loans and consumer auto loans which have longer maturities than the Bank's
liabilities which consist primarily of certificates of deposit and savings
deposits.
A principal part of the Bank's business strategy is to manage interest rate
risk and to minimize the Bank's exposure to changes in market interest rates. In
recent years, the Bank has followed the following strategies to manage interest
rate risk: (i) investing in short-term U.S. government securities and federal
agency obligations; and (ii) maintaining a high level of liquid interest earning
assets such as FHLB term deposits. By investing in short-term, liquid
securities, the Bank believes it is better positioned to react to increases in
market interest rates. However, investments in shorter-term securities generally
provide lower levels of interest income than would be obtained by investing in
longer term fixed rate loans. Management believes that maintaining a significant
portion of its assets in short-term investments reduces the Bank's exposure to
interest rate fluctuations and enhances long-term profitability.
Net Portfolio Value
Management monitors the Bank's interest rate sensitivity through use of a
model which estimates the change in net portfolio value ("NPV") in response to a
range of assumed changes in market interest rates. NPV is the present value of
expected cash flows from assets, liabilities, and off-balance sheet items. The
model estimates the effect on the Bank's NPV of instantaneous and permanent 100
to 400 basis point increases and decreases in market interest rates with no
given effect to any steps that management might take to counter the effect of
interest rate movements.
The table sets forth, as of March 31, 1998, the estimated changes in the
Bank's NPV which would result from the designated instantaneous change in
interest rates.
<TABLE>
<CAPTION>
Changes Estimated Increase
in (Decrease) in NPV (1)
Interest rates Estimated --------------------
(Basis points) NPV Amount Percent
-------------- --------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C>
+400 $ 2,216 (194) (8)%
+300 2,325 (85) (4)
+200 2,403 (7) 0
+100 2,442 32 1
0 2,410 -- --
-100 2,349 (61) (3)
-200 2,324 (85) (4)
-300 2,319 (91) (4)
-400 2,351 (58) (2)
</TABLE>
- --------------------------
(1) Represents the increase (decrease) in the estimated NPV at the indicated
change in interest rates compared to the NPV assuming no change in interest
rates.
17
<PAGE>
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of prospective actual results. Further, the computations do not
reflect any actions that management may undertake in response to a change in
market interest rates.
The table set forth above indicates that, in the event of a 200 basis point
decrease in interest rates, the Bank would experience a 4% decrease in NPV. In
the event of a 200 basis point increase in interest rates, the Bank would be
expected to experience less than a 1% decrease in NPV.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes in NPV require making certain
assumptions which may or nay not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV table
presented assumes that the composition of the Bank's interest sensitive assets
and liabilities existing at the beginning of a period remain constant over the
period being measured and assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration or the
repricing of specific assets and liabilities. Accordingly, although the NPV
table provides an indication of the Bank's interest rate risk exposure at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in interest rates on the
Bank's net income, and will differ from actual results. Additionally, the
guidelines established by the Board of Directors are not strict limitations.
While a goal of the Asset/Liability Management Committee and the Board of
Directors is to limit projected NPV changes to be within the Board's guidelines,
the Bank will not necessarily limit projected changes in NPV if the required
action would present disproportionate risk to the Bank's continued
profitability.
Employees
At March 31, 1998, the Bank had 8 full-time and one part-time employees.
The Bank's employees are not represented by any collective bargaining group.
Management considers its employee relations to be good.
Legal Proceedings
The Bank is involved, from time to time, as plaintiff or defendant in
various legal actions arising in the normal course of their businesses. While
the ultimate outcome of these proceedings cannot be predicted with certainty, it
is the opinion of management, after consultation with counsel representing the
Bank in the proceedings, that the resolution of these proceedings should not
have a material effect on the Company's financial position or results of
operations on a consolidated basis.
Service Corporation Activities
As a federally chartered savings association, the Bank is permitted by OTS
regulations to invest up to 2% of its assets, or approximately $200,000 at
March 31, 1998, in the stock of, or loans to, service corporation subsidiaries.
The Bank may invest an additional 1% of its assets in service corporations where
such additional funds are used for inner-city or community development purposes
and up to 50% of its total capital in conforming loans to service corporations
in which it owns more than 10% of the capital stock. In addition to investments
in service corporations, federal associations are permitted to invest an
unlimited amount in operating subsidiaries engaged solely in activities in which
a federal association may engage.
REGULATION
General
The Bank is a federally chartered savings association, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, the Bank is subject to broad federal
regulation and oversight extending to all its operations. The Bank is a member
of the FHLB of New York and is subject to certain limited regulation by the
Federal Reserve Board. As the savings and loan holding company of the Bank, the
Company also is subject to federal regulation and oversight. The purpose of the
regulation of the Company and other holding companies is to protect subsidiary
savings and loan associations. The Bank is a member of the
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SAIF. The deposits of the Bank are insured by the SAIF of the FDIC. As a result,
the FDIC has certain regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. When these examinations are conducted by the OTS and the FDIC, the
examiners may require the Bank to provide for higher general or specific loan
loss reserves. All savings associations are subject to a semi-annual assessment,
based upon the savings and loan association's total assets.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws and regulations, and the Bank is prohibited from
engaging in any activities not permitted by such laws and regulations. For
example, no savings institution may invest in non-investment grade corporate
debt securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings
associations are also generally authorized to branch nationwide. The Bank is in
compliance with the noted restrictions.
OTS regulations limit a thrift institution's loans-to-one borrower to the
greater of $500,000 or 15% of unimpaired capital and surplus (except for loans
fully secured by certain readily marketable collateral, in which case this limit
is increased to 25% of unimpaired capital and surplus). At March 31, 1998, the
Bank's lending limit under this restriction was approximately $500,000. The Bank
is in compliance with the loans-to-one borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a capital compliance
plan. A failure to submit a plan or to comply with an approved plan will subject
the institution to further enforcement action. The OTS and the other federal
banking agencies have also adopted additional guidelines on asset quality and
earnings standards. The guidelines were designed to enhance early identification
and resolution of problem assets.
During August and September 1997, the OTS conducted its previously
scheduled routine safety and soundness on-sight examination of the Bank. During
the course of its examination, OTS examiners raised a number of concerns and
noted certain deficiencies in the Bank's operation. As a result of the
examination, the Bank agreed with the OTS not to originate any new consumer or
commercial loans and to limit one-to four-family loan origination's to no more
than $200,000 per month. Management has addressed the concerns of the OTS and
full operational lending authority was restored in the quarter ending March 31,
1998.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. 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 and loan associations,
after giving the OTS an opportunity
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<PAGE>
to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged or is engaging in unsafe or unsound
practices, or is in an unsafe or unsound condition.
In September 1996, Congress enacted legislation to recapitalize the SAIF by
a one-time assessment on all SAIF-insured deposits held as of March 31, 1995.
The assessment was 65.7 basis points per $100 in deposits, payable on November
27, 1996 and amounted to $43,000 for the Bank. In addition, beginning January 1,
1997, interest payments on FICO bonds issued in the late 1980's by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation will be paid jointly by Bank Insurance Fund ("BIF") insured
institutions and SAIF-insured institutions. The FICO assessment is 1.29 basis
points per $100 for BIF deposits and 6.44 basis points per $100 for SAIF
deposits. Beginning January 1, 2000, the FICO interest payments will be paid pro
rata by banks and thrifts based on deposits (approximately 2.4 basis points per
$100 in deposits). In addition, as of January 1, 1997, SAIF assessment rates
dropped significantly and currently range from zero to 27 basis points based
upon an institution's regulatory risk classification and capital group. Prior to
the payment of the one-time special assessment, the Bank's annual SAIF
assessment per $100 in deposits as of June 30, 1996 was 23 basis points. The
Bank anticipates its ongoing SAIF assessment will be 6 basis points per $100 in
deposits.
The legislation also provides for the merger of the BIF and SAIF on
January 1, 1999 if there are no more savings associations as of that date.
Several bills have been introduced in the current Congress that would
eliminate the federal thrift charter and OTS. The bills would require that
all federal savings associations convert to national banks or state
depository institutions by no later than January 1, 1998 in one bill and June
30, 1998 in the other and would treat all state savings associations as state
banks for purposes of federal banking laws. Subject to a narrow
grandfathering, all savings and loan holding companies would become subject
to the same regulation as bank holding companies under the pending
legislative proposals. Under such proposals, any lawful activity in which a
savings association would be permitted for up to two years following the
effective date of its conversion to the new charter, with two additional
one-year extension which may be granted at the discretion of the regulator.
Additionally, such proposals would grandfather existing thrift intrastate and
interstate branches which were operated as branches or in the process of
being established on January 1, 1997 or January 7, 1997, respectively. The
legislative proposals would also abolish the OTS and transfer its functions
to the federal bank regulators with respect to the institutions and to the
Federal Reserve Board with respect to the regulation of holding companies.
The Company is unable to predict whether the legislation will be enacted or,
given such uncertainty, determine the extent to which the legislation, if
enacted, would affect its business. The Company is also unable to predict
whether the SAIF and BIF funds will eventually be merged.
Regulatory Capital Requirements
Federal Savings Associations. Federally insured savings associations, such
as the Bank, are required to maintain a minimum level of regulatory capital. The
OTS has established capital standards, including a tangible capital requirement,
a leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings and loan associations. Generally, these
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. Further, the valuation allowance applicable to the write-down
of investments and mortgage-backed securities in accordance with SFAS No. 115 is
excluded from the regulatory capital calculation. At March 31, 1998, the Bank
had no intangible assets and an unrealized loss, net of tax under SFAS No. 115
of $5,000.
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Limitations on Dividends and Other Capital Distributions
Federal Savings Associations. OTS regulations impose various restrictions
or requirements on associations with respect to their ability to pay dividends
or make other distributions of capital. OTS regulations prohibit an association
from declaring or paying any dividends or from repurchasing any of its stock if,
as a result, the regulatory capital of the association would be reduced below
the amount required to be maintained for the liquidation account established in
connection with its mutual-to-stock conversion.
The OTS utilizes a three-tiered approach to permit associations, based on
their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account.
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital exceeds its
fully phased-in capital requirement for such capital component, as measured at
the beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. The Bank meets the requirements
for a Tier 1 association and has not been notified of a need for more than
normal supervision. Tier 2 associations, which are associations that before and
after the proposed distribution meet their current minimum capital requirements,
may make capital distributions of up to 75% of net income over the most recent
four quarter period.
Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution. As a subsidiary of the Company, the Bank will also be
required to give the OTS 30 days' notice prior to declaring any dividend on its
stock. The OTS may object to the distribution during that 30-day period based on
safety and soundness concerns.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered
structure and the safe-harbor percentage limitations. Under the proposal a
savings association may make a capital distribution without notice to the OTS
(unless it is a subsidiary of a holding company) provided that it has a CAMEL
1 or 2 rating, is not in troubled condition and would remain adequately
capitalized (as defined by regulation) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must
notify the OTS 30 days prior to declaring a capital distribution. The OTS
stated it will generally regard as permissible that amount of capital
distributions that do not exceed 50% of the institution's excess regulatory
capital plus net income to date during the calendar year. A savings
association may not make a capital distribution without prior approval of the
OTS and the FDIC if it is undercapitalized before, or as a result of, such a
distribution. A savings association will be considered in troubled condition
if it has a CAMEL rating of 4 or 5, is subject to an enforcement action
relating to its safety and soundness or financial viability or has been
informed in writing by the OTS that it is in troubled condition. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted. At year end March 31,
1998, the Bank's CAMEL rating was 3.
Liquidity
All savings associations, including the Bank, are required to maintain an
average daily balance of liquid assets equal to a certain percentage of the sum
of its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. This liquid asset ratio requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the minimum liquid asset
ratio is 5%.
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<PAGE>
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term U.S. Treasury obligations) currently
must constitute at least 1% of the Bank's average daily balance of net
withdrawable deposit accounts and current borrowings. Penalties may be imposed
upon associations for violations of either liquid assets ratio requirement. At
March 31, 1998, the Bank was in compliance with both requirements, with a liquid
assets ratio of 18.0% and a short-term liquid assets ratio of 10.9%.
Accounting
An OTS policy statement applicable to all savings associations clarifies
and re-emphasizes that the investment activities of a savings association must
be in compliance with approved and documented investment policies and
strategies, and must be accounted for in accordance with generally accepted
accounting principles. Under the policy statement, management must support its
classification of and accounting for loans and securities (i.e., whether held
for investment, sale or trading) with appropriate documentation.
The OTS has adopted an amendment to its accounting regulations, which may
be made more stringent than generally accepted accounting principles to require
that transactions be reported in a manner that best reflects their underlying
economic substance and inherent risk and that financial reports must incorporate
any other accounting regulations or orders prescribed by the OTS. The Bank is in
compliance with these amended rules.
Qualified Thrift Lender Test
All savings associations, including the Bank, are required to meet a
qualified thrift lender ("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. At
March 31, 1998, the Bank met the test.
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 an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. 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
savings 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. If any association that fails the QTL test is controlled by a holding
company, then within one year after the failure, the holding company must
register as a bank holding company and become subject to all restrictions on
bank holding companies. See "--Holding Company Regulation."
Transactions with Affiliates
Generally, transactions between a savings association or its subsidiaries
and its affiliates are required to be on terms as favorable to the association
as transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the
association's capital. Affiliates of the Bank include the Company and any
company which is under common control with the Bank. In addition, a savings
association may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of most affiliates.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
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Holding Company Regulation
The Company will be a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non- savings association subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
holding company, and the activities of the Company and any of its subsidiaries
(other than the Bank or any other SAIF-insured savings and loan association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of the
OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See
"--Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control of
any other SAIF-insured association. Such acquisitions are generally prohibited
if they result in a multiple savings and loan holding company controlling
savings and loan associations in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings and loan association.
Interstate Banking and Branching. On September 29, 1994, the Riegle-Neal
Interstate Banking and Branching Act of 1994 (the "Act") was enacted to ease
restrictions on interstate banking. The Act allows the FRB to approve an
application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the assets
of, a bank located in a state other than such holding company's home state,
without regard to whether the transaction is prohibited by the laws of any
state. The FRB may not approve the acquisition of the bank that has not been in
existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state. The Act also prohibits the FRB from
approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. The Act does not
affect the authority of states to limit the percentage of total insured deposits
in the state which may be held or controlled by a bank or bank holding company
to the extent such limitation does not discriminate against out-of-state banks
or bank holding companies. Individual states may also waive the 30% state-wide
concentration limit contained in the Act.
Additionally, beginning on June 1, 1997, the federal banking agencies are
authorized to approve interstate merger transactions without regard to whether
such transaction is prohibited by the law of any state, unless the home state of
one of the banks opts out of the Act by adopting a law after the date of
enactment of the Act and prior to June 1, 1997 which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches will be permitted only
if the law of the state in which the branch is located permits such
acquisitions. Interstate mergers and branch acquisitions will also be subject to
the nationwide and statewide insured deposit concentration amounts described
above.
The Act authorizes the OCC and FDIC to approve interstate branching de novo
by national and state banks, respectively, only in states which specifically
allow for such branching. The Act also requires the appropriate federal banking
agencies to prescribe regulations by June 1, 1997 which prohibit any
out-of-state bank from using the interstate branching authority primarily for
the purpose of deposit production. These regulations must include guidelines to
ensure that interstate branches operated by an out-of-state bank in a host state
are reasonably helping to meet the credit needs of the communities which they
serve. The OCC, FDIC and FRB proposed such regulations on March 17, 1997.
Management of the Bank cannot predict when, or in what form final regulations
will be adopted.
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Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At March 31,
1998, the Bank was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements that may be imposed by the OTS.
See "--Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB of New York, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York. At March 31, 1998, the Bank had $87,000 of FHLB stock. In past
years, the Bank has received dividends on its FHLB stock. The dividend yield
from FHLB stock was 9.5% for fiscal 1998. No assurance can be given that such
dividends will continue in the future at such levels.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
Federal and State Taxation
Federal Taxation. Savings associations such as the Bank that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Code are permitted to establish reserves for bad debts and to
make annual additions thereto which may, within specified formula limits, be
taken as a deduction in computing taxable income for federal income tax
purposes. The amount of the bad debt reserve deduction for "non-qualifying
loans" is computed under the experience method. For tax years beginning before
December 31, 1995, the amount of the bad debt reserve deduction for "qualifying
real property loans" (generally loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable income
method (based on an annual election). If a savings association elected the
latter method, it could claim, each year, a deduction based on a percentage of
taxable income, without regard to actual bad debt experience.
Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings and loan association over a period of years.
Pursuant to certain legislation which was enacted and which is effective
for tax years beginning after 1995, a small thrift institution (one with an
adjusted basis of assets of less than $500 million), such as the Bank, no longer
is permitted to make additions to its tax bad debt reserve under the percentage
of taxable income method. Such institutions are permitted to use the experience
method in lieu of deducting bad debts only as they occur. Such legislation
requires the Bank to realize increased tax liability over a period of at least
six years, beginning in 1996. Specifically, the legislation requires a small
thrift institution to recapture (i.e., take into income) over a multi-year
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<PAGE>
period the balance of its bad debt reserves in excess of the lesser of (i) the
balance of such reserves as of the end of its last taxable year ending before
1988 or (ii) an amount that would have been the balance of such reserves had the
institution always computed its additions to its reserves using the experience
method. The recapture requirement is suspended for each of two successive
taxable years beginning January 1, 1996 in which the Bank originates an amount
of certain kinds of residential loans which in the aggregate are equal to or
greater than the average of the principal amounts of such loans made by the Bank
during its six taxable years preceding 1996. It is anticipated that any
recapture of the Bank's bad debt reserves accumulated after 1987 would not have
a material adverse effect on the Bank's financial condition and results of
operations. As of March 31, 1998, the Bank's accumulated bad debt reserves after
1987 amounted to $39,000.
If an association ceases to qualify as a "bank" (as defined in Code Section
581) or converts to a credit union, the pre-1988 reserves and the supplemental
reserve are restored to income ratably over a six-year period, beginning in the
tax year the association no longer qualifies as a bank. The balance of the
pre-1988 reserves are also subject to recapture in the case of certain excess
distributions to (including distributions on liquidation and dissolution), or
redemptions of, shareholders.
In addition to the regular federal income tax, corporations, including
savings and loan associations such as the Bank, generally are subject to a
minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20%
on alternative minimum taxable income, which is the sum of a corporation's
regular taxable income (with certain adjustments) and tax preference items, less
any available exemption. The alternative minimum tax is imposed to the extent it
exceeds the corporation's regular income tax and net operating losses can offset
no more than 90% of alternative minimum taxable income. For taxable years
beginning after 1986 and before 1996, corporations, including savings and loan
associations such as the Bank, are also subject to an environmental tax equal to
0.12% of the excess of alternative minimum taxable income for the taxable year
(determined without regard to net operating losses and the deduction for the
environmental tax) over $2 million.
The Bank files its federal income tax returns on a calendar year basis
using the cash method of accounting. The Company intends to file consolidated
federal income tax returns with the Bank. Savings and loan associations, such as
the Bank, that file federal income tax returns as part of a consolidated group
are required by applicable Treasury regulations to reduce their taxable income
for purposes of computing the percentage bad debt deduction for losses
attributable to activities of the non-savings and loan association members of
the consolidated group that are functionally related to the activities of the
savings association member.
The Bank has not been audited by the IRS with respect to federal income tax
returns during the past five years. In the opinion of management, any
examination of still open returns would not result in a deficiency which could
have a material adverse effect on the financial condition of the Bank.
State Taxation. The Bank is subject to the New York State Franchise Tax on
Banking Corporations in an annual amount equal to the greater of (i) 9% of the
Bank's "entire net income" allocable to New York State during the taxable year,
or (ii) the applicable alternative minimum tax. The alternative minimum tax is
generally the greatest of (a) .01% of the value of the taxable assets allocable
to New York State with certain modifications, (b) 3% of the Bank's "alternative
entire net income" allocable to New York State or (c) $250. Entire net income is
similar to federal taxable income, subject to certain modifications (including
that net operating losses cannot be carried back or carried forward) and
alternative entire net income is equal to entire net income without certain
adjustments.
Delaware Taxation. As a Delaware holding company, the Company is exempted
from Delaware corporate income tax but is required to file an annual report with
and pay an annual fee to the State of Delaware. The Company is also subject to
an annual franchise tax imposed by the State of Delaware.
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ITEM 2. Properties
The Bank conducts its business through its office, located in Canajoharie,
New York. The following table sets forth information relating to the Bank's main
office as of March 31, 1998. The total net book value of the Bank's premises and
equipment (including land, buildings and leasehold improvements and furniture,
fixtures and equipment) at March 31, 1998 was $197,000.
<TABLE>
<CAPTION>
Total Net Book Value
Approximate of Real Estate at
Location Date Acquired Square Footage March 31, 1998
- ------------------ ----------------- ----------------- ----------------
<S> <C> <C> <C>
Main Office: 1973 3,600 $127,000
26 Church Street
Canajoharie, New York
</TABLE>
ITEM 3. Legal Proceedings
There are various claims and lawsuits to which the Company is periodically
involved incident to the Company's business. In the opinion of management, such
claims and lawsuits in the aggregate are immaterial to the Company's
consolidated financial condition and results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.
PART II
ITEM 5. Market for Company's Common Stock and Related Security Holder
Matters
The "Market for Common Stock" section of the Company's Annual Report to
Stockholders is incorporated herein by reference.
ITEM 6. Selected Financial Data
The selected financial information for the year ended March 31, 1998 is
filed as part of the Company's Annual Report to Stockholders and is incorporated
by reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report to Stockholders which is incorporated herein by
reference.
ITEM 8. Financial Statements and Supplementary Data
The financial statements are contained in the Company's Annual Report to
Stockholders and is incorporated herein by reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
26
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Company
(a) Information concerning the directors of the Company is incorporated by
reference hereunder in the Company's Proxy Materials for the Annual Meeting of
Stockholders.
(b) Set forth below is information concerning the Principal Officer of the
Company.
<TABLE>
<CAPTION>
Name Age Title
- ----------------- --- -----
<S> <C> <C>
Gordon E. Coleman 43 President, Chief Executive Officer and Director
</TABLE>
ITEM 11. Executive Compensation
Information with respect to management compensation and transactions
required under this item is incorporated by reference hereunder in the Company's
Proxy Materials for the Annual Meeting of Stockholders under the caption
"Compensation".
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the sections captioned "Stock Ownership of
Management" is incorporated by reference to the Company's Proxy Materials for
its Annual Meeting of Stockholders.
ITEM 13. Certain Relationships and Related Transactions
The information required by this item is set forth under the caption
"Certain Transactions" in the Definitive Proxy Materials for the Annual Meeting
of Stockholders and is incorporated herein by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The exhibits and financial statement schedules filed as a part of this Form
10-K are as follows:
(A) Independent Auditors' Report
(B) Consolidated Statements of Financial Condition - March 31,
1998 and 1997
(C) Consolidated Statements of Operations - years ended
March 31, 1998 and 1997
(D) Consolidated Statements of Changes in Stockholders' Equity -
years ended March 31, 1998 and 1997
(F) Consolidated Statements of Cash Flows - years ended
March 31, 1998 and 1997
(G) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
27
<PAGE>
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(b) Reports on Form 8-K
The Company has not filed a Current Report on Form 8-K during the
fourth quarter of the fiscal year ended March 31, 1998.
(c) Exhibits
<TABLE>
<CAPTION>
<S> <C>
3.1 Certificate of Incorporation of Landmark Financial Corp.
Incorporated herein by reference to the Company's registration
statement on SB-2, file No. 333- 29793 (the "SB-2")
3.2 Bylaws of Landmark Financial Corp. (Incorporated herein by
reference to the Company's SB-2
4 Form of Stock Certificate of Landmark Financial Corp.,
incorporated from Form SB-2.
13 Annual Report to Stockholders
21 Subsidiaries of Company
27 Financial Data Schedule
</TABLE>
28
<PAGE>
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Landmark Financial Corp.
Date: June 24, 1998 By: /s/ Gordon E. Coleman
---------------------
Gordon E. Coleman
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By:/s/ Gordon E. Coleman By:/s/ F. Richard Ferraro
------------------------- ---------------------------
Gordon E. Coleman F. Richard Ferraro
President, Chief Executive Director
Officer and Director
(Principal Executive Officer)
Date: June 24, 1998 Date: June 24, 1998
By:/s/ John F. Von Ahn By:/s/ Patricia A. Symolon
------------------------- ---------------------------
John F. Von Ahn Patricia A. Symolon
Chief Financial Officer Director
(Principal Financial and
Accounting Officer)
Date: June 24, 1998 Date: June 24, 1998
By:/s/ John R. Francisco By:/s/ Carl J. Rockefeller
------------------------- ----------------------------
John R. Francisco Carl J. Rockefeller
Chairman of the Board Vice Chairman of the Board
Date: June 24, 1998 Date: June 24, 1998
By:/s/ Frederick LaCoppola By:/s/ Carl S. Salmon III
------------------------- ----------------------------
Frederick LaCoppola Carl S. Salmon III
Director Director
Date: June 24, 1998 Date: June 24, 1998
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
LANDMARK FINANCIAL CORP.
1998 ANNUAL REPORT
<PAGE>
LANDMARK FINANCIAL CORP.
26 Church Street
Canajoharie, New York 13317
Telephone (518) 673-2012
Telefax (518) 673-2081
- -------------------------------------------------------------------------------
The Board of Directors, Officers, and Staff of Landmark Financial Corp. and
its wholly owned subsidiary, Landmark Community Bank are pleased to provide
you, our fellow shareholders, with our first annual report as a publicly
owned company.
This past year was one of many changes for our Bank. After serving area
communities for over seventy years as a mutual institution under the name of
Canajoharie Building, Savings and Loan Association, our Bank, as part of its
modernization process and in an effort to broaden the market appeal of the
institution changed it's name to Landmark Community Bank.
A second major change occurred in April, 1997 when the Bank converted its
charter from that of a New York State chartered mutual savings and loan to a
federally chartered savings bank. The culmination of these actions was the
conversion of the Bank's form of ownership in November, 1997 from that of a
mutual savings bank to it's current form of ownership, a publicly owned
savings bank.
The Bank continued to experience substantial growth during fiscal year 1998.
Assets grew from $11.33 million at March 31, 1997 to $16.81 million at March
31, 1998. Net loans receivable grew from $9.40 million at March 31, 1997 to
$13.64 million at March 31, 1998. Consumer and one-to-four family mortgage
loans represented $3.76 million of that growth. Deposits grew correspondingly
from $10.24 million at March 31, 1997 to $14.63 million at March 31, 1998.
Net income after taxes for the year 1998 was $7,500 compared to a loss of
$36,000 in 1997. Notwithstanding our growth, we remain a well capitalized
institution with capital in excess of regulatory requirements.
As a result of the Initial Stock Offering, the shareholder's equity grew from
$955,000 at March 31, 1997 to $2.06 million at March 31, 1998. As was
originally disclosed in the Bank's prospectus, the proceeds of the stock
offering will be used to take advantage of further growth opportunities in
our market area.
We are very pleased with the progress of the construction of a new full
service banking facility located on Erie Boulevard in the Village of
Canajoharie. It is anticipated that construction will be completed during the
third quarter of calendar 1998. This facility will allow the utilization of a
drive-up window, night depository, and more lobby space for our growing
customer base.
Our primary goal continues to be the enhancement of shareholder value while
continuing to provide a financial institution committed to meeting the needs
of its customers.
Thank you for your confidence in our Bank as we look forward to a prosperous
future.
Sincerely,
/s/ Gordon E. Coleman
----------------------
Gordon E. Coleman
President and CEO
<PAGE>
Table of Contents
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business of the Company 1
Selected Consolidated Financial Information 2-3
Management's Discussion and Analysis of Financial Condition
And Results of Operations 4-13
Independent Auditors' Report 14
Consolidated Financial Statements 15-18
Notes to Consolidated Financial Statements 19-36
Common Stock Information 37
Directors and Officers 38
Corporate Information 39
Annual Meeting 39
</TABLE>
<PAGE>
Business Of The Company
Landmark Financial Corp. (the "Company") is a Delaware Corporation which is the
holding company for Landmark Community Bank (the "Bank"). The Company was
organized by the Bank for the purpose of acquiring all of the capital stock of
the Bank in connection with the conversion of the Bank from mutual to stock
form, which was completed on November 13, 1997 (the "Conversion"). The only
significant assets of the Company are the capital stock of the Bank; the
Company's loan to the Bank's Employee Stock Ownership Plan (ESOP), and the
remaining net proceeds of the conversion retained by the Company of
approximately, $120,000. The business of the Company initially consists of the
business of the Bank.
The Bank was originally chartered in 1925 as a New York-chartered mutual savings
and loan association under the name Canajoharie Building Savings & Loan
Association, and is headquartered in Canajoharie, New York. The Bank amended its
mutual charter in 1997 to become a federal mutual savings bank. At March 31,
1998, the Bank had total assets of $16,811,038, deposits of $14,628,856 and
stockholders' equity of $2,059,355.
The Bank conducts its business through its main office in Canajoharie,
Montgomery County, New York. The Bank has been, and intends to continue to be, a
community -oriented financial institution offering selected financial services
to meet the needs of the communities it serves. The Bank attracts deposits from
the general public and historically has used such deposits, together with other
funds, primarily to originate one-to-four family residential mortgage loans,
construction and land loans for single-family residential properties, commercial
loans and consumer loans consisting primarily of loans secured by automobiles.
While the Bank's primary business has been that of a traditional thrift
institution, originating one-to-four family mortgage loans in its primary market
area for retention in its portfolio, the Bank also has been an active
participant in the origination of consumer loans primarily for the purchase of
automobiles.
1
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
Set forth below are selected consolidated financial and other data of the
Company. The financial data is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements and Notes thereto
presented elsewhere in this Annual Report.
<TABLE>
<CAPTION>
At March 31,
---------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total Assets .................. $16,811 11,326 7,606 7,628 8,212
Cash and cash equivalents ..... 1,530 709 1,351 881 1,495
Loans receivable, net ......... 13,640 9,392 5,528 6,267 6,248
Trading Account Securities (1) -- 69 -- -- --
Mortgage Backed Securities:
Held to maturity ....... 74 257 340 206 255
Investment Securities
Held to maturity ....... -- 200 -- -- --
Available for sale ..... 1,104 398 241 134 2
FHLB Stock .................... 87 59 64 64 64
Deposits ...................... 14,629 10,237 6,465 6,518 7,228
Advances by borrowers for taxes
and insurance .......... 97 107 95 155 148
Total stockholders' equity .... 2,059 956 993 907 824
</TABLE>
<TABLE>
<CAPTION>
At March 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Total interest income .............. $ 1,293 $ 688 $ 622 $ 565 $ 560
Total interest expense ............. (726) (326) (270) (225) (267)
------- ------- ------- ------- -------
Net interest income ............... 567 362 352 340 293
Provision for loan losses .......... (12) (78) -- -- --
------- ------- ------- ------- -------
Net interest income after
provision for loan losses ......... 555 284 352 340 293
Fees and service charges ........... 29 29 10 14 19
Other non-interest income .......... 38 67 -- -- --
------- ------- ------- ------- -------
Total non-interest income .......... 67 96 10 14 19
Total non-interest expense ......... (610) (434) (239) (242) (294)
------- ------- ------- ------- -------
Income (loss) before taxes ......... 12 (54) 123 112 18
Income tax (provision) benefit ..... (5) 18 (38) (29) (4)
------- ------- ------- ------- -------
Net income (loss) .................. $ 7 $ (36) $ 85 $ 83 $ 14
------- ------- ------- ------- -------
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Operations Data:
Perfomance Ratios:
Return on assets (ratio of net income to
average total assets) ................................ 0.05% -0.41% 1.08% 1.07% 0.17%
Return on retained earnings (ratio of
net income to average equity) ........................ 0.56% -3.67% 8.83% 9.55% 1.68%
Interest rate spread information:
Average during period ................................ 3.37% 3.77% 4.13% 4.16% 3.29%
End of period ........................................ 2.81% 3.34% 4.25% 4.18% 3.36%
Net interest margin (1) ................................ 3.71% 4.23% 4.59% 4.52% 3.65%
Ratio of operating expense to average total assets ..... 3.83% 4.89% 3.04% 3.11% 3.53%
Ratio of average interest-earning assets to average
interest-bearing liabilities ......................... 107.16% 111.97% 114.46% 112.28% 110.84%
Asset Quality Ratios:
Non-performing assets to total assets
at end of period ..................................... 0.86% 0.41% 0.00% 0.00% 0.00%
Allowance for loan losses to non-performing loans ...... 84.72% 235.32% 0.00% 0.00% 0.00%
Allowance for loan losses to loans receivable, net ..... 0.89% 1.17% 0.58% 0.51% 0.49%
Capital Ratios:
Net worth to total assets at end of period ............. 12.25% 8.43% 13.56% 12.31% 10.03%
Average net worth to average assets .................... 8.31% 11.06% 12.27% 11.17% 9.94%
Other Data:
Number of full-service offices ......................... 1 1 1 1 1
</TABLE>
- ----------------
(1) Net interest income divided by average interest earning assets.
3
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
GENERAL
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial conditions and
results of operations of the Company. The information contained in this section
should be read in conjunction with the consolidated financial statements and
accompanying notes thereto.
Certain statements in this annual report and throughout Management's Discussion
and Analysis of Financial Condition and Results of Operations are "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements involve known and unknown risk,
uncertainties and other factors that may cause the Company's actual results,
performance or achievements to be materially different from the results,
performance or achievements expressed or implied by any "forward looking
statement." "Forward looking statements" are generally identifiable by use of
the words "believe," "expect," "intend," "anticipate," "estimate," "project," or
similar expressions. Factors that may impact such "forward looking statements"
include, among others, changes in general economic conditions, changes in
interest rates, the legislative and regulatory environment, monetary and fiscal
policies of the United States government, the quality and/or composition of the
loan and/or investment portfolios, demand for loan products, deposit flows,
changes in accounting principles or policies and changes in competition.
The deposits of the Bank are presently insured by the Savings Association
Insurance Fund ("SAIF"), which together with the Bank Insurance Fund ("BIF") are
the two insurance funds administered by the Federal Deposit Insurance
Corporation (FDIC). In the third quarter of 1995, the FDIC lowered the premium
schedule for BIF-insured institutions in anticipation of the BIF achieving its
statutory reserve ratio. The reduced premium created a significant disparity in
deposit insurance expense causing a competitive advantage for BIF members.
Legislation enacted on September 30, 1996 provided for a one-time special
assessment of .657% of the Bank's SAIF insured deposits at March 31, 1995. The
purpose of the assessment was to bring the SAIF to its statutory reserve ratio.
Based upon the above formula, the Bank charged $43,000 against earnings for the
year ended March 31, 1997. Although the special one-time assessment
significantly increased non-interest expense for the period, the anticipated
reduction in the premium schedule has reduced the Bank's federal insurance
premiums in the current fiscal year.
During August and September 1997, the Office of Thrift Supervision (OTS)
conducted its previously scheduled routine safety and soundness on-sight
examination of the Bank. During the course of its examination OTS examiners
raised a number of concerns and noted certain deficiencies in the Bank's
operations. As a result of the examination Bank agreed with the OTS not to
originate any new consumer or commercial loans and to limit one-to-four family
loan origination's to no more than $200,000 per month. Management has addressed
the concerns of the OTS and full operational lending authority was restored in
the quarter ending March 31, 1998.
4
<PAGE>
OPERATING STRATEGY
The business of the Bank consists principally of attracting deposits from the
general public and using deposits to originate consumer loans and mortgage loans
secured by one-to-four family residences. The Bank's net income is primarily
dependent on net interest income, which is the difference between the income
earned on its interest-earning assets, such as loans and investments, and the
cost of its interest-bearing liabilities, which are primarily deposits. However,
the Bank's net income is also effected to a lesser extent by provisions for loan
losses and other operating income and expenses. General economic conditions,
particularly changes in market interest rates, government legislation, monetary
policies, and policies and actions of the regulatory authorities are some of the
many external factors that may have an effect on the Bank's net income.
Management has implemented various strategies designed to enhance the Bank's
profitability while maintaining its safety and soundness. These strategies
include reducing the Bank's exposure to interest rate risk by emphasizing
originations of adjustable rate mortgage loans for its portfolio and also of
originating shorter term consumer loans. The Bank maintains the asset quality of
its loan portfolio by adhering to internal loan underwriting policies. The Bank
also generally limits its investment portfolio and its investment in mortgage
backed securities to securities of the United States government, and its
Agencies and to mortgage-backed securities collateralized by the United States
government.
It is management's intention to remain a retail financial institution dedicated
to financing home ownership and consumer needs, and to providing quality service
to its customers located in Montgomery and the surrounding counties in the state
of New York.
YEAR 2000
The Bank is in the process of conducting a review of its computer systems in
order to determine which systems could be affected by the "Year 2000" issue,
while at the same time developing an implementation plan to resolve any
identified problem. The "Year 2000" problem is the result of computer programs
that were written using a two digit field rather than a four digit field to
define the year. For example, programs that have date-sensitive fields may
recognize a date using "00" as the year 1900 rather than the year 2000. The
result of this programming error could be system failure or miscalculation.
Management believes that with modifications to existing software and by
converting to new hardware, the "Year 2000" problem will not pose significant
operational problems for the Bank. Given the Bank's interdependence on a
third-party service provider, the internal costs related to the Bank's Year 2000
efforts will consist primarily of accelerating various hardware and software
upgrades which generally would have been incurred in the normal course of
business. Management does not believe that the internal costs necessary to
address the "Year 2000" issue will have a material adverse impact on future
operations other than the impact such an event will have on the cost of services
provided by its third-party service providers which is unknown at this time.
Management cannot guarantee that any third-party service provider will be Year
2000 ready other than through assurances provided from the third party service
provider to the Company.
5
<PAGE>
FINANCIAL CONDITION
Total Assets. Total assets increased $5.48 million or 48.4%, to $16.81 million
at March 31, 1998 from $11.33 million at March 31, 1997. Part of this increase
was due to the sale of Landmark Financial Corp. common stock, which generated
net proceeds of $1,086,433 on November 13, 1997, after deducting a $121,600 loan
by Landmark Financial Corp. to the Bank. This loan was used to purchase common
stock of Landmark Financial Corp. for the Landmark Community Bank Employee Stock
Ownership Plan (ESOP). The remaining increase in assets was due to an increase
in loans receivable of approximately $4.25 million from $9.39 million at
March 31, 1997 to $13.64 million at March 31, 1998.
Loans Receivable, Net. Loans receivable, net increased by $4.25 million or
45.23% to $13.64 million at March 31, 1998 from $9.39 million at March 31, 1997,
primarily due to increases in consumer loans of $2.26 million, an increase in
commercial loans of $550,000, and an increase in one-to-four family portfolio
loans of $1.50 million.
Mortgage-Backed Securities. Mortgage-backed securities decreased by $183,000 or
71.19% to $74,000 at March 31, 1998 from $257,000 at March 31, 1997. The
decrease was due to prepayments on loans, which secure the Bank's
mortgage-backed securities.
Investment Securities. Investment securities available-for-sale increased
$706,000 or 177.51% to 1.10 million at March 31, 1998 from $400,000 at March 31,
1997. The increase was funded primarily with proceeds received from the public
offering of Landmark Financial Corp.
Deposits. Deposits increased $4.40 million, or 42.90%, to $14.63 million at
March 31, 1998 from $10.24 million at March 31, 1997. The increase in deposits
is primarily attributable to an increase in out of market certificate of
deposits of $4.40 million with maturities of two to five years. These deposits
were obtained by participating in an on-line Internet service through
advertising certificate of deposit rates nationwide.
Equity. Total stockholders' equity increased $1.10 million or 115.66%, to
$2.06million at March 31, 1998 from $955,000 at March 31, 1997, due to the sale
of 152,000 common shares of Landmark Financial Corp. at an initial offering
price of $10 per share less the establishment of the Bank's ESOP for $121, 600
and conversion-related costs of $311,967.
Comparison of Operating Results for the Years Ended March 31, 1998 and March 31,
1997.
Performance Summary. Net income increased $43,539 to $7,467 for the year ended
March 31, 1998, compared to a net loss of $36,072 for the year ended March 31,
1997. The increase in
6
<PAGE>
earnings for the year ended March 31, 1998 as compared to the year ended
March 31, 1997 is primarily due to the one-time special assessment of
$43,000 paid to the SAIF fund in the year ended March 31, 1997.
Net Interest Income. Net interest income increased $205,165, or 56.71%, to
$566,918 for the year ended March 31, 1998, from $361,753 for the year ended
March 31, 1997. The increase in net interest income reflects an increase of
$604,546, to $1,292,906 from $688,360 in interest income and a corresponding
increase of $399,381, to $725,988 from $326,607 in interest expense for the year
ended March 31, 1998 as compared to the year ended March 31, 1997. The increase
in interest income reflects increased balances of loans receivable, primarily
consumer auto loans and one-to-four family mortgages that were originated during
the year ended March 31, 1998. Interest expense increased primarily due to the
increase of out of market deposits of $4.39 million.
For the year ended March 31, 1998, the average yield on interest-earning assets
was 8.47% compared to 8.05% for the year ended March 31, 1997. The average cost
of interest-bearing liabilities was 5.10% for the year ended March 31, 1998
which was an increase from 4.28% for the year ended March 31, 1997. The average
balance of interest-earning assets increased $6.72 million or 78.57%, to $15.27
million for the year ended March 31, 1998 as compared to $8.55 million for the
year ended March 31, 1997. During the same period, the average balance of
interest-bearing liabilities increased $6.61 million or 86.58%, to $14.25
million from $7.64 million in fiscal 1997.
Due to higher funding costs, the average interest rate spread was 3.37% for the
year ended March 31, 1998 compared to 3.77% for fiscal 1997. The average net
interest margin also decreased to 3.71% at March 31, 1998 compared to 4.23% for
the year ended March 31, 1997.
Provision for Loan Losses. During the year ended March 31, 1998, the Bank
charged $12,000 against earnings as a provision for loan losses compared to a
provision of $78,000 charged against earnings for the year ended March 31, 1997.
The Bank's loan portfolio has experienced minimal charge-offs in the past two
years and only one in fiscal 1998. The allowance for loan losses at March 31,
1998 is .89% of loans receivable, net as compared to 1.17% of loans receivable,
net at March 31, 1997. The allowance for loan losses as a percentage of
non-performing assets was 84.72% at March 31, 1998 as compared to 235.32% at
March 31, 1997. Total non-performing loans at March 31, 1998 are $144,000, or
1.06% of loans receivable, net, as compared to total non-performing loans at
March 31, 1997 of $47,000 or 0.50% of loans receivable net.
Management regularly reviews the loan portfolio, including problem loans, and
changes in the relative makeup of the loan portfolio to determine whether any
loans require classification or the
7
<PAGE>
establishment of additional reserves. Management will continue to monitor its
allowance for loan losses and make future additions to the allowance as economic
conditions dictate. Although the Bank maintains its allowance for loan losses at
a level which it considers to be adequate to provide for potential losses, there
can be no assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods.
Non-interest Income. For the year ended March 31, 1998, non-interest income
decreased $28,069 or 29.29%, to $67,766 from $95,835 for the same period in
1997. The decrease is primarily due to a gain realized in the sale of trading
account securities in the amount of $12,411 in for the year ended March 31, 1998
as compared to a gain of $67,056 for the year ended March 31, 1997. Commissions
received by the Bank for brokering mortgage applications underwritten at other
financial institutions was $19,061 for the year ended March 31, 1998 as compared
to $0 (zero) for the year ended March 31, 1997.
Non-interest Expense. Non-interest expense increased $175,912 or 40.53%, to
$609,972 for the year ended March 31, 1998 from $434,060 for the same period in
1997. During this same period compensation and related benefits expense
increased $118,996, due to the addition of staff to handle the increased loan
and deposit activity. Other operating expenses increased $83,184 due to
additional legal, accounting and regulatory reporting expenses associated with
being a public company.
Income Taxes. Income taxes increased by $23,645 to $5,245 for the year ended
March 31, 1998 from a tax benefit of $18,400 for the year ended March 31, 1997.
The increase is due to the increase in pre-tax income. The Company's effective
tax rate is 34% for the year ended March 31, 1998 and 0.00% for the year ended
March 31, 1997.
8
<PAGE>
Average Yields Earned and Rates Paid
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- ------- ------ ----------- ------- ------ ----------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) ................ $13,250 $ 1,174 8.86% $ 6,960 $ 585 8.41% $ 5,866 516 8.80%
Mortgage-backed securities .......... 117 10 8.55% 290 26 8.97% 249 22 8.84%
Investment securities ............... 849 53 6.24% 393 27 6.87% 314 19 6.05%
FHLB stock .......................... 74 7 9.46% 61 4 6.56% 64 5 7.81%
Interest bearing deposits ........... 978 49 5.01% 846 46 5.44% 1,178 60 5.09%
------- ------- ------- ------- ------- -------
Total interest-earning assets ..... $15,268 $ 1,293 8.47% $ 8,550 $ 688 8.05% $ 7,671 $ 622 8.11%
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Interest-bearing checking ........... $ 463 3 0.65% $ 63 1 1.59% $ 0 0 0.00%
Passbook accounts ................... 3,965 118 2.98% 3,703 108 2.92% 4,185 126 3.01%
Certificate accounts ................ 9,820 605 6.16% 3,870 217 5.61% 2,517 144 5.72%
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities ....................... $14,248 726 5.10% $ 7,636 326 4.27% $ 6,702 270 4.03%
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Net interest income ................... $ 567 $ 362 $ 352
------- ------- -------
------- ------- -------
Net interest rate spread .............. 3.37% 3.78% 4.08%
----- ----- -----
----- ----- -----
Net earning assets .................... $ 1,020 $ 914 $ 969
------- ------- -------
------- ------- -------
Net yield on average
interest-earning assets ............. 3.71% 4.23% 4.59%
----- ----- -----
----- ----- -----
Ratio of average interest-earning
assets to average interest-bearing
liabilities ......................... 107.16% 111.97% 114.46%
------- ------- -------
------- ------- -------
</TABLE>
- --------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves
9
<PAGE>
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average yield on loans ................................... 8.86% 8.41% 8.80%
Weighted average yield on mortgage-backed securities .............. 8.55% 8.97% 8.84%
Weighted average yield on investment securities ................... 6.24% 6.87% 6.05%
Weighted average yield on FHLB stock .............................. 9.46% 6.56% 7.81%
Weighted average yield on other interest-bearing deposits ......... 5.01% 5.44% 5.09%
Weighted average yield on all interest-earning assets ............. 8.47% 8.05% 8.11%
Weighted average rate paid on interest-bearing checking ........... 0.65% 1.59% 0.00%
Weighted average rate paid on passbook accounts ................... 2.98% 2.92% 3.01%
Weighted average rate paid on certificate accounts ................ 6.16% 5.61% 5.72%
Weighted average rate paid on all interest-bearing liabilities .... 5.10% 4.27% 4.03%
Interest rate spread (spread between weighted average
rate on all interest-earning assets and all interest-bearing
liabilities) .................................................... 3.37% 3.78% 4.08%
Net interest margin (net interest income as a percentage
of average interest-earning assets) ............................. 3.71% 4.23% 4.59%
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- --------------------------
Rate Volume Net Rate Volume Net
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans Receivable ............................................... $ 529 $ 60 $ 589 $ 97 $ (28) $ 69
Investment Securities .......................................... 31 (5) 26 4 0 4
Mortgage-backed securities ..................................... (16) (0) (16) 12 (4) 8
Other .......................................................... 8 (2) 6 (18) 3 (15)
----- ----- ----- ----- ----- -----
Total net change in income on interest-earning assets ......... $ 553 $ 52 $ 605 $ 95 $ (29) $ 66
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
Interest-bearing liabilities:
Passbook accounts .............................................. $ 8 $ 2 $ 10 $ (21) $ 0 $ (21)
Interest-bearing checking ...................................... 6 (4) 2 1 0 1
Certificates of deposit ........................................ 334 54 388 64 12 76
----- ----- ----- ----- ----- -----
Total net change in income on interest-bearing liabilities .... $ 348 $ 52 $ 400 $ 44 $ 12 $ 56
----- ----- ----- ----- ----- -----
Net change in net interest income ................................ $205 $ 10
----- -----
----- -----
</TABLE>
11
<PAGE>
xxxxxxxxxxxxxxx
Comparison of Operating Results for the Years Ended March 31, 1997 and March 31,
1996.
Performance Summary. Net income decreased $121,410 to a net loss of $36,072 for
the year ended March 31, 1997, compared to net income of $85,338 for the year
ended March 31, 1996. The decrease in earnings for the year ended March 31, 1997
as compared to the year ended March 31, 1996 is partly due to the one-time
special assessment of $43,000 paid to the SAIF fund in the year ended March 31,
1997 and partly due to an increase in compensation expense of $68,673 in order
to prepare for the Bank's loan portfolio growth.
Net Interest income. Net interest income increased $9,414, or 2.67%, to $361,753
for the year ended March 31, 1997, from $352,339 for the year ended March 31,
1996. The increase in net interest income reflects an increase of $65,906, to
$688,360 from $622,454 in interest income and a corresponding increase of
$56,492, to $326,607 from $270,115 in interest expense for the year ended March
31, 1997 as compared to the year ended March 31, 1996. The increase in interest
income reflects increased balances of loans receivable, primarily consumer auto
loans and one-to-four family mortgages that were originated during the year
ended March 31, 1997. Interest expense increased primarily due to the increase
of deposits of $3.77 million.
For the year ended March 31, 1997, the average yield on interest-earning assets
was 8.05% compared to 8.11% for the year ended March 31, 1996. The average cost
of interest-bearing liabilities was 4.28% for the year ended March 31, 1997
which was an increase from 3.99% for the year ended March 31, 1996. The average
balance of interest-earning assets increased $879,340 or 11.46%, to $8.55
million for the year ended March 31, 1997 as compared to $7.67 million for the
year ended March 31, 1996. During the same period, the average balance of
interest-bearing liabilities increased $934,768 or 13.95%, to $7.64 million from
$6.70 million in fiscal 1996.
Due to higher funding costs, the average interest rate spread was 3.77% for the
year ended March 31, 1997 compared to 4.13% for fiscal 1996. The average net
interest margin also decreased to 4.23% at March 31, 1997 compared to 4.59% for
the year ended March 31, 1996.
Provision for Loan Losses. During the year ended March 31, 1997, the Bank
charged $78,000 against earnings as a provision for loan losses compared to a
provision of $0 (zero) charged against earnings for the year ended March 31,
1996. The increase to the loan provision was made in order to bring the loss
allowance in line with the overall thrift industry. The allowance for loan
losses at March 31, 1997 was 1.17% of loans receivable, net as compared to 0.58%
of loans receivable, net at March 31, 1996. The allowance for loan losses as a
percentage of non-performing assets was 235.32% at March 31, 1997 as compared to
0.00% at March 31, 1996. Total non-performing loans at December 31, 1997 are
$47,000, or 0.50% of loans receivable, net, as compared to total non-performing
loans at March 31, 1997 of $0 or 0.00% of loans receivable net.
<PAGE>
Non-interest Income. For the year ended March 31, 1997, non-interest income
increased $85,555 or 832.25%, to $95,835 from $10,280 for the year ended
March 31, 1996. The increase is primarily due to a gain realized in the sale
of trading account securities in the amount of $67,056 for the year ended
March 31, 1997. The remaining increase was due to increased loan fees as a
result of the increased size of the loan portfolio.
Non-interest Expense. Non-interest expense increased $194,879 or 81.48%, to
$434,060 for the year ended March 31, 1997 from $239,181 for the year ended
March 31, 1996. During this same period compensation and related benefits
expense increased $68,673 due to the addition of staff to handle the increased
lending activity. Also during fiscal year 1997 there was a one-time special
assessment of $43,000 paid to help recapitalize the SAIF fund. Other operating
expenses increased $76,780 due to an increase in resources demanded to grow the
loan portfolio.
Income Taxes. Income taxes decreased by $56,500 to a benefit of $18,400 for the
year ended March 31, 1997 from a tax expense of $38,100 for the year ended
March 31, 1996. The increase is due to the increase in pre-tax income. The
Company's effective tax rate is 0.00% for the year ended March 31, 1997 and
31% for the year ended March 31, 1996.
xxxxxxxxxxxxxxxxxxxx
<PAGE>
Asset and Liability Management
One of the Bank's principal financial objectives is to achieve long-term
profitability while reducing its exposure to fluctuations in interest rates. The
Bank has sought to reduce exposure of its earnings to changes in market rates by
managing the mismatch between asset and liability maturities and interest rates.
The principal element in achieving this objective has been to increase the
interest-rate sensitivity of the Bank's assets by originating loans with
interest rates subject to periodic adjustment to market conditions and of
originating consumer loans with maturities of five years and less. The Bank
currently retains longer term fixed rate loans in the portfolio as part of its
effort to increase the size and the yield of its loan portfolio and to reduce
its mortgage-backed securities portfolio. The Bank has adopted an informal
policy, which is subject to change from time to time, to increase the longer
term fixed rate loans in its portfolio so that such loans comprise the majority
of loans in the overall portfolio mix. In addition, the Bank has invested in
short to intermediate term investments to hedge against decreases in interest
rates.
The Company has historically relied upon retail deposit accounts in the form of
savings accounts and certificates of deposits as its primary source of funds.
Management believes that reliance upon retail deposits accounts as a source of
funding, compared to brokered deposits or long-term borrowings, reduces the
effects of interest rate fluctuations because these deposits generally represent
a stable source of funds from within and around the surrounding communities.
The Bank's Board of Directors has formulated and Asset Liability Management
Policy designed to promote long-term profitability while managing interest-rate
risk. The Company recognizes the inherent risk in its interest-sensitive gap
position, particularly in periods of fluctuating interest rates.
Liquidity and Capital Resources
The Bank's principal sources of funds are deposits, principal and interest
payments on loans, deposits in other insured institutions and investment
securities. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan prepayments are more
influenced by interest rates, general economic conditions and competition.
Additional sources of funds may be obtained from the Federal Home Loan Bank of
New York by utilizing numerous available products to meet funding needs. The
Bank has a credit line with the Federal Home Loan Bank of New York in the amount
of $1,576,600, which expires on September 11, 1998. It is management's intention
to renew the credit line prior to its expiration. At March 31, 1998, the Bank
had no borrowings outstanding to the FHLB.
In light of the competition for deposits, the Bank may utilize the funding
source of the FHLB to meet demand in accordance with the Bank's growth plans.
The wholesale funding sources may allow the Bank to obtain a lower cost of
funding and create a more efficient liability match to the respective assets
being funded.
12
<PAGE>
The Bank is required to maintain minimum levels of liquid assets as defined by
regulations. The required percentage is currently 5.0% of net withdrawable
savings deposits and borrowings payable on demand or in one year or less. The
Bank has maintained its liquidity ratio at levels exceeding the minimum
requirement. The eligible liquidity ratio at March 31, 1998 and March 31, 1997
were 18.06% and 12.45%, respectively.
The Bank's most liquid assets are cash and cash equivalents. For these purposes,
all short-term investments with a maturity of three months or less at date of
purchase are considered cash equivalents. Cash and cash equivalents for the
periods ended December 31, 1997 and March 31, 1997 were $1,530,236 and $709,458,
respectively. The increase was primarily due to the fact that the majority of
the proceeds from the sale of common stock were invested at the FHLB.
At March 31, 1998 the Bank had neither outstanding loan commitments nor loans
awaiting disbursement. Additionally, the Company is constructing a new
headquarters/branch facility in Canajoharie, New York, which should be completed
by August 1, 1998 with at an estimated cost of $450,000. Prior to March 31,
1998, approximately $35,000 was disbursed for the purchase of the land. It is
anticipated that sufficient funds will be available to meet loan commitments
including loan applications received and in process, as well as, funds for the
construction of the new facility.
Certificates of deposit, which are scheduled to mature in one year or less at
March 31, 1998, were $4.70 million. Management believes that a significant
portion of such deposits will remain with the Bank.
At March 31, 1998, the Bank had tangible capital of $2,166,749, or 12.9% of
total adjusted assets, which is approximately $1,914,549 above the minimum
requirement of 1.5% of adjusted total assets in effect on that date. The Bank
had core capital of $2,166,749, or 12.9% of total adjusted assets, which is
approximately $1,494,349 above the minimum leverage ratio of 4.0% in effect on
that date. The bank had total capital of $2,166,749 and total risk-weighted
assets of $9.7million, or total capital of 22.3% of risk weighted assets. This
was $1,400,449 above the 8.0% requirement in effect on that date.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto, presented herein, have
been prepared in accordance with generally accepted accounting principles, which
generally requires the measurement of financial position and operating results
in terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
13
<PAGE>
HARVAZINSKI & MONTANYE, LLP
Certified Public Accountants
Albany, New York
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Landmark Financial Corp. and Subsidiary
We have audited the accompanying consolidated statements of financial
condition of Landmark Financial Corp. (the Company) and subsidiary as of March
31, 1998 and 1997, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the years then ended. 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Landmark
Financial Corp. and subsidiary as of March 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/S/ HARVAZINSKI & MONTANYE, LLP
-------------------------------
Albany, New York
May 14, 1998
- --------------------------------------------------------------------------------
14
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31,
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Cash (including interest bearing deposits
$1,490,000, 1998; $120,000, 1997) ........................... $ 1,530,236 $ 709,458
Trading account securities ....................................... -- 69,324
Mortgage-backed securities, held-to-maturity ..................... 74,080 257,096
Investment securities
Securities held-to-maturity ................................. -- 200,000
Securities available-for-sale ............................... 1,103,916 397,793
Loans receivable, net ............................................ 13,640,142 9,392,212
Investments required by law -stock in Federal Home Loan
Bank of New York, at cost ................................... 87,400 58,500
Accrued interest receivable ...................................... 86,143 38,630
Premises and equipment, net of accumulated depreciation .......... 197,234 155,379
Deferred tax asset ............................................... 7,100 7,100
Other assets ..................................................... 84,787 40,309
---------- ----------
Total Assets ....................................... $ 16,811,038 $ 11,325,801
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDES' EQUITY
LIABILITIES
Accounts payable ............................................ $ 3,851 $ 7,920
Deposits .................................................... 14,628,856 10,237,301
Advance payments by borrowers for property taxes and
insurance ............................................... 97,453 107,277
Other liabilities ........................................... 21,523 18,397
---------- ----------
Total liabilities ....................................... 14,751,683 10,370,895
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock of $.10 par value; 100,000 shares
authorized, none issued ................................. -- --
Common stock of $.10 par value; 900,000 shares authorized;
152,000 and -0- shares issued and outstanding in 1998
and 1997, respectively .................................. 15,200 --
Additional paid-in capital .................................. 1,192,833 --
Retained earnings, substantially restricted ................. 963,752 956,285
Unrealized gain (loss) on securities available-for-sale,
net of applicable deferred income taxes ................. 5,036 (1,379)
Unearned ESOP shares ........................................ (117,466) --
---------- ----------
2,059,355 954,906
---------- ----------
Total Liabilities and Stockholders' Equity ......... $ 16,811,038 $ 11,325,801
---------- ----------
---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
15
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended
March 31,
1998 1997
---------- ----------
<S> <C> <C>
INTEREST INCOME
Loans receivable
First mortgage loans ..................... $ 742,948 $ 545,030
Other loans .............................. 431,341 39,932
Investment securities and interest
bearing deposits ............................ 118,617 103,398
---------- ----------
Total interest income .................. 1,292,906 688,360
INTEREST EXPENSE
Interest on deposits ......................... 725,988 326,607
---------- ----------
Net interest income ................. 566,918 361,753
PROVISION FOR LOAN LOSSES ......................... 12,000 78,000
---------- ----------
Net interest income after provision
for loan losses ................................ 554,918 283,753
---------- ----------
NONINTEREST INCOME
Loan fees and service charges ................ 28,559 28,779
Trading account gain on FREDDIE MAC stock .... 12,411 67,056
Other noninterest income ..................... 26,796 --
---------- ----------
Total noninterest income ............... 67,766 95,835
---------- ----------
NONINTEREST EXPENSE
General and administrative expenses
Compensation, payroll taxes and
fringe benefits ........................ 303,150 184,154
Advertising and business promotion ....... 9,156 6,030
Building occupancy and equipment expenses,
including depreciation ................. 37,695 34,086
Federal insurance premiums ............... 8,121 55,256
Data processing expenses ................. 36,804 22,672
Other operating expenses ................. 215,046 131,862
---------- ----------
Total noninterest expense .............. 609,972 434,060
---------- ----------
Income (loss) before income taxes ... 12,712 (54,472)
PROVISION FOR INCOME TAX EXPENSE (BENEFIT) ........ 5,245 (18,400)
---------- ----------
Net income (loss) ................... $ 7,467 $ (36,072)
---------- ----------
---------- ----------
NET INCOME PER COMMON SHARE
Basic ........................................ $ .05 $ --
---------- ----------
---------- ----------
Diluted ...................................... $ .05 $ --
---------- ----------
---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
16
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
Years Ended March 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
gain (loss)
on securities
available-
for-sale, net
Additional of applicable Unearned Total
Common stock paid-in Retained deferred ESOP Stockholders'
Shares Amounts Capital Earnings Income Taxes Shares Equity
------ ------- ---------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT
March 31, 1996 -- $-- $-- $ 992,357 $ 38,907 $-- $ 1,031,264
Net income (loss) -- -- -- (36,072) -- -- (36,072)
Change in unrealized
gain (loss) on
securities available
for-sale, net of
applicable deferred
income taxes -- -- -- -- (40,286) -- (40,286)
------- ----------- ----------- --------- --------- ----------- -----------
BALANCES AT
March 31, 1997 -- -- -- 956,285 (1,379) -- 954,906
Net income -- -- -- 7,467 -- -- 7,467
Sale of common stock,
net of issuance costs 152,000 15,200 1,192,833 -- -- -- 1,208,033
Unearned ESOP shares -- -- -- -- -- (121,600) (121,600)
ESOP shares earned -- -- -- -- -- 4,134 4,134
Change in unrealized
gain (loss) on
securities available-
for-sale, net of
applicable deferred
income taxes -- -- -- -- 6,415 -- 6,415
------- ----------- ----------- --------- --------- ----------- -----------
BALANCES AT
March 31, 1998 152,000 $ 15,200 $ 1,192,833 $ 963,752 $ 5,036 $ (117,466) $ 2,059,355
------- ----------- ----------- --------- --------- ----------- -----------
------- ----------- ----------- --------- --------- ----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
17
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended
March 31,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES
Net income (loss) ............................ $ 7,467 $ (36,072)
Adjustments to reconcile net income to net
cash provided by (used in)
operating activities
Depreciation ............................. 18,456 11,570
Amortization (accretion), net ............ 2,066 2,755
Provision for loan losses ................ 14,437 78,000
Deferred income taxes .................... -- (18,900)
Allocation of ESOP shares ................ 4,134 --
Decrease (increase) in
Accrued interest receivable ......... (47,513) (19,343)
Trading account securities .......... 69,324 (69,324)
Other assets ........................ (44,478) (30,601)
Increase (decrease) in
Accounts payable .................... (4,069) 5,581
Other liabilities ................... 3,126 17,843
----------- -----------
22,950 (58,491)
----------- -----------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES
Net increase in loans receivable ............. (4,262,367) (3,942,580)
Proceeds from sale of investments
required by law ............................. -- 5,700
Purchases of available-for-sale securities ... (701,774) (399,063)
Proceeds from principal repayments of
mortgage-backed securities .................. 47,483 82,618
Purchase of premises and equipment ........... (60,311) (113,407)
Purchase of investments required by law ...... (28,900) --
Proceeds of held-to-maturity securities ...... 335,533 --
Proceeds from issuance of common stock, net
of issuance costs ........................... 1,086,433 --
----------- -----------
(3,583,903) (4,366,732)
----------- -----------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES
Net increase in deposits ..................... 4,391,555 3,772,228
Increase (decrease) in advances from borrowing
taxes and insurance ......................... (9,824) 11,880
----------- -----------
4,381,731 3,784,108
----------- -----------
Net increase (decrease) in cash ..... 820,778 (641,115)
CASH, beginning of year ........................... 709,458 1,350,573
----------- -----------
CASH, end of year ............................... $ 1,530,236 $ 709,458
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes ............................. $ 17,350 $ 17,140
----------- -----------
----------- -----------
Interest $ ............................... 725,988 $ 326,607
----------- -----------
----------- -----------
Increase (decrease) on unrealized gain
on securities available-for-sale ......... $ 6,415 $ (40,286)
----------- -----------
----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
18
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Organization
On November 13, 1997, Landmark Community Bank (the Bank) converted from a
federally chartered mutual savings bank to a federally chartered stock
savings bank, at which time all of the capital stock of the converted bank
was acquired by Landmark Financial Corp. (the Company), a Delaware
Corporation. The Company was organized to acquire all of the stock issued
by the Bank upon consummation of the stock conversion. Prior to November
13, 1997, the Company had no assets or liabilities and had not engaged in
any business other than as necessary to complete its organization and the
conversion. On November 13, 1997, in connection with the stock conversion,
the Company issued and sold 152,000 shares of its common stock, par value,
$0.10 per share, in a subscription and community offering to the Company's
Employee Stock Ownership Plan (ESOP), the Bank's members and the general
public. Total net proceeds of the subscription and community offering,
after conversion expenses of approximately $311,967, were approximately
$1,208,033. The transaction was accounted for in a manner similar to a
pooling-of-interests method. Accordingly, the accounting basis for assets,
liabilities and equity accounts remained the same as prior to the
conversion.
The only business of the Company is the ownership of the Bank. The Bank
provides a variety of financial services to the greater Canajoharie, New
York area. The Bank's primary sources of revenue are single-family
residential mortgages and consumer loans.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements
follows.
2. Basis of Consolidation
The consolidated financial statements include the accounts of the Landmark
Financial Corp. (the Company) and its wholly-owned subsidiary Landmark
Community Bank (the Bank). Amounts for 1997 are those of the Bank. All
material intercompany balances have been eliminated in consolidation.
3. Cash and Time Deposits
Cash is defined to include all checking and demand deposits, as well as
certificates of deposit with an original maturity when purchased of three
months or less. Time deposits include certificates of deposit with an
original maturity in excess of three months.
The Company maintains cash and time deposits at one financial institution
in Canajoharie, New York, totaling $249,170 at March 31, 1998. These
balances are insured by the Federal Deposit Insurance Corporation up to
$100,000.
4. Investment Securities
Trading Securities: Securities that are held for short-term resale are
classified as trading account securities and recorded at their fair values.
Realized and unrealized gains and losses on trading account securities are
included in noninterest income.
19
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
4. Investment Securities - continued
Securities Held-to-Maturity: Government and Federal agency securities that
management has the positive intent and ability to hold to maturity are
reported at cost, adjusted for amortization of premiums and accretion of
discounts that are recognized in interest income using the interest method
over the period to maturity. Mortgage-backed securities represent
participating interests in pools of long-term first mortgage loans
originated and serviced by issuers of the securities. Mortgage-backed
securities are carried at unpaid principal balances, adjusted for
unamortized premiums and unearned discounts. Premiums and discounts are
amortized using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments.
Securities Available-for-Sale: Available-for-sale securities consist of
investment securities not classified as trading securities nor as
held-to-maturity securities. Unrealized holding gains and losses, net of
tax, on available-for-sale securities are reported as a net amount in a
separate component of stockholders' equity until realized. Gains and losses
on the sale of available-for-sale securities are determined using the
specific-identification method. The amortization of premiums and the
accretion of discounts are recognized in interest income using the interest
method over the period of maturity.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than
temporary result in write-downs of the individual securities to their fair
value. The related write-downs are included in earnings as realized losses.
The Company recognized no write downs in 1998 or 1997.
5. Loans Receivable
Loans are stated at unpaid principal balances, less the allowance for loan
losses.
On April 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 114, Accounting for Creditors for
Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures. The
Statements provide guidance in defining and measuring loan impairment. A
loan is considered impaired when it is probable that the Company will be
unable to collect all amounts of principal and interest under the original
terms of the agreement. Accordingly, the Company measures all nonaccrual
and restricted commercial real estate and commercial loans (if any)
individually, based on the present value of expected future cash flows,
discounted at the loans effective interest rate or, at the loan's
observable market price or the fair value of collateral. The statements do
not apply to large groups of small balance, homogeneous loans such as
residential real estate, installment and consumer loans, that are
collectively evaluated for impairment. The adoption of SFAS No. 114 and
No.118 resulted in no prospective adjustment to the allowance for loan
losses.
SFAS No. 91, Accounting for Non-refundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases,
states that loan fees and certain direct loan origination costs are
normally deferred and the net fee or cost is recognized as an adjustment
to interest income using the interest method, over the contractual life
of the loans, adjusted for
20
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. Loans Receivable - continued
estimated prepayments based on the Company's historical prepayment
experience. Commitment fees and costs relating to commitments whose
likelihood of exercise is remote should be recognized over the commitment
period on a straight-line basis. If the commitment is subsequently
exercised during the commitment period, the remaining unamortized
commitment fee at the time of exercise should be recognized over the life
of the loan as an adjustment of yield. Loan fees and certain direct loan
origination costs are not deferred at the Company, however, due to
immateriality. These fees are recognized in the period collected. The
Company does not charge commitment fees.
Interest income generally is not recognized on specific impaired loans
unless the likelihood of further loss is remote. Interest payments received
on such loans are applied as a reduction of the loan principal balance.
Interest income on other impaired loans is recognized only to the extent of
interest payments received.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, economic conditions and other risks
inherent in the portfolio. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated
cash flows. The allowance is increased by a provision for loan losses,
which is charged to expense, and reduced by charge-offs, net of recoveries.
6. Premises and Equipment
Premises and equipment are reported at cost. Expenditures for acquisitions,
renewals, and betterments are capitalized, whereas maintenance and repair
costs are expensed as incurred. When equipment is retired or otherwise
disposed of, the appropriate accounts are relieved of costs and accumulated
depreciation and any resultant gain or loss is credited or charged to
income.
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated useful lives on a
straight-line basis. The estimated lives used in determining depreciation
vary from five (5) to thirty-one and one-half (31.5) years.
7. Income Taxes
Income taxes are provided for the tax effects of the transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of
investments, allowance for loan losses, and the use of the modified cash
basis for income tax reporting purposes. The deferred tax assets and
liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred tax assets and liabilities
are reflected at income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled.
As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. The
Company and its subsidiary file consolidated federal and separate state
income tax returns. Income taxes are allocated to the Company and its
Subsidiary as though separate federal tax returns are being filed.
21
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
8. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the estimated losses on loans and foreclosed
real estate, if any. Management obtains independent appraisals for
significant properties.
While management uses available information to recognize losses on loans
and foreclosed real estate, further reductions in the carrying amounts of
loans and foreclosed assets may be necessary based on changes in local
economic conditions. In addition, regulatory agencies, as an integral part
of their examination process, periodically review the estimated losses on
loans and foreclosed real estate. Such agencies may require the Company to
recognize additional losses based on their judgments about information
available to them at the time of their examination. Because of these
factors, it is reasonably possible that the estimated losses on loans and
foreclosed real estate may change materially in the near term. However, the
amount of the change that is reasonably possible cannot be estimated.
9. Fair Value of Financial Instruments
Effective April 1, 1995 the Company implemented Statement of Financial
Accounting Standards No. 107, Disclosures about Fair Value of Financial
Instruments, which requires disclosure of fair market value information
about financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In
that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. Statement No. 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
statement of financial condition for cash and cash equivalents
approximate those assets' fair values.
Time deposits: Fair values for time deposits are estimated using a
discounted cash flow analysis that applies interest rates currently
being offered on certificates to a schedule of aggregated contractual
maturities on such time deposits.
22
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
9. Fair Value of Financial Instruments - continued
Investment securities including trading account securities: Fair values
for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values for other loans (for example, fixed rate real
estate) are estimated using discounted cash flow analysis, based on
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk
characteristics. Fair values for impaired loans are estimated using
discounted cash flow analysis or underlying collateral values, where
applicable. The carrying amount of accrued interest receivable
approximates its fair value.
Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing passbook accounts) are, by definition, equal to the
amount payable on demand at the reporting date (that is, their carrying
amounts). The fair values for certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated
contractual maturities on such time deposits.
Advance payments by borrowers for taxes and insurance (escrows): The
carrying amount of escrow accounts approximate fair value.
Accrued interest: The carrying amounts of accrued interest approximate
the fair values.
Loan commitments: Fees charged for commitments to extend credit are not
significant and are offset by associated credit risk with respect to
certain amounts expected to be funded. Accordingly, the fair value of
the financial instruments is immaterial.
10. Statements of Cash Flows
The Company considers all cash and amounts due from depository institutions
and interest-bearing deposits in other banks to be cash equivalents for
purposes of the statements of cash flows.
11. Interest Rate Risk
The Bank is engaged principally in providing first mortgage loans (both
adjustable rate and fixed rate mortgage loans) and consumer loans to
individuals (See Note C for the composition of the loan portfolio at March
31, 1998 and 1997). Mortgage and consumer loans and investment securities
are funded primarily with short-term liabilities which have interest rates
that vary with market rates over time. Net interest income and the market
value of net interest-earning assets will fluctuate based on changes in
interest rates and changes in the levels of interest-sensitive assets and
liabilities. The actual duration of interest-earning assets and
interest-bearing liabilities may differ significantly from the stated
duration as a result of prepayment, early withdrawals, and similar factors.
23
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
12. Employee Stock Ownership Plan
The cost of common shares issued to the ESOP but not yet allocated to
participants is presented in the consolidated balance sheet as a reduction
of stockholders' equity. Compensation expense is recorded based on the
market price of the shares as they are committed to be released for
allocation to participant accounts. The difference between the market price
and the cost of shares committed to be released is recorded as an
adjustment to paid-in capital.
Shares are considered outstanding for earnings per share calculations as
they are committed to be released; unallocated shares are not considered
outstanding.
13. Earnings Per Common Share
Earnings per common share is computed under the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Amounts
reported as Earnings per Common Share for year ended March 31, 1998 reflect
the earnings available to common stockholders for the year divided by the
weighted average number of common shares outstanding during the year.
14. Reclassification
Certain 1997 accounts have been reclassified to conform with the 1998
presentation.
NOTE B - INVESTMENT AND MORTGAGED-BACKED SECURITIES
Investment and mortgage-backed securities have been classified according to
management's intent. The amortized cost of securities and their approximate
fair values are as follows:
Securities held-to-maturity
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
------------------------------------------ --------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
government
and federal
agencies $ -- $ -- $ -- $ -- $ 200,000 $ -- $ (3,243) $ 196,757
Mortgage-
backed (GNMA)
securities 74,080 -- (2,431) 71,649 257,096 -- (9,309) 247,787
---------- --------- --------- ---------- --------- -------- -------- ---------
$ 74,080 $ -- $ (2,431) $ 71,649 $ 457,096 $ -- $(12,552) $ 444,544
---------- --------- --------- ---------- --------- -------- -------- ---------
---------- --------- --------- ---------- --------- -------- -------- ---------
</TABLE>
24
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE B - INVESTMENT AND MORTGAGED-BACKED SECURITIES - Continued
Securities available-for-sale
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
------------------------------------------ ------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
government
and federal
agencies $1,098,880 $ 5,036 $ -- $1,103,916 $ 399,172 $ -- $ (1,379) $ 397,793
---------- --------- ------- ---------- --------- ------ -------- ---------
---------- --------- ------- ---------- --------- ------ -------- ---------
</TABLE>
The following is a summary of maturities of securities held-to-maturity and
available-for-sale as of March 31, 1998:
<TABLE>
<CAPTION>
Securities held-to-maturity Securities available-for-sale
--------------------------- -----------------------------
Amounts maturing in: Amortized Amortized
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
<S> <C> <C> <C> <C>
One year or less $ -- $ -- $ 299,959 $ 300,781
After one year through five years -- -- 398,921 404,407
After five years through ten years -- -- 400,000 398,728
After ten years 74,080 71,649 -- --
------------ ------------ --------------- --------------
$ 74,080 $ 71,649 $ 1,098,880 $ 1,103,916
------------ ------------ --------------- --------------
------------ ------------ --------------- --------------
</TABLE>
The amortized cost and fair value of mortgage-backed securities are
presented in the held-to-maturity category by contractual maturity in the
preceding table. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations without call or prepayment penalties.
In 1997, debt securities with an amortized cost of $200,000 were
transferred from available-for-sale to held-to-maturity and equities with a
fair market value of $69,324 were transferred from available-for-sale to
trading account securities. The equity securities had an unrealized gain of
$67,056 which was recognized in net income during 1997. There were no
securities transferred between classifications during 1998.
25
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE C - LOANS RECEIVABLE, NET
The Company's loans receivable are summarized as follows:
<TABLE>
<CAPTION>
March 31,
1998 1997
---- ----
<S> <C> <C>
Conventional first mortgages on real estate (1-4 family) $ 8,686,915 $ 7,185,096
Property improvement loans ............................. 15,566 29,871
Loans to depositors, secured by savings ................ 101,744 228,942
Consumer loans ......................................... 3,818,123 1,558,002
Commercial ............................................. 1,139,794 587,418
------------ ------------
13,762,142 9,589,329
Allowance for loan losses .............................. (122,000) (110,000)
Loans in process ....................................... -- (87,117)
------------ ------------
$ 13,640,142 $ 9,392,212
------------ ------------
------------ ------------
</TABLE>
An analysis of the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
March 31,
1998 1997
---- ----
<S> <C> <C>
Balance, beginning of year $ 110,000 $ 32,000
Loans charged off ........ (2,437) --
Recoveries ............... -- --
Provision for losses ..... 14,437 78,000
--------- ---------
Balance, end of year ..... $ 122,000 $ 110,000
--------- ---------
--------- ---------
</TABLE>
The Company has no commitments to loan additional funds to the borrowers
whose loans have been modified.
In the ordinary course of business, the Company has and expects to continue
to have transactions, including borrowings, with its employees, officers,
directors, and their affiliates. In the opinion of management, such
transactions were on substantially the same terms, including interest rates
and collateral, as those prevailing at the time of comparable transactions
with other persons and did not involve more than a normal risk of
collectibility or present any other unfavorable features to the Company.
Loans to such borrowers are summarized as follows:
<TABLE>
<S> <C>
Balance, beginning of year $ 191,919
Additions ................ 3,700
Payments ................. (7,013)
Change in status ......... (35,811)
---------
Balance, end of year ..... $ 152,795
---------
---------
</TABLE>
26
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE D - STOCK IN FEDERAL HOME LOAN BANK OF NEW YORK
The Company has its savings shares insured by the Federal Savings and Loan
Insurance Corporation. The Federal Home Loan Bank requires all
participating savings and loan associations to purchase Federal Home Loan
Bank stock in an amount equal to one percent (1%) of outstanding first
mortgage loans.
NOTE E - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
March 31,
1998 1997
---- ----
<S> <C> <C>
Loans .................... $74,919 $30,783
Mortgage-backed securities 507 826
Investments and other .... 10,717 7,021
------- -------
$86,143 $38,630
------- -------
------- -------
</TABLE>
NOTE F - PREMISES AND EQUIPMENT
A summary of the Company's premises and equipment is as follows:
<TABLE>
<CAPTION>
March 31,
1998 1997
---- ----
<S> <C> <C>
Land and building ........... $ 58,405 $ 14,000
Improvements ................ 128,721 128,425
Equipment ................... 118,628 103,018
-------- --------
305,754 245,443
Less accumulated depreciation 108,520 90,064
-------- --------
$197,234 $155,379
-------- --------
-------- --------
</TABLE>
Depreciation expense for 1998 and 1997 was $18,456 and $11,570,
respectively.
27
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE G - DEPOSITS
Deposit account balances at March 31, 1998 and 1997, are summarized as
follows:
<TABLE>
<CAPTION>
March 31,
1998 1997
----------------------- ----------------------
Amount % Amount %
------ ----- -------- -----
<S> <C> <C> <C> <C>
Balance by interest rate:
Interest-bearing checking accounts ... $ 233,742 1.60% $ 235,154 2.30%
Non-interest bearing checking accounts 225,564 1.54% 297,578 2.91%
Passbook accounts .................... 3,583,967 24.50% 3,584,228 35.01%
Certificates of deposit .............. 10,585,583 72.36% 6,120,341 59.78%
---------- ----- --------- -----
$14,628,856 100.00% $10,237,301 100.00%
---------- ----- --------- -----
---------- ----- --------- -----
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100,000 was approximately $725,000 and $307,000 at
March 31, 1998 and 1997, respectively. Deposit amounts in excess of
$100,000 are not Federally insured.
At March 31, 1998 scheduled maturities of certificates of deposit are as
follows:
<TABLE>
<S> <C>
March 31, 1999 $ 4,707,520
2000 3,686,654
2001 1,575,061
2002 and thereafter 616,348
---------------
$ 10,585,583
---------------
---------------
</TABLE>
Interest expense for 1998 and 1997 was $2,782 and $594, respectively for
interest-bearing checking accounts, $117,855 and $108,654, respectively for
passbook accounts, and $605,351 and $217,359, respectively for certificates
of deposit.
NOTE H - INCOME TAXES
The Company files federal and state income tax returns on a calendar year
basis. If certain conditions are met in determining taxable income, the
Company is allowed a special bad debt deduction based on specified
experience formulas. The Company used the experience formula in 1997 and
anticipates using the same method in 1998.
Income tax expense (benefit) is summarized as follows:
<TABLE>
<S> <C> <C>
Federal
Current $ 6,000 $ (9,700)
Deferred -- (5,000)
-------- --------
6,000 (14,700)
-------- --------
</TABLE>
28
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE H - INCOME TAXES - Continued
<TABLE>
<S> <C> <C>
State
Current $ (755) $ (1,600)
Deferred -- (2,100)
-------- --------
(755) (3,700)
$ 5,245 $(18,400)
-------- --------
-------- --------
</TABLE>
Taxes paid during the years ended March 31, 1998 and 1997, were $17,350 and
$17,140, respectively.
The provision for income taxes (benefit) differs from that computed by
applying federal statutory rates to income (loss) before income tax
expense, as indicated in the following analysis:
<TABLE>
<CAPTION>
Year Ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Expected tax provision (benefit) at 34% $ 2,500 $(18,500)
State franchise tax ................... -- 1,000
Other, net ............................ 2,745 (900)
-------- --------
$ 5,245 $(18,400)
-------- --------
-------- --------
</TABLE>
Effective tax rate (benefit) for 1998 and 1997 was 34%.
Deferred tax liabilities have been provided for taxable temporary
differences related to unrealized gains on trading account securities and
accrued interest receivable. Deferred tax assets have been provided for
deductible temporary differences related to the allowance for loan losses,
accounts payable, other liabilities and a net operating loss carryforward.
The net deferred tax assets (liabilities) in the accompanying statements of
financial condition include the following components:
<TABLE>
<CAPTION>
March 31,
1998 1997
---- ----
<S> <C> <C>
Deferred tax liabilities $(50,300) $(31,300)
Deferred tax assets .... 57,400 38,400
-------- --------
Net deferred tax assets $ 7,100 $ 7,100
-------- --------
-------- --------
</TABLE>
Included in retained earnings at March 31, 1998 and 1997 is approximately
$141,000 in bad debt reserves for which no deferred federal income tax
liability has been recorded. These amounts represent allocations of income
to bad debt deductions for tax purposes only. Reduction of these reserves
for purposes other than tax bad-debt losses or adjustment arising from
carryback of net operating losses would create income for tax purposes,
which would be subject to the then-current corporate income tax rate. The
unrecorded deferred liability on these amounts was approximately $48,000 at
March 31, 1998 and 1997, respectively.
29
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE I - REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by its primary federal regulator, the Office of
Thrift Supervision (OTS). Failure to meet the minimum regulatory capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators, that if undertaken, could have a
direct material affect on the Company and the consolidated financial
statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank
must meet specific capital guidelines involving quantitative measures of
the Company and the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Company and the Bank's capital amounts and classification
under the prompt corrective action guidelines are also subject to
qualitative judgments by the regulators and components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of:
total risk-based capital and Tier I capital to risk-weighted assets (as
defined in the regulations), Tier I capital to adjusted total assets (as
defined), and tangible capital to adjusted total assets (as defined).
Management believes, as of March 31, 1998, that the Company and the Bank
meets all capital adequacy requirements to which they are subject.
As of March 31, 1998, the most recent notification form the OTS, the
Company and the Bank was categorized as well capitalized under the
regulatory framework for prompt corrective action. To remain categorized as
well capitalized, the Company will have to maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed in
the table below. There are no conditions or events since the most recent
notification that management believes have changed the Company and the
Bank's prompt corrective action category.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
As of March 31, 1998:
Total Risk-Based Capital
(to Risk-Weighted Assets) . $ 2,166,749 22.3% Greater than or equal to $ 766,300 Greater than or equal to 8.0%
Tier I Capital
(to Risk-Weighted Assets) $ 2,166,749 22.3% Greater than or equal to $ 388,200 Greater than or equal to 4.0%
Tier I Capital
(to Adjusted Total Assets) $ 2,166,749 12.9% Greater than or equal to $ 672,400 Greater than or equal to 4.0%
Tangible Capital
(to Adjusted Total Assets) $ 2,166,749 12.9% Greater than or equal to $ 252,200 Greater than or equal to 1.5%
</TABLE>
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount Ratio
------ -----
<S> <C> <C>
As of March 31, 1998:
Total Risk-Based Capital
(to Risk-Weighted Assets) . Greater than or equal to $970,500 Greater than or equal to 10.0%
Tier I Capital
(to Risk-Weighted Assets) Greater than or equal to $582,300 Greater than or equal to 6.0%
Tier I Capital
(to Adjusted Total Assets) Greater than or equal to $840,600 Greater than or equal to 5.0%
Tangible Capital
(to Adjusted Total Assets) Greater than or equal to $252,200 Greater than or equal to 1.5%
</TABLE>
30
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE I - REGULATORY MATTERS - Continued
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
As of March 31, 1997:
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 956,285 16.0% Greater than or equal to $ 478,300 Greater than or equal to 8.0%
Tier I Capital
(to Risk-Weighted Assets) $ 956,285 16.0% Greater than or equal to $ 239,200 Greater than or equal to 4.0%
Tier I Capital
(to Adjusted Total Assets) $ 956,285 8.4% Greater than or equal to $ 453,000 Greater than or equal to 4.0%
Tangible Capital
(to Adjusted Total Assets) $ 956,285 8.4% Greater than or equal to $ 169,900 Greater than or equal to 1.5%
</TABLE>
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount Ratio
------ -----
<S> <C> <C>
As of March 31, 1997:
Total Risk-Based Capital
(to Risk-Weighted Assets) Greater than or equal to $597,800 Greater than or equal to 10.0%
Tier I Capital
(to Risk-Weighted Assets) Greater than or equal to $358,700 Greater than or equal to 6.0%
Tier I Capital
(to Adjusted Total Assets) Greater than or equal to $566,300 Greater than or equal to 5.0%
Tangible Capital
(to Adjusted Total Assets) Greater than or equal to $169,900 Greater than or equal to 1.5%
</TABLE>
On November 13, 1997, the date of the Bank's conversion to a stock
institution, the Bank established a liquidation account totaling $956,000.
The liquidation account is maintained for the benefit of eligible
depositors who continue to maintain their accounts at the Bank after the
conversion. The liquidation account will be reduced annually to the extent
that eligible depositors have reduced their qualifying deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying
balances for accounts then held. The liquidation account balance is not
available for payment of dividends.
During August 1997, OTS conducted a routine safety and soundness on-sight
examination of the Bank. During the course of its examination OTS examiners
raised a number of concerns and noted certain deficiencies in the Bank's
operations. As a result of the examination the Bank voluntarily agreed with
OTS not to originate any new consumer or commercial loans and to limit
one-to-four family residential loan originations to no more than $200,000
per month, until the Bank corrected the noted deficiencies. Effective
February 10, 1998, OTS rescinded these lending restrictions.
NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amounts recognized in the
statements of financial condition.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit
is represented by the contractual notional amount of those instruments (see
Note L). The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
31
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments may
expire without being 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 and type of
collateral obtained, if deemed necessary by the Company upon extension of
credit, varies and is based on management's credit evaluation of the
counterparty.
The Company has not incurred any losses on its commitments in the years
ended March 31, 1998 and 1997.
NOTE K - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTION
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying financial statements. In addition, the Company is a defendant
in certain claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have
a material adverse effect on the financial position of the Company.
The Company had outstanding commitments to originate loans as follows:
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
-------------- --------------
Fixed-Rate Variable-Rate Total Fixed Rate Variable Rate Total
---------- ------------- ----- ---------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
First-mortgage $ -- $ -- $ -- $ 244,700 $ 90,400 $ 335,100
---------- ---------- ---------- ------------ ------------ ------------
---------- ---------- ---------- ------------ ------------ ------------
</TABLE>
The interest rate on outstanding fixed-rate commitments at March 31, 1997,
was 8.5%.
At March 31, 1998, the Company had an unused line of credit with the
Federal Home Loan Bank as follows:
<TABLE>
<CAPTION>
<S> <C>
Companion (DRA) Commitment $ 788,300
Overnight line of credit 788,300
--------------
$ 1,576,600
--------------
--------------
</TABLE>
The Company's line of credit with the Federal Home Loan Bank expires on
September 11, 1998.
Year 2000 Issue
The Bank has begun to develop a plan to analyze how the Year 2000 will
impact its operations. In addition, the Bank has communicated with its
significant third-party service provider to determine their Year 2000
compliance readiness and the extent to which the Bank is vulnerable to any
third-party Year 2000 issues. Given the Bank's interdependence on purchased
software and third-party service providers, the internal costs related to
the Bank's Year 2000 efforts will consist primarily of accelerating various
hardware and purchased software upgrades which generally would have been
incurred in the normal course of business. Management of the Bank does not
believe the internal
32
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE K - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTION - Continued
Year 2000 Issue - continued
costs to address Year 2000 compliance will have a material adverse impact
on future operations other than the impact such event will have on the cost
of services provided by its third-party service provider which is unknown
at this time. These costs for accomplishing the Bank's plans to complete
the Year 2000 modifications and testing processes are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including continued availability of various resources, third-party
modification plans and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ from
these plans.
Related Party Transaction
Customers (borrowers) of the Bank have obtained title insurance from
Landmark Title Company. The Company's Chairman of the Board is the sole
owner of Landmark Title Company. During the years ended March 31, 1998 and
1997, Landmark Title Company received $17,079 and $509, respectively in
title insurance premiums as a result of mortgage closings at the Bank.
NOTE L - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company financial instruments are as
follows:
<TABLE>
<CAPTION>
March 31,
1998 1997
--------------------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash $ 1,530,236 $ 1,530,236 $ 709,458 $ 709,458
Trading account securities -- -- 69,324 69,324
Mortgage-backed securities 74,080 71,649 257,096 247,787
Investment securities 1,103,916 1,103,916 597,793 594,550
Loans receivable, net 13,640,142 13,974,000 9,392,212 9,394,000
Accrued interest receivable 86,143 86,143 38,630 38,630
Financial liabilities:
Deposits 14,628,856 14,725,000 10,237,301 10,188,000
Advance payments by
borrowers for taxes
and insurance 97,453 97,453 107,277 107,277
</TABLE>
The carrying amounts in the preceding table are included in the statement
of financial condition under the applicable captions. The contract or
notional amounts of the Company's financial instruments with
off-balance-sheet risk are disclosed in Notes K and L and their carrying
values
33
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE L - FAIR VALUES OF FINANCIAL INSTRUMENTS - Continued
represent fair value. No derivatives were held by the Company for trading
purposes. It is not practicable to estimate the fair value of Federal Home
Loan Bank (FHLB) stock because it is not marketable. The carrying amount of
that investment is reported in the statements of financial condition.
NOTE M - CONCENTRATION OF CREDIT
The majority of the Company's loans have been granted to customers in the
Company's market area, which is primarily Canajoharie, New York.
Canajoharie is a largely rural area and relies heavily on the agricultural
industry and a certain manufacturer. The concentrations of credit by type
of loan are set forth in the note on loans receivable (see Note C). The
Company, as a matter of policy, does not extend credit to any borrowers in
excess of its legal lending limit.
NOTE N - SPECIAL INSURANCE ASSESSMENT RELATING TO THE CAPITALIZATION
OF THE SAVINGS COMPANY INSURANCE FUND (SAIF)
During September 1996, Congress enacted legislation to recapitalize the
SAIF by a one-time assessment on all SAIF-insured deposits held as of March
1995. This assessment of approximately $43,000 was paid during the year
ended March 31, 1997 and included in non-interest expense.
NOTE O - EMPLOYEE STOCK OWNERSHIP PLAN
Qualified employees of the Company and Bank participate in an Employee
Stock Ownership Plan (the ESOP). In connection with the conversion
described in Note A1, the ESOP has borrowed from the Company, the proceeds
of which were used to acquire 12,160 shares of the Company's common stock.
The outstanding loan balance at March 31, 1998 was $117,466. Interest
charged on the loan is at the Bank's prime lending rate (8.50% at March 31,
1998). Contributions from the Bank are used by the ESOP to make payments of
principal and interest on the loan. Under the terms of the ESOP,
contributions are allocated to participants using a formula based upon
compensation. Employees of the Company are eligible to participate in the
ESOP after one year of service and attainment of twenty-one (21) years of
age providing they worked at least 1,000 hours during the prior twelve (12)
month period. Participants are fully vested after five years. Because the
Company has provided the ESOP's borrowing, the unearned compensation is
presented as a reduction of stockholders' equity in the accompanying
consolidated balance sheets. On March 31, 1998 and 1997, 205 shares and -0-
shares, respectively, were allocated to participants. ESOP contributions to
the Bank, representing the fair value of allocated shares, charged to
compensation and benefits expense in 1998 and 1997 were approximately
$4,134 and $0, respectively. The fair value of the remaining unallocated
shares at March 31, 1998 aggregated approximately $152,000.
Dividends, if any, will be allocated among the participant's accounts and
the unallocated shares in accordance with their holdings of the stock on
which the dividends were paid. If dividends are used to repay the ESOP
borrowings then stock with a fair market value equal to the dividends will
be allocated to the Participant's Accounts in lieu of the dividends.
34
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE P - PROSPECTIVE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting of Comprehensive Income and Statement No. 131, Disclosures
About Segments of an Enterprise and Related Information. Both statements
are effective for financial statements for periods beginning after December
15, 1997. Statement No. 130 establishes standards for reporting and display
of comprehensive income in a full set of general purpose financial
statements. An enterprise shall continue to display an amount for net
income but will also be required to display other comprehensive income,
which includes other changes in equity. Statement No. 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers.
Adoption of these statements is not anticipated to have a significant
effect upon the presentation of the Company's financial statements.
NOTE Q - EARNINGS PER COMMON SHARE
A reconciliation of the numerators and denominators for earnings per common
share computations for the years ended March 31, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997
---- ----
<S> <C> <C>
Basic Earnings Per Share
Net income (loss) available to common shareholders $ 7,467 $(36,072)
-------- --------
-------- --------
Weighted average common shares outstanding ....... 139,975 --
-------- --------
-------- --------
Basic Earnings Per Share .................... $ .05 $ --
-------- --------
-------- --------
Earnings Per Share Assuming Dilution
Net income (loss) available to common shareholders $ 7,467 $(36,072)
-------- --------
-------- --------
Weighted average common shares outstanding ....... 139,975 --
Add: dilutive effect of assumed exercises:
ESOP ........................................ 12,025 --
-------- --------
Weighted average common and dilutive
potential common shares outstanding ............. 152,000 --
-------- --------
-------- --------
Diluted Earnings Per Share .................. $ .05 $ --
-------- --------
-------- --------
</TABLE>
NOTE R - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial condition as of March 31,
1998 and 1997 and the condensed statement of operations and statement of
cash flows for the two years then ended should be read in conjunction with
the Consolidated Financial Statements and related notes.
35
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE R - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - Continued
<TABLE>
<CAPTION>
March 31,
1998 1997
---- ----
<S> <C> <C>
STATEMENT OF FINANCIAL CONDITION
Assets:
Cash ........................................ $ 4,134 $ --
Investment in and advances to Bank .......... 2,055,221 --
---------- --------------
Total assets ............................. $2,059,355 $ --
---------- --------------
---------- --------------
Liabilities ...................................... $ -- $ --
Stockholders' Equity ............................. 2,059,355 --
---------- --------------
Total liabilities and stockholders' equity $2,059,355 $ --
---------- --------------
---------- --------------
</TABLE>
<TABLE>
<CAPTION>
Years Ended March 31,
1998 1997
---- ----
<S> <C> <C>
STATEMENT OF OPERATIONS
Income:
Income .................................................. $ -- $ --
Expenses ................................................ -- --
--------- ------------
Income before income taxes and equity in earnings of Bank -- --
Provision for income tax expense (benefit) .............. -- --
--------- ------------
Income before equity in earnings of Bank ................ -- --
Equity in earnings of Bank .............................. 7,467 --
--------- ------------
Net income .......................................... $ 7,467 $ --
--------- ------------
STATEMENT OF CASH FLOWS
Cash flows provided (used) by operating activities:
Net income .............................................. $ 7,467 $ --
Adjustments to reconcile net income to
net cash used for operating activities
Equity in earnings of Bank ...................... (7,467) --
--------- ------------
-- --
--------- ------------
Cash flows provided (used) by investing activities:
Investment in subsidiary ................................ (1,086,433)
Principal payments on ESOP loan ......................... 4,134
--------- ------------
(1,082,299)
--------- ------------
Cash flows provided (used) by financing activities:
Proceeds from the sale of stock, net of issuance cost ... 1,086,433 --
--------- ------------
Net increase in cash ................................ 4,134 --
Cash, beginning of year ...................................... -- --
--------- ------------
Cash, end of year ............................................ $ 4,134 $ --
--------- ------------
--------- ------------
</TABLE>
36
<PAGE>
Common Stock Information
The Common Stock of Landmark Financial Corp. is traded on the Small Cap Market
under the symbol "LMFC." At March 31, 1998 there were approximately 125
stockholders of record, including brokers, and 152,000 shares outstanding of
which 12,160 are held by the Landmark Community Bank Employee Stock ownership
Plan.
The following table sets forth the market price of the Company's Common Stock
for the year ended March 31, 1998. The Common Stock of Landmark Financial Corp.
did not begin trading until November 26, 1997. At the current time the Company
has no current intention to pay dividends.
<TABLE>
<CAPTION>
Fiscal 1998 High Low
- ----------- ---- ---
<S> <C> <C>
Third Quarter $12.25 $11.50
Fourth Quarter $13.38 $11.50
</TABLE>
37
<PAGE>
Directors And Officers
Directors Officers
John Francisco Gordon E. Coleman
Chairman of the Board President & Chief Executive Officer
Gordon E. Coleman John F. Von Ahn
Vice President & Chief Financial Officer
Carl Rockefeller H. Stuart Larson
Vice President - Consumer Lending
Patricia Symolon Michael L. Countryman
Assistant Cashier
Richard Ferraro
Frederick LaCoppola
Carl Salmon, III
38
<PAGE>
Corporate Information
Corporate Headquarters Transfer Agent
26 Church Street Registrar & Transfer Company
Canajoharie, New York 13317 10 Commerce Drive
(518) 673-2012 Cranford, New Jersey 07016
(800) 456-0596
Special Counsel Independent Auditors
Luse Lehman Gorman Pomerenk & Schick, P.C. Harvazinski & Montanye
5335 Wisconsin Avenue, N.W. 21 Everett Road Extension
Suite 400 Albany, New York 12205
Washington, D.C. 20015 (518) 453-0636
(202) 274-2000
Annual Meeting
The Annual Meeting of the Stockholders will be held July 22, 1998 at 11:00 a.m.
at the Fort Rennsalaer Club at 4 Moyer Street in Canajoharie, New York.
General Inquiries
A copy of the Company's Annual Report to the SEC on Form 10-K may be obtained
without charge by written request of stockholders to John F. Von Ahn or by
calling the Company at (518) 673-2012.
SEC Disclaimer
This Annual Report has not been reviewed or confirmed for accuracy or relevance
by the SEC.
39
<PAGE>
Landmark Financial Corp.
26 Church Street
CANAJOHARIE, NY 13317
TEL. (518) 673-2012
FAX (518) 673-2081
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
Company Percent Owned
<S> <C>
Landmark Community Bank 100%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,530
<INT-BEARING-DEPOSITS> 1,490
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,104
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 74
<LOANS> 13,640
<ALLOWANCE> 122
<TOTAL-ASSETS> 16,811
<DEPOSITS> 14,629
<SHORT-TERM> 0
<LIABILITIES-OTHER> 21
<LONG-TERM> 0
15
0
<COMMON> 0
<OTHER-SE> 2,156
<TOTAL-LIABILITIES-AND-EQUITY> 16,811
<INTEREST-LOAN> 1,174
<INTEREST-INVEST> 118
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,293
<INTEREST-DEPOSIT> 725
<INTEREST-EXPENSE> 725
<INTEREST-INCOME-NET> 555
<LOAN-LOSSES> 12
<SECURITIES-GAINS> 12
<EXPENSE-OTHER> 610
<INCOME-PRETAX> 12
<INCOME-PRE-EXTRAORDINARY> 12
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
<YIELD-ACTUAL> 3.37
<LOANS-NON> 144
<LOANS-PAST> 144
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 61
<ALLOWANCE-OPEN> 110
<CHARGE-OFFS> 2
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 122
<ALLOWANCE-DOMESTIC> 122
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
