SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB405
(Mark One):
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period
from to .
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Commission File No. 000-18464
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EMCLAIRE FINANCIAL CORP.
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(Name of Small Business Issuer in Its Charter)
Pennsylvania 25-1606091
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(State or Other Jurisdiction of Incorporation I.R.S. Employer
or Organization) Identification No.
612 Main Street, Box D, Emlenton, Pennsylvania 16373
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(Address of Principal Executive Offices (Zip Code)
Issuer's Telephone Number, Including Area Code: (724) 867-2311
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Securities registered pursuant to Section 12(b) of the Act: None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.25 per share
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(Title of Class)
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Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B 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 amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $10,119,000
As of March 17, 1998, there were issued and outstanding 1,081,453 shares of the registrant's Common Stock.
The Registrant's Common Stock trades on the OTC Electronic Bulletin Board under the symbol "EMCF." The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on the last price the registrant's Common Stock was sold on February 11, 1998, was $15,011,592 ($18.25 per share based on 822,553 shares of Common Stock outstanding).
Transition Small Business Disclosure Format (check one) YES [ ] NO [X]
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the Annual Report to Stockholders for the Fiscal Year ended December 31, 1997. (Parts I, II, and IV)
2. Portions of the Proxy Statement for the Annual Meeting of Stockholders.
(Part III)
PART I
Item 1. Description of Business
General
Emclaire Financial Corp. ("Company") was incorporated in Pennsylvania in 1989 to own and control all of the capital stock of The Farmers National Bank of Emlenton ("Bank"). The Company is a registered bank holding company pursuant to the Bank Holding Company Act of 1956 ("BHCA"), as amended. The Company has no employees other than executive officers whom do not receive compensation for serving in such capacity. Because the Company has not engaged in any significant business to date, almost entirely all of the business conducted by the Company on a consolidated basis is conducted through the Bank, its wholly owned subsidiary.
The Bank was organized in 1900 as a national banking association, and operates under the supervision of the Office of the Comptroller of the Currency ("OCC"). The Bank operated from a single office until 1978 when it opened its first branch office in Eau Claire. A second branch was established in Clarion in 1985. During 1991, the Bank acquired the East Brady and Emlenton branch operations of Mellon Bank. The Emlenton office of Mellon Bank was closed and donated to the Borough of Emlenton while the deposit accounts were transferred to the existing Emlenton office. In 1996, the fifth and sixth offices were established in Bon Aire Plaza in Butler, and in a grocery store located in Knox. In September 1996, the Knox branch operation of Mellon Bank was acquired.
The Bank operates as a full-service community bank, offering a variety of financial services to meet the needs of its markets served. Those services include accepting time and demand deposits from the general public and together with other funds, using the proceeds to originate secured and unsecured commercial and consumer loans, finance commercial transactions and provide construction and mortgage loans, as well as home equity and personal lines of credit. In addition funds are also used to purchase investment and mortgage-backed securities.
Lending Activities
General. The principal lending activities of the Bank are the origination of residential mortgage loans, home equity loans, commercial and commercial real estate loans, and installment loans. Generally, loans are originated in the Bank's primary market area. For a description of the Bank's loan portfolio, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Stockholders ("Annual Report") included as Exhibit 13 and incorporated herein by reference.
One-to-Four Family Mortgage Loans. The Bank offers first mortgage loans secured by one-to-four family residences located in the Bank's primary lending area. Typically such residences are single family owner occupied units. The Bank is an approved, qualified lender for the Federal Home Loan Mortgage Corporation ("FHLMC"). As a result, the Bank may sell loans to and service loans for the FHLMC. While the Bank has made no such sales to date, it anticipates the ability to sell loans to the FHLMC will allow it to minimize the interest rate risk associated with longer term fixed rate mortgages.
Home Equity Loans. The Bank originates home equity loans secured by single-family residences. These loans may be either a single advance fixed rate loan with a term of up to 15 years, or a variable rate revolving line of credit. These loans are made only on owner-occupied single-family residences.
Commercial and Commercial Real Estate Loans. Commercial lending constitutes a significant portion of the Bank's lending activities comprising a combined total of 30.5% of the total loan portfolio at December 31, 1997. Commercial real estate loans generally consist of loans granted for commercial purposes secured by commercial or other nonresidential real estate. Commercial loans consist of secured and unsecured loans for such items as capital assets, inventory, operating funds, and other commercial purposes.
Consumer Loans. Consumer loans generally consist of fixed rate term loans for automobile purchases, home improvements not secured by real estate, capital, and other personal expenditures. In addition, the Bank funds education loans under various government guaranteed student loan programs. These loans are serviced for the Bank by a third party. The Bank also offers unsecured revolving personal lines of credit and overdraft protection
Loans to One Borrower. National banks are subject to limits on the amount of credit which they can extend to one borrower. Under current law, loans to one borrower are limited to an amount equal to 15% of unimpaired capital and surplus on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and surplus if the loan is secured by readily marketable collateral. At December 31, 1997, the Bank's loans-to-one borrower limit based upon 15% of unimpaired capital was $1.9 million. At December 31, 1997, the Bank's largest aggregation of loans to one borrower was approximately $744,000 of loans secured by commercial and residential rental properties. At December 31, 1997, all of these loans were performing in accordance with their terms.
Investment Portfolio
General. The Bank maintains an investment portfolio of securities such as U.S. government and agency securities, state and municipal debt obligations, corporate notes and bonds, and to a lesser extent, mortgage-backed securities. Management generally maintains an investment portfolio with relatively short maturities to minimize overall interest rate risk.
Investment decisions are made within policy guidelines established by the Board of Directors. This policy is aimed at maintaining a diversified investment portfolio, which complements the overall asset/liability and liquidity objectives of the Bank, while limiting the related credit risk to an acceptable level. For a description of the Company's investment portfolio see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report incorporated herein by reference.
Sources of Funds
General. Deposits are the primary source of the Bank's funds for lending and investing activities. Secondary sources of funds are derived from loan repayments and investment maturities. Loan repayments can be considered a relatively stable funding source, while deposit activity is greatly influenced by interest rates and general market conditions. The Bank also has access to funds through credit facilities available from the Federal Home Loan Bank ("FHLB") and through its primary correspondent bank. In addition, the Bank can obtain advances from the Federal Reserve Bank discount window. For a description of the Bank's sources of funds see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report incorporated herein by reference.
Deposits. The Bank offers a wide variety of retail deposit account products to both consumer and commercial deposit customers, including time deposits, non-interest bearing and interest bearing demand deposit accounts, savings deposits, and money market accounts.
Deposit products are promoted in periodic newspaper and radio advertisements, along with notices provided in customer account statements. The Bank's market strategy is based on its reputation as a community bank that provides quality products and personal customer service.
The Bank pays interest rates on its interest bearing deposit products that are competitive with rates offered by other financial institutions in its market area. Interest rates on deposits are reviewed weekly by management considering a number of factors including (1) the Bank's internal cost of funds; (2) rates offered by competing financial institutions; (3) investing and lending opportunities; and (4) the Bank's liquidity position.
Subsidiary Activity
The Company has one wholly-owned subsidiary, the Bank, a national association. As of December 31, 1997, the Bank had no subsidiaries.
Personnel
At December 31, 1997, the Bank had 75 full time equivalent employees. None of its employees are represented by a collective bargaining unit. The Bank believes its relationship with its employees to be satisfactory.
Competition
The Bank competes with regional and other community commercial banks, thrift institutions, credit unions, and non financial institution entities such as mutual funds and securities brokers, for deposit customers, in its primary market area of Venango, Clarion, Butler and northern Armstrong Counties. In addition to competing financial institutions, the Bank also competes with mortgage brokers, mortgage banking companies and consumer finance companies for loan customers.
The Bank competes for deposit funds by offering a variety of deposit products, quality personal service and competitive interest rates. In addition, the Bank offers a number of other services including but not limited to, safe deposit boxes, night depositories, debit cards, automated teller machines, wire transfers and direct deposit.
The Bank competes for loans by charging competitive interest rates and nominal fees, along with providing efficient and comprehensive service to loan customers.
Supervision and Regulation
Bank holding companies and banks are extensively regulated under both federal and state law. Set forth below is a summary description of certain provisions of certain laws which relate to the regulation of the Company and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.
Regulation - The Company
The Company, as a registered bank holding company, is subject to regulation under the BHCA. The Company is required to file quarterly reports and annual reports with the Federal Reserve Board ("FRB") and such additional information as the FRB may require pursuant to the BHCA. The FRB may conduct examinations of the Company and its subsidiaries.
The FRB may require that the Company terminate an activity or terminate control of or liquidate or divest certain subsidiaries or affiliates when the FRB believes the activity or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness, or stability of any of its banking subsidiaries. The FRB also has the authority to regulate provisions of certain bank holding company debt, including authority to impose interest ceilings and reserve requirements on such debt. Under certain circumstances, the Company must file written notice and obtain approval from the FRB prior to purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the FRB, a bank holding company and its nonbanking subsidiaries are prohibited from requiring certain tie-in arrangements in connection with any extension of credit, lease, or sale of property or furnishing of services. Further, the Company is required by the FRB to maintain certain levels of capital. Because the Company has less than $150 million in assets on a consolidated basis, the capital levels of the Bank are deemed by the FRB to be the capital levels of the Company. For additional information on the capital levels of the Bank, see "- Regulation - The Bank"; and "Management's Discussion and Analysis - Liquidity and Capital Resources - Capital Resources" in the Annual Report incorporated herein by reference.
The Company is required to obtain the prior approval of the FRB for the acquisition of more than 5% of the outstanding shares of any class of voting securities or substantially all of the assets of any bank or bank holding company. Prior approval of the FRB is also required for the merger or consolidation of the Company and another bank holding company.
The Company is prohibited by the BHCA, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or furnishing services to its subsidiaries. However, the Company, subject to the prior approval of the FRB, may engage in any activities, or acquire shares of companies engaged in activities that are deemed by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.
Bank holding companies and their subsidiary banks are subject to the provisions of the Community Reinvestment Act of 1977, as amended ("CRA"). Under the terms and the provisions of the CRA, the Bank's record in meeting the credit needs of the community served by the Bank, including low- and moderate-income neighborhoods, is generally annually assessed by the OCC. When a bank holding company applies for approval to acquire a bank or other bank holding company, the Federal Reserve will review the assessment of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application. At March 6, 1996, the Bank was rated "Satisfactory" with respect to the CRA.
Under FRB regulations, a bank holding company is required to serve as a source
of financial and managerial strength to its subsidiary banks and may not conduct
its operations in an unsafe or unsound manner. In addition, it is the FRB's
policy that in serving as a source of strength to its subsidiary banks, a bank
holding
company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of the FRB's regulations or both. This doctrine has become known as the "source of strength" doctrine. The validity of the source of strength doctrine has been and is likely to continue to be the subject of litigation until definitively resolved by the courts or by Congress.
Regulation - The Bank
General - The Bank is subject to supervision and examination by the OCC and to certain regulations of the FDIC, and the FHLB. The Bank is also subject to various requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types, amount and terms and conditions of loans that may be granted and limitations on the types of investments that may be made and the types of services that may be offered. Various consumer laws and regulations also affect the operations of the Bank.
Dividend Restrictions - Dividends from the Bank constitute the principal source of income to the Company. The Bank is subject to various statutory and regulatory restrictions on its ability to pay dividends to the Company. Under such restrictions, the amount available for payment of dividends to the Company by the Bank totaled approximately $1.5 million at December 31, 1997. In addition, the OCC has the authority to prohibit the Bank from paying dividends, depending upon the Bank's financial condition, if such payment is deemed to constitute an unsafe or unsound practice. The ability of the Bank to pay dividends in the future is presently, and could be further, influenced by bank regulatory and supervisory policies.
Affiliate Transactions - The Bank is subject to federal laws that limit the transactions by subsidiary banks to or on behalf of their parent company and to or on behalf of any nonbank subsidiaries. Such transactions by a subsidiary bank to its parent company or to any nonbank subsidiary are limited to 10 percent of a bank subsidiary's capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20 percent of such bank subsidiary's capital and surplus. Further, loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also prohibits banks from purchasing "low quality" assets from affiliates.
Insurance Assessments - Deposits of the Bank are insured by the BIF of the FDIC and are subject to FDIC insurance assessments. The amount of FDIC assessments paid by the individual insured depository institution is based on their relative risk as measured by regulatory capital ratios and certain other factors. During 1995, the FDIC significantly reduced premium rates assessed on deposits insured by the BIF. Under the current regulations, the Bank is assessed a premium on BIF-insured deposits.
Beginning January 1, 1997, pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"), the Bank paid, in addition to its normal deposit insurance premium as a member of the BIF, an amount equal to approximately 1.3 basis points toward the retirement of the Financing Corporation bonds ("Fico Bonds") issued in the 1980's to assist in the recovery of the savings and loan industry. Members of the Savings Association Insurance Fund ("SAIF"), by contrast, will pay, in addition to their normal deposit insurance premium, approximately 6.4 basis points. Beginning no later than January 1, 2000, the rate paid to retire the Fico Bonds will be equal for members of the BIF and the SAIF. The Act also provides for the merging of the BIF and the SAIF by January 1, 1999 provided there are no financial institutions still 6
chartered as savings associations at that time. Should the insurance funds be merged before January 1, 2000, the rate paid by all members of this new fund to retire the Fico Bonds would be equal.
Enforcement Powers of Federal Banking Agencies - Federal Banking agencies possess broad powers to take corrective and other supervisory action deemed appropriate for an insured depository institution and its holding company. The extent of these powers depends on whether the institution in question is considered "well capitalized", "adequately capitalized", "under capitalized" or "critically undercapitalized". At December 31, 1997, the Bank exceeded the required ratios for classification as "well capitalized". The classification of depository institutions is primarily for the purpose of applying the federal banking agencies' prompt corrective action and other supervisory powers and is not intended to be, and should not be interpreted as, a representation of the overall financial condition or prospects of any financial institution.
The agencies' prompt corrective action powers can include, among other things, requiring an insured depository institution to adopt a capital restoration plan which cannot be approved unless guaranteed by the institution's parent company; placing limits on asset growth and restrictions on activities, including restrictions on transactions with affiliates; restricting the interest rate the institution may pay on deposits; prohibiting the payment of principal or interest on subordinated debt, prohibiting the holding company from making capital distributions without prior regulatory approval; and, ultimately, appointing a receiver for the institution. Among other things, only a "well capitalized" depository institution may accept brokered deposits without prior regulatory approval and only an "adequately capitalized" depository institution may accept brokered deposits with prior regulatory approval.
Under the risk-based capital guidelines applicable to the Company and the Bank, the minimum guideline for the ratio of total capital to risk-weighted assets (including certain off-balance-sheet activities) is 8.00 percent. At least half of the total capital must be "Tier 1" or core capital, which primarily includes common stockholders' equity and qualifying preferred stock, less goodwill and other disallowed intangibles. "Tier 2" or supplementary capital includes, among other items, certain cumulative and limited-life preferred stock, qualifying subordinated debt and the allowance for loan losses, subject to certain limitations, less required deductions as prescribed by regulation.
In addition, the federal bank regulators established leverage ratio (Tier 1 capital to total adjusted average assets) guidelines providing for a minimum leverage ratio of 3 percent for bank holding companies and banks meeting certain specified criteria, including that such institutions have the highest regulatory examination rating and are not contemplating significant growth or expansion. Institutions not meeting these criteria are expected to maintain a ratio which exceeds the 3 percent minimum by at least 100 to 200 basis points. The federal bank regulatory agencies may, however, set higher capital requirements when particular circumstances warrant. Under federal banking laws, failure to meet the minimum capital requirements could subject a bank to a variety of enforcement remedies available to federal bank regulatory agencies.
At December 31, 1997, the Bank's respective total and Tier 1 risk-based capital ratios and leverage ratios exceeded the minimum regulatory requirements. See Note 14 in the audited consolidated financial statements included in the Annual Report and incorporated herein by reference.
Legislative Proposals and Reforms
In recent years, significant legislative proposals and reforms affecting the financial services industry have been discussed and evaluated by U.S. Congress. In the last Congress, such proposals included legislation to revise the BHCA to expand permissible activities for banks, principally to facilitate the convergence of commercial and investment banking. Certain proposals also sought to expand insurance activities of banks.
It is unclear whether any of these proposals, or any form of them, will be reintroduced in the current Congress and become law. Consequently, it is not possible to determine what effect, if any, they may have on the Company and the Bank.
(a) Properties.
The Company owns no real property but utilizes the main office of the Bank. The Company's and the Bank's executive offices are located at 612 Main Street, Emlenton, Pennsylvania. The Company pays no rent or other form of consideration for the use of this facility. The Bank has seven offices located in Venango, Clarion, and Butler counties, Pennsylvania. The Bank's total investment in office property and equipment was $4.0 million with a net book value of $2.6 million at December 31, 1997.
Main Office Eau Claire Office Clarion Office ----------- ----------------- -------------- 612 Main Street 207 South Washington Street Sixth and Wood Streets Emlenton, Pennsylvania Eau Claire, Pennsylvania Clarion, Pennsylvania Venango County Butler County Clarion County East Brady Office Bon Aire Office Knox 338 Office Knox Main Street Office ----------------- --------------- --------------- ----------------------- Broad and Brady Streets 1101 North Main Street Rt. 338 South Main and State Streets East Brady, Pennsylvania Butler, Pennsylvania Knox, Pennsylvania Knox, Pennsylvania Clarion County Butler County Clarion County Clarion County |
All offices are owned by the Bank, except for the Bon Aire and Knox 338 offices which are leased. The Bon Aire office is a unit in the Bon Aire Plaza operated under a 5 year lease with an option to renew. The Knox 338 office is located in a supermarket, and is operated under a 5 year lease with three (3) options to renew. The Bank also maintains a remote ATM facility located in a supermarket in East Brady.
In August 1997, the Bank began construction of a Data Processing Center on a lot previously used for employee parking. Refer to Note 7 in the audited consolidated financial statements included in the Annual Report and incorporated herein by reference.
In February, 1998, the Bank entered into a lease to establish its eighth branch office in the Clarion Mall. The lease has a five year term with two (2) options to renew. The office is expected to commence operations late in the first quarter of 1998.
(b) Investment Policies.
See "Item 1. Business" above for a general description of the Bank's investment policies and any regulatory or Board of Directors' percentage of assets limitations regarding certain investments. All of the Bank's investment policies are reviewed and approved by the Board of Directors of the Bank, and such policies, subject to regulatory restrictions (if any), can be changed without a vote of stockholders. The Bank's investments are primarily acquired to produce income, and to a lesser extent, possible capital gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item
1. Business - Lending Activities," "Item 1. Business - Regulation of the Bank,"
and "Item 2. Description of Property - (a) Properties" above.
(2) Investments in Real Estate Mortgages. See "Item 1. Business - Lending Activities" and "Item 1. Business - Regulation of the Bank."
(3) Investments in Securities of or Interests in Persons Primarily Engaged in Real Estate Activities. See "Item 1. Business - Lending Activities," "Item 1. Business - Regulation of the Bank," and "Item 1. Business - Subsidiary Activity."
(c) Description of Real Estate and Operating Data.
Not Applicable.
Neither the Bank nor the Company is involved in any material legal proceedings. The Bank, from time to time, is party to litigation which arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of the Bank. In the opinion of management the resolution of any such issues would not have a material adverse impact on the financial position, results of operation, or liquidity of the Bank or the Company.
No matters were submitted to stockholders for a vote during the quarter ended December 31, 1997.
PART II
The information contained under the section captioned "Common Stock Information" in the Company's Annual Report for the fiscal year ended December 31, 1997, is incorporated herein by reference.
The required information is contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report and is incorporated herein by reference.
The Company's consolidated financial statements required herein are contained in the Annual Report and are incorporated herein by reference.
Not Applicable.
PART III
The information contained under the sections captioned "Principal Beneficial Owners of the Corporation's Common Stock" and "Information as to Nominees, Directors and Executive Officers" in the Company's definitive proxy statement for the Company's Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by reference.
The information contained under the section captioned "Information as to Nominees, Directors and Executive Officers" in the Proxy Statement is incorporated herein by reference.
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by reference to the section captioned "Principal Beneficial Owners of the Corporation's Common Stock" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference to the section captioned "Principal Beneficial Owners of the Corporation's Common Stock" in the Proxy Statement.
(c) Changes in Control
Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the Registrant.
The information required by this item is incorporated herein by reference to the section captioned "Information as to Nominees, Directors and Executive Officers" in the Proxy Statement.
(a) Exhibits are either attached as part of this Report or incorporated herein by reference.
3.1 Articles of Incorporation of Emclaire Financial Corp. *
3.2 Bylaws of Emclaire Financial Corp. *
4 Specimen Stock Certificate of Emclaire Financial Corp.
10
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10 Form of Change in Control Agreement between Registrant and three (3) executive
officers. **
11 Statement regarding computation of earnings per share (see Note 1 to the Notes to
Consolidated Financial Statements in the Annual Report).
13 Annual Report to Stockholders for the fiscal year ended December 31, 1997.
21 Subsidiaries of the Registrant (see information contained herein under "Business -
Subsidiary Activity").
27 Financial Data Schedule ***
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EMCLAIRE FINANCIAL CORP.
Dated: March 18, 1998 By: /s/ David L. Cox
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David L. Cox
President, Chief Executive Officer, and Director
(Duly Authorized Representative)
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Pursuant to the requirement of the Securities Exchange Act 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/ David L. Cox By: /s/ John J. Boczar
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David L. Cox John J. Boczar
President, Chief Executive Officer, and Director Treasurer (Principal Financial and
(Principal Executive Officer) Accounting Officer)
Date: March 18, 1998 Date:March 18, 1998
By: /s/ Ronald L. Ashbaugh By: /s/Brian C. McCarrier
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Ronald L. Ashbaugh Brian C. McCarrier
Director Director
Date: March 18, 1998 Date:March 18, 1998
By: /s/ Bernadette H. Crooks By: /s/ George W. Freeman
-------------------------------------- -------------------------------------
Bernadette H. Crooks George W. Freeman
Director Director
Date: March 18, 1998 Date:March 18, 1998
By: /s/ Rodney C. Heeter By: /s/ Robert L. Hunter
-------------------------------------- -------------------------------------
Rodney C. Heeter Robert L. Hunter
Director Director
Date: March 18, 1998 Date:March 18, 1998
By: /s/ J. Michael King By: /s/ John B. Mason
-------------------------------------- -------------------------------------
J. Michael King John B. Mason
Director Director
Date: March 18, 1998 Date:March 18, 1998
By: /s/
--------------------------------------
Elizabeth C. Smith
Director
Date:
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EXHIBIT 4
Specimen Stock Certificate of Emlciare Financial Corp.
COMMON STOCK INCORPORATED UNDER THE CUSIP 290828 10 2
CERTIFICATE NO. LAWS OF THE COMMONWEALTH
OF PENNSYLVANIA
EMCLAIRE FINANCIAL CORP.
EMLENTON, PENNSYLVANIA SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT:
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Is The Owner Of:
shares of the Common Stock, $1.25 par value of Emclaire Financial Corp. hereinafter called the Corporation, transferable only on the books of the Corporation, by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed.
The amount of the Common Stock of the Corporation is set forth on the books of the Corporation and the par value of the shares of Common Stock of the Corporation is set forth in the Articles of Incorporation of the Corporation, as amended or to be amended hereafter, which Articles of Incorporation and any and all amendments thereof are on file at the office of the Corporation and are also on file at the office of the Commonwealth of Pennsylvania Department of State and are hereby expressly incorporated herein by reference and to all of which the holder, by acceptance hereof, hereby agrees and assents.
This certificate is not valid unless countersigned and registered by the Corporation's transfer agent and registrar.
IN WITNESS WHEREOF, Emclaire Financial Corp. has caused the facsimile signatures of its duly authorized officers and has caused a facsimile of its Corporate Seal to be hereunto affixed.
DATED: ------------------------------------ --------------------------------- SECRETARY PRESIDENT |
SEAL
Incorporated 1989
The Board of Directors of Emclaire Financial Corp. (the "Corporation") is authorized by resolution(s), from time to time adopted, to provide for the issuance of preferred stock and to fix and state the voting powers, preferences and relative, participating, optional, or other special rights of the shares of each such series and the qualifications, limitations, and restrictions thereof. The Corporation will furnish to any shareholder upon request and without charge a full description of each class of stock and any series thereof.
The shares represented by this certificate may not be cumulatively voted in the election of directors of the Corporation. The shares represented by this certificate may not be cumulatively voted in the election of directors of the Corporation. The Corporation's Articles also include a provision the general effect of which is to require an affirmative vote of the holders of 80% of the outstanding common shares of the Corporation to approve any merger, consolidation, liquidation, or dissolution of the Corporation, or any action that would result in the sale or other disposition of all, or substantially all, of the assets of the Corporation. The affirmative vote of 80% of the outstanding shares of common stock of the Corporation is required to amend this provision of the Articles.
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF TRANS MIN ACT - ________Custodian_________
(Cus) (Minor)
TEN ENT - as tenants by the entireties under Uniform Transfers to Minors Act
JT TEN - as joint tenants with right of --------------------------
survivorship and not as tenants (State)
in common
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Additional abbreviations may also be used though not in the above list.
For Value Received _______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
Dated _____________________ In presence of:
NOTICE: The signatures to this assignment must correspond with the name as written upon the face of the certificate, in every particular, without alteration or enlargement or any change whatever.
The signature(s) of the assignor(s) must be guaranteed hereon by a participant in either the Securities Transfer Agent's Medallion Program (STAMP), the Stock Exchange Medallion (SEMP), or the New York Stock Exchange Medallion Program (MSP).
Countersigned and Registered:
Transfer Agent and Registrar
By: _______________________________
Authorized Signature
EXHIBIT 13
Annual Report to Stockholders for the fiscal year ended December 31, 1997
The Cover
Located in Clarion and Forest counties along the Clarion River, Cook Forest consists of approximately 7,500 acres of natural forest land. The area that became known as Cook Forest was originally settled by John Cook in the late 1820s. The family operated lumber and boat businesses which under the guidance of Anthony Wayne Cook, grandson of John Cook, had procured timberlands as far away as Oregon and Washington by the early 1900s.
Cook Forest is the home to eastern white pine trees whose straight, resilient trunks were used as masts for British ships during the 1700's. During the early to mid-1800's, the lightweight and workable pine timber was prized by settlers. Though small sections of the forest were selectively logged in the 1800s and early 1900s, Anthony Wayne Cook and other family members preserved large areas of the forest. By 1911, the idea of creating a public park from the forest was presented to public officials.
In 1928, after years of political wrangling and private fund raising, Cook Forest became the first forest land acquired by the Commonwealth of Pennsylvania for the purpose of preserving a natural landmark. In 1969, the Forest Cathedral area was designated a National Natural Landmark by the National Park Service, U.S. Department of the Interior.
Photograph: Old-growth eastern white pine canopy photographed over the Forest Cathedral of The Cook Forest from the top of an ancient eastern hemlock.
Acknowledgment: The photograph was reproduced from The Cook Forest: An Island in Time, photographed and written by Anthony E. Cook, grandson of Anthony Wayne Cook. The photograph and excerpts from The Cook Forest: An Island in Time, are used courtesy of the author.
TABLE OF CONTENTS
President's letter 1
Selected Financial Data 2
Consolidated Financial Statements 3-6
Notes to Consolidated Financial Statements 7-22
Report of Independent Auditors 23
Management's Discussion and Analysis of
Financial Condition and Results of Operations 24-35
Common Stock Information 35
|
Dear stockholders and friends:
The past year, 1997, has been dedicated to rebuilding income from the expansion experienced in 1996. We were able to take advantage of the new market opportunities in Knox and Butler to increase our customer relationships. Our loan portfolio increased by an impressive 26% and our deposits increased by 3%, giving our bank total loans and deposits, as of year end 1997, of $86.1 million and $117.7 million, respectively. Our loan to deposit ratio increased from 59% to 72% during 1997. This helped increase net interest income by 22% and offset certain costs associated with the previously mentioned expansion. Net income increased by 27% from $981 thousand in 1996 to $1,244 thousand in 1997, and our earnings per share remained at $1.15.
Although the year was dedicated to absorbing expansion costs, we do not believe in remaining status quo in the future. To this end, we decided to expand our data processing facility to prepare for the future of our Bank. In August we broke ground on a new data processing center in downtown Emlenton. When completed in April of 1998, this center will house our bookkeeping, proof, computer, and customer support departments. We also began plans for our eighth branch office to be located in the Clarion Mall and to be opened in March of 1998. With the opening of this office, we will provide expanded service to our customers in Clarion and also offer the convenience of our first MAC machine in Clarion. We are proud of our Bank and our efforts to expand our markets and philosophy of friendly community banking.
During 1997 we offered our customers the ability to access their checking accounts for purchases with the new debit card. We chose the MasterMoney(TM) card to enable our customers to make purchases at 14 million stores and other locations worldwide, wherever MasterCard(R) is accepted. My daughter, Amy, spent five months in Kenya, Africa, and she was able to access her checking account in Emlenton, Pennsylvania, to make purchases or to receive cash. The technology is available to make small community banks like ours competitive, and with the added personal hometown service we are able to provide, the future of community banks, such as ours, remains bright.
The effects of the 1996 stock sale and subsequent quoting of Emclaire common stock on the OTC Bulletin Board provided our shareholders additional liquidity for their shares in 1997. As many of our long-time shareholders are aware, our stock was very difficult to purchase in the past. Although it is still not traded on a daily basis, trading has been more active in 1997 than in past years. We were able to see trades in each quarter of 1997, and as of year end our stock price stood at $17.00 per share. We continue to pursue a more active market of our stock and we were able to increase the shares outstanding by paying a 5% stock dividend in December. Shareholders remain a driving force of the decisions of management and the Board of Directors.
During the final quarter of 1997, we revisited our strategic plan and developed the direction for our bank over the next five years. We believe that customer service and offering the right type of products are instrumental to our success in the future. We also feel our employees are key to making our Bank succeed. All employees are to be commended on the goals we have reached over the past year in loan and income growth. Looking towards the future, we also realize how important the problem of year 2000 becomes to our institution. We have started an aggressive program of addressing this problem and continue to proceed on an ongoing basis. The reputation and well being of our bank is at risk if we are not prepared for the change of the century, and we do not have the ability to push back the dead line of December 31, 1999. The Board of Directors and management are committed to have all systems performing before, during, and after January 1, 2000.
This year our annual meeting will be held May 20, 1998, at our new data processing center, beside the post office, in Emlenton. I would encourage all shareholders to attend, not only to express their views, but also to tour this new facility. We are holding the meeting at 7:00 p.m., and it affords you as shareholders the opportunity to meet and share in discussion with the Board of Directors, officers, and employees of your company.
Sincerely,
/s/David L. Cox --------------- David L. Cox President and Chief Executive Officer |
EMCLAIRE FINANCIAL CORP.
Selected Financial Data
Year Ended December 31,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- -------------- ------------- -------------
SUMMARY OF EARNINGS
Interest income $ 9,523 $ 8,098 $ 7,437 $ 6,751 $ 6,772
Interest expense 3,727 3,352 2,986 2,573 2,651
------------- ------------- -------------- ------------- -------------
Net interest income 5,796 4,746 4,451 4,178 4,121
Provision for loan losses 220 120 143 132 180
------------- ------------- -------------- ------------- -------------
Net interest income after
provision for loan losses 5,576 4,626 4,308 4,046 3,941
Other income 596 427 389 384 301
Other expense 4,382 3,636 3,005 2,899 2,780
------------- ------------- -------------- ------------- -------------
Income before income taxes and
cumulative effect adjustment 1,790 1,417 1,692 1,531 1,462
Applicable income tax expense 546 436 520 454 450
------------- ------------- -------------- ------------- -------------
Net income before cumulative effect adjustment 1,244 981 1,172 1,077 1,012
Cumulative effect adjustment - - - - 31
------------- ------------- -------------- ------------- -------------
NET INCOME $ 1,244 $ 981 $ 1,172 $ 1,077 $ 1,043
============= ============= ============== ============= =============
PER SHARE DATA (1) Earnings per share:
Prior to cumulative effect adjustment $ 1.15 $ 1.15 $ 1.40 $ 1.28 $ 1.20
Cumulative effect adjustment
- - - - .04
============= ============= ============== ============= =============
Earnings per share $ 1.15 $ 1.15 $ 1.40 $ 1.28 $ 1.24
============= ============= ============== ============= =============
Dividends paid (1) $ .44 $ .41 $ .43 $ .38 $ .36
Book value per share at period end (1) $ 12.48 $ 11.68 $ 10.76 $ 9.72 $ 8.81
Average number of shares outstanding (1) 1,081,453 852,403 839,160 839,160 839,160
STATEMENT OF CONDITION STATISTICS
(At end of period)
Assets $ 133,956 $ 128,002 $ 98,599 $ 96,714 $ 94,774
Deposits 117,655 114,725 88,944 87,986 86,996
Loans 86,144 68,428 64,322 64,086 61,378
Allowance for loan losses 874 733 687 688 639
Federal funds sold
- 3,500 2,500 900 3,350
Investment securities
38,034 46,483 26,361 25,436 23,180
Stockholders' equity 13,498 12,631 9,032 8,155 7,397
SIGNIFICANT RATIOS
Return on average equity 9.57 % 10.33 % 13.56 % 13.80 % 14.69 %
Return on average assets .96 .89 1.20 1.12 1.11
Net yield on earning assets 4.87 4.68 4.97 4.81 4.80
Net loans as a percent of deposits 72.47 59.01 71.55 72.05 69.82
Equity to assets at period end 10.08 9.87 9.16 8.43 7.80
Earning average assets to total assets 93.10 93.63 94.11 92.84 92.62
Average interest bearing liabilities to assets 74.71 77.02 77.26 78.36 79.84
Dividends as a percent of net income 38.26 35.65 30.71 29.69 29.03
Allowance for loan losses to total loans 1.01 1.07 1.07 1.07 1.04
Full time equivalent employees 75 74 52 47 47
Banking offices 7 7 4 4 4
|
(1) - Adjusted for a 5% stock dividend in 1997 and a 4-for1 stock split in 1996.
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
December 31,
1997 1996
----------- -----------
ASSETS
Cash and due from banks $ 4,975 $ 4,742
Federal funds sold -- 3,500
Investment securities (Note 4):
Available for sale 31,977 36,208
Held to maturity (estimated market value
of $6,053 and $10,246) 6,057 10,275
Loans (Note 5) 86,144 68,428
Less allowance for loan losses (Note 6) 874 733
----------- -----------
Net loans 85,270 67,695
Premises and equipment (Note 7) 2,619 2,308
Accrued interest and other assets 3,058 3,274
----------- -----------
TOTAL ASSETS $ 133,956 $ 128,002
=========== ===========
LIABILITIES
Deposits
Non-interest bearing demand $ 19,765 $ 17,650
Interest bearing demand 17,276 15,784
Savings 16,261 15,347
Money market 18,077 19,059
Time (Note 8) 46,276 46,885
----------- -----------
Total deposits 117,655 114,725
Obligation under capital lease 63 104
Borrowed funds (Note 12) 2,200 --
Accrued interest and other liabilities 540 542
----------- -----------
TOTAL LIABILITIES 120,458 115,371
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00, 3,000,000 shares
authorized; none issued -- --
Common stock, par value $1.25 per share; 12,000,000
shares authorized 1,081,453 and 1,030,000 shares
isssued in 1997 and 1996 (Note 15) 1,352 1,288
Additional paid in capital 4,432 3,622
Retained earnings 7,492 7,597
Net unrealized gain on securities 222 124
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 13,498 12,631
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 133,956 $ 128,002
=========== ===========
|
See accompanying notes to the consolidated financial statements.
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
Year Ended December 31,
1997 1996
------------ --------------
INTEREST INCOME
Loans, including fees $ 6,969 $ 5,839
Interest bearing deposits in other banks 1 2
Federal funds sold 89 236
Investment securities:
Taxable
2,279 1,879
Exempt from federal income tax 185 141
---------- ----------
Total interest income 9,523 8,097
---------- ----------
INTEREST EXPENSE
Deposits 3,655 3,282
Borrowed funds 67 63
Lease obligation 5 7
---------- ----------
Total interest expense 3,727 3,352
---------- ----------
NET INTEREST INCOME 5,796 4,745
Provision for loan losses 220 120
---------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,576 4,625
---------- ----------
OTHER OPERATING INCOME
Service fees on deposit accounts 476 344
Other 120 84
---------- ----------
Total other operating income 596 428
---------- ----------
OTHER OPERATING EXPENSE
Salaries and employee benefits 2,240 1,903
Occupancy, furniture and equipment 688 524
Other (Note 9) 1,454 1,209
---------- ----------
Total other operating expense 4,382 3,636
---------- ----------
Income before income taxes 1,790 1,417
Income taxes (Note 10) 546 436
---------- ----------
NET INCOME $ 1,244 $ 981
========== ==========
EARNINGS PER SHARE $ 1.15 $ 1.15
AVERAGE SHARES OUTSTANDING 1,081,453 852,403
|
See accompanying notes to the consolidated financial statements.
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in Thousands Except Per Share Amounts)
Net
Additional Unrealized
Common Paid in Retained Gain on Treasury
Stock Capital Earnings Securities Stock Total
-------------- -------------- -------------- -------------- ------------- ---------------
Balance December 31, 1995 $ 1,000 $ 1,013 $ 6,960 $ 66 $ (6) $ 9,033
Net income 981 981
Dividends declared
($.41 per share) (344) (344)
Net proceeds from sale of
230,800 shares of common
stock (Note 15) 288 2,609 6 2,903
Net unrealized gain on securities 58 58
-------------- -------------- -------------- -------------- ------------- -----------------
Balance December 31, 1996 1,288 3,622 7,597 124 - 12,631
Net income 1,244 1,244
Dividends declared
($.44 per share) (474) (474)
Five percent stock dividend
including fractional shares
cash paid (Note 15) 64 810 (875) (1)
Net unrealized gain on securities 98 98
-------------- -------------- -------------- -------------- ------------- ----------------
Balance December 31, 1997 $ 1,352 $ 4,432 $ 7,492 $ 222 $ - $ 13,498
============== ============== ============== ============== ============= ================
|
See accompanying notes to the consolidated financial statements.
EMCLAIRE FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
1997 1996
--------- ---------
OPERATING ACTIVITIES
Net income $ 1,244 $ 981
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 598 365
Net amortization of investment security
discounts and premiums 198 220
Provision for loan losses 220 120
Deferred income taxes (3) (60)
(Increase) decrease in accrued interest receivable 102 (358)
Increase in accrued interest payable 2 61
Other, net (250) (370)
-------- --------
Net cash provided by operating activities 2,111 959
-------- --------
INVESTING ACTIVITIES
Proceeds from maturities and repayments of investment securities:
Available for sale 5,000 --
Held to maturity 4,157 8,961
Proceeds from sales of investment securities:
Available for sale 1,990 90
Purchases of investment securities:
Available for sale (2,748) (26,168)
Held to maturity -- (3,136)
Net loan originations (17,813) (4,218)
Purchases of premises and equipment (588) (779)
Proceeds from sales of foreclosed or other bank property 10 50
Net proceeds from branch acquisition (Note 2) -- 12,683
-------- --------
Net cash used for investing activities (9,992) (12,517)
-------- --------
FINANCING ACTIVITIES
Net increase in deposits 2,930 11,605
Net increase in short-term borrowings 200 --
Proceeds from Federal Home Loan Bank advance 2,000 --
Payments for obligation under capital lease (41) (39)
Proceeds from sale of common stock, net of cost -- 2,903
Cash dividends paid (475) (344)
-------- --------
Net cash provided by financing activities 4,614 14,125
-------- --------
Increase (decrease) in cash and cash equivalents (3,267) 2,567
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,242 5,675
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,975 $ 8,242
======== ========
|
See accompanying notes to the consolidated financial statements.
EMCLAIRE FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Emclaire Financial Corp. (Company) is a Pennsylvania corporation organized as the holding company of The Farmers National Bank of Emlenton (Bank). The Bank is a national association headquartered in Emlenton, Pennsylvania. The Company's principal sources of revenue emanate from its investment securities portfolio, its portfolio of residential real estate, commercial mortgage, commercial and consumer loans, as well as a variety of deposit services offered to its customers through seven offices. The Company is supervised by the Board of Governors of the Federal Reserve System, while the Bank is subject to regulation and supervision by the Office of the Comptroller of the Currency.
The consolidated financial statements of the Company include its wholly-owned subsidiary, the Bank. All intercompany transactions have been eliminated in consolidation. The investment in subsidiary, on the parent company financial statements, is carried at the parent company's equity position in the underlying net assets.
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period.
Actual results could differ significantly from those estimates.
Investment securities have been classified into two categories: Held to Maturity and Available for Sale. Debt securities acquired with the ability and intent to hold to maturity are stated at cost adjusted for amortization of premium and accretion of discount which are computed using the interest method and recognized as adjustments of interest income. All other debt securities have been classified as available for sale to serve principally for liquidity purposes. Unrealized holding gains and losses for available for sale securities are reported as a separate component of stockholders' equity, net of tax, until realized. Realized securities gains and losses are computed using the specific identification method. Interest and dividends on securities are recognized as income when earned.
Common stock of the Federal Home Loan Bank and Federal Reserve Bank represents ownership in institutions which are wholly-owned by other financial institutions. These equity securities are accounted for at cost and classified as available for sale.
Loans are reported at their principal amount net of the allowance for loan losses. Interest on all loans is recognized as income when earned on the accrual method. The accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions, that the borrower's financial condition is such that collection of interest is doubtful. Interest payments received on nonaccrual loans are recorded as income or applied against principal according to management's judgment as to the collectibility of such principal.
Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related loan yield. The Company is amortizing these amounts over the contractual lives of the related loans.
The allowance for loan losses represents the amount which management estimates is adequate to provide for potential losses in its loan portfolio. The allowance method is used in providing for loan losses. Accordingly, all loan losses are charged to the allowance, and all recoveries are credited to it. The allowance for loan losses is established through a provision for loan losses which is charged to operations. The provision is based upon management's periodic evaluation of individual loans, the overall risk characteristics of the various portfolio segments, past experience with losses, the impact of economic conditions on borrowers, and other relevant factors. The estimates used in determining the adequacy of the allowance for loan losses are particularly susceptible to significant change in the near term.
The Company considers a commercial or commercial real estate loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect principal or interest due according to the contractual terms of the loan. Loan impairment is measured based on the present value of expected cash flows discounted at the loan's effective
interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent.
Payments received on impaired loans are applied against the recorded investment in the loan. For loans other than those that the Company expects repayment through liquidation of the collateral, when the remaining recorded investment in the impaired loans is less than or equal to the present value of the expected cash flows, income is recorded on a cash basis.
Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized.
Other real estate owned acquired in settlement of foreclosed loans is carried as a component of other assets at the lower of cost or fair value minus the cost to sell. Valuation allowances for estimated losses are provided when the carrying value of the real estate acquired exceeds the fair value. Direct costs incurred in the foreclosure process and subsequent holding costs incurred on such properties are recorded as expenses of current operations.
The excess cost over net tangible assets and identified intangible assets of acquired branch offices is amortized using the straight-line method over a period not to exceed fifteen years. Core deposit intangible premiums are amortized on a straight-line basis over the average remaining lives of the acquired deposits, not to exceed ten years. Other identified intangible assets are amortized over the estimated benefited period, not to exceed ten years.
The Bank maintains a non-contributory defined benefit pension plan covering substantially all employees and officers. The plan calls for benefits to be paid to eligible employees at retirement based primarily upon years of service with the Bank and compensation rates near retirement.
The Company and the Bank file a consolidated federal income tax return. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share." Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to fully diluted earnings per share. The Company maintains a simple capital structure therefore, there are no dilutive effects on earnings per share.
The Company has defined cash equivalents as those amounts included in due from banks and federal funds sold.
Cash payments for interest in 1997 and 1996 were $3,725,000 and $3,292,000, respectively. Cash payments for income taxes in 1997 and 1996 were $625,000 and $501,000, respectively.
Certain comparative amounts for 1996 have been reclassified to conform to the current year presentation. Such reclassification had no effect on net income.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards board issued Statement No. 125, "Accounting for Transfers of Financial Assets and Extinguishments of Liabilities." This statement, which became effective January 1, 1997, provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This statement also extends the treatment of mortgage servicing rights to all servicing assets.
Certain provisions of Statement 125, were deferred for one year by Statement
127. The deferral affected repurchase agreements, securities lending, and
pledged collateral. The adoption of these statements did not have a material
impact on the Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement No. 130 "Reporting Comprehensive Income." This standard which is effective for years beginning after December 15, 1997, establishes standards for reporting the components of comprehensive income by requiring that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income includes net income, as well as, certain items that are reported directly within separate components of stockholders' equity, and thus bypass net income. This disclosure will have no impact on the Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for the way public companies report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The statement defines an operating segment as a component of an enterprise that generates revenue and incurs expense, whose operating results are reviewed by the chief operating decision maker in the determination of resource allocation and performance, and for which discrete financial information is available. This Statement is effective for fiscal years beginning after December 15, 1997, however, it does not require disclosure in interim reporting in the year of initial application.
3. BRANCH ACQUISITION
On September 20, 1996, the Bank acquired certain deposit liabilities of the Knox, Pennsylvania office of Mellon Bank, N.A. in a transaction recorded as a branch purchase. The Bank assumed deposit liabilities of approximately $14.1 million and acquired the land, building and equipment. The difference between the liabilities assumed and the assets acquired was received in cash totaling approximately $12.6 million. The amount by which the acquisition cost exceeded the value of the assets purchased, totaling approximately $1.4 million, was recorded as an intangible asset.
4. INVESTMENT SECURITIES
The amortized cost and estimated market values of investment securities are summarized as follows (in thousands):
Available for Sale 1997
----
Gross Gross Estimated
Amortized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $17,510 $ 163 $ (1) $17,672
Obligations of states and political
subdivisions 3,617 43 -- 3,660
Corporate notes 10,067 134 (3) 10,198
------- ------- ------- -------
Total debt securities 31,194 340 (4) 31,530
Equity investment in Federal Reserve
and Federal Home Loan Banks 447 -- -- 447
------- ------- ------- -------
Total $31,641 $ 340 $ (4) $31,977
======= ======= ======= =======
|
Held to Maturity 1997
----
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $1,006 $ 7 $ -- $1,013
Obligations of states and political
subdivisions 1,390 1 -- 1,391
Corporate notes 2,978 10 (3) 2,985
Mortgage-backed securities 683 -- (19) 664
------ ------ ------ ------
Total $6,057 $ 18 $ (22) $6,053
====== ====== ====== ======
|
Available for Sale 1996
----
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $23,539 $ 166 $ (43) $23,662
Obligations of states and political
subdivisions 1,920 1 (3) 1,918
Corporate notes 10,157 94 (27) 10,224
------- ------- ------- -------
Total debt securities 35,616 261 (73) 35,804
Equity investment in Federal Reserve
and Federal Home Loan Banks 404 -- -- 404
------- ------- ------- -------
Total $36,020 $ 261 $ (73) $36,208
======= ======= ======= =======
|
Held to Maturity 1996
----
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
U. S. Treasury securities and
obligations of U. S. Government
corporations and agencies $ 2,012 $ -- $ (1) $ 2,011
Obligations of states and political
subdivisions 3,130 5 (1) 3,134
Corporate notes 3,528 9 (6) 3,531
Mortgage-backed securities 1,605 -- (35) 1,570
------- ------- ------- -------
Total $10,275 $ 14 $ (43) $10,246
======= ======= ======= =======
|
Proceeds from the sale of investment securities classified as available for sale totaled $1,990,000 and $90,000 for 1997 and 1996, respectively. No gains or losses resulted from these sales.
Investment securities with a carrying value of approximately $5,738,000 and $5,363,000 at December 31, 1997 and 1996, respectively, were pledged to secure deposits and for other purposes as required by law. The carrying value approximated the estimated market value of the investment securities for both years.
The amortized cost and estimated market value of debt securities at December 31, 1997, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available for Sale Held to Maturity
------------------ ----------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
---- ----- ---- -----
Due in one year or less $ 5,502 $ 5,513 $ 2,566 $ 2,563
Due after 1 year through 5 years
23,995 24,299 3,080 3,093
Due after 5 years through 10 years
1,697 1,718 -- --
After 10 years
-- -- 411 397
------- ------- ------- -------
Total $31,194 $31,530 $ 6,057 $ 6,053
======= ======= ======= =======
|
5. LOANS
Major classifications of loans are summarized as follows (in thousands):
1997 1996
---- ----
Commercial and industrial $11,147 $10,390
Real estate mortgages
Residential 45,709 34,251
Commercial and other 15,188 11,400
Consumer 14,100 12,387
------- -------
86,144 68,428
Less allowance for loan losses 874 733
------- -------
Total $85,270 $67,695
======= =======
|
In the normal course of business, loans are extended to directors, executive officers, and their associates. In management's opinion, all of these loans are on substantially the same terms and conditions as loans to other individuals and businesses of comparable creditworthiness, with the exception of consumer and residential mortgage loans granted to executive officers which carry an interest rate one percent below that quoted non-employees. Such loans, which are included in the following schedule, totaled $197,000 and $ - at December 31, 1997 and 1996, respectively. A summary of loan activity for those directors, executive officers, and their associates with aggregate loan balances in excess of $60,000 for the year ended December 31, 1997, is as follows (in thousands):
Balance Balance
December 31, December 31,
1996 New Loans Repayments 1997
---- ---------- ----------- ----
$1,253 664 749 $1,168
|
The Bank's primary business activity is with customers located within Venango, Clarion, and Butler Counties. Commercial, residential, personal, and agricultural loans are granted. Although the Bank has a diversified loan portfolio at December 31, 1997 and 1996, loans outstanding to individuals and businesses are dependent upon the local economic conditions within the immediate trade area.
6. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are summarized as follows (in thousands):
1997 1996
---- ----
Balance, January 1 $733 $687
Provision charged to operations 220 120
Recoveries 29 47
Less loans charged off 108 121
---- ----
Balance, December 31 $ 874 $ 733
==== ====
|
At December 31, 1997 and 1996, the recorded investment in loans which are considered to be impaired was $685,000 and $743,000, respectively, all of which was placed in nonaccrual status. In addition, $70,000 and $80,000 of the related allowance for loan losses has been allocated for these impaired loans at December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, There were commitments for unfunded letters of credit totaling $7,500, to a borrower with outstanding loans considered to be impaired.
The average recorded investment in impaired loans during the years ended December 31, 1997 and 1996, was approximately $719,000 and $820,000, respectively. Interest income totaling $14,000 and $13,000 was recognized on impaired loans in 1997 and 1996, respectively, all of which was recognized using the cash basis method of income recognition.
7. PREMISES AND EQUIPMENT
Major classifications of premises and equipment are summarized as follows (in thousands):
1997 1996
---- ----
Land and improvements $ 256 $ 221
Buildings 1,431 1,430
Construction in process 489 --
Leasehold improvements 148 129
Furniture and fixtures 1,695 1,656
------ ------
4,019 3,436
Less accumulated depreciation
1,400 1,128
------ ------
Total $2,619 $2,308
====== ======
|
Depreciation and amortization charged to operations was $272,000 in 1997 and $201,000 in 1996.
Included in construction in process are the costs associated with the construction of a data processing center by the Bank. Construction, equipment and furnishing costs are estimated to total $1.2 million. Construction is expected to be completed during the second quarter of 1998.
8. TIME DEPOSITS
Time deposits include certificates of deposit in denominations of $100,000 or more. Such deposits aggregated $4,328,000 and $4,583,000 at December 31, 1997 and 1996, respectively. The following schedule presents the contractual maturities for time deposits in excess of $100,000 at December 31, 1997 (in thousands):
Within three months $ 548 After three months through six months 362 After six months through one year 986 After one year 2,432 Total $4,328 |
9. OTHER EXPENSES
The following is an analysis of other expense (in thousands:
1997 1996
---- ----
Telephone $ 105 $ 91
Printing forms and supplies
138 183
Postage
140 97
Amortization of intangible assets
243 129
Other
828 709
---- ----
$1,454 $1,209
====== =====
10. INCOME TAXES
|
The provision for income taxes is summarized as follows:
1997 1996
----- -----
Currently payable $ 549 $ 496
Deferred (3) (60)
----- -----
546 $ 436
===== =====
|
The reconciliation between the federal statutory rate and the Company's effective income tax rate is as follows (dollars in thousands):
1997 1996
---- ----
% of Pre-Tax % of Pre-Tax
Amount Income Amount Income
------ ------ ------ ------
Provision at statutory rate $ 609 34.0% $ 482 34.0%
Effect of tax exempt income (76) (4.2) (57) (4.0
Other 13 0.7 11 0.8
----- ---- ----- -----
Total $ 546 30.5% $ 436 30.8%
===== ==== ===== ====
|
The tax effects of deductible and taxable temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities, respectively, at December 31 are as follows (in thousands):
1997 1996
---- ----
Deferred tax assets
Provision for loan losses $244 $196
Intangible asset amortization 83 51
Capital lease obligation 21 35
Pension expense 35 16
---- ----
Gross deferred tax assets 383 298
---- ----
Deferred tax liabilities
Net unrealized gain on securities 114 64
Depreciation 215 143
Net loan origination costs 17 7
---- ----
Gross deferred tax liabilities 346 214
---- ----
Net deferred tax asset $ 37 $ 84
==== ====
|
No valuation allowance was established, for the net deferred tax asset, at December 31, 1997 and 1996, in view of the Company's ability to carry-back to taxes paid in previous years and future anticipated taxable income which is evidenced by the Company's earnings potential.
11. PENSION PLAN
The following presents the components of the pension expense for each year (in thousands):
1997 1996
----- -----
Service cost of benefits earned during the period $ 95 $ 66
Interest cost on projected benefit obligation 99 75
Return on plan assets (128) (177)
Net amortization and deferral (8) 50
----- -----
Net periodic pension cost $ 58 $ 14
===== =====
|
The actuarial present value of accumulated benefit obligations at December 31, 1997 and 1996, was $997,000 and $738,000 including vested benefit obligations of $964,000 and $715,000. The following table sets forth the funded status and amounts recognized in the balance sheets at December 31, (in thousands):
1997 1996
------- -------
Plan assets at fair value $ 1,802 $ 1,510
Projected benefit obligation 1,586 1,319
------- -------
Funded status 216 191
Unrecognized net gain from past experience
different from assumed (208) (117)
Unamortized prior service cost 1 1
Unrecognized net transition asset (113) (121)
------- -------
Accrued pension cost $ (104 $ (46)
======= =======
|
Plan assets are primarily comprised of debt and equity mutual funds at December 31, 1997 and 1996.
In preparing the above information the following actuarially assumed rates were used.
1997 1996
---- ----
Discount rate 7.25% 7.50%
Rate of increase in future compensatin levels 5.00 5.00
Rate of return on plan assets 8.50 8.50
12. BORROWED FUNDS
|
Short-term Borrowings and Available Lines of Credit
The Bank maintains two credit arrangements as sources of additional liquidity. One of these arrangements, with a borrowing limit at December 31, 1997, of approximately $3.4 million, is with the Federal Home Loan Bank of Pittsburgh (FHLB). This credit line is subject to annual renewal, incurs no service charges, and is secured by a blanket security agreement on outstanding residential mortgage loans and the FHLB stock owned by the Bank.
The second arrangement is an unsecured federal funds line of credit, subject to annual renewal, with a borrowing limit at December 31, 1997 of $3.1 million, maintained with a correspondent bank.
The following table presents information related to short- term borrowings during 1997 and 1996 (dollars in thousands):
1997 1996
--------- ---------
Outstanding balance at December 31, $ 200 $ --
Average balance outstanding
117 1,128
Maximum month-end balance
1,250 5,000
Weighted average interest rate for the year 5.71% 5.60%
Weighted average interest rate at year-end 6.75 N/A
|
Long-term borrowings
Included in borrowed funds is an advance from the FHLB totaling $2,000,000 at December 31, 1997, maturing July 11, 2002, with a current interest rate of 5.60%. This borrowing has a fixed interest rate for the first six months, at which time it may convert to a variable rate instrument should the benchmark interest rate reach 6.50%. The
Bank as the option to repay the borrowing without penalty at the conversion date, or at any subsequent repricing date. This borrowing is secured by a blanket security agreement on outstanding residential mortgage loans and the FHLB stock owned by the Bank
13. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Bank makes various commitments which are not reflected in the accompanying financial statements. The Bank offers such products to enable its customers to meet their financing objectives. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Bank's exposure to credit loss in the event of nonperformance by the other parties to the financial instruments is represented by the contractual amounts as disclosed. Losses, if any, are charged to the allowance for loan losses. The Bank minimizes its exposure to credit loss under these commitments by subjecting them to credit approval and review procedures and collateral requirements as deemed necessary.
The off-balance sheet commitments were comprised of the following at December 31, (in thousands):
1997 1996
---- ----
Commitments to extend credit $8,122 $6,810
Standby letters of credit
1,225 1,112
|
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. These commitments are comprised primarily of available commercial and personal lines of credit and loans approved but not yet funded. The Bank uses the same credit policies in making loan commitments and conditional obligations as it does for on-balance sheet instruments. Since many of the credit line commitments are expected to expire without being fully drawn upon, the total contractual amounts do not necessarily represent future funding requirements.
Standby letters of credit obligate the Bank to disburse funds to a third party if the Bank's customer fails to perform under the terms of the agreement with the beneficiary. These instruments are issued primarily to support bid or performance-related contracts. The coverage period for these instruments is typically a one year period with an annual renewal option subject to prior approval by management. The Bank generally holds collateral for these instruments, as deemed necessary.
Certain office facilities are leased under various operating leases. Rental expense was $45,000 and $23,000 in 1997 and 1996, respectively. Future minimum rental commitments under noncancellable leases are (in thousands):
Future Minimum
Lease Payments
1998 $45
1999
48
2000 48
2001 10
2002 -
17
|
14. REGULATORY MATTERS |
The district Federal Reserve Bank requires the Bank to maintain certain reserve balances. As of December 31, 1997 and 1996, the Bank had required reserves of $899,000 and $880,000 comprised of vault cash, and a depository amount held with the Federal Reserve Bank.
The Federal Reserve Act limits extensions of credit by the Bank to the Company and requires such credits to be collateralized. Further such secured loans are limited in amount to 10% of the Bank's capital and surplus. There were no loans between the Bank and the Company during 1997 and 1996.
The Bank is subject to a dividend restriction which generally limits the amount of dividends that can be paid by a national bank. Prior approval of the Comptroller of the Currency is required if the total of all dividends declared by a national bank in any calendar year exceeds net profits as defined for the year combined with its retained net profits for the two preceding calendar years less any required transfer to surplus. Using this formula, the amount available for payment of dividends by the Bank to the Company in 1998, without approval of the comptroller, will be limited to $1,514,000 plus net profits retained up to the date of the dividend declaration.
The Company is subject to various capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial position and results of operations.
Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios, as set forth in the table below, of total capital and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that as of December 31, 1997. the Company meets all capital adequacy requirements to which it is subject.
As of December 31, 1997 and 1996, the Company has been categorized as "Well Capitalized" under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company must maintain minimum total risk-based, Tier 1, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Company's classification category.
Regulatory Capitalization Requirement
-------------------------------------
Actual Adequate Well
------ -------- ----
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1997
Total capital to risk weighted assets $ 12,795 15.0% $ 6,824 8.0% $ 8,530 10.0%
Tier 1 capital to risk weighted assets 11,921 14.0 3,412 4.0 5,118 6.0
Tier 1 capital to average assets 11,921 9.1 5,260 4.0 6,576 5.0
December 31, 1996
Total capital to risk weighted assets $ 11,558 15.7% $ 5,896 8.0% $ 7,371 10.0%
Tier 1 capital to risk weighted assets 10,824 14.7 2,948 4.0 4,422 6.0
Tier 1 capital to average assets 10,824 8.7 4,990 4.0 6,238 5.0
|
15. COMMON STOCK
On December 18, 1997, the Company distributed 51,453 shares of common stock in connection with a 5% stock dividend. As a result of the stock dividend, common stock was increased by $64,000, additional paid-in capital was increased by $810,000, and retained earnings was decreased by $875,000. Fractional shares were paid in cash. All references to per share amounts in the accompanying financial statements for 1996 have been restated to reflect the stock dividend.
On December 12, 1996, the Company completed the sale of 230,800 shares of common stock, par value $1.25. These shares were sold at a price of $13.50 per share, resulting in net proceeds to the Company of $2,903,000. Included in the shares offered were 800 shares of stock which had been previously held as treasury shares. Upon completion of the stock sale the Company directly contributed $2,800,000 to the Bank in the form of additional paid-in capital.
16. FAIR VALUE DISCLOSURE OF FINANCIAL INSTRUMENTS
Financial instruments are defined as cash, evidence of an ownership interest in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms. Fair value is defined as the amount at which a financial instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. If a quoted market price is available for a financial instrument, the estimated fair value would be calculated based upon the market price per trading unit of the instrument.
If no readily available market exists, the fair value estimates for financial
instruments would be based upon management's judgment regarding current economic
conditions, interest rate risk, expected cash flows, future estimated losses,
and other factors as determined through various option pricing formulas or
simulation modeling. As many of these assumptions result from judgments made by
management based upon estimates which are inherently uncertain, the resulting
estimated fair values
may not be indicative of the amount realizable in the sale of a particular
financial instrument. In addition, changes in the assumptions on which the
estimated fair values are based may have a significant impact on the resulting
estimated fair values.
As certain assets and liabilities, such as deferred tax assets and premises and equipment, are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.
The estimated fair values at December 31, 1997 and 1996, of the Company's financial instruments are as follows (in thousands):
1997 1996
---- ----
Carrying Carrying Fair
Value Value Value Value
----- ----- ----- -----
Financial assets
Cash and due from banks and federal
funds sold $ 4,975 $ 4,975 $ 8,242 $ 8,242
Investment securities:
Available for sale 31,977 31,977 36,208 36,208
Held to maturity 6,057 6,053 10,275 10,246
Net loans 85,270 86,811 67,695 68,583
Accrued interest receivable 1,009 1,009 1,111 1,111
-------- -------- -------- --------
$129,288 $130,825 $123,531 $124,390
======== ======== ======== ========
Financial liabilities
Deposits $117,655 $117,986 $114,725 $114,423
Borrowed funds
2,200 2,200 -- --
Accrued interest payable
322 322 320 320
-------- -------- -------- --------
$120,177 $120,508 $115,045 $114,743
======== ======== ======== ========
|
The Company employed simulation modeling in determining the estimated fair value of financial instruments for which quoted market prices were not available based upon the following assumptions:
The fair value is equal to the current carrying value.
The fair value of securities held to maturity is equal to the available quoted market price. If no quoted market price is available, fair values are estimated using the quoted market price for similar securities.
The fair value of securities available for sale is equal to the current carrying value.
The fair value of loans is estimated by discounting the future cash flows using a simulation model which estimates future cash flows and constructs discount rates that consider reinvestment opportunities, operating expenses, non-interest income, credit quality, and prepayment risk. Demand, savings, and money market deposit accounts are valued at the amount payable on demand as of year end. Fair value for time deposits and borrowed funds are estimated using a discounted cash flow calculation that applies contractual costs currently being offered in the existing portfolio to current market rates being offered for deposits and borrowed funds of similar remaining maturities.
These financial instruments are generally not subject to sale and estimated fair values are not readily available. The carrying value, represented by the net deferred fee arising from the unrecognized commitment or letter of credit, and the fair value, determined by discounting the remaining contractual fee over the term of the commitment using fees currently charged to enter into similar agreements with similar credit risk, are not considered material for disclosure. The contractual amounts of unfunded commitments and letters of credit are presented in Note 13.
16. PARENT COMPANY
CONDENSED BALANCE SHEET
(Dollars in Thousands)
December 31,
1997 1996
---- ----
ASSETS
Cash on deposit in subsidiary bank $ 6 $ 166
Investment in bank subsidiary 13,490 12,539
Other assets 8 3
------- -------
TOTAL ASSETS $13,504 $12,708
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 6 $ 77
Stockholders' equity 13,498 12,631
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,504 $12,708
======= =======
|
CONDENSED STATEMENT OF INCOME
(Dollars in Thousands)
Year Ended December 31,
1997 1996
---- ----
NCOME
Dividends from subsidiary $ 403 $ 325
EXPENSES 18 8
------- -------
Income before income taxes and equity in undistributed
earnings of subsidiary 385 317
Income tax benefit (6) (3)
------- -------
Income before equity in undistributed earnings in subsidiary 391 320
Equity in undistributed earnings in subsidiary 853 661
------- -------
NET INCOME $ 1,244 $ 981
======= =======
|
CONDENSED STATEMENT OF CASH FLOWS
(Dollars in Thousands)
Year Ended December 31,
1997 1996
---- ----
OPERATING ACTIVITIES
Net income $ 1,244 $ 981
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiary (853) (661)
Other, net (76) 77
------- -------
Net cash provided by operating activities 315 397
------- -------
INVESTING ACTIVITIES
Investment in subsidiary -- (2,800)
------- -------
Net cash used for investing activities -- (2,800)
------- -------
FINANCING ACTIVITIES
Proceeds from sale of common stock, net of cost -- 2,903
Cash dividends paid (475) (344)
------- -------
Net cash provided by (used for) financing activities (475) 2,559
------- -------
Increase (decrease) in cash (160) 156
CASH AT BEGINNING OF YEAR 166 10
------- -------
CASH AT END OF YEAR $ 6 $ 166
======= =======
|
Board of Directors and Stockholders
Emclaire Financial Corp.
We have audited the consolidated balance sheet of Emclaire Financial Corp. and Subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Emclaire Financial Corp. and Subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.
/s/S.R. Snodgrass ----------------- S. R. Snodgrass, A.C. Wexford, PA February 6, 1998 |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Emclaire Financial Corp. ("Emclaire or the "Company") is the parent holding company for the Farmers National Bank of Emlenton ("Farmers" or the "Bank"). The following discussion and analysis is intended to provide information about the financial condition and results of operation of the Company and should be read in conjunction with the Consolidated Financial Statements and the related notes thereto appearing elsewhere in this annual report.
Certain information presented in this discussion and analysis and other statements concerning future performance, developments or events, and expectations for growth and market forecasts constitute forward-looking statements which are subject to a number of risks and uncertainties, including interest rate fluctuations, changes in local or national economic conditions, and government and regulatory actions which might cause actual results to differ materially from stated expectations or estimates.
During 1997 Emlcaire Financial Corp. focused on maximizing the returns resulting from the growth and expansion undertaken in 1996. The Company sought to take advantage of its new and expanded markets to establish or expand banking relationships with new and existing customers. This resulted in total loans increasing 26% to $86.1 million and total deposits rising 3% to $117.7 million.
Due largely to the increase in the loan portfolio, net interest income, on a tax equivalent basis, increased 22%, resulting in an increase in net income of 27%. Due to the effect of the issuance of 230,800 additional shares in December 1996, earnings per share for 1997 of $1.15, remained unchanged from 1996.
In August 1997, ground was broken for the Bank's new data center. When completed this facility, located in downtown Emlenton, will house the data processing and bookkeeping operations. Construction is scheduled to be completed in April 1998.
As 1998 began, the Bank made plans to open its eighth office at Clarion Mall. The full service office will be located in a site previously occupied by another financial institution. This new location will allow us to better serve our existing Clarion customers, by providing them an alternate site to conduct their banking business, while allowing Emclaire the opportunity to attract new customers from the western side of Clarion. This office is scheduled to open late in March.
RESULTS OF OPERATIONS
Summary
For 1997, Emclaire posted net income of $1.2 million, an increase of $263,000 or 27% from 1996. This increase was largely due to the 22% increase in net interest income, on a tax equivalent basis, which rose $1.1 million, to $5.9 million. The $14.2 million or 22% increase in loan volume was the principal factor for the increase in net interest income.
Other operating income of $596,000 rose $168,000 or 39% from 1996, due to the restructuring of fees for overdrafts and returned items, as well as fee income associated with ATM convenience charges and debit card transactions.
Total other operating expenses for the Company increased 21% to $4.4 million in 1997 as compared to $3.6 million in 1996. This increase in other operating costs was due principally to the overhead associated with a full year of operating the branch locations opened or purchased in 1996.
Earnings per share for 1997 equaled the $1.15 earned in 1996, due to the additional weighted shares outstanding resulting from the sale of 230,800 shares of common stock in December 1996, combined with the effect of the 5% stock dividend paid in December 1997.
Net interest income
The Company's net interest income on a tax equivalent basis increased $1.1 million or 22% to $5.9 million in 1997, due to an increase of $1.45 million or 18% in interest income on a tax equivalent basis, which totaled $9.6 million for 1997 as compared to $8.2 million in 1996. This increase in interest income more than offset the $375,000 or 11% increase in interest expense.
The increase in interest income in 1997, resulted primarily from an increase of $1.1 million or 19% in interest income on loans, due to an increase in the average outstanding balance of the portfolio, which rose $14.2 million to $78.6 million for the year. The 22% increase in loan volume served to offset the reduction in the overall yield on the portfolio which declined 20 basis points to 8.89%. The decline in yield is due to a general decline in long-term interest rates during the second half of 1997, combined with increased competition for loan customers. Should the current interest rate environment prevail and the level of competition continue, it is likely the overall return on the loan portfolio will decline further.
Interest income on investment securities increased $466,000, on a tax equivalent basis, to $2.6 million. This improvement was the result of the increase in the average volume of investment securities which rose $5.7 million or 19% for taxable securities, and $851,000 or 23% for tax-exempt investments. In addition, the yields on the investment portfolio increased to 6.24% from 6.10% for taxable securities, and to 6.23% from 5.87%, on a tax equivalent basis, for tax-exempt investments. The improved yield on the taxable securities portfolio was due to having the full year effect in 1997, of purchases made during the second and third quarters of 1996.
For 1997 the yield on earning assets, on a tax equivalent basis, increased 2 basis points to 7.95%. This very modest improvement was the result of the significant increase in loan volume combined with the increase in volume and yield on the investment portfolio.
Interest expense increased $375,000 or 11% to $3.7 million for 1997, from $3.4 million in 1996, due to the increase in the average volume of interest-bearing liabilities which rose $12.3 million during 1997, to $97.3 million. The average volume of time deposits increased $6.3 million or 16% during 1997, resulting in an increase in the related interest expense of $294,000 or 14%. In addition, in July 1997, the Company obtained a $2.0 million five year advance from the Federal Home Loan Bank.
Due the general decline in interest rates, the cost of interest bearing liabilities decreased to 3.83% for 1997 as compared to 3.95% for 1996. Despite the reduction in the cost of funds during 1997, continuing competition for deposits and a flattening of the yield curve, as the spread between short- and long-term interest rates narrows, caused interest rates to either increase or not fall in proportion to the reduction in longer term rates. As a result, the Company's cost of funds rose during the fourth quarter of 1997 rose to 3.94%.
As a result of the slight improvement in the yield on total earning assets, combined with the decline in the cost of interest-bearing liabilities, the net yield on earning assets increased to 4.87% for 1997 as compared to 4.68% in 1996.
The following tables set forth for the periods indicated information regarding the total dollar amounts of interest income from interest-earning assets and the resulting average yields, the total dollar amount of interest expense on interest-bearing liabilities and the resulting average rate paid, net interest income and the net yield on interest-earning assets (dollars in thousands):
AVERAGE BALANCE SHEETS AND NET INTEREST ANALYSIS
1997 1996
---- ----
Average Yield/ Average Yield/
Volume Interest (2) Rate (2) Volume Interest (2) Rate (2)
------ ------------ -------- ------ ------------ --------
ASSETS
Interest-earning assets
Investment securities
Taxable $ 36,525 $ 2,279 6.24% $ 30,810 $ 1,879 6.10%
Exempt from federal income
tax 4,495 280 6.23 3,644 214 5.87
Interest bearing deposits 24 1 4.17 37 2 5.41
in other banks 37 2
Loans (1) (3) 78,610 6,989 8.89 64,414 5,853 9.09
Federal funds sold 1,610 89 5.53 4,348 236 5.43
--------- -------- ---------
Total interest-earning 121,264 9,638 7.95 103,253 8,184 7.93
-------- ----------
assets
Noninterest-earning assets
Cash and due from banks 4,281 3,638
Allowance for loan losses (795 (714)
Other assets 5,501 4,101
-------- --------
Total assets $ 130,251 $110,278
========= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities
NOW accounts $ 16,481 295 1.79% $ 12,966 267 2.06%
Money market accounts 18,134 579 3.19 16,921 544 3.21
Savings deposits 15,903 443 2.79 14,558 427 2.93
Time deposits 45,515 2,338 5.14 39,251 2,044 5.21
Obligation under capital lease 85 5 5.88 124 7 5.65
Borrowed funds 1,196 67 5.60 1,128 63 5.59
--------- --------- -------- ---------
Total interest-bearing 97,314 3,727 3.83 84,948 3,352 3.95
-------- ---------
liabilities
Noninterest-bearing liabilities
Demand deposits 19,417 15,257
Other liabilities 517 584
Capital 13,003 9,499
--------- --------
Total liabilities and $ 130,251 $110,288
========= ========
stockholders' equity
Net interest income
and net yield on
interest-earning assets $ 5,911 4.87% $ 4,832 4.68%
========= ====== ======== =======
|
(1) - Interest on loans includes fee income
(2) - Tax exempt income on loans and investment securities and the related
yields are computed on a tax equivalent basis computed using the federal
statutory rate of 34%.
(3) - Nonaccrual loans included.
Changes in net interest income are attributable to three factors: 1) a change in the volume of an interest-earning asset or interest-bearing liability, 2) a change in interest rates, or 3) a change attributable to a combination of changes in volume and rate. The following table sets forth certain information regarding changes in interest income, on a tax-equivalent basis, and interest expense of the Company for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to 1) changes in volume (changes in volume multiplied by the old interest rate); and 2) changes in rates (changes in interest rates multiplied by the old average volume). Changes attributable to a combination of changes in volume and rate are proportionately allocated to changes in volume and changes in rate. (dollars in thousands)
ANALYSIS OF CHANGES IN NET INTEREST INCOME
1997 Change From 1996 1996 Change From 1995
Total Change Due To Total Change Due To
Change Volume Rate Change Volume Rate
------ ------ ---- ------ ------ ----
INTEREST INCOME ON:
Taxable investment securities $ 400 $ 356 $ 44 $ 845 $ 712 $ 133
44
Non-taxable investments 66 52 14 (41) (54) 13
Interest bearing deposits in other
banks (1) (1) -- -- -- --
Loans 1,136 1,268 (132) (198) (31) (167)
Federal funds sold (147) (151) 4 38 52 (14)
------- ------- ------- ------- ------- -------
Total interest income 1,454 1,524 (70) 644 679 (35)
------- ------- ------- ------- ------- -------
INTEREST EXPENSE ON:
NOW accounts 28 66 (38) (5) 17 (22)
Money market accounts 35 38 (3) (10) 5 (15)
Savings deposits 16 37 (21) 1 38 (37)
Time deposits 294 321 (27) 320 336 (16)
Obligation under capital lease (2) (2) -- (3) (2) (1)
Borrowed funds 4 4 -- 63 63 --
------- ------- ------- ------- ------- -------
Total interest expense 375 464 (89) 366 457 (91)
------- ------- ------- ------- ------- -------
NET INTEREST INCOME $ 1,079 $ 1,060 $ 19 $ 278 $ 222 $ 56
======= ======= ======= ======= ======= =======
|
Provision for loan losses
The provision for loan losses of $220,000 for the year ended December 31, 1997 represented an 83% increase from the $120,000 provided in 1996. Management makes periodic provisions to the allowance for loan losses to maintain the allowance at an acceptable level commensurate with the credit risk inherent in the loan portfolio. See "Loan Quality" for additional discussion of the allowance for loan losses. The level at which funds were provided to the allowance during 1997, is a reflection of the overall growth of the loan portfolio during the year, and is not an indication of any overall decline in the quality of the loan portfolio. The following table presents a summary of loan losses by loan type and changes in the allowance for loan losses for the two years ended December 31, 1997 (dollars in thousands):
Year Ended December 31,
1997 1996
---- ----
Total loans outstanding $86,144 $68,428
======= =======
Average loans outstanding 78,610 64,414
======= =======
Allowance for loan losses at beginning of year $ 733 $ 687
Provision charged to expense 220 120
Charge-offs:
Commercial and industrial 1 11
Real estate 33 1
Consumer 74 109
Total 108 121
------- -------
Recoveries:
Commercial and industrial 2 1
Real estate 19 1
Consumer 8 45
------- -------
Total 29 47
------- -------
Net charge-offs 79 74
------- -------
Allowance for loan losses at end of period $ 874 $ 733
======= =======
Allowance for loan losses as a percent of total loans 1.01% 1.07%
Net charge-offs as a percent of average loans .10 .11
|
Other operating income
Other operating income which is comprised principally of fees and charges on customer deposit accounts increased $168,000 or 39% to $596,000 in 1997 from $428,000 in 1996. Service charges on customer accounts increased $132,000 or 38%, due to the restructuring of overdraft charges, combined with the increase in volume resulting from the additional branch operations, and the implementation of a charge on returned deposit items. Other income increased $36,000 or 43% during the same period due primarily to fees from the MasterMoney(TM) debit card product introduced in August, and the imposition of an ATM convenience charge for non-customers using a Farmers ATM.
Other operating expense
Other operating expense increased $746,000 or 21% to $4.4 million in 1997 as compared to $3.6 million in 1996. This increase is largely attributed to the overhead costs associated with the impact of the full year of operations of the branch offices established in 1996. The new branch operations generated approximately $690,000 in additional overhead expenses during 1997, in comparison to the expenses related to part-year operation of these offices in 1996.
Salaries and employee benefits for 1997 totaled $2.2 million, an increase of $337,000 or 18% from $1.9 million reported in 1996. Of this total increase, approximately $175,000 represents the effect of a full year's expense associated with new employees added during 1996, including those at the new branch offices. Normal recurring employee cost increases for such things as salaries and hospitalization insurance and pension benefits represents approximately $150,000 of the increase. For 1998, in addition to normal recurring salary adjustments, it is expected certain employee benefit costs will increase, such as medical benefits which will rise approximately 14% or $36,000.
Occupancy and equipment expense increased $164,000 or 31% in 1997. Of this increase, $90,000 is due to additional costs related to the operation of the new branch offices. Depreciation costs associated with capital expenditures made during the fourth quarter of 1996, for a wide area network and teller terminal platform accounted for approximately $68,000 of the increase.
Other expenses for 1997 totaled $1.5 million, a $245,000 or 20% increase from the $1.2 million reported in 1996. Costs associated with the additional branch offices primarily accounted for this increase. Specifically, amortization of intangible assets increased approximately $114,000 due to the purchase of the Knox branch office in 1996. The remaining increase is principally attributed to the full year of operations of the branch offices.
In 1997, management began an assessment of the current data processing operation, including the space occupied by the data processing and bookkeeping departments located at the Emlenton office, and the impact of the branch expansion in 1996 on the available data processing capacity. This project resulted in the construction of the previously mentioned data processing center. While this facility will improve the efficiency with which daily transactions are processed, as well as, increasing the capacity to process transactions, the overhead associated with this facility will increase operating expenses approximately $65,000, annually.
In addition to the construction of the data center, the assessment of the Company's data processing system, indicated that based on growth projections, an upgrade or replacement of the existing equipment was needed. The assessment of hardware and software vendors began during the fourth quarter of 1997 and is expected to be completed early in the second quarter of 1998. Based on preliminary cost estimates, a complete upgrade of the data processing equipment and software could require a capital investment ranging from $250,000 to $500,000. The time frame for having this upgrade completed is the first quarter of 1999, so as to allow sufficient time to perform testing for year 2000 compliance.
Income Tax Expense
Income tax expense increased $110,000 or 25% during 1997 when compared to 1996, due to the 26% increase in income before income taxes.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Total assets at December 31, 1997, amounted to $133.9 million, an increase of $5.9 million or 5%, over total assets at December 31, 1996. The increase was funded by a $2.9 million or 3% increase in deposits, and a $2 million Federal Home Loan Bank Advance.
Investment Securities
Total investment securities decreased $8.5 million during 1997, to $38.0 million, as the proceeds from investment security sales and maturities were used to fund loan demand.
Information detailing the book value of the investment portfolio by security type and classification is presented in Note 4 to the consolidated financial statements.
Loans
Loans receivable at December 31, 1997 totaled $86.1 million, an increase of $17.7 million or 26% from 1996. The establishment of the three additional offices during 1996, expanded Emclaire's market area and served to increase loan demand. The two newest markets accounted for approximately 53% of the total increase in loans.
The loan growth generated during 1997, was largely from increases in loans secured by residential or commercial real estate. These segments of the portfolio increased $11.5 million or 33%, and $3.8 million or 33%, respectively. Of the residential mortgage loan increase, $2.5 million consisted of construction and purchase money mortgages originated with the assistance of a mortgage broker. Commercial loans grew $757,000 or 7%, while consumer loans increased $1.7 million or 14% during 1997. The increase in consumer loans is attributed to two direct mail solicitations during the year that generated approximately $1.2 million in new loans.
The following table presents the composition of the loan portfolio and the percentage of loans by type at December 31, 1997 an d1996 (dollars in thousands)
December 31,
------------
1997 1996
---- ----
% of loans % of loans
to to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
Commercial and industrial $11,147 12.9% $10,390 15.2%
Commercial and multi-family real estate 15,188 17.6 11,400 16.6
1 - 4 Family real estate 45,709 53.1 34,251 50.1
Consumer 14,100 16.4 12,387 18.1
------- ----- ------- -----
Total loans 86,144 100.0% 68,428 100.0%
===== =====
Less: allowance for loan losses 874 733
------- -------
Net loans $85,270 $67,695
======= =======
|
Loan Quality
Loans are subject to ongoing periodic monitoring by management and the Board of Directors. Loans are placed on nonaccrual status when, in the opinion of management, the collection of additional interest is doubtful; but not longer than 90 days past due for non-real estate loans and 120 days past due for loans secured by real estate. Interest accrued and unpaid at the time the account is placed on nonaccrual status is generally charged against interest income. Subsequent payments are either applied to the outstanding principal balance or recorded as interest income based upon management's assessment of the collectibility of the account.
At December 31, 1997, the Bank had $171,000 in loans greater than 90 days past due and still accruing interest, and $820,000 in loans on nonaccrual status.
Of the total non-performing loans, $685,000 in principal amounts of loans to a single customer were classified as impaired loans. A loan is considered to be impaired when, based on current information, it is probable the Company will be unable to collect all principal and interest due in accordance with the contractual terms of the loan agreement. These impaired loans consist of four commercial real estate loans to one borrower. The loans are secured by real estate. During 1996, the borrower sought bankruptcy protection under Chapter 11, and continues to operate. During 1997, $82,000 in payments were received on this account, resulting from the liquidation of collateral. Of the funds received, $68,000 was applied to principal and $14,000 was recognized as interest income. As part of management's ongoing assessment of its loan portfolio, $70,000 of the allowance for loan losses at December 31, 1997, has been allocated for these loans. Management believes the Company is adequately secured by the underlying collateral.
The following table sets forth non-performing loans at December 31, 1997 and 1996, along with nonaccrual loan interest data for 1997 (dollars in thousands):
December 31,
------------
1997 1996
---- ----
Loans past due 90 days or more and
accruing $ 171 111
Nonaccrual loans 820 778
---- --------
Non performing loans $991 $ 889
==== ========
Non-performing loans to total loans 1.15% 1.30%
Allowance for loan losses to non-
performing loans 88.19 82.45
Non-performing loans to total assets .74 .69
Nonaccrual loan interest data:
Interest computed on original $ 81
=======
terms
Interest recognized in income $ 15
=======
|
At December 31, 1997, no real estate or other assets were held as foreclosed or repossessed property. In addition, based upon the ongoing quarterly review and assessment of credit quality management is not aware of any trends or uncertainties related to any accounts which might have a material adverse effect on future earnings, liquidity, or capital resources.
Based upon the results of the quarterly internal loan review process, and considering the trend of past loan losses and recoveries, as well as, the current risk elements in the loan portfolio, management believes the allowance for loan losses at December 31, 1997 is adequate. The following table presents management's estimate of the allocation of the allowance for loan losses among the loan categories, along with the percentage of loans in each category to total loans (dollars in thousands):
December 31, December 31,
1997 1996
---- ----
% of Loans % of Loans
to to
Amount Total Loans Amount Total Loans
---- ------ ----- ------
Commercial and industrial $ 49 12.9% $106 15.2%
Commercial & multi-family real estate 205 17.6 158 16.6
1-4 family real estate 19 53.1 13 50.1
Consumer 101 16.4 106 18.1
Unallocated 500 -- 350 --
---- ----- ---- ------
$874 100.0% $733 100.0%
==== ===== ==== =====
|
Deposits
Total deposits of $117.7 million at December 31, 1997, represented an increase of $3.0 million or 3% from December 31, 1996. The increase in deposits is princiaplly attributed to growth at the newest office locations.
See also, "Average Balance Sheets and Net Interest Analysis" for information related to the average amount and average interest rate paid on deposit accounts during 1997 and 1996. Information related to the maturity of time deposits of $100,000 and over at December 31, 1997 is presented in Note 8 of the accompanying consolidated financial statements.
Stockholders' Equity
Stockholders' equity increased $867,000 or 7% during 1997 to $13.5 million. This increase was the result of $769,000 of net retained earnings during the year.
In December 1997, the Company paid a 5% stock dividend resulting in the issuance of 51,453 shares of common stock.
Market Risk Management
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. The Company's market risk is comprised principally of interest rate risk. The Company's Asset/Liability committee is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to interest rate risk. The guidelines established by the Asset/Liability committee are subject to review by the Company's Board of Directors.
Asset/Liability Management
One of the principal functions of the Company's asset/liability management program is to monitor the level to which the balance sheet is subject to interest rate risk. The goal of this program is to manage the relationship between interest-earning assets and interest-bearing liabilities to minimize the fluctuations in the net interest spread and achieve consistent growth in net interest income during periods of changing interest rates.
Interest rate sensitivity is the relationship of differences in the amounts and repricing dates of interest-earning assets and interest-bearing liabilities. In order to measure the impact on net interest income and pre-tax income, and to limit the adverse effect on earnings due to interest rate changes, Emclaire monitors interest rate sensitivity through gap and simulation analyses. The Company's gap model includes certain assumptions based on past experience and expected customer behavior during periods of rising or falling interest rates. These assumptions deal primarily with the interest rate changes for deposit accounts with no fixed maturity, such as savings, NOW and money market accounts. These assumptions have been developed through consideration of past events combined with estimates of future pricing practices.
The Company's policy is to limit the adverse change in annual pre-tax income to 5% based on an immediate change in interest rates of 200 basis points. At December 31, 1997, pre-tax income would be impacted by such a change in interest rates as follows:
Cuumulative gap at 1 year (7.4%)
Impact on pre-tax earnings
+ 200 basis points (1.4 )
- 200 basis points
10.9
|
Liquidity
Liquidity represents the Company's ability to meet normal cash flow requirements of its customers for the funding of loans and repayment of deposits. Liquidity is generally derived from the repayments and maturities of loans and investment securities, and the receipt of deposits. Management monitors liquidity daily, and on a monthly basis incorporates liquidity management into its asset/liability program.
Operating activities, as presented in the statement of cash flows in the accompanying consolidated financial statements, provided $2.1 million in cash during 1997, generated principally from net income, and depreciation and amortization, as compared to the $959,000 provided during 1996. The primary reasons for the increase during 1997 was the increase in net income and the increased depreciation associated with capital expenditures made by the Company during the fourth quarter of 1996.
Investing activities consist primarily of loan originations and repayments, and investment purchases and maturities. These activities used $10.0 million in funds during 1997, principally for the net funding of loans which totaled $17.8 million for the year. This cash outlay exceeded funds received from investment repayments and maturities, totaling $9.2 million, and $2.0 million from securities sales. For 1996, investing activities used $12.5 million, resulting from $26.2 million in investment securities purchases, which were principally funded by $12.7 million received in the purchase of the Knox branch office operation.
Financing activities consisted of the solicitation and repayment of customer deposits, borrowings and repayments and the payment of dividends. For 1997, financing activities provided $4.6 million comprised on net deposit increases of $2.9 million and borrowings of $2.2 million. For 1996, the sale of common stock provided $2.9 million, while net deposits increased $11.6 million, exclusive of the funds acquired in the branch purchase.
In addition to using the loan, investment and deposit portfolios as sources of liquidity, the Company has access to funds from other sources if a need for additional funds would arise. There are available lines of credit through the FHLB, along with a federal funds line of credit available through the Bank's primary correspondent bank. In addition, the Bank has access to funds through the discount window at the Federal Reserve Bank. The Company also has a ready source of funds through the available-for-sale component of the investment securities portfolio. The following table presents the amortized cost of the investment portfolio, the weighted average, tax equvalent yield and maturities at December 31, 1997 (dollars in thousands):
Available for Sale After 1 Year After 5 Years
Within Within Within After
1 Year 5 Years 10 Years 10 Years Total
------ ------- -------- -------- -----
U. S. Treasury $ 4,503 $ 6,998 $ -- $ -- $11,501
U. S. Government Agency 999 5,010 -- -- 6,009
Obligations of states and
polictical subdivisions -- 1,920 1,697 -- 3,617
Corporate -- 10,067 -- -- 10,067
------- ------- --------- ------- -------
Total $ 5,502 $23,995 $ 1,697 $ -- $31,194
======= ======= ========= ======= =======
Yield 6.08% 6.55% 6.86% - % 6.48%
Held to Maturity
U. S. Treasury $ -- $ 1,006 $ -- $ -- $ 1,006
Obligations of states and polictical
subdivisions 1,390 -- -- -- 1,390
Corporate 904 2,074 -- -- 2,978
Mortgage-backed securities 272 -- -- 411 683
------- ------- --------- ------- -------
Total $ 2,566 $ 3,080 $ -- $ 411 $ 6,057
======= ======= ========= ======= =======
Yield 5.99% 6.19% -- % 6.46% 6.12%
|
The following table presents the maturity distribution and interest rate sensitivity of commercial and industrial loans, and commercial and multi-family real estate loans at December 31, 1997 (dollars in thousands):
After 1 Year
Within Within
1 Year 5 Years After 5 Years Total
------ ------- ------------- -----
Commercial and industrial $ 6,316 $ 4,414 $ 417 $11,147
Commercial and multi-family real estate 3,002 5,346 6,840 15,188
------- ------- ------- -------
$ 9,318 $ 9,760 $ 7,257 $26,335
======= ======= ======= =======
Predetermined interest rates $ 3,189 $ 6,654 $ 4,237 $14,080
Floating interest rates 6,129 3,106 3,020 12,255
------- ------- ------- -------
$ 9,318 $ 9,760 $ 7,257 $26,335
======= ======= ======= =======
|
Generally, commercial loans with maturities of one year or less consist of funds drawn on commercial lines of credit, short-term notes written with maturities of ninety days to six months, and demand notes written without alternative maturity schedules. All lines of credit and demand loans are subject to annual review where the account may be approved for up to one year. Short-term notes are generally permitted two renewals, prior to being placed on a fixed repayment schedule.
The Company anticipates it will have sufficient funds available to meet the needs of its customers for deposit repayments and loan fundings. At December 31, 1997, loan and letter of credit commitments totaled $9.3 million. Many of these commitments are in the form of lines of credit and letters of credit which are available for use by the borrower, but are generally not drawn on. Certificates of deposit scheduled to mature in one year or less totaled $25.6 million at December 31, 1997.
Capital Resources
Capital adequacy is the ability of the Company to support growth while protecting the interests of shareholders and depositors. Bank regulatory agencies have developed certain capital ratio requirements, which are used to assist them in monitoring the safety and soundness of financial institutions. Management continually monitors these capital requirements and believes the Company to be in compliance with these regulations at December 31, 1997.
The Bank's regulatory capital position at December 31, 1997, as compared to the minimum regulatory capital requirements imposed on the Bank by banking regulators at that date is presented in Note 14 of the accompanying financial statements. Management is not aware of any actions contemplated by banking regulators which would result in the Bank being in non-compliance with any of the above requirements.
Impact of Inflation and Changing Prices
The financial statements of the Company and the notes thereto, presented elsewhere herein, have been prepared in accordance with generally accepted accounting standards, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike most industrial companies, nearly all of the Company's assets and liabilities are monetary. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services.
YEAR 2000
The Company formed a committee in September 1997, to implement an action plan designed to ensure the Company's computer systems, software applications and other date reliant equipment would function properly after December 31, 1999. This process involves identifying all equipment, software and third party providers, deemed to be critical to the Company's daily operations, and ascertaining if these products or product providers are Year 2000 compliant.
For items or vendors that are not compliant and have not achieved significant progress toward compliance by October 1, 1998, the committee will implement contingency plans to either replace the product or vendor, or implement an alternative procedure to mitigate the affected area.
All software programs used by the Company are purchased directly from vendors, and are not modified internally by the Company. This eliminates the need for the direct hiring of programmers to rewrite or modify computer software.
The total cost of this project has not yet been determined, but it is not expected to have a material impact on the financial condition or results of operations of the Company. Personnel and other costs resulting from this project will be expensed as incurred. Expenditures for hardware and software purchases will be capitalized in accordance with policy.
Management believes that substantially all date reliant equipment and software will be tested and, if needed, upgraded or replaced by December 31, 1998. In addition, assessments of significant vendors, service providers and customers will also be completed. Despite the best efforts of management to address this issue, the vast number of external entities that have direct and indirect business relationships with the Company, such as customers, vendors, payment system providers and other financial institutions, makes it impossible to assure that a failure to achieve compliance by one or more of these entities would not have a material adverse impact on the operations of the Company.
COMMON STOCK INFORMATION
Prior to December 1996, there was no established public trading market for the Company's common stock. In December 1996, the Company began trading its stock in the local over-the-counter market through the National Association of Securities Dealers OTC Electronic Bulletin Board. Price quotations from the fourth quarter of 1996 forward, reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The following table summarizes the high and low prices and dividend information since January 1, 1996, after adjustment for a 5% stock dividend paid in December 1997, and a 4-for-1 stock split effected June 20, 1996. Prices are based upon information made available to the Company. Cash dividends are declared on a quarterly basis.
1997 1996
---- ----
Dividend Dividend
High Low Declared High Low Declared
First Quarter $14.75 $13.25 $.105 $ -- $ -- $.095
Second Quarter 15.00 13.25 .105 11.25 11.25 .105
Third Quarter 16.67 14.28 .114 -- - .105
Fourth Quarter 17.00 16.25 .114 13.50 13.00 .105
|
At December 31, 1997, the Company had approximately 590 shareholders of record.
BOARD OF DIRECTORS
Ronald L. Ashbaugh J. Michael King
Retired President Senior Partner
Emclaire Financial Corp. and Lynn, King & Schreffler
Farmers National Bank Attorneys at Law
David L. Cox John B. Mason
President, Emclaire Financial Corp. H.B. Beels & Sons, Inc.
President, Farmers National Bank
Brian C. McCarrier
Bernadette H. Crooks President - Interstate Pipe and Supply
Retired Retailer
Crooks Clothing Elizabeth C. Smith
Retired
George W. Freeman Former Owner-The Inn at Oakmont
Freeman's Tree Farm
Director Emeritus
Rodney C. Heeter
Heeter Lumber, Co. Dr. Clinton R. Coulter
Retired Medical Doctor
Robert L. Hunter
Hunter Truck Sales and Service The above listed persons are members of the Boards
Hunter Leasing of Directors of both the Company and the Bank.
EXECUTIVE OFFICERS
Emclaire Financial Corp. Farmers National Bank
David L. Cox David L. Cox
President and Chief Executive Officer President and Chief Executive Officer
Ronald L. Larimore Ronald L. Larimore
Secretary Vice President/Cashier and
Chief Operations Officer
John J. Boczar, CPA
Treasurer John J. Boczar, CPA
Vice President and Chief Financial Officer
Robert W. Foust
Vice President and Branch Administrator
|
OTHER OFFICERS
Edith M. Beckwith Allan I. Johnson Fred S. Port
Manager - Eau Claire Manager - Knox Manager - Clarion
Scott B. Daum James W. LeVier Joseph M. Sporer
Manager - Human Resources Assistant Vice President Assistant Vice President
Compliance Officer Manager - Consumer Loans
Janice F. Dittman
Manager - Data Processing Thomas E. McFadden Robert A. Vernick
Assistant Vice President Assistant Vice President
Cindy L. Elder Assistant Cashier Manager - Bon Aire
Assistant Vice President
Manager - Emlenton Troy J. Moore
Acting Manager - East Brady
|
ANNUAL MEETING
The Annual Meeting of Shareholders of Emclaire Financial Corp. will be held at the Farmers National Bank Data Processing Center, 708 Main Street, Emlenton, Pennsylvania, on Wednesday, May 20, 1998 at 7:00 p.m.
ADDITIONAL FINANCIAL INFORMATION
A copy of Emclaire Financial Corp.'s Annual Report on Form 10-KSB, as filed with the Securities and Exchange Commission, will be furnished, free of charge, upon written request to John J. Boczar, Treasurer, Drawer D, Emlenton, PA, 16373-0046.
The Annual Report and other Company reports are also filed electronically through the Electronic Data Gathering, Analysis, and Retrieval System ("EDGAR") which performs automated collection, validation, indexing, acceptance, and forwarding of submissions to the Securities and Exchange Commission and is accessible to the public by using the Internet at http://www.sec.gov/edgarhp.htm.
TRANSFER AGENT
Emclaire Financial Corp.
612 Main Street
P.O. Drawer D
Emlenton, PA 16373
(724) 867-2311
Emclaire Financial Corp. common stock is quoted on the OTC Electronic Bulletin Board under the symbol "EMCF". The following companies act as market makers:
Hopper Soliday & Co., Inc. 1703 Oregon Pike Lancaster, PA 17601 (800) 646-8647
E. E. Powell & Co., Inc. 1100 Gulf Tower Pittsburgh, PA 15219 (412) 391-4594
F. J. Morrissey & Co., Inc. 1700 Market Street - Suite 1420 Philadelphia, PA 19103 (215) 563-8500
Ryan Beck & Co.
80 Main Street
West Orange, NJ 07052
(201) 325-3200
BRANCH OFFICE LOCATIONS
Emlenton Eau Claire Clarion - 2 Locations Knox - 2 Locations
612 Main Street 207 S. Washington Street Sixth & Wood Streets Rt. 338 South
Emlenton, PA 16373 Eau Claire, PA 16030 Clarion, PA 16214 Knox, PA 16232
(724) 867-2311 (724) 791-2591 (814) 226-7523 (814) 797-2200
and and
East Brady Butler
323 Broad Street Bon Aire Plaza Clarion Mall Main & State Streets
East Brady, PA 16028 1101 North Main Street I-80 and Rt. 68 Knox, PA 16232
(724) 526-5793 Butler, PA 16003 Clarion, PA (814) 797-1136
(724) 283-4666 (814) 226-7488
|
| ARTICLE 9 |
| This schedule contains summary financial information derived from the annual report on Form 10KSB40 and is qualified in its entirety by reference to such financial information. |
| MULTIPLIER: 1,000 |
| PERIOD TYPE | 12 MOS |
| FISCAL YEAR END | DEC 31 1997 |
| PERIOD END | DEC 31 1997 |
| CASH | 4,947 |
| INT BEARING DEPOSITS | 28 |
| FED FUNDS SOLD | 0 |
| TRADING ASSETS | 0 |
| INVESTMENTS HELD FOR SALE | 31,977 |
| INVESTMENTS CARRYING | 6,057 |
| INVESTMENTS MARKET | 6,053 |
| LOANS | 86,144 |
| ALLOWANCE | 874 |
| TOTAL ASSETS | 133,956 |
| DEPOSITS | 117,655 |
| SHORT TERM | 200 |
| LIABILITIES OTHER | 540 |
| LONG TERM | 2,063 |
| PREFERRED MANDATORY | 0 |
| PREFERRED | 0 |
| COMMON | 1,352 |
| OTHER SE | 12,146 |
| TOTAL LIABILITIES AND EQUITY | 133,956 |
| INTEREST LOAN | 6,969 |
| INTEREST INVEST | 2,464 |
| INTEREST OTHER | 90 |
| INTEREST TOTAL | 9,523 |
| INTEREST DEPOSIT | 3,655 |
| INTEREST EXPENSE | 3,727 |
| INTEREST INCOME NET | 5,796 |
| LOAN LOSSES | 220 |
| SECURITIES GAINS | 0 |
| EXPENSE OTHER | 4,382 |
| INCOME PRETAX | 1,790 |
| INCOME PRE EXTRAORDINARY | 1,244 |
| EXTRAORDINARY | 0 |
| CHANGES | 0 |
| NET INCOME | 1,244 |
| EPS PRIMARY | 1.15 |
| EPS DILUTED | 1.15 |
| YIELD ACTUAL | 4.78 |
| LOANS NON | 820 |
| LOANS PAST | 171 |
| LOANS TROUBLED | 0 |
| LOANS PROBLEM | 0 |
| ALLOWANCE OPEN | 733 |
| CHARGE OFFS | 108 |
| RECOVERIES | 29 |
| ALLOWANCE CLOSE | 874 |
| ALLOWANCE DOMESTIC | 374 |
| ALLOWANCE FOREIGN | 0 |
| ALLOWANCE UNALLOCATED | 500 |