SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No.1
to
FORM 10-KSB
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended March 31, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transaction period from ___________________ to ______________________
Commission File Number: 000-22951
LANDMARK FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
Delaware 16-1531343
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
26 Church Street, Canajoharie, NY 13317
(Address of Principal Executive Office) (Zip Code)
(518) 673-2012
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days. YES __ NO x
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendments to
this Form 10-KSB. [X]
The Registrant's revenues for the fiscal year ended March 31, 1998 were
$1,293,000.
As of June 10, 1998, there were issued and outstanding 152,000 shares of
the Registrant's Common Stock. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of the Common Stock as of June 10, 1998, 1998 ($12.75) was
$1,938,000.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
March 31, 1998 (Parts II and IV).
2. Proxy Statement for the 1998 Annual Meeting of Stockholders (Parts I and
III).
PART I
ITEM 1. Business
Landmark Financial Corp.
Landmark Financial Corp. (the "Company") was organized in June 1997 for the
purpose of serving as the holding company for Landmark Community Bank (the
"Bank"). The Company has not engaged and will not engage in any material
operations. The Company has no significant assets other than the outstanding
capital stock of the Bank, net proceeds of $120,007 from the Stock Conversion
and a note evidencing its loan to the Bank's ESOP. The Company's principal
business is overseeing and directing the business of the Bank and investing the
net Stock Conversion proceeds retained by it.
At March 31, 1998, the Company had consolidated assets of $16,811,038,
deposits of $14,628,856 and stockholders' equity of $2,059,355.
The executive office of the Company is located at 26 Church Street,
Canajoharie, New York 13317-1117. Its telephone number at that address is
(518) 673-2012.
Landmark Community Bank
The Bank is a federally chartered stock savings bank headquartered in
Canajoharie, New York. The Bank was chartered in 1925 as a New York savings and
loan association under the name Canajoharie Building Savings and Loan
Association. In 1997, the Bank converted to a federal mutual savings bank
charter and changed its name to Landmark Community Bank. Its deposits are
insured up to the maximum allowable amount by the SAIF of the FDIC. Through its
office it serves communities located in Canajoharie, New York.
The Bank has been, and intends to continue to be, a community-oriented
financial institution offering selected financial services to meet the needs of
the communities it serves. The Bank attracts deposits from the general public
and historically has used such deposits, together with other funds, to originate
one- to four-family residential mortgage loans, and in recent periods to
originate commercial real estate loans, commercial business loans and consumer
loans consisting primarily of personal loans secured by automobiles. At March
31, 1998, the Bank's total loan portfolio was $13.8 million, of which $8.7
million, or 63.1% were one- to four-family residential mortgage loans, $971,000,
or 7.1% were commercial real estate loans, $3.9 million, or 28.6% were consumer
loans, and $169,000, or 1.2% were commercial business loans.
During the year ended March 31, 1998, the Bank originated $7.7 million of
fixed-rate and $237,000 million of adjustable rate loans, all of which were
retained in the Bank's portfolio. See "Business--Lending Activities."
The Bank's executive office is located at 26 Church Street, Canajoharie,
New York 13317-1117. Its telephone number at that address is (518) 673-2012.
Market Area and Competition
The Bank conducts its operations through its office in Canajoharie,
New York which is located in Montgomery County. Montgomery County's population
has remained relatively stable over the last 10 years. The largest employers
in the Bank's market area are Beechnut Foods, Inc., Richardson Foods and
Hasbro Toys. Consequently, the local economy is not expected to produce a
large number of one- to four-family residential mortgage lending
opportunities. Unemployment in Montgomery County is higher than the average
nationally and in New York State. At March 1998 the unemployment rate in
Montgomery County was 7.8%
The Bank faces competition in attracting deposits and originating loans.
Such competition consists of two commercial banks, one savings association and
one credit union.
Lending Activities
General. The Bank has emphasized and, subject to market conditions, will
continue to emphasize the origination of one- to four-family residential
mortgage loans. However, to a lesser extent, the Bank intends to continue to
focus additional resources and lending efforts in consumer lending and
commercial business lending. In recent years, subject to market conditions, the
Bank has emphasized the origination of ARM loans and shorter-term fixed-rate
residential mortgage loans. At March 31, 1998, the Bank's portfolio of one- to
four-family residential mortgage loans totaled $8.7 million, or 63.1% of total
loans. At March 31, 1998, the commercial real estate portfolio totaled $971,000,
or 7.1% of total loans, all of which were secured by properties located in the
Bank's market area. The Bank's consumer loans consist primarily of personal
loans (primarily secured by automobiles), passbook loans and property
improvement loans. At March 31, 1998 consumer loans totaled $3.9 million, or
28.6% of total loans. The Bank has recently commenced the origination of
commercial business loans which at March 31, 1998 totaled $169,000, or 1.2% of
total loans.
Under OTS regulations, a thrift institution's loans-to-one borrower limit
is generally limited to the greater of 15% of unimpaired capital and surplus or
$500,000. See "Regulation--Federal Regulation of Savings Associations." At March
31, 1998, the maximum amount which the Bank could have lent under this limit to
any one borrower and the borrower's related entities was approximately $500,000.
At March 31, 1998, the Bank had no loans or groups of loans to related borrowers
with outstanding balances in excess of this amount. The Bank's largest lending
relationship at March 31, 1998 was approximately $150,000, which was secured by
a personal residence, barns, a fruit and vegetable retail store and 112 acres of
land. At March 31, 1998, this loan was performing in accordance with its terms.
Loan Portfolio Composition. The following information concerning the
composition of the Bank's loan portfolio in dollar amounts and in percentages
(before deductions for loans in process, deferred fees and discounts and
allowances for losses) as of the dates indicated.
March 31,
---------------------------------------------
1998 1997
---------------------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family......................................... $ 8,687 63.13% $ 7,185 74.93%
Commercial.................................................. 971 7.06 392 4.09
------- -------- ------- --------
Total real estate loans................................... 9,658 70.19 7,577 79.02
------- -------- ------- --------
Other Loans:
Consumer Loans:
Property improvement........................................ 16 .11 29 .30
Passbook loans.............................................. 102 .74 229 2.39
Personal loans (1).......................................... 3,818 27.74 1,558 16.25
------- -------- ------- --------
Total consumer loans...................................... 3,936 28.59 1,816 18.94
Commercial business loans................................... 168 1.22 196 2.04
------- -------- ------- --------
Total loans............................................... $13,762 100.00% $ 9,589 100.00%
------- -------- ------- --------
------- -------- ------- --------
Less:
Loans in process............................................ -- $ (87)
Allowance for losses........................................ (122) (110)
------- --------
Total loans receivable, net................................. $13,640 $ 9,392
------- --------
------- --------
- ----------
(1) Personal loans are primarily comprised of loans secured by automobiles.
2
The following table shows the composition of the Bank's loan portfolio by
fixed- and adjustable-rate at the dates indicated.
March 31,
---------------------------------------------
1998 1997
---------------------------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family........................................ $ 4,713 34.25% $ 3,044 31.74%
Commercial................................................. 971 7.06 392 4.09
------- ----- ------- -----
Total real estate loans.................................. 5,684 41.31 3,436 35.83
Consumer..................................................... 4,105 29.83 1,816 18.94
------- ----- ------- -----
Total fixed-rate loans................................... 9,789 71.13 5,252 54.77
------- ----- ------- -----
Adjustable-Rate Loans:
Real estate:
One- to four-family........................................ 3,973 28.87 4,141 43.18
------- ----- ------- -----
Total real estate loans.................................. 3,973 28.87 4,141 43.18
------- ----- ------- -----
Consumer..................................................... -- -- 196 2.04
------- ----- ------- -----
Total adjustable-rate loans.............................. 3,973 28.87 4,337 45.23
------- ----- ------- -----
Total loans.............................................. $13,762 100.00% $ 9,589 100.00%
------- ------- ------- -------
------- -------
Less:
Loans in process............................................. -- $ (87)
Allowance for loan losses.................................... (122) (110)
------- --------
Total loans receivable, net.............................. $13,640 $ 9,392
------- --------
------- --------
One- to Four-Family Mortgage Loans. The Bank's primary lending activity is
the origination for its portfolio of one- to four-family, owner-occupied,
residential mortgage loans secured by property located in the Bank's market
area. Loans are generated through the Bank's marketing efforts, its existing
customers and referrals, real estate brokers, builders and local businesses. The
Bank generally has limited its real estate loan originations to the financing of
properties located within its market area. The average principle balance of the
loans in the Bank's one- to four-family residential mortgage loan portfolio was
approximately $31,500 at March 31, 1998. At March 31, 1998, the Bank had $8.7
million, or 63.1% of its total loan portfolio, invested in mortgage loans
secured by one- to four-family residences.
The Bank originates fixed-rate residential one- to four-family loans with
terms of up to 20 years. As of March 31, 1998, $4.7 million, or 34.25% of the
Bank's loan portfolio, consisted of fixed-rate residential one- to four-family
loans. The Bank's fixed-rate mortgage loans amortize monthly with principal and
interest due each month. Residential real estate loans often remain outstanding
for significantly shorter periods than their contractual terms because borrowers
may refinance or prepay loans at their option. The Bank also originates
fixed-rate residential balloon loans with either five or ten year terms that
amortize over a 30 year period.
The Bank also offers ARM loans with maturities ranging up to 30 years. The
Bank currently offers ARM loans that adjust every year, with interest rate
adjustment limitations up to two percentage points per year and up to six
percentage points over the life of the loan. In a rising interest rate
environment, such rate limitations may prevent ARM loans from repricing to
market interest rates, which would have an adverse effect on net interest
income. The Bank has used different interest indices for ARM loans in the past,
and currently uses the one year U.S. Treasury Index adjusted to a constant
maturity, with a margin of 350 basis points for agency-conforming ARM loans. ARM
loans secured by residential one- to four-family real estate totaled $4.0
million, or 28.9% of the Bank's total loan portfolio at March 31, 1998. The
origination of fixed-rate mortgage loans versus ARM loans is monitored on an
ongoing basis and is affected significantly by the level of market interest
rates, customer preference, the Bank's interest rate gap position and loan
products offered by the Bank's competitors. Particularly in a relatively low
interest rate environment, borrowers prefer fixed-rate loans to ARM loans.
During fiscal 1998, the Bank originated $2.7 million in fixed-rate residential
mortgage loans and $239,000 of ARM loans.
The primary purpose of offering ARM loans is to make the Bank's loan
portfolio more interest rate sensitive. However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans do not offer the
Bank predictable cash flows as would long-term, fixed-rate loans. See
"Management's Discussion and Analysis
3
of Financial Condition and Results of Operations--Asset/Liability Management."
ARM loans carry increased credit risk associated with potentially higher monthly
payments by borrowers as general market interest rates increase. It is possible,
therefore, during periods of rising interest rates, that the risk of
delinquencies and defaults on ARM loans may increase due to the upward
adjustment of interest costs to the borrower, resulting in increased loan
losses.
The Bank's residential first mortgage loans customarily include due-on-sale
clauses, which are provisions giving the Bank the right to declare a loan
immediately due and payable in the event, among other things, that the borrower
sells or otherwise disposes of the underlying real property serving as security
for the loan. Due-on-sale clauses are a means of imposing assumption fees and
increasing the interest rate on the Bank's mortgage portfolio during periods of
rising interest rates.
Regulations limit the amount that a savings association may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. Such regulations permit a maximum
loan-to-value ("LTV") ratio of 95% for residential property (and 100% for loans
guaranteed by the Veterans Administration) and 90% for all other real estate
loans. The Bank's lending policies, however, generally limit the maximum LTV
ratio to 80% of the lesser of the appraised value or the purchase price of the
property securing the loan in the case of loans secured by one- to four-family
owner-occupied properties. On conventional one- to four-family loans, the Bank
will lend up to a 95% LTV ratio; however, loans with LTV ratios in excess of 80%
may require private mortgage insurance and loans with LTV ratios in excess of
90%, with rare exceptions, require private mortgage insurance or additional
readily marketable collateral.
When underwriting residential real estate loans, the Bank reviews each loan
applicant's employment, income and credit history. The Bank's policy is to
obtain credit reports and financial statements on all borrowers and guarantors.
Properties securing real estate loans are appraised by independent certified
appraiser. Appraisals are subsequently reviewed by the Bank's Chief Executive
Officer. Management believes that stability of income, past credit history and
adequacy of the proposed security are integral parts in the underwriting
process. Generally, the applicant's total monthly mortgage payment, including
all escrow amounts, is limited to 28% of the applicant's total monthly income.
In addition, total monthly obligations of the applicant, including mortgage
payments, should not generally exceed 36% of total monthly income. Written
appraisals are always required on real estate property offered to secure an
applicant's loan. The Bank requires fire and casualty insurance on all
properties securing real estate loans, as well as title insurance or a certified
abstract and written attorney's title opinion.
Commercial Real Estate Lending. The Bank originates loans secured by
commercial real estate. At March 31, 1998, $1.0 million, or 7.1%, of the Bank's
loan portfolio consisted of commercial real estate loans. The Bank's commercial
real estate loans are secured by a campground, restaurant and rental properties.
At March 31, 1998, 2.9% of commercial real estate loans were classified as
non-performing. The Bank will seek to emphasize the origination of commercial
real estate lending in the future. There can be no assurances, however, that
delinquencies will not increase in the future.
Commercial real estate loans originated by the Bank may be either
fixed- or adjustable-rate loans with terms to maturity and amortization
schedules of up to 20 years. Commercial real estate loans are written in amounts
of up to 75% of the lesser of the appraised value of the property or the sales
price.
Appraisals on properties which secure commercial real estate loans are
performed by an independent appraiser designated by the Bank before the loan is
made. All appraisals on commercial real estate loans are reviewed by the Bank's
Chief Executive Officer. In underwriting such loans, the Bank primarily
considers the cash flows generated by the real estate to support the debt
service, the financial resources and income level of the borrower and the Bank's
experience with the borrower. In addition, the Bank's underwriting procedures
require verification of the borrower's credit history, an analysis of the
borrower's income, financial statements and banking relationships, a review of
the borrower's property management experience and references, and a review of
the property, including cash flow projections and historical operating results.
The Bank seeks to ensure that the property securing the loans will generate
sufficient cash flow to adequately cover operating expenses and debt service
payments.
4
Commercial real estate lending affords the Bank an opportunity to receive
interest at rates higher than those generally available from one- to four-family
residential lending. Nevertheless, loans secured by such properties are
generally larger, more difficult to evaluate and monitor and, therefore,
generally involve a greater degree of risk than one- to four-family residential
mortgage loans. Because payments on loans secured by commercial real estate are
often dependent on the successful operation or management of the properties,
repayment of such loans may be subject to adverse conditions in the real estate
market or the economy. If the cash flow from the project is reduced, the
borrower's ability to repay the loan might be impaired. The Bank has attempted
to minimize these risks by lending primarily to the ultimate user of the
property or on existing income-producing properties.
Consumer and Other Lending. The Bank originates a limited variety of
consumer loans, primarily property improvement loans, passbook loans and
personal loans which are secured by automobiles. The Bank currently originates
substantially all of its consumer loans in its primary market area.
The primary component of the Bank's consumer loan portfolio consists of
personal loans secured by automobiles. In the past year the Bank has sought to
increase its consumer loan originations. It has entered into correspondent
relationships with a number of automobile dealerships in its market area whereby
a borrower wishing to acquire an automobile will complete a loan form at the
dealership. The loan document is sent to the Bank which evaluates the borrower's
credit worthiness, including the borrower's credit history, ability to meet
existing obligations and payments on the proposed loan. The Bank generally will
not make an automobile loan with a loan-to-value ratio in excess of 80% of the
invoice price or the automobile's National Automobile Dealers Association
"yellow book" value. The Bank's personal loans are generally fixed rate loans
and have terms that do not exceed 66 months.
Finally, the Bank has originated a small number of loans for property
improvement. Such loans are generally secured by a second mortgage or UCC-1
filing on improvement and are originated as fixed-rate loans with terms of less
than 66 months.
Consumer loan terms vary according to the type and value of collateral,
length of contract and creditworthiness of the borrower. The underwriting
standards employed by the Bank for originated consumer loans include an
application, a determination of the applicant's payment history on other debts
and an assessment of ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets, such as automobiles. Further, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. At March 31, 1998, 2.0% of consumer loans were classified as
non-performing. See "--Asset Quality--Delinquent Loans and Non-Performing
Assets." There can be no assurances, however, that delinquencies will not
increase in the future.
Commercial Business Lending. The Bank originates commercial business loans
to borrowers located in its market area which are secured by collateral other
than real estate. Such commercial business loans are generally secured by
equipment, inventory and accounts receivable. At March 31, 1998, the Bank's
commercial business loan portfolio totaled $169,000, or 1.23% of total loans. At
that date, all of the Bank's commercial business loans were performing in
accordance with their terms.
The underwriting standards used by the Bank for commercial business loans
include a determination of the borrower's ability to meet existing obligations
and payments on the proposed loan from normal cash flow generated
5
from the borrower's business. The financial strength of each borrower is
assessed through a review of tax returns and credit reports.
Commercial business loans generally bear higher interest rates than one- to
four-family residential loans, but they also involve a higher risk of default
since their repayment is dependent on the successful operation of the borrower's
business.
6
Loan Maturity Schedule
The following table illustrates the interest rate sensitivity of the Bank's
loan portfolio at March 31, 1998. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
Commercial Commercial
One- to Four-Family Real Estate Consumer Business
------------------- ------------------ ---------------------- --------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Due During Years Ending March 31,
1999............................ $ 3 9.20% $ -- --% $ 322 8.79% $ 41 9.25%
2000............................ 15 9.78 18 9.50 165 10.90 5 9.50
2001 and 2002................... 813 8.85 -- -- 3,367 9.26 61 9.72
2003 to 2007.................... 1,452 8.91 230 9.95 81 9.18 61 8.75
2008 to 2022.................... 5,439 8.72 724 9.57 -- -- -- --
2023 and following.............. 965 8.28 -- -- -- -- -- --
------ ------- ------- ------
Total Amount Due $8,687 8.72 $ 972 9.66 $ 3,935 9.29 $ 168 9.24
------ ------- ------- ------
------ ------- ------- ------
Weighted
Average
Amount Rate
------ --------
Due During Years Ending March 31,
1999............................ $ 366 8.85%
2000............................ 203 10.66
2001 and 2002................... 4,241 9.19
2003 to 2007.................... 1,824 9.05
2008 to 2022.................... 6,163 8.82
2023 and following.............. 965 8.28
-------
Total Amount Due $13,762 8.95
-------
-------
- -----------------
(1) Includes demand loans, loans having no stated maturity and overdraft loans.
The total amount of loans due after March 31, 1999 which have predetermined
interest rates is $9.4 million, while the total amount of loans due after such
date which has floating or adjustable interest rates is $4.0 million.
7
Loan Originations
Loan originations are developed from continuing business with depositors
and borrowers, soliciting realtors, builders, walk-in customers and third-party
sources. The Board of Directors of the Bank has authorized certain officers to
originate loans within specified underwriting limits. Specifically, Bank
officers may originate loans secured by single-family, owner occupied residences
up to $140,000. All loans over $50,000 or with a loan to value ratio over 80%
require action by the Bank's Loan Committee. In addition, the full Board of
Directors meets monthly to review all real estate loans made by officers of the
Bank.
While the Bank originates both adjustable-rate and fixed-rate loans, its
ability to originate loans to a certain extent is dependent upon the relative
customer demand for loans in its market, which is affected by the interest rate
environment, among other factors. For fiscal 1998, the Bank originated $7.7
million in fixed-rate loans and $239,000 in adjustable-rate loans.
The following table shows the loan origination and repayment activities of
the Bank for the periods indicated. The Bank did not purchase or sell any loans
during the periods indicated.
Years Ended March 31,
------------------------
1998 1997
------- -------
(In Thousands)
Originations by Type:
Adjustable rate real estate:
- one- to four-family...................... $ 239 $ 1,051
- multi-family............................. -- --
- commercial............................... -- 586
Non-real estate-consumer........................ -- --
Commercial business.......................... -- 210
-------- --------
Total adjustable-rate.................... 239 1,847
-------- --------
Fixed-rate real estate:
- one- to four-family...................... 2,689 1,909
- multi-family............................. -- --
- commercial............................... -- --
Non-real estate-- consumer................... 4,300 1,919
Commercial business.......................... 725 --
-------- --------
Total fixed-rate......................... 7,714 3,828
-------- --------
Total loans originated................... 7,953 5,675
-------- --------
Principal repayments............................ 3,780 1,645
-------- --------
Total reductions......................... 3,780 1,645
-------- --------
Net increase (decrease)......................... $ 4,173 $ 4,030
-------- --------
-------- --------
Asset Quality
The Bank's collection procedures provide that when a real estate loan is
past due 15 days, a delinquent notice is sent requesting payment. Prior to a
loan becoming 30 days past due, personal contact is attempted by the Bank's
collection officer. If the loan document provides for a right to cure, then the
required notice is mailed by certified mail and regular mail when the loan
becomes 30 days past due. Personal contact is continued on all delinquent real
estate loans until the loan is completely current.
With respect to consumer loans, a delinquent notice is sent requesting
payment 15 days after the due date. If payment is not made by the 30th day after
it is due, the Bank sends a certified letter requesting that the borrower cure
the delinquency. If consumer loans are not resolved by 90 days, the account is
put on non-accrual status and repossession and/or legal action is normally
initiated. Real estate loans of 30 days or more past due and consumer loans of
30 or more past due are reported monthly to the Board of Directors. For both
consumer loans and real estate loans, the Bank officer has authority to begin
foreclosure and/or repossession procedures at any time he feels it necessary or
advisable. At March 31, 1998, the total loans delinquent 90 days or more was
$144,000 and the total loans delinquent 60 to 89 days was $61,000.
8
Delinquent Loans and Non-performing Assets. Loans are reviewed on a regular
basis and are placed on non-accrual status when, in the opinion of management,
the collection of additional interest is doubtful. Mortgage and consumer loans
are placed on non-accrual status when principal is 90 days or more past due.
Interest accrued and unpaid at the time a loan is placed on non-accrual status
is charged against interest income. The loan will remain on non-accrual status
until the loan is brought current.
Real estate acquired through foreclosure or by deed-in-lieu of foreclosure
is classified as real estate owned until such time as it is sold. When real
estate owned is acquired, it is recorded at the lower of the unpaid principal
balance of the related loan, or its fair value, less estimated selling expenses.
Any further write-down of real estate owned is charged against earnings. At
March 31, 1998, the Bank had no property classified as real estate owned.
The following table sets forth the Bank's loan delinquencies by type, by
amount and by percentage of type at March 31, 1998.
Loans Delinquent For:
60-89 Days 90 Days and Over Total Delinquent Loans
----------------------- ----------------------- -------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
One- to four-family... -- $-- --% 2 $ 99 1.14% 2 $ 99 1.14%
Commercial ........... -- -- -- 1 28 2.88 1 28 2.88
Consumer ............... 6 61 1.55 2 17 0.43 8 78 1.98
Commercial business..... -- -- -- -- -- -- -- -- --
Total ............. 6 $ 61 .44% 5 $144 .05% 11 $205 1.49%
The table below sets forth the amounts and categories of non-performing
assets in the Bank's loan portfolio. Loans are placed on non-accrual status when
the collection of principal and/or interest become doubtful. For all years
presented, the Bank has had no troubled debt restructurings (which involve
forgiving a portion of interest or principal on any loans or making loans at a
rate materially less than that of market rates). Foreclosed assets include
assets acquired in settlement of loans. At March 31, 1998 and 1997, the Bank did
not have any accruing loans that were delinquent more than 90 days, nor did it
have any foreclosed assets.
March 31,
-----------------------
1998 1997
-------- ------
(Dollars In Thousands)
Non-accruing loans:
One- to four-family................. $ 99 $ 47
Commercial real estate.............. 28 --
Consumer............................ 17 --
Commercial business................. -- --
------ -------
Total............................. 144 47
------ -------
Total non-performing assets........... $ 144 $ 47
------ -------
------ -------
Total as a percentage of total assets. 0.86% 0.41%
------ -------
------ -------
For the year ended March 31, 1998, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $9,000. No amounts were included in interest income
on such loans for the year ended March 31, 1998.
Classified Assets. Federal regulations provide for the classification of
loans and other assets, such as debt and equity securities, considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful"
9
have all of the weaknesses inherent in those classified "substandard" with the
added characteristic that the weaknesses present make "collection or liquidation
in full" on the basis of currently existing facts, conditions and values,
"highly questionable and improbable." Assets classified as "loss" are those
considered "uncollectible" and of such little value that their continuance as
assets without the establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either substandard
or doubtful, it may establish general allowances for losses in an amount deemed
prudent by management. General allowances represent loss allowances which have
been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When an insured institution classifies problem assets
as "loss," it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge-off such
amount. An institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the
regulatory authorities, who may order the establishment of additional general or
specific loss allowances.
In connection with the filing of its periodic reports with the OTS and in
accordance with its classification of assets policy, the Bank reviews loans in
its portfolio quarterly to determine whether such assets require classification
in accordance with applicable regulations.
On the basis of management's review of its assets, at March 31, 1998, the
Bank had classified a total of $89,000 of its loans and other assets as follows:
March 31, 1998
--------------
(In Thousands)
Special Mention........................... $ --
Substandard............................... 89
Doubtful assets........................... --
Loss assets............................... --
-------
Total................................ $ 89
-------
-------
General loss allowance.................... $ 122
-------
-------
Specific loss allowance................... --
Charge-offs............................... --
-------
-------
Other Loans of Concern. In addition to the non-performing loans set forth
in the tables above, as of March 31, 1998, there were no loans classified by the
Bank with respect to which known information about the possible credit problems
of the borrowers or the cash flows of the security properties have caused
management to have some doubts as to the ability of the borrowers to comply with
present loan repayment terms and which may result in the future inclusion of
such items in the non-performing asset categories.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in its loan portfolio and changes in the nature and volume of its loan
activity, including those loans which are being specifically monitored by
management. Such evaluation, which includes a review of loans for which full
collectibility may not be reasonably assured, considers among other matters, the
loan classifications discussed above, the estimated fair value of the underlying
collateral, economic conditions, historical loan loss experience, the amount of
loans outstanding and other factors that warrant recognition in providing for an
adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at the
lower of cost or fair value minus estimated cost to sell. If fair value at the
date of foreclosure is lower than the balance of the related loan, the
difference will be charged-off to the allowance for loan losses at the time of
transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on such property is established by a
charge to operations. At March 31, 1998, the Bank had no properties that were
acquired through foreclosure.
Although management believes that it uses the best information available to
determine the allowance, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if
10
circumstances differ substantially from the assumptions used in making the final
determination. Future additions to the Bank's allowance for loan losses will be
the result of periodic loan, property and collateral reviews and thus cannot be
predicted in advance. In addition, federal regulatory agencies, as an integral
part of the examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to increase the allowance based
upon their judgment of the information available to them at the time of their
examination. At March 31, 1998, the Bank had a total allowance for loan losses
of $122,000, representing 84.7% of total non-performing loans and 0.89% of the
Bank's loans receivable, net. See Notes A and C of the Notes to Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
At March 31,
----------------------------------------------------------------
1998 1997
----------------------------------------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- ------- --------- -------- --------
(Dollars in Thousands)
One- to four-family............................. $ 60 $ 8,687 63.13% $ 55 $ 7,185 74.93%
Commercial real estate.......................... -- 971 7.06 -- 392 4.09
Consumer........................................ 59 3,936 28.59 53 1,816 18.94
Commercial business............................. 3 168 1.22 2 196 2.04
Unallocated..................................... -- -- -- -- -- --
------ ------- ------- ------- ------- -------
Total...................................... $ 122 $13,762 100.00% $ 110 $ 9,589 100.00%
------ ------- ------- ------- ------- -------
------ ------- ------- ------- ------- -------
The following table sets forth an analysis of the Bank's allowance for loan
losses.
Years Ended March 31,
--------------------------
1998 1997
------------- ---------
(Dollars In Thousands)
Balance at beginning of period........................................... $ 110 $ 32
Charge-offs:
One- to four-family................................................... (2) --
Commercial real estate................................................ -- --
Consumer.............................................................. -- --
Commercial business................................................... -- --
------- ------
Total charge-offs.................................................. (2) --
------- ------
Recoveries:
One- to four-family................................................... -- --
Commercial real estate................................................ -- --
Consumer.............................................................. -- --
Commercial business................................................... -- --
------- ------
Total recoveries................................................... -- --
------- ------
Net charge-offs.......................................................... (2) --
Provision for loan losses................................................ 14 78
------- ------
Balance at end of period................................................. $ 122 $ 110
------- ------
------- ------
Ratio of net charge-offs during the period
to average loans outstanding during the period.......................... 0.02% 0.00%
------- ------
------- ------
Ratio of net charge-offs during the period to
average non-performing assets 2.09% 0.00%
------- ------
------- ------
11
Investment Activities
General. The Bank must maintain minimum levels of investments that qualify
as liquid assets under OTS regulations. Liquidity may increase or decrease
depending upon the availability of funds and comparative yields on investments
in relation to the return on loans. Historically, the Bank has generally
maintained liquid assets at levels above the minimum requirements imposed by the
OTS regulations and at levels believed adequate to meet the requirements of
normal operations, including repayments of maturing debt and potential deposit
outflows. Cash flow projections are regularly reviewed and updated to assure
that adequate liquidity is maintained. At March 31, 1998, the Bank's liquidity
ratio (liquid assets as a percentage of net withdrawable savings deposits and
current borrowings) was 18.0%. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Liquidity and Capital Resources"
and "Regulation--Liquidity."
Federally chartered savings institutions have the authority to invest in
various types of liquid assets, including U.S. Treasury obligations, securities
of various federal agencies, certain certificates of deposit of insured banks
and savings institutions, certain bankers' acceptances, repurchase agreements
and federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest their assets in commercial paper, investment grade
corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Bank, as established by the Board
of Directors, is to invest funds among various categories of investments and
maturities based upon the Bank's liquidity needs, asset/liability management
policies, investment quality, marketability and performance objectives.
Mortgage-backed Securities. The Bank historically purchased mortgage-backed
securities primarily to supplement its lending activities, to generate positive
interest rate spreads on principal balances with minimal administrative expense,
to lower the credit risk of the Bank as a result of the guarantees provided by
Government National Mortgage Administration ("GNMA") and to generally assist in
managing the interest rate risk of the Bank. The Bank has invested primarily in
federal agency securities, principally GNMA obligations. At March 31, 1998, the
Bank's investment in mortgage-backed securities totaled $74,000, or 0.44% of its
total assets. At March 31, 1998, all of the Bank's mortgage-backed securities
were classified as held to maturity. See Note B of the Notes to Financial
Statements.
The GNMA certificates are modified pass-through mortgage-backed securities
that represent undivided interests in underlying pools of fixed-rate, or certain
types of adjustable-rate, single-family residential mortgages issued by these
government-sponsored entities. As a result, the interest rate risk
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable rate, as well as prepayment risk, are passed on to the certificate
holder. GNMA's guarantee to the holder of timely payments of principal and
interest is backed by the full faith and credit of the United States Government.
All of the Bank's GNMA certificates are fixed-rate securities.
Mortgage-backed securities generally yield less than the loans that
underlie such securities because of the cost of payment guarantees and credit
enhancements. In addition, mortgage-backed securities are usually more liquid
than individual mortgage loans and may be used to collateralize certain
liabilities and obligations of the Bank. These types of securities also permit
the Bank to optimize its regulatory capital because they have low risk
weighting.
Of the Bank's $74,000 mortgage-backed securities portfolio at March 31,
1998, mortgage-backed securities totaling $74,000 had contractual maturities
over 10 years. The actual maturity of a mortgage-backed security may be less
than its contractual maturity due to prepayments of the underlying mortgages.
Prepayments that are faster than anticipated may shorten the life of the
security and may result in a loss of any premiums paid and thereby reduce the
net yield on such securities. Although prepayments of underlying mortgages
depend on many factors, including the type of mortgages, the coupon rate, the
age of mortgages, the geographical location of the underlying real estate
collateralizing the mortgages and general levels of market interest rates, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant determinant
of
12
the rate of prepayments. During periods of declining mortgage interest rates, if
the coupon rate of the underlying mortgages exceeds the prevailing market
interest rates offered for mortgage loans, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Under such circumstances, the Bank may be subject to reinvestment risk because,
to the extent that the Bank's mortgage-backed securities amortize or prepay
faster than anticipated, the Bank may not be able to reinvest the proceeds of
such repayments and prepayments at a comparable rate.
The guaranteed portion of a given pool must be all fixed or all variable
rate. The certificates purchased by the Bank are fixed rate mortgage backed
securities.
The following table sets forth the composition of the Bank's
mortgage-backed securities at the dates indicated.
At March 31,
----------------------------------
1998 1997
--------------- ----------------
Book % of Book % of
Value Total Value Total
----- ----- ----- -----
(Dollars in Thousands)
Mortgage-backed securities held to maturity:
GNMA ..................................... $ 67 90.54% $ 267 103.89%
----- ------ ----- ------
Unamortized premium (discounts), net ....... 7 9.46 (10) (3.89)%
----- ------ ----- ------
Total mortgage-backed securities ........ $ 74 100.00% $ 257 100.00%
----- ------ ----- ------
----- ------ ----- ------
The following table shows mortgage-backed securities repayment activities
of the Bank for the periods indicated. The Bank did not purchase any
mortgage-backed securities during fiscal 1998.
Years Ended March 31,
----------------------------
1998 1997
-------- ------
(In Thousands)
Purchases:
Adjustable-rate (1)................................... $ -- $ --
Fixed-rate (1)........................................ -- --
------- --------
Total purchases..................................... -- --
------- --------
Sales (136) --
Principal Repayments:
Principal repayments.................................. (47) (83)
Increase in other items, net.......................... -- --
------- --------
Net increase (decrease)............................. $ (183) $ (83)
------- --------
------- --------
- -------------------------
(1) Consists of pass-through securities.
Other Investments. At March 31, 1998, the Bank's investment securities
other than mortgage-backed securities consisted of federal agency obligations,
U.S. Government securities, FHLB stock, and interest-earning deposits with other
financial institutions.
OTS regulations restrict investments in corporate debt and equity
securities by the Bank. These restrictions include prohibitions against
investments in the debt securities of any one issuer in excess of 15% of the
Bank's unimpaired capital and unimpaired surplus as defined by federal
regulations, plus an additional 10% if the investments are fully secured by
readily marketable collateral. At March 31, 1998, the Bank was in compliance
with this regulation. See "Regulation--Federal Regulation of Savings
Associations" for a discussion of additional restrictions on the Bank's
investment activities.
13
The following table sets forth the composition of the Bank's investment
securities at the dates indicated.
At March 31,
-----------------------------------------------
1998 1997
--------------------- ------------------
Book % of Book % of
Value Total Value Total
----- ----- ----- -----
(Dollars in Thousands)
Investment securities held to maturity:
Federal agency obligations.................................. $ -- --% $ 200 27.55%
Investment securities available for sale:
U.S. government securities.................................. 599 50.51 398 54.82
Federal agency obligations.................................. 500 42.15 -- --
Equity securities........................................... -- -- -- --
------- ------- ------- ------
Subtotal.................................................. 1,099 92.66 598 82.37
------- ------- ------- ------
Trading account security (1).................................. -- -- 69 9.50
FHLB stock.................................................... 87 7.34 59 8.13
------- ------- ------- ------
Total investment securities and FHLB stock $ 1,186 100.00% $ 726 100.00%
------- ------- ------- ------
------- ------- ------- ------
Average remaining life of debt securities..................... 2.3 years 4.3 years
Other interest-earning assets:
Interest-bearing deposits with banks........................ $ 1,490 100.00% $ 120 100.00%
Federal funds sold.......................................... -- -- -- --
------- ------- ------- ------
Total..................................................... $ 1,490 100.00% $ 120 100.00%
------- ------- ------- ------
------- ------- ------- ------
- ----------
(1) Consists of Freddie Mac stock that was sold during the year ended March 31,
1998.
Investment Portfolio Maturities. The composition and maturities of the
investment securities portfolio and mortgage-backed securities are indicated in
the following table.
At March 31, 1998
------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Investment Securities
---------------------------
Amortized Amortized Amortized Amortized Amortized Fair
Cost Cost Cost Cost Cost Value
--------- --------- --------- --------- --------- -----
(Dollars in Thousands)
U.S. government securities.................. $300 $299 $ -- $-- $ 599 $ 606
Federal agency obligations.................. -- 100 400 -- 500 498
Mortgage-backed securities.................. -- -- -- 74 74 72
Total investment securities................. $300 $399 $400 $74 $1,173 $1,176
Weighted average yield...................... 6.24% 6.31% 6.77% 6.54% 6.46% 6.13%
Sources of Funds
General. The Bank's primary sources of funds are deposits, receipt of
principal and interest on loans and securities, FHLB advances, and other funds
provided from operations.
FHLB advances are used to support lending activities and to assist in the
Bank's asset/liability management strategy. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Asset\Liability
Management." Typically, the Bank does not use other forms of borrowings. At
March 31, 1998, the Bank had no FHLB advances.
Deposits. The Bank offers deposit accounts having a range of interest rates
and terms. The Bank's deposits consist of passbook, checking and certificate
accounts. The certificate accounts currently range in terms from 91 days to 10
years.
14
The Bank relies primarily on advertising, competitive pricing policies and
customer service to attract and retain these deposits. During fiscal 1998, the
Bank participated in an on-line service pursuant to which it advertises its
certificates of deposit rates nationwide. For the year ended March 31, 1998, the
Bank obtained certificates of deposit totaling $4.4 million through this
service, which represented 30.1% of the Bank's total deposits at March 31, 1998.
Deposits obtained through the on-line service are a more volatile source of
funds than transaction or savings accounts, or certificate of deposit accounts
obtained from depositors in the Bank's market area. As such, the Bank no longer
utilizes an on-line service to obtain certificate of deposits. The flow of
deposits is influenced significantly by general economic conditions, changes in
money market and prevailing interest rates and competition. During fiscal 1997,
the Bank introduced an interest bearing checking account product. At March 31,
1998, $234,000, or 1.6% of total deposits were in interest bearing checking
accounts.
The Bank has become more susceptible to short-term fluctuations in deposit
flows as customers have become more interest-rate conscious. The Bank endeavors
to manage the pricing of its deposits in keeping with its profitability
objectives giving consideration to its asset/liability management. At March 31,
1998, $893,000 million, or 8.4% of the Bank's certificates of deposit were in
certificates of deposit with terms of 12 months or less. The Bank believes that
upon maturity most of these deposits will remain at the Bank. The ability of the
Bank to attract and maintain savings accounts and certificates of deposit, and
the rates paid on these deposits, has been and will continue to be significantly
affected by market conditions.
Savings Portfolio
The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs offered by the Bank as of the dates indicated.
At March 31,
------------------------------------------------
1998 1997
----------------------- --------------------
Amount Percent Amount Percent
------- ------- ------- -------
(Dollars in Thousands)
Transactions and savings deposits:
Non-interest bearing checking accounts....................... $ 226 1.54% 298 2.91%
Interest-bearing checking accounts 1.75%..................... 234 1.60 235 2.30%
Passbook accounts 3.00%...................................... 3,584 24.50 3,584 35.01
------- ------ ------- -----
Total transactions and savings deposits...................... 4,044 27.64 4,117 40.22
------- ------ ------- -----
Certificates of deposit:
0.00 - 3.99%............................................... -- -- 198 1.93
4.00 - 5.99%............................................... 2,983 20.39 2,672 26.10
6.00 - 7.99%............................................... 7,602 51.97 3,250 31.75
------- ------ ------- -----
Total certificates of deposit................................ 10,585 72.36 6,120 59.78
------- ------ ------- -----
Accrued Interest............................................. -- -- -- --
------- ------ ------- -----
Total Deposits............................................... $14,629 100.00% $10,237 100.00%
------- ------ ------- -----
------- ------ ------- -----
15
Deposit Activity
The following table sets forth the savings flows at the Bank during the
periods indicated.
Years Ended March 31,
--------------------------
1998 1997
---------- -------
(Dollars In Thousands)
Opening balance.................................. $ 10,237 $ 6,465
Deposits......................................... 33,278 7,115
Withdrawals...................................... (29,596) (3,628)
Interest credited................................ 710 285
--------- --------
Ending balance................................... $ 14,629 $ 10,237
--------- --------
--------- --------
Net increase (decrease).......................... $ 4,392 $ 3,772
--------- --------
--------- --------
Percent increase (decrease)...................... $ 42.90% 58.34%
--------- --------
--------- --------
Time Deposit Maturity Schedule
The following table shows weighted average rate and maturity information
for the Bank's certificates of deposit as of March 31, 1998.
Weighted
Certificate accounts maturing Total Average Percent of
in quarter ending Balance Rate Total
----------------------------- ---------- -------- ----------
(In Thousands)
June 30, 1998............................. $ 727 5.74% 6.87%
September 30, 1998........................ 1,693 5.83 16.00
December 31, 1998......................... 888 5.73 8.39
March 31, 1999............................ 1,399 6.09 13.21
June 30, 1999............................. 1,649 6.45 15.57
September 30, 1999........................ 992 6.27 9.38
December 31, 1999......................... 295 6.15 2.79
March 31, 2000............................ 751 6.36 7.09
June 30, 2000............................. 775 6.77 7.32
September 30, 2000........................ 693 6.58 6.55
December 31, 2000......................... -- -- --
March 31, 2001............................ 107 6.29 1.01
June 30, 2001............................. 1 6.25 .01
Thereafter................................ 615 6.70 5.81
--------- -------
Total................................. $ 10,585 6.21 100.00%
--------- -------
--------- -------
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of March 31,
1998.
Maturity
---------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------- -------- -------- ------------------
(In Thousands)
Certificates of deposit less than $100,000 $ 727 $ 1,590 $ -- $ 7,543 $ 9,860
Certificates of deposit of $100,000 or more -- 103 -- 622 725
------- -------- ------- -------- -------
Total certificates of deposit............... $ 727 $ 1,693 $ -- $ 8,165 $ 10,585
------- -------- ------- -------- -------
------- -------- ------- -------- -------
16
Borrowings. Federal law limits an institution's borrowings from the FHLB to
20 times the amount paid for capital stock in the FHLB, subject to regulatory
collateral requirements. At March 31, 1998, the Bank had an unused line of
credit at the FHLB for up to $788,000. At March 31, 1998, the Bank had no
advances from the FHLB.
Management of Market Risk - Interest Rate Risk
The Bank's most significant form of market risk is interest rate risk, as
the majority of the Bank's assets and liabilities are sensitive to changes in
interest rates. The Bank's mortgage loan portfolio, consisting primarily of
loans on residential real property located in Montgomery and Fulton Counties, is
subject to credit risk associated with the local economy. The Bank does not own
any assets classified as trading assets. At March 31, 1998 the Bank did not have
any hedging transactions in place, such as interest rate swaps and caps. The
Bank's interest rate risk management program focuses primarily on evaluating and
managing the composition of the Bank's assets and liabilities in the context of
various interest rate scenarios. Factors beyond the control of management, such
as market interest rates and competition, also have an impact on interest income
and interest expense. The Bank's assets consists primally of 1-4 family mortgage
loans and consumer auto loans which have longer maturities than the Bank's
liabilities which consist primarily of certificates of deposit and savings
deposits.
A principal part of the Bank's business strategy is to manage interest rate
risk and to minimize the Bank's exposure to changes in market interest rates. In
recent years, the Bank has followed the following strategies to manage interest
rate risk: (i) investing in short-term U.S. government securities and federal
agency obligations; and (ii) maintaining a high level of liquid interest earning
assets such as FHLB term deposits. By investing in short-term, liquid
securities, the Bank believes it is better positioned to react to increases in
market interest rates. However, investments in shorter-term securities generally
provide lower levels of interest income than would be obtained by investing in
longer term fixed rate loans. Management believes that maintaining a significant
portion of its assets in short-term investments reduces the Bank's exposure to
interest rate fluctuations and enhances long-term profitability.
Net Portfolio Value
Management monitors the Bank's interest rate sensitivity through use of a
model which estimates the change in net portfolio value ("NPV") in response to a
range of assumed changes in market interest rates. NPV is the present value of
expected cash flows from assets, liabilities, and off-balance sheet items. The
model estimates the effect on the Bank's NPV of instantaneous and permanent 100
to 400 basis point increases and decreases in market interest rates with no
given effect to any steps that management might take to counter the effect of
interest rate movements.
The table sets forth, as of March 31, 1998, the estimated changes in the
Bank's NPV which would result from the designated instantaneous change in
interest rates.
Changes Estimated Increase
in (Decrease) in NPV (1)
Interest rates Estimated --------------------
(Basis points) NPV Amount Percent
-------------- --------- ------ -------
(Dollars in Thousands)
+400 $ 2,216 (194) (8)%
+300 2,325 (85) (4)
+200 2,403 (7) 0
+100 2,442 32 1
0 2,410 -- --
-100 2,349 (61) (3)
-200 2,324 (85) (4)
-300 2,319 (91) (4)
-400 2,351 (58) (2)
- --------------------------
(1) Represents the increase (decrease) in the estimated NPV at the indicated
change in interest rates compared to the NPV assuming no change in interest
rates.
17
Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of prospective actual results. Further, the computations do not
reflect any actions that management may undertake in response to a change in
market interest rates.
The table set forth above indicates that, in the event of a 200 basis point
decrease in interest rates, the Bank would experience a 4% decrease in NPV. In
the event of a 200 basis point increase in interest rates, the Bank would be
expected to experience less than a 1% decrease in NPV.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes in NPV require making certain
assumptions which may or nay not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the NPV table
presented assumes that the composition of the Bank's interest sensitive assets
and liabilities existing at the beginning of a period remain constant over the
period being measured and assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration or the
repricing of specific assets and liabilities. Accordingly, although the NPV
table provides an indication of the Bank's interest rate risk exposure at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in interest rates on the
Bank's net income, and will differ from actual results. Additionally, the
guidelines established by the Board of Directors are not strict limitations.
While a goal of the Asset/Liability Management Committee and the Board of
Directors is to limit projected NPV changes to be within the Board's guidelines,
the Bank will not necessarily limit projected changes in NPV if the required
action would present disproportionate risk to the Bank's continued
profitability.
Employees
At March 31, 1998, the Bank had 8 full-time and one part-time employees.
The Bank's employees are not represented by any collective bargaining group.
Management considers its employee relations to be good.
Legal Proceedings
The Bank is involved, from time to time, as plaintiff or defendant in
various legal actions arising in the normal course of their businesses. While
the ultimate outcome of these proceedings cannot be predicted with certainty, it
is the opinion of management, after consultation with counsel representing the
Bank in the proceedings, that the resolution of these proceedings should not
have a material effect on the Company's financial position or results of
operations on a consolidated basis.
Service Corporation Activities
As a federally chartered savings association, the Bank is permitted by OTS
regulations to invest up to 2% of its assets, or approximately $200,000 at
March 31, 1998, in the stock of, or loans to, service corporation subsidiaries.
The Bank may invest an additional 1% of its assets in service corporations where
such additional funds are used for inner-city or community development purposes
and up to 50% of its total capital in conforming loans to service corporations
in which it owns more than 10% of the capital stock. In addition to investments
in service corporations, federal associations are permitted to invest an
unlimited amount in operating subsidiaries engaged solely in activities in which
a federal association may engage.
REGULATION
General
The Bank is a federally chartered savings association, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, the Bank is subject to broad federal
regulation and oversight extending to all its operations. The Bank is a member
of the FHLB of New York and is subject to certain limited regulation by the
Federal Reserve Board. As the savings and loan holding company of the Bank, the
Company also is subject to federal regulation and oversight. The purpose of the
regulation of the Company and other holding companies is to protect subsidiary
savings and loan associations. The Bank is a member of the
18
SAIF. The deposits of the Bank are insured by the SAIF of the FDIC. As a result,
the FDIC has certain regulatory and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. When these examinations are conducted by the OTS and the FDIC, the
examiners may require the Bank to provide for higher general or specific loan
loss reserves. All savings associations are subject to a semi-annual assessment,
based upon the savings and loan association's total assets.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws and regulations, and the Bank is prohibited from
engaging in any activities not permitted by such laws and regulations. For
example, no savings institution may invest in non-investment grade corporate
debt securities. In addition, the permissible level of investment by federal
associations in loans secured by non-residential real property may not exceed
400% of total capital, except with approval of the OTS. Federal savings
associations are also generally authorized to branch nationwide. The Bank is in
compliance with the noted restrictions.
OTS regulations limit a thrift institution's loans-to-one borrower to the
greater of $500,000 or 15% of unimpaired capital and surplus (except for loans
fully secured by certain readily marketable collateral, in which case this limit
is increased to 25% of unimpaired capital and surplus). At March 31, 1998, the
Bank's lending limit under this restriction was approximately $500,000. The Bank
is in compliance with the loans-to-one borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a capital compliance
plan. A failure to submit a plan or to comply with an approved plan will subject
the institution to further enforcement action. The OTS and the other federal
banking agencies have also adopted additional guidelines on asset quality and
earnings standards. The guidelines were designed to enhance early identification
and resolution of problem assets.
During August and September 1997, the OTS conducted its previously
scheduled routine safety and soundness on-sight examination of the Bank. During
the course of its examination, OTS examiners raised a number of concerns and
noted certain deficiencies in the Bank's operation. As a result of the
examination, the Bank agreed with the OTS not to originate any new consumer or
commercial loans and to limit one-to four-family loan origination's to no more
than $200,000 per month. Management has addressed the concerns of the OTS and
full operational lending authority was restored in the quarter ending March 31,
1998.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings and loan associations,
after giving the OTS an opportunity
19
to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged or is engaging in unsafe or unsound
practices, or is in an unsafe or unsound condition.
In September 1996, Congress enacted legislation to recapitalize the SAIF by
a one-time assessment on all SAIF-insured deposits held as of March 31, 1995.
The assessment was 65.7 basis points per $100 in deposits, payable on November
27, 1996 and amounted to $43,000 for the Bank. In addition, beginning January 1,
1997, interest payments on FICO bonds issued in the late 1980's by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation will be paid jointly by Bank Insurance Fund ("BIF") insured
institutions and SAIF-insured institutions. The FICO assessment is 1.29 basis
points per $100 for BIF deposits and 6.44 basis points per $100 for SAIF
deposits. Beginning January 1, 2000, the FICO interest payments will be paid pro
rata by banks and thrifts based on deposits (approximately 2.4 basis points per
$100 in deposits). In addition, as of January 1, 1997, SAIF assessment rates
dropped significantly and currently range from zero to 27 basis points based
upon an institution's regulatory risk classification and capital group. Prior to
the payment of the one-time special assessment, the Bank's annual SAIF
assessment per $100 in deposits as of June 30, 1996 was 23 basis points. The
Bank anticipates its ongoing SAIF assessment will be 6 basis points per $100 in
deposits.
The legislation also provides for the merger of the BIF and SAIF on
January 1, 1999 if there are no more savings associations as of that date.
Several bills have been introduced in the current Congress that would
eliminate the federal thrift charter and OTS. The bills would require that
all federal savings associations convert to national banks or state
depository institutions by no later than January 1, 1998 in one bill and June
30, 1998 in the other and would treat all state savings associations as state
banks for purposes of federal banking laws. Subject to a narrow
grandfathering, all savings and loan holding companies would become subject
to the same regulation as bank holding companies under the pending
legislative proposals. Under such proposals, any lawful activity in which a
savings association would be permitted for up to two years following the
effective date of its conversion to the new charter, with two additional
one-year extension which may be granted at the discretion of the regulator.
Additionally, such proposals would grandfather existing thrift intrastate and
interstate branches which were operated as branches or in the process of
being established on January 1, 1997 or January 7, 1997, respectively. The
legislative proposals would also abolish the OTS and transfer its functions
to the federal bank regulators with respect to the institutions and to the
Federal Reserve Board with respect to the regulation of holding companies.
The Company is unable to predict whether the legislation will be enacted or,
given such uncertainty, determine the extent to which the legislation, if
enacted, would affect its business. The Company is also unable to predict
whether the SAIF and BIF funds will eventually be merged.
Regulatory Capital Requirements
Federal Savings Associations. Federally insured savings associations, such
as the Bank, are required to maintain a minimum level of regulatory capital. The
OTS has established capital standards, including a tangible capital requirement,
a leverage ratio (or core capital) requirement and a risk-based capital
requirement applicable to such savings and loan associations. Generally, these
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. Further, the valuation allowance applicable to the write-down
of investments and mortgage-backed securities in accordance with SFAS No. 115 is
excluded from the regulatory capital calculation. At March 31, 1998, the Bank
had no intangible assets and an unrealized loss, net of tax under SFAS No. 115
of $5,000.
20
Limitations on Dividends and Other Capital Distributions
Federal Savings Associations. OTS regulations impose various restrictions
or requirements on associations with respect to their ability to pay dividends
or make other distributions of capital. OTS regulations prohibit an association
from declaring or paying any dividends or from repurchasing any of its stock if,
as a result, the regulatory capital of the association would be reduced below
the amount required to be maintained for the liquidation account established in
connection with its mutual-to-stock conversion.
The OTS utilizes a three-tiered approach to permit associations, based on
their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account.
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital exceeds its
fully phased-in capital requirement for such capital component, as measured at
the beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. The Bank meets the requirements
for a Tier 1 association and has not been notified of a need for more than
normal supervision. Tier 2 associations, which are associations that before and
after the proposed distribution meet their current minimum capital requirements,
may make capital distributions of up to 75% of net income over the most recent
four quarter period.
Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution. As a subsidiary of the Company, the Bank will also be
required to give the OTS 30 days' notice prior to declaring any dividend on its
stock. The OTS may object to the distribution during that 30-day period based on
safety and soundness concerns.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered
structure and the safe-harbor percentage limitations. Under the proposal a
savings association may make a capital distribution without notice to the OTS
(unless it is a subsidiary of a holding company) provided that it has a CAMEL
1 or 2 rating, is not in troubled condition and would remain adequately
capitalized (as defined by regulation) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must
notify the OTS 30 days prior to declaring a capital distribution. The OTS
stated it will generally regard as permissible that amount of capital
distributions that do not exceed 50% of the institution's excess regulatory
capital plus net income to date during the calendar year. A savings
association may not make a capital distribution without prior approval of the
OTS and the FDIC if it is undercapitalized before, or as a result of, such a
distribution. A savings association will be considered in troubled condition
if it has a CAMEL rating of 4 or 5, is subject to an enforcement action
relating to its safety and soundness or financial viability or has been
informed in writing by the OTS that it is in troubled condition. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted. At year end March 31,
1998, the Bank's CAMEL rating was 3.
Liquidity
All savings associations, including the Bank, are required to maintain an
average daily balance of liquid assets equal to a certain percentage of the sum
of its average daily balance of net withdrawable deposit accounts and borrowings
payable in one year or less. This liquid asset ratio requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations. At the present time, the minimum liquid asset
ratio is 5%.
21
In addition, short-term liquid assets (e.g., cash, certain time deposits,
certain bankers acceptances and short-term U.S. Treasury obligations) currently
must constitute at least 1% of the Bank's average daily balance of net
withdrawable deposit accounts and current borrowings. Penalties may be imposed
upon associations for violations of either liquid assets ratio requirement. At
March 31, 1998, the Bank was in compliance with both requirements, with a liquid
assets ratio of 18.0% and a short-term liquid assets ratio of 10.9%.
Accounting
An OTS policy statement applicable to all savings associations clarifies
and re-emphasizes that the investment activities of a savings association must
be in compliance with approved and documented investment policies and
strategies, and must be accounted for in accordance with generally accepted
accounting principles. Under the policy statement, management must support its
classification of and accounting for loans and securities (i.e., whether held
for investment, sale or trading) with appropriate documentation.
The OTS has adopted an amendment to its accounting regulations, which may
be made more stringent than generally accepted accounting principles to require
that transactions be reported in a manner that best reflects their underlying
economic substance and inherent risk and that financial reports must incorporate
any other accounting regulations or orders prescribed by the OTS. The Bank is in
compliance with these amended rules.
Qualified Thrift Lender Test
All savings associations, including the Bank, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. Such assets
primarily consist of residential housing related loans and investments. At
March 31, 1998, the Bank met the test.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
savings association is immediately ineligible to receive any new FHLB borrowings
and is subject to national bank limits for payment of dividends. If such
association has not requalified or converted to a national bank within three
years after the failure, it must divest of all investments and cease all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any association that fails the QTL test is controlled by a holding
company, then within one year after the failure, the holding company must
register as a bank holding company and become subject to all restrictions on
bank holding companies. See "--Holding Company Regulation."
Transactions with Affiliates
Generally, transactions between a savings association or its subsidiaries
and its affiliates are required to be on terms as favorable to the association
as transactions with non-affiliates. In addition, certain of these transactions,
such as loans to an affiliate, are restricted to a percentage of the
association's capital. Affiliates of the Bank include the Company and any
company which is under common control with the Bank. In addition, a savings
association may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of most affiliates.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
22
Holding Company Regulation
The Company will be a unitary savings and loan holding company subject to
regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non- savings association subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
As a unitary savings and loan holding company, the Company generally is not
subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
holding company, and the activities of the Company and any of its subsidiaries
(other than the Bank or any other SAIF-insured savings and loan association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of the
OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See
"--Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control of
any other SAIF-insured association. Such acquisitions are generally prohibited
if they result in a multiple savings and loan holding company controlling
savings and loan associations in more than one state. However, such interstate
acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings and loan association.
Interstate Banking and Branching. On September 29, 1994, the Riegle-Neal
Interstate Banking and Branching Act of 1994 (the "Act") was enacted to ease
restrictions on interstate banking. The Act allows the FRB to approve an
application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the assets
of, a bank located in a state other than such holding company's home state,
without regard to whether the transaction is prohibited by the laws of any
state. The FRB may not approve the acquisition of the bank that has not been in
existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state. The Act also prohibits the FRB from
approving an application if the applicant (and its depository institution
affiliates) controls or would control more than 10% of the insured deposits in
the United States or 30% or more of the deposits in the target bank's home state
or in any state in which the target bank maintains a branch. The Act does not
affect the authority of states to limit the percentage of total insured deposits
in the state which may be held or controlled by a bank or bank holding company
to the extent such limitation does not discriminate against out-of-state banks
or bank holding companies. Individual states may also waive the 30% state-wide
concentration limit contained in the Act.
Additionally, beginning on June 1, 1997, the federal banking agencies are
authorized to approve interstate merger transactions without regard to whether
such transaction is prohibited by the law of any state, unless the home state of
one of the banks opts out of the Act by adopting a law after the date of
enactment of the Act and prior to June 1, 1997 which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches will be permitted only
if the law of the state in which the branch is located permits such
acquisitions. Interstate mergers and branch acquisitions will also be subject to
the nationwide and statewide insured deposit concentration amounts described
above.
The Act authorizes the OCC and FDIC to approve interstate branching de novo
by national and state banks, respectively, only in states which specifically
allow for such branching. The Act also requires the appropriate federal banking
agencies to prescribe regulations by June 1, 1997 which prohibit any
out-of-state bank from using the interstate branching authority primarily for
the purpose of deposit production. These regulations must include guidelines to
ensure that interstate branches operated by an out-of-state bank in a host state
are reasonably helping to meet the credit needs of the communities which they
serve. The OCC, FDIC and FRB proposed such regulations on March 17, 1997.
Management of the Bank cannot predict when, or in what form final regulations
will be adopted.
23
Federal Reserve System
The Federal Reserve Board requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At March 31,
1998, the Bank was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements that may be imposed by the OTS.
See "--Liquidity."
Savings associations are authorized to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve Board regulations require associations to
exhaust other reasonable alternative sources of funds, including FHLB
borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB of New York, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are subject
to the regulation and oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York. At March 31, 1998, the Bank had $87,000 of FHLB stock. In past
years, the Bank has received dividends on its FHLB stock. The dividend yield
from FHLB stock was 9.5% for fiscal 1998. No assurance can be given that such
dividends will continue in the future at such levels.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
Federal and State Taxation
Federal Taxation. Savings associations such as the Bank that meet certain
definitional tests relating to the composition of assets and other conditions
prescribed by the Code are permitted to establish reserves for bad debts and to
make annual additions thereto which may, within specified formula limits, be
taken as a deduction in computing taxable income for federal income tax
purposes. The amount of the bad debt reserve deduction for "non-qualifying
loans" is computed under the experience method. For tax years beginning before
December 31, 1995, the amount of the bad debt reserve deduction for "qualifying
real property loans" (generally loans secured by improved real estate) may be
computed under either the experience method or the percentage of taxable income
method (based on an annual election). If a savings association elected the
latter method, it could claim, each year, a deduction based on a percentage of
taxable income, without regard to actual bad debt experience.
Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings and loan association over a period of years.
Pursuant to certain legislation which was enacted and which is effective
for tax years beginning after 1995, a small thrift institution (one with an
adjusted basis of assets of less than $500 million), such as the Bank, no longer
is permitted to make additions to its tax bad debt reserve under the percentage
of taxable income method. Such institutions are permitted to use the experience
method in lieu of deducting bad debts only as they occur. Such legislation
requires the Bank to realize increased tax liability over a period of at least
six years, beginning in 1996. Specifically, the legislation requires a small
thrift institution to recapture (i.e., take into income) over a multi-year
24
period the balance of its bad debt reserves in excess of the lesser of (i) the
balance of such reserves as of the end of its last taxable year ending before
1988 or (ii) an amount that would have been the balance of such reserves had the
institution always computed its additions to its reserves using the experience
method. The recapture requirement is suspended for each of two successive
taxable years beginning January 1, 1996 in which the Bank originates an amount
of certain kinds of residential loans which in the aggregate are equal to or
greater than the average of the principal amounts of such loans made by the Bank
during its six taxable years preceding 1996. It is anticipated that any
recapture of the Bank's bad debt reserves accumulated after 1987 would not have
a material adverse effect on the Bank's financial condition and results of
operations. As of March 31, 1998, the Bank's accumulated bad debt reserves after
1987 amounted to $39,000.
If an association ceases to qualify as a "bank" (as defined in Code Section
581) or converts to a credit union, the pre-1988 reserves and the supplemental
reserve are restored to income ratably over a six-year period, beginning in the
tax year the association no longer qualifies as a bank. The balance of the
pre-1988 reserves are also subject to recapture in the case of certain excess
distributions to (including distributions on liquidation and dissolution), or
redemptions of, shareholders.
In addition to the regular federal income tax, corporations, including
savings and loan associations such as the Bank, generally are subject to a
minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20%
on alternative minimum taxable income, which is the sum of a corporation's
regular taxable income (with certain adjustments) and tax preference items, less
any available exemption. The alternative minimum tax is imposed to the extent it
exceeds the corporation's regular income tax and net operating losses can offset
no more than 90% of alternative minimum taxable income. For taxable years
beginning after 1986 and before 1996, corporations, including savings and loan
associations such as the Bank, are also subject to an environmental tax equal to
0.12% of the excess of alternative minimum taxable income for the taxable year
(determined without regard to net operating losses and the deduction for the
environmental tax) over $2 million.
The Bank files its federal income tax returns on a calendar year basis
using the cash method of accounting. The Company intends to file consolidated
federal income tax returns with the Bank. Savings and loan associations, such as
the Bank, that file federal income tax returns as part of a consolidated group
are required by applicable Treasury regulations to reduce their taxable income
for purposes of computing the percentage bad debt deduction for losses
attributable to activities of the non-savings and loan association members of
the consolidated group that are functionally related to the activities of the
savings association member.
The Bank has not been audited by the IRS with respect to federal income tax
returns during the past five years. In the opinion of management, any
examination of still open returns would not result in a deficiency which could
have a material adverse effect on the financial condition of the Bank.
State Taxation. The Bank is subject to the New York State Franchise Tax on
Banking Corporations in an annual amount equal to the greater of (i) 9% of the
Bank's "entire net income" allocable to New York State during the taxable year,
or (ii) the applicable alternative minimum tax. The alternative minimum tax is
generally the greatest of (a) .01% of the value of the taxable assets allocable
to New York State with certain modifications, (b) 3% of the Bank's "alternative
entire net income" allocable to New York State or (c) $250. Entire net income is
similar to federal taxable income, subject to certain modifications (including
that net operating losses cannot be carried back or carried forward) and
alternative entire net income is equal to entire net income without certain
adjustments.
Delaware Taxation. As a Delaware holding company, the Company is exempted
from Delaware corporate income tax but is required to file an annual report with
and pay an annual fee to the State of Delaware. The Company is also subject to
an annual franchise tax imposed by the State of Delaware.
25
ITEM 2. Properties
The Bank conducts its business through its office, located in Canajoharie,
New York. The following table sets forth information relating to the Bank's main
office as of March 31, 1998. The total net book value of the Bank's premises and
equipment (including land, buildings and leasehold improvements and furniture,
fixtures and equipment) at March 31, 1998 was $197,000.
Total Net Book Value
Approximate of Real Estate at
Location Date Acquired Square Footage March 31, 1998
- ------------------ ----------------- ----------------- ----------------
Main Office: 1973 3,600 $127,000
26 Church Street
Canajoharie, New York
ITEM 3. Legal Proceedings
There are various claims and lawsuits to which the Company is periodically
involved incident to the Company's business. In the opinion of management, such
claims and lawsuits in the aggregate are immaterial to the Company's
consolidated financial condition and results of operations.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.
PART II
ITEM 5. Market for Company's Common Stock and Related Security Holder
Matters
The "Market for Common Stock" section of the Company's Annual Report to
Stockholders is incorporated herein by reference.
ITEM 6. Selected Financial Data
The selected financial information for the year ended March 31, 1998 is
filed as part of the Company's Annual Report to Stockholders and is incorporated
by reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
The information required by this item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report to Stockholders which is incorporated herein by
reference.
ITEM 8. Financial Statements and Supplementary Data
The financial statements are contained in the Company's Annual Report to
Stockholders and is incorporated herein by reference.
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
26
PART III
ITEM 10. Directors and Executive Officers of the Company
(a) Information concerning the directors of the Company is incorporated by
reference hereunder in the Company's Proxy Materials for the Annual Meeting of
Stockholders.
(b) Set forth below is information concerning the Principal Officer of the
Company.
Name Age Title
- ----------------- --- -----
Gordon E. Coleman 43 President, Chief Executive Officer and Director
ITEM 11. Executive Compensation
Information with respect to management compensation and transactions
required under this item is incorporated by reference hereunder in the Company's
Proxy Materials for the Annual Meeting of Stockholders under the caption
"Compensation".
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the sections captioned "Stock Ownership of
Management" is incorporated by reference to the Company's Proxy Materials for
its Annual Meeting of Stockholders.
ITEM 13. Certain Relationships and Related Transactions
The information required by this item is set forth under the caption
"Certain Transactions" in the Definitive Proxy Materials for the Annual Meeting
of Stockholders and is incorporated herein by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The exhibits and financial statement schedules filed as a part of this Form
10-K are as follows:
(A) Independent Auditors' Report
(B) Consolidated Statements of Financial Condition - March 31,
1998 and 1997
(C) Consolidated Statements of Operations - years ended
March 31, 1998 and 1997
(D) Consolidated Statements of Changes in Stockholders' Equity -
years ended March 31, 1998 and 1997
(F) Consolidated Statements of Cash Flows - years ended
March 31, 1998 and 1997
(G) Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
27
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(b) Reports on Form 8-K
The Company has not filed a Current Report on Form 8-K during the
fourth quarter of the fiscal year ended March 31, 1998.
(c) Exhibits
3.1 Certificate of Incorporation of Landmark Financial Corp.
Incorporated herein by reference to the Company's registration
statement on SB-2, file No. 333- 29793 (the "SB-2")
3.2 Bylaws of Landmark Financial Corp. (Incorporated herein by
reference to the Company's SB-2
4 Form of Stock Certificate of Landmark Financial Corp.,
incorporated from Form SB-2.
13 Annual Report to Stockholders
21 Subsidiaries of Company
27 Financial Data Schedule
28
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Landmark Financial Corp.
Date: August 21, 1998 By: /s/ Gordon E. Coleman
---------------------
Gordon E. Coleman
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By:/s/ Gordon E. Coleman By:/s/ F. Richard Ferraro
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Gordon E. Coleman F. Richard Ferraro
President, Chief Executive Director
Officer and Director
(Principal Executive Officer)
Date: August 21, 1998 Date: August 21, 1998
By:/s/ Paul Hofmann By:/s/ Patricia A. Symolon
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Paul Hofmann Patricia A. Symolon
Chief Financial Officer Director
(Principal Financial and
Accounting Officer)
Date: August 21, 1998 Date: August 21, 1998
By:/s/ John R. Francisco By:/s/ Carl J. Rockefeller
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John R. Francisco Carl J. Rockefeller
Chairman of the Board Vice Chairman of the Board
Date: August 21, 1998 Date: August 21, 1998
By:/s/ Frederick LaCoppola By:/s/ Carl S. Salmon III
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Frederick LaCoppola Carl S. Salmon III
Director Director
Date: August 21, 1998 Date: August 21, 1998