LANDMARK CREDIT UNION FINANCIAL STATEMENTS. March 31, 2011 and 2010

Transcription

1 FINANCIAL STATEMENTS March 31, 2011 and 2010

2 CONTENTS Paqe INDEPENDENT AUDITORS' REPORT FINANCIAL STATEMENTS: Statements of Financial Condition... 2 Statements of Income... 3 Statements of Changes in Members' Equity... 4 Statements of Cash Flows Notes to Financial Statements SUPPLEMENTAL INFORMATION: Independent Auditors' Report on Supplemental Information Schedules of Noninterest Expense Schedule of Compliance with Freddie Mac Home Mortgage Net Worth Requirement Supplemental Financial Data... 36

3 INDEPENDENT AUDITORS' REPORT To the Board of Directors Landmark Credit Union New Berlin, Wisconsin We have audited the accompanying statements of financial condition of Landmark Credit Union as of March 31,2011 and 2010, and the related statements of income, changes in members' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Credit Union's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Credit Union's internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Landmark Credit Union as of March 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. tx~~ gq Certified Public Accountants Milwaukee, Wisconsin June 30, 2011 Appleton Fond du Lac Green Bay Manitowoc Milwaukee Oshkosh Sheboygan Stevens Point schencksc.com

4 STATEMENTS OF FINANCIAL CONDITION March 31,2011 and 2010 (Dollars in thousands) ASSETS Cash and cash equivalents Investment securities Trading assets Securities held-to-maturity Securities available-for -sale Loans held for sale, net of unrealized losses Loans receivable, net of allowance for loan losses Accrued interest receivable Other real estate owned, net of allowance for losses Property and equipment - net NCUSIF deposit Mortgage servicing rights Other assets $ 114,102 $ 126,283 11,746 13,338 45,837 40,170 1,122 1,137 15,913 17,139 1,312,452 1,168,599 4,927 4,737 3,272 2,017 36,663 34,222 12,609 11,865 12,255 12,135 20,724 25,704 $1,591,622 $ 1,457,346 LIABILITIES AND MEMBERS' EQUITY Liabilities Members' share and savings accounts Notes payable Advance payments by borrowers for taxes and insurance on real estate loans Accrued interest payable Accrued expenses and other liabilities $ 1,438,839 18,981 6, ,398 $ 1,300,284 35,146 6,195 3 T otalliabilities 1,471,199 1,348,999 Members' equity - substantially restricted 120, ,347 $1,591,622 $ 1,457,346 See notes to financial statements. 2

5 STATEMENTS OF INCOME Years Ended March 31,2011 and 2010 (Dollars in thousands) Percent of Gross Revenue Interest income Loans receivable Investment securities $ 69,273 $ 68, % 69.90% Trading assets % 0.47% Held-to-maturity % 0.03% Available-for-sale % 0.66% Total interest income 70,503 70, % 71.06% Interest expense Dividends on members' share and savings accounts 17,747 22, % 22.95% Borrowed funds 1,252 1, % 1.66% Total interest expense 18,999 24, % 24.61% Net interest income 51,504 45, % 46.45% Provision for loan losses 12,616 11, % 12.15% Net interest income after provision for loan losses 38,888 33, % 34.30% Non-interest income Gain on sales of interest-earning assets, net 4,310 4, % 4.19% Commissions 1,565 1, % 1.23% Loan servicing fees 3,092 4, % 4.14% Fees and service charges 14,636 13, % 13.84% Total non-interest income 23,603 23, % 23.40% Non-interest expense General and administrative Compensation and benefis 26,322 23, % 23.63% Occupancy 5,102 4, % 4.54% Other 19,231 18, % 18.38% Total non-interest expense 50,655 45, % 46.55% Operating income 11,836 11, % 11.15% Nonoperating income 171 5, % 5.55% Net Income $ 12,007 $ 16, % 16.70% See notes to financial statements. 3

6 Statements of Changes in Members' Equity Years Ended March 31, 2011 and 2010 (Dollars in thousands) Balance - March 31, 2009 Regular Reserve 20,400 Undivided Earnings $ 69,721 Accumulated Other Comprehensive Loss $ (3,671) Total $ 86,450 Net Income 16,483 16,483 Other comprehensive income ASC 715 adjustment to pension plan Total comprehensive income 1 9 Acquired equity 4,578 4,578 Balance - March 31, ,400 90,782 (2,835) 108,347 Net income 12,007 12,007 Other comprehensive income ASC 715 adjustment to pension plan Total comprehensive income 12,076 Balance - March 31, 2011 $ 20,400 $ 102,789 $ (2,766) $ 120,423 See notes to financial statements. 4

7 Statements of Cash Flows Years Ended March 31,2011 and 2010 (Dollars in thousands) Operatinq activities Net income Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization Net amortization of premiums and discounts on investment securities Provision for loan losses Net changes in operating assets and liabilities Accrued interest receivable Other assets NCUSIF deposit Accrued interest payable Accrued expenses and other liabilities Deferred income Net cash provided by operating activities $ 12,007 $ 16,483 2,972 2, (285) 12,364 11,720 (190) (429) 4,860 1,019 (744 ) (7,318) (1 ) (973) (1,274) ( 1,485) (67) 29, Investinq activities Proceeds from maturing trading securites Proceeds from maturing securites available-for-sale Proceeds from maturing securities held-to-maturity Purchases of trading securities Purchases of securities available-for-sale Purchases of securities held-to-maturity Acquired equity Increase in loans receivable - net Increase in foreclosed property Decrease in loans held for sale Purchases of property and equipment Net cash used for investing activities 1, ,625 (18,518) (154,663) (1,255) 1,226 (5,413) (164,391) 69 2,032 (2,195) (717) (28,331) 4,578 (82,548) (1,231) 26,906 (11,501) (92,938) See notes to financial statements. 5

8 Statements of Cash Flows Years Ended March 31, 2011 and 2010 (Dollars in thousands) Financinq activities Net increase in advance payments by borrowers Net increase in members' share and savings accounts Proceeds from CCCU advances Repayment of CCCU advances Net cash provided by financing activities , , (16,178) (5,162) ,229 Cash and cash equivalents Net increase (decrease) Beginning of year (12,181) 126,283 50,410 75,873 End of year $ 114,102 $ 126,283 Supplemental Cash Flow Information Cash paid during the period for Interest on deposit accounts Interest on borrowings $ 17,747 $ 1,252 $ 22,647 $ 1,637 Noncash investinq activities Loans transferred to foreclosed properties and real estate in judgment $ 1,255 $ 1,231 See notes to financial statements. 6

9 March 31,2011 and 2010 Note 1 - Nature of business and summary of significant accounting policies A. Nature of business Landmark Credit Union provides a variety of financial services to its members. The Credit Union's primary deposit products are share accounts, and its primary lending products are automobile and real estate loans. B. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Specifically, management has made estimates based upon assumptions for fair value of financial instruments and the assessment of other than temporary impairment on investments. Actual results could differ from those estimates. C. Investment securities The Credit Union's investments in securities are classified and accounted for as follows: Held-to-Maturity: Government and government agency bonds, notes, and certificates, which the Credit Union has the positive intent and ability to hold to maturity, are reported at cost, adjusted for amortization or premiums and accretion of discounts which are recognized in interest income using the interest method over the period to maturity. Available-for-Sale: Government and government agency bonds, notes, and certificates are classified as available-for-sale when the Credit Union anticipates that the securities could be sold in response to rate changes, prepayment risk, liquidity, availability of and the yield on alternative investments and other market and economic factors. These securities are reported at fair value. Trading Securities: Securities that are held for short-term resale are classified as trading account securities and recorded at their fair values. Realized and unrealized gains and losses on trading securities are included in other income. Unrealized gains and losses on securities available-for-sale are recognized as direct increases or decreases in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Credit Union to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and the costs of securities sold are determined using the specific identification method. 7

10 March 31, 2011 and 2010 Note 1 - Nature of business and summary of significant accounting policies, continued D. Loans held for sale Loans held for sale consists of mortgage loans carried at the lower of original cost or market value in compliance with GAAP. Market value is determined either on a loan-by-ioan basis or on a combined related pool. Net unrealized losses are recognized through a valuation allowance by charges to income. All sales are made without recourse. E. Loans receivable The Credit Union grants mortgage, commercial and consumer loans to members. A substantial portion of the loan portfolio is represented by mortgage loans throughout Wisconsin and Illinois. The ability of the members to honor their contracts is dependent upon the real estate and general economic conditions in this area. Loans receivable are stated at unpaid principal balances, less an allowance for loan losses and net deferred loan origination fees and discounts. Interest on loans is recognized over the term of the loan and is calculated using the simple-interest method on principal amounts outstanding. The accrual of interest on loans is discontinued at the time the loan is 60 days delinquent unless the credit is well-secured and in process of collection. Credit card loans and other personal loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if management believes, after considering economic conditions, business conditions, and collection efforts, that collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off are reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method. until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loan fees and certain direct loan origination costs are deferred, and the net fee or cost is recognized as an adjustment to interest income using the interest method over the contractual life of the loans, adjusted for estimated prepayments based on the Credit Union's historical prepayment experience. Commitment fees and costs relating to commitments whose likelihood of exercise is remote are recognized over the commitment period on a straight-line basis. If the commitment is subsequently exercised during the commitment period, the remaining unamortized commitment fee at the time of exercise is recognized over the life of the loan as an adjustment of yield. F. Allowance for loan losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. 8

11 March 31, 2011 and 2010 Note 1 - Nature of business and summary of significant accounting policies, continued F. Allowance for loan losses, continued The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectabilty of the loans in light of historical experience, the nature and volume of the loan portolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The Credit Union's allowance for loan losses is that amount considered adequate to absorb probable losses in the portfolio based upon management's evaluations of the size and current risk characteristics of the loan portolio. Such evaluations consider prior loss experience, the risk rating distribution of the portolios, the impact of current internal and external influences on credit loss and the levels of non performing loans. Specific allowances for loan losses are established for large impaired loans on an individual basis. The specific allowance established for these loans is based on a thorough analysis of the most probable source of repayment, including the present value of the loan's expected future cash flows, the loan's estimated market value, or the estimated fair value of the underlying collateral. General allowances are established for loans that can be grouped into pools based on similar characteristics. In the process, general allowance factors are based on an analysis of historical charge-off experience and expected losses given default derived from the Credit Union's internal risk rating process. These factors are developed and applied to the portfolio in terms of loan type. The qualitative factors associated with the allowances are subjective and require a high degree of management judgment. These factors include the credit quality statistics, recent economic uncertainty, losses incurred from recent events, and lagging data. Accrual of interest on a loan is discontinued when the loan is more than sixty days delinquent for consumer and real estate loans. Uncollectible interest previously accrued is charged off or an allowance is established by means of a charge to interest income. Income is subsequently recognized only to the extent cash payments are received until the borrower is current, in which case, the loan is returned to accrual status. G. Valuation of lonq-lived assets Long-lived assets and certain identifiable intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management reviews all material assets annually for possible impairment. If such assets are considered to be impaired, the impairment recognized is measured as the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. H. Pension plan The Credit Union has a qualified, noncontributory, defined-benefit pension plan covering substantially all employees. Annual contributions to the plan cover both present and past service costs as allowable under the Internal Revenue Code. 9

12 March 31,2011 and 2010 Note 1 - Nature of business and summary of significant accounting policies, continued i. NCUSIF deposit The deposit in the National Credit Union Share Insurance Fund (NCUSIF) is in accordance with National Credit Union Administration (NCUA) regulations, which require the maintenance of a deposit by each insured credit union in an amount equal to one percent of its insured shares. The deposit would be refunded to the Credit Union if its insurance coverage is terminated, it converts to insurance coverage from another source, or the operations of the fund are transferred from the NCUA Board. See Note 8. J. NCUSIF insurance premiums A credit union is required to pay an annual insurance premium equal to one-twelfth of one percent of its total insured shares, unless the payment is waived or reduced by the NCUA Board. The NCUA Board waived the 2010 and 2009 insurance premium. See Note 8. K. Other real estate owned Real estate properties acquired through or in lieu of loan foreclosure are initially recorded at fair value less estimated selling cost at the date of foreclosure. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and property held for sale is carried at the lower of the new cost basis or fair value less cost to sell. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically performed by management, and any subsequent writedowns are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. L. Property and equipment Land is carried at cost. Buildings, leasehold improvements, furniture, fixtures, and equipment are carried at cost, less accumulated depreciation and amortization. The buildings, furniture, fixtures, and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. The cost of leasehold improvements is amortized using the straight-line method over the terms of the related leases. Accumulated amortization is included in accumulated depreciation. M. Members' share andsavinqs accounts Members' shares are subordinated to all other liabilities of the Credit Union upon liquidation. Interest on members' share and savings accounts is based on available earnings at the end of an interest period and is not guaranteed by the Credit Union. Interest rates on members' share accounts are set by a rate committee and ratified by the Board of Directors, based on an evaluation of current and future market conditions. 10

13 March 31, 2011 and 2010 Note 1 - Nature of business and summary of significant accounting policies, continued N. Members' equity The Credit Union is required by regulation to maintain a statutory reserve. This reserve, which represents a regulatory restriction of retained earnings, is not available for the payment of interest. O. Reserve requirement In 2001, the NCUA revised the regulatory net worth requirements for credit unions. Credit unions that are classified as "well capitalized" (net worth ratio of 7% or higher) are not required to make statutory transfers to the regular reserve. The regular reserve has been established at the discretion of the Board of Directors to protect the interests of the members. The Board may at times change the reserved amount for specific requirements. P. Comprehensive income (loss) Comprehensive income or loss consists of net income or loss and other comprehensive income or loss that includes unrealized gains and losses on securities available for sale, and certain adjustments to the pension liability. Q. Income taxes The Credit Union is exempt by statute from federal and state income taxes except for certain products and services such as members' financial management services, car warranties, and guaranteed auto protection (GAP) insurance which have been deemed by the Internal Revenue Service (IRS), to be unrelated to the specific entity's exempt purpose. As presented in the technical advice memorandums, the net taxable income from these products and services is subject to income taxes under the Unrelated Business Income Tax (UBIT) regulations. The taxing authorities have the abilty to assess taxes, penalties and interest for any years for which no tax return was filed. In the opinion of management, the estimated liability recorded and any potential additional liability resulting from taxing authorities imposing additional taxes, penalties, and interest on the taxes due is not expected to have a material eff~ct on the Credit Union's financial position or results of operation. Effective April 1, 2010, the Credit Union has adopted the guidance for accounting or uncertainties in income taxes, which is part of Accounting Standards Codification (ASC) This guidance increases the relevancy and comparability of financial reporting by clarifying the way companies account for uncertainties in income taxes for tax positions taken or expected to be taken. It makes recognition and measurement more consistent as well as offering criteria for subsequently recognizing, derecognizing and measuring such tax positions for financial statement purposes. The adoption has no impact on the Credit Union's financial condition, results of operations or cash flows and no interest and penalties are recorded based on this analysis. As of March 31, 2011 and 2010, the Credit Union had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. 11

14 March 31, 2011 and 2010 Note 1 - Nature of business and summary of significant accounting policies, continued Q. Income taxes, continued Penalties and interest assessed by income taxing authorities are included in operating expense. The Company had no interest and penalties related to income taxes for the years ended March 31, 2011 and The Credit Union's federal income tax returns are subject to examination generally for three years after they are filed and its state income tax returns generally for four years after they are filed. R. Loan servicinq The Credit Union has elected to carry their mortgage servicing rights at amortized cost in accordance with FASB ASC 860, Transfers and Servicing. The adoption of ASC 860 has resulted in $12,255,000 and $12,135,000 recognized as mortgage servicing rights as March 31,2011 and 2010, respectively. The fair value of the mortgage servicing rights as of March 31, 2011 and 2010 was $12,678,000 and $12,466,000, respectively. The fair value is determined by using a discounted cash flow analysis paired with pricing obtained from a third-party company that buys servicing release premiums as part of its business. The portfolio is stratified into two segments - over twenty years and under twenty years. The vast majority of underlying instruments are conventional thirty and fifteen year loans that have been sold to Fannie Mae and Freddie Mac. The Credit Union calculates the fair market value as the average of the two valuation methodologies. The changes in the mortgage servicing rights are recapped in Note 15. S. Off-balance-sheet credit related financial instruments In the ordinary course of business, the Credit Union has entered into commitments to extend credit. Such financial instruments are recorded when they are funded. T. Advertisinq Advertising costs are expensed as incurred. Advertising expense was approximately $938,000 and $681,000 for the years ended March 31, 2011 and 2010, respectively. U. Concentration of credit risk At March 31, 2011 and 2010, and at various times during the years then ended, the Credit Union maintained cash balances in its financial institutions in excess of NCUA insurable limits. V. Reclassifications Certain reclassifications have been made to the March 31,2010 financial statement presentation to correspond to the current year's format. Total equity and net income are unchanged due to these reclassifications. W. Subsequent events Subsequent events were evaluated through june 30, 2011, which is the date on which the financial statements were available to be issued. 12

15 March 31, 2011 and 2010 Note 2 - Membership eligibility The following persons are eligible for membership in Landmark Credit Union: Employees of, members of, and contributors to Allis Chalmers Corporation, Milwaukee; Allis Chalmers Corporation, West Alls, WI; Anamosa Division of Doerr Electric & Doerr Electric Northbrook Division, Northbrook, IL; Carnation Company, its divisions and subsidiaries in Wi; companies associated with the graphic communication industry; Doerr Electric and Doerr Products Corporation, Cedarburg, WI; Doerr Electric Sheboygan Falls Division, Sheboygan Falls, WI; Envirex, Inc., Waukesha, WI; Leed, Inc. and Deel, Inc. of Sturgeon Bay, WI; Rexnord, Inc., Milwaukee, WI; Rexworks, Inc., Milwaukee, WI; Teamsters Local 344; Transport Corporation of Milwaukee; St. Matthias Parish, Milwaukee, WI; United Way of Milwaukee and Waukesha, Wi; and successors, affiliates, and subsidiary operations of the preceding entities; persons residing or employed in Dodge, Jefferson, Kenosha, Milwaukee, Ozaukee, Racine, Walworth, Washington and Waukesha counties, WI; and members of record at the date of consolidations of the Lake Country Credit Union, Lifetime Credit Union, ALLCO Credit Union, Wiscor Credit Union and First Security Credit Union may become members of this credit union in the manner provided in the bylaws. Note 3 - Restrictions on cash The Credit Union is required to maintain balances with a corporate credit union as membership shares that are uninsured and require a three-year notice before withdrawal. The balance of the membership shares account is based upon one percent of the Credit Union's year-end members' share balance and is adjusted annually on January 1 of each year to a maximum of $2,000,000. The Credit Union was also required to maintain other compensating balances with the corporate credit union in the amount of $3,620,996 and $6,286,986 at March 31,2011 and 2010, respectively. Note 4 - Investment securities Trading securities consists of the following (dollars in thousands): March 31,2011 Fair Value March 31,2010 Fair Value Asset Management Fund - ARM Mutual Fund $ 11,7 46 $ 13,338 13

16 Note 4 - Investment securities, continued LANDMARK CREDIT UNION March 31, 2011 and 2010 Securities held-to-maturity consists of the following (dollars in thousands): March 31, 2011 March 31, 2010 Amortized Fair Amortized Fair Cost Value Cost Value Certificates of Deposit $ 20,538 $ 20,538 $ 4,729 $ 4,729 U.S. Government Agencies 14,584 14,783 24,769 25,054 Corporate Central deposits 10,656 10,656 10,613 10,613 FHLB Membership deposits Business Lending Services, LLC $ 45,837 $ 46,036 $ 40,170 $ 40,455 Securities available-for-sale consists of the following (dollars in thousands): March 31,2011 March 31, 2010 Gross Gross Unrealized Unrealized Amortized Gains! Fair Amortized Gains! Fair Cost (Losses) Value Cost (Losses) Value Wiscub, Inc. common stock $ 47 $ - $ 47 $ 47 $ - Wisconsin Credit Union $ 47 Shared Services, Inc. common stock PSCU Revolving Fund certificates FHLB Capital Stock CU Mortgage Investors, LLC $ 1,122 $ - $ 1,122 - $ 1,137 Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than the cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Credit Union to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. 14

17 Note 4 - Investment securities, continued LANDMARK CREDIT UNION March 31,2011 and 2010 Market changes in interest rates and market changes in credit spreads will cause normal fluctuations in the market price of securities and the possibility of temporary unrealized losses. Effective December 31, 2007 the Credit Union adopted FASB ASC 820, Fair Value Measurements and Disclosures and took a one time write down of the Asset Management Fund - ARM Mutual Fund through undivided earnings which in effect now categorized the investment as a trading asset. The Credit Union believes that that the write down will more accurately reflect the fair value of the asset. The fair value of the Mutual Fund meets the requirements of ASC 820. The Credit Union has determined that there was no additional other-than-temporary impairment associated with these securities at March 31, The amortized cost and estimated market value of investment securities by contractual maturity are shown below. Expected maturities will differ from contractual maturities on those securities where the borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Contractual maturities are as follows (dollars in thousands): Estimated Estimated Amortized Market Amortized Market Cost Value Cost Value Within one year or no maturity $ 34,211 $ 34,218 $ 24,909 $ 24,909 Greater than one year through five years 5,198 5,198 7,809 7,798 Greater than five years through ten years Greater than ten years 7,022 7,207 7,786 8,080 Total $ 46,959 $ 47,158 $ 41,307 $ 41,592 15

18 March 31, 2011 and 2010 Note 5 - Loans receivable The composition of loans to members is as follows (dollars in thousands): Automobile $ 500,966 $ 471,313 Real estate 235, ,473 Unsecured 5,478 6,968 Lines of credit Real estate equity 263, ,915 Student loans 10,314 10,702 Credit card loans 53,389 51,595 Business loans 150, ,644 SBA loans Participation loans purchased 4,112 7,725 Other - secured 101, ,964 Deferred loan costs 5 1,529 Less: 1,326,338 1,180,290 Participation loans sold 1,476 1,723 Undisbursed portion of loans 12 Allowance for loan losses 12,398 9,968 13,886 11,691 Net loans to members $ 1,312,452 $ 1,168,599 A summary of loans by maturity is as follows (dollars in thousands): Maturity within one year $ 679,974 $ 707,828 One to three years 452, ,321 Over three years 179,773 50,450 $ 1,312,452 $ 1,168,599 16

19 Note 5 - Loans receivable, continued LANDMARK CREDIT UNION March 31,2011 and 2010 A summary of the activity in the allowance for loan losses is as follows (dollars in thousands): Balance - beginning of year $ 9,968 $ 6,348 Provision charged to operations 12,364 11,718 Loans charged off (10,574) (8,944) Recoveries Balance - end of year $ 12,398 $ 9,968 The following is a summary of information pertaining to impaired and non-accrual thousands): loans (dollars in Impaired loans with a valuation allowance $ 31,413 $ 33,767 Valuation allowance allocated to impaired loans $ 9,841 $ 6,833 Impaired loans on non-accrual status $ 9,841 $ 6,833 Loans on which the accrual of interest has been discontinued or reduced amounted to $31,413,000 and $33,767,000 at March 31,2011 and 2010, respectively. If interest on those loans had been accrued, such income would have approximated $1,493,149 and $1,409,197 for March 31, 2011 and The Credit Union has no commitments to loan additional funds to the borrowers whose loans have been modified. Included in loans receivable at March 31,2011 and 2010, are loans of $4,090,306 and $3,270,277 respectively, to directors and officers of the Credit Union. Such loans are made in the ordinary course of business at normal credit terms, including interest rates and collateralization. All real estate loans are for maximum terms of thirty years. 17

20 Note 6 - Other real estate owned LANDMARK CREDIT UNION March 31, 2011 and 2010 Foreclosed properties and properties subject to foreclosure are summarized as follows (dollars in thousands): Acquired by foreclosure or by deed in lieu of foreclosure Less allowance for losses $ 3,272 $ 2,017 Note 7 - Property and equipment Property and equipment is summarized as follows (dollars in thousands): $ 3,272 $ 2, Land $ 8,135 $ 7,388 Land improvements Buildings 27,970 23,302 Leasehold improvements 1,547 2,062 Furniture, fixtures and equipment 16,057 14,407 Construction in progress 335 1,943 54,288 49,146 Less accumulated depreciation (17,625) (14,924) $ 36,663 $ 34,222 Depreciation expense amounted to $2,886,000 and $2,224,000 for the years ended March 31,2011 and

21 March 31,2011 and 2010 Note 8 - National Credit Union Share Insurance Fund (NCUSIF) Deposit The deposit in the NCUSIF is in accordance with National Credit Union Administration (NCUA) regulations, which require the maintenance of a deposit by each insured credit union in an amount equal to one percent of its insured shares. The deposit would be refunded to the Credit Union if: (1) the insurance coverage is terminated; (2) the Credit Union converts to insurance coverage from another source; or (3) the operations of the fund are transferred from the NCUA Board. The insurance fund currently insures share accounts up to $250,000. As a result of unfavorable financial events in 2008 to the corporate credit union network and the demise of Corporate Federal Credit Union and other large corporate credit unions, the NCUSIF sustained significant losses. The NCUA established a stabilization plan in June 2008 to minimize the financial impact on credit unions and improve liquidity in the NCUSIF. Based on the Credit Union's review of these events and the evolving stabilization plan, it was determined the Credit Union should reserve a portion of its deposit at the NCUSIF. At March 31, 2011 the Credit Union's total net deposit with NCUSIF was $12,609,000. The U.S. Congress enacted the Helping Families Save Their Homes Act in May 2009, from which the NCUA Board was able to undertake a series of actions that resulted in the recapitalization of the NCUSIF. Accordingly, within the NCUA's recapitalization of the NCUSIF, the Credit Union received a dividend/pass-back income for the full recovery of the Credit Union's previous NCUSIF impairment. Thus, this recapitalization was recognized as a reduction of non-operating income in the Credit Union's statement of income in the fiscal year ending March 31, The NCUA Board took action to begin the repayment of its Treasury borrowings for the corporate credit union stabilization plan in The resulting combined premium collected was 15 basis points of insured shares as of June 30, 2009, which was assessed and paid by the Credit Union during the fourth quarter of The Credit Union may have to pay additional premiums to repay the fund in future years. 19

22 Note 9 - Members' share and savings accounts LANDMARK CREDIT UNION March 31,2011 and 2010 Members' share and savings accounts are summarized as follows (dollars in thousands): 2011 Percent To Yield Amount Total Amount Share draft accounts including non-interest-bearing deposits of $406 and $96 in 2011 and 2010, 144, % $ Money market 461, % respectively. 0.00% % $ 0.55% % 120, ,257 Share savings 0.05% % 229, % 200, , % 722,333 To Total 9.26% 30.86% 15.43% 55.55% Share certificates accounts and IRAs: 0:3.00% 3.00% to 3.99% 4.00% to 4.99% 5.00% to 5.99% 527,759 16,376 52,165 7, % 1.14% 3.62% 0.55% 444,786 23,214 87, % 1.79% 6.75% 604, % $ 1,438, % $ 1,300, % % The aggregate amounts of members' share and savings accounts over $250,000 were $12,628,311 and $13,441,526 at March 31, 2011 and 2010, respectively. At March 31, 2011, scheduled maturities of share certificates are as follows (dollars in thousands): Year Ending March 31, (::) Totals 0:3.00% $ 7 $ 125,295 $ 263,864 $ 95,036 $ 9,553 $ 34,004 $ 527, % to 3.99% 2,791 9, , , % to 4.99% 4,410 8,633 23,426 1,384 14,312 52, % to 5.99% 2,346 3,240 2,333 7,919 7 $ 285,565 $ 13,348 $ 48,680 $ 604,219 Interest expense on members' share and savings accounts is summarized as follows (dollars in thousands): Money market $ 3,856 $ 4,504 Share savings Share draft Certificates 13,080 17,350 Escrows 27 $ 22,647 20

23 March 31,2011 and 2010 Note 10 - Line of credit The Credit Union maintains a line of credit with the Corporate Central Credit Union at a rate to be determined by the lender when funds are borrowed. Borrowings outstanding were $18,980,633 and $35,146,175 for the years ended March 31, 2011 and 2010, respectively. The Credit Union could borrow up to $150,000,000 for both years ended as of March 31,2011 and 2010, respectively. The line of credit is collateralized by the entire shareholdings of the Credit Union members. Note 11 - Commitments and contingent liabilities The principal commitments of the Credit Union are as follows (dollars in thousands): Loan commitments At March 31, 2011, the Credit Union had outstanding commitments for unused lines of credit and to originate loans that are not reflected in the accompanying financial statements as follows (dollars in thousands): First Mortgage Loans (3.875% to 5.50%) Lines of Credit (2.25% to 18.13%) Credit Cards (0.00% to 23.99%) Fixed Rate $ 26, ,067 $ Variable Rate 744,419 Total $ 26, , ,067 $ 229,827 $ 744,419 $ 974,246 Credit card commitments are commitments on credit cards issued by the Credit Union. These commitments are unsecured. Lease commitments The Credit Union entered into an operating lease agreement for its Sussex branch office facilities on October 1, The lease expires September 30,2014 with an option to renew the lease for an additional five-year period. In addition to minimum rentals, the agreement requires the Credit Union to pay its proportionate share of common area maintenance costs and real estate taxes. Additionally, on April 11, 2001 the Credit Union entered into an operating lease with Wal-Mart Stores East, Inc. The lease was renewed on April 24, 2006 with an option to renew the lease for one additional five-year period. The lease expires on August 31, Additionally, on August 31, 2002 the Credit Union entered into an operating lease with Wal-Mart Stores East, Inc. The lease was renewed through December 31,2016. Additionally, on September 15, 2008 the Credit Union entered into an operating lease with Roundy's Wyndham Vilage, LLC. The lease expires on December 31,2013 with an option to renew the lease for two additional five-year periods. 21

24 March 31,2011 and 2010 Note 11 - Commitments and contingent liabilities, continued Lease commitments, continued Additionally, on April 1, 2010 the Credit Union entered into an operating lease with Roundy's, Inc. in West Bend for a five-year period with options to renew. Additionally, on June 1, 2010 the Credit Union entered into an operating lease with Roundy's, Inc. in West Bend-South for a five-year period with options to renew. The future minimum lease payments are as follows: Year Ending March 31, Thereafter Amount $ 151, , , ,625 72,678 51,273 Rent expense charged to operations under these leases was $200,956 and $311,602 for the years ended March 31, 2011 and 2010, respectively. Note 12 - Financial instruments with off-balance-sheet risk The Credit Union is party to conditional commitments to lend funds in the normal course of business to meet the financing needs of its members. These commitments represent financial instruments to extend credit which include lines of credit, credit cards, and home equity lines that involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. The Credit Union's exposure to credit loss is represented by the contractual notional amount of these instruments. The Credit Union uses the same credit policies in making commitments as it does for loans recorded in the financial statements. Commitments to extend credit are agreements to lend to a member as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Credit Union evaluates each member's creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Credit Union upon extension of credit is based on management's credit evaluation of the counterparty. Collateral held generally consists of certificates of deposit, share accounts, and automobiles and real estate. 22

25 March 31,2011 and 2010 Note 12 - Financial instruments with off-balance-sheet risk, continued Outstanding credit commitments at March 31,2011 and 2010 total approximately $974,246,000 and $977,338,000, respectively, and are not reflected in the consolidated financial statements. For these commitments to extend credit, the contract amounts represent credit risk. Unless noted otherwise, the Credit Union does not require collateral or other security to support financial instruments with credit risk. Unfunded commitments under commerciallines-of-credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These Iines-of-credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Credit Union is committed. Note 13 - Financial instruments with concentrations of credit risk The majority of the Credit Union's lending activity is with borrowers located in metropolitan Milwaukee, Wisconsin. Although the Credit Union has a diversified portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the general economic conditions of the area. The Credit Union's policy for requiring collateral is to obtain it whenever possible. Note 14 - Legal contingencies The Credit Union is a party to various legal actions normally associated with financial institutions, the aggregate effect of which, in management's and legal counsel's opinion, would not be material to the financial condition of Landmark Credit Union Note 15 - Loan servicing Mortgage loans serviced for others are not included in the accompanying statements of financial condition. The unpaid principal balances of these loans are summarized as follows (dollars in thousands): Mortgage loan portfolios serviced for: FNMA $ 663,250 $ 637,279 FHLMC 528, ,715 CUMI 6,514 Other $ 1,198,089 $ 1,177,112 Custodial escrow balances maintained in connection with the foregoing loan servicing were approximately $6,132,128 and $5,823,702 at March 31, 2011 and 2010, respectively. 23

26 March 31,2011 and 2010 Note 16 - Employee benefit and compensation plans The Credit Union has established an employee incentive plan, which enables employees to share in the success of the Credit Union. The amount to be distributed is calculated based on criteria, which measures the Credit Union's performance for the year. The amount of net income (before write-offs) eligible for distribution wil be 0% to 10% as determined annually by the Board of Directors. The total expense related to this plan amounted to $597,000 and $595,830 for the years ended March 31,2011 and 2010, respectively. The Credit Union maintains a 401(k) retirement plan for its employees. Employees are eligible to participate after one year of service (minimum 1,000 hours) and attaining the age of 20. Under the terms of the Plan, employees are entitled to contribute from 0% to 80% of their compensation, within limitations established by Internal Revenue Codes 401 (k), 404 and 415. At the discretion of the Board of Directors, the Credit Union may make a matching contribution equal to a percentage of each employee's contribution. The percentage contribution of 3% amounted to matching contributions of $325,446 and $293,410 for the years ended March 31,2011 and 2010, respectively. In addition, the Credit Union may make discretionary contributions to the Plan. No discretionary contributions were made for the years ended March 31, 2011 and The Credit Union has a qualified, noncontributory, defined-benefit pension plan covering substantially all of its employees. The benefits are based on each employee's years of service up to a maximum of 25 years, and a five-year average salary period. An employee becomes fully vested upon completion of seven years of qualifying service. The following is a summary of the plan as of March 31, 2011 and 2010 (dollars in thousands): Change in Benefit Obligation: Benefit obligation at beginning of year Service cost i nterest cost Actuarial loss Benefits paid : Benefit obligation at end of year Change in Plan Assets: Plan assets at estimated fair value at beginning of year Actual return on plan assets Employer contributions Benefits paid Other Fair value of plan assets at end of year Funded status Accumulated other comprehensive loss Net amount recognized $ 10,240 $ 7, ,621 (289) 12,062 (290) 10,240 9,620 7,233 1,098 2,355 1, (289) (290) ,620 (632) (620) (2,135) (2,213) $ (2,833) 24

27 March 31, 2011 and 2010 Note 16 - Employee benefit and compensation plans, continued The Credit Union's accumulated benefit obligation was $9,593,884 and $7,932,098 at March 31,2011 and 2010, respectively. Benefits expected to be paid for each of the next five fiscal years and in aggregate for the five years thereafter are as follows: Year endinq March 31, Thereafter $ 2,676, , ,010 1,335,077 1,312,473 6,858,554 $ 13,608,190 Contributions paid to the plan during the fiscal year ending March 31,2011 amount to $1,000,000. The weighted-average discount rates used in determining the actuarial present value of the projected benefit obligation were 5.75% and 6.00% as of March 31, 2011 and 2010, respectively. The rate of increase in future compensation levels were 3.75% and 4.00% as of March 31,2011 and 2010, respectively. The weighted-average expected long-term rate of return on assets was 7.50% as of March 31,2011 and Net pension cost includes the following components (dollars in thousands): Service cost Interest cost on benefit obligation Expected. return on assets Amortization of net gain 2011 $ (722) (543) 390 Net periodic pension cost 988 The pension plan's investment policies and strategies consist of using a target asset allocation range to optimize the expected return based upon employer's risk tolerance. The Plan's expected long-term rate of return of 7.50% of return is determined by applying historical average investment returns from published indexes relating to the current allocation of assets in the portolio. 25

28 March 31, 2011 and 2010 Note 16 - Employee benefit and compensation plans, continued The Credit Union's pension plan weighted-average asset allocations by asset category generally are as follows: Equity securities Debt securities 57% 43% 65% 35% 100% 100% The President is retained by the Board of Directors and is the Chief Executive Officer of the Credit Union. Under direction of the Board, the President is responsible for the Credit Union's day-to-day operations and compliance with federal and Wisconsin rules, regulations, and statutes applicable to federally insured Wisconsin chartered credit unions. The President serves under a formal employment contract structured by the Board. All employees of the credit union receive a base compensation and a year-end variable incentive based on the overall performance of the credit union. All full-time employees, including the President, are eligible to receive the same life, medical, dental, and disability insurance benefits. As an additional benefit, the President also receives a car allowance. In the 2010 calendar year $536,000 was the total value of the President's base compensation, variable incentive, and car allowance. All full-time employees, including the President, are eligible to receive retirement benefits from defined benefit and defined contribution plans. Benefits from these retirement plans are calculated identically for all full-time employees, including the President. Wisconsin statutes and the Bylaws of the Credit Union allow Officers of the Board of Directors to receive compensation for services rendered in addition to reimbursement of expenses. The combined compensation of all Board of Directors totaled $13,000 in Board members do not participate in the Credit Union's employee benefits. Note 17 - Gain on sales of interest-earning assets Net gains are summarized as follows (dollars in thousands): Realized gain on sales of: First mortgage loans $ 4,607 $ 4,324 Loss on sale of other real estate (297) (188) $ 4,310 $ 4,136 26