EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
LANDMARK FINANCIAL CORP.
1998 ANNUAL REPORT
LANDMARK FINANCIAL CORP.
26 Church Street
Canajoharie, New York 13317
Telephone (518) 673-2012
Telefax (518) 673-2081
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The Board of Directors, Officers, and Staff of Landmark Financial Corp. and
its wholly owned subsidiary, Landmark Community Bank are pleased to provide
you, our fellow shareholders, with our first annual report as a publicly
owned company.
This past year was one of many changes for our Bank. After serving area
communities for over seventy years as a mutual institution under the name of
Canajoharie Building, Savings and Loan Association, our Bank, as part of its
modernization process and in an effort to broaden the market appeal of the
institution changed it's name to Landmark Community Bank.
A second major change occurred in April, 1997 when the Bank converted its
charter from that of a New York State chartered mutual savings and loan to a
federally chartered savings bank. The culmination of these actions was the
conversion of the Bank's form of ownership in November, 1997 from that of a
mutual savings bank to it's current form of ownership, a publicly owned
savings bank.
The Bank continued to experience substantial growth during fiscal year 1998.
Assets grew from $11.33 million at March 31, 1997 to $16.81 million at March
31, 1998. Net loans receivable grew from $9.40 million at March 31, 1997 to
$13.64 million at March 31, 1998. Consumer and one-to-four family mortgage
loans represented $3.76 million of that growth. Deposits grew correspondingly
from $10.24 million at March 31, 1997 to $14.63 million at March 31, 1998.
Net income after taxes for the year 1998 was $7,500 compared to a loss of
$36,000 in 1997. Notwithstanding our growth, we remain a well capitalized
institution with capital in excess of regulatory requirements.
As a result of the Initial Stock Offering, the shareholder's equity grew from
$955,000 at March 31, 1997 to $2.06 million at March 31, 1998. As was
originally disclosed in the Bank's prospectus, the proceeds of the stock
offering will be used to take advantage of further growth opportunities in
our market area.
We are very pleased with the progress of the construction of a new full
service banking facility located on Erie Boulevard in the Village of
Canajoharie. It is anticipated that construction will be completed during the
third quarter of calendar 1998. This facility will allow the utilization of a
drive-up window, night depository, and more lobby space for our growing
customer base.
Our primary goal continues to be the enhancement of shareholder value while
continuing to provide a financial institution committed to meeting the needs
of its customers.
Thank you for your confidence in our Bank as we look forward to a prosperous
future.
Sincerely,
/s/ Gordon E. Coleman
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Gordon E. Coleman
President and CEO
Table of Contents
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Page
----
Business of the Company 1
Selected Consolidated Financial Information 2-3
Management's Discussion and Analysis of Financial Condition
And Results of Operations 4-13
Independent Auditors' Report 14
Consolidated Financial Statements 15-18
Notes to Consolidated Financial Statements 19-36
Common Stock Information 37
Directors and Officers 38
Corporate Information 39
Annual Meeting 39
Business Of The Company
Landmark Financial Corp. (the "Company") is a Delaware Corporation which is the
holding company for Landmark Community Bank (the "Bank"). The Company was
organized by the Bank for the purpose of acquiring all of the capital stock of
the Bank in connection with the conversion of the Bank from mutual to stock
form, which was completed on November 13, 1997 (the "Conversion"). The only
significant assets of the Company are the capital stock of the Bank; the
Company's loan to the Bank's Employee Stock Ownership Plan (ESOP), and the
remaining net proceeds of the conversion retained by the Company of
approximately, $120,000. The business of the Company initially consists of the
business of the Bank.
The Bank was originally chartered in 1925 as a New York-chartered mutual savings
and loan association under the name Canajoharie Building Savings & Loan
Association, and is headquartered in Canajoharie, New York. The Bank amended its
mutual charter in 1997 to become a federal mutual savings bank. At March 31,
1998, the Bank had total assets of $16,811,038, deposits of $14,628,856 and
stockholders' equity of $2,059,355.
The Bank conducts its business through its main office in Canajoharie,
Montgomery County, New York. The Bank has been, and intends to continue to be, a
community -oriented financial institution offering selected financial services
to meet the needs of the communities it serves. The Bank attracts deposits from
the general public and historically has used such deposits, together with other
funds, primarily to originate one-to-four family residential mortgage loans,
construction and land loans for single-family residential properties, commercial
loans and consumer loans consisting primarily of loans secured by automobiles.
While the Bank's primary business has been that of a traditional thrift
institution, originating one-to-four family mortgage loans in its primary market
area for retention in its portfolio, the Bank also has been an active
participant in the origination of consumer loans primarily for the purchase of
automobiles.
1
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,
---------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands, except per share data)
Selected Financial Condition Data:
Total Assets .................. $16,811 11,326 7,606 7,628 8,212
Cash and cash equivalents ..... 1,530 709 1,351 881 1,495
Loans receivable, net ......... 13,640 9,392 5,528 6,267 6,248
Trading Account Securities (1) -- 69 -- -- --
Mortgage Backed Securities:
Held to maturity ....... 74 257 340 206 255
Investment Securities
Held to maturity ....... -- 200 -- -- --
Available for sale ..... 1,104 398 241 134 2
FHLB Stock .................... 87 59 64 64 64
Deposits ...................... 14,629 10,237 6,465 6,518 7,228
Advances by borrowers for taxes
and insurance .......... 97 107 95 155 148
Total stockholders' equity .... 2,059 956 993 907 824
At March 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
Selected Operations Data:
Total interest income .............. $ 1,293 $ 688 $ 622 $ 565 $ 560
Total interest expense ............. (726) (326) (270) (225) (267)
------- ------- ------- ------- -------
Net interest income ............... 567 362 352 340 293
Provision for loan losses .......... (12) (78) -- -- --
------- ------- ------- ------- -------
Net interest income after
provision for loan losses ......... 555 284 352 340 293
Fees and service charges ........... 29 29 10 14 19
Other non-interest income .......... 38 67 -- -- --
------- ------- ------- ------- -------
Total non-interest income .......... 67 96 10 14 19
Total non-interest expense ......... (610) (434) (239) (242) (294)
------- ------- ------- ------- -------
Income (loss) before taxes ......... 12 (54) 123 112 18
Income tax (provision) benefit ..... (5) 18 (38) (29) (4)
------- ------- ------- ------- -------
Net income (loss) .................. $ 7 $ (36) $ 85 $ 83 $ 14
------- ------- ------- ------- -------
2
Years Ended March 31,
---------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Selected Operations Data:
Perfomance Ratios:
Return on assets (ratio of net income to
average total assets) ................................ 0.05% -0.41% 1.08% 1.07% 0.17%
Return on retained earnings (ratio of
net income to average equity) ........................ 0.56% -3.67% 8.83% 9.55% 1.68%
Interest rate spread information:
Average during period ................................ 3.37% 3.77% 4.13% 4.16% 3.29%
End of period ........................................ 2.81% 3.34% 4.25% 4.18% 3.36%
Net interest margin (1) ................................ 3.71% 4.23% 4.59% 4.52% 3.65%
Ratio of operating expense to average total assets ..... 3.83% 4.89% 3.04% 3.11% 3.53%
Ratio of average interest-earning assets to average
interest-bearing liabilities ......................... 107.16% 111.97% 114.46% 112.28% 110.84%
Asset Quality Ratios:
Non-performing assets to total assets
at end of period ..................................... 0.86% 0.41% 0.00% 0.00% 0.00%
Allowance for loan losses to non-performing loans ...... 84.72% 235.32% 0.00% 0.00% 0.00%
Allowance for loan losses to loans receivable, net ..... 0.89% 1.17% 0.58% 0.51% 0.49%
Capital Ratios:
Net worth to total assets at end of period ............. 12.25% 8.43% 13.56% 12.31% 10.03%
Average net worth to average assets .................... 8.31% 11.06% 12.27% 11.17% 9.94%
Other Data:
Number of full-service offices ......................... 1 1 1 1 1
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(1) Net interest income divided by average interest earning assets.
3
Management's Discussion and Analysis of Financial Condition and Results of
Operations
GENERAL
Management's discussion and analysis of financial condition and results of
operations is intended to assist in understanding the financial conditions and
results of operations of the Company. The information contained in this section
should be read in conjunction with the consolidated financial statements and
accompanying notes thereto.
Certain statements in this annual report and throughout Management's Discussion
and Analysis of Financial Condition and Results of Operations are "forward
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. These statements involve known and unknown risk,
uncertainties and other factors that may cause the Company's actual results,
performance or achievements to be materially different from the results,
performance or achievements expressed or implied by any "forward looking
statement." "Forward looking statements" are generally identifiable by use of
the words "believe," "expect," "intend," "anticipate," "estimate," "project," or
similar expressions. Factors that may impact such "forward looking statements"
include, among others, changes in general economic conditions, changes in
interest rates, the legislative and regulatory environment, monetary and fiscal
policies of the United States government, the quality and/or composition of the
loan and/or investment portfolios, demand for loan products, deposit flows,
changes in accounting principles or policies and changes in competition.
The deposits of the Bank are presently insured by the Savings Association
Insurance Fund ("SAIF"), which together with the Bank Insurance Fund ("BIF") are
the two insurance funds administered by the Federal Deposit Insurance
Corporation (FDIC). In the third quarter of 1995, the FDIC lowered the premium
schedule for BIF-insured institutions in anticipation of the BIF achieving its
statutory reserve ratio. The reduced premium created a significant disparity in
deposit insurance expense causing a competitive advantage for BIF members.
Legislation enacted on September 30, 1996 provided for a one-time special
assessment of .657% of the Bank's SAIF insured deposits at March 31, 1995. The
purpose of the assessment was to bring the SAIF to its statutory reserve ratio.
Based upon the above formula, the Bank charged $43,000 against earnings for the
year ended March 31, 1997. Although the special one-time assessment
significantly increased non-interest expense for the period, the anticipated
reduction in the premium schedule has reduced the Bank's federal insurance
premiums in the current fiscal year.
During August and September 1997, the Office of Thrift Supervision (OTS)
conducted its previously scheduled routine safety and soundness on-sight
examination of the Bank. During the course of its examination OTS examiners
raised a number of concerns and noted certain deficiencies in the Bank's
operations. As a result of the examination Bank agreed with the OTS not to
originate any new consumer or commercial loans and to limit one-to-four family
loan origination's to no more than $200,000 per month. Management has addressed
the concerns of the OTS and full operational lending authority was restored in
the quarter ending March 31, 1998.
4
OPERATING STRATEGY
The business of the Bank consists principally of attracting deposits from the
general public and using deposits to originate consumer loans and mortgage loans
secured by one-to-four family residences. The Bank's net income is primarily
dependent on net interest income, which is the difference between the income
earned on its interest-earning assets, such as loans and investments, and the
cost of its interest-bearing liabilities, which are primarily deposits. However,
the Bank's net income is also effected to a lesser extent by provisions for loan
losses and other operating income and expenses. General economic conditions,
particularly changes in market interest rates, government legislation, monetary
policies, and policies and actions of the regulatory authorities are some of the
many external factors that may have an effect on the Bank's net income.
Management has implemented various strategies designed to enhance the Bank's
profitability while maintaining its safety and soundness. These strategies
include reducing the Bank's exposure to interest rate risk by emphasizing
originations of adjustable rate mortgage loans for its portfolio and also of
originating shorter term consumer loans. The Bank maintains the asset quality of
its loan portfolio by adhering to internal loan underwriting policies. The Bank
also generally limits its investment portfolio and its investment in mortgage
backed securities to securities of the United States government, and its
Agencies and to mortgage-backed securities collateralized by the United States
government.
It is management's intention to remain a retail financial institution dedicated
to financing home ownership and consumer needs, and to providing quality service
to its customers located in Montgomery and the surrounding counties in the state
of New York.
YEAR 2000
The Bank is in the process of conducting a review of its computer systems in
order to determine which systems could be affected by the "Year 2000" issue,
while at the same time developing an implementation plan to resolve any
identified problem. The "Year 2000" problem is the result of computer programs
that were written using a two digit field rather than a four digit field to
define the year. For example, programs that have date-sensitive fields may
recognize a date using "00" as the year 1900 rather than the year 2000. The
result of this programming error could be system failure or miscalculation.
Management believes that with modifications to existing software and by
converting to new hardware, the "Year 2000" problem will not pose significant
operational problems for the Bank. Given the Bank's interdependence on a
third-party service provider, the internal costs related to the Bank's Year 2000
efforts will consist primarily of accelerating various hardware and software
upgrades which generally would have been incurred in the normal course of
business. Management does not believe that the internal costs necessary to
address the "Year 2000" issue will have a material adverse impact on future
operations other than the impact such an event will have on the cost of services
provided by its third-party service providers which is unknown at this time.
Management cannot guarantee that any third-party service provider will be Year
2000 ready other than through assurances provided from the third party service
provider to the Company.
5
FINANCIAL CONDITION
Total Assets. Total assets increased $5.48 million or 48.4%, to $16.81 million
at March 31, 1998 from $11.33 million at March 31, 1997. Part of this increase
was due to the sale of Landmark Financial Corp. common stock, which generated
net proceeds of $1,086,433 on November 13, 1997, after deducting a $121,600 loan
by Landmark Financial Corp. to the Bank. This loan was used to purchase common
stock of Landmark Financial Corp. for the Landmark Community Bank Employee Stock
Ownership Plan (ESOP). The remaining increase in assets was due to an increase
in loans receivable of approximately $4.25 million from $9.39 million at
March 31, 1997 to $13.64 million at March 31, 1998.
Loans Receivable, Net. Loans receivable, net increased by $4.25 million or
45.23% to $13.64 million at March 31, 1998 from $9.39 million at March 31, 1997,
primarily due to increases in consumer loans of $2.26 million, an increase in
commercial loans of $550,000, and an increase in one-to-four family portfolio
loans of $1.50 million.
Mortgage-Backed Securities. Mortgage-backed securities decreased by $183,000 or
71.19% to $74,000 at March 31, 1998 from $257,000 at March 31, 1997. The
decrease was due to prepayments on loans, which secure the Bank's
mortgage-backed securities.
Investment Securities. Investment securities available-for-sale increased
$706,000 or 177.51% to 1.10 million at March 31, 1998 from $400,000 at March 31,
1997. The increase was funded primarily with proceeds received from the public
offering of Landmark Financial Corp.
Deposits. Deposits increased $4.40 million, or 42.90%, to $14.63 million at
March 31, 1998 from $10.24 million at March 31, 1997. The increase in deposits
is primarily attributable to an increase in out of market certificate of
deposits of $4.40 million with maturities of two to five years. These deposits
were obtained by participating in an on-line Internet service through
advertising certificate of deposit rates nationwide.
Equity. Total stockholders' equity increased $1.10 million or 115.66%, to
$2.06million at March 31, 1998 from $955,000 at March 31, 1997, due to the sale
of 152,000 common shares of Landmark Financial Corp. at an initial offering
price of $10 per share less the establishment of the Bank's ESOP for $121, 600
and conversion-related costs of $311,967.
Comparison of Operating Results for the Years Ended March 31, 1998 and March 31,
1997.
Performance Summary. Net income increased $43,539 to $7,467 for the year ended
March 31, 1998, compared to a net loss of $36,072 for the year ended March 31,
1997. The increase in
6
earnings for the year ended March 31, 1998 as compared to the year ended
March 31, 1997 is primarily due to the one-time special assessment of
$43,000 paid to the SAIF fund in the year ended March 31, 1997.
Net Interest Income. Net interest income increased $205,165, or 56.71%, to
$566,918 for the year ended March 31, 1998, from $361,753 for the year ended
March 31, 1997. The increase in net interest income reflects an increase of
$604,546, to $1,292,906 from $688,360 in interest income and a corresponding
increase of $399,381, to $725,988 from $326,607 in interest expense for the year
ended March 31, 1998 as compared to the year ended March 31, 1997. The increase
in interest income reflects increased balances of loans receivable, primarily
consumer auto loans and one-to-four family mortgages that were originated during
the year ended March 31, 1998. Interest expense increased primarily due to the
increase of out of market deposits of $4.39 million.
For the year ended March 31, 1998, the average yield on interest-earning assets
was 8.47% compared to 8.05% for the year ended March 31, 1997. The average cost
of interest-bearing liabilities was 5.10% for the year ended March 31, 1998
which was an increase from 4.28% for the year ended March 31, 1997. The average
balance of interest-earning assets increased $6.72 million or 78.57%, to $15.27
million for the year ended March 31, 1998 as compared to $8.55 million for the
year ended March 31, 1997. During the same period, the average balance of
interest-bearing liabilities increased $6.61 million or 86.58%, to $14.25
million from $7.64 million in fiscal 1997.
Due to higher funding costs, the average interest rate spread was 3.37% for the
year ended March 31, 1998 compared to 3.77% for fiscal 1997. The average net
interest margin also decreased to 3.71% at March 31, 1998 compared to 4.23% for
the year ended March 31, 1997.
Provision for Loan Losses. During the year ended March 31, 1998, the Bank
charged $12,000 against earnings as a provision for loan losses compared to a
provision of $78,000 charged against earnings for the year ended March 31, 1997.
The Bank's loan portfolio has experienced minimal charge-offs in the past two
years and only one in fiscal 1998. The allowance for loan losses at March 31,
1998 is .89% of loans receivable, net as compared to 1.17% of loans receivable,
net at March 31, 1997. The allowance for loan losses as a percentage of
non-performing assets was 84.72% at March 31, 1998 as compared to 235.32% at
March 31, 1997. Total non-performing loans at March 31, 1998 are $144,000, or
1.06% of loans receivable, net, as compared to total non-performing loans at
March 31, 1997 of $47,000 or 0.50% of loans receivable net.
Management regularly reviews the loan portfolio, including problem loans, and
changes in the relative makeup of the loan portfolio to determine whether any
loans require classification or the
7
establishment of additional reserves. Management will continue to monitor its
allowance for loan losses and make future additions to the allowance as economic
conditions dictate. Although the Bank maintains its allowance for loan losses at
a level which it considers to be adequate to provide for potential losses, there
can be no assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods.
Non-interest Income. For the year ended March 31, 1998, non-interest income
decreased $28,069 or 29.29%, to $67,766 from $95,835 for the same period in
1997. The decrease is primarily due to a gain realized in the sale of trading
account securities in the amount of $12,411 in for the year ended March 31, 1998
as compared to a gain of $67,056 for the year ended March 31, 1997. Commissions
received by the Bank for brokering mortgage applications underwritten at other
financial institutions was $19,061 for the year ended March 31, 1998 as compared
to $0 (zero) for the year ended March 31, 1997.
Non-interest Expense. Non-interest expense increased $175,912 or 40.53%, to
$609,972 for the year ended March 31, 1998 from $434,060 for the same period in
1997. During this same period compensation and related benefits expense
increased $118,996, due to the addition of staff to handle the increased loan
and deposit activity. Other operating expenses increased $83,184 due to
additional legal, accounting and regulatory reporting expenses associated with
being a public company.
Income Taxes. Income taxes increased by $23,645 to $5,245 for the year ended
March 31, 1998 from a tax benefit of $18,400 for the year ended March 31, 1997.
The increase is due to the increase in pre-tax income. The Company's effective
tax rate is 34% for the year ended March 31, 1998 and 0.00% for the year ended
March 31, 1997.
8
Average Yields Earned and Rates Paid
Years Ended March 31,
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- ------- ------ ----------- ------- ------ ----------- ------- ------
Interest-earning assets:
Loans receivable (1) ................ $13,250 $ 1,174 8.86% $ 6,960 $ 585 8.41% $ 5,866 516 8.80%
Mortgage-backed securities .......... 117 10 8.55% 290 26 8.97% 249 22 8.84%
Investment securities ............... 849 53 6.24% 393 27 6.87% 314 19 6.05%
FHLB stock .......................... 74 7 9.46% 61 4 6.56% 64 5 7.81%
Interest bearing deposits ........... 978 49 5.01% 846 46 5.44% 1,178 60 5.09%
------- ------- ------- ------- ------- -------
Total interest-earning assets ..... $15,268 $ 1,293 8.47% $ 8,550 $ 688 8.05% $ 7,671 $ 622 8.11%
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Interest-bearing checking ........... $ 463 3 0.65% $ 63 1 1.59% $ 0 0 0.00%
Passbook accounts ................... 3,965 118 2.98% 3,703 108 2.92% 4,185 126 3.01%
Certificate accounts ................ 9,820 605 6.16% 3,870 217 5.61% 2,517 144 5.72%
------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities ....................... $14,248 726 5.10% $ 7,636 326 4.27% $ 6,702 270 4.03%
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Net interest income ................... $ 567 $ 362 $ 352
------- ------- -------
------- ------- -------
Net interest rate spread .............. 3.37% 3.78% 4.08%
----- ----- -----
----- ----- -----
Net earning assets .................... $ 1,020 $ 914 $ 969
------- ------- -------
------- ------- -------
Net yield on average
interest-earning assets ............. 3.71% 4.23% 4.59%
----- ----- -----
----- ----- -----
Ratio of average interest-earning
assets to average interest-bearing
liabilities ......................... 107.16% 111.97% 114.46%
------- ------- -------
------- ------- -------
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(1) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves
9
Years Ended March 31,
---------------------
1998 1997 1996
---- ---- ----
Weighted average yield on loans ................................... 8.86% 8.41% 8.80%
Weighted average yield on mortgage-backed securities .............. 8.55% 8.97% 8.84%
Weighted average yield on investment securities ................... 6.24% 6.87% 6.05%
Weighted average yield on FHLB stock .............................. 9.46% 6.56% 7.81%
Weighted average yield on other interest-bearing deposits ......... 5.01% 5.44% 5.09%
Weighted average yield on all interest-earning assets ............. 8.47% 8.05% 8.11%
Weighted average rate paid on interest-bearing checking ........... 0.65% 1.59% 0.00%
Weighted average rate paid on passbook accounts ................... 2.98% 2.92% 3.01%
Weighted average rate paid on certificate accounts ................ 6.16% 5.61% 5.72%
Weighted average rate paid on all interest-bearing liabilities .... 5.10% 4.27% 4.03%
Interest rate spread (spread between weighted average
rate on all interest-earning assets and all interest-bearing
liabilities) .................................................... 3.37% 3.78% 4.08%
Net interest margin (net interest income as a percentage
of average interest-earning assets) ............................. 3.71% 4.23% 4.59%
10
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- --------------------------
Rate Volume Net Rate Volume Net
(In thousands)
Interest-earning assets:
Loans Receivable ............................................... $ 529 $ 60 $ 589 $ 97 $ (28) $ 69
Investment Securities .......................................... 31 (5) 26 4 0 4
Mortgage-backed securities ..................................... (16) (0) (16) 12 (4) 8
Other .......................................................... 8 (2) 6 (18) 3 (15)
----- ----- ----- ----- ----- -----
Total net change in income on interest-earning assets ......... $ 553 $ 52 $ 605 $ 95 $ (29) $ 66
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
Interest-bearing liabilities:
Passbook accounts .............................................. $ 8 $ 2 $ 10 $ (21) $ 0 $ (21)
Interest-bearing checking ...................................... 6 (4) 2 1 0 1
Certificates of deposit ........................................ 334 54 388 64 12 76
----- ----- ----- ----- ----- -----
Total net change in income on interest-bearing liabilities .... $ 348 $ 52 $ 400 $ 44 $ 12 $ 56
----- ----- ----- ----- ----- -----
Net change in net interest income ................................ $205 $ 10
----- -----
----- -----
11
xxxxxxxxxxxxxxx
Comparison of Operating Results for the Years Ended March 31, 1997 and March 31,
1996.
Performance Summary. Net income decreased $121,410 to a net loss of $36,072 for
the year ended March 31, 1997, compared to net income of $85,338 for the year
ended March 31, 1996. The decrease in earnings for the year ended March 31, 1997
as compared to the year ended March 31, 1996 is partly due to the one-time
special assessment of $43,000 paid to the SAIF fund in the year ended March 31,
1997 and partly due to an increase in compensation expense of $68,673 in order
to prepare for the Bank's loan portfolio growth.
Net Interest income. Net interest income increased $9,414, or 2.67%, to $361,753
for the year ended March 31, 1997, from $352,339 for the year ended March 31,
1996. The increase in net interest income reflects an increase of $65,906, to
$688,360 from $622,454 in interest income and a corresponding increase of
$56,492, to $326,607 from $270,115 in interest expense for the year ended March
31, 1997 as compared to the year ended March 31, 1996. The increase in interest
income reflects increased balances of loans receivable, primarily consumer auto
loans and one-to-four family mortgages that were originated during the year
ended March 31, 1997. Interest expense increased primarily due to the increase
of deposits of $3.77 million.
For the year ended March 31, 1997, the average yield on interest-earning assets
was 8.05% compared to 8.11% for the year ended March 31, 1996. The average cost
of interest-bearing liabilities was 4.28% for the year ended March 31, 1997
which was an increase from 3.99% for the year ended March 31, 1996. The average
balance of interest-earning assets increased $879,340 or 11.46%, to $8.55
million for the year ended March 31, 1997 as compared to $7.67 million for the
year ended March 31, 1996. During the same period, the average balance of
interest-bearing liabilities increased $934,768 or 13.95%, to $7.64 million from
$6.70 million in fiscal 1996.
Due to higher funding costs, the average interest rate spread was 3.77% for the
year ended March 31, 1997 compared to 4.13% for fiscal 1996. The average net
interest margin also decreased to 4.23% at March 31, 1997 compared to 4.59% for
the year ended March 31, 1996.
Provision for Loan Losses. During the year ended March 31, 1997, the Bank
charged $78,000 against earnings as a provision for loan losses compared to a
provision of $0 (zero) charged against earnings for the year ended March 31,
1996. The increase to the loan provision was made in order to bring the loss
allowance in line with the overall thrift industry. The allowance for loan
losses at March 31, 1997 was 1.17% of loans receivable, net as compared to 0.58%
of loans receivable, net at March 31, 1996. The allowance for loan losses as a
percentage of non-performing assets was 235.32% at March 31, 1997 as compared to
0.00% at March 31, 1996. Total non-performing loans at December 31, 1997 are
$47,000, or 0.50% of loans receivable, net, as compared to total non-performing
loans at March 31, 1997 of $0 or 0.00% of loans receivable net.
Non-interest Income. For the year ended March 31, 1997, non-interest income
increased $85,555 or 832.25%, to $95,835 from $10,280 for the year ended
March 31, 1996. The increase is primarily due to a gain realized in the sale
of trading account securities in the amount of $67,056 for the year ended
March 31, 1997. The remaining increase was due to increased loan fees as a
result of the increased size of the loan portfolio.
Non-interest Expense. Non-interest expense increased $194,879 or 81.48%, to
$434,060 for the year ended March 31, 1997 from $239,181 for the year ended
March 31, 1996. During this same period compensation and related benefits
expense increased $68,673 due to the addition of staff to handle the increased
lending activity. Also during fiscal year 1997 there was a one-time special
assessment of $43,000 paid to help recapitalize the SAIF fund. Other operating
expenses increased $76,780 due to an increase in resources demanded to grow the
loan portfolio.
Income Taxes. Income taxes decreased by $56,500 to a benefit of $18,400 for the
year ended March 31, 1997 from a tax expense of $38,100 for the year ended
March 31, 1996. The increase is due to the increase in pre-tax income. The
Company's effective tax rate is 0.00% for the year ended March 31, 1997 and
31% for the year ended March 31, 1996.
xxxxxxxxxxxxxxxxxxxx
Asset and Liability Management
One of the Bank's principal financial objectives is to achieve long-term
profitability while reducing its exposure to fluctuations in interest rates. The
Bank has sought to reduce exposure of its earnings to changes in market rates by
managing the mismatch between asset and liability maturities and interest rates.
The principal element in achieving this objective has been to increase the
interest-rate sensitivity of the Bank's assets by originating loans with
interest rates subject to periodic adjustment to market conditions and of
originating consumer loans with maturities of five years and less. The Bank
currently retains longer term fixed rate loans in the portfolio as part of its
effort to increase the size and the yield of its loan portfolio and to reduce
its mortgage-backed securities portfolio. The Bank has adopted an informal
policy, which is subject to change from time to time, to increase the longer
term fixed rate loans in its portfolio so that such loans comprise the majority
of loans in the overall portfolio mix. In addition, the Bank has invested in
short to intermediate term investments to hedge against decreases in interest
rates.
The Company has historically relied upon retail deposit accounts in the form of
savings accounts and certificates of deposits as its primary source of funds.
Management believes that reliance upon retail deposits accounts as a source of
funding, compared to brokered deposits or long-term borrowings, reduces the
effects of interest rate fluctuations because these deposits generally represent
a stable source of funds from within and around the surrounding communities.
The Bank's Board of Directors has formulated and Asset Liability Management
Policy designed to promote long-term profitability while managing interest-rate
risk. The Company recognizes the inherent risk in its interest-sensitive gap
position, particularly in periods of fluctuating interest rates.
Liquidity and Capital Resources
The Bank's principal sources of funds are deposits, principal and interest
payments on loans, deposits in other insured institutions and investment
securities. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and early loan prepayments are more
influenced by interest rates, general economic conditions and competition.
Additional sources of funds may be obtained from the Federal Home Loan Bank of
New York by utilizing numerous available products to meet funding needs. The
Bank has a credit line with the Federal Home Loan Bank of New York in the amount
of $1,576,600, which expires on September 11, 1998. It is management's intention
to renew the credit line prior to its expiration. At March 31, 1998, the Bank
had no borrowings outstanding to the FHLB.
In light of the competition for deposits, the Bank may utilize the funding
source of the FHLB to meet demand in accordance with the Bank's growth plans.
The wholesale funding sources may allow the Bank to obtain a lower cost of
funding and create a more efficient liability match to the respective assets
being funded.
12
The Bank is required to maintain minimum levels of liquid assets as defined by
regulations. The required percentage is currently 5.0% of net withdrawable
savings deposits and borrowings payable on demand or in one year or less. The
Bank has maintained its liquidity ratio at levels exceeding the minimum
requirement. The eligible liquidity ratio at March 31, 1998 and March 31, 1997
were 18.06% and 12.45%, respectively.
The Bank's most liquid assets are cash and cash equivalents. For these purposes,
all short-term investments with a maturity of three months or less at date of
purchase are considered cash equivalents. Cash and cash equivalents for the
periods ended December 31, 1997 and March 31, 1997 were $1,530,236 and $709,458,
respectively. The increase was primarily due to the fact that the majority of
the proceeds from the sale of common stock were invested at the FHLB.
At March 31, 1998 the Bank had neither outstanding loan commitments nor loans
awaiting disbursement. Additionally, the Company is constructing a new
headquarters/branch facility in Canajoharie, New York, which should be completed
by August 1, 1998 with at an estimated cost of $450,000. Prior to March 31,
1998, approximately $35,000 was disbursed for the purchase of the land. It is
anticipated that sufficient funds will be available to meet loan commitments
including loan applications received and in process, as well as, funds for the
construction of the new facility.
Certificates of deposit, which are scheduled to mature in one year or less at
March 31, 1998, were $4.70 million. Management believes that a significant
portion of such deposits will remain with the Bank.
At March 31, 1998, the Bank had tangible capital of $2,166,749, or 12.9% of
total adjusted assets, which is approximately $1,914,549 above the minimum
requirement of 1.5% of adjusted total assets in effect on that date. The Bank
had core capital of $2,166,749, or 12.9% of total adjusted assets, which is
approximately $1,494,349 above the minimum leverage ratio of 4.0% in effect on
that date. The bank had total capital of $2,166,749 and total risk-weighted
assets of $9.7million, or total capital of 22.3% of risk weighted assets. This
was $1,400,449 above the 8.0% requirement in effect on that date.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto, presented herein, have
been prepared in accordance with generally accepted accounting principles, which
generally requires the measurement of financial position and operating results
in terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally have a
more significant impact on a financial institution's performance than do general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
13
HARVAZINSKI & MONTANYE, LLP
Certified Public Accountants
Albany, New York
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Landmark Financial Corp. and Subsidiary
We have audited the accompanying consolidated statements of financial
condition of Landmark Financial Corp. (the Company) and subsidiary as of March
31, 1998 and 1997, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Landmark
Financial Corp. and subsidiary as of March 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/S/ HARVAZINSKI & MONTANYE, LLP
-------------------------------
Albany, New York
May 14, 1998
- --------------------------------------------------------------------------------
14
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
March 31,
1998 1997
---------- ----------
ASSETS
Cash (including interest bearing deposits
$1,490,000, 1998; $120,000, 1997) ........................... $ 1,530,236 $ 709,458
Trading account securities ....................................... -- 69,324
Mortgage-backed securities, held-to-maturity ..................... 74,080 257,096
Investment securities
Securities held-to-maturity ................................. -- 200,000
Securities available-for-sale ............................... 1,103,916 397,793
Loans receivable, net ............................................ 13,640,142 9,392,212
Investments required by law -stock in Federal Home Loan
Bank of New York, at cost ................................... 87,400 58,500
Accrued interest receivable ...................................... 86,143 38,630
Premises and equipment, net of accumulated depreciation .......... 197,234 155,379
Deferred tax asset ............................................... 7,100 7,100
Other assets ..................................................... 84,787 40,309
---------- ----------
Total Assets ....................................... $ 16,811,038 $ 11,325,801
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDES' EQUITY
LIABILITIES
Accounts payable ............................................ $ 3,851 $ 7,920
Deposits .................................................... 14,628,856 10,237,301
Advance payments by borrowers for property taxes and
insurance ............................................... 97,453 107,277
Other liabilities ........................................... 21,523 18,397
---------- ----------
Total liabilities ....................................... 14,751,683 10,370,895
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock of $.10 par value; 100,000 shares
authorized, none issued ................................. -- --
Common stock of $.10 par value; 900,000 shares authorized;
152,000 and -0- shares issued and outstanding in 1998
and 1997, respectively .................................. 15,200 --
Additional paid-in capital .................................. 1,192,833 --
Retained earnings, substantially restricted ................. 963,752 956,285
Unrealized gain (loss) on securities available-for-sale,
net of applicable deferred income taxes ................. 5,036 (1,379)
Unearned ESOP shares ........................................ (117,466) --
---------- ----------
2,059,355 954,906
---------- ----------
Total Liabilities and Stockholders' Equity ......... $ 16,811,038 $ 11,325,801
---------- ----------
---------- ----------
- --------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
15
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Years Ended
March 31,
1998 1997
---------- ----------
INTEREST INCOME
Loans receivable
First mortgage loans ..................... $ 742,948 $ 545,030
Other loans .............................. 431,341 39,932
Investment securities and interest
bearing deposits ............................ 118,617 103,398
---------- ----------
Total interest income .................. 1,292,906 688,360
INTEREST EXPENSE
Interest on deposits ......................... 725,988 326,607
---------- ----------
Net interest income ................. 566,918 361,753
PROVISION FOR LOAN LOSSES ......................... 12,000 78,000
---------- ----------
Net interest income after provision
for loan losses ................................ 554,918 283,753
---------- ----------
NONINTEREST INCOME
Loan fees and service charges ................ 28,559 28,779
Trading account gain on FREDDIE MAC stock .... 12,411 67,056
Other noninterest income ..................... 26,796 --
---------- ----------
Total noninterest income ............... 67,766 95,835
---------- ----------
NONINTEREST EXPENSE
General and administrative expenses
Compensation, payroll taxes and
fringe benefits ........................ 303,150 184,154
Advertising and business promotion ....... 9,156 6,030
Building occupancy and equipment expenses,
including depreciation ................. 37,695 34,086
Federal insurance premiums ............... 8,121 55,256
Data processing expenses ................. 36,804 22,672
Other operating expenses ................. 215,046 131,862
---------- ----------
Total noninterest expense .............. 609,972 434,060
---------- ----------
Income (loss) before income taxes ... 12,712 (54,472)
PROVISION FOR INCOME TAX EXPENSE (BENEFIT) ........ 5,245 (18,400)
---------- ----------
Net income (loss) ................... $ 7,467 $ (36,072)
---------- ----------
---------- ----------
NET INCOME PER COMMON SHARE
Basic ........................................ $ .05 $ --
---------- ----------
---------- ----------
Diluted ...................................... $ .05 $ --
---------- ----------
---------- ----------
- --------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
16
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY
Years Ended March 31, 1998 and 1997
- --------------------------------------------------------------------------------
Unrealized
gain (loss)
on securities
available-
for-sale, net
Additional of applicable Unearned Total
Common stock paid-in Retained deferred ESOP Stockholders'
Shares Amounts Capital Earnings Income Taxes Shares Equity
------ ------- ---------- -------- ------------- -------- -------------
BALANCES AT
March 31, 1996 -- $-- $-- $ 992,357 $ 38,907 $-- $ 1,031,264
Net income (loss) -- -- -- (36,072) -- -- (36,072)
Change in unrealized
gain (loss) on
securities available
for-sale, net of
applicable deferred
income taxes -- -- -- -- (40,286) -- (40,286)
------- ----------- ----------- --------- --------- ----------- -----------
BALANCES AT
March 31, 1997 -- -- -- 956,285 (1,379) -- 954,906
Net income -- -- -- 7,467 -- -- 7,467
Sale of common stock,
net of issuance costs 152,000 15,200 1,192,833 -- -- -- 1,208,033
Unearned ESOP shares -- -- -- -- -- (121,600) (121,600)
ESOP shares earned -- -- -- -- -- 4,134 4,134
Change in unrealized
gain (loss) on
securities available-
for-sale, net of
applicable deferred
income taxes -- -- -- -- 6,415 -- 6,415
------- ----------- ----------- --------- --------- ----------- -----------
BALANCES AT
March 31, 1998 152,000 $ 15,200 $ 1,192,833 $ 963,752 $ 5,036 $ (117,466) $ 2,059,355
------- ----------- ----------- --------- --------- ----------- -----------
------- ----------- ----------- --------- --------- ----------- -----------
- --------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
17
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Years Ended
March 31,
1998 1997
----------- -----------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES
Net income (loss) ............................ $ 7,467 $ (36,072)
Adjustments to reconcile net income to net
cash provided by (used in)
operating activities
Depreciation ............................. 18,456 11,570
Amortization (accretion), net ............ 2,066 2,755
Provision for loan losses ................ 14,437 78,000
Deferred income taxes .................... -- (18,900)
Allocation of ESOP shares ................ 4,134 --
Decrease (increase) in
Accrued interest receivable ......... (47,513) (19,343)
Trading account securities .......... 69,324 (69,324)
Other assets ........................ (44,478) (30,601)
Increase (decrease) in
Accounts payable .................... (4,069) 5,581
Other liabilities ................... 3,126 17,843
----------- -----------
22,950 (58,491)
----------- -----------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES
Net increase in loans receivable ............. (4,262,367) (3,942,580)
Proceeds from sale of investments
required by law ............................. -- 5,700
Purchases of available-for-sale securities ... (701,774) (399,063)
Proceeds from principal repayments of
mortgage-backed securities .................. 47,483 82,618
Purchase of premises and equipment ........... (60,311) (113,407)
Purchase of investments required by law ...... (28,900) --
Proceeds of held-to-maturity securities ...... 335,533 --
Proceeds from issuance of common stock, net
of issuance costs ........................... 1,086,433 --
----------- -----------
(3,583,903) (4,366,732)
----------- -----------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES
Net increase in deposits ..................... 4,391,555 3,772,228
Increase (decrease) in advances from borrowing
taxes and insurance ......................... (9,824) 11,880
----------- -----------
4,381,731 3,784,108
----------- -----------
Net increase (decrease) in cash ..... 820,778 (641,115)
CASH, beginning of year ........................... 709,458 1,350,573
----------- -----------
CASH, end of year ............................... $ 1,530,236 $ 709,458
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES:
Cash paid for:
Income taxes ............................. $ 17,350 $ 17,140
----------- -----------
----------- -----------
Interest $ ............................... 725,988 $ 326,607
----------- -----------
----------- -----------
Increase (decrease) on unrealized gain
on securities available-for-sale ......... $ 6,415 $ (40,286)
----------- -----------
----------- -----------
- --------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
18
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Organization
On November 13, 1997, Landmark Community Bank (the Bank) converted from a
federally chartered mutual savings bank to a federally chartered stock
savings bank, at which time all of the capital stock of the converted bank
was acquired by Landmark Financial Corp. (the Company), a Delaware
Corporation. The Company was organized to acquire all of the stock issued
by the Bank upon consummation of the stock conversion. Prior to November
13, 1997, the Company had no assets or liabilities and had not engaged in
any business other than as necessary to complete its organization and the
conversion. On November 13, 1997, in connection with the stock conversion,
the Company issued and sold 152,000 shares of its common stock, par value,
$0.10 per share, in a subscription and community offering to the Company's
Employee Stock Ownership Plan (ESOP), the Bank's members and the general
public. Total net proceeds of the subscription and community offering,
after conversion expenses of approximately $311,967, were approximately
$1,208,033. The transaction was accounted for in a manner similar to a
pooling-of-interests method. Accordingly, the accounting basis for assets,
liabilities and equity accounts remained the same as prior to the
conversion.
The only business of the Company is the ownership of the Bank. The Bank
provides a variety of financial services to the greater Canajoharie, New
York area. The Bank's primary sources of revenue are single-family
residential mortgages and consumer loans.
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying consolidated financial statements
follows.
2. Basis of Consolidation
The consolidated financial statements include the accounts of the Landmark
Financial Corp. (the Company) and its wholly-owned subsidiary Landmark
Community Bank (the Bank). Amounts for 1997 are those of the Bank. All
material intercompany balances have been eliminated in consolidation.
3. Cash and Time Deposits
Cash is defined to include all checking and demand deposits, as well as
certificates of deposit with an original maturity when purchased of three
months or less. Time deposits include certificates of deposit with an
original maturity in excess of three months.
The Company maintains cash and time deposits at one financial institution
in Canajoharie, New York, totaling $249,170 at March 31, 1998. These
balances are insured by the Federal Deposit Insurance Corporation up to
$100,000.
4. Investment Securities
Trading Securities: Securities that are held for short-term resale are
classified as trading account securities and recorded at their fair values.
Realized and unrealized gains and losses on trading account securities are
included in noninterest income.
19
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
4. Investment Securities - continued
Securities Held-to-Maturity: Government and Federal agency securities that
management has the positive intent and ability to hold to maturity are
reported at cost, adjusted for amortization of premiums and accretion of
discounts that are recognized in interest income using the interest method
over the period to maturity. Mortgage-backed securities represent
participating interests in pools of long-term first mortgage loans
originated and serviced by issuers of the securities. Mortgage-backed
securities are carried at unpaid principal balances, adjusted for
unamortized premiums and unearned discounts. Premiums and discounts are
amortized using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments.
Securities Available-for-Sale: Available-for-sale securities consist of
investment securities not classified as trading securities nor as
held-to-maturity securities. Unrealized holding gains and losses, net of
tax, on available-for-sale securities are reported as a net amount in a
separate component of stockholders' equity until realized. Gains and losses
on the sale of available-for-sale securities are determined using the
specific-identification method. The amortization of premiums and the
accretion of discounts are recognized in interest income using the interest
method over the period of maturity.
Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than
temporary result in write-downs of the individual securities to their fair
value. The related write-downs are included in earnings as realized losses.
The Company recognized no write downs in 1998 or 1997.
5. Loans Receivable
Loans are stated at unpaid principal balances, less the allowance for loan
losses.
On April 1, 1995, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 114, Accounting for Creditors for
Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures. The
Statements provide guidance in defining and measuring loan impairment. A
loan is considered impaired when it is probable that the Company will be
unable to collect all amounts of principal and interest under the original
terms of the agreement. Accordingly, the Company measures all nonaccrual
and restricted commercial real estate and commercial loans (if any)
individually, based on the present value of expected future cash flows,
discounted at the loans effective interest rate or, at the loan's
observable market price or the fair value of collateral. The statements do
not apply to large groups of small balance, homogeneous loans such as
residential real estate, installment and consumer loans, that are
collectively evaluated for impairment. The adoption of SFAS No. 114 and
No.118 resulted in no prospective adjustment to the allowance for loan
losses.
SFAS No. 91, Accounting for Non-refundable Fees and Costs Associated
with Originating or Acquiring Loans and Initial Direct Costs of Leases,
states that loan fees and certain direct loan origination costs are
normally deferred and the net fee or cost is recognized as an adjustment
to interest income using the interest method, over the contractual life
of the loans, adjusted for
20
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
5. Loans Receivable - continued
estimated prepayments based on the Company's historical prepayment
experience. Commitment fees and costs relating to commitments whose
likelihood of exercise is remote should be recognized over the commitment
period on a straight-line basis. If the commitment is subsequently
exercised during the commitment period, the remaining unamortized
commitment fee at the time of exercise should be recognized over the life
of the loan as an adjustment of yield. Loan fees and certain direct loan
origination costs are not deferred at the Company, however, due to
immateriality. These fees are recognized in the period collected. The
Company does not charge commitment fees.
Interest income generally is not recognized on specific impaired loans
unless the likelihood of further loss is remote. Interest payments received
on such loans are applied as a reduction of the loan principal balance.
Interest income on other impaired loans is recognized only to the extent of
interest payments received.
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the
loan portfolio. The amount of the allowance is based on management's
evaluation of the collectibility of the loan portfolio, including the
nature of the portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, economic conditions and other risks
inherent in the portfolio. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated
cash flows. The allowance is increased by a provision for loan losses,
which is charged to expense, and reduced by charge-offs, net of recoveries.
6. Premises and Equipment
Premises and equipment are reported at cost. Expenditures for acquisitions,
renewals, and betterments are capitalized, whereas maintenance and repair
costs are expensed as incurred. When equipment is retired or otherwise
disposed of, the appropriate accounts are relieved of costs and accumulated
depreciation and any resultant gain or loss is credited or charged to
income.
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated useful lives on a
straight-line basis. The estimated lives used in determining depreciation
vary from five (5) to thirty-one and one-half (31.5) years.
7. Income Taxes
Income taxes are provided for the tax effects of the transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of
investments, allowance for loan losses, and the use of the modified cash
basis for income tax reporting purposes. The deferred tax assets and
liabilities represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred tax assets and liabilities
are reflected at income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or settled.
As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. The
Company and its subsidiary file consolidated federal and separate state
income tax returns. Income taxes are allocated to the Company and its
Subsidiary as though separate federal tax returns are being filed.
21
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
8. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the estimated losses on loans and foreclosed
real estate, if any. Management obtains independent appraisals for
significant properties.
While management uses available information to recognize losses on loans
and foreclosed real estate, further reductions in the carrying amounts of
loans and foreclosed assets may be necessary based on changes in local
economic conditions. In addition, regulatory agencies, as an integral part
of their examination process, periodically review the estimated losses on
loans and foreclosed real estate. Such agencies may require the Company to
recognize additional losses based on their judgments about information
available to them at the time of their examination. Because of these
factors, it is reasonably possible that the estimated losses on loans and
foreclosed real estate may change materially in the near term. However, the
amount of the change that is reasonably possible cannot be estimated.
9. Fair Value of Financial Instruments
Effective April 1, 1995 the Company implemented Statement of Financial
Accounting Standards No. 107, Disclosures about Fair Value of Financial
Instruments, which requires disclosure of fair market value information
about financial instruments, whether or not recognized in the statement of
financial condition. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions
used, including the discount rate and estimates of future cash flows. In
that regard, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. Statement No. 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the
statement of financial condition for cash and cash equivalents
approximate those assets' fair values.
Time deposits: Fair values for time deposits are estimated using a
discounted cash flow analysis that applies interest rates currently
being offered on certificates to a schedule of aggregated contractual
maturities on such time deposits.
22
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
9. Fair Value of Financial Instruments - continued
Investment securities including trading account securities: Fair values
for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying
amounts. The fair values for other loans (for example, fixed rate real
estate) are estimated using discounted cash flow analysis, based on
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk
characteristics. Fair values for impaired loans are estimated using
discounted cash flow analysis or underlying collateral values, where
applicable. The carrying amount of accrued interest receivable
approximates its fair value.
Deposits: The fair values disclosed for demand deposits (for example,
interest-bearing passbook accounts) are, by definition, equal to the
amount payable on demand at the reporting date (that is, their carrying
amounts). The fair values for certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated
contractual maturities on such time deposits.
Advance payments by borrowers for taxes and insurance (escrows): The
carrying amount of escrow accounts approximate fair value.
Accrued interest: The carrying amounts of accrued interest approximate
the fair values.
Loan commitments: Fees charged for commitments to extend credit are not
significant and are offset by associated credit risk with respect to
certain amounts expected to be funded. Accordingly, the fair value of
the financial instruments is immaterial.
10. Statements of Cash Flows
The Company considers all cash and amounts due from depository institutions
and interest-bearing deposits in other banks to be cash equivalents for
purposes of the statements of cash flows.
11. Interest Rate Risk
The Bank is engaged principally in providing first mortgage loans (both
adjustable rate and fixed rate mortgage loans) and consumer loans to
individuals (See Note C for the composition of the loan portfolio at March
31, 1998 and 1997). Mortgage and consumer loans and investment securities
are funded primarily with short-term liabilities which have interest rates
that vary with market rates over time. Net interest income and the market
value of net interest-earning assets will fluctuate based on changes in
interest rates and changes in the levels of interest-sensitive assets and
liabilities. The actual duration of interest-earning assets and
interest-bearing liabilities may differ significantly from the stated
duration as a result of prepayment, early withdrawals, and similar factors.
23
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
12. Employee Stock Ownership Plan
The cost of common shares issued to the ESOP but not yet allocated to
participants is presented in the consolidated balance sheet as a reduction
of stockholders' equity. Compensation expense is recorded based on the
market price of the shares as they are committed to be released for
allocation to participant accounts. The difference between the market price
and the cost of shares committed to be released is recorded as an
adjustment to paid-in capital.
Shares are considered outstanding for earnings per share calculations as
they are committed to be released; unallocated shares are not considered
outstanding.
13. Earnings Per Common Share
Earnings per common share is computed under the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Amounts
reported as Earnings per Common Share for year ended March 31, 1998 reflect
the earnings available to common stockholders for the year divided by the
weighted average number of common shares outstanding during the year.
14. Reclassification
Certain 1997 accounts have been reclassified to conform with the 1998
presentation.
NOTE B - INVESTMENT AND MORTGAGED-BACKED SECURITIES
Investment and mortgage-backed securities have been classified according to
management's intent. The amortized cost of securities and their approximate
fair values are as follows:
Securities held-to-maturity
March 31, 1998 March 31, 1997
------------------------------------------ --------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
U.S.
government
and federal
agencies $ -- $ -- $ -- $ -- $ 200,000 $ -- $ (3,243) $ 196,757
Mortgage-
backed (GNMA)
securities 74,080 -- (2,431) 71,649 257,096 -- (9,309) 247,787
---------- --------- --------- ---------- --------- -------- -------- ---------
$ 74,080 $ -- $ (2,431) $ 71,649 $ 457,096 $ -- $(12,552) $ 444,544
---------- --------- --------- ---------- --------- -------- -------- ---------
---------- --------- --------- ---------- --------- -------- -------- ---------
24
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE B - INVESTMENT AND MORTGAGED-BACKED SECURITIES - Continued
Securities available-for-sale
March 31, 1998 March 31, 1997
------------------------------------------ ------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
U.S.
government
and federal
agencies $1,098,880 $ 5,036 $ -- $1,103,916 $ 399,172 $ -- $ (1,379) $ 397,793
---------- --------- ------- ---------- --------- ------ -------- ---------
---------- --------- ------- ---------- --------- ------ -------- ---------
The following is a summary of maturities of securities held-to-maturity and
available-for-sale as of March 31, 1998:
Securities held-to-maturity Securities available-for-sale
--------------------------- -----------------------------
Amounts maturing in: Amortized Amortized
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
One year or less $ -- $ -- $ 299,959 $ 300,781
After one year through five years -- -- 398,921 404,407
After five years through ten years -- -- 400,000 398,728
After ten years 74,080 71,649 -- --
------------ ------------ --------------- --------------
$ 74,080 $ 71,649 $ 1,098,880 $ 1,103,916
------------ ------------ --------------- --------------
------------ ------------ --------------- --------------
The amortized cost and fair value of mortgage-backed securities are
presented in the held-to-maturity category by contractual maturity in the
preceding table. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations without call or prepayment penalties.
In 1997, debt securities with an amortized cost of $200,000 were
transferred from available-for-sale to held-to-maturity and equities with a
fair market value of $69,324 were transferred from available-for-sale to
trading account securities. The equity securities had an unrealized gain of
$67,056 which was recognized in net income during 1997. There were no
securities transferred between classifications during 1998.
25
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE C - LOANS RECEIVABLE, NET
The Company's loans receivable are summarized as follows:
March 31,
1998 1997
---- ----
Conventional first mortgages on real estate (1-4 family) $ 8,686,915 $ 7,185,096
Property improvement loans ............................. 15,566 29,871
Loans to depositors, secured by savings ................ 101,744 228,942
Consumer loans ......................................... 3,818,123 1,558,002
Commercial ............................................. 1,139,794 587,418
------------ ------------
13,762,142 9,589,329
Allowance for loan losses .............................. (122,000) (110,000)
Loans in process ....................................... -- (87,117)
------------ ------------
$ 13,640,142 $ 9,392,212
------------ ------------
------------ ------------
An analysis of the allowance for loan losses is as follows:
March 31,
1998 1997
---- ----
Balance, beginning of year $ 110,000 $ 32,000
Loans charged off ........ (2,437) --
Recoveries ............... -- --
Provision for losses ..... 14,437 78,000
--------- ---------
Balance, end of year ..... $ 122,000 $ 110,000
--------- ---------
--------- ---------
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 $ 191,919
Additions ................ 3,700
Payments ................. (7,013)
Change in status ......... (35,811)
---------
Balance, end of year ..... $ 152,795
---------
---------
26
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE D - STOCK IN FEDERAL HOME LOAN BANK OF NEW YORK
The Company has its savings shares insured by the Federal Savings and Loan
Insurance Corporation. The Federal Home Loan Bank requires all
participating savings and loan associations to purchase Federal Home Loan
Bank stock in an amount equal to one percent (1%) of outstanding first
mortgage loans.
NOTE E - ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
March 31,
1998 1997
---- ----
Loans .................... $74,919 $30,783
Mortgage-backed securities 507 826
Investments and other .... 10,717 7,021
------- -------
$86,143 $38,630
------- -------
------- -------
NOTE F - PREMISES AND EQUIPMENT
A summary of the Company's premises and equipment is as follows:
March 31,
1998 1997
---- ----
Land and building ........... $ 58,405 $ 14,000
Improvements ................ 128,721 128,425
Equipment ................... 118,628 103,018
-------- --------
305,754 245,443
Less accumulated depreciation 108,520 90,064
-------- --------
$197,234 $155,379
-------- --------
-------- --------
Depreciation expense for 1998 and 1997 was $18,456 and $11,570,
respectively.
27
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE G - DEPOSITS
Deposit account balances at March 31, 1998 and 1997, are summarized as
follows:
March 31,
1998 1997
----------------------- ----------------------
Amount % Amount %
------ ----- -------- -----
Balance by interest rate:
Interest-bearing checking accounts ... $ 233,742 1.60% $ 235,154 2.30%
Non-interest bearing checking accounts 225,564 1.54% 297,578 2.91%
Passbook accounts .................... 3,583,967 24.50% 3,584,228 35.01%
Certificates of deposit .............. 10,585,583 72.36% 6,120,341 59.78%
---------- ----- --------- -----
$14,628,856 100.00% $10,237,301 100.00%
---------- ----- --------- -----
---------- ----- --------- -----
The aggregate amount of short-term jumbo certificates of deposit with a
minimum denomination of $100,000 was approximately $725,000 and $307,000 at
March 31, 1998 and 1997, respectively. Deposit amounts in excess of
$100,000 are not Federally insured.
At March 31, 1998 scheduled maturities of certificates of deposit are as
follows:
March 31, 1999 $ 4,707,520
2000 3,686,654
2001 1,575,061
2002 and thereafter 616,348
---------------
$ 10,585,583
---------------
---------------
Interest expense for 1998 and 1997 was $2,782 and $594, respectively for
interest-bearing checking accounts, $117,855 and $108,654, respectively for
passbook accounts, and $605,351 and $217,359, respectively for certificates
of deposit.
NOTE H - INCOME TAXES
The Company files federal and state income tax returns on a calendar year
basis. If certain conditions are met in determining taxable income, the
Company is allowed a special bad debt deduction based on specified
experience formulas. The Company used the experience formula in 1997 and
anticipates using the same method in 1998.
Income tax expense (benefit) is summarized as follows:
Federal
Current $ 6,000 $ (9,700)
Deferred -- (5,000)
-------- --------
6,000 (14,700)
-------- --------
28
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE H - INCOME TAXES - Continued
State
Current $ (755) $ (1,600)
Deferred -- (2,100)
-------- --------
(755) (3,700)
$ 5,245 $(18,400)
-------- --------
-------- --------
Taxes paid during the years ended March 31, 1998 and 1997, were $17,350 and
$17,140, respectively.
The provision for income taxes (benefit) differs from that computed by
applying federal statutory rates to income (loss) before income tax
expense, as indicated in the following analysis:
Year Ended
March 31,
1998 1997
---- ----
Expected tax provision (benefit) at 34% $ 2,500 $(18,500)
State franchise tax ................... -- 1,000
Other, net ............................ 2,745 (900)
-------- --------
$ 5,245 $(18,400)
-------- --------
-------- --------
Effective tax rate (benefit) for 1998 and 1997 was 34%.
Deferred tax liabilities have been provided for taxable temporary
differences related to unrealized gains on trading account securities and
accrued interest receivable. Deferred tax assets have been provided for
deductible temporary differences related to the allowance for loan losses,
accounts payable, other liabilities and a net operating loss carryforward.
The net deferred tax assets (liabilities) in the accompanying statements of
financial condition include the following components:
March 31,
1998 1997
---- ----
Deferred tax liabilities $(50,300) $(31,300)
Deferred tax assets .... 57,400 38,400
-------- --------
Net deferred tax assets $ 7,100 $ 7,100
-------- --------
-------- --------
Included in retained earnings at March 31, 1998 and 1997 is approximately
$141,000 in bad debt reserves for which no deferred federal income tax
liability has been recorded. These amounts represent allocations of income
to bad debt deductions for tax purposes only. Reduction of these reserves
for purposes other than tax bad-debt losses or adjustment arising from
carryback of net operating losses would create income for tax purposes,
which would be subject to the then-current corporate income tax rate. The
unrecorded deferred liability on these amounts was approximately $48,000 at
March 31, 1998 and 1997, respectively.
29
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE I - REGULATORY MATTERS
The Company and the Bank are subject to various regulatory capital
requirements administered by its primary federal regulator, the Office of
Thrift Supervision (OTS). Failure to meet the minimum regulatory capital
requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators, that if undertaken, could have a
direct material affect on the Company and the consolidated financial
statements. Under the regulatory capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Company and the Bank
must meet specific capital guidelines involving quantitative measures of
the Company and the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Company and the Bank's capital amounts and classification
under the prompt corrective action guidelines are also subject to
qualitative judgments by the regulators and components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of:
total risk-based capital and Tier I capital to risk-weighted assets (as
defined in the regulations), Tier I capital to adjusted total assets (as
defined), and tangible capital to adjusted total assets (as defined).
Management believes, as of March 31, 1998, that the Company and the Bank
meets all capital adequacy requirements to which they are subject.
As of March 31, 1998, the most recent notification form the OTS, the
Company and the Bank was categorized as well capitalized under the
regulatory framework for prompt corrective action. To remain categorized as
well capitalized, the Company will have to maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed in
the table below. There are no conditions or events since the most recent
notification that management believes have changed the Company and the
Bank's prompt corrective action category.
For Capital
Actual Adequacy Purposes
Amount Ratio Amount Ratio
------ ----- ------ -----
As of March 31, 1998:
Total Risk-Based Capital
(to Risk-Weighted Assets) . $ 2,166,749 22.3% Greater than or equal to $ 766,300 Greater than or equal to 8.0%
Tier I Capital
(to Risk-Weighted Assets) $ 2,166,749 22.3% Greater than or equal to $ 388,200 Greater than or equal to 4.0%
Tier I Capital
(to Adjusted Total Assets) $ 2,166,749 12.9% Greater than or equal to $ 672,400 Greater than or equal to 4.0%
Tangible Capital
(to Adjusted Total Assets) $ 2,166,749 12.9% Greater than or equal to $ 252,200 Greater than or equal to 1.5%
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount Ratio
------ -----
As of March 31, 1998:
Total Risk-Based Capital
(to Risk-Weighted Assets) . Greater than or equal to $970,500 Greater than or equal to 10.0%
Tier I Capital
(to Risk-Weighted Assets) Greater than or equal to $582,300 Greater than or equal to 6.0%
Tier I Capital
(to Adjusted Total Assets) Greater than or equal to $840,600 Greater than or equal to 5.0%
Tangible Capital
(to Adjusted Total Assets) Greater than or equal to $252,200 Greater than or equal to 1.5%
30
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE I - REGULATORY MATTERS - Continued
For Capital
Actual Adequacy Purposes
Amount Ratio Amount Ratio
------ ----- ------ -----
As of March 31, 1997:
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 956,285 16.0% Greater than or equal to $ 478,300 Greater than or equal to 8.0%
Tier I Capital
(to Risk-Weighted Assets) $ 956,285 16.0% Greater than or equal to $ 239,200 Greater than or equal to 4.0%
Tier I Capital
(to Adjusted Total Assets) $ 956,285 8.4% Greater than or equal to $ 453,000 Greater than or equal to 4.0%
Tangible Capital
(to Adjusted Total Assets) $ 956,285 8.4% Greater than or equal to $ 169,900 Greater than or equal to 1.5%
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount Ratio
------ -----
As of March 31, 1997:
Total Risk-Based Capital
(to Risk-Weighted Assets) Greater than or equal to $597,800 Greater than or equal to 10.0%
Tier I Capital
(to Risk-Weighted Assets) Greater than or equal to $358,700 Greater than or equal to 6.0%
Tier I Capital
(to Adjusted Total Assets) Greater than or equal to $566,300 Greater than or equal to 5.0%
Tangible Capital
(to Adjusted Total Assets) Greater than or equal to $169,900 Greater than or equal to 1.5%
On November 13, 1997, the date of the Bank's conversion to a stock
institution, the Bank established a liquidation account totaling $956,000.
The liquidation account is maintained for the benefit of eligible
depositors who continue to maintain their accounts at the Bank after the
conversion. The liquidation account will be reduced annually to the extent
that eligible depositors have reduced their qualifying deposits. Subsequent
increases will not restore an eligible account holder's interest in the
liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying
balances for accounts then held. The liquidation account balance is not
available for payment of dividends.
During August 1997, OTS conducted a routine safety and soundness on-sight
examination of the Bank. During the course of its examination OTS examiners
raised a number of concerns and noted certain deficiencies in the Bank's
operations. As a result of the examination the Bank voluntarily agreed with
OTS not to originate any new consumer or commercial loans and to limit
one-to-four family residential loan originations to no more than $200,000
per month, until the Bank corrected the noted deficiencies. Effective
February 10, 1998, OTS rescinded these lending restrictions.
NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amounts recognized in the
statements of financial condition.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit
is represented by the contractual notional amount of those instruments (see
Note L). The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
31
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments may
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount and type of
collateral obtained, if deemed necessary by the Company upon extension of
credit, varies and is based on management's credit evaluation of the
counterparty.
The Company has not incurred any losses on its commitments in the years
ended March 31, 1998 and 1997.
NOTE K - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTION
In the ordinary course of business, the Company has various outstanding
commitments and contingent liabilities that are not reflected in the
accompanying financial statements. In addition, the Company is a defendant
in certain claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have
a material adverse effect on the financial position of the Company.
The Company had outstanding commitments to originate loans as follows:
March 31, 1998 March 31, 1997
-------------- --------------
Fixed-Rate Variable-Rate Total Fixed Rate Variable Rate Total
---------- ------------- ----- ---------- ------------- -----
First-mortgage $ -- $ -- $ -- $ 244,700 $ 90,400 $ 335,100
---------- ---------- ---------- ------------ ------------ ------------
---------- ---------- ---------- ------------ ------------ ------------
The interest rate on outstanding fixed-rate commitments at March 31, 1997,
was 8.5%.
At March 31, 1998, the Company had an unused line of credit with the
Federal Home Loan Bank as follows:
Companion (DRA) Commitment $ 788,300
Overnight line of credit 788,300
--------------
$ 1,576,600
--------------
--------------
The Company's line of credit with the Federal Home Loan Bank expires on
September 11, 1998.
Year 2000 Issue
The Bank has begun to develop a plan to analyze how the Year 2000 will
impact its operations. In addition, the Bank has communicated with its
significant third-party service provider to determine their Year 2000
compliance readiness and the extent to which the Bank is vulnerable to any
third-party Year 2000 issues. Given the Bank's interdependence on purchased
software and third-party service providers, the internal costs related to
the Bank's Year 2000 efforts will consist primarily of accelerating various
hardware and purchased software upgrades which generally would have been
incurred in the normal course of business. Management of the Bank does not
believe the internal
32
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE K - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTION - Continued
Year 2000 Issue - continued
costs to address Year 2000 compliance will have a material adverse impact
on future operations other than the impact such event will have on the cost
of services provided by its third-party service provider which is unknown
at this time. These costs for accomplishing the Bank's plans to complete
the Year 2000 modifications and testing processes are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including continued availability of various resources, third-party
modification plans and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ from
these plans.
Related Party Transaction
Customers (borrowers) of the Bank have obtained title insurance from
Landmark Title Company. The Company's Chairman of the Board is the sole
owner of Landmark Title Company. During the years ended March 31, 1998 and
1997, Landmark Title Company received $17,079 and $509, respectively in
title insurance premiums as a result of mortgage closings at the Bank.
NOTE L - FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company financial instruments are as
follows:
March 31,
1998 1997
--------------------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
Cash $ 1,530,236 $ 1,530,236 $ 709,458 $ 709,458
Trading account securities -- -- 69,324 69,324
Mortgage-backed securities 74,080 71,649 257,096 247,787
Investment securities 1,103,916 1,103,916 597,793 594,550
Loans receivable, net 13,640,142 13,974,000 9,392,212 9,394,000
Accrued interest receivable 86,143 86,143 38,630 38,630
Financial liabilities:
Deposits 14,628,856 14,725,000 10,237,301 10,188,000
Advance payments by
borrowers for taxes
and insurance 97,453 97,453 107,277 107,277
The carrying amounts in the preceding table are included in the statement
of financial condition under the applicable captions. The contract or
notional amounts of the Company's financial instruments with
off-balance-sheet risk are disclosed in Notes K and L and their carrying
values
33
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE L - FAIR VALUES OF FINANCIAL INSTRUMENTS - Continued
represent fair value. No derivatives were held by the Company for trading
purposes. It is not practicable to estimate the fair value of Federal Home
Loan Bank (FHLB) stock because it is not marketable. The carrying amount of
that investment is reported in the statements of financial condition.
NOTE M - CONCENTRATION OF CREDIT
The majority of the Company's loans have been granted to customers in the
Company's market area, which is primarily Canajoharie, New York.
Canajoharie is a largely rural area and relies heavily on the agricultural
industry and a certain manufacturer. The concentrations of credit by type
of loan are set forth in the note on loans receivable (see Note C). The
Company, as a matter of policy, does not extend credit to any borrowers in
excess of its legal lending limit.
NOTE N - SPECIAL INSURANCE ASSESSMENT RELATING TO THE CAPITALIZATION
OF THE SAVINGS COMPANY INSURANCE FUND (SAIF)
During September 1996, Congress enacted legislation to recapitalize the
SAIF by a one-time assessment on all SAIF-insured deposits held as of March
1995. This assessment of approximately $43,000 was paid during the year
ended March 31, 1997 and included in non-interest expense.
NOTE O - EMPLOYEE STOCK OWNERSHIP PLAN
Qualified employees of the Company and Bank participate in an Employee
Stock Ownership Plan (the ESOP). In connection with the conversion
described in Note A1, the ESOP has borrowed from the Company, the proceeds
of which were used to acquire 12,160 shares of the Company's common stock.
The outstanding loan balance at March 31, 1998 was $117,466. Interest
charged on the loan is at the Bank's prime lending rate (8.50% at March 31,
1998). Contributions from the Bank are used by the ESOP to make payments of
principal and interest on the loan. Under the terms of the ESOP,
contributions are allocated to participants using a formula based upon
compensation. Employees of the Company are eligible to participate in the
ESOP after one year of service and attainment of twenty-one (21) years of
age providing they worked at least 1,000 hours during the prior twelve (12)
month period. Participants are fully vested after five years. Because the
Company has provided the ESOP's borrowing, the unearned compensation is
presented as a reduction of stockholders' equity in the accompanying
consolidated balance sheets. On March 31, 1998 and 1997, 205 shares and -0-
shares, respectively, were allocated to participants. ESOP contributions to
the Bank, representing the fair value of allocated shares, charged to
compensation and benefits expense in 1998 and 1997 were approximately
$4,134 and $0, respectively. The fair value of the remaining unallocated
shares at March 31, 1998 aggregated approximately $152,000.
Dividends, if any, will be allocated among the participant's accounts and
the unallocated shares in accordance with their holdings of the stock on
which the dividends were paid. If dividends are used to repay the ESOP
borrowings then stock with a fair market value equal to the dividends will
be allocated to the Participant's Accounts in lieu of the dividends.
34
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE P - PROSPECTIVE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting of Comprehensive Income and Statement No. 131, Disclosures
About Segments of an Enterprise and Related Information. Both statements
are effective for financial statements for periods beginning after December
15, 1997. Statement No. 130 establishes standards for reporting and display
of comprehensive income in a full set of general purpose financial
statements. An enterprise shall continue to display an amount for net
income but will also be required to display other comprehensive income,
which includes other changes in equity. Statement No. 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers.
Adoption of these statements is not anticipated to have a significant
effect upon the presentation of the Company's financial statements.
NOTE Q - EARNINGS PER COMMON SHARE
A reconciliation of the numerators and denominators for earnings per common
share computations for the years ended March 31, 1998 and 1997 is as
follows:
Years Ended March 31,
1998 1997
---- ----
Basic Earnings Per Share
Net income (loss) available to common shareholders $ 7,467 $(36,072)
-------- --------
-------- --------
Weighted average common shares outstanding ....... 139,975 --
-------- --------
-------- --------
Basic Earnings Per Share .................... $ .05 $ --
-------- --------
-------- --------
Earnings Per Share Assuming Dilution
Net income (loss) available to common shareholders $ 7,467 $(36,072)
-------- --------
-------- --------
Weighted average common shares outstanding ....... 139,975 --
Add: dilutive effect of assumed exercises:
ESOP ........................................ 12,025 --
-------- --------
Weighted average common and dilutive
potential common shares outstanding ............. 152,000 --
-------- --------
-------- --------
Diluted Earnings Per Share .................. $ .05 $ --
-------- --------
-------- --------
NOTE R - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial condition as of March 31,
1998 and 1997 and the condensed statement of operations and statement of
cash flows for the two years then ended should be read in conjunction with
the Consolidated Financial Statements and related notes.
35
LANDMARK FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,1998 and 1997
NOTE R - CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS - Continued
March 31,
1998 1997
---- ----
STATEMENT OF FINANCIAL CONDITION
Assets:
Cash ........................................ $ 4,134 $ --
Investment in and advances to Bank .......... 2,055,221 --
---------- --------------
Total assets ............................. $2,059,355 $ --
---------- --------------
---------- --------------
Liabilities ...................................... $ -- $ --
Stockholders' Equity ............................. 2,059,355 --
---------- --------------
Total liabilities and stockholders' equity $2,059,355 $ --
---------- --------------
---------- --------------
Years Ended March 31,
1998 1997
---- ----
STATEMENT OF OPERATIONS
Income:
Income .................................................. $ -- $ --
Expenses ................................................ -- --
--------- ------------
Income before income taxes and equity in earnings of Bank -- --
Provision for income tax expense (benefit) .............. -- --
--------- ------------
Income before equity in earnings of Bank ................ -- --
Equity in earnings of Bank .............................. 7,467 --
--------- ------------
Net income .......................................... $ 7,467 $ --
--------- ------------
STATEMENT OF CASH FLOWS
Cash flows provided (used) by operating activities:
Net income .............................................. $ 7,467 $ --
Adjustments to reconcile net income to
net cash used for operating activities
Equity in earnings of Bank ...................... (7,467) --
--------- ------------
-- --
--------- ------------
Cash flows provided (used) by investing activities:
Investment in subsidiary ................................ (1,086,433)
Principal payments on ESOP loan ......................... 4,134
--------- ------------
(1,082,299)
--------- ------------
Cash flows provided (used) by financing activities:
Proceeds from the sale of stock, net of issuance cost ... 1,086,433 --
--------- ------------
Net increase in cash ................................ 4,134 --
Cash, beginning of year ...................................... -- --
--------- ------------
Cash, end of year ............................................ $ 4,134 $ --
--------- ------------
--------- ------------
36
Common Stock Information
The Common Stock of Landmark Financial Corp. is traded on the Small Cap Market
under the symbol "LMFC." At March 31, 1998 there were approximately 125
stockholders of record, including brokers, and 152,000 shares outstanding of
which 12,160 are held by the Landmark Community Bank Employee Stock ownership
Plan.
The following table sets forth the market price of the Company's Common Stock
for the year ended March 31, 1998. The Common Stock of Landmark Financial Corp.
did not begin trading until November 26, 1997. At the current time the Company
has no current intention to pay dividends.
Fiscal 1998 High Low
- ----------- ---- ---
Third Quarter $12.25 $11.50
Fourth Quarter $13.38 $11.50
37
Directors And Officers
Directors Officers
John Francisco Gordon E. Coleman
Chairman of the Board President & Chief Executive Officer
Gordon E. Coleman John F. Von Ahn
Vice President & Chief Financial Officer
Carl Rockefeller H. Stuart Larson
Vice President - Consumer Lending
Patricia Symolon Michael L. Countryman
Assistant Cashier
Richard Ferraro
Frederick LaCoppola
Carl Salmon, III
38
Corporate Information
Corporate Headquarters Transfer Agent
26 Church Street Registrar & Transfer Company
Canajoharie, New York 13317 10 Commerce Drive
(518) 673-2012 Cranford, New Jersey 07016
(800) 456-0596
Special Counsel Independent Auditors
Luse Lehman Gorman Pomerenk & Schick, P.C. Harvazinski & Montanye
5335 Wisconsin Avenue, N.W. 21 Everett Road Extension
Suite 400 Albany, New York 12205
Washington, D.C. 20015 (518) 453-0636
(202) 274-2000
Annual Meeting
The Annual Meeting of the Stockholders will be held July 22, 1998 at 11:00 a.m.
at the Fort Rennsalaer Club at 4 Moyer Street in Canajoharie, New York.
General Inquiries
A copy of the Company's Annual Report to the SEC on Form 10-K may be obtained
without charge by written request of stockholders to John F. Von Ahn or by
calling the Company at (518) 673-2012.
SEC Disclaimer
This Annual Report has not been reviewed or confirmed for accuracy or relevance
by the SEC.
39
Landmark Financial Corp.
26 Church Street
CANAJOHARIE, NY 13317
TEL. (518) 673-2012
FAX (518) 673-2081