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, 1999
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: 0-22951
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LANDMARK FINANCIAL CORP.
-------------------------------------------
(Name of Small Business Issuer in its Charter)
Delaware 16-1531343
---------------------------------- ------------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
211 Erie Boulevard, Canajoharie, New York 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 such reports) and (2) has been subject to such
requirement for the past 90 days. YES X NO
--- ---
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]
As of March 31, 1999, the issuer's revenues\losses were ($96,404).
As of June 10, 1999, there were issued and outstanding 154,508 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, 1999 ($11.57) was $1,432,285.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended March
31, 1999 (Parts II and IV).
2. Proxy Statement for the 1999 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 in any material operations to date. The
Company has no significant assets other than the outstanding capital stock of
the Bank, net proceeds from its mutual-to-stock conversion and a note evidencing
its loan to the Bank's Employee Stock Ownership Plan ("ESOP"). The Company's
principal business is overseeing and directing the business of the Bank and
investing the net conversion proceeds retained by it.
At March 31, 1999, the Company had consolidated assets of $22,453,323,
deposits of $19,273,877 and stockholders' equity of $1,927,934.
The executive office of the Company is located at 211 Erie Boulevard,
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 FDIC. Through its office it
serves communities located in 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 through brokers 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, 1999, the Bank's total loan portfolio was $19.4
million, of which $10.6 million, or 54.8% were one- to four-family residential
mortgage loans, $1.3 million, or 6.5% were commercial real estate loans, $6.4
million, or 33.1% were consumer loans, and $1.1 million, or 5.6% were commercial
business loans.
During the year ended March 31, 1999, the Bank originated $10.1 million of
fixed-rate and $900,000 of adjustable rate loans, all of which were retained in
the Bank's portfolio.
The Bank's executive office is located at 211 Erie Boulevard, 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. and Richardson Foods. 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 April 1999 the unemployment rate in Montgomery County was 6.6%.
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. At March 31, 1999, the Bank's portfolio of one- to
four-family residential mortgage loans totaled $10.6 million, or 54.8% of total
loans. At March 31, 1999, the commercial real estate portfolio totaled $1.3
million, or 6.5% 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, 1999 consumer loans totaled $6.4 million, or
33.1% of total loans. The Bank has recently commenced the origination of
commercial business loans which at March 31, 1999 totaled $1.1 million, or 5.6%
of total loans.
Under Office of Thrift Supervision ("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. At March 31, 1999, 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, 1999, 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, 1999 was approximately $198,000, which was secured by
commercial real estate, a residence and a vehicle. At March 31, 1999, 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,
--------------------------------------------------------
1999 1998
------------------------ -------------------------
Amount Percent Amount Percent
--------- -------- --------- ---------
(Dollars in Thousands)
Real Estate Loans:
<S> <C> <C> <C> <C>
One- to four-family.......................... $ 10,613 54.76% $ 8,687 63.10%
Commercial................................... 1,256 6.48 971 7.00
---------- -------- --------- -------
Total real estate loans.................. 11,869 61.24 9,658 70.10
---------- -------- --------- -------
Other Loans:
Consumer Loans:
Property improvement......................... 113 .58 16 .10
Passbook loans............................... 74 .38 102 .70
Personal loans (1)........................... 6,243 32.21 3,818 27.70
---------- -------- --------- -------
Total consumer loans..................... 6,430 33.17 3,936 28.50
Commercial business loans.................... 1,080 5.59 168 1.20
---------- -------- --------- -------
Total loans.................................. $ 19,380 100.00% $ 13,762 100.00%
---------- -------- --------- =======
Less:
Loans in process............................. $ -- $ --
Allowance for losses......................... (191) (122)
----------- ----------
Total loans receivable, net.................. $ 19,189 $ 13,640
========== ==========
</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>
<CAPTION>
March 31,
------------------------------------------------
1999 1998
---------------------- ---------------------
Amount Percent Amount Percent
--------- --------- --------- ---------
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
<S> <C> <C> <C> <C>
One- to four-family........................... $ 7,336 37.85% $ 4,713 34.20%
Commercial.................................... 691 3.57 971 7.00
--------- -------- -------- --------
Total real estate loans................... 8,027 41.42 5,684 41.30
Consumer...................................... 6,431 33.18 4,105 29.80
--------- -------- -------- --------
Commercial.................................... 844 4.36 -- --
Total fixed-rate loans.................... 15,302 78.96 9,789 71.10
--------- -------- -------- --------
Adjustable-Rate Loans:
Real estate:
One- to four-family........................... 3,277 16.91 3,973 28.80
-------- --------
Commercial.................................... 565 2.92
Total real estate loans................... 3,842 19.83 3,973 28.80
--------- -------- -------- --------
Commercial.................................... 236 1.22
Total adjustable-rate loans............... 4,078 21.04 3,973 28.80
--------- -------- -------- --------
Total loans............................... $ 19,380 100.00% $ 13,762 100.00%
--------- -------- -------- --------
Less:
Loans in process.............................. $ -- $ --
Allowance for loan losses..................... (191) (122)
---------
Total loans receivable, net................... $ 19,189 $ 13,640
--------- =========
</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 $36,700 at March 31, 1999. At March 31, 1999, the Bank had $10.6
million, or 54.8% 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, 1999, $7.3 million, or 37.9% 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 a
fixed-rate residential balloon loan with either a five or ten year term and
which amortizes over 30 years.
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 $3.3
million, or 16.9% of the Bank's total loan portfolio at March 31, 1999. 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 1999, the Bank originated $3.5 million in fixed-rate residential
mortgage loans and no ARM loans.
3
<PAGE>
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. 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 the Bank's directors.
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, 1999, $1.3 million, or 6.5%, of the Bank's
loan portfolio consisted of 27 commercial real estate loans. At March 31, 1999,
the Bank's commercial real estate loans were all performing according to their
terms. The Bank will seek to emphasize the origination of commercial real estate
lending 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 two years 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 improvements, 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, 1999, three consumer loans were classified as
non-performing. Aggregate balances of non-performing consumer loans were
$18,400.
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, 1999, the Bank's
commercial business loan portfolio totaled $1.1 million, or 5.6% 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 from the
borrower's business. The financial strength of each borrower is assessed through
a review of tax returns and credit reports.
5
<PAGE>
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, 1999. 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 Total
------------------ ------------------ ------------------ ----------------- -----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
--------- ----- ------- ---- -------- ------ -------- ------ -------- ------
(Dollars in Thousands)
Due During Years Ending March 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2000............................. $ 59 8.22% $ 7 8.75% $ 317 8.79% $ 291 9.02% $ 674 9.09%
2001............................. 13 9.97 -- -- 405 10.02 15 8.68 433 10.17
2002 and 2003.................... 757 8.59 75 8.75 5,252 9.42 552 8.25 6,636 9.35
2004 to 2008..................... 1,837 8.58 279 9.99 315 8.58 22 7.38 2,453 8.82
2009 to 2023..................... 6,639 8.33 815 8.97 142 8.20 -- -- 7,596 8.38
2024 and following............... 1,308 8.56 80 7.50 -- -- 200 7.75 1,588 7.77
-------- ------- ------- ------- --------
Total Amount Due $ 10,613 $ 1,256 $ 6,431 $ 1,080 $ 19,380
======== ======= ======= ======= ========
</TABLE>
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after March 31, 2000 which have predetermined
interest rates is $15.6 million, while the total amount of loans due after such
date which has floating or adjustable interest rates is $3.1 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 $150,000. All loans over $75,000 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 on a monthly basis to review all 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 1999, the Bank originated $10.9
million in fixed-rate loans and $879,000 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.
Years Ended March 31,
---------------------------
1999 1998
------ -------
(In Thousands)
Originations by Type:
Adjustable rate real estate:
- one- to four-family........... $ 219 $ 239
- multi-family.................. -- --
- commercial.................... 175 --
Non-real estate-consumer................. 30 --
Commercial business................. 455 --
----------- ---------
Total adjustable-rate...... 879 239
----------- ---------
Fixed-rate real estate:
- one- to four-family........... 3,450 2,689
- multi-family.................. -- --
- commercial.................... 236 --
Non-real estate-- consumer.......... 6,379 4,300
Commercial business................. -- 725
----------- ---------
Total fixed-rate........... 10,065 7,714
----------- ---------
Total loans originated..... 10,944 7,953
----------- ---------
Principal repayments..................... 5,326 3,780
----------- ---------
Total reductions........... 5,326 3,780
----------- ---------
Net increase (decrease).................. $ 5,618 $ 4,173
=========== =========
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 60 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 it is necessary or
advisable. At March 31, 1999, the total loans delinquent 90 days or more was
$106,000 and the total loans delinquent 60 to 89 days was $97,000.
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. 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, 1999, the Bank had two properties classified as real estate owned in
the amount of $119,000.
The following table sets forth the Bank's loan delinquencies by type, by
amount and by percentage of type at March 31, 1999.
<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
----------------------------------------------------------------------------------------------------
Real Estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family......... -- $ -- --% 2 $ 88 0.83% 2 $ 88 0.83%
Commercial.................. 1 47 3.74 -- -- -- 1 47 3.74
Consumer...................... 7 50 0.78 3 18 0.29 10 68 1.07
Total.................... 8 $ 97 0.50% 5 $ 106 0.55% 12 $ 203 1.05%
</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, 1999 and 1998, the Bank did
not have any accruing loans that were delinquent more than 90 days. The Bank did
have foreclosed assets in the aggregate amount of $119,000.
March 31,
---------------------------
1999 1998
---------- ----------
(Dollars In Thousands)
Non-accruing loans:
One- to four-family.......................... $ 88 $ 99
Commercial real estate....................... -- 28
Consumer..................................... 18 17
Commercial business.......................... -- --
-------- ---------
Total.................................... 106 144
-------- ---------
Foreclosed Assets................................. 119 --
-------- ---------
Total non-performing assets....................... $ 225 $ 144
-------- =========
Total as a percentage of total assets............. 1.00% 0.86%
======== =========
For the year ended March 31, 1999, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $5,000. No amounts were included in interest income
on such loans for the year ended March 31, 1999.
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
9
<PAGE>
the insured institution will sustain "some loss" if the deficiencies are not
corrected. Assets classified as "doubtful" have all of the weaknesses inherent
in those classified "substandard" with the added characteristic that the
weaknesses present make "collection or liquidation in full" on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
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, 1999, the
Bank had classified a total of $276,000 of its loans and other assets as
follows: March 31, 1999 (In Thousands)
Special Mention.................... $ 50
Substandard........................ 120
Doubtful assets.................... 106
Loss assets........................ --
Total......................... 276
General loss allowance............. 191
Specific loss allowance............ --
Charge-offs........................ 52
Other Loans of Concern. In addition to the non-performing assets set forth
in the tables above, as of March 31, 1999, 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, 1999, the Bank had two properties that were
acquired through foreclosure. Both properties were sold in April 1999, at no
further loss to the Bank.
10
<PAGE>
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 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, 1999, the Bank had a total allowance for loan losses
of $191,000, representing 69.2% of total non-performing assets and 1.00% of the
Bank's loans receivable, net.
The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
March 31,
--------------------------------------------------------------------------------------
1999 1998
---------------------------------------- -----------------------------------------
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....... $ 105 $ 10,613 54.77% $ 60 $ 8,687 63.13%
Commercial real estate.... -- 1,256 6.48 -- 971 7.06
Consumer.................. 67 6,431 33.18 59 3,936 28.59
Commercial business....... -- 1,080 5.57 3 168 1.22
Unallocated............... 19 -- -- -- -- --
-------- ---------- ------- -------- --------- --------
Total................. $ 191 $ 19,380 100% $ 122 $ 13,762 100.00%
======== ========== ======= ======== ========= ========
</TABLE>
The following table sets forth an analysis of the Bank's allowance for loan
losses.
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------
1999 1998
---------- ----------
(Dollars In Thousands)
<S> <C> <C>
Balance at beginning of period............................................................ $ 122 $ 110
Charge-offs:
One- to four-family................................................................. (25) (2)
Commercial real estate.............................................................. -- --
Consumer............................................................................ (27) --
Commercial business................................................................. -- --
-------- --------
Total charge-offs.............................................................. (52) (2)
-------- --------
Recoveries:
One- to four-family................................................................. -- --
Commercial real estate.............................................................. -- --
Consumer............................................................................ -- --
Commercial business................................................................. -- --
-------- --------
Total recoveries............................................................... -- --
-------- --------
Net charge-offs........................................................................... (52) (2)
Provision for loan losses................................................................. 121 14
-------- --------
Balance at end of period.................................................................. $ 191 $ 122
======== ========
Ratio of net charge-offs during the period to average loans outstanding during the period. .31% 0.02%
======== ========
Ratio of net charge-offs during the period to average non-performing assets............... 28.49% 2.09%
</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, 1999, the Bank's liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
current borrowings) was 12.95%.
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 Federal National
Mortgage Association ("FNMA") 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, 1999, the Bank's
investment in mortgage-backed securities totaled $545,000, or 2.43% of its total
assets. At March 31, 1999, $38,000 of the Bank's mortgage-backed securities were
classified as held to maturity.
The GNMA and FNMA 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, 202,000 of FNMA
certificates are adjustable-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.
All of the Bank's $545,000 mortgage-backed securities portfolio at March
31, 1999 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 the rate of prepayments. During periods of
declining mortgage interest rates, if the coupon rate of the underlying
mortgages exceeds the prevailing market interest
12
<PAGE>
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 both fixed and adjustable rate
mortgage backed securities.
The following table sets forth the composition of the Bank's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
March 31,
------------------------------------------------
1999 1998
-------------------- --------------------
Book % of Book % of
Value Total Value Total
(Dollars in Thousands)
Mortgage-backed securities available for sale:
<S> <C> <C> <C> <C>
FNMA.......................................... $ 198 36.33% $ -- --%
GNMA.......................................... 300 55.04 67 90.54
------- --------- ------- --------
Mortgage-backed - held to maturity ................ 36 6.61 -- --
Unamortized premium (discounts), net............... 11 2.02% 7 9.46%
------- --------- ------- --------
Total mortgage-backed securities.......... $ 545 100.00% $ 74 100.00%
======= ========= ======= ========
</TABLE>
The following table shows mortgage-backed securities repayment activities
of the Bank for the periods indicated. The Bank did not purchase or sell any
mortgage-backed securities during fiscal 1999.
Years Ended March 31,
--------------------------
1999 1998
------- -------
(In Thousands)
Purchases:
Adjustable-rate (1)................. $ 300 $ --
Fixed-rate (1)...................... 300 --
------- --------
Total purchases................. 600 --
------- --------
Sales ........................... -- (136)
Principal Repayments:
Principal repayments................ (129) (47)
Increase in other items, net........ -- --
------- --------
Net increase (decrease)......... $ 471 $ (183)
======= ========
- -------------------------
(1) Consists of pass-through securities.
Other Investments. At March 31, 1999, the Bank's investment securities
other than mortgage-backed securities consisted of federal agency obligations,
U.S. Government securities and FHLB stock.
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, 1999, the Bank was in compliance
with this regulation.
13
<PAGE>
The following table sets forth the composition of the Bank's investment
securities at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
------------------------------------------------------------
1999 1998
----------------------- -------------------------
Book % of Book % of
Value Total Value Total
(Dollars in Thousands)
Investment securities held to maturity:
<S> <C> <C> <C> <C>
Federal agency obligations............................ $ 38 1.86% $ 74 5.87%
Investment securities available for sale:
U.S. government securities............................ 400 19.55 599 47.55
Federal agency obligations............................ 1,507 73.65 500 39.68
Equity securities..................................... -- -- -- --
---------- ---------- ---------- ---------
Subtotal.......................................... 1,945 95.06 1,173 93.10
---------- ---------- ---------- ---------
FHLB stock................................................. 101 4.94 87 6.90
---------- ---------- ---------- ---------
Total investment securities and FHLB stock........ $ 2,046 100.00% $ 1,260 100.00%
========== ========== ========== =========
Average remaining life of debt securities.................. 2.6 years 2.3 years
Other interest-earning assets:
Interest-bearing deposits with banks.................. $ 11 100.00% $ 1,490 100.00%
Federal funds sold.................................... -- -- -- --
---------- ---------- ---------- ---------
Total............................................. $ 11 100.00% $ 1,490 100.00%
========== ========== ========== =========
</TABLE>
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, 1999
-------------------------------------------------------------------------------------
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........ $ 200 $ 200 $ -- $ -- $ 400 $ 401
Federal agency obligations........ -- 250 750 -- 1000 1000
Mortgage-backed securities........ -- -- -- 545 545 538
Total investment securities....... 200 450 750 545 1945 1939
Weighted average yield............ 5.94% 5.96% 6.2% 7.06% 6.36% --
</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. Typically, the Bank does not use
other forms of borrowings. At March 31, 1999, the Bank had FHLB advances of $1.1
million.
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. In fiscal 1998, the Bank
began obtaining brokered jumbo CD deposits from out of market customers. These
deposits 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. At March 31, 1999, the Bank had $5.8 million in out of
market certificates of deposit compared to $6.0 million at March 31, 1998. Out
of market certificates of deposit represented 38.41% of total certificates of
deposit at March 31, 1999 compared to 56.60% at March 31, 1998. 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,
1999, $492,000, or 1.89% 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.
Notwithstanding the foregoing, a significant percentage of the Bank's deposits
are for terms of less than one year. At March 31, 1999, $9.4 million, or 62.25%
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,
-----------------------------------------------
1999 1998
---------------------- ----------------------
Amount Percent Amount Percent
(Dollars in Thousands)
Transactions and savings deposits:
<S> <C> <C> <C> <C>
Non-interest bearing checking accounts............. $ 303 1.57% $ 226 1.54%
Interest-bearing checking accounts 1.75%........... 492 2.55 234 1.60
Passbook accounts 3.00%............................ 3,395 17.61 3,584 24.50
--------- -------- --------- ---------
Total transactions and savings deposits............ 4,190 21.73 4,044 27.64
--------- -------- --------- ---------
Certificates of deposit:
0.00 - 3.99%..................................... -- -- -- --
4.00 - 5.99%..................................... 7,870 40.83 2,983 20.39
6.00 - 7.99%..................................... 7,214 37.44 7,602 51.97
--------- -------- --------- ---------
Total certificates of deposit...................... 15,084 78.27 10,585 72.36
--------- -------- --------- ---------
Accrued Interest................................... -- -- -- --
--------- -------- --------- ---------
Total Deposits..................................... $ 19,274 100.00% $ 14,629 100.00%
========= ======== ========= =========
</TABLE>
15
<PAGE>
Deposit Activity
The following table sets forth the savings flows at the Bank during the
periods indicated.
Years Ended March 31,
---------------------------
1999 1998
--------- -----------
(Dollars In Thousands)
Opening balance...................... $ 14,629 $ 10,237
Deposits............................. 30,553 33,278
Withdrawals.......................... (26,803) (29,596)
Interest credited.................... 895 710
---------- ----------
Ending balance....................... $ 19,274 $ 14,629
========== ==========
Net increase (decrease).............. $ 4,645 $ 4,392
========== ==========
Percent increase (decrease).......... 31.75% 42.90%
========== ==========
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, 1999.
Weighted
Certificate accounts maturing in Total Average Percent of
quarter endings: Balance Rate Total
(In Thousands)
June 30, 1999.................... $ 2,452 6.26% 16.26%
September 30, 1999............... 3,832 5.88 25.40
December 31, 1999................ 1,176 5.63 7.80
March 31, 2000................... 1,964 5.70 13.02
June 30, 2000.................... 1,474 6.08 9.77
September30, 2000................ 1,205 6.17 7.99
December 31,2000................. 179 5.39 1.19
March 31, 2001................... 1,296 5.11 8.59
June 30, 2001.................... 48 5.35 .32
September 30, 2001............... 1,458 6.03 9.66
--------- ------- --------
Thereafter.......................
Total................... $15,084 5.88% 100.00%
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,
1999.
<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........ $ 2,231 $ 3,623 $ 2,126 $ 5,742 $ 13,722
Certificates of deposit of $100,000 or more....... 224 209 314 618 1362
--- --- --- --- ----
Total certificates of deposit..................... $ 2,452 $ 3,832 $ 2,440 $ 6,360 $ 15,084
</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, 1999, the Bank had an unused line of
credit at the FHLB for up to $1.68 million. At March 31, 1999, the Bank had
$1.08 million in advances from the FHLB.
Employees
At March 31, 1999, the Bank had 9 full-time and one part-time employee. 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, 1999, 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 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
17
<PAGE>
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, 1999, 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.
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 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.
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, 1999, the Bank
had no intangible assets and an unrealized loss, net of tax under SFAS No. 115
of $5,403.
18
<PAGE>
Limitation on Capital Distributions.
Under current OTS regulations, a savings institution may make a capital
distribution without notice to the OTS, unless it is a subsidiary of a holding
company, provided that it has a regulatory rating in the two top categories, is
not of supervisory concern, and would remain adequately capitalized, as defined
in the OTS prompt corrective action regulations, following the proposed
distribution. Savings institutions 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 institution
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.
The OTS may object to a capital distribution if it would constitute an unsafe or
unsound practice.
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%.
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, 1999, the Bank was in compliance with both requirements, with a liquid
assets ratio of 12.95% and a short-term liquid assets ratio of 3.80%.
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, 1999, 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.
19
<PAGE>
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.
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.
Holding Company Regulation
The Company is a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries 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.
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.
20
<PAGE>
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,
1999, 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.
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, 1999, the Bank had $101,000 of FHLB stock. In
past years, the Bank has received dividends on its FHLB stock. The dividend
yield from FHLB stock was 7.25% for fiscal 1999. 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
21
<PAGE>
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 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.
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.
22
<PAGE>
ITEM 2. Properties
- ---------------------
The Bank conducts its business through its main and branch offices, located
in Canajoharie, New York. The following table sets forth information relating to
the offices as of March 31, 1999. 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, 1999 was $583,000.
Total Net Book Value
Approximate of Real Estate at
Location Date Acquired Square Footage March 31, 1999
- ----------------- --------------- ---------------- ------------------
Main Office: 1998 3,200 $ 290,000
211 Erie Boulevard
Canajoharie, New York
26 Church Street
Canajoharie, New York 1973 3,600 $ 116,000
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. 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 7. Financial Statements
- ----------------------------
The financial statements are contained in the Company's Annual Report to
Stockholders and is incorporated herein by reference.
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
None.
23
<PAGE>
PART III
--------
ITEM 9. Directors and Executive Officers of the Company; Compliance with Section
16(a) of the Exchange Act
- --------------------------------------------------------------------------------
(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.
Name Age Title
- ----------------- ---- -----------------------------------------------
Gordon E. Coleman 44 President, Chief Executive Officer and Director
ITEM 10. 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 11. 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 12. 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.
24
<PAGE>
PART IV
-------
ITEM 13. 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-KSB are as follows:
(A) Independent Auditors' Report;
(B) Consolidated Statements of Financial Condition - March 31, 1999
and 1998.
(C) Consolidated Statements of Operations - years ended March 31,
1999 and 1998;
(D) Consolidated Statements of Changes in Stockholders' Equity -
years ended March 31, 1999 and 1998;
(F) Consolidated Statements of Cash Flows - years ended March 31,
1999 and 1998; and
(G) Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
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, 1999.
(c) Exhibits
3.1 Certificate of Incorporation of Landmark Financial Corp.
Incorporated herein by reference to the Company's registration
statement on Form SB-2, file No. 333-29793 (the "Form SB-2")
3.2 Bylaws of Landmark Financial Corp. (Incorporated herein by
reference to the Company's Form 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
25
<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 21, 1999 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 Officer and Director
Director (Principal Executive Officer)
Date: June 21, 1999 Date: June 21, 1999
By:/s/ Paul Hofmann By:/s/ Patricia A. Symolon
---------------------------------------- -------------------------
Paul Hofmann Patricia A. Symolon
Chief Financial Officer (Principal Director
Financial and Accounting Officer)
Date: June 21, 1999 Date: June 21, 1999
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 21, 1999 Date: June 21, 1999
By:/s/ Frederick LaCoppola
---------------------------------------
Frederick LaCoppola
Director
Date: June 21, 1999
26
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
Landmark Financial Corp.
1999 Annual Report
<PAGE>
Table Of Contents
- --------------------------------------------------------------------------------
Page
Selected Consolidated Financial Information 1-2
Management's Discussion and Analysis of Financial Condition
And Results of Operations 3-13
Independent Auditors' Report 14
Consolidated Financial Statements 15-18
Notes to Consolidated Financial Statements 19-40
Common Stock Information 41
Directors and Officers 42
Corporate Information 43
Annual Meeting 43
<PAGE>
LANDMARK FINANCIAL CORP.
Date: June 18, 1999
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 this year's annual report.
During this past year the Bank continued its metamorphosis from that of a
traditional mutual savings and loan association into a dynamic, full-service
financial institution prepared to face the challenges of the 21st century. After
completing the conversion from mutual to stock ownership last year, the Board of
Directors and management initiated several changes in the institution and its
infrastructure to address those obstacles that were preventing us from fully and
effectively competing in the marketplace. We prepared a "wish list" of those
items that would allow us to compete on an equal basis with other larger banks.
The list included a modern banking facility, new and up-to-date computer
systems, additions to both our loan and deposit products and increased asset
size. As many of you know, the banking facility problem was solved with the
completion of our newly constructed banking office at 211 Erie Blvd. in the
Village of Canajoharie. The Bank also purchased a modern, Year 2000 compliant
computer hardware and software system that is fully integrated with the Bank's
data processing service provider. In addition, our new banking facility allowed
us to add a drive-up window, night depository and automatic teller machine. A
merchant credit card program has also been added to facilitate commercial
deposits. We have also partnered with another financial institution to provide a
Visa charge card program that includes the Landmark Community Bank name and
logo. As a result of these improvements and of our continued efforts to increase
the asset size of the Bank, assets did in fact increase during the past fiscal
year from $16.81 million on April 1, 1998 to $22.45 million on March 31, 1999,
an increase of 34%.
All these changes did not come without significant, but what we believe short
term costs to net income. However, management believes that we have now
positioned the Bank to effectively compete in the local banking market. Although
this required that we take the long-term view at the expense of short-term
profits, we believe that this is the prudent course of action and that
profitability will follow as a by-product of the actions taken and sacrifices
made.
The Company posted an operating loss of $96,404 for the fiscal year. Although
net interest income increased $117,000, the continued growth in assets
necessitated a significant increase in the Bank's Provision for Loan Loss from
$12,000 in fiscal year 1998 to $121,000 in this past fiscal year. Increased
non-interest expenses - including occupancy and equipment costs, deposit
insurance premiums, data processing costs and expenses related to being a public
company - all contributed to the net loss for the year.
With the addition of our new technology and the continued dedication of our
employees, Senior Management and the Board of Directors believe the Company is
poised to succeed in an evolving 21st century marketplace. As always, our goal
continues to be the enhancement of shareholder value while simultaneously
providing to our community a financial institution that knows and accommodates
it's customers and is proud to serve them in a competent and friendly manner.
Thank you for your continued confidence in your Company as we look forward to a
prosperous and profitable future.
Sincerely,
/s/Gordon E. Coleman
Gordon E. Coleman
President and CEO
<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,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
Selected Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total Assets $ 22,453 $ 16,811 $ 11,326 $ 7,606 $ 7,628
Cash and cash equivalents 296 1,530 709 1,351 881
Loans receivable, net 19,189 13,640 9,392 5,528 6,267
Trading Account Securities - - 69 - -
Mortgage Backed Securities:
Held to maturity 38 74 257 340 206
Investment Securities
Held to maturity - - 200 - -
Available for sale 1,901 1,104 398 241 134
FHLB Stock 101 87 59 64 64
Deposits 19,274 14,629 10,237 6,465 6,518
Advances by borrowers for taxes
and insurance 108 97 107 95 155
Total stockholders' equity 1,928 2,059 956 993 907
</TABLE>
<TABLE>
<CAPTION>
At March 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
Selected Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total interest income $ 1,596 $ 1,293 $ 688 $ 622 $ 565
Total interest expense (912) (726) (326) (270) (225)
Net interest income 684 567 362 352 340
Provision for loan losses (121) (12) (78) - -
Net interest income after
provision for loan losses 563 555 284 352 340
Fees and service charges 35 29 29 10 14
Other non-interest income 10 38 67 - -
Total non-interest income 44 67 96 10 14
Total non-interest expense (731) (610) (434) (239) (242)
Income (loss) before taxes (123) 12 (54) 123 112
Income tax (provision) benefit 27 (5) 18 (38) (29)
Net income (loss) $ (96) $ 7 $ (36) $ 85 $ 83
Earnings per common share
Basic $ (.69) $ 0.05 $ N/A N/A $ N/A
Fully diluted $ (.69) $ 0.05 $ N/A N/A $ N/A
Weighted average common
outstanding 140,247 139,975 N/A N/A N/A
</TABLE>
<PAGE>
SELECTED RATIOS DATA
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Perfomance Ratios:
Return on assets (ratio of net income to
<S> <C> <C> <C> <C> <C>
average total assets) -0.48% 0.05% -0.41% 1.08% 1.07%
Return on retained earnings (ratio of
net income to average equity) -4.85% 0.56% -3.67% 8.83% 9.55%
Interest rate spread information:
Average during period 3.30% 3.37% 3.77% 4.13% 4.16%
End of period 3.53% 2.81% 3.34% 4.25% 4.18%
Net interest margin (1) 3.64% 3.71% 4.23% 4.59% 4.52%
Ratio of operating expense to average total assets 3.68% 3.83% 4.89% 3.04% 3.11%
Ratio of average interest-earning assets to average
interest-bearing liabilities 106.93% 107.16% 111.97% 114.46% 112.28%
Asset Quality Ratios:
Non-performing assets to total assets
at end of period 1.00% 0.86% 0.41% 0.00% 0.00%
Allowance for loan losses to non-performing loans 179.90% 84.72% 235.32% 0.00% 0.00%
Allowance for loan losses to loans receivable, net 1.00% 0.89% 1.17% 0.58% 0.51%
Capital Ratios:
Stockholder's equity to total assets at end of period 8.59% 12.25% 8.43% 13.56% 12.31%
(Previously net worth to total assets 1997-1995)
Average net worth to average assets 10.00% 8.31% 11.06% 12.27% 11.17%
Other Data:
Number of full-service offices 1 1 1 1 1
(1) Net interest income divided by average interest earning assets.
</TABLE>
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 Company does not undertake, and specifically declines any obligation to
publicly release the result of any revisions which may be made to any forward
looking statements to convey events or circumstances after the date of such
statements or to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
GENERAL
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 $97,000. The business of the Company consists solely 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,
1999, the Bank had total assets of $22,648,328, deposits of $19,273,876, and
stockholders' equity of $1,854,862.
<PAGE>
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 from deposit brokers and historically has used such deposits,
together with other funds, 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, and of commercial loans for small business and agriculture.
OPERATING STRATEGY
The Company conducts no business other than to hold the common stock of the
Bank. The business of the Bank consists principally of attracting deposits and
using those deposits to fund consumer loans, mortgage loans secured by
one-to-four family residences and commercial or agricultural properties, small
business loans, and investment securities. 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. The
Bank's net income is also effected by its provision for loan losses and other
operating income and expenses. Other income is derived from service charges on
deposit accounts, late fees on loans, and the sale of investment securities.
Other expenses include employee compensation and benefits, occupancy costs,
legal, accounting and regulatory costs and deposit insurance premiums. Earnings
of the Bank are also affected by general economic conditions, particularly
changes in market interest rates, government legislation, monetary policies, and
policies and actions of the regulatory authorities.
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 originating
shorter-term consumer loans and adjustable rate business loans and by investing
in adjustable rate mortgage backed securities. Additionally, the Bank has been
working to extend the maturity of interest bearing liabilities, including using
FHLB advances to fund assets, and to increase its demand deposit base by
offering a variety of checking account products. 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 issued by or
guaranteed by the United States government or agencies thereof.
It is management's intention to remain a retail financial institution dedicated
to financing home ownership and consumer and small business needs, and to
providing quality service to its customers located in Montgomery County and the
surrounding counties in the State of New York. The Bank is subject to certain
minimum capital requirements, which are monitored by The Office of Thrift
Supervision. It is management's intention to continue to surpass the minimum
levels and to maintain its capital strength. The Company's ratio of equity to
assets at March 31, 1999 was 8.59%.
<PAGE>
FINANCIAL CONDITION
Total Assets. Total assets increased $5.64 million or 33.6%, to $22.45 million
at March 31, 1999 from $16.81 million at March 31, 1998. The increase in assets
was primarily due to increases in loans receivable, investment securities,
premises and equipment, and foreclosed properties as noted below.
Loans Receivable, Net. Loans receivable, net increased by $5.55 million or 40.7%
to $19.19 million at March 31, 1999 from $13.64 million at March 31, 1998,
primarily due to increases in consumer loans of $2.49 million, an increase in
commercial loans of $1.20 million, and an increase in one-to-four family loans
of $1.93 million.
Mortgage-Backed Securities. Mortgage-backed securities held to maturity
decreased by $36,000 or 48.6% to $38,000 at March 31, 1999 from $74,000 at March
31, 1998. The decrease was due to amortization and prepayments on the loans that
secure the Bank's mortgage-backed securities.
Investment Securities. Investment securities available-for-sale increased
$797,000 or 77.2% to $1.9 million at March 31, 1999 from $1.1 million at March
31, 1998. The increase was funded primarily by a portion of the reduction in
cash from $1.5 million at March 31, 1998 to $296,000 at March 31, 1999.
Premises and Equipment. The Bank built and moved to a new facility during the
year and also invested in new teller equipment, an ATM and new computer hardware
and software. Premises and equipment increased $386,000 or 195.8% to $583,000 at
March 31, 1999 compared to March 31, 1998.
Deposits. Deposits increased $4.64 million, or 31.8%, to $19.27 million at March
31, 1999 from $14.63 million at March 31, 1998. The increase in deposits is
primarily attributable to an increase in local certificates of deposit of $4.5
million with maturities of one to three years, an increase in checking deposits
of $334,000 and a decrease in out of market certificates of deposit of $178,000.
The Bank had $5.8 million in out of market certificates of deposit at March 31,
1999.
Advances from FHLB. The Bank had $1.08 million of outstanding advances from the
Federal Home Loan Bank at March 31, 1999 compared to no advances outstanding on
March 31, 1998. The advances are being used by the Bank to fund both short and
long term cash needs and to help manage interest rate risk.
Equity. Total stockholders' equity decreased $131,000 or 6.4%, to $1.93 million
at March 31, 1999 from $2.1 million at March 31, 1998, due to the operating loss
of $96,000 and the recognition of $33,000 of unearned stock based compensation,
a $10,000 reduction in accumulated other comprehensive income (loss) as a result
of the change in unrealized gain (loss) on securities available for sale, and an
increase of $8,000 in the Bank's unearned ESOP shares.
<PAGE>
Comparison of Operating Results for the Years Ended March 31, 1999 and March 31,
1998.
Performance Summary. Net income decreased $103,871 to a loss of $96,404 for the
year ended March 31, 1999, compared to net income of $7,467 for the year ended
March 31, 1998. The decrease in earnings was primarily due to an increase in the
provision for loan losses, increased general and administrative expenses
associated with the growth in assets, the new facilities and equipment, and a
reduction in non-interest income due to gains taken on the sale of securities
and commission income received in the previous year compared to no gains and
$16,855 less of commission income in the year ended March 31, 1999.
Net Interest Income. Net interest income increased $117,271 or 20.7%, to
$684,189 for the year ended March 31, 1999, from $566,918 for the year ended
March 31, 1998. The increase in net interest income reflects an increase of
$303,442, to $1,596,348 from $1,292,906 in interest income and a corresponding
increase of $186,171, to $912,159 from $725,988 in interest expense for the year
ended March 31, 1999 as compared to the year ended March 31, 1998. The increase
in interest income reflects increased balances of loans receivable and
investment securities. Interest expense increased primarily due to the increase
in deposits, particularly certificates of deposit.
For the year ended March 31, 1999, the average yield on interest-earning assets
was 8.49% compared to 8.47% for the year ended March 31, 1998. The average cost
of interest-bearing liabilities was 5.19% for the year ended March 31, 1999
which was an increase from 5.10% for the year ended March 31, 1998. The average
balance of interest-earning assets increased $3.5 million or 23.1%, to $18.8
million for the year ended March 31, 1999 as compared to $15.3 million for the
year ended March 31, 1998. During the same period, the average balance of
interest-bearing liabilities increased $3.4 million or 23.9%, to $17.6 million
from $14.2 million in the year ended March 31, 1998.
Due to higher funding costs, the average interest rate spread was 3.30% for the
year ended March 31, 1999 compared to 3.37% for fiscal 1998. The average net
interest margin also decreased to 3.64% at March 31, 1999 compared to 3.71% for
the year ended March 31, 1998.
Provision for Loan Losses. During the year ended March 31, 1999, the Bank
charged $121,000 against earnings as a provision for loan losses compared to a
provision of $12,000 charged against earnings for the year ended March 31, 1998.
During fiscal 1999, the Bank's loan portfolio experienced charge-offs of
$51,981. The allowance for loan losses at March 31, 1999 was increased to 1.00%
of loans receivable, net as compared to 0.89% of loans receivable, net at March
31, 1998. The allowance for loan losses as a percentage of non-performing assets
was 179.90% at March 31, 1999 as compared to 84.72% at March 31, 1998. Total
non-performing loans at March 31, 1999 are $106,000, or 0.55% of loans
receivable, net, as compared to total non-performing loans at March 31, 1998 of
$144,000 or 1.06% of loans receivable net. The increase in the allowance for
loan losses as a percentage of loans is due to management's recognition of the
increased risk associated with the increased balances of the commercial and
consumer loan portfolios as well as the overall increase in the dollar value of
loans receivable, net. The Bank's allowance for loan losses at March 31, 1999
and March 31, 1998 was $191,019 and $122,000, respectively.
<PAGE>
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 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. Based on historical experience
with loan losses, the Bank believes that the current allowance for loan losses
is adequate to cover any potential losses.
Non-interest Income. For the year ended March 31, 1999, non-interest income
decreased $23,254 or 34.3%, to $44,512 from $67,766 for the year ended March 31,
1998. The decrease was primarily due to a gain realized in the sale of trading
account securities in the amount of $12,411 for the year ended March 31, 1998 as
compared no sales or gains for the year ended March 31, 1999, and a reduction in
commission income for brokering mortgage applications underwritten at other
financial institutions from $19,601 for the year ended March 31, 1998 to $2,746
for the year ended March 31, 1999. Loan fees and service fees on deposit
accounts increased $5,721 or 20.0% to $34,280 from $28,559 for the years ended
March 31, 1999 and 1998 respectively.
Non-interest Expense. Non-interest expense increased $120,738 or 19.8%, to
$730,710 for the year ended March 31, 1999 from $609,972 for the same period in
1998. During this same period compensation and related benefits expense
increased $24,601 or 6.1%, and occupancy and equipment expenses increased $7,533
or 20.0%, primarily due to increased depreciation expense associated with the
new facility and equipment. Expenses for data processing and FDIC insurance
increased commensurably with the increase in loan and deposit volume. General
office and supply expense increased $29,621 or 140.5% and other operating
expenses increased $35,231 or 30.1% primarily due to expenses incurred in moving
furniture and fixtures as well as data processing equipment to the Bank's new
facility, increases in printing and supply costs, increases in fees paid to
originate indirect automobile loans, and increases in costs associated with
being a public company.
Income Taxes. Income taxes decreased by $31,850 to a benefit of $26,605 for the
year ended March 31, 1999 from a tax expense of $5,245 for the year ended March
31, 1998. The decrease is due to the decrease in pre-tax income. The Company's
effective tax rate was 34% for the years ended March 31, 1999 and March 31,
1998.
Market Risk Analysis
As a holding company for the Bank, the Company's primary component of market
risk is interest rate volatility. Changes in interest rates will affect both
income and expenses associated with a large portion of the Bank's assets and
liabilities, and the market value of all interest earning assets. Management of
the Bank measures and evaluates interest rate risk on a regular basis and
actively strives to reduce such risk. The Bank is not subject to foreign
currency exchange risk or commodity price risk. The Bank's loan portfolio is
concentrated in Montgomery County, New York and the immediate surrounding
counties and is therefore subject to risks associated with the local economy.
The Company and the Bank do not have any hedging transactions in place such as
interest rate swaps and caps.
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
AVERAGE YIELDS EARNED AND RATES PAID
Years Ended March 31,
1999 1998 1997
------------------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/ Outstanding Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate Balance Paid Yield/Rate
------------------------------------------------------------------------------------------------------
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable (1)(2) $ 16,515 $ 1,453 8.80% $ 13,250 $ 1,174 8.86% $ 6,960 $ 585 8.41%
Mortgage-backed securities 52 4 7.69% 117 10 8.55% 290 26 8.97%
Investment securities 1,409 87 6.17% 849 53 6.24% 393 27 6.87%
FHLB stock 89 6 6.74% 74 7 9.46% 61 4 6.56%
Interest bearing deposits 725 46 6.34% 978 49 5.01% 846 46 5.44%
--------- ------- -------- ------- ------- ------
Total interest-earning assets $ 18,790 $ 1,596 8.49% $ 15,268 $ 1,293 8.47% $ 8,550 $ 688 8.05%
========= ======= ======== ======= ======= ======
Interest-bearing liabilities:
Interest-bearing checking $ 816 $ 9 1.10% 463 $ 3 0.65% $ 63 $ 1 1.59%
Passbook accounts 3,391 102 3.01% 3,965 118 2.98% 3,703 108 2.92%
Certificate accounts 12,913 781 6.05% 9,820 605 6.16% 3,870 217 5.61%
FHLB advances 452 20 4.42%
--------- ------- -------- ------- ------- ------
Total interest-bearing
liabilities $ 17,572 $ 912 5.19% $ 14,248 $ 726 5.10% $ 7,636 $ 326 4.27%
========= ======= ======== ======= ======= ======
Net interest income $ 684 $ 567 $ 362
======= ====== ======
Net interest rate spread 3.30% 3.37% 3.78%
==== ==== ====
Net earning assets $ 1,218 $ 1,020 $ 914
========= ========= =======
Net yield on average
interest-earning assets 3.64% 3.71% 4.23%
==== ==== ====
Ratio of average interest-earning assets to
average interest-bearing liabilities 106.93% 107.16% 111.97%
====== ====== ======
(1) Calculated net of deferred loan fees,loan discounts, loans in process and loss reserves.
(2) In computing average balances and average yield on loans, non-accruing loans have been included.
</TABLE>
<PAGE>
SPREAD AND MARGIN
Years Ended March 31,
---------------------
1999 1998 1997
---- ---- ----
Weighted average yield on loans 8.80% 8.86% 8.41%
Weighted average yield on mortgage-backed securities 7.69% 8.55% 8.97%
Weighted average yield on investment securities 6.17% 6.24% 6.87%
Weighted average yield on FHLB stock 6.74% 9.46% 6.56%
Weighted average yield on other interest-bearing deposits 6.34% 5.01% 5.44%
Weighted average yield on all interest-earning assets 8.49% 8.47% 8.05%
Weighted average rate paid on interest-bearing checking 1.10% 0.65% 1.59%
Weighted average rate paid on passbook accounts 3.01% 2.98% 2.92%
Weighted average rate paid on certificate accounts 6.05% 6.16% 5.61%
Weighted average rate paid on FHLB advances 4.42%
Weighted average rate paid on all interest-bearing 5.19% 5.10% 4.27%
liabilities
Interest rate spread (spread between weighted average
rate on all interest-earning assets and all interest-
bearing liabilities) 3.30% 3.37% 3.78%
Net interest margin (net interest income as a
percentage of average interest-earning assets) 3.64% 3.71% 4.23%
<PAGE>
<TABLE>
<CAPTION>
RATE VOLUME ANALYSIS
1999 Compared to 1998 1998 Compared to 1997
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------------------------
Volume Rate Net Volume Rate Net
(In thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans Receivable $ 291 $ (10) $ 281 $ 529 $ 60 $ 589
Investment Securities 35 (1) 34 31 (5) 26
Mortgage-backed securities (6) (0) (6) (16) (0) (16)
Other (15) 9 (6) 8 (2) 6
----- ----- ----- ----- ---- -----
Total net change in income on interest-earning $ 306 $ (3) $ 303 $ 552 $ 52 $ 605
assets ===== ===== ===== ===== ==== =====
Interest-bearing liabilities:
Passbook accounts $ (17) $ 1 $ (16) $ 8 $ 2 $ 10
Interest-bearing checking 2 4 6 6 (4) 2
Certificates of deposit 191 (15) 176 334 54 388
FHLB advances 0 20 20
----- ----- ----- ----- ---- -----
Total net change in income on interest-bearing $ 176 $ 10 $ 186 $ 348 $ 52 $ 400
liabilities ===== ===== ===== ===== ==== =====
Net change in net interest income $ 117 $ 205
===== =====
</TABLE>
<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 elements in achieving this objective have been to increase the
interest-rate sensitivity of the Bank's assets by originating consumer and
business loans with maturities of five years and less and by investing in
variable rate securities. At the same time the Bank has sought to extend the
maturities of certain of its liabilities by utilizing FHLB term loans to fund
some of the asset growth and by promoting longer term certificates of deposit.
The Bank has also increased its core deposit base by increasing DDA account
balances 73% to $794,652 from $459,306 at March 31, 1999 and 1998 respectively.
However, the Bank continues to retain longer term fixed rate residential
mortgage loans in the portfolio as part of its effort to increase the size and
the yield of its loan portfolio. During the fiscal year fixed rate residential
mortgages increased 57.2% to $6.6 million from $4.2 million, while adjustable
rate residential mortgages decreased 30.4% from $3.6 million to $2.5 million.
This increase in longer term fixed rate assets has exceeded the pace of the
Bank's efforts to extend maturities of liabilities and created a negative
interest sensitivity gap. A gap is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. During a period of rising interest rates a negative gap would
tend to adversely affect interest income. During a period of falling interest
rates, a negative gap would tend to positively affect net interest income. At
March 31, 1999, total interest-bearing liabilities maturing or repricing within
one year exceeded total interest-earning assets maturing or repricing during the
same period by $2,348,220, representing a cumulative one-year gap of (10.46)%.
<TABLE>
<CAPTION>
Interest Rate Gap Analysis Cumulatively Repriced Within
3 months 4 to 12 Months 1 to 5 years After 5 yrs Total
-------- -------------- ------------ ------------ -----
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 0 $ 0 $ 0 $ 295,827 $ 295,827
Securities 257,456 300,000 750,000 732,904 2,040,360
Loans 2,296,756 5,757,230 3,610,526 7,524,745 19,189,257
Other assets 927,879 927,879
---------- ---------- --------- --------- ----------
Total assets $ 2,554,212 $ 6,057,230 $ 4,360,526 $ 9,481,355 $22,453,323
Deposits:
Demand 66,800 133,600 200,400 267,200 668,001
Savings 528,269 422,615 176,090 2,394,821 3,521,795
Time 2,451,950 6,971,427 5,623,515 37,188 15,084,080
--------- --------- --------- ------ ----------
Total deposits $ 3,047,019 $ 7,527,643 $ 6,000,005 $ 2,699,209 $19,273,876
Borrowing $ 285,000 $ 100,000 $ 585,000 $ 114,587 $ 1,084,587
Other Liabilities 166,926 166,926
Equity 963,967 963,967 1,927,934
---------- ---------- --------- --------- ----------
Total liabilities and equity $ 3,332,019 $ 7,627,643 $ 7,548,972 $ 3,944,689 $22,453,323
Periodic gap $ (777,807) $ (1,570,413) $ (3,188,446) $ 5,536,666
Cumulative gap $ (777,807) $ (2,348,220) $ (5,536,666) $ 0
Cumulative gap -3.46% -10.46% -24.66% 0.00%
as % of assets
</TABLE>
<PAGE>
The Company has historically relied upon retail deposit accounts in the form of
savings accounts and certificates of deposit as its primary source of funds.
Although management believes that these retail deposits may reduce 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 has supplemented these deposits with brokered certificates of deposit from
out of area customers. The rapid growth in assets has necessitated a similar
growth in liabilities, including local retail deposits, brokered deposits
and FHLB borrowings. As of March 31, 1999 total deposits and borrowed funds were
$20,358,000, consisting of retail deposits of $13,443,000, brokered deposits of
$5,830,000, and FHLB borrowings of $1,085,000.
The Bank's Board of Directors has formulated an Asset Liability Management
Policy designed to promote long-term profitability while managing interest-rate
risk. The Company recognizes the inherent risk in its interest rate 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, 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 $1,681,100, which expires on September 11, 1999. It
is management's intention to renew the credit line prior to its expiration. The
Bank also has available collateralized borrowing capacity at the FHLB of
approximately $5 million. At March 31, 1999, the Bank had borrowings outstanding
to the FHLB of $1,084,587. 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.
The Bank is required to maintain minimum levels of liquid assets as defined by
regulations. The required percentage is currently 4.0% 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 ratios at March 31, 1999 and March 31, 1998
were 12.95% and 18.06%, 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 March 31, 1999 and March 31, 1998 were $295,827 and $1,530,236
respectively. The decrease was primarily due to the Bank investing excess cash
in loans and investments.
At March 31, 1999 the Bank had outstanding loan commitments and loans awaiting
disbursement of $794,000. It is anticipated that sufficient funds will be
available to meet loan commitments including loan applications received and in
process.
Certificates of deposit, which are scheduled to mature in one year or less at
March 31, 1999, were $9.42 million. Management believes that a significant
portion of such deposits will remain with the Bank.
At March 31, 1999, the Company had tangible capital of $2,030,381, or 9.0% of
total assets, which is approximately $1,693,641 above the minimum requirement of
1.5% of adjusted total assets in effect on that date. The Company had core
capital of $2,030,381, or 9.0% of total adjusted assets, which is
<PAGE>
approximately $1,132,406 above the minimum leverage ratio of 4.0% in effect on
that date. The Company had total risk based capital of $2,221,400 which is
approximately $981,100 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.
Year 2000
Like most financial institutions, the Bank relies upon computers for the daily
conduct of business and for data processing. There is concern that on January 1,
2000 computers will be unable to recognize the new year and therefore may
malfunction. The Bank has conducted a review of its computer systems in order to
determine which systems could be affected by the "Year 2000" issue, and
developed an implementation plan to resolve any identified problem. The testing
phase of the implementation plan is currently under way. 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 have consisted primarily
of accelerating various hardware and software upgrades which generally would
have been incurred in the normal course of business, and testing various
information systems. The upgrades for hardware and software were substantially
in place as of March 31, 1999. Management believes that the internal costs
necessary to address the "Year 2000" issue have been identified and these costs
have been estimated to be approximately $20,000. Approximately 75% of the costs
have been expensed to date.
The Bank contracts with a data processing service bureau, Connecticut On Line
Computer Center to provide all direct processing of the Bank's loan and deposit
transactions, together with calculations of interest income and expense thereon.
The service bureau asserts that it has substantially completed assessment and
testing and implementation procedures and that it will achieve year 2000
readiness in the near future. The Bank is participating in the testing and
implementation processes with its service provider.
The Bank has adopted and is testing various contingency plans to address
policies and procedures in the event of data processing, electrical power supply
and/or phone service failures associated with the year 2000.
As of June 1, 1999 the Company believes that the progress it has made to date,
along with the testing ongoing in 1999, will result in the Company's being well
prepared to meet the year 2000 issue. 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. All
third party providers have been contacted and the Company has received such
assurances.
<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, 1999 and 1998, 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, 1999 and 1998, 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 13, 1999
<PAGE>
<TABLE>
<CAPTION>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ----------------------------------------------------------------------------------------------
March 31,
1999 1998
------------ ------------
ASSETS
Cash (including interest bearing deposits
<S> <C> <C>
$10,600, 1999; $1,490,000, 1998) $ 295,827 $ 1,530,236
Mortgage-backed securities, held-to-maturity (fair value
approximates $38,336; 1999; $71,649, 1998) 38,468 74,080
Investment securities, available-for-sale 1,900,992 1,103,916
Loans receivable, net of allowance for loan losses of $191,019
in 1999 and $122,000 in 1998 19,189,257 13,640,142
Investments required by law - stock in Federal Home Loan
Bank of New York, at cost 100,900 87,400
Accrued interest receivable 107,805 86,143
Premises and equipment, net of accumulated depreciation 583,401 197,234
Foreclosed real estate 118,815 --
Deferred tax asset 39,597 7,100
Other assets 78,261 84,787
------------ ------------
Total Assets $ 22,453,323 $ 16,811,038
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 1,853 $ 3,851
Deposits, non-interest bearing 302,641 225,564
Deposits, interest bearing 18,971,236 14,403,292
Advance payments by borrowers for property taxes and
insurance 108,174 97,453
Advances from the Federal Home Loan Bank of New York
Short-term 250,000 --
Long-term 834,586 --
Other liabilities 56,899 21,523
---------- ----------
Total liabilities 20,525,389 14,751,683
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock of $.10 par value; 100,000 shares authorized,
none issued -- --
Common stock of $.10 par value; 400,000 shares authorized;
152,000 shares issued and outstanding in 1999 and 1998 15,200 15,200
Additional paid-in capital 1,192,833 1,192,833
Retained earnings, substantially restricted 867,348 963,752
Accumulated other comprehensive income (loss) (5,403) 5,036
Unearned stock based compensation (32,604) --
Unearned ESOP shares (109,440) (117,466)
---------- ----------
1,927,934 2,059,355
---------- ----------
Total Liabilities and Stockholders' Equity $ 22,453,323 $ 16,811,038
============ ============
- ----------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------
Years Ended
March 31,
1999 1998
----------- -----------
INTEREST INCOME
Loans receivable
<S> <C> <C>
First mortgage loans $ 742,642 $ 742,948
Other loans 700,384 431,341
Investment securities and interest bearing deposits 153,322 118,617
--------- ---------
Total interest income 1,596,348 1,292,906
--------- ---------
INTEREST EXPENSE
Deposits 892,587 725,988
Short-term advances, Federal Home Loan Bank of New York 242 --
Long-term advances, Federal Home Loan Bank of New York 19,330 --
--------- ---------
912,159 725,988
--------- ---------
Net interest income 684,189 566,918
PROVISION FOR LOAN LOSSES 121,000 12,000
--------- ---------
Net interest income after provision for loan losses 563,189 554,918
--------- ---------
NONINTEREST INCOME
Loan fees and service charges 34,280 28,559
Trading account gain on FREDDIE MAC stock -- 12,411
Other noninterest income 10,232 26,796
--------- ---------
Total noninterest income 44,512 67,766
--------- ---------
NONINTEREST EXPENSE
General and administrative expenses
Compensation, payroll taxes and fringe benefits 327,751 303,150
Advertising and business promotion 7,785 9,156
Building occupancy and equipment expenses,
including depreciation 45,228 37,695
Federal insurance premiums 14,758 8,121
Data processing expenses 45,609 36,804
General office and supply expense 50,701 21,080
Professional and regulatory fees 86,518 76,837
Other operating expenses 152,360 117,129
--------- ---------
Total noninterest expense 730,710 609,972
--------- ---------
Income (loss) before income taxes (123,009) 12,712
PROVISION FOR INCOME TAX BENEFIT (EXPENSE) 26,605 (5,245)
--------- ---------
Net income (loss) $ (96,404) $ 7,467
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE
Basic $ (.69) $ .05
=========== ===========
Diluted $ (.69) $ .05
=========== ===========
- -----------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
Years Ended March 31, 1999 and 1998
Accumulated Unearned
Additional Other Stock Unearned Total
Common Stock paid-in Retained Comprehensive Based ESOP Stockholders'
Shares Amounts Capital Earnings Income (loss) Compensation Shares Equity
------ ------- ------- -------- ------------- ------------ ------ ------
BALANCES AT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
March 31, 1997 -- $ -- $ -- $ 956,285 $ (1,379) $ -- $ -- $ 954,906
Comprehensive Income (loss)
Net income (loss) -- -- -- 7,467 -- -- -- 7,467
Change in unrealized
gain (loss) on
securities available
for-sale, net of tax
effects -- -- -- -- 6,415 -- -- 6,415
-----
Total comprehensive
income (loss) 13,882
------
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
-------------------------------------------------------------------------------------------------------
BALANCES AT
March 31, 1998 152,000 15,200 1,192,833 963,752 5,036 -- (117,466) 2,059,355
Comprehensive Income (loss)
Net income (loss) -- -- -- (96,404) -- -- -- (96,404)
Change in unrealized
gain (loss) on
securities available
for sale, net of tax
effects -- -- -- -- (10,439) -- -- (10,439)
--------
Total comprehensive
income (loss) (106,843)
--------
Unearned stock
based compensation -- -- -- -- -- (32,604) -- (32,604)
ESOP shares earned -- -- -- -- -- -- 8,026 8,026
-------------------------------------------------------------------------------------------------------
BALANCES AT
March 31, 1999 152,000 $ 15,200 $1,192,833 $867,348 $(5,403) $(32,604) $(109,440) $1,927,934
====================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------------------------------------------------
Years Ended
March 31,
1999 1998
----------- -----------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ (96,404) $ 7,467
Adjustments to reconcile net income to net cash provided by (used in)
operating activities
Depreciation 32,189 18,456
Amortization (accretion), net 4,134 2,066
Provision for loan losses 121,000 12,000
Deferred income taxes (32,497) --
Allocation of ESOP shares 8,026 4,134
Decrease (increase) in
Accrued interest receivable (21,662) (47,513)
Trading account securities -- 69,324
Other assets 6,526 (44,478)
Increase (decrease) in
Accounts payable (1,998) (4,069)
Other liabilities 2,772 3,126
---------- ---------
22,086 20,513
---------- ---------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES
Net increase in loans receivable (5,788,930) (4,259,930)
Proceeds from maturities and calls of available-for-sale securities 600,000 --
Purchases of available-for-sale securities (1,505,434) (701,774)
Proceeds from principal repayments of mortgage-backed securities 129,397 47,483
Purchase of premises and equipment (418,356) (60,311)
Purchase of investments required by law, FHLB stock (13,500) (28,900)
Proceeds from maturity of held-to-maturity securities -- 200,000
Proceeds from sale of held-to-maturity securities -- 135,533
---------- ---------
(6,996,823) (4,667,899)
---------- ---------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES
Net increase in deposits 4,645,021 4,391,555
Proceeds from issuance of common stock, net of issuance costs -- 1,086,433
Net increase (decrease) in short-term advances, FHLB 250,000 --
Proceeds from long-term advances, FHLB 850,000 --
Payments on long-term advances, FHLB (15,414) --
Increase (decrease) in advances from borrowing taxes and insurance 10,721 (9,824)
---------- ---------
5,740,328 5,468,164
---------- ---------
Net increase (decrease) in cash (1,234,409) 820,778
CASH, beginning of year 1,530,236 709,458
---------- ---------
CASH, end of year $ 295,827 $ 1,530,236
========== =========
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes $ 125 $ 17,350
========== =========
Interest on deposits and borrowings $ 912,159 $ 725,988
========== =========
Increase (decrease) on unrealized gain
on securities available-for-sale $ (10,439) $ 6,415
========== =========
Transfer of loans receivable to foreclosed real estate $ 118,815 $ --
========== =========
- ------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
</TABLE>
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
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). 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,
totaling $273,023 at March 31, 1999. 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.
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
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 1999 or 1998.
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 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
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. Loans Receivable - continued
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, less accumulated depreciation.
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-nine (39) years.
7. Foreclosed Real Estate
Foreclosed real estate includes both formally foreclosed property and
in-substance foreclosed property. In-substance foreclosed properties are
those properties for which the institution has taken physical possession,
regardless of whether formal foreclosure proceedings have taken place.
At the time of foreclosure, foreclosed real estate is recorded at the lower
of the carrying amount or fair value less cost to sell, which becomes the
property's new basis. Any write-downs based on the asset's fair value at
date of acquisition are charged to the allowance for loan losses. After
foreclosure, these assets are carried at the lower of their new cost basis
or fair value less cost to sell. Costs incurred in maintaining foreclosed
real estate and subsequent adjustments to the carrying amount of the
property are included in income (loss) on foreclosed real estate.
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
8. 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.
9. 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.
10. 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
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
10. Fair Value of Financial Instruments - continued
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.
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.
Advances from the Federal Home Loan Bank: The fair value of these
advances is estimated by discounting the future cash flows of these
advances using the current rates at which similar term advances could
be obtained.
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.
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
11. 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.
12. 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, 1999 and 1998). 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.
13. 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.
14. 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 the year ended March 31, 1999
reflect earnings available to the common stockholders for the year, divided
by the weighted average number of common shares outstanding during the
year. The 1998 Earnings per Common Share amounts reflect the earnings
available to common stockholders from the conversion date through March 31,
1998 divided by the weighted average number of common shares outstanding in
that period. Earnings for the period from April 1, 1997 through the
conversion date were approximately breakeven.
15. Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for the reporting and display of comprehensive
income and its components in financial statements. Comprehensive income
represents the sum of net income and items of "other comprehensive income,"
which are reported directly in stockholders' equity, net of tax, such as
the change in the net unrealized gain or loss on securities available for
sale. While SFAS No. 130 does not require a specific reporting format, it
does require that an enterprise display an amount representing total
comprehensive income for each period for which an income statement is
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
15. Comprehensive Income - continued
presented. In accordance with SFAS No. 130, the Company has reported
comprehensive income and its components for 1999 and 1998, in the
consolidated statements of changes in stockholders' equity. Accumulated
other comprehensive income, which is included in stockholders' equity, net
of tax, represents the net unrealized gain or loss on securities available
for sale.
16. Stock Compensation Plans
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation, encourages all entities to adopt a fair value
based method of accounting for employee stock compensation plans, whereby
compensation cost is measured at the grant date based on the value of the
award and is recognized over the service period, which is usually the
vesting period. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method
of accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, whereby compensation cost is the
excess, if any, of the quoted market price of the stock at the grant date
over the amount an employee must pay to acquire the stock. The Company has
elected to continue with the accounting methodology in Opinion No. 25 and,
as a result, has provided pro forma disclosures of net income and earnings
per share and other disclosures, as if the fair value based method of
accounting had been applied.
17. Reclassification
Certain 1998 accounts have been reclassified to conform with the 1999
presentation.
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
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 available-for-sale
-----------------------------
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
------------------------------------------ ------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
U.S.
government
and federal
<S> <C> <C> <C> <C> <C> <C> <C> <C>
agencies $ 1,399,476 $ 2,137 $ -- $1,401,613 $1,098,88 $ 5,036 $ -- $ 1,103,916
Mortgage-
backed
securities 506,919 -- (7,540) 499,379 -- -- -- --
--------- ---- -------- -------- ------ ---- ---- -----
$1,906,395 $2,137 $ (7,540) $1,900,992 $1,098,880 $ 5,036 $ -- $1,103,916
========== ====== ========= ========== ========= ====== ======== ==========
Securities held-to-maturity
---------------------------
March 31, 1999 March 31, 1998
------------------------------------------ --------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
Mortgage-
backed
securities $ 38,468 $ -- $ (132) $ 38,336 $ 74,080 $ -- $ (2,431) $71,649
========= ===== ======= =============== ========= ===== ========= =======
The following is a summary of maturities of securities held-to-maturity and
available-for-sale as of March 31, 1999:
Securities held-to-maturity Securities available-for-sale
--------------------------- -----------------------------
Amounts maturing in: Amortized Amortized
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
One year or less $ -- $ -- $ 199,854 $ 201,105
After one year through five years -- -- 450,047 455,438
After five years through ten years -- -- 749,576 745,070
After ten years 38,468 38,336 506,918 499,379
----------- ------------ --------- -----------
$ 38,468 $ 38,336 $1,906,395 $1,900,992
============ ============ ========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE B - INVESTMENT AND MORTGAGED-BACKED SECURITIES - Continued
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.
For the years ended March 31, 1999 and 1998 proceeds from the sale of
securities held-to-maturity amounted to $-0- and $135,533, respectively.
Gross realized gain (loss) amounted to $-0- for each year. There were no
sales of securities available-for-sale during the years ended March 31,
1999 and 1998.
NOTE C - LOANS RECEIVABLE, NET
The Company's loans receivable are summarized as follows:
<TABLE>
<CAPTION>
March 31,
1999 1998
---- ----
<S> <C> <C>
Conventional first mortgages on real estate (1-4 family) $ 9,481,327 $ 8,140,758
Property improvement loans 112,782 15,566
Home equity loans 911,501 546,157
Construction loans 219,992 --
Loans to depositors, secured by savings 74,098 101,744
Consumer loans 6,242,686 3,818,123
Commercial 2,337,890 1,139,794
-------------- ------------
$ 19,380,276 $ 13,762,142
Allowance for loan losses (191,019) (122,000)
Loans in process -- --
-------------- ------------
Total loans receivable, net $ 19,189,257 $ 13,640,142
============== ============
An analysis of the allowance for loan losses is as follows:
March 31,
1999 1998
---- ----
Balance, beginning of year $ 122,000 $110,000
Loans charged off (51,981) --
Recoveries -- --
Provision for losses 121,000 12,000
------------- ------------
Balance, end of year $ 191,019 $122,000
=========== ========
</TABLE>
At March 31, 1999 and 1998, the total recorded investment in impaired loans, all
of which had allowances determined in accordance with SFAS No. 114 and No. 118
amounted to approximately $59,000 and $28,000, respectively. The average
recorded investment in impaired loans amounted to approximately $34,000 and
$28,000 for the years ended March 31, 1999 and 1998, respectively. The allowance
for loan losses related to impaired loans amounted to $-0- at March 31, 1999 and
1998, respectively. Interest income on impaired loans of $2,050 and $-0- was
recognized for cash payments received in 1999 and 1998, respectively.
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE C - LOANS RECEIVABLE, NET - Continued
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:
Balance, beginning of year $ 152,795
Additions 504,613
Payments (194,557)
Change in status (2,816)
--------------
Balance, end of year $ 460,035
==============
Loans with carrying amounts of $118,815 and $-0- were transferred to
foreclosed real estate in 1999 and 1998, respectively.
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:
March 31,
1999 1998
---- ----
Loans $ 87,836 $74,919
Mortgage-backed securities 3,173 507
Investments and other 16,796 10,717
-------- -------
$107,805 $86,143
======== =======
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE F - PREMISES AND EQUIPMENT
A summary of the Company's premises and equipment is as follows:
March 31,
1999 1998
---- ----
Land and building $307,917 $ 58,405
Improvements 130,294 128,721
Equipment 285,666 118,628
------- -------
723,877 305,754
Less accumulated depreciation 140,476 108,520
------- -------
$583,401 $197,234
======== ========
Depreciation expense for 1999 and 1998 was $32,189 and $18,456, respectively.
NOTE G - FORECLOSED REAL ESTATE
At March 31, 1999 and 1998, the Company had foreclosed real estate expected
to be disposed of in the near term of $118,815 and $-0-, respectively. In
1999 and 1998, foreclosure losses in the amount of $30,000 and $-0-,
respectively, were charged off to the allowance for loan losses.
NOTE H - DEPOSITS
Deposit account balances at March 31, 1999 and 1998, are summarized as
follows:
<TABLE>
<CAPTION>
March 31,
1999 1998
------------------------------ -------------------------------
Amount % Amount %
------ --- ------ ---
Balance by interest rate:
<S> <C> <C> <C> <C>
Interest-bearing checking accounts $ 492,011 2.55% $ 233,742 1.60%
Non-interest bearing checking accounts 302,641 1.57% 225,564 1.54%
Passbook accounts 3,395,145 17.62% 3,583,967 24.50%
Certificates of deposit 15,084,080 78.26% 10,585,583 72.36%
---------- ----- ---------- -----
$19,273,877 100.00% $14,628,856 100.00%
========== ====== =========== ======
</TABLE>
The aggregate amount of short-term jumbo certificates of deposit with a minimum
denomination of $100,000 was approximately $1,362,000 and $725,000 at March 31,
1999 and 1998, respectively. Deposit amounts in excess of $100,000 are not
Federally insured.
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE H - DEPOSITS - Continued
At March 31, 1999 scheduled maturities of certificates of deposit are as
follows:
March 31, 2000 $ 9,423,377
2001 4,154,361
2002 1,227,947
2003 67,164
2004 75,043
Thereafter 136,188
---------------
$ 15,084,080
================
Interest expense for 1999 and 1998 was $7,352 and $2,782, respectively for
interest-bearing checking accounts, $101,707 and $117,855, respectively for
passbook accounts, and $783,528 and $605,351, respectively for certificates of
deposit.
NOTE I - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Short-term Advances
The Bank has short-term advances outstanding from the Federal Home
Loan Bank as of March 31, 1999 and 1998 of $250,000 and $-0-,
respectively. The advance is due on June 21, 1999 and bears interest
at a rate of 4.98%.
Long-term Advances
The Bank has long-term advances outstanding from the Federal Home Loan
Bank as of March 31, 1999 and 1998 of $834,586 and $-0-, respectively.
The advances bear interest ranging from 5.08% to 5.22% and have due
dates ranging from December 12, 2000 to October 29, 2008. The
long-term advances at March 31, 1999 are repayable as follows:
Years ending March 31, 2000 $ 131,069
2001 388,028
2002 134,839
2003 23,265
2004 24,509
2005 - 2008 132,876
---------------
$ 834,586
================
The advances are collateralized by qualifying one to four family first
mortgage loans (see note C).
NOTE J - 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
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE J - INCOME TAXES - Continued
deduction based on specified experience formulas. The Company used the
experience formula in 1998 and anticipates using the same method in 1999.
Income tax expense (benefit) is summarized as follows:
Years Ended
March 31,
1999 1998
---- ----
Federal
Current $ (2,206) $ 6,000
Deferred (18,960) --
------- ------
(21,166) 6,000
------- ------
State
Current $ 8,098 $ (755)
Deferred (13,537) --
------- ------
(5,439) (755)
------- ------
$(26,605) $ 5,245
======= ======
Taxes paid during the years ended March 31, 1999 and 1998, were $125 and
$17,350, 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:
Years Ended
March 31,
1999 1998
---- ----
Expected tax provision (benefit) at 34% $(41,823) $2,500
State franchise tax, net of federal tax benefit 7,307 --
Other, net 7,911 2,745
------- ------
$(26,605) $5,245
======== ======
Effective tax rate (benefit) for 1999 and 1998 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,
interest
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE J - INCOME TAXES - Continued
receivable, other liabilities and a net operating loss carryforward. The
components of the net deferred tax asset is as follows:
March 31,
1999 1998
---- ----
Deferred tax asset
Net operating loss $ 25,067 $ 8,000
Allowance for loan losses 45,845 28,300
-------- --------
70,912 36,300
-------- --------
Deferred tax liabilities
Interest receivable (25,873) (29,200)
Other (5,442) --
-------- --------
(31,315) (29,200)
-------- --------
Net deferred tax asset $ 39,597 $ 7,100
======== ========
Included in retained earnings at March 31, 1999 and 1998 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, 1999 and 1998, respectively.
NOTE K - 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, 1999, that the Company and the Bank
meets all capital adequacy requirements to which they are subject.
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE K - REGULATORY MATTERS - Continued
As of March 31, 1999, the most recent notification from 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>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------------- ------------------ -----------------------
As of March 31, 1999:
Total Risk-Based Capital
<S> <C> <C> <C> <C> <C> <C>
(to Risk-Weighted Assets) $ 2,221,400 14.3% >=$1,240,300 >=8.0% >=$1,550,400 >=10.0%
Tier I Capital
(to Risk-Weighted Assets) $ 2,030,381 13.1% >=$ 620,200 >=4.0% >=$ 930,300 >=6.0%
Tier I Capital
(to Adjusted Total Assets) $ 2,030,381 9.0% >=$ 906,800 >=4.0% >=$1,133,500 >=5.0%
Tangible Capital
(to Adjusted Total Assets) $ 2,030,381 9.0% >=$ 453,400 >=2.0% >=$ 453,400 >=2.0%
</TABLE>
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- ------------------ -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------------- ------------------ -----------------------
As of March 31, 1998:
Total Risk-Based Capital
<S> <C> <C> <C> <C> <C> <C>
(to Risk-Weighted Assets) $ 2,286,685 23.6% >=$ 776,300 >=8.0% >=$ 970,500 >=10.0%
Tier I Capital
(to Risk-Weighted Assets) $ 2,166,749 22.3% >=$ 388,200 >=4.0% >=$ 582,300 >=6.0%
Tier I Capital
(to Adjusted Total Assets) $ 2,166,749 12.9% >=$ 672,400 >=4.0% >=$ 840,600 >=5.0%
Tangible Capital
(to Adjusted Total Assets) $ 2,166,749 12.9% >=$ 252,200 >=1.5% >=$ 252,200 >=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.
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE K - REGULATORY MATTERS - Continued
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 L - 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 N). The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
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, 1999 and 1998.
NOTE M - 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, 1999 March 31, 1998
-------------- --------------
Fixed-Rate Variable-Rate Total Fixed Rate Variable-Rate Total
---------- ------------- ----- ---------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
First-mortgage $ 794,303 $ -- $ 794,303 $ -- $ -- $ --
========== ============ ========= ========== ======== ======
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE M - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTION - Continued
The interest rate on outstanding fixed-rate commitments at March 31, 1999,
ranges between 7.7% and 9.7%.
At March 31, 1999, the Company had an unused line of credit with the
Federal Home Loan Bank as follows:
Companion (DRA) Commitment $ 840,550
Overnight line of credit 840,550
---------
$ 1,681,100
=========
The Company's line of credit with the Federal Home Loan Bank expires on
September 11, 1999.
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, 1999 and
1998, Landmark Title Company received $15,162 and $17,079 respectively in
title insurance premiums as a result of mortgage closings at the Bank.
NOTE N - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company financial instruments are as
follows:
<TABLE>
<CAPTION>
March 31,
1999 1998
---------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
<S> <C> <C> <C> <C>
Cash $ 295,827 $ 295,827 $ 1,530,236 $ 1,530,236
Mortgage-backed securities 38,468 38,336 74,080 71,649
Investment securities 1,900,992 1,900,992 1,103,916 1,103,916
Loans receivable, net 19,189,257 19,284,000 13,640,142 13,974,000
Accrued interest receivable 107,805 107,805 86,143 86,143
Financial liabilities:
Deposits 19,273,877 19,552,000 14,628,856 14,725,000
Advance payments by
borrowers for taxes
and insurance 108,174 108,174 97,453 97,453
Advances from the
Federal Home Loan Bank 1,084,586 1,066,000 -- --
</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 L and M and their carrying
values
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE N - 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 O - 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 P- 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, 1999 and 1998 was $109,440 and
$117,466, respectively. Interest charged on the loan is at the Bank's prime
lending rate (7.75% at March 31, 1999). 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, 1999 and 1998, 808 shares and 205 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 1999 and 1998 were approximately $8,026 and $4,134,
respectively. The fair value of the remaining unallocated shares at March
31, 1999 aggregated approximately $84,000.
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.
NOTE Q - EMPLOYEE BENEFIT PLAN
The Bank has a 401(k) Plan whereby substantially all employees participate
in the Plan. Employees may contribute up to 15 percent of their
compensation subject to certain limits based on federal tax laws. The
Company makes matching contributions equal to 100 percent of the first 3
percent of an employee's compensation contributed to the Plan. Matching
contributions vest to the employee
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE Q - EMPLOYEE BENEFIT PLAN - Continued
equally over a five-year period. For the years ended March 31, 1999 and
1998, expense attributable to the Plan amounted to $5,011 and $2,751,
respectively.
NOTE R - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1998, the FASB issued Statement No. 132, Employer's Disclosures
about Pensions and Other Postretirement Benefits, an amendment of FASB
Statements No. 87, 88 and 106 ("SFAS 132"). The statement revises
employers' disclosures about pensions and other postretirement benefits. It
does not change the measurement or recognition of those plans. It
standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer as useful as they were when FASB Statements
No. 87, No. 88 and No. 106 were issued. The Statement suggests combined
formats for presentation of pension and other postretirement benefit
disclosures. This Statement is effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS 132 did not have a material effect
on the Company's consolidated financial statements.
In June, 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which establishes accounting and
reporting standards for derivative instruments and for hedging activities.
The Statement requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet at fair value. If certain
conditions are met, a derivative may be specifically designated as a fair
value hedge, a cash flow hedge, or a foreign currency hedge. Entities may
reclassify securities from the held-to-maturity category to the
available-for-sale category at the time adopting SFAS No. 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999 and,
accordingly, would apply to the Company beginning on April 1, 2000. The
Company plans to adopt the standard at that time and does not presently
intend to reclassify securities between categories. The Company has not
engaged in derivatives and hedging activities covered by the new standard,
and does not expect to do so in the foreseeable future. Accordingly, SFAS
No. 133 is not expected to have a material impact on the Company's
financial statements.
In October, 1998 the FASB issued SFAS No. 134 which amends SFAS No. 65
"Accounting for Certain Mortgage Banking Activities". Statement No. 65, as
amended by Statement No. 115 and Statement No. 125, required that after
securitization of a mortgage loan held for sale, a mortgage banking
enterprise classify the resulting security as a trading security. Statement
No. 134 amends this section to require that after the securitization of
mortgage loans held for sale, the entity classify the resulting
mortgage-backed security or other retained interest based on its ability
and intent to sell or hold those investments. SFAS 134 is effective for the
first quarter beginning after December 15, 1998 and has been adopted by the
Company for the year ended March 31, 1999. The Company has not engaged in
retaining securities after the securitization of its mortgage loans held
for sale and does not expect to do so in the foreseeable future.
Accordingly, SFAS No. 134 is not expected to have a material impact on the
Company's financial statements.
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE S - EARNINGS PER COMMON SHARE
A reconciliation of the numerators and denominators for earnings per common
share computations for the years ended March 31, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
Years Ended March 31,
1999 1998
---- ----
Basic Earnings Per Share
<S> <C> <C>
Net income (loss) available to common shareholders $ (96,404) $ 7,467
============ ============
Weighted average common shares outstanding 140,247 139,975
============ ============
Basic Earnings Per Share $ (.69) $ .05
=========== ============
Earnings Per Share Assuming Dilution
Net income (loss) available to common shareholders $ (96,404) $ 7,467
============ ============
Weighted average common and dilutive
potential common shares outstanding 140,247 139,975
============ ============
Diluted Earnings Per Share $ (.69) $ .05
=========== ============
</TABLE>
NOTE T - STOCK COMPENSATION PLANS
During the year ended March 31, 1999, shareholders approved a Stock Option
Plan and a Recognition and Retention Plan for directors and key employees.
Under the Stock Option Plan, the Company may grant options for up to 15,200
shares of authorized but currently unissued common stock. Both incentive
stock and non-qualified stock options may be granted under the Plan. All
options have a ten (10) year term and vest and became exercisable over a
five (5) year period. Activity in the Stock Option Plan for 1999 and 1998
is as follows:
<TABLE>
<CAPTION>
Options Option Price Shares
Outstanding Per Share Exercisable
----------- ------------ ------------
<S> <C> <C> <C>
Outstanding at March 31, 1998 -- $ -- --
Granted (July 22, 1998) 6,860 13.00 --
Exercised -- -- --
Forfeited -- -- --
----------- ----------- ------------
Outstanding at March 31, 1999 6,860 $ 13.00 --
========== =========== ============
</TABLE>
In July 1998, the Shareholders approved an option plan with an exercise
price equal to the market value of the Company's shares at the date of
grant. The excess of market value over exercise price for approved options
approximated $-0-. Compensation expense for the years ended March 31, 1999
and 1998 was $-0-.
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE T - STOCK COMPENSATION PLANS - Continued
During 1999, the Company awarded 2,508 shares (6,080 authorized) of
restricted stock under the Recognition and Retention Plan. The market value
of shares awarded at the date of grant approximated $32,604 and has been
recognized in the accompanying statement of condition as unearned stock
based compensation. Compensation expense for the years ended March 31, 1999
and 1998 was $-0-. The market value of shares awarded will be recognized as
compensation expense ratably over the 5-year restriction period, beginning
one year after the grant date (July 22, 1998) as defined within the Plan.
The Company has elected to account for its stock-based compensation plans
in accordance with Accounting Principles Board Opinion No. 25. Proforma
amounts of net income and earnings per share under Statement of Financial
Accounting Standards No. 123 are as follows:
Years Ended March 31,
1999 1998
---- ----
Net income (loss) As reported $ (96,404) $ 7,467
Pro forma $ (100,548) $ N/A
Net income (loss) As reported
per share Pro forma $ (.69) $ .05
$ (.72) $ N/A
Net income (loss)
per share - As reported $ (.69) $ .05
assuming dilution Pro forma $ (.72) N/A
The fair value of these options was estimated on the date of grant using a
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Years Ended March 31,
1999 1998
---- ----
Dividend yield --% N/A
Expected life 5 years N/A
Expected volatility 24.57% N/A
Risk-free interest rate 5.79% N/A
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. Therefore,
the foregoing pro forma results are not likely to be representative of
reported net income (loss) of future periods due to additional years of
vesting. The weighted-average fair value per share of options granted
during 1999 is $4.03.
- --------------------------------------------------------------------------------
<PAGE>
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998
NOTE U - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial condition as of March 31,
1999 and 1998 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.
<TABLE>
<CAPTION>
March 31,
1999 1998
---------- ----------
STATEMENT OF FINANCIAL CONDITION
Assets:
<S> <C> <C>
Cash $ 12,359 $ 4,134
Investment in and advances to Bank 1,939,139 2,055,221
Other assets 9,987 --
---------- ----------
Total assets $1,961,485 $2,059,355
========== ==========
Liabilities $ 33,551 $ --
Stockholders' Equity 1,927,934 2,059,355
---------- ----------
Total liabilities and stockholders' equity $1,961,485 $2,059,355
========== ==========
Years Ended March 31,
1999 1998
---- ----
STATEMENT OF OPERATIONS
Income:
Income, including dividend from bank subsidiary of
$120,000 in 1999 and $-0- in 1998 $ 132,903 $ --
Expenses 46,444 --
---------- ----------
Income before income taxes and equity in earnings of Bank 86,459 --
Provision for income tax benefit (expense) 7,056 --
---------- ----------
Income before equity in earnings of Bank 93,515 --
Equity in earnings (loss) of Bank (69,922) 7,467
---------- ----------
Net income $ 23,593 $ 7,467
========== ==========
STATEMENT OF CASH FLOWS
Cash flows provided (used) by operating activities:
Net income $ 23,593 $ 7,467
Adjustments to reconcile net income (loss) to
net cash used for operating activities
Equity in (earnings) loss of Bank 69,922 (7,467)
Other assets (9,987) --
Liabilities 947 --
---------- ----------
84,475 --
---------- ----------
Cash flows provided (used) by investing activities:
Investment in and advances to Bank (84,276) (1,086,433)
Principal payments on ESOP loan 8,026 4,134
---------- ----------
(76,250) (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 8,225 4,134
Cash, beginning of year 4,134 --
---------- ----------
Cash, end of year $ 12,359 $ 4,134
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
Common Stock Information
The Common Stock of Landmark Financial Corp. is traded on the "pink sheets"
under the symbol "LMFC." At March 31, 1999 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, 1999. At the current time the Company has no
intention to pay dividends.
Fiscal 1999 High Low
- ----------- ---- ---
First Quarter $13.37 $12.50
Second Quarter $13.00 $ 8.00
Third Quarter $12.00 $ 8.25
Fourth Quarter $ 9.37 $ 7.00
<PAGE>
Directors and Officers
Directors Officers
John Francisco Gordon E. Coleman
Chairman of the Board President & Chief Executive Officer
Gordon E. Coleman Paul S. Hofmann
Vice President & Chief Financial Officer
Carl Rockefeller H. Stuart Larson
Vice President - Consumer Lending
Patricia Symolon
Richard Ferraro
Frederick LaCoppola
Carl Salmon, III
<PAGE>
Corporate Information
Corporate Headquarters Transfer Agent
Landmark Financial Corp. Registrar & Transfer Company
211 Erie Blvd. 10 Commerce Drive
Canajoharie, New York 13317 Cranford, New Jersey 07016
(518) 673-2012 (800) 456-0596
Special Counsel Independent Auditors
Luse Lehman Gorman Pomerenk & Schick, P.C. Harvazinski & Montanye, LLP
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 29, 1999 at 10:30 a.m.
at the Fort Rennselaer 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 Gordon E. Coleman 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.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Company Percent Owned
- ------------------- -------------
Landmark Community Bank 100%
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> year
<FISCAL-YEAR-END> Mar-31-1999
<PERIOD-END> Mar-31-1999
<CASH> 285
<INT-BEARING-DEPOSITS> 11
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,901
<INVESTMENTS-CARRYING> 39
<INVESTMENTS-MARKET> 38
<LOANS> 19,380
<ALLOWANCE> (191)
<TOTAL-ASSETS> 22,453
<DEPOSITS> 19,274
<SHORT-TERM> 250
<LIABILITIES-OTHER> 167
<LONG-TERM> 835
0
0
<COMMON> 15
<OTHER-SE> 1,913
<TOTAL-LIABILITIES-AND-EQUITY> 22,453
<INTEREST-LOAN> 1,443
<INTEREST-INVEST> 153
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,596
<INTEREST-DEPOSIT> (893)
<INTEREST-EXPENSE> (912)
<INTEREST-INCOME-NET> 684
<LOAN-LOSSES> (121)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> (731)
<INCOME-PRETAX> (123)
<INCOME-PRE-EXTRAORDINARY> (123)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (96)
<EPS-BASIC> (0.69)
<EPS-DILUTED> (0.69)
<YIELD-ACTUAL> 3.64
<LOANS-NON> 106
<LOANS-PAST> 0
<LOANS-TROUBLED> 94
<LOANS-PROBLEM> 276
<ALLOWANCE-OPEN> 122
<CHARGE-OFFS> (52)
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 191
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 191
</TABLE>
