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, 2000
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.
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(Name of Small Business Issuer in its Charter)
Deleware 16-1531343
- ----------------------------------------- ---------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
211 Erie Boulevard, Canajoharie, New York 13317
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(Address of Principal Executive Office) (Zip Code)
(518) 673-2012
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(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
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Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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(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
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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, 2000, the issuer's revenues\losses were $33,710.
As of June 8, 2000, 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 8, 2000 ($20.88) was $2,513,012.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended March
31, 2000 (Parts II and IV).
PART I
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ITEM 1. Business
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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, 2000, the Company had consolidated assets of $25,436,355,
deposits of $21,922,502 and stockholders' equity of $1,944,752.
The executive office of the Company is located at 211 Erie Boulevard,
Canajoharie, New York 13317 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, 2000, the B total loan portfolio was $21.9 million, of
which $11.6 million, or 53.2% were one- to four-family residential mortgage
loans, $2.2 million, or 10.1% were commercial real estate loans, $6.0 million,
or 27.6% were consumer loans, and $1.7 million, or 7.7% were commercial business
loans.
During the year ended March 31, 2000, the Bank originated $6.4 million of
fixed-rate and $2.6 million 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. Th 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 30, 2000 the unemployment
rate in Montgomery County was 6.4%.
The Bank faces competition in attracting deposits and originating loans.
Such competition consists of two commercial banks, one savings association and
one credit union.
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, 2000, the Bank's portfolio of one- to
four-family residential mortgage loans totaled $11.6 million, or 53.2% of total
loans. At March 31, 2000, the commercial real estate portfolio totaled $2.2
million, or 10.1% of total loans, all of which were secured by properties
located in the Bank's market area. The Bank's consumer loans consist primarily
of personal loans (primarily secured by automobiles), passbook loans and
property improvement loans. At March 31, 2000 consumer loans totaled $6.0
million, or 27.6% of total loans. The Bank has recently commenced the
origination of commercial business loans which at March 31, 2000 totaled $1.7
million, or 7.7% of total loans.
Under Office of Thrift Supervision ("OTS") regulations, a thrift
institution's loans-to-one borrower li generally limited to the greater of 15%
of unimpaired capital and surplus or $500,000. At March 31, 2000, 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, 2000,
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, 2000 was approximately $300,000, which was secured by commercial real
estate, and commercial vehicles. At March 31, 2000, 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 dan allowances for
losses) as of the dates indicated.
March 31,
--------------------------------------------
2000 1999
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Amount Percent Amount Percent
--------- --------- --------- ---------
(Dollars in Thousands)
Real Estate Loans:
- -----------------
One- to four-family........................................ $11,638 53.2% $10,613 54.76%
Commercial................................................. 2,215 10.1 1,256 6.48
------- ------- ------- --------
Total real estate loans.................................. 13,853 63.3 11,869 61.24
------- ------- ------- --------
Other Loans:
- -----------
Consumer Loans:
Property improvement....................................... 155 0.7 113 .58
Passbook loans............................................. 142 0.7 74 .38
Personal loans (1)......................................... 6,035 27.6 6,243 32.21
------- ------- ------- --------
Total consumer loans..................................... 6,332 29.0 6,430 33.17
Commercial business loans.................................. 1,686 7.7 1,080 5.59
------- ------- ------- --------
Total loans................................................ $21,871 100.00% $19,380 100.00%
======= ======== ------- ========
Less:
- ----
Loans in process........................................... $ -- $ --
Allowance for losses....................................... 227 (191)
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Total loans receivable, net................................ $21,644 $19,189
======= =======
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(1) Personal loans are primarily comprised of loans secured by automobiles.
2
The following table shows the composition of the Bank's loan portfolio by
fixed- and adjustable-rate at the dates indicated.
March 31,
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2000 1999
-------------------- --------------------
Amount Percent Amount Percent
--------- --------- --------- ---------
(Dollars in Thousands)
Fixed-Rate Loans:
- ----------------
Real estate:
One- to four-family......................................... $ 7,269 33.24% $ 7,336 37.85%
Commercial.................................................. 952 4.35 691 3.57
------- -------- ------- --------
Total real estate loans................................... 8,221 37.59 8,027 41.42
Consumer.................................................... 6,273 28.68 6,431 33.18
Commercial.................................................. 1,077 4.92 844 4.36
------- -------- ------- --------
Total fixed-rate loans.................................... 15,571 71.19 15,302 78.96
Adjustable-Rate Loans:
- ---------------------
Real estate:
One- to four-family......................................... 4,369 19.98 3,277 16.91
Commercial.................................................. 1,287 5.88 565 2.92
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Total real estate loans................................... 5,656 25.86 3,842 19.83
Commercial.................................................. 585 2.67 236 1.22
Consumer.................................................... 59 .27
Total adjustable-rate loans............................... 6,300 28.81 4,078 21.04
------- -------- ------- --------
Total loans............................................... $21,871 100.00% $19,380 100.00%
------- ======== ------- ========
Less:
- ----
Loans in process............................................ $ -- $ --
Allowance for loan losses................................... 227 (191)
--------
Total loans receivable, net................................. $21,644 $19,189
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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 tth 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 $35,500 at March 31, 2000. At March 31, 2000, the Bank had $11.6
million, or 53.2% 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, 2000, $7.3 million, or 33.2% 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 m 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 ut six
percentage points over the life of the loan. In a rising interest rate
environment, such rate limitations may prevent ARM loans from repricing to
market interest rates, which would have an adverse effect on net interest
income. The Bank has used different interest indices for ARM loans in the past,
and currently uses the one year U.S. Treasury Index adjusted to a constant
maturity, with a margin of 350 basis points for agency-conforming ARM loans. ARM
loans secured by residential one- to four-family real estate totaled $4.4
million, or 20.0% of the Bank's total loan portfolio at March 31, 2000. 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 2000, the Bank originated $1.0 million in fixed-rate residential
mortgage loans and $900,000 in ARM loans.
3
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, 2000, $2.2 million, or 10.1%, of the Bank's
loan portfolio consisted of 38 commercial real estate loans. At March 31, 2000,
the Bank's commercial real estate loans were all performing according to their
terms.
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
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 rtha 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. 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, 2000, two consumer loans were classified as
non-performing. Aggregate balances of non-performing consumer loans were $7,700.
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, 2000, the Bank's
commercial business loan portfolio totaled $1.7 million, or 7.7% 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.
Commercial business loans generally bear higher interest rates than one- to
four-family residential lbu they also involve a higher risk of default since
their repayment is dependent on the successful operation of the borrower's
business.
5
Loan Maturity Schedule
The following table illustrates the interest rate sensitivity of the Bank's
loan portfolio at March 31, 2000. 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 rth effects of possible prepayments or
enforcement of due-on-sale clauses.
Commercial Commercial
One- to Four-Family Real Estate Consumer Business Total
------------------- ------------------- -------------------- -------------------- --------------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
-------- -------- -------- -------- --------- --------- --------- --------- --------- ---------
(Dollars in Thousands)
Due During Years
Ending March 31,
2001................... $ -- --% $ -- --% $ 471 8.95% $ 228 9.59% $ 699 9.15%
2002 .................. 174 8.53 -- -- 693 9.99 27 7.93 894 9.65
2003 to 2005........... 526 8.52 -- -- 4,956 9.16 767 8.40 6,249 9.01
2005 to 2009........... 2,324 8.37 492 8.71 149 8.89 470 8.55 3,435 8.54
2010 to 2024........... 7,354 8.32 1,646 9.15 62 8.20 -- -- 9,062 8.47
2025 and following..... 1,260 8.04 77 7.5 -- -- 194 8.75 1,532 8.14
------ ------ ------- ------- -------
Total Amount Due $11,638 $2,215 $ 6,332 $ 1,686 $21,871
======= ====== ======= ======= =======
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after March 31, 2001 which have predetermined
interest rates is $16.3 million, while the total amount of loans due after such
date which has floating or adjustable interest rates is $4.9 million.
6
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 2000, the Bank originated $6.4
million in fixed-rate loans and $2.6 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,
2000 1999
--------- ---------
(In Thousands)
Originations by Type:
- --------------------
Adjustable rate real estate:
- one- to four-family........................... $ 985 $ 219
- multi-family.................................. -- --
- commercial.................................... 1,242 175
Non-real estate-consumer............................. 205 30
Commercial business............................... 127 455
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Total adjustable-rate......................... 2,559 879
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Fixed-rate real estate:
- one- to four-family........................... 1,527 3,450
- multi-family.................................. -- --
- commercial.................................... -- 236
Non-real estate-- consumer........................ 3,963 6,379
Commercial business............................... 908 --
------- -------
Total fixed-rate.............................. 6,398 10,065
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Total loans originated........................ 8,957 10,944
------- -------
Principal repayments................................. 6,466 5,326
------- -------
Total reductions.............................. 6,466 5,326
------- -------
Net increase (decrease).............................. $ 2,491 $ 5,618
======= =======
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 and consumer loans of 30 or more days 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,
2000, the total loans delinquent 90 days or more was $99,000 and the total loans
delinquent 60 to 89 days was $59,000.
7
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 also 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, 2000, the Bank had no properties classified as real estate owned.
The following table sets forth the Bank's loan delinquencies by type, by
amount and by percentage of type at March 31, 2000.
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:
One- to four-family.... 1 22 0.19 4 91 0.78 5 113 0.97
Commercial............. 1 23 1.04 -- -- -- 1 23 1.04
Consumer................. 4 14 0.22 2 8 0.13 6 22 0.35
Total................. 6 59 0.27 6 99 0.45 12 158 0.72
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, 2000 and 1999, 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 $3,000.
March 31,
--------------------------
2000 1999
-------- ---------
(Dollars In Thousands)
Non-accruing loans:
One- to four-family............................ $ 91 $ 88
Commercial real estate......................... -- --
Consumer....................................... 8 18
Commercial business............................ -- --
------ -------
Total........................................ 99 106
------ -------
Foreclosed Assets................................. 3 119
------ -------
Total non-performing assets....................... $ 102 $ 225
------ =======
Total as a percentage of total assets............. 0.40% 1.00%
====== =======
For the year ended March 31, 2000, 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, 2000.
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
8
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, 2000, the
Bank had classified a total of $149,000 of its loans and other assets as
follows:
March 31, 2000
-----------------
(In Thousands)
Special Mention........................... $ 51
Substandard............................... --
Doubtful assets........................... 98
Loss assets............................... --
Total................................... 149
General loss allowance.................... 227
Specific loss allowance................... --
Charge-offs............................... 13
Other Loans of Concern. In addition to the non-performing assets set forth
in the tables above, as of March 31, 2000, 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, 2000, the Bank had no properties that were
acquired through foreclosure.
9
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, 2000, the Bank had a total allowance for loan losses
of $227,000, representing 222.6% of total non-performing assets and 1.05% 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:
March 31,
---------------------------------------------------------------
2000 1999
------------------------------- ------------------------------
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)
One- to four-family............................. $ 120 $11,638 53.2% $ 105 $10,613 54.77%
Commercial real estate.......................... 23 2,215 10.1 -- 1,256 6.48
Consumer........................................ 66 6,332 29.0 67 6,431 33.18
Commercial business............................. 18 1,686 7.7 -- 1,080 5.57
Unallocated..................................... -- -- -- 19 -- --
------ ------ ------ ------ ------ ------
Total......................................... $ 227 $21,871 100% $ 191 $19,380 100.00%
====== ======= ====== ====== ======= ======
The following table sets forth an analysis of the Bank's allowance for loan
losses.
Years Ended March 31,
--------------------------
2000 1999
----------- -----------
(Dollars In Thousands)
Balance at beginning of period.................. $ 191 $ 122
Charge-offs:
One- to four-family.......................... (2) (25)
Commercial real estate....................... -- --
Consumer..................................... (11) (27)
Commercial business.......................... -- --
------ -------
Total charge-offs......................... (13) (52)
------- -------
Recoveries:
One- to four-family.......................... -- --
Commercial real estate....................... -- --
Consumer..................................... 1 --
Commercial business.......................... -- --
------ -------
Total recoveries.......................... 1 --
------ -------
Net charge-offs................................. (12) (52)
Provision for loan losses....................... 48 121
------ -------
Balance at end of period........................ $ 227 $ 191
====== =======
Ratio of net charge-offs during the period to
average loans outstanding during the period.... 0.03% 0.31%
==== =======
Ratio of net charge-offs during the period to
average non-performing assets.................. 7.34% 28.49%
====== =======
10
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, 2000, the Bank's liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
current borrowings) was 14.99%.
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 ban
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, igrad 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, 2000, the Bank's
investment in mortgage-backed securities totaled $374,000, or 1.47% of its total
assets. At March 31, 2000, $24,000 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, $53,000 in
principal amount 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 $374,000 mortgage-backed securities portfolio at March
31, 2000 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
11
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.
March 31,
------------------------------------------------
2000 1999
---------------------- ----------------------
Book % of Book % of
Value Total Value Total
--------- --------- --------- --------
(Dollars in Thousands)
Mortgage-backed securities available for sale:
FNMA..................................................... $ 52 13.90% $ 198 36.33%
GNMA..................................................... 293 78.35 300 55.04
-------- -------- -------- -------
Mortgage-backed - held to maturity ......................... 23 6.15 36 6.61
Unamortized premium (discounts), net........................ 6 1.60% 11 2.02%
-------- -------- -------- -------
Total mortgage-backed securities....................... $ 374 100.00% $ 545 100.00%
======== ======== ======== =======
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 2000.
Years Ended March 31,
2000 1999
-------- --------
(In Thousands)
Purchases:
- ---------
Adjustable-rate (1)................................. $ -- $ 300
Fixed-rate (1)...................................... -- 300
------- -------
Total purchases................................... -- 600
------- -------
Sales ................................................ -- --
Principal Repayments:
- --------------------
Principal repayments................................ (166) (129)
Amortization of premiums............................ (5) --
-------- -------
Net increase (decrease)........................... $ (171) $ 471
======== =======
- -------------------------
(1) Consists of pass-through securities.
Other Investments. At March 31, 2000, 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, 2000, the Bank was in compliance
with this regulation.
12
The following table sets forth the composition of the Bank's investment
securities at the dates indicated.
At March 31,
------------------------------------------------
2000 1999
---------------------- ----------------------
Book % of Book % of
Value Total Value Total
--------- --------- --------- --------
(Dollars in Thousands)
Investment securities held to maturity:
Federal agency obligations................................. 24 0.96 $ 38 1.86%
Investment securities available for sale:
U.S. government securities................................. -- -- 400 19.55
Federal agency obligations................................. 2,363 94.07 1,507 73.65
Equity securities.......................................... -- -- -- --
------- ------- ------- ------
Subtotal................................................. 2,387 95.03 1,945 95.06
------- ------- ------- ------
FHLB stock.................................................... 125 4.97 101 4.94
------- ------- ------- ------
Total investment securities and FHLB stock............... $ 2,512 100.00% $ 2,046 100.00%
======= ======= ======= ======
Average remaining life of debt securities..................... 6.0 years 2.6 years
Other interest-earning assets:
Interest-bearing deposits with banks....................... $ 50 50.00% $ 11 100.00%
Federal funds sold......................................... 50 50.00 -- --
------- ------- ------- ------
Total.................................................... $ 100 100.00% $ 11 100.00%
======= ======= ======= ======
Investment Portfolio Maturities. The composition and maturities of the
investment securities portfolio and mortgage-backed securities are indicated in
the following table.
At March 31, 2000
---------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over Total Investment
1 Year Years Years 10 Years Securities
--------- --------- --------- -------- -------------------
Amortized Amortized Amortized Amortized Amortized Fair
Cost Cost Cost Cost Cost Value
--------- --------- --------- -------- -------- --------
(Dollars in Thousands)
U.S. government securities.................. $ -- $ -- $ -- $ -- $ -- $ --
Federal agency obligations.................. 250 100 1,368 295 2,013 1,951
Mortgage-backed securities.................. -- -- -- 374 374 356
Total investment securities................. 250 100 1,368 669 2,387 2,307
Weighted average yield...................... 5.58% 6.29% 6.62% 7.27% 6.69% --%
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, 2000, the Bank had FHLB advances of $1.4
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.
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, 2000, the Bank had $5.9 million
13
in out of market certificates of deposit compared to $5.8 million at March 31,
1999. Out of market certificates of deposit represented 36.03% of total
certificates of deposit at March 31, 2000 compared to 38.41% at March 31, 1999.
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, 2000, $326,000, or 1.49% 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, 2000, $9.3 million, or 56.63%
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.
At March 31,
------------------------------------------------
2000 1999
---------------------- ----------------------
Amount Percent Amount Percent
--------- --------- --------- --------
(Dollars in Thousands)
Transactions and savings deposits:
- ---------------------------------
Non-interest bearing checking accounts....................... $ 863 3.94% $ 303 1.57%
Interest-bearing checking accounts 1.75%..................... 326 1.49 492 2.55
Passbook accounts 3.00%...................................... 4,359 19.88 3,395 17.61
------- ------- ------- ------
Total transactions and savings deposits...................... 5,548 25.31 4,190 21.73
------- ------- ------- ------
Certificates of deposit:
- -----------------------
0.00 - 3.99%.............................................. -- -- -- --
4.00 - 5.99%.............................................. 8,738 39.86 7,870 40.83
6.00 - 7.99%.............................................. 7,637 34.83 7,214 37.44
------- ------- ------- ------
Total certificates of deposit................................ 16,375 64.69 15,084 78.27
------- ------- ------- ------
Accrued Interest............................................. -- -- -- --
------- ------- ------- ------
Total Deposits............................................... $21,923 100.00% $19,274 100.00%
======= ======= ======= ======
14
Deposit Activity
The following table sets forth the savings flows at the Bank during the
periods indicated.
Years Ended March 31,
-------------------------------
2000 1999
------------- -------------
(Dollars In Thousands)
Opening balance.............................. $ 19,274 $ 14,629
Deposits..................................... 37,071 30,553
Withdrawals.................................. (35,469) (26,803)
Interest credited............................ 1,047 895
--------- --------
Ending balance............................... $ 21,923 $ 19,274
========= ========
Net increase (decrease)...................... $ 2,649 $ 4,645
========= ========
Percent increase (decrease).................. 13.74% 31.75%
========= ========
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, 2000.
Weighted
Certificate accounts maturing in Total Average Percent of
quarter endings: Balance Rate Total
--------------------------------------- ------------- ------------- -------------
(In Thousands)
June 30, 2000............................ $ 414 6.21 2.53%
September30, 2000........................ 2,700 5.77 16.49
December 31,2000......................... 1,869 5.63 11.41
March 31, 2001........................... 2,262 5.67 13.82
June 30, 2001............................ 1,363 5.87 8.32
September 30, 2001....................... 2,324 6.15 14.20
December 31, 2001........................ 942 5.83 5.75
March 31, 2002........................... 901 6.05 5.50
June 30, 2002............................ 305 5.86 1.86
Thereafter............................... 3,295 6.32 20.12
-------- ------ ------
Total................................ $ 16,375 5.93 100.00%
======== ====== ======
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,
2000.
Maturity
-------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
Or Less Months Months 12 Months Total
--------- --------- --------- ----------------------
(In Thousands)
Certificates of deposit less than $100,000..... $ 192 $ 2,363 $ 3,494 $ 8,213 $14,262
Certificates of deposit of $100,000 or more.... 222 337 637 917 2,113
------- -------- ------- ------- ------
Total certificates of deposit.................. $ 414 $ 2,700 $ 4,131 $ 9,130 $16,375
======= ======== ======= ======= =======
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, 2000, the Bank had an unused line of
credit at the FHLB for up to $2.4 million. At March 31, 2000, the Bank had $1.4
million in advances from the FHLB.
15
Employees
At March 31, 2000, the Bank had 7 full-time and 4 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 which are in
the normal course of business should not have a material effect on the Company's
financial position or results of operations on a consolidated basis.
On February 21, 2000, the Company's Board of Directors' and the Board of
Directors' of TrustCo Bank Corp NY and Landmark Acquisition Co. ( a wholly-owned
subsidiary of TrustCo Bank Corp. NY) entered into an Agreement and Plan of
Merger subject to the approval of the Company's shareholders and the required
regulatory approvals.
Subsequent to the Company's fiscal year end of March 31, 2000, Private
Mortgage Investment Services, Inc. (PMIS) and its President, Charles F. Cefalu,
on April 17, 2000, filed legal action against the Company and its Board of
Directors. The suit alleges that (1) the Company's Board of Directors violated
its fiduciary duties to its stockholders by entering into a merger agreement
with TrustCo Bank Corp NY and (2) the Agreement to vote in favor that each
Company Board member entered into with TrustCo Bank Corp NY is subject to a
voting limitation contained in the Company's Certificate of Incorporation. Based
upon these allegations, the plaintiffs sought a preliminary and permanent
injunction preventing any action in furtherance of the TrustCo Bank Corp NY
merger agreement, a declaration that the merger agreement is void, damages in an
amount not less than $1,000,000 and costs and attorney's fees. Also on April 17,
2000, the court ordered an order to show cause temporarily restraining any
action on the Agreement and Plan of Merger.
On May 10, 2000, PMIS and a wholly-owned subsidiary, Investors and Lenders,
LLC (Investors) filed a Schedule 14D with the Securities and Exchange Commissar
formally commencing a tender offer. The tender offer is for a minimum of 100,000
shares or approximately 65% of the Company's outstanding shares at a price of
$25.00 per share. The tender offer is subject to a number of contingencies,
including the ability of Investors and PMIS to obtain financing and to obtain
regulatory approval from the Office of Thrift Supervision.
On May 16, 200, a modified temporary restraining order was entered that
permits the Company's Board of Directors' to respond to the tender offer in
compliance with their duties and obligations under state and federal law, to
issue a recommendation statement to the Company's stockholders comparing the
Investors/PMIS offer with the Agreement and Plan of Merger, and to communicate
with TrustCo Bank Corp NY about the Merger and the tender offer.
On May 31, 2000, the temporary restraining order was dissolved and the
plaintiff's request for a preliminary injunction was denied, allowing the
Company to schedule a vote on the TrustCo merger
On June 9, 2000, the plaintiff's sought to have the New York's Supreme
Court ruling overturned in Appellate Court. In the opinion of management and
counsel at this stage of the litigation, it is not possible to predict the
outcome of the action or the pending appeal. The Company intends to vigorously
oppose any efforts by plaintiffs to interfere with the ability of the Company's
stockholders to vote on the Agreement and Plan of Merger with TrustCo Bank Corp
NY and to defend the action.
In the opinion of management, the costs of defending the litigation
referred to above will have a man adverse impact on the Company's operations
during the fiscal year ending March 31, 2001. Also, in the opinion of
16
management the total actual costs associatied with the litigation can not be
reasonably estimated as of the filing date of the 10-KSB.
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 $500,000 at March
31, 2000, 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
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In gthes 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 r 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, 2000, the
Bank's lending limit under
17
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 at 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, 2000, the Bank
had no intangible assets and an unrealized loss, net of tax under SFAS No. 115
of $67,897.
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.
18
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, 2000, the Bank was in compliance with both requirements, with a liquid
assets ratio of 14.99% and a short-term liquid assets ratio of 3.43%.
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, 2000, 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 aha 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 hstate 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.
19
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 Binclud 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.
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 a At March 31, 2000,
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.
20
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.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York. At March 31, 2000, the Bank had $125,000 of FHLB stock. In
past years, the Bank has received dividends on its FHLB stock. The dividend
yield from FHLB stock was 6.74% for fiscal 2000. 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-quali loans" is
computed under the experience method. For tax years beginning before December
31, 1995, the amount of the bad debt reserve deduction for "qualifying real
property loans" (generally loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable income
method (based on an annual election). If a savings association elected the
latter method, it could claim, each year, a deduction based on a percentage of
taxable income, without regard to actual bad debt experience.
Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings and loan association over a period of years.
Pursuant to certain legislation which was enacted and which is effective
for tax years beginning after 1995, a small thrift institution (one with an
adjusted basis of assets of less than $500 million), such as the Bank, no longer
is permitted to make additions to its tax bad debt reserve under the percentage
of taxable income method. Such institutions are permitted to use the experience
method in lieu of deducting bad debts only as they occur. Such legislation
requires the Bank to realize increased tax liability over a period of at least
six years, beginning in 1996. Specifically, the legislation requires a small
thrift institution to recapture (i.e., take into income) over a multi-year
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.
21
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
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, 2000. 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, 2000 was $552,000.
Total Net Book Value
Approximate of Real Estate at
Location Date Acquired Square Footage March 31, 2000
- ------------------ ----------------- ----------------- -----------------
Main Office: 1998 3,200 $283,000
211 Erie Boulevard
Canajoharie, New York
26 Church Street
Canajoharie, New York 1973 3,600 $112,000
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, the
defense of the lawsuit filed by PMIS will result in a significant material and
adverse impact on the Company's operations during the fiscal year ending March
31, 2001. The information contained under "Item 1. Business" Legal Proceedings
is incorporated by reference.
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
PART III
ITEM 9. Directors and Executive Officers of the Company; Compliance with Section
16(a) of the Exchange Act
- --------------------------------------------------------------------------------
The following table sets forth certain information regarding the directors of
the Company:
Name Title Age
Leila N. Salmon Director 70
F. Richard Ferraro Director 75
Edward R. Jacksland Director 47
Patricia A. Symolon Director 65
Frederick W. Lee Director 64
Frederick P. LaCoppola Director and Treasurer 57
Carl J. Rockefeller Director 48
John R. Francisco Chairman of the Board 49
Gordon E. Coleman President, Chief Executive 45
Officer and Director
- -----------------------
(1) At March 31, 2000.
The business experience of each director is set forth below. All directors
have held their present position for at least the past five years, except as
otherwise indicated.
John R. Francisco is the Chairman of the Board of the Company. Mr.
Francisco is a retired attorney and a private investor.
Gordon E. Coleman is the President and Chief Executive Officer of the
Company. Prior to joining the Bank in 1996, Mr. Coleman was the Agricultural
Loan Officer for Central National Bank from 1993 until 1996. Prior to that time
Mr. Coleman was an Assistant Vice President of Citizens National Bank of Malone.
Leila N. Salmon is a consultant for not-for-profit organizations in the
area of mental health administration.
F. Richard Ferraro is a Leasing Manger for R. Brown & Sons, Inc., an
automobile dealership.
Frederick P. LaCoppola is the Bank's Treasurer. Mr. LaCoppola is retired.
Mr. LaCoppola was a District Agent for Prudential Insurance Corp.
Carl J. Rockefeller serves as the business manager of the Fort Plain
Central School in Ft. Plain, New York. Mr. Rockefeller is also bookkeeper for
the town of Minden.
Patricia A. Symolon is retired. Until her retirement in 1996, she was the
former Chief Executive Officer of Canajoharie Buildings Savings and Loan
Association.
24
Edward R. Jacksland is the President and Manager of The Hearn Agency, Inc.
an insurance brokerage.
Frederick W. Lee is the President and Chairman of the Board of Lee
Publications, Inc., a publisher and printer.
The Common Stock of the Company is registered with the Securities and
Exchange Commission (the "SE") pursuant to Section 12(g) of the Securities
Exchange Act of 1934 (the "Exchange Act"). The officers and directors of the
Company and beneficial owners of greater than 10% of the Company's Common Stock
("10% beneficial owners") are required to file reports on Forms 3,4 and 5 with
the SEC disclosing beneficial ownership and changes in beneficial ownership of
the Common Stock. SEC rules require disclosure in the Company's Proxy Statement
or Annual Report on Form 10-KSB of the failure of an officer, director or 10%
beneficial owner of the Company's Common Stock to file a Form 3, 4, or 5 on a
timely basis. All of the Company's officers and directors filed these reports on
a timely basis.
ITEM 10. Executive Compensation
- -------------------------------
Executive Compensation
The following table sets forth for the years ended March 31, 1998, 1999,
and 2000, certain information as to the total remuneration paid by the Company
to Mr. Coleman, the Company's chief executive officer. No officer of the Company
received cash compensation exceeding $100,000 in 2000.
SUMMARY COMPENSATION TABLE
==========================================================================================================================
Long-Term
Annual Compensation Compensation Awards
Fiscal Other Restricted
Years Annual Stock Options/ All Other
Name and Ended Salary Bonus Compensation Award(s) SARs Compensation
Principal Position (1) March 31, ($) ($) ($)(2) ($) (#) Payouts ($)(3)
- --------------------------------------------------------------------------------------------------------------------------
Gordon E. Coleman 2000 $64,700 $300 $1,941 --
President and Chief 1999 63,300 250 24,204 -- 3,800 -- --
Executive Officer 1998 54,600 4,400 1,940 -- -- -- --
==========================================================================================================================
<FN>
(1) No other executive officer received salary and bonuses that in the
aggregate exceeded $100,000.
(2) Includes 1,520 shares allocated to Mr. Coleman under the Landmark Financial
Corp. 1998 Recognition and Retention Plan.
(3) The aggregate amount of such benefits did not exceed the lesser of $50,000
or 10% of cash compensation for tname individuals.
</FN>
Benefits
Employee Stock Ownership Plan and Trust. The Company has established an
Employee Stock Ownership Plan and Related Trust ("ESOP") for eligible employees.
The ESOP is a tax-qualified plan subject to the requirements of ERISA and the
Code. Employees with a 12-month period of employment with the Company during
which they worked at least 1,000 hours and who have attained age 21 are eligible
to participate. The ESOP has borrowed funds and has purchased 12,160 shares. The
Common Stock purchased by the ESOP serves as collateral for the loan. The loan
will be repaid principally from the Company's contributions to the ESOP over a
period of up to 15 years. The interest rate for the loan is the prime rate.
Shares purchased by the ESOP will be held in a suspense account for allocation
among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account in
an amount proportional to the repayment of the ESOP loan will be allocated among
participants on the basis of compensation in the year of allocation, up to an
annual adjusted maximum level of compensation. Benefits generally become vested
after five years of credited service. Forfeitures will be reallocated among
remaining participating employees in the same
25
proportion as contributions. Benefits may be payable upon death, retirement,
early retirement, disability or separation from service. The Company's
contributions to the ESOP will not be fixed, so benefits payable under the ESOP
cannot be estimated.
In connection with the establishment of the ESOP, a committee consisting of
all nonemployee Directors was selected by the Company to administer the ESOP and
the Company's other stock benefit plans (the "Stock Benefits Committee"). An
unrelated corporate trustee for the ESOP initially was appointed. The Stock
Benefits Committee may instruct the trustee regarding investment of funds
contributed to the ESOP. The ESOP trustee generally will vote all shares of
Common Stock held under the ESOP in accordance with the written instructions of
the Stock Benefits Committee. In certain circumstances, however, the ESOP
trustee must vote all allocated shares held in the ESOP in accordance with the
instructions of the participating employees, and unallocated shares and shares
held in the suspense account in a manner calculated to most accurately reflect
the instructions the ESOP trustee has received from participants regarding the
allocated stock, subject to and in accordance with the fiduciary duties under
ERISA owed by the ESOP trustee to the ESOP participants. Under ERISA, the
Secretary of Labor is authorized to bring an action against the ESOP trustee for
the failure of the ESOP trustee to comply with its fiduciary responsibilities.
Stock Option Plan
The Company adopted the Landmark Financial Corp. 1998 Stock Option Plan
(the "Option Plan"), which provides for discretionary awards to officers,
directors and key employees with a proprietary interest in the Company as an
incentive to contribute to the success of the Company and to reward key
employees for outstanding performance and attainment of targeted goals. The
grant of awards under the Option Plan is determined by the Company's
Compensation Committee (the "Committee"), the members of which are the full
Board of Directors or at least two non-employee directors. The Option Plan
authorizes the granting of incentive and non-statutory stock options for up to
15,200 shares of Common Stock (as adjusted to reflect the Stock Dividends), to
such officers and full-time employees of the Company and any subsidiaries as the
Committee may determine. Mr. Coleman did not receive any stock option grants
during fiscal year 2000. Directors Salmon, Jacksland and Lee were each granted
options to purchase 400 shares of common stock at a price of $13.00 per share.
Set forth in the table that follows certain information concerning options
outstanding to the chief executive officer at March 31, 2000. No options were
exercised by the chief executive officer during fiscal 2000.
AGGREGATED OPTION EXERCISES IN THE LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
========================================================================================================================
Number of Unexercised Value of Unexercised In-
Options at Year-End The-Money Options at
Year-End (2)
Shares Acquired Upon ------------------------ -------------------------
Name Exercise Value Realized(1) Exercisable\Unexercisable Exercisable\Unexercisable
(#) ($)
- ------------------------------------------------------------------------------------------------------------------------
Gordon E. Coleman -0- -0- -0-\3,800 $-0-\$-0-
======================= ======================= ================== ========================= =========================
(1) Equals to difference between the aggregate exercise price of the
options exercised and the aggregate fair market value of the shares of
common stock received upon exercise computed using the price of common
stock as quoted on the National Quotation System "Pink Sheets" at the
time of exercise.
(2) Equals the difference between the aggregate exercise price of such
options and the aggregate fair market value of the shares of common
stock that would be received upon exercise, assuming such exercise
occurred on March 31, 1999, at which date the closing price of the
common stock as quoted on the National Daily Quotation System "Pink
Sheets" was at $7.50.
26
Recognition and Retention Plan
The Company adopted the Landmark Financial Corp. 1998 Recognition and
Retention Plan (the "RRP") as a method of providing certain key employees and
non-employee directors of the Company and Bank with a proprietary interest in
the Company and the Bank and to provide these individuals with an incentive to
increase the value of the Company and the Bank and contribute to its success.
The RRP is administered by the Company's Compensation Committee, the members of
which are the full Board of Directors or at least two non-employee directors.
The RRP provides for the award of 6,080 shares which will vest at a rate of 20%
per year over the five years following the date of grant.. Under the RRP, shares
of common stock have been awarded in the following amounts to the Chief
Executive Officer, Executive Group and Non-Executive Director group. Gordon E.
Coleman received an award of 1,520 shares of common stock, H. Stuart Larson
received an award of 380 shares of common stock, Directors Francisco and
Rockefeller received awards of 304 and 304. During the year ended March 31,
2000, no awards were made under the RRP.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
BENEFICIAL OWNERSHIP OF LANDMARK COMMON STOCK
BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We have 154,508 shares of common stock issued and outstanding. The
following table sets forth information regarding share ownership of those
persons or entities known by management to beneficially own more than five
percent of our common stock, and all directors and executive officers of
Landmark as a group.
Amount of Shares
Owned and Nature Percent of Shares
Name and Address of of Beneficial of Common Stock
Beneficial Owners Ownership Outstanding
Directors and Officers (1):
Frederick W. Lee 3,500(4) 2.27%
Edward R. Jacksland 2,000 1.29%
Gordon E. Coleman 5,009(5) 3.21%
John R. Francisco 6,365(6) 4.11%
F. Richard Ferraro 280(7) 0.18%
Frederick P. LaCoppola 580(8) 0.38%
Carl J. Rockefeller 641(9) 0.41%
Leila N. Salmon 1,100(10) 0.71%
Patricia A. Symolon 580(11) 0.38%
Paul Hofmann 1,500 0.97%
H. Stuart Larson 576 0.37%
-------- ------
All Directors and Executive Officers 22,131 14.28%
======== ======
as a Group (11 persons)
Landmark Community Bank 12,160(3) 7.87%
Employee Stock Ownership Plan
211 Erie Boulevard
Canajoharie, New York 13126
Unvested RRP shares 2,006 1.30
- -----------------
(1) The mailing address of all named persons is 211 Erie Boulevard, Canajoharie,
New York.
(2) Excludes unvested shares awarded under the Recognition and Retention Plan
and Stock Option Plan, but includes 1,232 shares subject to currently
exercisable options or options exercisable at any time within 60 days from
the Record Date.
(3) The amount reported represents 12,160 shares held by the ESOP, 1,824 of the
original 12,160 have been allocated to accounts of participants as the
Record Date (June, 2000). The trustee of the ESOP, may be deemed to
beneficially own the shares held by the ESOP that have not been allocated
to accounts of participants. Unallocated shares held in the ESOP's suspense
account or allocated shares for which no voting instructions are received
are voted by the trustee in the same proportion as allocated shares voted
by participants.
(4) Mr. Lee claims shared investment and voting power over all reported shares.
(5) Mr. Coleman claims shared investment and voting power over 75 shares. Also
includes 1,520 shares underlying options exercisable within 60 days of the
record date.
27
(6) Includes 304 shares underlying options exercisable within 60 days of the
record date.
(7) Includes 80 shares underlying options exercisable within 60 days of the
record date.
(8) Includes 80 shares underlying options exercisable within 60 days of the
record date.
(9) Includes 80 shares underlying options exercisable within 60 days of the
record date.
(10) Includes 1,000 shares of common stock as to which Ms. Salmon claims shares
investment and voting power.
(11) Includes 80 shares underlying options exercisable within 60 days of the
record date.
ITEM 12. Certain Relationships and Related Transactions
- -------------------------------------------------------
Transactions With Certain Related Persons
All transactions between the Company and its executive officers, directors,
holders of 10% or more of the shares of its Common Stock and affiliates thereof,
are on terms no less favorable to the Company than could have been obtained by
it in arm's-length negotiations with unaffiliated persons. Such transactions
must be approved by a majority of independent outside directors of the Company
not having any interest in the transaction.
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, 2000 and 1999.
(C) Consolidated Statements of Operations - years ended March
31, 2000 and 1999;
(D) Consolidated Statements of Changes in Stockholders' Equity
- years ended March 31, 2000 and 1999;
(F) Consolidated Statements of Cash Flows - years ended March
31, 2000 and 1999; 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 filed a Form 8-K Current Report on March 3, 2000 to report on
"Item 5-Other Events" the Company's Agreement to be acquired by TrustCo Bank NY.
(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")
28
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
10 Agreement and Plan of Merger (Incorporated by reference to
Current Report on Form 8-K filed via EDGAR on March 3, 2000)
13 Annual Report to Stockholders
21 Subsidiaries of Company
27 Financial Data Schedule
29
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 26, 2000 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\ Frederick W. Lee
----------------------------------------- --------------------------
Gordon E. Coleman Frederick W. Lee
President, Chief Executive Officer and Director
Director (Principal Executive Officer)
Date: June 26, 2000 Date: June 26, 2000
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 26, 2000 Date: June 26, 2000
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 26, 2000 Date: June 26, 2000
By:\s\ Frederick LaCoppola By:\s\ Edward R. Jacksland
----------------------------------------- --------------------------
Frederick LaCoppola Edward R. Jacksland
Director Director
Date: June 26, 2000 Date: June 26, 2000
By:\s\ Leila N. Salmon
-----------------------------------------
Leila N. Salmon
Director
Date: June 26, 2000
31
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
Landmark Financial Corp.
2000 Annual Report
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 19-42
Common Stock Information 43
Directors and Officers 44
Corporate Information 45
LANDMARK FINANCIAL CORP.
211 Erie Blvd., Canajoharie, NY 13317
(518) 673 2012
June 8, 2000
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.
I would like to take a moment and review the past fiscal year with you, the
owners of Landmark Financial Corp. The Company ended its fiscal year on March
31, 2000 with $25,436,355 in total assets. This compares to the previous fiscal
year-end of $22,453,323, which represents 8.8% growth. The company's earnings
also showed tremendous improvement ending the year with a net profit of
$33,710.00, this net number includes the extraordinary expense item of
$71,133.00 in merger and acquisition fees. This compares to a net loss of
$96,404.00 the previous year.
This past year has been one of many changes for the Company. We saw the
turnaround in the profitability of your organization occur, as we anticipated.
We entered into a merger agreement with TRUSTCO Bank Corp NY, a well regarded
community bank throughout the capital district of New York Unfortunately,
following the announcement of the TRUSTCO merger, a local business filed a
lawsuit against the Board of Directors to stop the pending merger. That lawsuit
is still pending at this time. Management and the Board, in consultation with
our advisors, have concluded that the lawsuit is without merit and we intend to
vigorously oppose this attempt to harm your company.
The pending merger and acquisition of Landmark Financial Corp. and it's wholly
owned subsidiary Landmark Community Bank by TRUSTCO represents a wonderful
opportunity for you, the shareholder. The $21.00 per share offer is a
substantial premium over the current per share book value of $12.55. For those
shareholders who participated in the initial stock offering during the fourth
calendar quarter of 1997, the TRUSTCO offer represents a 210% return on your
initial investment.
I would welcome the opportunity to further discuss any aspect of this letter, or
any other questions or concerns that you may have about our Company, with each
of you privately. Please don't hesitate to contact me by telephone at (518)
673-2012, e-mail at cbsl@telenet.net, or in person at our banking office at 211
Erie Blvd., Canajoharie, NY.
Sincerely,
/s/ Gordon E. Coleman
Gordon E. Coleman
President and CEO
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.
At March 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
Selected Financial Condition Data:
Total Assets $ 25,436 22,453 $ 16,811 $ 11,326 $ 7,606
Cash and cash equivalents 568 296 1,530 709 1,351
Loans receivable, net 21,644 19,189 13,640 9,392 5,528
Trading Account Securities - - - 69 -
Mortgage Backed Securities:
Held to maturity 24 38 74 257 340
Investment Securities
Held to maturity - - - 200 -
Available for sale 2,283 1,901 1,104 398 241
FHLB Stock 125 101 87 59 64
Deposits 21,923 19,274 14,629 10,237 6,465
Advances by borrowers for taxes
and insurance 85 108 97 107 95
Total stockholders' equity 1,945 1,928 2,059 956 993
At March 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
Selected Operations Data:
Total interest income $ 1,980 1,596 $ 1,293 $ 688 $ 622
Total interest expense (1,157) (912) (726) (326) (270)
---------- -------- --------- -------- -------
Net interest income 823 684 567 362 352
Provision for loan losses (49) (121) (12) (78) -
---------- -------- --------- -------- -------
Net interest income after
provision for loan losses 774 563 555 284 352
Fees and service charges 54 35 29 29 10
Other non-interest income 35 10 38 67 -
---------- -------- --------- -------- -------
Total non-interest income 89 44 67 96 10
Total non-interest expense (821) (731) (610) (434) (239)
---------- -------- --------- -------- -------
Income (loss) before taxes 42 (123) 12 (54) 123
Income tax (provision) benefit (9) 27 (5) 18 (38)
---------- -------- --------- -------- -------
Net income (loss) $ 34 (96) $ 7 $ (36) $ 85
========== ========= ========= ======== =======
SELECTED RATIOS DATA
Years Ended March 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
---------- --------- ---------- --------- ---------
Perfomance Ratios:
Return on assets (ratio of net income to
average total assets) 0.14% -0.48% 0.05% -0.41% 1.08%
Return on retained earnings (ratio of
net income to average equity) 1.74% -4.85% 0.56% -3.67% 8.83%
Interest rate spread information:
Average during period 3.18% 3.30% 3.37% 3.77% 4.13%
End of period 3.39% 3.53% 2.81% 3.34% 4.25%
Net interest margin (1) 3.59% 3.64% 3.71% 4.23% 4.59%
Ratio of operating expense to average total assets 3.43% 3.68% 3.83% 4.89% 3.04%
Ratio of average interest-earning assets to average
interest-bearing liabilities 108.05% 106.93% 107.16% 111.97% 114.46%
Asset Quality Ratios:
Non-performing assets to total assets
at end of period 0.40% 1.00% 0.86% 0.41% 0.00%
Allowance for loan losses to non-performing loans 231.86% 179.90% 84.72% 235.32% 0.00%
Allowance for loan losses to loans receivable 1.04% 0.99% 0.89% 1.17% 0.58%
Capital Ratios:
Stockholder's equity to total assets at end of period 7.65% 8.59% 12.25% 8.43% 13.56%
(Previously net worth to total assets 1997-1996)
Average net worth to average assets 8.09% 10.00% 8.31% 11.06% 12.27%
Other Data:
Number of full-service offices 1 1 1 1 1
(1) Net interest income divided by average interest earning assets.
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. 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. The Bank is headquartered in Canajoharie, New York. The Bank
amended its mutual charter in 1997 to become a federal mutual savings bank. At
March 31, 2000, the Bank had total assets of $25,414,772, deposits of
$21,922,503, and stockholders' equity of $1,905,862.
In February 2000, the Company entered into an agreement to be acquired by
TrustCo Bank Corp. NY. Pursuant to the agreement each share of Landmark common
stock will be converted into the right to
receive $21.00 in cash. Landmark shareholders will be given the opportunity to
vote on the agreement to be acquired by TrustCo. A special meeting of
shareholders is scheduled to be held during the third calendar quarter 2000.
Detailed information regarding the acquisition will be included in the special
meeting proxy statement.
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.
SUBSEQUENT EVENTS
On April 17, 2000, Private Mortgage Investment Services, Inc. (PMIS), and its
President, Charles F. Cefalu filed legal action against the Company and its
Board of Directors. The suit alleges that (1) the Company's Board of Directors
violated its fiduciary duties to its stockholders by entering into a merger
agreement with TrustCo Bank Corp NY, and (2) the agreement to vote in favor that
each Company Board member entered into with TrustCo Bank Corp NY is subject to a
voting limitation contained in the Company's Certificate of Incorporation. Based
upon these allegations, the plaintiffs sought a preliminary and permanent
injunction preventing any action in furtherance of the TrustCo Bank Corp NY
merger agreement, a declaration that the merger agreement is void, damages in an
amount not less than $1,000,000 and costs and attorney's fees. Also on April 17,
2000, the court ordered an order to show cause temporarily restraining any
action on the Agreement and Plan of the Merger. On May 10, 2000 PMIS and a
wholly-owned subsidiary. Investors and Lenders, LLC (Investors) filed a Schedule
14D with the Securities and Exchange Commissar formally commencing a tender
offer. The tender offer is for a minimum of 100,000 shares or approximately 65%
of the Company's outstanding shares at a price of $25.00 per share. The tender
offer is subject to a number of contingencies, including the ability of
Investors and PMIS to obtain financing and to obtain regulatory approval from
the Office of Thrift Supervision.
On May 16, 2000, a modified temporary restraining order was entered that
permitted the Company's Board of Directors to respond to the tender offer in
compliance with their duties and obligations under state and federal law, to
issue a recommendation statement to the Company's stockholders comparing the
Investors/PMIS offer with the Agreement and Plan of Merger, and to communicate
with TrustCo Bank Corp NY about the Merger and tender offer.
On May 31, 2000, New York State Supreme Court Justice Robert P. Best signed an
order dissolving the Temporary Restraining Order entered on April 17, 2000.
Judge Best also denied a request for a Preliminary Injunction made the same day
by Investors/PMIS. The Company intends to proceed to schedule a stockholder
meeting to vote on the Merger agreement with TrustCo Bank Corp NY.
The Company intends to vigorously oppose any efforts by Investors/PMIS to
interfere with the ability of the Company's stockholders to vote on the
Agreement and Plan of Merger with TrustCo Bank Corp NY.
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 and savings deposit
bases by offering a variety of checking and saving 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.
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, 2000 was 7.65%.
FINANCIAL CONDITION
Total Assets. Total assets increased $2.98 million or 13.3%, to $25.44 million
at March 31, 2000 from $22.45 million at March 31, 1999. The increase in assets
was primarily due to increases in loans receivable, investment securities, and
cash on hand.
Loans Receivable, Net. Loans receivable, net increased by $2.45 million or 12.8%
to $21.64 million at March 31, 2000 from $19.19 million at March 31, 1999,
primarily due to increases in commercial loans of $1.54 million, an increase in
one-to-four family loans of $700,000, and an increase in home equity loans of
$366,000.
Mortgage-Backed Securities. Mortgage-backed securities held to maturity
decreased by $14,000 or 37.6% to $24,000 at March 31, 2000 from $38,000 at March
31, 1999. 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
$382,000 or 20.1% to $2.3 million at March 31, 2000 from $1.9 million at March
31, 1999.
Premises and Equipment. Premises and equipment decreased $31,000 to $552,000 at
March 31, 2000 compared to $583,000 at March 31, 1999.
Deposits. Deposits increased $2.65 million, or 13.7%, to $21.92 million at March
31, 2000 from $19.27 million at March 31, 1999. The increase in deposits is
primarily attributable to an increase in local certificates of deposit (with
maturities of one to three years) of $1.2 million and an increase in out of
market certificates of deposit of $100,000, an increase in savings deposits of
$964,000, and an increase in checking deposits of $395,000. The Bank had $5.9
million in out of market certificates of deposit at March 31, 2000.
Advances from FHLB. The Bank had $1.37 million of outstanding advances from the
Federal Home Loan Bank at March 31, 2000 compared to $1.08 million of
outstanding advances on March 31, 1999. 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 increased $17,000 or 0.87%, to $1.94 million
at March 31, 2000 from $1.93 million at March 31, 1999.
Comparison of Operating Results for the Years Ended March 31, 2000 and March 31,
1999.
Performance Summary. Net income increased $130,114 to $33,710 for the year ended
March 31, 2000, compared to a net loss of ($96,404) for the year ended March 31,
1999. The increase in earnings was primarily due to increases in net interest
income and non-interest income and a decrease in the provision for loan losses.
Partially offsetting these increases to income were increases in non-interest
expense and income tax expense. Earnings per share increased to $0.24 from a
loss of ($0.69) for the previous year.
Net Interest Income. Net interest income increased $138,719 or 20.3%, to
$822,908 for the year ended March 31, 2000, from $684,189 for the year ended
March 31, 1999. The increase in net interest income reflects an increase of
$383,782 in interest income, to $1,980,130 from $1,596,348 and a corresponding
increase of $245,063 in interest expense, to $1,157,222 from $912,159 for the
year ended March 31, 2000 as compared to the year ended March 31, 1999. The
increase in interest income reflects increased balances of loans receivable and
investment securities. Interest expense increased primarily due to the increases
in interest bearing deposits and advances from the Federal Home Loan Bank.
For the year ended March 31, 2000, the average yield on interest-earning assets
was 8.64% compared to 8.49% for the year ended March 31, 1999. The average cost
of interest-bearing liabilities was 5.45% for the year ended March 31, 2000
which was an increase from 5.19% for the year ended March 31, 1999. The average
balance of interest-earning assets increased $4.1 million or 22.0%, to $22.9
million for the year ended March 31, 2000 as compared to $18.8 million for the
year ended March 31, 1999. During the same period, the average balance of
interest-bearing liabilities increased $3.6 million or 20.7%, to $21.2 million
from $17.6 million in the year ended March 31, 1999.
Due to funding costs increasing more rapidly than earning yields, the average
interest rate spread declined to 3.18% for the year ended March 31, 2000
compared to 3.30% for fiscal 1999. The average net interest margin also
decreased to 3.59% at March 31, 2000 compared to 3.64% for the year ended March
31, 1999.
Provision for Loan Losses. During the year ended March 31, 2000, the Bank
charged $48,500 against earnings as a provision for loan losses compared to a
provision of $121,000 charged against earnings for the year ended March 31,
1999. During fiscal 2000, the Bank's loan portfolio experienced charge-offs of
$13,267 compared with $51,981 charged off during the previous year. The
allowance for loan losses at March 31, 2000 was increased to 1.04% of loans
receivable as compared to 0.99% of loans receivable at March 31, 1999. The
allowance for loan losses as a percentage of non-performing assets was 224.2% at
March 31, 2000 as compared to 179.9% at March 31, 1999. Total non-performing
assets at March 31, 2000 were $101,000, or 0.46% of loans receivable, as
compared to total non-performing assets at March 31, 1999 of $225,000 or 1.03%
of loans receivable. 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 loan portfolio as well
as the overall increase in the dollar value of loans receivable. The Bank's
allowance for loan losses at March 31, 2000 and March 31, 1999 was $227,218 and
$191,019, respectively.
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, 2000, non-interest income
increased $44,850 or 100.8%, to $89,362 from $44,512 for the year ended March
31, 1999. The increase was primarily due to increases in service charge income,
late fees on loans, and insurance commissions in the amount of $20,109 for the
year ended March 31, 2000, and an increase in other income from MasterCard
programs, lease of the 26 Church St. facility, and gain on sale of securities in
the amount of $24,741.
Non-interest Expense. Non-interest expense increased $90,784 or 12.4%, to
$821,494 for the year ended March 31, 2000 from $730,710 for the same period in
1999. The majority of the increase, $71,133 or 78.4% of the increase was the
expense incurred in relation to the proposed merger with TrustCo. Of the
remaining increase of $19,651, compensation expense increased $31,000, occupancy
expenses increased $21,000, data processing expense increased $10,000, while
professional and legal fees decreased $12,000, FDIC premiums decreased $4,000,
and other operating expenses decreased $31,000.
Income Taxes. Income tax expense increased $35,171 to $8,566 for the year ended
March 31, 2000 from a benefit of $26,605 for the year ended March 31, 1999. The
increase is due to the increase in pre-tax income. The Company's effective tax
rate was 34% for the years ended March 31, 2000 and March 31, 1999.
AVERAGE YIELDS EARNED AND RATES PAID
Years Ended March 31,
2000 1999 1998
------------------------------ ------------------------------- -----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Outstanding Earned/ Outstanding Earned/
Balance Paid Yield/Rate Balance Paid Yield/Rate Balance Paid Yield/Rate
----------- -------- ---------- ----------- -------- ---------- ----------- ------ ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable (1) (2) $ 20,626 1,823 8.84% 16,515 $ 1,453 8.80% $ 13,250 $ 1,174 8.86%
Mortgage-backed securities 31 3 9.68% 52 4 7.69% 117 10 8.55%
Investment securities 2,092 143 6.84% 1,409 87 6.17% 849 53 6.24%
FHLB stock 113 8 7.08% 89 6 6.74% 74 7 9.46%
Interest bearing deposits 56 3 5.41% 725 46 6.34% 978 49 5.01%
--------- ------- --------- --------- --------- --------
Total interest-earning assets $ 22,917 1,980 8.64% 18,790 $ 1,596 8.49% $ 15,268 $ 1,293 8.47%
========= ======= ========= ========= ========= ========
Interest-bearing liabilities:
Interest-bearing checking $ 378 8 2.12% 816 $ 9 1.10% 463 $ 3 0.65%
Passbook accounts 3,877 117 3.02% 3,391 102 3.01% 3,965 118 2.98%
Certificate accounts 15,730 931 5.92% 12,913 781 6.05% 9,820 605 6.16%
FHLB advances 1,226 101 8.24% 452 20 4.42%
--------- ------- --------- --------- --------- --------
Total interest-bearing liabilities $ 21,210 1,157 5.45% 17,572 $ 912 5.19% $ 14,248 $ 726 5.10%
========= ======= ========= ========= ========= ========
Net interest income $ 823 $ 684 $ 567
======== ========= =========
Net interest rate spread 3.18% 3.30% 3.37%
======== ========= =======
Net earning assets $ 1,707 1,218 $ 1,020
========= ========== =========
Net yield on average
interest-earning assets 3.59% 3.64% 3.71%
======== ========= =======
Ratio of average interest-earning assets to
average interest-bearing liabilities 108.05% 106.93% 107.16%
========= ========= =========
(1) Calculated net of deferred loan fees, loan discounts, and loans in process.
(2) In computing average balances and average yield on loans, non-accruing
loans have been included.
SPREAD AND MARGIN
Years Ended March 31,
-----------------------------------------------
2000 1999 1998
---------- ---------- ----------
Average yield on loans 8.84% 8.80% 8.86%
Average yield on mortgage-backed securities 9.68% 7.69% 8.55%
Average yield on investment securities 6.84% 6.17% 6.24%
Average yield on FHLB stock 7.08% 6.74% 9.46%
Average yield on other interest-bearing deposits 5.41% 6.34% 5.01%
Average yield on all interest-earning assets 8.64% 8.49% 8.47%
Average rate paid on interest-bearing checking 2.12% 1.10% 0.65%
Average rate paid on passbook accounts 3.02% 3.01% 2.98%
Average rate paid on certificate accounts 5.92% 6.05% 6.16%
Average rate paid on FHLB advances 8.24% 4.42%
Average rate paid on all interest-bearing liabilities 5.45% 5.19% 5.10%
Interest rate spread (spread between weighted average
rate on all interest-earning assets and all interest-bearing
liabilities) 3.18% 3.30% 3.37%
Net interest margin (net interest income as a percentage
of average interest-earning assets) 3.59% 3.64% 3.71%
RATE VOLUME ANALYSIS
2000 Compared to 1999 1999 Compared to 1998
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------- ---------------------------------------
Volume Rate Net Volume Rate Net
(In thousands)
Interest-earning assets:
Loans Receivable $ 362 $ 8 $ 370 $ 291 $ (10) $ 281
Mortgage-backed securities (2) 1 (1) (6) (0) (6)
Investment Securities 42 14 56 35 (1) 34
FHLB stock 2 0 2 1 (2) (1)
Interest bearing deposits (42) (1) (43) (15) 10 (5)
--------- -------- -------- -------- --------- ---------
Total net change in income on
interest-earning assets $ 361 $ 23 $ 384 $ 307 $ (4) $ 303
========= ======== ======== ======== ========= =========
Interest-bearing liabilities:
Passbook accounts $ (5) $ 4 $ (1) $ 2 $ 4 $ 6
Interest-bearing checking 15 0 15 (17) 1 (16)
Certificates of deposit 170 (20) 150 191 (15) 176
FHLB advances 34 47 81 0 20 20
--------- -------- -------- -------- --------- ---------
Total net change in income on
interest-bearing liabilities $ 214 $ 31 $ 245 $ 176 $ 10 $ 186
========= ======== ======== ======== ========= =========
Net change in net interest income $ 139 $ 117
======== =========
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.
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 business loans
with maturities of five years and less and by extending 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 49.7% to
$1,189,247 from $794,652 at March 31, 2000 and 1999 respectively and passbook
balances 28.4% to $4,358,743 from $3,395,145 during the same period. However,
the Bank continues to retain longer term fixed rate residential mortgage loans
in the portfolio. During the fiscal year, fixed rate residential mortgages
increased 7.7% to $7.1 million from $6.6 million, while adjustable rate
residential mortgages increased 4.1% from $2.5 million to $2.6 million. 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, 2000, total interest-bearing
liabilities maturing or repricing within one year exceeded total
interest-earning assets maturing or repricing during the same period by
$6,757,167, representing a one-year gap of (27.99)%.
Interest Rate Gap Analysis Cumulatively Repriced Within
12 months 1 to 3 Years 3 to 5 years After 5 yrs Total
-------------- ------------------ -------------- --------------- -------------
Interest Earning Cash $ 135,996 $ 0 $ 0 $ 0 $ 135,996
Securities 302,281 0 372,594 1,690,846 2,365,721
Loans 3,930,597 3,616,011 4,933,212 9,164,032 21,643,852
Non-int rate sensitive assets 1,269,204 1,269,203
-------------- ------------------ -------------------------------- -------------
Total assets $ 4,368,597 $ 3,616,011 $ 5,305,806 $ 12,124,082 $ 25,414,772
Deposits:
Demand 237,590 237,590 237,590 475,179 1,187,949
Savings 1,090,011 523,205 523,205 2,223,622 4,360,043
Time 9,272,990 6,185,033 247,503 668,986 16,374,512
-------------- ------------------ -------------------------------- -------------
Total deposits $ 10,600,590 $ 6,945,828 $ 1,008,298 $ 3,367,787 $ 21,922,504
Borrowing $ 525,450 $ 460,216 $ 273,854 $ 107,058 $ 1,366,578
Non-int sensitive liabilities 219,828 219,828
Equity 1,905,862 1,905,862
-------------- ------------------ -------------- --------------- -------------
Total liabilities and equity $ 11,126,041 $ 7,406,043 $ 1,282,152 $ 5,600,535 $ 25,414,772
Incremental gap:
Interest sensitivity gap $ (6,757,167) $ (3,790,033) $ 4,023,654 $ 6,523,547
Gap as a % of earn. assets (27.99%) (15.70%) 16.66% 27.02%
Int sensitive 39.27 48.83 413.82 193.82
assets/liabilities
Cumulative gap:
Interest sensitivity gap $ (6,757,167) $ (10,547,200) (6,523,546) 0
Gap as a % of earn. assets (27.99%) (43.68%) (27.02%) 0
Int sensitive assets/liabilities 39.27 43.09 67.08 95.01
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 historically supplemented these deposits with brokered certificates of
deposit from out of area customers. Management has strived to reduce the
relative dependence on out-of-market deposits due to their higher cost and lower
stability. At March 31, 2000 out-of-market deposits were $5.7 million or 26.0%
of total deposits, compared to $5.8 million or 30.1% of total deposits as of
March 31, 1999.
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 rising 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 $2,400,600, which expires on September 13, 2000. 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, 2000, the Bank had borrowings
outstanding to the FHLB of $1,366,577.
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, 2000 and March 31, 1999
were 14.99% and 12.95%, 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, 2000 and March 31, 1999 were $568,080 and $295,827
respectively.
At March 31, 2000 the Bank had outstanding loan commitments and loans awaiting
disbursement of $195,000. 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, 2000, were $9.27 million. Management believes that a significant
portion of such deposits will remain with the Bank.
At March 31, 2000, the Company had tangible capital of $2,029,336, or 8.0% of
total assets, which is approximately $1,520,636 above the minimum requirement of
2.0% of adjusted total assets in effect on that date. The Company had core
capital of $2,029,336, or 8.0% of total adjusted assets, which is approximately
$1,011,936 above the minimum leverage ratio of 4.0% in effect on that date. The
Company had total risk based capital of $2,256,554 which is approximately
$862,654 above the 8.0% requirement in effect on that date.
Management is aware that the Company's capital ratios will be adversely affected
by the ongoing merger and acquisition expenses and those expenses related to
defending the Company from a lawsuit filed subsequent to the Company's fiscal
year end.
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.
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, 2000 and 1999, 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, 2000 and 1999, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
Albany, New York
May 16, 2000
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- ---------------------------------------------------------------------------------------------------------------------------
March 31,
2000 1999
---- ----
ASSETS
Cash (including interest bearing deposits
$100,000, 2000; $10,600, 1999) $ 568,080 $ 295,827
Mortgage-backed securities, held-to-maturity (fair value
approximates $23,312; 2000; $38,336, 1999) 23,997 38,468
Investment securities, available-for-sale 2,283,184 1,900,992
Loans receivable, net of allowance for loan losses of $227,218
in 2000 and $191,019 in 1999 21,643,852 19,189,257
Investments required by law - stock in Federal Home Loan
Bank of New York, at cost 125,000 100,900
Accrued interest receivable 126,119 107,805
Premises and equipment, net of accumulated depreciation 552,385 583,401
Foreclosed real estate -- 118,815
Deferred tax asset 44,462 39,597
Other assets 69,276 78,261
-------------- ----------
Total Assets $ 25,436,355 $ 22,453,323
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits, non-interest bearing $ 862,774 $ 302,641
Deposits, interest bearing 21,059,728 18,971,236
Advance payments by borrowers for property taxes and
insurance 84,745 108,174
Advances from the Federal Home Loan Bank of New York
Short-term -- 250,000
Long-term 1,366,577 834,586
Accrued expenses and other liabilities 117,779 58,752
---------------- ---------------
Total liabilities 23,491,603 20,525,389
---------------- ---------------
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;
154,508 and 152,000 shares issued and outstanding in
2000 and 1999, respectively 15,451 15,200
Additional paid-in capital 1,225,186 1,192,833
Retained earnings, substantially restricted 901,058 867,348
Accumulated other comprehensive income (loss) (67,897) (5,403)
Unearned stock based compensation (27,713) (32,604)
Unearned ESOP shares (101,333) (109,440)
---------------- ---------------
1,944,752 1,927,934
---------------- ---------------
Total Liabilities and Stockholders' Equity $ 25,436,355 $ 22,453,323
================ ===============
- ---------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended
March 31,
2000 1999
---- ----
INTEREST INCOME
Loans receivable
First mortgage loans $ 827,967 $ 742,642
Other loans 995,352 700,384
Investment securities and interest bearing deposits 156,811 153,322
------------ ------------
Total interest income 1,980,130 1,596,348
------------ ------------
INTEREST EXPENSE
Deposits 1,047,291 892,587
Short-term advances, Federal Home Loan Bank of New York 2,797 242
Long-term advances, Federal Home Loan Bank of New York 107,134 19,330
------------ ------------
1,157,222 912,159
------------ ------------
Net interest income 822,908 684,189
PROVISION FOR LOAN LOSSES 48,500 121,000
------------ ------------
Net interest income after provision for loan losses 774,408 563,189
------------ ------------
NON-INTEREST INCOME
Loan fees and service charges 54,389 34,280
Net gain on sales of available-for-sale securities 2,925 --
Other non-interest income 32,048 10,232
------------ ------------
Total non-interest income 89,362 44,512
------------ ------------
NON-INTEREST EXPENSE
General and administrative expenses
Compensation, payroll taxes and fringe benefits 358,759 327,751
Advertising and business promotion 7,084 7,785
Building occupancy and equipment expenses,
including depreciation 66,226 45,228
Federal insurance premiums 10,618 14,758
Data processing expenses 55,690 45,609
General office and supply expense 56,726 50,701
Professional and regulatory fees 74,160 86,518
Merger and acquisition expense 71,133 --
Other operating expenses 121,098 152,360
------------ ------------
Total non-interest expense 821,494 730,710
------------ ------------
Income (loss) before income taxes 42,276 (123,009)
PROVISION FOR INCOME TAX BENEFIT (EXPENSE) (8,566) 26,605
------------ ------------
Net income (loss) $ 33,710 $ (96,404)
============ =============
NET INCOME (LOSS) PER COMMON SHARE
Basic $ .24 $ (.69)
=========== =============
Diluted $ .22 $ (.69)
=========== =============
- ----------------------------------------------------------------------------------------------------------------------------
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
Years Ended March 31, 2000 and 1999
- ----------------------------------------------------------------------------------------------------------------------------
Accumulated Unearned
Common Stock Additional Other Stock Unearned Total
------------ paid-in Retained Comprehensive Based ESOP stockholders
Shares Amounts capital earnings income (loss) Compensation Shares equity
------ ------- ------- -------- ------------- ------------ ------ ------
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
=====================================================================================================
Comprehensive Income (loss)
Net income (loss) -- -- -- 33,710 -- -- -- 33,710
Change in unrealized
gain (loss) on
securities available
for sale, net of reclassification
adjustment and tax effects -- -- -- -- (62,494) -- -- (62,494)
-------
Total comprehensive
income (loss) (28,784)
-----------
Shares granted for
stock based compensation 2,508 251 32,353 -- -- -- -- 32,604
Amortization of stock
based compensation -- -- -- -- -- 4,891 -- 4,891
ESOP shares earned -- -- -- -- -- -- 8,107 8,107
------------------------------------------------------------------------------------------------------
BALANCES AT
March 31, 2000 154,508 $ 15,451 $1,225,186 $ 901,058 $ (67,897) $(27,713) $(101,333) $1,944,752
====================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------------------------------
Years Ended
March 31,
2000 1999
---- ----
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES
Net income (loss) $ 33,710 $ (96,404)
Adjustments to reconcile net income to net cash provided by (used in)
operating activities
Depreciation 52,621 32,189
Amortization (accretion), net 5,319 4,134
Realized gain on sale of available-for-sale securities, net (2,925) --
Amortization of stock based compensation 4,891 --
Provision for loan losses 48,500 121,000
Deferred income taxes 7,117 (32,497)
Allocation of ESOP shares 8,107 8,026
Decrease (increase) in
Accrued interest receivable (18,314) (21,662)
Other assets 8,985 6,526
Increase (decrease) in
Accrued expenses and other liabilities 91,631 774
------------- --------------
239,642 22,086
------------- --------------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES
Net increase in loans receivable (2,473,260) (5,788,930)
Proceeds from sale of available-for-sale securities 202,925 --
Proceeds from maturities and calls of available-for-sale securities 200,000 600,000
Purchases of available-for-sale securities (1,013,068) (1,505,434)
Proceeds from principal repayments of mortgage-backed securities 165,552 129,397
Purchase of premises and equipment (21,605) (418,356)
Purchase of investments required by law, FHLB stock (24,100) (13,500)
Proceeds from sale foreclosed real estate 88,980 --
------------- --------------
(2,874,576) (6,996,823)
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES
Net increase in deposits 2,648,625 4,645,021
Net increase (decrease) in short-term advances, FHLB (250,000) 250,000
Proceeds from long-term advances, FHLB 750,000 850,000
Payments on long-term advances, FHLB (218,009) (15,414)
Increase (decrease) in advances from borrowing taxes and insurance (23,429) 10,721
------------- --------------
2,907,187 5,740,328
Net increase (decrease) in cash and cash equivalents 272,253 (1,234,409)
CASH AND CASH EQUIVALENTS, beginning of year 295,827 1,530,236
------------- --------------
CASH AND CASH EQUIVALENTS, end of year $ 568,080 $ 295,827
============= ==============
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes $ 820 $ 125
============= ==============
Interest on deposits and borrowings $ 1,157,222 $ 912,159
============= ==============
Decrease on unrealized loss on securities available-for-sale, net of tax $ (62,494) $ (10,439)
============= ==============
Transfer of loans receivable to foreclosed real estate $ -- $ 118,815
============= ==============
Insurance of common stock for stock based compensation $ 32,604 $ --
============= ==============
Loans originated to finance the sale of real estate acquired
through foreclosure $ 29,835 $ --
============= ==============
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
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 Presentation and 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 $270,353 at March 31, 2000. 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.
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
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 2000 or 1999.
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
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
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.
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
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
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
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.
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
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, 2000 and 1999). 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 years ended March 31, 2000
and 1999 reflect earnings available to the common stockholders for the
year, divided by the weighted average number of common shares outstanding
during the year. Diluted earnings per share reflects additional common
shares that would have been outstanding if dilutive potential common shares
had been issued, as well as any adjustment to income that would result from
assumed issuance. Potential common shares that may be issued by the Company
relate to outstanding stock options, and are determined using the treasury
stock method.
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
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
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 2000 and 1999, 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.
The components of other comprehensive income and related tax effects are as
follows:
Years Ended
March 31,
2000 1999
---- ----
Unrealized gains (losses) on securities
available-for-sale $ (71,551) $ (10,439)
Reclassification adjustment for gains
realized in income (2,925) --
--------- ---------
Net Unrealized losses (74,476) (10,439)
Tax benefit 11,982 --
--------- ------------
Net-of-tax-amount $ (62,494) $ (10,349)
========= ============
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 1999 accounts have been reclassified to conform with the 2000
presentation.
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
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
-----------------------------
March 31, 2000 March 31, 1999
------------------------------------------ ------------------------------------------
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
agencies $2,012,685 $ -- $ (61,805) $1,950,880 $1,399,476 $ 2,137 $ -- $1,401,613
Mortgage-
backed
securities 350,378 -- (18,074) 332,304 506,919 -- (7,540) 499,379
---------- --------- --------- ---------- ---------- -------- -------- ----------
$2,363,063 $ -- $ (79,879) $2,283,184 $1,906,395 $ 2,137 $ (7,540) $1,900,992
========== ========= ========= ========== ========== ======== ======== ==========
Securities held-to-maturity
---------------------------
March 31, 2000 March 31, 1999
------------------------------------------ --------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
Mortgage-
backed
securities $ 23,997 $ -- $ (685) $ 23,312 $ 38,468 $ -- $ (132) $ 38,336
========== ========= ========= ========== ========= ======== ======== =========
The following is a summary of maturities of securities held-to-maturity and
available-for-sale as of March 31, 2000:
Securities held-to-maturity Securities available-for-sale
--------------------------- -------------------------------
Amounts maturing in: Amortized Amortized
Cost Fair Value Cost Fair Value
One year or less $ -- $ -- $ 250,000 $ 247,735
After one year through five years -- -- 350,000 335,119
After five years through ten years -- -- 1,117,836 1,078,965
After ten years 23,997 23,312 645,227 621,365
------------ ------------ --------------- --------------
$ 23,997 $ 23,312 $ 2,363,063 $ 2,283,184
============ ============ =============== ==============
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
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, 2000 and 1999 proceeds from the sale of
securities held-to-maturity amounted to $-0-. Gross realized gain (loss) on
securities available-for-sale amounted to $2,925 and $-0- for the years
ended March 31, 2000 and 1999, respectively.
NOTE C - LOANS RECEIVABLE, NET
The Company's loans receivable are summarized as follows:
March 31,
2000 1999
---- ----
Conventional first mortgages on real estate (1-4 family) $ 10,218,106 $ 9,481,327
Property improvement loans 154,814 112,782
Home equity loans 1,277,395 911,501
Construction loans 166,669 219,992
Loans to depositors, secured by savings 142,062 74,098
Consumer loans 6,034,776 6,242,686
Commercial 3,877,248 2,337,890
-------------- --------------
$ 21,871,070 $ 19,380,276
Allowance for loan losses (227,218) (191,019)
Loans in process -- --
-------------- --------------
Total loans receivable, net $ 21,643,852 $ 19,189,257
============== ==============
An analysis of the allowance for loan losses is as follows:
March 31,
2000 1999
---- ----
Balance, beginning of year $ 191,019 $ 122,000
Loans charged off (13,267) (51,981)
Recoveries 966 --
Provision for losses 48,500 121,000
------------ ------------
Balance, end of year $ 227,218 $ 191,019
============ ============
At March 31, 2000 and 1999, 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 $78,000 and $59,000,
respectively. The average recorded investment in impaired loans amounted to
approximately $19,600 and $34,000 for the years ended March 31, 2000 and
1999, respectively. The allowance for loan losses related to impaired loans
amounted to $-0- at March 31, 2000 and 1999, respectively. Interest income
on impaired loans of $6,723 and $2,050 was recognized for cash payments
received in 2000 and 1999, respectively.
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
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 $ 460,035
Additions 466,093
Payments (152,730)
Change in status (258,753)
-------------
Balance, end of year $ 514,645
=============
Loans with carrying amounts of $-0- and $118,815 were transferred to
foreclosed real estate in 2000 and 1999, 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,
2000 1999
---- ----
Loans $ 96,262 $ 87,836
Mortgage-backed securities 1,949 3,173
Investments and other 27,908 16,796
------------ ------------
$ 126,119 $ 107,805
============ ============
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
NOTE F - PREMISES AND EQUIPMENT
A summary of the Company's premises and equipment is as follows:
March 31,
2000 1999
---- ----
Land and building $ 307,917 $ 307,917
Improvements 130,894 130,294
Equipment 299,618 285,666
------------ ------------
738,429 723,877
Less accumulated depreciation 186,044 140,476
------------ ------------
$ 552,385 $ 583,401
============ ============
Depreciation expense for 2000 and 1999 was $52,621 and $32,189,
respectively.
NOTE G - FORECLOSED REAL ESTATE
At March 31, 2000 and 1999, the Company had foreclosed real estate expected
to be disposed of in the near term of $-0- and $118,815, respectively. In
2000 and 1999, foreclosure losses in the amount of $-0- and $30,000,
respectively, were charged off to the allowance for loan losses.
NOTE H - DEPOSITS
Deposit account balances at March 31, 2000 and 1999, are summarized as
follows:
March 31,
2000 1999
----------------------- --------------------------
Amount % Amount %
------ - ------ -
Balance by interest rate:
Interest-bearing checking accounts $ 326,473 1.49% $ 492,011 2.55%
Non-interest bearing checking accounts 862,774 3.94% 302,641 1.57%
Passbook accounts 4,358,743 19.88% 3,395,145 17.62%
Certificates of deposit 16,374,512 74.69% 15,084,080 78.26%
--------------- ------ --------------- ------
$ 21,922,502 100.00% $ 19,273,877 100.00%
=============== ======= =============== =======
The aggregate amount of certificates of deposit with a minimum denomination
of $100,000 was approximately $1,333,000 and $1,362,000 at March 31, 2000
and 1999, respectively. Deposit amounts in excess of $100,000 are not
Federally insured.
Deposits from related parties held by the Company at March 31, 2000 and
1999 amounted to $583,487 and $486,649, respectively.
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
NOTE H - DEPOSITS - Continued
At march 31, 2000 scheduled maturities of certificates of deposit are as
follows:
March 31, 2001 $ 9,272,990
2002 4,606,695
2003 1,578,338
2004 238,512
2005 8,991
Thereafter 668,986
---------------
$ 16,374,512
===============
Interest expense for 2000 and 1999 was $11,407 and $7,352, respectively for
interest-bearing checking accounts, $116,194 and $101,707, respectively for
passbook accounts, and $919,690 and $783,528, 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, 2000 and 1999 of $-0- and $250,000, respectively.
The advance was paid on June 21, 1999 and interest was charged 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, 2000 and 1999 of $1,366,577 and $834,586,
respectively. The advances bear interest ranging from 5.08% to 6.29% and
have due dates ranging from December 18, 2000 to October 29, 2008. The
long-term advances at March 31, 2000 are repayable as follows:
Years ending March 31, 2001 $ 525,450
2002 281,158
2003 179,057
2004 190,388
2005 83,465
2006 - 2009 107,059
---------------
$ 1,366,577
===============
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
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
NOTE J - INCOME TAXES - Continued
deduction based on specified experience formulas. The Company used the
experience formula in 1999 and anticipates using the same method in 2000.
Income tax expense (benefit) is summarized as follows:
Years Ended
March 31,
2000 1999
---- ----
Federal
Current $ -- $ (2,206)
Deferred 12,129 (18,960)
----------- -----------
12,129 (21,166)
State
Current $ 1,449 $ 8,098
Deferred (5,012) (13,537)
----------- -----------
(3,563) (5,439)
----------- -----------
$ 8,566 $ (26,605)
=========== ===========
Taxes paid during the years ended March 31, 2000 and 1999, were $820 and
$125, 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,
2000 1999
---- ----
Expected tax provision (benefit) at 34% $ 14,373 $ (41,823)
State franchise tax, net of federal tax benefit (2,351) 7,307
Other, net (3,456) 7,911
----------- ------------
$ 8,566 $ (26,605)
=========== ============
Effective tax rate (benefit) for 2000 and 1999 was 34%.
Deferred tax liabilities have been provided for taxable temporary
differences related to depreciation and accrued interest receivable.
Deferred tax assets have been provided for deductible temporary differences
related to the allowance for loan losses, unrealized losses on securities
available-for-sale,
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
NOTE J - INCOME TAXES - Continued
interest receivable, other liabilities and a net operating loss
carryforward. The components of the net deferred tax asset is as follows:
March 31,
2000 1999
---- ----
Deferred tax asset
Net operating loss $ -- $ 25,067
Unrealized loss on securities
available-for-sale 11,982 --
Allowance for loan losses 51,607 45,845
------------ ------------
63,589 70,912
Deferred tax liabilities
Interest receivable (14,347) (25,873)
Other (4,780) (5,442)
------------ ------------
(19,127) (31,315)
------------ ------------
Net deferred tax asset $ 44,462 $ 39,597
============ ============
Included in retained earnings at March 31, 2000 and 1999 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, 2000 and 1999, 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, 2000, that the Company and the Bank
meets all capital adequacy requirements to which they are subject.
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
NOTE K - REGULATORY MATTERS - Continued
As of March 31, 2000, 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, except as disclosed in Note V, that management believes have
changed the Company and the Bank's prompt corrective action category.
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- -------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
----------------- -------------------- ------------------------
As of March 31,2000:
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 2,256,554 13.0% >=$1,393,900 >=8.0% >=$1,742,300 >=10.0%
Tier I Capital
(to Risk-Weighted Assets) $ 2,029,336 11.6% >=$ 696,900 >=4.0% >=$1,045,400 >=6.0%
Tier I Capital
(to Adjusted Total Assets) $ 2,029,336 8.0% >=$1,017,400 >=4.0% >=$1,271,800 >=5.0%
Tangible Capital
(to Adjusted Total Assets) $ 2,029,336 8.0% >=$ 508,700 >=2.0% >=$508,700 >=2.0%
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
(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%
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.
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
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, 2000 and 1999.
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. Subsequent to March 31, 2000, certain
shareholders of the Company filed a legal action against the Company and
its Board of Directors. See Subsequent Events Note V for description of the
litigation and the impact it may have upon the Company. In addition,
various other legal claims also arise from time to time in the normal
course of business which, in the opinion of management, will have no
material effect on the Company's consolidated financial statements.
The Company had outstanding commitments to originate loans as follows:
March 31, 2000 March 31, 1999
-------------- --------------
Fixed-Rate Variable-Rate Total Fixed Rate Variable Rate Total
---------- ------------- ----- ---------- ------------- -----
First-mortgage $ 195,000 $ -- $ 195,000 $ 794,303 $ -- $ 794,303
============ ============ ============ ============ ============ ============
The interest rate on outstanding fixed-rate commitments at March 31, 2000,
ranges between 7.9% and 8.38%.
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
NOTE M - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTION -
Continued
At March 31, 2000, the Company had an unused line of credit with the
Federal Home Loan Bank as follows:
Companion (DRA) Commitment $ 1,200,300
Overnight line of credit 1,200,300
--------------
$ 2,400,600
The Company's line of credit with the Federal Home Loan Bank expires on
September 13, 2000.
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, 2000 and
1999, Landmark Title Company received $-0- and $15,162 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:
March 31,
2000 1999
--------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- -------------- ---------- ------------------
Financial assets:
Cash $568,080 $568,080 $ 295,582 $295,827
Securities held-to-maturity 23,997 23,312 38,468 38,336
Securities available-for-sale 2,283,184 2,283,184 1,900,992 1,900,992
Loans receivable, net 21,643,842 21,752,000 19,189,257 19,284,000
Accrued interest receivable 126,119 126,119 107,805 107,805
Financial liabilities:
Deposits 21,922,502 21,736,000 19,273,877 19,552,000
Advance payments by
borrowers for taxes
and insurance 84,745 84,745 108,174 108,174
Advances from the
Federal Home Loan Bank 1,366,577 1,309,000 1,084,586 1,066,000
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
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
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, 2000 and 1999 was $101,333 and
$109,440, respectively. Interest charged on the loan is at the Bank's prime
lending rate (9.00% at March 31, 2000). 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, 2000 and 1999, 811 shares and 808 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 2000 and 1999 were approximately $8,107 and $8,026,
respectively. The fair value of the remaining unallocated shares at March
31, 2000 aggregated approximately $200,000.
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
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
NOTE Q - EMPLOYEE BENEFIT PLAN - Continued
equally over a five-year period. For the years ended March 31, 2000 and
1999, expense attributable to the Plan amounted to $8,861 and $5,011,
respectively.
NOTE R - IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
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.
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, 2000 and 1999 is as
follows:
Years Ended March 31,
2000 1999
---- ----
Basic Earnings Per Share
Net income (loss) available to common shareholders $ 33,710 $ (96,404)
============ ============
Weighted average common shares outstanding 143,146 140,247
============ ============
Basic Earnings Per Share $ .24 $ (.69)
============ ===========
Earnings Per Share Assuming Dilution
Net income (loss) available to common shareholders $ 33,710 $ (96,404)
============ ============
Weighted average common and dilutive
potential common shares outstanding 150,806 140,247
============ ============
Diluted Earnings Per Share $ .22 $ (.69)
======= ========
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
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 2000 and 1999
is as follows:
Options Option Price
Outstanding Per Share
Outstanding at March 31, 1999 6,860 $ 13.00
Granted (September 23, 1999) 1,600 13.00
Exercised -- --
Forfeited -- --
----------- -----------
Outstanding at March 31, 2000 8,460 $ 13.00
=========== ===========
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 $54,000. Compensation expense for the years ended March 31,
2000 and 1999 was $-0-. Options exercisable at March 31, 2000 and 1999 were
2,561 and 1,029, respectively.
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, 2000
and 1999 was $4,891 and $-0-, respectively. 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 option plan in accordance
with Accounting Principles Board Opinion No. 25. Accordingly, no
compensation cost has been recognized. Had compensation cost for the
Company's stock option plan been determined based upon the fair value at
the grant dates for awards under the plan consistent with the method
prescribed by Statement of Financial Accounting Standard No. 123, the
Company's net income and earnings per share would have adjusted to the Pro
forma amounts as follows:
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
NOTE T - STOCK COMPENSATION PLANS - Continued
Years Ended March 31,
2000 1999
---- ----
Net income (loss) As reported $ 33,710 $ (96,404)
Pro forma $ 27,151 $ (100,548)
Net income (loss)
per share As reported $ .24 $ (.69)
Pro forma $ .19 $ (.72)
Net income (loss)
per share - As reported $ .22 $ (.69)
assuming dilution Pro forma $ .18 (.72)
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,
2000 1999
---- ----
Dividend yield --% --%
Expected life 5 years 5 years
Expected volatility 48.40% 24.57
Risk-free interest rate 5.80% 5.79%
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 the years ended March 31, 2000 and 1999 was $6.46 and $4.03,
respectively.
NOTE U - AGREEMENT AND PLAN OF MERGER
On February 21, 2000, the Company's Board of Directors' and the Board of
Directors' of TrustCo Bank Corp NY and Landmark Acquisition Co. (a
wholly-owned subsidiary of TrustCo Bank Corp. NY) entered into an Agreement
and Plan of Merger (Agreement), subject to the approval of the Company's
shareholders and the required regulatory approvals.
The Agreement specifies that Landmark Acquisition Co. shall merge with and
into the Company. Landmark Acquisition Company shall be the merging
corporation in the Merger and its corporate identity and existence,
separate and apart from the Company, shall cease upon consummation of the
Merger. The Company shall be the surviving corporation in the Merger.
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
NOTE U - AGREEMENT AND PLAN OF MERGER - Continued
By virtue of the Merger and without any action on the part of TrustCo Bank
Corp. NY, Landmark Acquisition Co. and the Company or their respective
shareholders, each share of common stock of the Company issued and
outstanding immediately prior to the merger shall be converted into the
right to secure merger consideration in the amount of twenty-one dollars
($21.00). All of the common shares of the Company, outstanding prior to the
merger, shall no longer be outstanding and shall be canceled and retired
and shall cease to exist.
Stock options issued and outstanding in accordance with the Company's Stock
Option Plan shall, by reason of the Merger, cease to be outstanding and
shall be converted into the right to secure cash in an amount equal to the
difference between the merger consideration of $21.00 per share and the
exercise price of the option.
Restricted stock awards granted under the Company's Recognition and
Retention Plan, by reason of the Merger shall cease to exist and shall be
converted into the right to secure the merger consideration of $21.00 per
share.
In connection with the execution of the Agreement, the Company and TrustCo
Bank Corp NY entered into a Stock Option Agreement, dated February 21,
2000, pursuant to which the Company granted TrustCo Bank Corp NY an option
to purchase, subject to certain terms and conditions contained therein, up
to an aggregate of 19.9% of the outstanding shares of the Company's common
stock.
In the opinion of management costs associated with the Merger will
approximate $150,000. Merger expenses incurred as of March 31, 2000 were
$71,133.
NOTE V - SUBSQUENT EVENTS
Private Mortgage Investment Services, Inc. (PMIS) and its President,
Charles F. Cefalu, are stockholders of the Company who last November 1999
approached the Company with a proposal to acquire a controlling interest in
the Company in exchange for an unspecified amount of cash and a group of
mortgages. That proposal was rejected by the Company's Board of Director's
in December 1999.
On April 17, 2000, Mr. Cefalu and PMIS filed legal action against the
Company and its Board of Directors. The suit alleges that (1) the Company's
Board of Directors violated its fiduciary duties to its stockholders by
entering into a merger agreement with TrustCo Bank Corp NY (see Note U) and
(2) the Agreement to vote in favor that each Company Board member entered
into with TrustCo Bank Corp NY is subject to a voting limitation contained
in the Company's Certificate of Incorporation. Based upon these
allegations, the plaintiffs sought a preliminary and permanent injunction
preventing any action in furtherance of the TrustCo Bank Corp NY merger
agreement, a declaration that the merger agreement is void, damages in an
amount not less than $1,000,000 and
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
NOTE V - SUBSQUENT EVENTS - Continued
costs and attorney's fees. Also on April 17, 2000, the court ordered an
order to show cause temporarily restraining any action on the Agreement and
Plan of the Merger (see Note U). On May 10, 2000, PMIS and a wholly-owned
subsidiary, Investors and Lenders, LLC (Investors) filed a Schedule 14D
with the Securities and Exchange Commissar formally commencing a tender
offer. The tender offer is for a minimum of 100,000 shares or approximately
65% of the Company's outstanding shares at a price of $25.00 per share. The
tender offer is subject to a number of contingencies, including the ability
of Investors and PMIS to obtain financing and to obtain regulatory approval
from the Office of Thrift Supervision.
On May 16, 2000, a modified temporary restraining order was entered that
permits the Company's Board of Directors' to respond to the tender offer in
compliance with their duties and obligations under state and federal law,
to issue a recommendation statement to the Company's stockholders comparing
the Investors/PMIS offer with the Agreement and Plan of Merger (see Note
U), and to communicate with TrustCo Bank Corp NY about the Merger and the
tender offer.
In the opinion of management and counsel at this preliminary stage of the
litigation, it is not possible to predict the outcome of the action or the
pending motions. The Company intends to vigorously oppose any efforts by
plaintiffs to interfere with the ability of the Company's stockholders to
vote on the Agreement and Plan of Merger with TrustCo Bank Corp NY (see
note U) and to defend the action.
In the opinion of management, the costs of defending the litigation
referred to above will have a material and adverse impact on the Company's
operations during the fiscal year ending March 31, 2001. Also, in the
opinion of management the total actual costs associated with the litigation
can not be reasonably estimated as of the statement date (May 16, 2000).
NOTE W - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial condition as of March 31,
2000 and 1999 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.
March 31,
2000 1999
---- ----
STATEMENT OF FINANCIAL CONDITION
Assets:
Cash $ 13,121 $ 12,359
Investment in and advances to (from) Bank 1,881,720 1,939,139
Other assets 51,509 9,987
-------------- --------------
Total assets $ 1,946,350 $ 1,961,485
============== ==============
Liabilities $ 1,598 $ 33,551
Stockholders' Equity 1,944,752 1,927,934
-------------- --------------
Total liabilities and stockholders' equity $ 1,946,350 $ 1,961,485
============== ==============
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 and 1999
NOTE W - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS -
Continued
Years Ended March 31,
2000 1999
---- ----
STATEMENT OF OPERATIONS
Income:
Income, including dividend from bank subsidiary of
$-0- in 2000 and $120,000- in 1999 $ 8,704 $ 132,903
Expenses 130,772 46,444
Income (loss) before income taxes and equity in earnings of Bank (122,068) 86,459
Provision for income tax benefit 42,284 7,056
-------------- --------------
Income before equity in earnings of Bank (79,784) 93,515
Equity in earnings (loss) of Bank 113,494 (69,922)
-------------- ---------------
Net income $ 33,710 $ 23,593
============== ==============
STATEMENT OF CASH FLOWS
Cash flows provided (used) by operating activities:
Net income $ 33,710 $ 23,593
Adjustments to reconcile net income (loss) to
net cash used for operating activities
Equity in (earnings) loss of Bank (113,494) 69,922
Amortization of stock based compensation 4,891 --
Other assets (41,522) (9,987)
Liabilities 651 947
-------------- --------------
(115,764) 84,475
-------------- ----------------
Cash flows provided (used) by investing activities:
Investment in and advances from (to) Bank 108,419 (84,276)
Principal payments on ESOP loan 8,107 8,026
-------------- --------------
116,526 (76,250)
-------------- --------------
Net increase in cash 762 8,225
Cash, beginning of year 12,359 4,134
-------------- --------------
Cash, end of year $ 13,121 $ 12,359
============== ==============
Common Stock Information
The Common Stock of Landmark Financial Corp. is traded on the "pink sheets"
under the symbol "LMFC.OB" At March 31, 2000 there were approximately 125
stockholders of record, including brokers, and 154,208 shares outstanding of
which 12,160 are held by the Landmark Community Bank Employee Stock ownership
Plan.
The following table sets forth the closing market price of the Company's Common
Stock for the year ended March 31, 2000. At the current time the Company has no
intention to pay dividends.
Fiscal 2000 High Low
- ----------- ---- ---
First Quarter $13.00 $ 7.00
Second Quarter $13.25 $11.87
Third Quarter $14.25 $11.75
Fourth Quarter $20.00 $13.25
Directors and Officers
Directors Officers
John R. Francisco Gordon E. Coleman
Chairman of the Board President & Chief Executive Officer
Gordon E. Coleman Paul S. Hofmann
Vice President & Chief Financial Officer
Carl J. Rockefeller H. Stuart Larson
Vice President - Consumer Lending
Patricia A. Symolon
F. Richard Ferraro
Frederick P. LaCoppola
Leila N. Salmon
Edward R. Jacksland
Frederick W. Lee
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
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.
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Company Percent Owned
Landmark Community Bank 100%